Arm's-length pricing requires transaction-level benchmarking under one method unless international transactions are demonstrably closely linked.
Arm's-length pricing requires independent international transactions to be benchmarked separately unless they are demonstrably closely linked; one most appropriate method must be selected, and comparable-price and net-margin evidence requires verification before recomputation. Commission paid to foreign agents for services rendered outside India does not require withholding where the income is not chargeable to tax in India, preventing corresponding disallowance. Export-sale-linked additional consideration and business-nexus interest form eligible undertaking profits for the export deduction. Unit-specific expenses may be directly allocated and common expenses apportioned by quantities sold; an allocation error alone does not justify rejecting books. A corrected computation of an existing export-deduction claim may be considered without a revised return.
Issues: (i) Whether independent international transactions could be aggregated for determining the Arm's Length Price and whether both the Comparable Uncontrolled Price Method and Transactional Net Margin Method could be deployed as the Most Appropriate Method; (ii) Whether foreign-agent commission for services rendered outside India attracted tax deduction at source and disallowance; (iii) Whether sales-linked miscellaneous income and business-linked interest formed profits of the eligible undertaking for Section 10B deduction; (iv) Whether the re-allocation of expenses between the units and rejection of books of account were sustainable; and (v) Whether a Revised Computation of Income for an already claimed Section 10B deduction could be considered despite absence of a revised return.
Issue (i): Whether independent international transactions could be aggregated for determining the Arm's Length Price and whether both the Comparable Uncontrolled Price Method and Transactional Net Margin Method could be deployed as the Most Appropriate Method.
Analysis: Section 92(1) requires income from an international transaction to be computed having regard to its Arm's Length Price. Rule 10A(d) permits aggregation only of closely linked transactions; independent sales made on different dates and at differing prices cannot be annually averaged without evidence of a common contractual or other binding linkage. The Comparable Uncontrolled Price Method requires comparison using comparable prices on the transaction date or an appropriately proximate date, with arithmetic averaging only of multiple comparable prices for the relevant transaction. Although another prescribed method may be advanced at the appellate stage, Section 92C(1) requires identification of one Most Appropriate Method rather than simultaneous reliance on both the Comparable Uncontrolled Price Method and Transactional Net Margin Method. The Transactional Net Margin Method data admitted as additional evidence had not been verified, and the contractual material and claimed comparability adjustments also required examination.
Conclusion: The Arm's Length Price adjustment requires fresh determination by the Assessing Officer/Transfer Pricing Officer after the assessee identifies a single Most Appropriate Method and the relevant evidence is verified; annual aggregation is unavailable unless closely linked transactions are established.
Issue (ii): Whether foreign-agent commission for services rendered outside India attracted tax deduction at source and disallowance.
Analysis: The agents performed their services outside India, and no material established that the commission income was chargeable to tax in India under Sections 5 or 9(1). Consequently, Section 195 did not require tax deduction at source, and the consequential disallowance under Section 40(a)(i) was inapplicable. Documentary material established the genuineness of the services and payments.
Conclusion: The commission disallowance was correctly deleted; this issue is in favour of the assessee.
Issue (iii): Whether sales-linked miscellaneous income and business-linked interest formed profits of the eligible undertaking for Section 10B deduction.
Analysis: The amount credited as miscellaneous income was additional consideration arising from export sales and its accounting nomenclature did not alter its business character. Interest on the business security deposit and the nominal bank interest had a direct nexus with the undertaking's business. Section 10B(4) applies the export-turnover formula to the profits of the business of the undertaking, which includes such business receipts.
Conclusion: The additional sale consideration and the interest income qualify for inclusion in the eligible profits for Section 10B deduction; this issue is in favour of the assessee.
Issue (iv): Whether the re-allocation of expenses between the units and rejection of books of account were sustainable.
Analysis: Expenses specifically attributable to a unit were directly allocated, while common expenses were allocated according to quantities sold. A mistake in the original allocation did not by itself establish that the books were incomplete or incorrect, and no specific defect in the books justified rejection of books of account under Section 145(2).
Conclusion: The re-allocation of expenses was valid and the rejection of books of account was unsustainable; this issue is in favour of the assessee.
Issue (v): Whether a Revised Computation of Income for an already claimed Section 10B deduction could be considered despite absence of a revised return.
Analysis: The assessee had claimed Section 10B deduction in the original return and subsequently furnished only a corrected computation of that existing claim. A Revised Computation of Income correcting the quantification of an existing deduction is not a fresh claim, and the Assessing Officer remains obliged to determine the correct deduction.
Conclusion: The corrected computation of the existing Section 10B claim could be considered; this issue is in favour of the assessee.
Final Conclusion: The Arm's Length Price issue requires a method-specific and evidence-based fresh determination, while the tax treatment of the foreign-agent commission and the eligible-unit deduction computations remains governed by the affirmed characterisation of the relevant receipts and expenses.
Ratio Decidendi: Independent international transactions may be aggregated for Arm's Length Price benchmarking only when they are shown to be closely linked; absent such linkage, transaction-level analysis under one identified Most Appropriate Method is required.