TMI Blog2017 (1) TMI 1050X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the year under consideration. In such circumstances we hold assessee to be a Distributor and hold that RPM prima facie appears to be the most appropriate method in the facts and circumstances of the instant case. - I.TA NO. 3008/DEL/2009 - - - Dated:- 30-10-2016 - N.K. SAINI, ACCOUNTANT MEMBER AND SMT. BEENA A. PILLAI, JUDICIAL MEMBER For The Appellant : Percy Pardiwalla, Sr. Adv., Divyanshu Agrawal, FCA and A.R. Singh, Advocate For The Respondent : Neeraj Kumar, Sr. DR ORDER Beena A. Pillai Judicial Member - The present appeal has been filed by the assessee against the order dated 27/04/2009 passed by the lower net CIT (A) 20, New Delhi for assessment year 2003-04 on the following grounds of appeal: 1. That on the facts and in the circumstances of the case and in law, the orders passed by the Ld. Assistant Commissioner of Income-tax ('Ld. AO') and the Ld. Commissioner of Income Tax (Appeals) [Ld. CIT(A')], are bad in law and void-ab-initio. 2. That the Ld. CIT(A) grossly erred on facts and in law in concluding that the reference made by the Ld. AO to the Ld. Transfer Pricing Officer (Ld. TPO), under section 92CA(3) of the Income Tax A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th. 4.5 That the Ld. CIT(A) erred on facts and in law in only making general statements regarding the inapplicability of RPM. 4.6 That the Ld. CIT(A). erred on facts and in law in not appreciating that under TNMM appropriate adjustments would have to be made for differences in the intensity of the functions relating to marketing, selling, distribution etc as these would impact operating margins and by making such adjustments, the analysis would tantamount to establishing a de-facto gross margin analysis. 4.7 That the Ld. CIT(A) erred on facts in holding that the Appellant is engaged in substantial Brand promotion and advertising expenditure as compared to the comparables therefore should have earned higher gross margin without appreciating the fact that the Appellant had earned gross margin which is even higher than the highest gross margin earned by the comparably. 4.8 That the Ld. CIT(A) erred on facts and in law in not appreciating the basic business model adopted by Bose India and in erroneously confirming the TPO's action in applying TNMM as the more appropriate method. 4.9 That the Ld. CIT(A) erred on facts and in law in not appreciating the that during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee filed its return of income for the year under consideration on 02/12/2003 showing a loss of ₹ 1,03,18,818/-. The case was processed under section 143 (1) of the Act and subsequently it was selected for scrutiny. Notices under section 143 (2) was issued to the iv assessee along with detailed questionnaire in response to which the representatives of the assessee filed various details as called for. During the assessment proceedings the ld. AO observed that assessee had entered into international transactions with respect to the purchase of goods and spare parts. A reference was made to the transfer pricing officer under section 92CA (3) in respect of the international transactions entered into by the assessee. The ld.TPO accordingly issued notice under section 92CE to the assessee and called for various details relating to the functions and economic analysis under rule 10 D of income tax rules. 3.2 Ld.TPO observed that assessee is engaged in the business of distribution of sound and audio assistance for individual customers and public places. This division provides products and design services tailored to customer specific requirements. It was also observed that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was determined to be at 21% vis-a-vis margin of assessee being 50%. The assessee thus considered the international transaction to be at arm's length. 3.6 Ld. TPO issued notice to the assessee as to why transactional net margin method (TNMM) may not be used as MAM to ascertain the ALP of the international transaction undertaken by the assessee with its AE. After considering the submissions by assessee, the ld. TPO on basis of various objections rejected the RPM selected by the assessee and applied TNMM to determine the arm's length price of the international transactions entered into by the assessee with its AE. The ld.TPO however accepted the search adopted by the assessee in respect of the comparables selected and used the same set of comparables in computing the arm's length margin under the TNMM. The TPO determined the arms length price of the assessee at ₹ 37,31.000/-. 4. Aggrieved by the order passed by the ld. TPO the assessee preferred an appeal before the Id. CIT (A). The ld.CIT (A) upheld the order passed by the ld. TPO. 4.1 Aggrieved by the order of the ld. CIT (A) the assessee is in appeal before us now. 5. The ld. Counsel for assessee subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de order dated 7/11/2040. Luxottica India eyewear P. Ltd. v. DCIT in ITA No. 1115/del/2014 for assessment year 2009-10. DCIT versus Delta power solution India P. Ltd. in IT.-. No. 3004/del/2013 for assessment year 2008-09. 6. On the contrary the Ld. DR submitted that in the previous and the subsequent assessment years as there was no Transfer Pricing addition made by the TPO, does not mean at the Department has accepted RPM to be MAM. He submitted that assessee is not carrying on as a pure distributor/Trader as from the transfer pricing study, one third of business, of assessee is from professional sale, for the year under consideration. The ld.. DR referred to pages 50, 51 and 52 of $he paper book. 6.1 He submitted that for the subsequent assessment Years , being 2005-06 and 2006-07 the assessee had declared profit because of which, no further TP additions were made, and for assessment year 2007-08, as the AMP issue came into existence there could not be any possibility of making any other adjustment. He thus submitted merely because there has been no adjustment that has been made by Ld. TPO, it cannot be concluded that the Department has accepted RPM to be MAM. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecognition is from sale of goods. 7.2. As the issue involved for consideration is in respect of the MAM for determination of ALP, it will be useful to first set out the modus operandi of the RPM, being the method chosen by the assessee as the most appropriate method, given under Rule 10B(l)(b) as under:- Resale Price Method, by which,- (i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified; (ii) such resale 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 price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of the instant case, we find that the assessee simply purchased Bose Products from its AE's and resold the same as such without any further value addition. Since the goods imported from AEs representing the international transaction, were neither processed further nor used as raw material for manufacturing any other product, in our considered opinion, RPM is the first choice as the most appropriate method for determination of ALP of the international transaction. 7.5 The Id. DR has vehemently argued against the application of RPM in the given circumstances as the most appropriate method by contending that the assessee incurred huge advertisement and marketing expenses and that one third sales made by the assessee is through professional sales. It has been further submitted by the Ld.DR that the solutions provided by the design team of assessee comprises both of Bose's and non-Bose products. In view of such, the ld. DR stated that the better course would be to apply TNMM which would consider operating profit. 7.6 We are unable to accept the contention advanced on behalf of the Revenue. The obvious reason for this is that the incurring of high advertisement and marke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than the cost of purchases in order to equalilze the operating expenses. This would tantamount to establishing a de facto gross margin analyses. If TNMM is adopted due to product differences, when the only related party transaction is imports then adjustments have to be made in such a manner that an arm's length standard can be estimated. However, Ld. TPO did not make any of the above mentioned economic adjustments so as to make the controlled and uncontrolled transactions comparable under TNMM. It is observed on perusal of the orders passed by the ld. TPO that the observations made therein are not based on any evidences. The ld.TPO also stated that the assessee is selling high-value products whereas the comparables are dealing in products that are fast moving and that resale margin is realised much quickly without any basis. The Ld. TPO has not assigned any reason for using TNMM to arrive at the margin of the comparables instead of RPM. 8.1 At this juncture, we note the mandate of Rule 10C which defines the 'Most appropriate method'. Sub-rule (1) of Rule 10C states that: 'For the purposes of sub-section (1) of section 92C. the most appropriate method shall be t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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