CUP method can apply to formula-based pricing where controlled and uncontrolled transactions use the same residual profit-sharing model.

The CUP method was accepted where the controlled and uncontrolled transactions used the same 50:50 residual profit-sharing formula, because price can include a comparable formula for determining consideration. The Tribunal treated the formula-based pricing in freight forwarding as an industry norm followed in both associated enterprise and independent transactions, and held that the absence of an identical money figure was not decisive. On that basis, substitution of TNMM was found unwarranted, and the arm's length price adjustment was deleted.

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Issues: Whether the Comparable Uncontrolled Price method could be applied where the pricing in controlled and uncontrolled transactions was determined by the same 50:50 residual profit-sharing formula, and whether the transfer pricing adjustment made by substituting the Transactional Net Margin Method was sustainable.

Analysis: The pricing mechanism under the CUP rule was read broadly to include not only an amount stated in money terms but also a formula by which consideration is quantified. The record showed that in the relevant freight forwarding business, the 50:50 sharing of residual profits was an industry norm and was followed both in transactions with associated enterprises and with independent parties. The absence of an identical monetary amount in the uncontrolled transactions was held not to be decisive where the same pricing formula operated in substantially similar transactions. The decision relied on the direct nature of CUP, the flexibility inherent in the transfer pricing framework, and the later recognition of a broader method for comparable uncontrolled transactions. The Tribunal therefore preferred a pragmatic construction over a pedantic one and treated the formula-based pricing as a valid benchmark.

Conclusion: The CUP method was held applicable and the substitution of TNMM was not justified. The arm's length price adjustment was deleted, in favour of the assessee.

Final Conclusion: The appeal succeeded and the transfer pricing addition did not survive because the assessee's 50:50 pricing model was accepted as at arm's length.

Ratio Decidendi: For CUP analysis, price may include a legally and commercially comparable formula for determining consideration, and where controlled and uncontrolled transactions follow the same pricing formula in similar circumstances, the transaction may be accepted as at arm's length.

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