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2017 (4) TMI 962 - AT - Income TaxTransfer pricing adjustment - whether RPM should be considered as most appropriate method or not? - Held that:- It is quite ostensible that in case of a distributor, wherein the goods are purchased from AE and resold to other independent entities without any value addition, then resale price method should be reckoned as MAM. One of the main reason given by the TPO as well as the DRP is that the assessee is a full-fledged/full risk distributor and performing host of functions, therefore, RPM should not be taken us the MAM, because all these functions required huge cost which may not represent correct gross profit margin. We are unable to appreciate such proposition, because in a comparable uncontrolled transactions scenario, a normal distributor will undertake all kind of functions which are related to sales of the product. The functions like market research, sales and marketing, ware-housing, inventory control, quality control etc. and also risk like market risk, inventory risk, credit risk etc all are undertaken by any distributor for sale of products. No comparable instances have been brought either by the TPO or by the Ld. DRP that the other distributors are not performing such functions. What is important is to see is, whether there is any value addition or not on the goods purchased for resale? If there is no value addition and if the finished goods which are purchased from AE are resold in the market as it is, then gross profit margin earned on such transaction becomes the determinative factor to analyse the gross compensation after the cost of sales. Thus, we hold that under the facts of the present case, RPM should be held as MAM. Huge variation in the gross profit margin of the two products distributed by the assessee and, therefore, under the RPM same cannot be clubbed together, because it will not yield proper arm’s length result - Held that:- As already clarified by the assessee before the authorities below as well as before us that, assessee has separately worked out the gross profit margin for both the items distributed and even then the assessee’s gross profit margin is higher than the comparables. However, in order to examine whether the gross profit margin for both the products are at arm’s length margin or not vis-a-vis the comparables, we are of the opinion that for the limited purpose of benchmarking the gross margins of the comparables selected by the assessee for both the products, i.e., automotive components and medical equipment should be separately benchmarked; and if on comparison it is found that the gross profit margin of these comparables chosen by the assessee as well as accepted by the Department are within the arm’s length range, then no adjustment should be made. With this limited direction the matter is remitted back to the TPO/AO only to verify the gross margins of the comparable companies.
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