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2016 (5) TMI 867 - ITAT DELHI

2016 (5) TMI 867 - ITAT DELHI - TMI - Addition on account of transfer pricing adjustment - determination of the most appropriate method - non availability of comparable uncontrolled transaction - computation of adjusted gross margin of distributors - Held that:- RPM is quite a useful method where the goods purchased by the Indian AE are sold without doing any value enahncement. We, therefore, approve the application of RPM as the most appropriate method.

The term ‘uncontrolled transac .....

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transaction of purchase of goods is always determined on the basis of the gross profit margin on the resale price charged in a comparable transaction between enterprises other than the associated enterprises. It cannot be anything else. Only when some gross profit margin in comparable transaction between two independent enterprises is available, sub-clause (ii) of Rule 10B(1)(b) works. The existence of a comparable uncontrolled transaction giving gross profit margin accruing from purchase and r .....

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en taken by the TPO on the basis of what the assessee stated before the Customs Authorities in a generalized manner. The TPO has not brought on record any comparable uncontrolled case and thus has not eventually determined gross profit margin from purchase and resale of similar goods in a comparable uncontrolled transaction. In the absence of availability of any comparable uncontrolled transaction, we cannot approve the action of the AO in making such an addition, as the same has not been done i .....

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eepak Chopra, Ms Rashi Khanna and Ms Neha Singh, Advocates For The Department : Shri Hemant Gupta, Sr. DR ORDER PER R.S. SYAL, AM: This appeal by the Revenue is directed against the order passed by the CIT(A) on 30.6.2010 in relation to the assessment year 2004-05. 2. The only issue raised in this appeal is against the deletion of addition on account of transfer pricing adjustment in respect of two international transactions. 3. Briefly stated, the facts of the case are that the assessee, an Ind .....

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Net Margin Method (TNMM) was applied in respect of transactions falling in Class I and Class II and the Comparable Uncontrolled Price (CUP) method in respect of transaction falling in Class III. On a reference made by the Assessing Officer (AO) to the Transfer Pricing Officer (TPO) for determining the arm s length price (ALP) of the international transactions, the latter took up transactions falling under Class I, on which the assessee adopted Profit level indicator (PLI) of Operating Profit/Tot .....

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argin from the international transaction per se was not identifiable. He opined that aggregation of all the international transactions by the assessee was not appropriate inasmuch as controlled transactions could be aggregated with controlled transactions alone and uncontrolled transactions with uncontrolled transactions. He held that there was no provision under which aggregation of controlled transactions with uncontrolled transactions was permissible. He, therefore, treated CUP as the most ap .....

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er dated 26.8.2004 was passed by the Assistant Commissioner of Customs, wherein such imports of raw material, components and semi finished goods were examined in detail. It was noticed from such order that the assessee submitted before the Assistant Commissioner of Customs that the raw material imported by it from its AE was, in turn, purchased by the AE from other parties and : the imports were made at substantially higher prices than the price at which the AE has purchased the raw material. It .....

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ion, the assessee put forth that the third party supplier prices did not constitute a valid CUP because there were several differences in the third party supplier prices vis-à-vis the prices charged from it. These differences were explained, being, a time gap between the third party supplying goods to the assessee s AE and, in turn, the assessee importing them from its AE. In this regard, it was submitted that the raw materials were purchased by its AE from third parties during the period .....

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d before the TPO that there was no internal CUP available to benchmark the international transaction of Import of raw material/components from group companies. The TPO did not accept the assessee s contentions. He noticed from the submissions made before the Customs Authorities that the comparable uncontrolled price of various items purchased was ascertainable. A chart has been drawn in the TPO s order showing average margin of 11.75% charged by the AE from the assessee. As the AE was not doing .....

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₹ 26,80,767/-. The assessee assailed the assessment order containing this addition before the ld. CIT(A), who deleted the addition by accepting the assessee s contention that the percentage variation computed by the TPO was not on account of margin charged by the AE on sale to the assessee, but, towards the weighted average pricing methodology followed by the AE and the same being further supported by a certificate received from Luxottica SPA, Italy, confirming that no mark-up was charged .....

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any separate accounts for Class I, Class II and Class III international transactions. It is only for the purpose of determining the ALP of these international transactions that the assessee split up common expenses/incomes into these three classes. In doing so, the assessee benchmarked all the international transactions under Class I as per the TNMM by showing that its PLI of 17.87% was better than 6.23% of comparables. The TPO has disputed only Import of raw materials, components and finished .....

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me of which may significantly impact the determination of ALP while others may not. Thus, if some direct comparable uncontrolled instance of purchase or sale of similar goods or services is available, then, CUP serves as the most appropriate method for determining the ALP of such an international transaction. Adverting to the facts of the instant case, we find that the dispute is only qua the determination of ALP of the international transaction of Import of raw materials, components and semi fi .....

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f import of raw materials, components and semi finished goods. 6. Now, turning to the application of the CUP method, we find that the ld. CIT(A) has deleted the addition by simply accepting the assessee s contention that the percentage variation computed by the TPO was not on account of margin charged by the AE on sale to the assessee, but, due to weighted average price methodology followed by the AE. This is in complete contrast to what the assessee argued before the Customs Authorities, namely .....

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in deleting the addition on this count. 7. At the same time, we find that the TPO has taken assistance from the order of the Customs Authorities, during which proceedings the assessee contended that the imports were made at substantially higher prices than the price at which the AE had purchased the raw material. The TPO sought details from the assessee which divulged that the AE charged average margin of 11.75% on the goods supplied to the assessee. It is with this application of average profit .....

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is identified ; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market ; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm s length price in respect of the property transferred or services provided in the international transaction ; 8. Sub-clause (i) of 10B(1 .....

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instant case, it is found that the TPO has proceeded to determine the ALP under CUP method by considering the transaction between the asessee s AE in Italy and third party also in Italy. Such a geographical difference, where in both the buyer and seller are foreign parties, cannot constitute a comparable uncontrolled transaction, more so, when the assessee itself has been treated as a tested party. An external comparable uncontrolled transaction will exist when similar goods are purchased by som .....

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e AE from the assessee for computing the ALP. The CUP method contemplates comparing the adjusted comparable uncontrolled price with the price charged or paid in an international transaction. The TPO has not compared any price charged in a comparable uncontrolled transaction with the price paid by the assessee. It is axiomatic that the CUP method requires comparison of the price charged in a comparable uncontrolled transaction and then making transfer pricing adjustment for the difference, if req .....

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ontrolled transactions. Having set aside the view point of the ld. CIT(A) in deleting the addition and approving in principle, the adoption of the CUP method and the further fact that the TPO has not applied the CUP method in the manner as discussed above, we are of the considered opinion that it would be in the fitness of things if the matter is restored to the file of AO/TPO for determining the ALP of this international transaction under the CUP method as per law. We order accordingly. Needles .....

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as a transaction of import of finished goods from its AE, which were sold as such without any value addition by the assessee in the capacity of a distributor. He again went through the order dated 26.8.2004 passed by the Customs Authorities, during the course of which it was argued by the assessee that the price to the assessee was higher than the price to the unrelated parties. The assessee had also contended before the Customs Authorities that it sold the imported sunglasses, etc. to the deale .....

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ons, the TPO held that the TNMM could not be accepted as the most appropriate method. He changed the most appropriate method to the Resale Price Method (RPM) for determining the ALP of this international transaction of Import of finished goods . In determining the ALP under the RPM, the TPO noticed that the assessee contended before the Customs Authorities that the gross margin of down the line distributors was 100% on cost or 50% if computed on sales. He, therefore, adopted normal gross profit .....

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onal transaction @ 50% of resale price : Rs.4,24,68,030/- 11. The AO made this addition. When challenged, the ld. CIT(A) deleted the same by accepting the assessee s contention that the so-called ALP margin (i.e. 50% on sales earned by down the line distributors) was not the actual gross margin of the distributors as they also paid VAT/sales tax at around 12.5% on sale to end customer, thereby bringing their gross margin of 37.50%, which was in close vicinity to the assessee s gross profit margi .....

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challenge to it by the assessee. In our considered opinion, the RPM is quite a useful method where the goods purchased by the Indian AE are sold without doing any value enahncement. We, therefore, approve the application of RPM as the most appropriate method. 13. Now coming to the merits, we find that the ld. CIT(A) chose to delete the addition by simply accepting the assessee s contention that the VAT/sales tax was around 12.5% on sale to end customer and thus the actual adjusted gross margin o .....

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The ld. CIT(A) failed to take note of this important aspect and went on to consider only the payment part in isolation of the receipt part of VAT/sales tax. He further failed to consider the assessee s contention before the Customs Authorities that: they have submitted the details of these imports and that this shows that the price to the Indian company is higher than the price to the unrelated parties. As such, we are constrained to disapprove the view taken by the ld. CIT(A) in deleting the a .....

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ale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions ; (iii) the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services ; (iv) the pric .....

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operty or obtaining of the services by the enterprise from the associated enterprise; 15. A perusal of the above mandate transpires that sub-clause (i) of Rule 10B(1)(b) provides that the price at which the goods purchased by the enterprise from its AE is resold is identified. Such resale price under subclause (ii) is reduced by the amount of normal gross profit margin from the purchase and resale of the same goods in a comparable uncontrolled transaction. The price so arrived at is revised unde .....

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urchase and resale of similar goods in a comparable uncontrolled transaction. The term uncontrolled transaction has been defined in Rule 10A(a) to mean: a transaction between enterprises other than associated enterprises whether resident or nonresident. When we substitute the definition of the term uncontrolled transaction in Rule 10B(1)(b)(ii), the relevant part would read that the resale price of the enterprise is reduced by the amount of normal gross profit margin accruing in a comparable tra .....

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)(b) works. In other words, the existence of a comparable uncontrolled transaction giving gross profit margin accruing from purchase and resale of similar goods is an essential condition for determining the ALP under RPM. Adverting to the facts of the instant case, we find from the calculation of the ALP under RPM as extracted above that the TPO has taken arm s length margin of GP on sales at 50%, which has been considered for determining the ALP of this international transaction at ₹ 4.24 .....

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