Arm's length price must follow the prescribed method; ad hoc mark-up on employee cost reimbursement was deleted.

Reimbursement of employee salary and travel costs from associated enterprises could not be adjusted on an ad hoc mark-up where the transfer pricing officer did not determine arm's length price by the prescribed statutory method. The assessee's cost-plus model and cost-to-cost characterisation were rejected without lawful benchmarking, and the Tribunal held that arm's length price must be computed strictly in accordance with section 92CA. Because the adjustment was made without following the mandated method, it lacked legal support and was deleted.

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Issues: Whether the transfer pricing adjustment made on reimbursement of employee costs from associated enterprises was sustainable when the transfer pricing officer did not determine arm's length price by the prescribed method.

Analysis: The assessee was engaged in stability studies and operated on a cost-plus model. The reimbursement received from associated enterprises was towards salary and travel cost of employees deputed on on-site work. The transfer pricing officer rejected the assessee's cost-to-cost characterization and applied an 18% mark-up on the salary cost of the deputed employees without following the method prescribed under section 92CA of the Income-tax Act, 1961. The Tribunal noted that arm's length price must be determined strictly in accordance with law and that an adjustment cannot be sustained on an ad hoc basis. Since the prescribed statutory method was not followed, the adjustment lacked legal support.

Conclusion: The transfer pricing adjustment was deleted and the appeal was allowed in favour of the assessee.

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