Internal TNMM and transaction-level adjustment govern transfer pricing where reliable comparables exist and controlled transactions are distinct.
Where reliable internal comparables were available, export of trucks to associated enterprises was benchmarked transaction-wise under internal TNMM rather than by aggregating segments and applying external TNMM; the domestic segment was accepted as the proper benchmark. Import of raw materials/components from associated enterprises was treated as a separate transaction, and the matter was remitted for fresh arm's length price examination because the assessee had changed its stand and relied on additional evidence requiring verification. Any transfer pricing adjustment was confined to the international transactions actually under review, and entity-level adjustment was rejected.
Issues: (i) Whether the export of trucks to associated enterprises had to be benchmarked by applying internal TNMM on the domestic segment rather than by aggregating transactions and applying external TNMM. (ii) Whether the import of raw materials/components from associated enterprises required separate benchmarking and, in the circumstances of the changed stand and additional evidence, the matter had to be restored for fresh examination. (iii) Whether adjustment, if any, was to be restricted to the value of international transactions and not made at entity level.
Issue (i): Whether the export of trucks to associated enterprises had to be benchmarked by applying internal TNMM on the domestic segment rather than by aggregating transactions and applying external TNMM.
Analysis: The products sold in the domestic market and those exported to the developing-country markets were found to be substantially similar, and geographical differences with Germany were held not to be material for comparability. The Court accepted that the same inputs were used for both segments and that the alleged differences in functions and risks did not justify rejection of internal comparables. Where an internal comparable is available, the transaction-by-transaction approach was preferred over aggregation. The domestic segment thus provided a proper benchmark for the export segment.
Conclusion: Internal TNMM was held to be the appropriate method for benchmarking the export transactions, and the aggregation/external TNMM approach was not upheld, in favour of the assessee.
Issue (ii): Whether the import of raw materials/components from associated enterprises required separate benchmarking and, in the circumstances of the changed stand and additional evidence, the matter had to be restored for fresh examination.
Analysis: The import of raw materials was treated as an independent transaction, but the assessee had changed its stand on the most appropriate method and had relied on additional evidence that had not been properly examined below. The pricing and surcharge data, including the accountant's certificate, required verification, and the consistent treatment adopted in earlier years was also a relevant consideration. In these circumstances, a fresh examination by the Assessing Officer / Transfer Pricing Officer was warranted.
Conclusion: The issue was restored for fresh determination of arm's length price, in favour of the assessee to the extent of remand.
Issue (iii): Whether adjustment, if any, was to be restricted to the value of international transactions and not made at entity level.
Analysis: The adjustment was held to be referable only to the international transactions, not to the entire entity-level results. The principle applied was that transfer pricing adjustment must be confined to the controlled transactions actually under consideration, and not extended to unrelated domestic transactions. On this basis, proportionate transaction-level adjustment was accepted, while entity-level adjustment was rejected.
Conclusion: The adjustment was restricted to international transactions alone, in favour of the assessee and against the Revenue.
Final Conclusion: The assessee succeeded on the principal transfer pricing methodology issue and on the restriction of adjustment to international transactions, while the raw-material import benchmarking issue was remitted for fresh consideration; the cross-appeals were therefore partly allowed.
Ratio Decidendi: Where reliable internal comparable uncontrolled results are available, transfer pricing must ordinarily be benchmarked transaction-wise rather than by aggregating distinct transactions, and any adjustment must be confined to the controlled international transactions actually in issue.
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