Buy-Sell Arrangement: The Double-Distribution Model

Definition

The buy-sell (the buy-sell arrangement) is the [distributor] (/docs/glossary/distributor) inside the supply chain — the group entity that buys the goods from another group entity (the supplier/principal) and resells them to a third party (or to another group entity), taking title on the way through but bearing, in the classic form, less than the full-risk distributor’s risk. The buy-sell’s FAR profile is the double-distribution shape: it has two transfer prices — the buy price (what it pays the group supplier) and the sell price (what it charges the customer or the downstream group entity) — and its arm’s length position is the margin between the two (the buy-sell’s operating margin on the buy-sell function: the purchasing, the inventory holding, the logistics, the credit — the intermediate distribution, not the full distribution from manufacture). The classic Indian fact pattern is the buy-sell trading entity: the group’s manufacturing arm sells to the Indian buy-sell (the buy leg — the transfer price examined), the buy-sell resells to the Indian market (the sell leg — the third-party price, the market anchor). The buy-sell’s return is benchmarked like the [distributor’s] (/docs/glossary/distributor) (the TNMM on the OP/S or OP/OC, the comparables the buy-sell/trading comparables of the same product class and risk profile) — and where the buy-sell is the limited-risk form (the [limited-risk distributor] (/docs/glossary/limited-risk-distributor) shield: the supplier absorbs the demand/inventory/credit risk, the margin prescribed or tightly benchmarked), the routine return logic and the Amount B profile test apply to the buy-sell function. The [distributor guide] (/docs/transactions/distributor-transfer-pricing) carries the distribution benchmark in full; the buy-sell’s standing examination question is the buy leg’s price (the transfer price into the buy-sell — the margin the buy-sell keeps against its comparables), which is the tested party question the benchmark answers.

The buy-sell, in one chain:
  1. The buy leg (the group supplier → the buy-sell — the transfer price examined, the margin the buy-sell keeps)
  2. The sell leg (the buy-sell → the third party / the downstream group — the market price, the anchor)
  3. The function (the intermediate distribution — purchasing, inventory, logistics, credit)
  4. The return (the buy-sell's operating margin, benchmarked — the TNMM on the buy-sell comparables)

The element	The content
The two legs	The buy (the group supplier’s price to the buy-sell — the transfer price, examined) and the sell (the buy-sell’s price to the market/downstream — the anchor, the third-party or the group resale)
The margin	The buy-sell’s operating margin on the buy-sell function (the sell minus the buy, minus the operating costs — the PLI measured on the comparables)
The risk	The slice the intercompany agreement leaves it — the full buy-sell risk (the inventory, the credit, the demand it bears) or the limited-risk shield (the supplier’s absorption, the routine return)
The benchmark	The buy-sell/trading comparables of the same product class and risk profile — the TNMM IQR on the OP/S/OP/OC (the distributor guide method)

The working read (the distributor guide): the buy-sell is the distributor with a group buyer on one side (the classic distributor sells to the third-party market; the buy-sell buys from the group and sells to the market — the buy leg is the transfer price, the sell leg is the market). The examination’s attention is on the buy leg (the transfer price into the buy-sell — the margin the buy-sell keeps is the [arm’s length] (/docs/glossary/alp) question: does the buy-sell earn the return of a comparable buy-sell/trading entity on the buy-sell function?). The sell leg is the anchor (the third-party price — the market’s verdict on the goods’ value, the [resale price method] (/docs/glossary/rpm)’s logic: the [gross margin] (/docs/glossary/gross-margin-method) on the resale, worked back to the buy price). The [comparability] (/docs/glossary/comparability) discipline is the risk profile (the buy-sell’s risk slice — the full or the limited-risk — matched on the comparables side, the qualitative screening enforcing it) and the PLI consistency (the buy-sell’s cost structure matched by the pool’s — the [PLI reference] (/docs/methods/pli-reference) carries the formulas). Where the buy-sell is limited-risk (the supplier’s absorption, the prescribed margin), the routine return logic and the [Amount B] (/docs/glossary/amount-b) profile test apply to the buy-sell function — the buy-sell’s profile (not just its [NIC code] (/docs/glossary/industry-classification)) is the benchmark’s foundation, as in the LRD case.

Example

A group: the overseas manufacturer sells a consumer product to the Indian buy-sell entity (the buy leg — the transfer price), the buy-sell resells to the Indian retail/e-commerce market (the sell leg — the third-party price). The buy-sell’s FAR: the intermediate distribution (the purchasing from the group, the inventory holding, the logistics, the credit on the receivables), the working capital

• the warehouse, and the market and inventory risk (the buy-sell bears the demand on the stock it holds, the obsolescence, the credit — the full-risk buy-sell, not the [limited-risk shield] (/docs/glossary/limited-risk-distributor)). The [tested party] (/docs/glossary/tested-party) is the Indian buy-sell (the routine side of the chain — the manufacturer carries the product risk and the intangibles), the PLI is the OP/S (the TNMM workhorse), the comparables are the full-risk trading/buy-sell entities of the same product class (the [search design] (/docs/benchmarking/search-design) on the [NIC family] (/docs/glossary/industry-classification), the [screens] (/docs/benchmarking/quantitative-screening), the [accept-reject matrix] (/docs/glossary/accept-reject-matrix) recording the risk-profile rejects), and the arm’s length range is the comparables’ IQR on the [OP/S] (/docs/glossary/op-s) — the buy-sell’s operating margin tested against it, the [working capital adjustment] (/docs/glossary/wc-adjustment) for the payment-terms difference. The buy leg’s price is then the resale price (the market anchor) minus the arm’s-length margin (the RPM logic, worked back) — the transfer price the examination reads against the range.

See also

• Distributor
• Limited-Risk Distributor
• Distributor Transfer Pricing Guide
• Resale Price Method

FAQ

What is the difference between the buy-sell and the ordinary distributor? The buyer: the ordinary [distributor] (/docs/glossary/distributor) buys from the group and sells to the market (the one transfer price — the buy; the sell is the third-party market price). The buy-sell is the same shape emphasized as the double-leg — the buy from the group (the transfer price examined) and the sell to the market or to the downstream group entity (the anchor) — and the term is used where the intermediate trading function (the buy-sell’s margin on the buy-sell) is the benchmark’s subject. In practice the two are the same [FAR profile] (/docs/fundamentals/functional-analysis) (the distribution) described from the transfer price’s perspective (the buy-sell’s buy leg is the price examined); the [distributor guide] (/docs/transactions/distributor-transfer-pricing) covers both under the distribution benchmark. The limited-risk buy-sell is the LRD form (the supplier’s absorption, the routine return).

Which leg is the transfer price examined? The buy leg (the group supplier’s price to the buy-sell) — the [arm’s length] (/docs/glossary/alp) question is whether the buy-sell earns the return of a comparable buy-sell/trading entity on the buy-sell function (the [margin] (/docs/glossary/operating-margin) the buy-sell keeps: the sell minus the buy, minus the operating costs). The sell leg is the anchor (the third-party price — the market’s verdict, the RPM’s resale logic). The [benchmark] (/docs/benchmarking/benchmarking-study-guide) works the buy leg’s margin against the [comparables’ range] (/docs/glossary/arms-length-range); the sell leg’s market price is the cross-check (the [gross margin] (/docs/glossary/gross-margin-method) on the resale, worked back to the buy price — the RPM consistency).

Is the buy-sell always the tested party? Usually — the buy-sell is the routine side of the chain (the supplier/principal carries the product risk and the intangibles — the entrepreneurial side), and the tested party selection picks the less complex entity (the buy-sell, the standard profile). The exception is the supplier’s function being the routine one (rare — the contract manufacturer’s [cost plus] (/docs/glossary/cost-plus) where the principal is the complex side) — the selection is the [FAR comparison] (/docs/fundamentals/functional-analysis), not the label, and the benchmark works the standard case through.