TMI Blog2019 (7) TMI 1899X X X X Extracts X X X X X X X X Extracts X X X X ..... 11-12 also. The finding in the same paragraph by the Tribunal is that the Assessee purchases and sells re agents and chemicals without any value addition. The tribunal has also recorded a finding that analyzer, spares and consumables, though were imported, however, they were not sold but were provided in the laboratories/diagnostics units of the third party customers for testing and research activity. In the light of similarity of facts in AY 2011-12 2010-11, we are of the view that the decision rendered by the Tribunal in AY 2010-11 would equally apply to AY 2011-12 also. Following the aforesaid decision of the tribunal we hold that RPM is the MAM for determining ALP. Computing arm's length interest in respect of receivable outstanding from the AEs beyond six months as on 31.03.2011 - normal credit period was only 60-90 days whereas the Assessee had allowed credit period of more than 700 to 800 days - whether allowing a greater period of payment to the AE would be an international transaction and income from such arrangement should also be determined having regard to Arm s Length Price as laid down in Sec.92? - HELD THAT:- In the present case, admittedly the receivables ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore passed u/s.143(3) read with Sec.144C of the Income Tax Act, 1961 (the Act) in relation to assessment year 2011-12. 2. We shall first take up for consideration the appeal by the Assessee. Grounds No. E F raised by the Assessee are with regard to determination of Arm s Length Price (ALP) in respect of an international transaction of sale of reagents by the Assessee to its Associated Enterprise (AE). The assessee is a wholly owned Indian subsidiary of Randox Laboratories Ltd., a company based in United Kingdom (hereinafter referred to as AE). The parent company is primarily engaged in the business of manufacturing medical diagnostic reagents and analyzers. The assessee imports reagents and diagnostic equipments (analyzers) from the parent Randox Laboratories (India) P. Ltd. and sells them to independent third parties in India. The question before the AO was, whether the price paid by the Assessee to its AE for purchase of reagents was at Arm s length because as per the provisions of Sec.92 of the Act, income arising from an international transaction has to be determined having regard to Arm s Length Price (ALP). 3. The AO referred to the Transfer Pricing Officer (TPO) the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as per Indian norms for clinical tests and to provide feedback to the Head Office. Thus, as could be seen from the facts on record, the analyzers were never sold to the third party customers who buy the reagents from the assessee, but, were only installed in their premises for chemical analysis and research work for a period of five years. After expiry of five year period, the WDV of the analyzers get reduced to zero and accounting entries to that effect are passed in the books. These facts are evident from the materials available on record. Thus, it is clear, the assessee is merely purchasing reagents from its AE and reselling them to third party customers in India without making any value addition. In fact, the analyzer / spares of the machines are never sold to the third party customers but always remain the property of the assessee. 8. Having examined the nature of transaction carried on by the assessee, it is necessary now to advert to the core issue. Undisputedly, in the transfer pricing analysis, the assessee has selected RPM as the most appropriate method. However, the Transfer Pricing Officer has rejected the RPM primarily on the following reasoning:- i) In the yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufacturing unit was extended till 16th May 2011, since, the assessee was in the process of obtaining relevant approval from KIADB for setting-up of the unit. Further, from the financial statements of the assessee it is evident that the assessee has not started its manufacturing activity in the impugned assessment year as it was still in the process of settingup of the plant. Therefore, the finding of the Transfer Pricing Officer and learned DRP that the assessee is involved in manufacturing activity is factually incorrect. Further the fact that the analyzers were not sold to the third party customers is evident from the sample copy of the agreement placed in the paper book. Insofar as the product development cost is concerned, the material on record indicates that such cost was incurred towards spares for the analyzers and the assessee capitalized such cost. 11. Thus, from the aforesaid facts, it is very much clear that in the year under consideration, assessee has not undertaken any manufacturing activity as the manufacturing unit was still in the process of being set-up. On the contrary, the facts on record clearly reveal that the assessee had purchased reagents and chemical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee is a reseller of finished goods, in the duty free shops set up at the Delhi Airport. It is also accepted that the products sold by the assessee such as liquor, perfumes, confectionary, tobacco, etc., are purchased from A.Es and sold to customers without any value addition or material change to such products. It is a fact that the assessee had bench marked the international transaction relating to purchase of finished goods from A.Es by adopting RPM. However, the Transfer Pricing Officer has rejected RPM primarily on the ground that gross profit computation of comparables was not produced by the assessee. He had also stated that the gross profit margin of the products sold by the assessee cannot be compared with gross profit margin of the products sold by the comparables as they are different in nature. In this context, it is to be noted that at the outset, the Transfer Pricing Officer had opined that the transaction of purchase of finished goods for resale was to be bench marked as per CUP method. We are unable to understand why the Transfer Pricing Officer abandoned bench marking under CUP if he considered it as the most appropriate method to bench mark the internation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Bench that in such case of purchase and resale of finished products without any value addition RPM, is the best method to evaluate the arm's length price of the transactions. In case of Luxottica India Eyeware Pvt. Ltd. (supra), the Tribunal, Delhi Bench, following a number of other decisions held as under:- 10.2. Coming to the argument that the assessee himself has adopted TNMM as the MAM for its transfer pricing study and hence it cannot turn around and argue for adoption of RSPM as the MAM, we find that the Mumbai Bench of the Tribunal in the case of Mattel Toys(I) Pvt.Ltd. in ITA no.2476/Mum/2008 held as follows. 41. Now coming to the argument of the Ld.DR that once the assessee itself has chosen TNMM as the MAM in TPR, then it cannot resort to change its method at an assessment or appellate stage. In our opinion, such a contention cannot be upheld because if it is found on the facts of the case that a particular method will not result into proper determination of the ALP, the TPO or the appellate authorities can very well hold that why a particular method can be applied for getting proper determination of ALP or the assessee can demonstrate a particular method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de by the assessee under the resale price method. (ii) In the case of L'Oreal India P. Ltd. vs. ITO (ITA no.5423/Mum/2009) it is held as follows: 19. During the course of hearing, ld.DR also supported the method considered by TPO and referred to Para 2.29 of OECD price guidelines 2010 as stated hereinabove. On the other hand, ld.AR justified the RPM method adopted by it and also referred to order of TPO in the preceding AY as well as succeeding AY to the AY under consideration to substantiate that RPM is the most appropriate method to determine ALP. He submitted that the assessee made adjustment for marketing and selling expenses to the profits to make it comparable to the comparable companies' profits. We agree with the Ld.CIT(A) that there is no order of priority of methods to determine ALP. RPM is one of the standard method and OECD guidelines also states that in case of distribution and marketing activities when the goods are purchased from AEs which are sold to unrelated parties, RPM is the most appropriate method. In the case before us, there is no dispute to the fact that the assessee buys products from its AEs and sells to unrelated parties without any furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and objective findings. In this case except theoretical assertions and generalized observations, no objective findings have been given to come to a reasoned conclusion that assessee's adoption of CPM for manufacturing segment and RPM for trading segment was Factually and objectively not correct. Thus the rejection of methods by TPO as adopted by assessee is bereft of any cogency and objectivity. The same is a work of guessing and conjectured. Similarly the TNMM method applied by the TPO suffers from the same inherent aberrations as mentioned above. In these circumstances we are of the view that Assessee's methods of CPM and RPM respectively worked by applying appropriate comparables is to be upheld. Thus the ALP working returned by the assessee is upheld. The Assessee's TP grounds are allowed. (v) Textronic India Pvt.Ltd. vs. DCIT (ITA no. 1334/Bang/ 2010), it is held as follows: We have considered the rival submissions. The dispute is with regard to the ALP in respect of international transactions whereby the assessee imports equipment from its AE and resells them without any value addition to the Indian customers. In similar circumstances, Mumbai Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learly applies to the facts of the present case not only because the assessee is involved purely in trading activity, but also in the TP study assessee has adopted RPM as the most appropriate method. Only because in the preceding assessment year for some reason assessee has not challenged the decision of DRP in upholding application of TNMM, assessee cannot be prevented from objecting to adoption of TNMM in the impugned assessment year. In view of the aforesaid, we remit the matter back to the file of the AO/TPO to examine assessee's analysis under the RPM and decide the issue accordingly afterdue opportunity of being heard to the assessee. 13. The facts on record reveal that the Transfer Pricing Officer under a misconception that the assessee has undertaken manufacturing activity has rejected RPM. Learned DRP has also not examined the facts in proper perspective. Rather, learned DRP has recorded an erroneous finding by stating that in the transfer pricing analysis the assessee has chosen TNMM as the most appropriate method. The aforesaid finding of learned DRP is factually incorrect, as, on a perusal of the transfer pricing analysis of the assessee, a copy of which is pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present AY are identical as it prevailed in AY 2010- 11. 5. We have given a careful consideration to the rival submissions and have also taken note of the factual basis of assessment in AY 2010-11 and the present AY involved in this appeal viz., AY 2011-12. The TPO in AY 2011-12 has proceeded on the basis that the Assessee was making additions to plant and machinery and doing so suggests that the Assessee is not nearly into trading and further is making expenditure on plant and machinery. In the past the Assessee has capitalized cost on product development which is still appearing in its balance sheet. Acquisition of land from KIDBA for construction of factory for manufacture has also been cited by the TPO. The Assessee sells re agents (chemicals) after purchase from AE but to use re agents the customer has to possess analysers, which is given free of cost by the Assessee. Therefore, the Assessee is not merely indulging in simple trading in reagents. Perusal of the order of the Tribunal for AY 2010-11 (Paragraph-8) would show that the same reasons were given by the TPO in AY 2010-11 for coming to the conclusion that the Assessee is not a reseller simpliciter and therefore RP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and would not include a receivable as a consequence of an international transaction. He has failed to appreciate that the latter is the effect of an existing international transaction and hence not a transaction at all in its very natural meaning thereby failing the test of international transaction. 5. The Honourable DRP and Learned TPO have failed to appreciate that an unilateral delay in payment of debt by the Associated Enterprise cannot be regarded as an arrangement, understanding or action in concert within the meaning of section 92F (v) of IT Act. 6. The Honourable DRP and Learned TPO have failed to appreciate that whether any interest is to be charged or not or what strategy needs to be adopted for carrying out a business activity is the sole prerogative of the assessee, and neither the TPO nor the Assessing Officer has any role in this regard. The legitimate business needs of the assessee cannot be dictated by the revenue authorities as held in the cases of S.A. Builders Ltd. vs. CIT [2006] 288 ITR 1 (SC), Festo Controls (P.) Ltd. vs. DCIT [2013] 30 taxmann.com 16 (Bang.-ITAT), CIT vs. EKL Appliances Ltd. [2012] 345 ITR 241 (Delhi), Dresser-Rand India (P.) Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atories Ltd., U.K.(AE) as on 31.3.2011. The Assessee was also due and payable to M/s. Randox Laboratories Ltd., UK, a sum of ₹ 23,16,01,984/-. The TPO called upon the Assessee to explain the nature of amount receivable by the Assessee from its AE. The Assessee explained that amount were receivable from AE for services rendered by the Assessee to the AE like Life Science Support services, Engineering product services, Market Support services and accounting support services rendered by the Assessee to AE during financial year 2007-08 2008-09. The outstanding balance also includes a balance which is on account of sale of certain unusable fixed assets. 9. The TPO on perusal of the aforesaid reply of the Assessee was of the view that normal credit period was only 60-90 days whereas the Assessee had allowed credit period of more than 700 to 800 days. According to the TPO allowing larger credit period than the usual period conferred benefit on the AE and was also an international transaction and the income in the form of interest which the Assessee ought to have received for such enlarged credit period ought to be added as income on account of determination of ALP. The TPO also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ec.92B was introduced by the Finance Act, 2012 w.r.e.f 1-4-2002. The said amendment reads thus: Meaning of international transaction. 92B. (1) For the purposes of this section and sections 92, 92C, 92D and 92E, international transaction means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of subsection (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income from such arrangement should also be determined having regard to Arm s Length Price as laid down in Sec.92 of the Act. 13. We have considered the rival submissions on the above issue. The international transaction reported by the Assessee in Form No.3CEB was (i) Purchase of reagents, spares, analyzers and consumables of the value of ₹ 12,50,36,145/-, (ii) Purchase of fixed assets of the value of ₹ 3,58,208; (iii) reimbursement of expenses of ₹ 3,64,251 and (iv) recovery of expenses of the value of ₹ 12,336/-. We have already seen that the Assessee explained about the nature of receivables from the AE as due for services rendered by the Assessee to the AE like Life Science Support services, Engineering product services, Market Support services and accounting support services rendered by the Assessee to AE during financial year 2007-08 2008-09. The outstanding balance also includes a balance which is on account of sale of certain unusable fixed assets. The outstanding has therefore nothing to do with any international transaction. Therefore there is no question of any normal credit period existing for such receivables. There are conflicting decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontext every item of receivables‟ appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the Assessee will have to be studied. In other words, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis- -vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way. 11. The Court finds that the entire focus of the AO was on just one AY and the figure of receivables in relation to that AY can hardly reflect a pattern that would justify a TPO concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself. With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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