TMI Blog2017 (4) TMI 962X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable instances have been brought either by the TPO or by the Ld. DRP that the other distributors are not performing such functions. What is important is to see is, whether there is any value addition or not on the goods purchased for resale? If there is no value addition and if the finished goods which are purchased from AE are resold in the market as it is, then gross profit margin earned on such transaction becomes the determinative factor to analyse the gross compensation after the cost of sales. Thus, we hold that under the facts of the present case, RPM should be held as MAM. Huge variation in the gross profit margin of the two products distributed by the assessee and, therefore, under the RPM same cannot be clubbed together, because it will not yield proper arm’s length result - Held that:- As already clarified by the assessee before the authorities below as well as before us that, assessee has separately worked out the gross profit margin for both the items distributed and even then the assessee’s gross profit margin is higher than the comparables. However, in order to examine whether the gross profit margin for both the products are at arm’s length margin or not v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional transaction. 4. On facts and in law, the Ld.AO/Ld.TPO and Hon'ble DRP erred in determination of arm's length price for the trading transactions based on an ad-hoc allocation methodology and segmental profitability. 5. On facts and in law, the Ld.AO/Ld.TPO and Hon'ble DRP erred in disregarding cash profits as an appropriate profit level indicator while applying TNMM as the most appropriate method. 6. On facts and in law, the Ld. AO /Ld. TPO and Hon'ble DRP erred, in disregards the adjustment on account of extra ordinary expenses incurred by the Appellant during the subject assessment year thereby contravening the provision of Rule 10B 7. The Ld AO erred on facts and in law in initiating penalty proceedings under sect271 (l)(c) of the Act. 8. The Ld. AO, based on directions of Hon'ble DRP, erred on facts and in a charging interest under section 234B and 234C of the Act. 3. The brief facts qua the issue raised are that the assessee company is a subsidiary of Horiba Limited, Japan which is mainly engaged in manufacturing and sale of measuring instruments. The assessee in India undertakes the distribution of various finish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 44% and from sale of medical equipment, gross margin was at 25%.Thus, he came to the conclusion that the pricing structures of both these classes of products are different. Lastly, he re-characterized the assessee as full risk distributor and observed that a full-fledged distributor performs a whole range of marketing and selling functions; employs and develops valuable marketing intangible assets; and assumes a range of risk associated with its activity such as inventory risk, bad debt risk and market risks etc. From the transfer pricing report he also highlighted the functional analysis and noted the following functions performed by the assessee:- i. Market research ii. Purchase order iii. Provision of goods iv. Custom clearance and transportation v. Warehousing and Inventory control vi. Quality control vii. Sales and marketing viii. Market risk ix. Inventory risk x. Product liability risk xi. Credit risk xii. Foreign exchange risk He also took note of various assets utilized which were mostly in the form of tangible assets. 5. In the light of aforesaid reasons, TPO came to the conclusion that RPM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uying and selling function. Once the assessee is performing pure distribution functions and the business model is based on distribution of various finished products of its AE, then RPM is to be considered as MAM. In support, he relied upon the following judicial pronouncements: Judicial Pronouncements: i. Mattel Toys India Pvt. Ltd. (Mumbai ITAT)- (2013)158 TTJ 461, wherein it has been held that where the assessee is a distributor and gets the finished goods from its AE and resells the same to independent parties without any value addition, in such a situation, RPM can be the best method to evaluate the transactions whether they are at ALP. Thus in case of distribution activities i.e., import of products and services from the AE and resale to the independent parties without any value addition, the RPM would be the most appropriate method on for determining the ALP. ii. Danisco (India) Pvt. Ltd. (Delhi ITAT) - (2014) 151 ITD 460- wherein it has been held that first examine whether there as any value addition on imported goods and if the answer is in the negative then apply RPM as a most appropriate method for trading transaction of imported goods. iii. Star ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egards the TPO s and DRP s observation that assessee has two different segments for distribution of finished goods with different gross profit margins, he first of all submitted that, there is no restriction imposed by law that RPM cannot be applied where there are distribution of two different products. Under the RPM method the focus is more on functions rather than similarity of products because product differentiation does not materially affect the gross profit margins, as it represents gross composition after the cost of sales for specific functions performed. Though product similarity is most desired but for applying RPM it is not mandatory that product should be similar as in the case of CUP method. The main focus is on the functions performed. In support of, he strongly relied upon the decision of ITAT Mumbai Bench in the case of Mattel Toys India P. Ltd. (supra). Without prejudice, he submitted that during the course of transfer pricing proceedings when assessee was required to give the separate working of the gross profit margins for the sale of automotive components and medical equipment, the same was duly provided and it was reported that under the automotive products th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee in those years also assessee was carrying distribution of similar products as a full risk distributor. Thus, on the principle of consistency also RPM should be applied in this year also to benchmark the transaction of sale and purchase of goods from the AE for resale in India. 11. On the other hand, Ld. CIT DR, Shri TM Shiv Kumar, submitted that, whence the assessee is purchasing two different products which has different gross profit margins then these two different products cannot be clubbed together to arrive at appropriate gross profit margin for the purpose of bench marking. The huge variation in the gross profit margin (i.e. 44% for the automotive products and 25% for the medical equipment) together cannot give proper benchmarking analysis. On this factor alone RPM cannot be said to be the correct method to apply in the present case. The reason being the manner of pricing for both the products is different and so also the income. Further the cost related to all the various functions as highlighted by the TPO would again is vital factor, because under the distribution function, only the gross compensation after the cost of sales is taken and, therefore, it is diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market; (iv) the adjusted price arrived at under sub-clause (iv) is taken to be an arm's length price in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise; Thus, the RPM method identifies 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. The RPM is mostly applied in a situation in which the reseller purchases tangible property or obtain services from an A.E. and reseller does not physically alter the tangible goods and services or use any intangible assets to add substantial value to the property or services, i.e., resale is made without any value addition having been made. 13. In the case of Mattel Toys India P. Ltd. (supra), the Tribunal after analyzing the RP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dependent 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 by the learned Counsel have also expressed on the similar line that RPM would be the best method when resale takes place without any value addition to a product for bench 23 marking the ALP. 40. On the other hand, under the TNMM, the ALP is determined by comparing the operating profit related to an appropriate base i.e., cost or sale or assets of the tested party with the operating profit of an uncontrolled party engaged in comparable transactions. Under the TNMM, net margin or operating profit is compared 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the RPM same cannot be clubbed together, because it will not yield proper arm s length result. As already clarified by the assessee before the authorities below as well as before us that, assessee has separately worked out the gross profit margin for both the items distributed and even then the assessee s gross profit margin is higher than the comparables. However, in order to examine whether the gross profit margin for both the products are at arm s length margin or not vis-a-vis the comparables, we are of the opinion that for the limited purpose of benchmarking the gross margins of the comparables selected by the assessee for both the products, i.e., automotive components and medical equipment should be separately benchmarked; and if on comparison it is found that the gross profit margin of these comparables chosen by the assessee as well as accepted by the Department are within the arm s length range, then no adjustment should be made. With this limited direction the matter is remitted back to the TPO/AO only to verify the gross margins of the comparable companies. 16. In the result, grounds no. 1 2 are allowed. 17. In view of the finding given above that RPM is the M ..... X X X X Extracts X X X X X X X X Extracts X X X X
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