|CORAM:||Abraham P. George (AM), P. Madhavi Devi (JM)|
|CATCH WORDS:||aggregation, Arms length price, Transfer Pricing|
|COUNSEL:||K. R. Vasudevan|
|DATE:||November 21, 2014 (Date of pronouncement)|
|DATE:||December 3, 2014 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|Transfer Pricing: Law on aggregation of several international transactions to determine the Arms' Length Price explained|
1) Whether the payment of royalty is interlinked and interconnected with the other international transactions of the assessee with its AE’s?
2) Where different international transactions with the AE are interconnected and interlinked, whether the aggregation of the transactions is required and the comparables are also be considered on aggregate basis.
(i) As per the Indian Income-Tax Act, ideally, the transfer pricing is to be made on a transaction by transaction basis. However, Rule 10A(d) provides that the term ‘transaction’ includes a number of closely linked transactions. Thus, in cases where separate transactions are so closely linked or are closely inter-related or continuous and where application of the arm’s length principle on a transaction by transaction basis becomes cumbersome for all involved and would not lead to an accurate result, recourse is often had to evaluate transactions following an ‘aggregation’ principle. Due to increasing presence of composite contracts and ‘package deals’ in an MNE group, the aggregation of transactions become necessary as a composite contract may contain a number of elements including royalties, leases, sale and licenses all packaged into one deal. One would usually want to consider the deal in its totality to understand how various elements relate to each other, but the components of the composite package deal may or may not, depending on the facts and circumstances of each case, need to be evaluated separately to arrive at the appropriate transfer price. Aggregation issue may also arise when looking at uncontrolled comparables. This is because third party information is not often available at the transaction level. In such circumstances, entity level information is the only recourse available. Therefore, whether ALP-principle is to be applied on a transaction by transaction basis or on an aggregation basis depends on the facts of each case and is not universally or generally applied in all composite contracts involving multiple transactions.
(ii) In the case before us, the assessee has entered into various transactions which include purchase of raw-material, components and consumables, capital assets and payment towards royalty, technical assistance, IT support fee, payment of warranty claims, training fee, reimbursement of expenses etc. It is the case of the assessee that all these transactions are inter-linked. However, on perusal of the TP documents filed along- with return of income, we find that the payment of royalty is not part of a composite contract/agreement but is on account of a separate Technical Assistance Agreement entered into by the assessee with its AE. The assessee is required to pay the royalty under the Technical Assistance Agreement for use of certain Technical and manufacturing know-how proprietary to Toyota Motor Corporation/Aisin Takaoka Company which is developed by them by virtue of their investment in research and development.
(iii) From the above details, it is seen that the payment of royalty is independent of the purchase of raw materials, components, tools, packing materials, fixed assets etc. The royalty is exclusively towards the use of know-how in the manufacturing process undertaken by the assessee and is therefore not in any way interlinked or inter-connected with other transactions and it would not lead to inaccurate result if it is analyzed separately. In such a situation, we are of the opinion that the contract of payment of royalty can be analyzed separately and the ALP of such a payment can be determined independently. The ‘L’ bench of the Tribunal at Mumbai, in the case of UCB India(P) Ltd. vs. Ass.CIT, reported in (2009) 121 ITD 131(Mum), held that, when in an enterprise, only similar transactions are undertaken, i.e. all the transactions are of the same type, same class and of similar variety, and the enterprise does not have any other transaction which is not similar, in such a situation, the operating margins of the enterprise would be the TNMM of a class of transactions. In view of the same, we do not see any reason to take a different stand from that of the AO on this issue.