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TMI Blog2016 (3) TMI 826X X X X Extracts X X X X X X X X Extracts X X X X ..... hod ("RPM") and selecting Transactional Net Margin Method ("TNMM") as most appropriate method for distribution segment of the Appellant; (ii) wrongly computing the relevant cost base of the distribution segment while applying the TNMM for distribution segment; (iii ) not providing the computation of operating profit margin on sales of the comparable company at 17.72% under TNMM; (iv) wrongly computing the operating prof it margin on sales of the comparable company at 17.72% as against 11.96% under TNMM and thereby erroneously increasing the transfer pricing adjustment by Rs. 2,20,43,542; (v) wrongly including the provision for warranty of Rs. 50,78,903 and fees of Rs. 81,90,00 paid to the Registrar of Companies in the cost base for arriving at the operating profit margin of the Appellant under TNMM even when the aforesaid provision and fee were disallowed as allowable expenditure u/s 37 by the Ld. AO; (vi) not conducting a fresh benchmarking analysis while applying the TNMM as most appropriate method for distribution segment; and (vii) wrongly considering the value of purchase of goods at Rs. 19,61,28,232 instead of Rs. 1 7,71,37,313/-. 03. Facts apropos are tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er kitchen and bath fittings in India, this did not result in a monopoly situation since there were similar products of various brands like Parryware, Hindware and Jaquar, sold by other competing, independent companies. In other words as per the assessee when items similar to that which were sold by it were also sold by unrelated parties in independent transactions, RPM was the best method which could be adopted for testing its international transactions. 05. However, TPO was not impressed by the above contentions of the assessee. According to him, for application of RPM, Rule 10B(1)(b) of IT Rules, required adjustments to be made for differences in the international transactions of the comparable uncontrolled transactions which had a material effect on the gross profit. As per the TPO, it was not possible to ascertain the material differences that might be there, considering the manner in which assessee had carried on its business and the manner in which independent enterprises chosen by the assessee had carried on their business. Hence, according to him adjustment as required under the above mentioned Rule was not possible. As per the TPO, assessee was not a mere reseller which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essed by the above arguments. As per the DRP assessee was performing value added services and was not a distributor simplicitor. Assessee had in the later years started manufacturing of the very same items. DRP thus held that TPO was justified in adopting TNMM in place of RPM considered by the assessee. 08. Now before us, Ld. AR strongly assailing the orders of authorities below submitted that in the first year of its operation also assessee had followed RPM in its TP study for international transactions in the power and distribution segment. As per the Ld. AR, assessee was selling kitchen, sanitary and bath fittings in India, directly importing it from its AE abroad. Assessee was not doing any processing of these items. Similar items were sold by its competitors in India like, Parryware, Hindware etc., As per the Ld. AR, lower authorities took a wrong presumption that advertisement and selling expenditure resulted in a value addition to the goods sold. Goods sold were not subjected to any value addition by the assessee. Ld. AR submitted that in a similar situation this Tribunal in the case of DCIT v. M/s. Sanyo India P. Ltd v. ACIT [(2015) 45 CCH 0098 - Bang-Trib], held that RPM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee had selected as comparable Euro Merchandise (India) Ltd, under the RPM. TPO though he rejected the RPM and adopted TNMM as MAM, had also considered the very same comparable. Nevertheless, TPO in our opinion, ought have made a close analysis of the items which were bought by the assessee from its AE abroad and sold as such in India, to verify whether such items were comparable with the items sold by Euro Merchandise (India) Ltd, or any other companies like Hindware, Parryware etc. Where an assessee suggests RPM as the MAM it is imperative that the products sold by the tested Indian entity is subjected to a close comparison with those which are sold by the comparables. Unless and until this is done it may not be possible to come to a conclusion whether RPM can be applied or not. RPM depends on a mechanism of verification of margins at gross levels and not at net levels. This is obvious from Rule 10B(1)(b) of the Act, which is reproduced hereunder : 10B. Determination of arm's length price under section 92C. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the followin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sufficient enough to make a representative sample has not been verified by any of the lower authorities. The question whether RPM is the MAP depends on such an analysis. We are therefore of the opinion that the matter as to the selection of MAM and also the pricing of international transactions of the assessee with regard to its distribution segment requires a fresh look by the TPO / AO. We set aside the orders of authorities below and remit the issue back to the file of TPO / AO for consideration afresh. In the circumstances, we keep the issues raised by the assessee in its grounds 3(ii) to 3(vi) open. AO shall also consider the correct value of the purchase while computing assessee's ALP, whatever may be the MAM finally selected by him. Ground 3 of the assessee is treated as partly allowed for statistical purpose. 12. Vide its ground 4, assessee is aggrieved that provision of warranty of Rs. 50,78,903/- was disallowed. Facts apropos are that assessee was required to provide details of the provisioning made on warranty during the course of assessment proceedings. Reply of the assessee was that faucets sold by it and used for residential purpose had a warranty of seven years and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs and heard the rival contentions. It is an admitted position that assessee was making warranty provision at 1% of the gross sales. It might be true that assessee might not be having historical data for making an exact working of the warranty provision which was required. However, admittedly assessee's parent company abroad was in the business of selling Kohler bath and sanitary fittings since the last very many years. Therefore, it is not a case where assessee could not have compiled sufficient data in support of its warranty provision. AO has given a clear finding that except for two items, assessee's warranty period never exceeded three years. Conditions set out by Hon'ble Apex Court in the case of Rotork Controls India (Pvt) Ltd (supra), for allowing a claim of warranty as under : a) An enterprise has a present obligation as a result of a past event. b) It is probable that an outflow of resources will be required to settle the obligation. c) A reliable estimate can be made of the amount of obligation. 17. While it is true that assessee had a present obligation on account of warranty resulting out of its sales and it was also probable that there could be an outflow of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revious years", the words "an amount equal to one-fifth of such expenditure for each of the five successive previous years" had been substituted.] (2) The expenditure referred to in sub-section (1) shall be the expenditure specified in any one or more of the following clauses, namely : (a) expenditure in connection with- (i) preparation of feasibility report; (ii) preparation of project report; (iii) conducting market survey or any other survey necessary for the business of the assessee; (iv) engineering services relating to the business of the assessee: Provided that the work in connection with the preparation of the feasibility report or the project report or the conducting of market survey or of any other survey or the engineering services referred to in this clause is carried out by the assessee himself or by a concern which is for the time being approved in this behalf by the Board; (b) legal charges for drafting any agreement between the assessee and any other person for any purpose relating to the setting up or conduct of the business of the assessee; (c) where the assessee is a company, also expenditure- (i) by way of legal charges for drafting ..... 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