Transfer-pricing tolerance applies to a single internal comparable, limiting vehicle pricing adjustments within the notified range.
The notified 3% transfer-pricing tolerance under Rule 10CA(7) applies where an arm's-length benchmark uses a single internal comparable, because its arithmetical mean is that single value; the vehicle-segment adjustment falls where the declared margin remains within the band. Corporate guarantee pricing must reflect its distinction from a bank guarantee, with the stated benchmark of 0.5%. A separate notional-interest adjustment on overdue associated-enterprise receivables requires verification that interest was likewise not charged to comparable third-party export customers; no adjustment arises if that uniform practice is substantiated.
Issues: (i) Whether the 3% tolerance under transfer-pricing law applies where the arm's-length benchmark is based on a single internal comparable. (ii) Whether the corporate guarantee adjustment should be benchmarked at 0.5%. (iii) Whether a separate notional-interest adjustment on outstanding receivables can be sustained without verifying the treatment of comparable third-party export receivables.
Issue (i): Whether the 3% tolerance under transfer-pricing law applies where the arm's-length benchmark is based on a single internal comparable.
Analysis: The third proviso to Section 92C(2) of the Income-tax Act, 1961, read with Rule 10CA(7) of the Income-tax Rules, 1962 and the notified 3% transfer-pricing tolerance band, governed the determination. The margin earned in the non-AE and domestic segment was used as an internal comparable to benchmark the AE segment. A dataset containing a single value has that value as its arithmetical mean; Rule 10CA(7) does not require more than one comparable for the tolerance to operate. The variation between the declared AE margin and the arm's-length margin adopted was within 3%.
Conclusion: The assessee was entitled to the 3% tolerance benefit, and the transfer-pricing adjustment for the two- and three-wheeler segment was deleted, in favour of the assessee.
Issue (ii): Whether the corporate guarantee adjustment should be benchmarked at 0.5%.
Analysis: The corporate guarantee commission was required to be benchmarked having regard to the distinct nature of a corporate guarantee as compared with a bank guarantee. On identical facts, the applicable arm's-length corporate guarantee rate had been determined at 0.5%.
Conclusion: The corporate guarantee adjustment must be recomputed by applying a 0.5% guarantee commission, in favour of the assessee.
Issue (iii): Whether a separate notional-interest adjustment on outstanding receivables can be sustained without verifying the treatment of comparable third-party export receivables.
Analysis: The asserted uniform policy of not charging interest on delayed receivables from both AE and third-party export customers was material to the proposed notional interest on receivables. The assertion required verification through documentary evidence before determining whether any separate transfer-pricing adjustment was warranted.
Conclusion: The receivables issue was remitted for verification; no interest adjustment shall be made if the absence of interest charged to third-party export customers is substantiated.
Final Conclusion: The vehicle-segment pricing was accepted within the notified tolerance, the corporate guarantee benchmark was limited to 0.5%, and the receivables adjustment requires factual verification.
Ratio Decidendi: A notified transfer-pricing tolerance under Rule 10CA(7) applies even where the dataset comprises a single internal comparable, since its arithmetical mean is that value.