Transfer pricing can use a profit-sharing formula as arm's length benchmarking in logistics and freight forwarding.

In transfer pricing for logistics and freight forwarding, a comparable uncontrolled price may be reflected through an agreed pricing formula or residual profit-sharing mechanism, rather than only a fixed monetary price. The Tribunal treated a new ground challenging the 50:50 revenue split model as admissible in a later round because it went to the core legal characterisation of the adjustment. It also noted that transfer pricing rules are anti-abuse provisions and should be applied pragmatically, with newer rules permitting any method based on comparable uncontrolled transactions. The benchmarking issue was sent back for fresh examination on the factual and comparable data.

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Issues: (i) whether the additional ground challenging the transfer pricing adjustment based on the 50:50 revenue split model could be admitted; (ii) whether the 50:50 revenue split model in the logistics and freight forwarding business could be accepted as a valid basis for determining arm's length price and, consequently, whether the matter required remand.

Issue (i): whether the additional ground challenging the transfer pricing adjustment based on the 50:50 revenue split model could be admitted.

Analysis: The ground raised a question going to the core of the transfer pricing determination. The same business model had already been recognised in earlier Tribunal decisions, and the assessee sought to raise the issue in light of subsequent legal developments. The Tribunal treated the omission to raise the ground earlier as not fatal and held that a new ground could be entertained in the second round of proceedings where it bears on the correct legal characterisation of the adjustment.

Conclusion: The additional ground was admitted.

Issue (ii): whether the 50:50 revenue split model in the logistics and freight forwarding business could be accepted as a valid basis for determining arm's length price and, consequently, whether the matter required remand.

Analysis: The Tribunal held that in this line of business the price may be expressed not only as a fixed monetary amount but also through a pricing formula, namely a residual profit-sharing mechanism. It approved the view that the comparable uncontrolled price method can accommodate such a formula where the same business model operates with independent enterprises as well. It further noted that transfer pricing rules are anti-abuse provisions and should be applied pragmatically, and that the newer rule permitting any method based on comparable uncontrolled transactions supported the same approach. Since the factual and benchmarking aspects had not been fully examined below in light of this ground, the matter was sent back for fresh examination.

Conclusion: The 50:50 model was accepted in principle as capable of benchmarking arm's length price, and the transfer pricing issue was remanded for reconsideration.

Final Conclusion: The appeals succeeded only to the extent of admission of the additional ground and remand of the transfer pricing issue, while the remaining issues were rendered academic.

Ratio Decidendi: For transfer pricing purposes, a comparable uncontrolled price may be reflected by an agreed pricing formula or profit-sharing mechanism, and direct methods should be applied in a pragmatic manner where the same pricing structure operates with independent parties.

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