Transfer pricing adjustment limited to AE transactions; segmental internal TNMM benchmarking remitted for fresh examination.

Transfer pricing adjustment is confined to international transactions with associated enterprises and cannot be extended to non-AE turnover. The Tribunal therefore set aside the adjustment computed on the entire turnover and remitted the matter to the Assessing Officer/TPO for fresh adjudication. It also held that the assessee's project-wise segmental accounts and internal TNMM benchmarking required re-examination, with an effective opportunity to produce material and support the allocation of revenues and expenses between AE and non-AE segments. The rejection of the segmental approach was likewise set aside and restored for fresh determination.

---

---

Issues: (i) Whether the rejection of the assessee's segmental approach and internal TNMM analysis for determining arm's length price was justified. (ii) Whether transfer pricing adjustment could be computed on the entire turnover, including non-associated enterprise transactions.

Issue (i): Whether the rejection of the assessee's segmental approach and internal TNMM analysis for determining arm's length price was justified.

Analysis: The assessee had maintained project-wise segmental accounts and sought to benchmark the AE segment against the non-AE segment by internal TNMM. Reliance was placed on comparable judicial authority supporting allocation of revenues and expenses between the two segments for determining the arm's length price. The Tribunal found merit in the challenge and held that the segmental issue required re-examination by the transfer pricing authorities after affording the assessee an effective opportunity and after considering relevant material.

Conclusion: The rejection of the segmental approach was set aside and the issue was remitted to the Assessing Officer/TPO for fresh determination.

Issue (ii): Whether transfer pricing adjustment could be computed on the entire turnover, including non-associated enterprise transactions.

Analysis: The Tribunal held that transfer pricing adjustment is confined to international transactions with associated enterprises and cannot be extended to transactions with non-associated enterprise customers. Following the governing principle that only tested-party AE transactions fall within transfer pricing adjustment, the Tribunal found the DRP's approach unsustainable and required the issue to be reconsidered by the Assessing Officer/TPO.

Conclusion: The direction to compute adjustment on the entire turnover was set aside and the issue was remitted for fresh adjudication.

Final Conclusion: The appeal succeeded to the extent that both transfer pricing issues were restored for fresh consideration, and the dispute was not finally determined on the merits at this stage.

Ratio Decidendi: Transfer pricing adjustment must be confined to international transactions with associated enterprises, and segmental benchmarking based on properly allocated AE and non-AE results requires fresh examination where the assessee's methodology is disputed.

---