TMI Blog2017 (4) TMI 767X X X X Extracts X X X X X X X X Extracts X X X X ..... ightly 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 made by the learned TPO has rightly been deleted by Ld CIT(A). Accordingly, the grounds raised by the Revenue are dismissed. - ITA No.6401/Del/2012 - - - Dated:- 17-4-2017 - SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER For The Appellant : Shri T.M. Shivakumar, CIT-DR. For The Respondent : Shri Tarandeep Singh, Advocate. ORDER PER AMIT SHUKLA, JM :- The aforesaid appeal has been filed by the Revenue against impugned order dated 15th October, 2012, passed by learned 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alers to the customers; and (d) The entire inventory management is the responsibility of the assessee. (ii) Marketing and administrative activities : The entire marketing strategy, advertisement etc. for sale of goods are done by the assessee. (iii) Post sales activities are done by the assessee but cost is being reimbursed by the AE. (iv) Assets : The manufacturing and R D is done by the AE and assessee, being a normal distributor, does 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 risks undertaken by the assessee are the normal distribution risks which are taken by a full-fledged distributor. 4. During the year, the assessee had undertaken the following international transactions with its AE :- Natu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee (out of seven selected by the assessee), viz., i) Cuprum Bagrodia Ltd.; ii) Gmmco Limited; and iii) India Tech Limited. Apart from that, he also took two fresh comparables viz., TIL Limited; 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 cost (B) 92,57,41,454 Operating profit of the tested party (C=A-B) (-)1,35,25,072 Arm s length mean margin (OP/Sales) % (D) 6.56% Arm s length operating profit (E=D*A) 5,98,41,395 Difference F=(E- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. India Techs Limited 5.76 4. TIL Limited 16.50 Arithmetic mean 17.23 Since the said margin was within the tolerance range of plus/minus 5%, hence the Ld. CIT(A) held that no TP adjustment should be made. He further held that the assessee was also able to justify its arm s length 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 SOT 263 (Mum)(URO) this decision has also been approved by Hon ble Bombay High Court in 228 Taxman 360 (Bom). (ii) Luxottica India Eyewear Pvt. Ltd. 2014-TII-236-Del-TP Hon'ble Delhi High Court has upheld this decision in 2015- TII-50-HC-De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factured 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 through the network of dealers to the customers. From the FAR analysis as discussed above, it is ostensible 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. As discussed above, the learned TPO has mainly gone on general proposition of the guidelines given in the OECD which mainly highlights the strengths and 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 man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ddition having been made. In the case of Mattel Toys (I) Pvt.Ltd. reported in (2013) 158 TTJ 461 (Mumbai), the Tribunal has analyzed the RPM as enshrined in the aforesaid Rules in the following manner :- 38. xxxx Since in RPM only margins are seen with reference to items purchased and sold or earned by an independent 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 product differentiation does not materially affect the gross profit margin as it represents gross compensation after the cost of sales for specific function performed. The functional attribute is more important while undertaking the comparability analysis under this method. Thus, in our opinion, under the RPM, products similarity is not a vital aspect for carrying out c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arty 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 given the preference and once these traditional methods have been rendered inapplicable then only TNMM should be resorted to. On the facts of the assessee s case, in our opinion, the assessee being a distributor who is purchasing the goods from its A.E. and reselling them to independent parties/unrelated parties, resale price method would be the most appropriate method for determining the ALP of the transactions between the assessee and the A.E. 13. The aforesaid decision clearly clinches the issue that under the RPM, the focus is more on same or similar nature of properties or services rather than similarity of products and functional attribute is a primary factor while undertaking the comparability analysis under RPM. Further, 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 same to third parties. Under these ..... X X X X Extracts X X X X X X X X Extracts X X X X
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