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Issues: (i) Whether transfer pricing adjustment could be made on the entire transaction of the assessee, including domestic transactions, or had to be confined to international transactions with the Associated Enterprise; (ii) Whether the reversal of royalty income also required reconsideration in the reassessment of the transfer pricing issue.
Issue (i): Whether transfer pricing adjustment could be made on the entire transaction of the assessee, including domestic transactions, or had to be confined to international transactions with the Associated Enterprise.
Analysis: Chapter X of the Income-tax Act, 1961 governs transfer pricing only in relation to international transactions. The Tribunal relied on the principle that non-associated enterprise transactions are ordinarily presumed to be at arm's length and that, in the absence of segmental accounting, proportionate adjustment may be adopted only for the international transaction component. Domestic transactions, unless they qualify as specified domestic transactions, cannot form the basis for transfer pricing adjustment.
Conclusion: The adjustment had to be confined to the international transaction with the Associated Enterprise, and the contrary approach was not sustained.
Issue (ii): Whether the reversal of royalty income also required reconsideration in the reassessment of the transfer pricing issue.
Analysis: Since the main transfer pricing issue was remitted for fresh examination, the royalty reversal of Rs. 1,27,05,764/- was also required to be reconsidered by the Assessing Officer and the Transfer Pricing Officer in the same proceedings, following the procedure under section 144C of the Income-tax Act, 1961.
Conclusion: The royalty reversal issue was also remitted for fresh consideration.
Final Conclusion: The transfer pricing and royalty issues were set aside and sent back for fresh adjudication, so the assessee obtained only a limited procedural success.
Ratio Decidendi: Transfer pricing adjustment under Chapter X is confined to international transactions with the associated enterprise and cannot be based on ordinary domestic transactions unless they are specified domestic transactions.
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