Transfer pricing adjustment needs a real international transaction and statutory method; obsolete stock write-off and ad hoc service markup were rejected.

A transfer pricing adjustment requires a real international transaction and computation under a prescribed statutory method. The write-off of obsolete stock-in-trade was treated as a commercial decision after the goods became unsaleable, and the distribution agreement did not create any obligation on the associated enterprise to reimburse such stock; the addition was therefore deleted. The alleged provision of market information services was also not established on the record, and an ad hoc percentage-based adjustment without applying the transfer pricing methods under Chapter X was impermissible; that adjustment was likewise deleted. Both transfer pricing additions were set aside and the assessee succeeded.

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Issues: (i) Whether the write-off of obsolete stock-in-trade constituted an international transaction warranting transfer pricing adjustment; (ii) Whether the alleged provision of market information services to the associated enterprise justified an ad hoc transfer pricing adjustment.

Issue (i): Whether the write-off of obsolete stock-in-trade constituted an international transaction warranting transfer pricing adjustment.

Analysis: The write-off arose from the assessee's commercial decision to destroy obsolete and unsaleable stock after the products had become out of fashion and unsaleable. The distribution agreement contemplated only replacement or recourse for manufacturing defects within the stipulated period, and not an obligation on the associated enterprise to reimburse stock that had become obsolete after title had passed. The assessee had also shown a consistent pattern of similar write-offs in earlier years without adjustment. The transfer pricing authorities were not justified in treating the stock write-off as a transaction with the associated enterprise or in applying a comparable uncontrolled price basis to it.

Conclusion: The addition on account of stock write-off was deleted and the issue was decided in favour of the assessee.

Issue (ii): Whether the alleged provision of market information services to the associated enterprise justified an ad hoc transfer pricing adjustment.

Analysis: The record did not establish that the assessee was contractually obliged to furnish market information services in the manner assumed by the transfer pricing authorities. Even otherwise, the adjustment was made on an ad hoc percentage of turnover without applying one of the prescribed methods under the transfer pricing rules. A transfer pricing adjustment under Chapter X cannot be sustained on a pure estimate divorced from the statutory methods.

Conclusion: The adjustment for market information services was deleted and the issue was decided in favour of the assessee.

Final Conclusion: Both transfer pricing additions were set aside, and the appeals were allowed.

Ratio Decidendi: A transfer pricing adjustment must rest on a real international transaction and be computed by one of the prescribed statutory methods; a commercial write-off of obsolete stock, unsupported by any contractual reimbursement obligation, cannot be treated as such a transaction, and an ad hoc percentage-based adjustment is impermissible.

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