Transfer pricing adjustment on royalty receipts fails when based only on reporting mismatches without arm's length analysis.

Transfer pricing adjustment on royalty receipts could not be sustained merely because Form 3CEB figures differed from the amounts reported by associated enterprises. The adjustment was based only on year-wise reporting mismatches, without any determination of arm's length price under the prescribed transfer pricing methods or examination of functions, assets and risks. The noted differences were substantially explained by timing differences in revenue recognition, differing accounting periods and receipt-based taxability of royalty, with substantial reconciliation of amounts on record. On that basis, an ad hoc addition was held unsustainable and the transfer pricing addition was deleted in favour of the assessee.

---

---

Issues: Whether the transfer pricing adjustment on royalty receipts could be sustained merely because the amounts reflected in Form 3CEB of the assessee differed from the amounts shown by its associated enterprises.

Analysis: The adjustment was founded only on year-wise mismatches in reporting and not on any determination of arm's length price by one of the prescribed methods under the transfer pricing regime. The differences were found to arise substantially from timing differences in revenue recognition between the non-resident assessee and its Indian group entities, including the effect of differing accounting periods and receipt-based taxability of royalty. The record also showed substantial reconciliation of the amounts. An addition made in this ad hoc manner, without examining functions, assets and risks and without applying the statutory transfer pricing methods, was held to be unsustainable.

Conclusion: The transfer pricing addition was deleted and the issue was decided in favour of the assessee.

---