Step 1: Analyze the given equation.
Expand and simplify the given equation using trigonometric identities:
\[
(a-b)^2 \cos^2 \frac{C}{2} + (a+b)^2 \sin^2 \frac{C}{2} = a^2 + b^2.
\]
Applying the half-angle formulas and simplifying can lead to insights about the relationship between sides \(a, b,\) and angles \(A, B, C\).
Step 2: Apply cosine rule and simplify.
Using the cosine rule in triangle geometry and comparing it with the given equation could simplify to:
\[
\cos A = \sin B.
\]
Step 3: Verify with triangle properties.
Check if the simplified equation holds under the cosine and sine laws, ensuring the result complies with the geometry of triangle ABC.