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Transfer Pricing- Aggregation of Transactions

Income Tax - Direct Tax Code - DTC - By: - CA Rohit Gupta - Dated:- 7-9-2016 Last Replied Date:- 30-12-1899 - for Benchmarking Aggregation of transactions or Combined Transaction Approach is a well-accepted practice for benchmarking and determination of Arms Length Price of international transaction/ specified domestic transactions in Transfer Pricing Certification and assessments and is widely upheld in many judgements. The aggregation and clubbing of closely linked transactions is permitted un .....

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ons for the purpose of transfer pricing and in terms of rule 10A(d) of Transfer Pricing Rules. The OECD transfer pricing guidelines Para 3.9 and 3.11 also highlights that in certain situations it is difficult to evaluate transactions separately and need to be evaluated by bundling them. The OECD guidelines have referred a portfolio approach as business strategy consisting of tax payers bundling certain transaction for the purpose of earning an appropriate return across portfolio rather than sing .....

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me parties i.e., the Assessee and its associate enterprise can be said to be closely linked if the transactions are interlinked and terms and condition as well as prices between the parties are determined based on the totality of the transactions and not on individual and separate transactions. Also, as per an example noted by the Institute of Chartered Accountants of India (in short the 'ICAI') in its Guidance Notes on transfer pricing, it is stated that two or more transactions can be .....

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o international transactions with its AEs under a composite agreement for purchase of raw material, sale of finished goods, payment of service fee, etc, however TPO split the transactions and proceeded to apply the CUP method for service charges and made adjustments. The honorable Delhi High Court (HC) upheld the order of Income Tax Appellate Tribunal(ITAT) which rejected the approach of TPO and accepted the ALP determined by the assessee by aggregating transactions under Transaction Net margin .....

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ould be treated as composite transaction and can be aggregated and construed as a single transaction for the purpose of determining the arm's length price. Where two or more transactions emanate from common source being an order or contract or an agreement or an arrangement, then such transactions could be said to be closely linked as the nature, characteristic and terms of such transactions substantially flow from the said common source and construed as a single transaction for purpose of d .....

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eave all). It further held that merely because purchase of goods and acceptance of services lead to manufacture of final product, it does not follow that they are dependent transactions. (Knorr-Bremse India P. Ltd. v. Asstt. CIT 2016 (5) TMI 145 - PUNJAB AND HARYANA HIGH COURT ) Services/Goods used for Manufacture not decisive for aggregation: The relevant criteria to determine whether certain transactions be considered as one international transaction or not is to see if such transactions were .....

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to examine whether the number of transactions are closely linked or continuous so as to aggregate for the purpose of evaluation it is to be considered that one transaction is follow-on of the earlier transaction and then the subsequent transaction is carried out and dependent wholly or substantially on the earlier transaction. It can be vice-versa when the earlier transaction has been entered into between parties by keeping in mind that a continuous transaction of similar nature will be entered .....

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regated with other international transaction carried out by the assessee as a distributor, who either simply acts an agent of manufacturer or purchases goods from the manufacturer for resale at his own account. Also, HC held that Inter-connected international transactions can be aggregated and section 92(3) does not prohibit the set-off. (Sony Ericsson Mobile Communications India (P) Ltd. v. CIT 2015 (3) TMI 580 - DELHI HIGH COURT ) It is discernible from the order that the application of TNM Me .....

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the AMP activities as both are separate and distinct. Aggregation by TPO not permissible if separate benchmarking by assessee: The aggregation approach of benchmarking the international transactions by the TPO is not sustainable as per the today's legal position. It is a trait law that the transactions have to be independently benchmarked applying the appropriate method in benchmarking of the transactions. (SAS Institute (India) (P.) Ltd 2016 (4) TMI 157 - ITAT MUMBAI) In this case, tribunal .....

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s in force. Aggregation of Unrelated transactions not permissible: Also, even though in transfer pricing proceedings, aggregation of related transactions is permissible, yet there is no rule that all related and unrelated transactions can be combined and shown at ALP under TNMM on entity level. (JCB India Ltd. 2016 (6) TMI 123 - ITAT DELHI ) Clubbing dependent on availability of comparables: Held, International transaction of AMP expenses can be clubbed with other international transactions carr .....

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ther transactions, ALP of transaction in question was to be determined seperately under CUP method. (JCB India Ltd. 2016 (6) TMI 123 - ITAT DELHI) Import, export, IT Support and Warranty are inter-related: The Tribunal, concluded that import, export of spare parts, IT support services, access to customized parts catalogue and amount received for warranty consideration were inter-related transactions, which were sourcing activities of assessee-company and, therefore, same had to be aggregated in .....

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products, there would be no question arising regarding payment of any royalty. That being so, royalty cannot be considered, and examined in isolation on a standalone basis. (Daksh Business Process Services (P.) Ltd. 2016 (8) TMI 324 - ITAT DELHI ) Royalty for know-how cannot be aggregated with imports and exports: Tribunal held that Where assessee-company entered into international transactions of import of raw materials and export of finished goods alongwith royalty payment for use of technical .....

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e permitted only to extent of transactions or to extent of members of transactions with each associated enterprise separately and not by clubbingtransactions with all AEs (Boskalis International Dredging International CV 2014 (7) TMI 866 - ITAT MUMBAI ) Separate invoicing does not mean separate benchmarking: Held, separate invoicing of an activity, flowing from a singular contract /negotiation, would not ipso facto lead to an inference that they are individual/independent transactions. (Demag Cr .....

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all products fell in category of insecticides and were used as supplementary to each other, all insecticide products sold by assessee to its AE in each country would be clubbed and aggregated together country-wise for purpose of determining arm's length price of said transaction. Godrej Sara Lee Ltd. 2015 (6) TMI 673 - ITAT MUMBAI ) Installation service can be aggregated with manufacturing activity: Held, activity of installation and commissioning/engineering services of products was 'cl .....

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