Transfer pricing method selection requires cogent reasons before rejection of a substantiated Most Appropriate Method.

The transfer pricing framework requires the Transfer Pricing Officer to record cogent reasons before rejecting an assessee's substantiated Most Appropriate Method. Where the assessee supports the Internal Cost Plus Method in its transfer pricing study, the officer cannot discard it and substitute the External Transaction Net Margin Method on an arbitrary or irrational basis. The High Court found no legal infirmity in the Tribunal's view and no substantial question of law arose from its order.

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Issues: Whether the Transfer Pricing Officer was justified in rejecting the assessee's Internal Cost Plus Method and substituting the External Transaction Net Margin Method, and whether any substantial question of law arose from the Tribunal's order.

Analysis: The Tribunal found that once the assessee had selected a Most Appropriate Method and supported it in the transfer pricing study, the Transfer Pricing Officer had to record and substantiate reasons for rejecting that method and for preferring another. The Tribunal held that the Transfer Pricing Officer's grounds for discarding the Internal Cost Plus Method were not sustainable and treated the selection of the alternative method as arbitrary and irrational. In that view, the High Court found no legal infirmity warranting interference.

Conclusion: The challenge to the Tribunal's direction failed, and no substantial question of law arose.

Ratio Decidendi: Where the assessee substantiates its chosen Most Appropriate Method, the Transfer Pricing Officer must give cogent reasons for rejecting it and cannot substitute another method arbitrarily.

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