CUP-based pricing for purchases from an associated enterprise challenged; transfer pricing ALP adjustment deleted for lack of proper ALP determination.

The dominant issue was whether an arm's length price (ALP) adjustment for purchases from an associated enterprise could be sustained when the assessee benchmarked specified domestic transactions under the CUP method. Applying the ratio of HC precedent and consistent ITAT reasoning, the Tribunal held that once CUP was accepted as the most appropriate method and the assessee's documentation supported comparability, the TPO/AO could not substitute an adjustment without first determining ALP under CUP; the ±5% range operates only after ALP determination and, if satisfied, bars adjustment. Consequently, the impugned transfer pricing adjustment on purchases from the AE was deleted and the appeal was allowed.

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1. ISSUES PRESENTED AND CONSIDERED

1) Whether an arm's length price adjustment for purchases treated as "specified domestic transactions" could be sustained where the relevant provision (clause (i) of section 92BA) stood omitted w.e.f. 01.04.2017, and both the TPO order and the assessment order were passed after that date.

2) Whether, on the merits of benchmarking, the assessee's adoption of the CUP method was the most appropriate method for determining ALP for the impugned purchase transactions with the associated enterprise, and whether any transfer pricing adjustment was warranted on that basis.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Sustainability of ALP adjustment post-omission of the SDT provision

Legal framework (as applied by the Tribunal): The Tribunal proceeded on the basis that clause (i) of section 92BA was omitted w.e.f. 01.04.2017 and applied the judicial principle (as followed in the relied-upon decision) that an unconditional omission, without a saving clause, results in the provision being treated as non-existent for continuing actions under that omitted provision.

Interpretation and reasoning: The Tribunal noted that the impugned ALP adjustment arose from treating the purchases as specified domestic transactions and that the TPO's order and the assessment order were both passed after 01.04.2017. Following the reasoning adopted in the Tribunal decision it relied upon (which, in turn, applied the Karnataka High Court view), the Tribunal held that action taken under the omitted provision could not be sustained after the omission became effective.

Conclusion: Since both the TPO order (28.10.2019) and the assessment order (19.12.2019) were passed after 01.04.2017, the Tribunal held that the upward ALP adjustment on this basis was not justified and directed deletion of the adjustment of Rs. 3,98,32,520.

Issue 2: Appropriateness of CUP method and need for adjustment on merits

Legal framework (as discussed): The Tribunal examined benchmarking under transfer pricing principles and discussed that the "±5%" is only a variation band for adjustment purposes after determination of ALP; if the price is within ±5% of ALP, no adjustment is required. It also addressed the selection of the "most appropriate method" (CUP versus TNMM) for benchmarking the impugned purchases.

Interpretation and reasoning: The Tribunal recorded that the assessee benchmarked the transactions using CUP and that, during transfer pricing proceedings, there was "no difference of opinion" between the assessee and the TPO regarding application of CUP as the most appropriate method. The Tribunal examined the documents/evidences referred to by the assessee and accepted that CUP was appropriate for the assessee's purchase transactions. The Tribunal further clarified that the 5% tolerance is not a standalone basis to avoid benchmarking but is relevant once ALP is determined; nonetheless, applying CUP on the facts, the Tribunal found no transfer pricing adjustment was required.

Conclusion: The Tribunal held that CUP was the most appropriate method for the assessee's transactions and, on applying CUP with the supporting material on record, concluded that no transfer pricing adjustment was warranted. The transfer pricing adjustment made by the TPO/Assessing Officer was therefore deleted and the appeal was allowed.

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