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Issues: (i) whether the transfer pricing adjustment in respect of the software licensing segment could be sustained when the rejection of the assessee's CUP method and the selection of TNMM and comparables were unsupported by reasons, warranting a fresh adjudication; (ii) whether the transfer pricing adjustment was required to be confined only to the value of the international transactions with associated enterprises.
Issue (i): whether the transfer pricing adjustment in respect of the software licensing segment could be sustained when the rejection of the assessee's CUP method and the selection of TNMM and comparables were unsupported by reasons, warranting a fresh adjudication.
Analysis: The assessee had adopted different methods for different transactions, but the transfer pricing authorities proceeded on the incorrect premise that TNMM governed the entire segment. The rejection of the CUP and related benchmarking adopted by the assessee was made without a speaking order explaining why those methods were not the most appropriate. The selection of comparables and the resultant adjustment were also made on an incomplete and inconsistent foundation. In these circumstances, the matter required reconsideration after giving the assessee a proper opportunity of hearing and after recording reasons on the choice of method, comparables, and the scope of adjustment.
Conclusion: The issue was remitted to the transfer pricing officer for fresh adjudication, and the assessee succeeded on this issue for statistical purposes.
Issue (ii): whether the transfer pricing adjustment was required to be confined only to the value of the international transactions with associated enterprises.
Analysis: The adjustment under transfer pricing provisions is to be linked to the international transactions with associated enterprises and not to the entire turnover of the segment. The jurisdictional High Court authority relied upon answered the point in favour of the assessee, and the adjustment could not be extended beyond the AE-related transactions.
Conclusion: The adjustment had to be restricted to the international transactions with associated enterprises, and this issue was decided in favour of the assessee.
Final Conclusion: The appeal succeeded in part. The substantive transfer pricing dispute on method and comparables was sent back for fresh consideration, while the scope of adjustment was confined to AE transactions.
Ratio Decidendi: Transfer pricing adjustment must be supported by reasons for rejecting the taxpayer's chosen method and must be confined to the value of international transactions with associated enterprises.
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