Transfer pricing adjustment barred where arm's length pricing would reduce taxable income under the cost-plus model.

Section 92(3) of the Income-tax Act bars an arm's length price adjustment where applying the transfer pricing analysis would reduce the assessee's chargeable income or increase its loss. Here, the proposed adjustment to intra-group services was inseparable from the assessee's cost-plus model for IT-enabled services: lowering the arm's length price of the intra-group services would also reduce the revenue from the main services by a greater amount because the markup on cost would fall. On those facts, the adjustment would lower income computed from the books, so section 92(3) prevented its application. The arm's length price adjustment was therefore not warranted, and the challenge to the Tribunal's view failed.

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Issues: Whether section 92(3) of the Income-tax Act, 1961 bars an arm's length price adjustment where the adjustment would reduce the assessee's income and erode the tax base.

Analysis: The adjustment proposed on the intra-group services was found to be inseparable from the assessee's cost-plus model for its IT-enabled services. On the facts, reducing the arm's length price of the intra-group services would simultaneously reduce the revenue receivable for the main services by a greater amount because the markup on cost would also fall. The effect of applying the transfer pricing adjustment would therefore be to lower the income computed on the basis of the books. In that situation, section 92(3) prevents application of the arm's length principle, since that provision excludes cases where such computation has the effect of reducing chargeable income or increasing loss.

Conclusion: The arm's length price adjustment was not warranted because it would diminish taxable income, and the challenge to the Tribunal's view failed.

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