Aggregated TNMM and Average LIBOR for receivables shaped transfer pricing treatment of associated enterprise transactions.

Business and management consultancy charges received from an associated enterprise were treated as closely linked to the assessee's core operations, so the arm's length analysis could be made on an aggregated TNMM basis rather than by separate transaction-wise benchmarking; the matter was remitted for examination of additional evidence and fresh transfer pricing review. Interest on outstanding receivables from associated enterprises was treated as an international transaction and was directed to be recomputed using Average LIBOR as the benchmark rate; that adjustment was therefore sustained in principle.

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Issues: (i) Whether business and management consultancy charges received from the associated enterprise could be segregated and separately benchmarked, or were required to be aggregated and tested under the Transactional Net Margin Method; (ii) whether interest on outstanding receivables from associated enterprises should be benchmarked by adopting Average LIBOR.

Issue (i): Whether business and management consultancy charges received from the associated enterprise could be segregated and separately benchmarked, or were required to be aggregated and tested under the Transactional Net Margin Method.

Analysis: The transaction was held to be closely linked with the assessee's core operations and the record contained additional evidence supporting receipt of services. Reliance was placed on co-ordinate bench decisions holding that, where entity-level margins are tested under TNMM, a transaction-to-transaction approach is not warranted for closely connected service payments and the arm's length analysis may be made on an aggregate basis.

Conclusion: The issue was remitted to the Transfer Pricing Officer to examine the additional evidence and benchmark the management fee on an aggregated TNMM basis. The ground was allowed for statistical purposes.

Issue (ii): Whether interest on outstanding receivables from associated enterprises should be benchmarked by adopting Average LIBOR.

Analysis: The receivables were treated as an international transaction, and the Tribunal followed co-ordinate bench authority directing computation of interest on delayed receivables with Average LIBOR as the benchmark rate.

Conclusion: The Assessing Officer was directed to recompute interest on outstanding receivables by adopting Average LIBOR, and the ground was allowed.

Final Conclusion: The appeal succeeded on both issues in substance, with one matter restored for fresh transfer pricing examination and the receivable-interest adjustment directed to be recomputed on the stated benchmark.

Ratio Decidendi: Where service payments are closely linked to the assessee's business operations and entity-level TNMM is adopted, the transfer pricing analysis may be made on an aggregated basis rather than by separate transaction-wise benchmarking; delayed receivables may be benchmarked by reference to Average LIBOR.

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