Benchmarking two international Transactions included in one another

Consider the situation – An assessee subject to Transfer Pricing pays its AE for “provision of basic market research and testing services”. Further it also pays “infrastructure services fees and reimbursement of expenses” separately. However, actually this “infrastructure services fees and reimbursement of expenses” is also as a part of “basic market research and testing services”. The TP officer accepts the expenditure for “basic market research and testing services” to AE but disputes “infrastructure services fees and reimbursement of expenses”. The question is “Is the approach incorrect by segregating the transactions related to the “payment of infrastructure fee” and the “reimbursement of expenses paid to Associated Enterprises (AEs) for employee salary costs and subjecting them to separate adjustments, while such transactions are already factored in the cost base used for charging the AE for the international transaction involving provision of basic market research & testing services which has been determined to be at arms length, by the Ld. AO / TPO himself in the impugned order itself.”

Here the answer is in the negative for the assessee. It is a fact that assessee has carried out two international transactions i.e. infrastructure services fees and reimbursement made to the AE and they have to be benchmarked by verification of various documents whether the allocation of expenditures by the AE are as per the norms and reasonableness whether the third party documents are submitted and on what basis these are allocated to the assessee. There is no duplication in this exercise as was held in Honda R&D (India) Private Limited Versus DCIT, Circle 10 (1), Delhi. - 2025 (10) TMI 579 - ITAT DELHI.

Let us now understand by a more common example- “the transactions related to the “purchase of goods” and the “royalty” paid to Associated Enterprises (AEs) are subject to separate adjustments, while royalty is already factored in the cost base used for charging the AE for the international transaction involving purchase of goods which has been determined to be at arms length, by the Ld. AO / TPO. The following is a numerical presentation –