Transfer Pricing- Aggregation of Transactions for Benchmarking
Aggregation of transactions or ‘blended Transaction approach’ is a nicely-widely wide-spread exercise for benchmarking and resolution of arms’ period price of global transaction/ exact domestic transactions in switch Pricing Certification and assessments and is broadly upheld in many judgements.
The aggregation and clubbing of closely related transactions is permitted underneath Indian transfer pricing law. segment 92C (1) of the profits-tax Act, 1961 speaks about “nature of transaction or class of transaction”. in addition the term “transaction” itself is defined in Rule 10A(d) of the profits-tax regulations, 1962 to encompass some of “carefully linked transactions”.
If some of transactions are carefully linked or non-stop in nature and bobbing up from a continuous transactions of supply of amenity or offerings, the transactions can be authorized as carefully connected transactions for the reason of transfer pricing and in phrases of rule 10A(d) of transfer Pricing rules.
The OECD transfer pricing recommendations Para three.9 and three.eleven also highlights that during sure situations it’s far hard to assess transactions separately and want to be evaluated via bundling them. The OECD guidelines have referred a portfolio approach as business method such as tax payers bundling certain transaction for the reason of earning the best return throughout portfolio as opposed to single product. for example, a few merchandise can be advertised by the tax payer with a low income or maybe at loss because they invent a call for for other products or associated services of the same tax payer which might be then sold or provide excessive earnings. some of the examples given in the OECD hints for switch pricing are the device and captive after-market consumables along with merchandising coffee machines and coffee drugs, or printers and cartridges. consequently, if two or more transactions between the same events i.e., the Assessee and its partner corporation can be stated to be closely related if the transactions are interlinked and phrases and situation in addition to fees among the parties are decided primarily based at the totality of the transactions and now not on individual and separate transactions.
also, as in keeping with an example cited by way of the Institute of Chartered Accountants of India (in quick the ‘ICAI’) in its guidance Notes on switch pricing, it’s miles said that or more transactions may be said to be ‘carefully connected’, in the event that they emanate from a commonplace supply, being an order or contract or an settlement or an association, and the nature, characteristic and terms of such transactions substantially glide from the stated commonplace supply.
The Indian Courts and Tribunals have analysed and discussed the concept of bundled technique or aggregation method in lots of instances.
In a latest case of Avery Dennison (India) Pvt. Ltd. [TS-527-HC-2016(Del)], the assessee had entered into global transactions with its AEs beneath a composite settlement for purchase of raw fabric, sale of completed goods, payment of service fee, and many others, but TPO break up the transactions and proceeded to apply the CUP approach for service expenses and made adjustments. The honorable Delhi high courtroom (HC) upheld the order of profits Tax Appellate Tribunal(ITAT) which rejected the method of TPO and customary the ALP determined by using the assessee by using aggregating transactions below Transaction internet margin method (TNMM), looking at that the assessee changed into predominantly a producer, and that services acquired via it from its AEs have been intrinsically related to middle business operations.
let us see a few different cases in which aggregation of transactions for the cause of benchmarking and resolution of hands’ length fee (ALP) of same were mentioned:
Transactions emanating from commonplace source can be aggregated: Tribunal held that wherein quantity of transactions are closely connected, then the equal the identical must be dealt with as composite transaction and can be aggregated and construed as a unmarried transaction for the motive of determining the arm’s period price. in which or extra transactions emanate from not unusual supply being an order or agreement or an settlement or an association, then such transactions can be said to be closely connected as the nature, feature and terms of such transactions drastically flow from the said commonplace supply and construed as a unmarried transaction for cause of figuring out arm’s length fee. (Cummins India Ltd.  fifty three taxmann.com fifty three (Pune – Trib.))
Transactions should be part of general package deal deal: The Punjab & Haryana high courtroom had held that as a way to integrate two or more transactions, it’s miles critical that they ought to be both inextricably connected to every other both by using way of a bundle deal or that a number of transactions are priced differently however on the know-how that the assessee will take delivery of all of them together (i.e. either take all or depart all). It in addition held that simply due to the fact purchase of products and recognition of offerings lead to manufacture of very last product, it does now not comply with that they’re established transactions. (Knorr-Bremse India P. Ltd. v. Asstt. CIT  380 ITR 307/ 236 Taxman 318/63 taxmann.com 186))
offerings/goods used for Manufacture not decisive for aggregation: The applicable criteria to decide whether or not positive transactions be taken into consideration as one worldwide transaction or not is to look if such transactions were entered into a package deal deal or have been meant to be simultaneously normal or those are so intently connected that one cannot at all stand with out the alternative. The mere reality that each the intra-organization services and items are used by the assessee for the manufacture of the final product cannot be treated decisive to recall such separate transactions as a unmarried transaction. (Gruner India (P.) Ltd.  70 taxmann.com 240 (Delhi – Trib.))
Transactions need to be encouraged via/dependent on each different: in order to have a look at whether or not the quantity of transactions are intently related or non-stop so that you can mixture for the purpose of evaluation it’s miles to be taken into consideration that one transaction is observe-on of the sooner transaction and then the subsequent transaction is done and dependent completely or extensively on the sooner transaction. it is able to be vice-versa whilst the earlier transaction has been entered into among events by using preserving in thoughts that a continuous transaction of comparable nature might be entered into between the events thereafter. therefore, while the transactions are motivated by means of each different and in particular in figuring out the price and profit worried in the transactions then those transactions can thoroughly be seemed as carefully connected transactions. (Boskalis international Dredging worldwide CV  forty seven taxmann.com 150 (Mumbai – Trib.))
Transactions should comply with equal or comparable interest or capabilities: excessive courtroom held tht the worldwide transaction of AMP fees have to be bundled/aggregated with other international transaction completed with the aid of the assessee as a distributor, who either actually acts an agent of manufacturer or purchases items from the producer for resale at his own account. also, HC held that Inter-related worldwide transactions can be aggregated and section 92(three) does not limit the set-off. (Sony Ericsson cell Communications India (P) Ltd. v. CIT  374 ITR 118/231 Taxman 113/55 taxmann.com 240 (Delhi))
remark: it is discernible from the order that the utility of TNM approach isn’t suitable and proper in case the assessee is engaged in production sports. In such situations, the import of uncooked material for manufacture might be an independent international transaction viz., advertising and distribution sports or features. The essence of said order is that or greater unrelated transactions can’t be aggregated and in case of a ‘manufacturer’, the international transactions concerned with the manufacturing interest can not be aggregated with the AMP activities as both are separate and awesome.
Aggregation with the aid of TPO not permissible if separate benchmarking through assessee: The aggregation method of benchmarking the worldwide transactions via the TPO is not sustainable as per the today’s criminal role. it is a trait law that the transactions need to be independently benchmarked making use of the precise approach in benchmarking of the transactions. (SAS Institute (India) (P.) Ltd  sixty seven taxmann.com 271 (Mumbai – Trib.))
remark: In this example, tribunal upheld the assessee approach of one by one benchmarking the transactions but the reasoning given via the tribunal become no longer in keeping with accepted legal exercise and law. Even the TP policies expressly permit the aggregation or combined transaction method and also OECD pointers also suggest portfolio method in element. however, the selection reflects that TPO cannot insist on aggregation of transactions where assessee himself has benchmarked the transactions one at a time in accordance with regulations in force.
Aggregation of Unrelated transactions not permissible: also, even though in switch pricing lawsuits, aggregation of related transactions is permissible, but there is no rule that all related and unrelated transactions can be blended and shown at ALP below TNMM on entity stage. (JCB India Ltd.  69 taxmann.com 383 (Delhi – Trib) )
Clubbing dependent on availability of comparables: Held, worldwide transaction of AMP costs can be clubbed with other international transactions executed by assessee as distributor best when AMP functions carried out by means of examined party and comparables are identical (Zimmer India (P.) Ltd.  60 taxmann.com a hundred and seventy (Delhi – Trib.)
price of royalty to be used of system is break free production interest– Assessee-organisation became engaged in manufacture of creation equipments and paid royalty to its AE for utilization of a specific device and implemented TNMM on entity level. Delhi tribunal held that in view that said transaction of fee of royalty became unbiased of other transactions, ALP of transaction in question changed into to be decided seperately beneath CUP technique. (JCB India Ltd.  69 taxmann.com 383 (Delhi – Trib.))
Import, export, IT assist and guarantee are inter-related: The Tribunal, concluded that import, export of spare components, IT help offerings, get entry to to customized parts catalogue and amount obtained for warranty attention had been inter-associated transactions, which had been sourcing activities of assessee-enterprise and, therefore, identical needed to be aggregated as a way to benchmark worldwide transaction. (Cummins India Ltd.  fifty three taxmann.com fifty three (Pune – Trib.))
Royalty inextricably linked with manufacturing and sales: The tribunal upheld the aggregation technique adopted by using assessee wherein assessee aggregated royalty with ITES services and carried out TNMM on ordinary foundation and held that royalty is inextricably linked with manufacturing and sales and the assessee become accurate in using an average TNMM for inspecting the royalty. inside the absence of production and sale of merchandise, there would be absolute confidence springing up concerning fee of any royalty. That being so, royalty can not be taken into consideration, and tested in isolation on a standalone foundation. (Daksh business procedure offerings (P.) Ltd.  72 taxmann.com 44 (Delhi – Trib.))
Royalty for know-how can not be aggregated with imports and exports: Tribunal held that wherein assessee-organization entered into worldwide transactions of import of raw substances and export of completed goods alongwith royalty price to be used of technical expertise and logo name of AE, on the grounds that said transactions had no link with every other, TPO became justified in segregating the ones transactions and figuring out ALP of royalty bills with the aid of applying CUP method. (Gruner India (P.) Ltd.  70 taxmann.com 240 (Delhi – Trib.))
Transaction with each AE need to be one after the other aggregated: Held, in which for execution of challenge, assessee company had employed equipments and dredgers from multiple associated employer, in determining ALP, aggregation of transaction would be permitted simplest to quantity of transactions or to quantity of contributors of transactions with every associated organization one by one and now not by clubbingtransactions with all AEs (Boskalis international Dredging worldwide CV  forty seven taxmann.com one hundred fifty (Mumbai – Trib.))
Separate invoicing does now not imply separate benchmarking: Held, separate invoicing of an activity, flowing from a singular contract /negotiation, would no longer ipso facto cause an inference that they are person/independent transactions. (Demag Cranes & components (India) (P.) Ltd.  30 taxmann.com 364 (Pune – Trib.))
Portfolio of products to be benchmarked together: Held that the individual object that’s a part of a basket of merchandise can not be benchmarked separately however all the products inside the same basket must be clubbed collectively for the purpose of determining the arm’s period price. further, ITAT held that in which assessee bought numerous insecticide products such as coil, liquid repellants, and so forth., to its AEs in various countries, due to the fact that all products fell in class of pesticides and were used as supplementary to each other, all insecticide merchandise bought through assessee to its AE in each u . s . would be clubbed and aggregated collectively u . s . a .-wise for motive of determining arm’s length fee of stated transaction. Godrej Sara Lee Ltd.  58 taxmann.com 109 (Mumbai – Trib.))
set up provider may be aggregated with production interest: Held, interest of set up and commissioning/engineering services of merchandise changed into ‘carefully linked’ with manufacturing hobby of such merchandise, the equal deserved to be aggregated and construed as a single transaction for purposes of figuring out ALP (Demag Cranes & components (India) (P.) Ltd.  30 taxmann.com 364 (Pune – Trib.)
Separate benchmarking of every unit/department of assessee no longer justified: Held, that the assessee is correct in contending that software development offerings rendered by means of it are of the equal or comparable nature amongst all 3 of its STP gadgets, inter se, and they ought to be combined and evaluated with the aid of adopting a combined transaction method, as opposed to employing the unitwise approach, as followed by way of the TPO. (Birla soft India Ltd.  46 taxmann.com 29 (Delhi – Trib.)
As may be seen from special dialogue above, even though aggregation of transactions with AEs for the cause of benchmarking and determination of ALP is a extensively customary exercise but the same needs to be done keeping in thoughts the judicial pronouncements as cited above. additionally, there are other parameters which need to be carefully considered at the same time as benchmarking the transactions in switch Pricing have a look at and shape 3CEB.
the debate revolving around analysing the arm’s duration price of international transactions on “transaction by using transaction” foundation or as a “bundled transaction” is extra or much less settled inside the gift context.
however, making use of the aggregation or combined transaction method for the sake of convenience or ease of training of TP have a look at without due attention can result in full-size TP changes and call for by way of the branch resulting in sizeable time eating litigation and accompanying fees.