TPO cannot reject internal comparables based solely on transaction size when determining arm's length pricing

Delhi HC upheld ITAT's decision rejecting TPO's arm's length price adjustment. TPO incorrectly rejected internal comparables solely based on transaction size, finding small volume of business with non-AEs insufficient compared to AE transactions. Court held size alone cannot justify rejecting comparables and that assessee was justified in adopting internal TNMM, comparing profits from AE transactions with non-AE transactions. ALP adjustment was deleted. Appeals on profit attribution between assessee and foreign AE were dismissed following consistency principle.

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Issues:
1. Transfer pricing adjustment and attribution of profits between the assessee and foreign Associated Enterprise (AE).

Analysis:
1. The primary issue in the appeals pertains to the transfer pricing adjustment and the attribution of profits between the respondent assessee and its foreign AE for Assessment Years 2009-10 and 2007-08. The Transfer Pricing Officer (TPO) had sought to make adjustments based on the size of the transaction set between the parties.

2. The Income Tax Appellate Tribunal (ITAT) considered the matter and referred to a previous assessment year's decision where it was held that for computing the arm's length price under the Transactional Net Margin Method (TNMM) based on internal comparables, it is not necessary for the net profit computations to be based on audited books of accounts. The ITAT concluded that the TPO erred in rejecting the segmental accounts and internal comparables based on size differences alone, as long as the net profits from controlled transactions were equal to or higher than uncontrolled transactions.

3. The judgment further highlighted the importance of functional analysis in transfer pricing, emphasizing the need for comparability analysis between controlled and uncontrolled transactions. The choice of the most appropriate method depends on the availability of potential comparables and the extent of adjustments required for accurate analysis.

4. Regarding the issue of attribution, the court noted the principle of consistency in previous decisions favoring the respondent assessee for AYs 2006-07 and 2008-09. As the Revenue Department had only filed an appeal on the transfer pricing issue for AY 2009-10, the court found no justification to entertain the appeals on the attribution issue, leading to the dismissal of the appeals.

5. In conclusion, based on the decisions rendered on the transfer pricing adjustment and attribution issues, the appeals were dismissed, and it was acknowledged that the questions raised in another related appeal would not survive in light of the judgment.

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