Transfer pricing adjustment is confined to associated enterprise transactions and cannot be extended to unrelated third-party dealings.

Transfer pricing adjustment under Chapter X of the Income-tax Act, 1961 is confined to international transactions with associated enterprises, where arm's length price must be determined to prevent profit shifting. Transactions with independent third parties do not fall within that adjustment mechanism because they are outside the scope of AE dealings and do not raise the same tax-avoidance concern. Extending transfer pricing rules to non-AE transactions would enlarge income computation beyond Chapter X. The Bombay High Court accordingly held that the adjustment cannot be applied to transactions with unrelated parties.

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Issues: Whether transfer pricing adjustment could be applied to transactions of the assessee with independent third parties, or whether it was confined to international transactions with associated enterprises.

Analysis: Under Chapter X of the Income-tax Act, 1961, redetermination of consideration is confined to income arising from international transactions and the determination of arm's length price in respect of those transactions. Transactions with independent unrelated third parties do not attract transfer pricing adjustment, because there is no question of tax avoidance in respect of such non-associated enterprise dealings. Extending the adjustment to non-AE transactions would enlarge profit computation beyond the scope of Chapter X.

Conclusion: The transfer pricing adjustment is confined to transactions with associated enterprises and cannot be extended to non-associated enterprise transactions. The issue is decided in favour of the assessee.

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