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Assistant Commissioner of Income Tax Circle-5 (1) New Delhi Versus M/s Kobelco Construction Equipment India Limited

TPA - selection of comparable - MAM - Held that:- It is an admitted fact that the assessee is performing the function of a normal distributor with normal risk and the goods which have been purchased have been resold without any value addition. This fact is undisputed that there is no value addition by the assessee. - RPM is mostly applied in the case of a distributor where reseller purchases tangible property and obtains services from the AE and without making any value addition, resells the .....

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d, we find that, T & I Global Limited has rightly been rejected by learned CIT(A), because this company was manufacturing machinery, therefore, same cannot be compared with the assessee which is purely performing the distribution function. Thus, the final list of comparables, i.e., three chosen by the assessee and accepted by the TPO and one as selected by the TPO and upheld by the learned CIT(A), is sustained for comparing the margins under RPM. As a consequence, we hold that the TP adjustment .....

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CIT(Appeals)-XX, New Delhi, for the quantum of assessment passed u/s 143(3) of the Income-tax Act, 1961, for the assessment year 2008-09. 2. In the grounds of appeal, the Revenue has raised following grounds :- 1. Whether on the facts and in the circumstances of the case, the learned CIT(A) erred in deleting the adjustment of ₹ 7,33,66,467/- in arms length price as proposed by the TPO. 2. Whether on the facts and in the circumstances of the case, the learned CIT(A) erred in accepting TNMM .....

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T&I Global as product similarity is not very vital in TNMM and functions are more important. 5. Whether on the facts and in the circumstances of the case, the learned CIT(A) has erred in admitting the additional evidence when assessee could not give any sufficient cause as to why he could not furnished that evidence during the proceeding before TPO in violation of Rule 46A of the Income Tax Rules. 6. Whether on the facts and in the circumstances of the case, the learned CIT(A) erred in givin .....

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functional analysis carried out by the assessee as reported in TP study report can be summarised in the following manner :- (i) Trading: - (a) Purchase activities: whereby the assessee purchased products within group companies; (b) Distribution: the assessee company maintains dealership networks, warehouses for the finished goods and performs inventory control functions; (c) Sales : sale of finished goods directly to the customers at high sea sales and in some cases, finished goods are sold thr .....

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not have any tangible or intangible assets. (v) Risk analysis : The market risk is borne by the assessee. So far as the high sea sales are concerned and with respect to Indian operations, the normal market risk is also on the assessee. The warranty/product liability risk is only for a limited period and that too is reimbursed by the AE. Customer credit risk is also borne by the assessee and also the foreign exchange risk. All other risk compliance is borne by the assessee. In other words, the r .....

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transfer pricing study report, the assessee has chosen Resale Price Method (RPM) as the Most Appropriate Method (MAM) and PLI was taken as gross profit/operating income. The assessee had shown gross margin of 14.86% and to benchmark the said margin, the assessee had identified seven comparable companies for comparative analysis and the average GP margin of the comparables was arrived at 16.78% based on multiple year data. Since the gross margin by the assessee vis-a-vis the comparables was withi .....

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nesses of the RPM method. He has not analyzed the FAR analysis of the assessee and the overall business model under which assessee operates. At page 13 of his order, he also made reference that the assessee is maintaining very high inventory which is almost 6.25% of the purchases. However, this observation is sans any data from the comparables as to whether 6.25% inventory is very high or not. In his order he has also gone off-track by noting that assessee is a seller of jewellery and luxury wat .....

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; and T & I Global Limited. After discussing the issue in detail, he held that, firstly, RPM is not the most appropriate method in the case of the assessee; secondly, TNMM should be adopted as MAM for benchmarking net profit margin of the assessee; and lastly, made an adjustment of ₹ 7,33,66,467/- by taking the average margin of the comparables at 6.56% and calculated the arm s length price in the following manner :- Calculation of arm s length price Total sales (A) 91,22,16,382 Total .....

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evidence was submitted by the assessee by way of secondary analysis by giving CUP data which was in the form of invoices of the AE for sale of hydraulic excavators to the independent parties during the same financial year. It was pointed out that the assessee has sold five models in India and same models were also sold to third parties by the AE. This information was already submitted before the TPO in the course of transfer pricing proceedings. Assessee s detail submission on the issue and reb .....

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has not brought any evidence to show that the assessee is performing additional function other than the distribution activities. The advantages or disadvantages of the methods given in OECD cannot be the basis unless it is analyzed on facts. After holding that single year data should be used and also analyzing the comparables of the assessee as well as the TPO, he held that RPM was the correct method on the facts of the assessee s case and out of the two comparables selected by the TPO, he inclu .....

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gth price of the international transaction by of secondary analysis by way of CUP method. 8. Before us, the learned counsel submitted after explaining the facts submitted that even as per the OECD guidelines, RPM has been reckoned as one of the standard methods for distribution and marketing activities where the goods are purchased from the AE and sold to unrelated parties without any value additions. In support, he had relied upon the following two decisions :- (i) L oreal India (P) Ltd. - 53 S .....

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tivities are best suited to be analyzed under RPM. So far as the TPO s observation that RPM cannot be accepted because the comparables did not have similar product profile, he submitted that under the RPM, similar product is not very essential but similar FAR is an important factor. In the case of the assessee, the comparables given were those of the distributors of computer parts/peripherals and also distributors of equipment which is akin to the assessee. He thus strongly relied upon the obser .....

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e hydraulic excavators etc., which the assessee is selling. He also pointed out that in the case of one of the comparables i.e., Gmmco Limited, this company is also into manufacturing and, from the financial statements which were enclosed in the paper book, he pointed out that if the comparable is into manufacturing, then its gross margin cannot be accepted to be comparable and therefore, by selection of comparables itself, it can be seen that RPM cannot be the MAM in the present case. 10. By wa .....

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in the impugned order as well as the material placed on record. It is an admitted fact that the assessee imports finished goods manufactured by its AE, like earthmoving equipment, hydraulic excavators, etc. for resale in India and it undertakes the entire function of a distributor . It mainly sells finished goods directly to the customers at high sea sales and some of the finished goods are sold through network of dealers. For the sale of spare parts, the assessee imports and then sells them th .....

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nd weaknesses of the RPM method. He has not analyzed the actual facts of the case as well as the FAR analysis vis-a-vis the comparables. Out of the seven comparables, three comparables of the assessee have been accepted by the TPO for analyzing the same under TNMM. The RPM has been prescribed in Rule 10B(1)(b) in the following manner :- Determination of arm's length price under section 92C. 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to .....

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prise 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 accounti .....

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the price at which the product purchased from the A.E. is resold to an unrelated party. Such price is reduced by normal gross profit margin, i.e., the gross profit margin accruing in a comparable controlled transaction on resale of same or similar property or services. As per OECD guidelines and also now it is quite settled by various judicial precedence that the RPM is mostly applied in a situation in which the reseller purchases tangible property or obtained services from an A.E. and reseller .....

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enterprise in comparable uncontrolled transactions vis-avis the one in the controlled transactions, therefore, in such a situation, the nature of products has not much relevance though their closer comparable may produce a better result. The focus is more on same or similar nature of properties or services rather than similarity of products. In RPM other attributes of comparabilities than the product itself can produce a reliable measure of arm s length conditions. The main reason is that the pr .....

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ting the transactions in the RPM wherein price is identified at which property or services are resold and normal gross profit margin is derived at by the enterprise which is deducted from the resale price of such property or service in comparable uncontrolled transactions. The gross profit margin earned by the independent enterprise is also what happens in the case of a distributor wherein the property and service are purchased from the A.E. and are resold to other independent entities, without .....

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sel also support our above conclusion that in case of distribution activities i.e., import of products and services from the A.E. and resale to the independent parties without any value addition, the RPM would be the most appropriate method for determining the ALP. This view has been upheld by the Tribunal, Mumbai Bench, in Textronix India P. Ltd. (supra), L oreal India P. Ltd. (supra) and Star Diamond Group v/s DDIT, 141 TTJ 21. The OECD guidelines and ICAI guidelines as have been referred to b .....

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ompared against with the independent entities against those achieved in related party transactions. Under the TNMM, the major thrust is to derive at the operating profit at the transactional level and to identify the operating expenses of both the tested party as well as the independent parties. This requires a lot of adjustments to derive at the actual operating profit. If the ALP of any transaction can be determined by applying any of the direct methods like CUP, RPM, CPM then they should be g .....

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