Transfer pricing under Chapter X must be limited to international AE transactions, not entity-wide costs or non-AE dealings.

Under the Transactional Net Margin Method, transfer pricing benchmarking must be confined to international transactions with associated enterprises, and Chapter X does not permit an adjustment based on the assessee's total entity-level costs or on transactions with non-associated enterprises. The computation using costs relatable to non-AE transactions was therefore legally unsustainable. The matter was remanded to the Assessing Officer/Transfer Pricing Officer for fresh consideration in accordance with law, with the transfer pricing addition set aside to that extent and benchmarking restricted to international transactions alone.

---

---

Issues: Whether a transfer pricing adjustment under Chapter X could be computed by taking the assessee's total operating costs, including costs attributable to non-associated enterprise transactions, instead of confining the benchmarking exercise to international transactions with associated enterprises.

Analysis: Under the Transactional Net Margin Method, the assessee's margin has to be compared only with the margin attributable to its international transactions. The adjustment cannot be extended to transactions with non-associated enterprises, because Chapter X is confined to determining income from international transactions at arm's length and does not permit benchmarking of domestic or non-international transactions. The computation made on the basis of total entity-level costs, including costs relatable to non-AE transactions, was therefore legally unsustainable.

Conclusion: The transfer pricing adjustment based on total costs including non-AE transactions was not sustainable and the matter was remanded to the Assessing Officer / Transfer Pricing Officer for fresh consideration in accordance with law.

Final Conclusion: The appeal succeeded to the extent of setting aside the impugned transfer pricing addition and restoring the matter for fresh adjudication confined to international transactions alone.

Ratio Decidendi: A transfer pricing adjustment under Chapter X must be restricted to international transactions with associated enterprises and cannot be computed on the assessee's total transactions including non-associated enterprise transactions.

---