Transfer Pricing ALP: Application of “Aggregation”/ “Portfolio Approach”

Atul Limited vs. ACIT (ITAT Ahmedabad)

The Tribunal had to consider the following transfer pricing issues: (i) whether the principle of “aggregation” or “portfolio approach” could be adopted so as to adjust the under-charge of one international transaction against the over-charge for another; (ii) whether an adjustment for the “difference in application” of the product by the customer could be made; (iii) whether an adjustment towards “quantity discount” could be made; (iv) whether the “tax avoidance motive” is relevant in invoking transfer pricing provisions; (v) whether (pre sub-sec. (2A) of s. 92CA) if the TPO determines the ALP of a transaction which is not referred to him, can the AO use the material to himself determine the ALP? HELD by the Tribunal:

(i) Rule 10A(d) defines the term “transaction” to include a number of closely linked transactions. The “closely linked transactions” are those which cannot be segregated and if segregated, cannot be evaluated adequately on a separate basis and it is impractical to determine the price of each individual product or transaction. This is also the purport of the OECD Guidelines. On facts, as the transactions are neither of same ‘product-line’ nor ‘routed-in-parts’, the ‘portfolio-approach’ is not called for (Tara Ultimo & UE Trade Corporation 45 SOT 197 (Delhi) referred);

(ii) An adjustment towards ‘difference in application’ i.e. that the ALP should be determined depending on what the end user uses the product for is not acceptable because the purpose for which the buyer uses the product has no relevance in fixation of sale price;

(iii) However, an adjustment towards ‘quantity discount’ is permissible because it is a common market practice that bulk purchasers are generally given some discount. The assessee has to show that such discount have been given to non AEs as well;

(iv) The argument that the department has to show “tax avoidance motive” before invoking transfer pricing provisions is not acceptable because the language used by the legislature is clear (Azetc Software 107 ITD 141 (Bang) (SB) followed);

(v) While it is true, as held in Amadeus India 246 CTR 338 (Del), that pre sub-sec. (2A) of s. 92CA, the TPO could not inquire into matters that were not referred to him by the AO, it is a fact that he could not make a reference to the TPO because the information about the transaction was not reported in Form 3CEB. The assessee cannot take advantage of its own mistake. Even if the TPO’s report on that issue is illegal, the AO is now aware of the fact that there is such an international transaction and he is empowered u/s 92C(3) to determine the ALP thereof.