Transfer pricing benchmarking cannot be split or adjusted ad hoc without a recognised method or comparable uncontrolled transaction.

Closely linked international transactions benchmarked together under TNMM should not be selectively split out for separate transfer pricing adjustment unless a valid comparable uncontrolled transaction is shown. On the facts, intra-group service payments supported by an agreement, documentary evidence and demonstrated business benefit could not be assigned a nil arm's length price under CUP. Likewise, import of capital goods could not be adjusted by rejecting the assessee's benchmarking and imposing an ad hoc reduction of the associated enterprise's mark-up without applying a recognised transfer pricing method. The transfer pricing principles applied require method-based benchmarking and consistency with the accepted factual matrix.

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Issues: (i) Whether the transfer pricing adjustment relating to payment for intra-group services could be sustained by segregating that transaction from the other closely linked international transactions and by determining the arm's length price at nil under the comparable uncontrolled price method; (ii) Whether the transfer pricing adjustment relating to import of capital goods could be sustained by rejecting the assessee's benchmarking and making an ad hoc adjustment to the mark-up charged by the associated enterprise.

Issue (i): Whether the transfer pricing adjustment relating to payment for intra-group services could be sustained by segregating that transaction from the other closely linked international transactions and by determining the arm's length price at nil under the comparable uncontrolled price method.

Analysis: The assessee had benchmarked the transactions on an aggregate basis under transactional net margin method, and the approach was accepted for the remaining closely linked transactions. The payment for intra-group services was supported by an agreement and documentary evidence showing receipt of planning, safety, information system, procurement and human resource support, together with material indicating tangible business benefit. The determination of nil arm's length price under CUP was found unsustainable because no comparable uncontrolled transaction was brought on record and the transaction could not be selectively carved out from the accepted bundled approach on the facts presented.

Conclusion: The transfer pricing adjustment on account of intra-group services was deleted and the issue was decided in favour of the assessee.

Issue (ii): Whether the transfer pricing adjustment relating to import of capital goods could be sustained by rejecting the assessee's benchmarking and making an ad hoc adjustment to the mark-up charged by the associated enterprise.

Analysis: The purchase of capital goods from the associated enterprise was not in dispute, but the authorities below did not benchmark the transaction under any recognised method in a lawful manner. The arm's length price was effectively fixed by disallowing the mark-up or by allowing a partial mark-up on an ad hoc basis, which was held to be inconsistent with the transfer pricing rules. The absence of any demonstrated factual distinction from earlier years, where similar transactions had been accepted, also weighed against the adjustment.

Conclusion: The adjustment relating to import of capital goods was deleted and the issue was decided in favour of the assessee.

Final Conclusion: The appeal succeeded in full, with both transfer pricing adjustments set aside and the assessed additions on these counts deleted.

Ratio Decidendi: Where international transactions are closely linked and have been benchmarked together under TNMM on an accepted factual matrix, a transaction cannot be selectively segregated and benchmarked at nil under CUP without a comparable uncontrolled transaction; similarly, an arm's length price cannot be determined by ad hoc disallowance or partial mark-up reduction without applying a recognised transfer pricing method in accordance with the rules.

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