Domestic transfer pricing and valuation principles: omitted statutory basis, unsuitable circle-rate benchmarking, and upheld interest adjustment deletion.

Omission of clause (i) of section 92BA was treated as removing the statutory basis for the domestic transfer pricing reference, so the related adjustment could not survive, and prior reporting of the transaction did not preclude challenge. In valuing development rights, capitalisation in the accounts did not exclude transfer pricing scrutiny, but circle rate was held to be an unsuitable benchmark for arm's length valuation, and the assessee's valuation was preferred on the facts. Routine business expenditure required fresh factual verification. On interest paid on CCDs/OCDs, the broader comparable set and median-based analysis were accepted, and the adjustment was deleted.

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Issues: (i) Whether, after omission of clause (i) of section 92BA, the domestic transfer pricing reference and the resulting adjustment survived for the assessment year in question; (ii) whether the transfer pricing adjustment on purchase of development rights could be sustained by rejecting the assessee's valuation and applying circle rate as the benchmark, including the treatment of capitalisation of the payment; (iii) whether the disallowance of business expenditure was justified; (iv) whether the transfer pricing adjustment on interest paid on CCDs/OCDs was sustainable.

Issue (i): Whether, after omission of clause (i) of section 92BA, the domestic transfer pricing reference and the resulting adjustment survived for the assessment year in question?

Analysis: The omission of clause (i) of section 92BA was held to remove the charging basis for the specified domestic transaction reference. The Court preferred the view that omission operates to obliterate the provision for the relevant purpose, and followed the line of authority treating such omission as eliminating the statutory foundation for the reference. It also held that the assessee's earlier reporting of the transaction in transfer pricing documentation did not estop it from challenging the applicability of the provision.

Conclusion: The challenge to the domestic transfer pricing reference succeeded and the adjustment based on section 92BA(i) could not be sustained.

Issue (ii): Whether the transfer pricing adjustment on purchase of development rights could be sustained by rejecting the assessee's valuation and applying circle rate as the benchmark, including the treatment of capitalisation of the payment?

Analysis: The Court held that capitalisation in the books did not take the transaction outside transfer pricing where the payment was for development rights in a real estate business. On valuation, it found the assessee's method and report to be the proper benchmark in the facts, and held that circle rate is a fiscal yardstick for stamp duty and not, by itself, the proper measure of market value for transfer pricing purposes. The Court further held that the TPO and the first appellate authority erred in substituting the valuation with circle rate.

Conclusion: The adjustment on purchase of development rights was not sustainable and the assessee succeeded on the principal valuation issues.

Issue (iii): Whether the disallowance of business expenditure was justified?

Analysis: The Court found that the expenses appeared to be routine business expenses connected with the assessee's business, but noted that the relevant supporting details had not been properly verified by the lower authorities. The matter therefore required factual verification at the assessment stage.

Conclusion: The disallowance was set aside for fresh verification and the issue was restored to the Assessing Officer.

Issue (iv): Whether the transfer pricing adjustment on interest paid on CCDs/OCDs was sustainable?

Analysis: The Court accepted the assessee's comparables in substance and upheld the first appellate authority's approach in broadening the comparable set, applying a median-based analysis, and rejecting the TPO's substitution of dissimilar comparables from unrelated industries. It found no infirmity in deleting the adjustment.

Conclusion: The deletion of the interest adjustment was upheld and the Revenue failed on this issue.

Final Conclusion: The assessee obtained relief on the principal transfer pricing controversy and on the Revenue's appeal, while the business expenditure issue was remanded for verification.

Ratio Decidendi: Where the statutory basis for a domestic transfer pricing reference stands omitted, and the valuation benchmark adopted by the revenue authorities is not the proper arm's length measure for the transaction, the adjustment cannot be sustained merely because the assessee had earlier reported the transaction in transfer pricing documentation.

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