Transfer pricing in back-to-back construction projects: CUP preferred over TNMM, and pass-through flows were not adjustable.

In a back-to-back construction arrangement where joint ventures functioned only as routing or administrative conduits, the Tribunal held that the comparable uncontrolled price method was the proper benchmark because the controlled transaction mirrored the uncontrolled transaction and receipts passed through without value addition; the transactional net margin method was wrongly applied. It also held that reimbursements on a cost-to-cost basis, capital contributions, mobilisation advances, and interim-payment or variation-adjustment flows were not liable to transfer pricing adjustment, as they were pass-through or capital movements without service markup and the relevant project receipts were already taxed in India.

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Issues: (i) Whether the transactional net margin method could be applied to benchmark the assessee's project-office transactions routed through joint ventures, or whether the comparable uncontrolled price method was the appropriate method; (ii) Whether reimbursements, capital contributions, mobilization advances, and receipts linked to interim payment certificates or variation adjustments were exigible to transfer pricing adjustment as international transactions.

Issue (i): Whether the transactional net margin method could be applied to benchmark the assessee's project-office transactions routed through joint ventures, or whether the comparable uncontrolled price method was the appropriate method.

Analysis: The project arrangements were found to be back-to-back construction contracts in which the joint ventures acted as administrative and routing vehicles, while the actual work, assets, and risks were borne by the project office to the extent of work allocated to it. The record showed that the contract price and work allocation were already fixed, the receipts passed through the joint ventures without value addition, and the comparable uncontrolled price reflected the same transaction economics as the controlled transaction. The transfer pricing analysis based on enterprise-wide characterisation and transactional recharacterisation was rejected in favour of a transaction-specific comparison.

Conclusion: The transactional net margin method was wrongly applied and the comparable uncontrolled price method was the correct benchmark, in favour of the assessee.

Issue (ii): Whether reimbursements, capital contributions, mobilization advances, and receipts linked to interim payment certificates or variation adjustments were exigible to transfer pricing adjustment as international transactions.

Analysis: The Tribunal accepted that reimbursement items were cost-to-cost pass-throughs without service element or markup, capital infusions and mobilization advances were capital or working-fund movements, and the variation-adjustment and interim-payment flows were routed through the joint ventures merely for administrative convenience. It was also found that the relevant project receipts were already offered to tax in India and that there was no realistic scope for profit shifting outside India on the facts of the case. The transfer pricing adjustment was therefore not sustainable on these items.

Conclusion: These items did not warrant transfer pricing adjustment, in favour of the assessee.

Final Conclusion: The revenue's challenge to the deletion of the transfer pricing adjustment failed, and the assessee's benchmarking approach and characterization of the disputed flows were sustained.

Ratio Decidendi: In a back-to-back construction arrangement where the joint venture is only a routing or administrative conduit and the controlled transaction mirrors the uncontrolled transaction, CUP is the preferred method and cost-to-cost, capital, and pass-through flows without service value addition do not justify a transfer pricing adjustment.

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