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2017 (4) TMI 962 - ITAT DELHI

2017 (4) TMI 962 - ITAT DELHI - TMI - Transfer pricing adjustment - whether RPM should be considered as most appropriate method or not? - Held that:- It is quite ostensible that in case of a distributor, wherein the goods are purchased from AE and resold to other independent entities without any value addition, then resale price method should be reckoned as MAM. One of the main reason given by the TPO as well as the DRP is that the assessee is a full-fledged/full risk distributor and performing .....

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ke market risk, inventory risk, credit risk etc all are undertaken by any distributor for sale of products. No 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 marg .....

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well as before us that, assessee has separately worked out the gross profit margin for both the items distributed and even then the assesseeís gross profit margin is higher than the comparables. However, in order to examine whether the gross profit margin for both the products are at armís 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., aut .....

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R AND SHRI AMIT SHUKLA, JUDICIAL MEMBER For The Assessee : Shri Kapil Hirani and Darpan Kirpalani For The Revenue : Shri T.M. Shiva Kumar, CIT DR ORDER PER AMIT SHUKLA, JUDICIAL MEMBER: The aforesaid appeal has been filed by the assessee against impugned final assessment order dated 21/10/2015, passed by Deputy Commissioner of Income Tax, Circle 11(1), New Delhi u/s 143(3) read with section 144C(13), in pursuance of directions given by the Dispute Resolution Panel-1, New Delhi (DRP), vide order .....

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ntered into by the Appellant with its Associated Enterprise ('AE') during the relevant previous year. 2. On facts and in law, the Ld. AO/ Ld. TPO and Hon'ble Dispute Resolution Panel ('DRP') erred in disregarding Resale Price Method ("RPM") as the most appropriate method for benchmarking the Appellant's international transactions based on erroneous reasons and instead, applying, Transactional Net Margin Method ("TNMM") as the most appropriate method. 3 .....

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ofits 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 .....

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ment . For the segment of trading of medical equipment and auto components, the assessee had disclosed following transactions with its AE: Nature of Transaction Value Rs. Method Applied PLI No. of Com -parables Arm s Length Price Result of Assessee Purchase of Goods for resale 11,84,32,963 RPM GP 12 16.24% 36.47% As regards the other segments like purchase of fixed assets, provision of support services, the assessee had separately shown the transaction and also separately benchmarked the same, w .....

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fit margin were at arm s length. 4. The Ld. TPO, though accepted that assessee is engaged in the distribution of various finished products manufactured by its AE, however, rejected the assessee s adoption of RPM as most appropriate method. The main reasons for rejection of RPM by the Ld. TPO, were; Firstly, in the cases where RMP is applied it is assumed that only the same kinds of goods are distributed and it is a case of pure distributor. The different kinds of goods give rise to different gro .....

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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. .....

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form of tangible assets. 5. In the light of aforesaid reasons, TPO came to the conclusion that RPM would not be the appropriate method; instead TNMM should be adopted as MAM for bench marking the net profit margin of the assessee. He took the same set of comparables and benchmarked the assessee s net profit margin which was determined by him at 1.31% and the arithmetic mean of the 7 comparable was arrived at 5.38%. The lists of comparables with their margins under TNMM were as under: S.No. Name .....

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resent case for bench marking the arm s length price albeit can be done by adopting TNMM as the MAM. The DRP further observed that in the case of the assessee it is an undisputed fact that the assessee is not only dealing in totally two independent products, i.e., automotive and medical equipment, but also involved in leasing of equipment. In such a situation, where assessee is having two different business models for earning revenue, RPM cannot be used as MAM. Further, once the assessee is full .....

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ying 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 in .....

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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 Diamond Group (Mumbai ITAT) - (2011) 141 TTJ 21 (UO)/ITA No. 3923/Mum/2008- RPM is the most appropriate method for determining the ALP with respect to imports by a trader assessee. iv. Kodak Polychrome Graphics (I) (P) Ltd - (Mumbai ITAT) (2015) 171 TTJ 224 (Mum) - The assessee is, in fact, engaged in distribution activities .....

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at the assessee buys products from its AEs and sells to unrelated parties without any further processing. vi. Nokia India (P) Ltd. (Delhi ITAT) - (2015) 167 TTJ 243 (Del)- A close scrutiny of the above two sub-clauses along with the remaining sub clauses of rule 10B(l)(b) makes it clear beyond doubt that RPM is best suited for determining ALP of an international transaction in the nature of purchase of goods from an AE which are resold as such to unrelated parties. Further concluded that RPM is .....

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arties without any further processing, then, this method can be adopted viii. Swarovski India Private Limited (Delhi ITAT) - ITA No. 5621/Del/2014- Adverting to the facts of the instant case, we find that the assessee purchased Crystal goods and Crystal components from its AE. No value addition was made to such imports. The goods were sold as such. In the given circumstances, the RPM is the most appropriate method for determining the ALP of the international transaction of' Import of Crystal .....

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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 pro .....

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. Regarding DRP s observation that the assessee was also engaged in leasing of equipment, the Ld. Counsel clarified that the same pertain to a different segment all together, i.e., the purchase of fixed assets, which has been separately benchmarked by applying CUP method and it has no correlation with the functions of purchase and resale of goods. Regarding various functions as highlighted by the TPO as well as the DRP in holding that assessee is a full-fledged distributor, he submitted that the .....

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od can be applied. In support he strongly relied upon the following OECD guidelines: 2.21 The resale price method begins with the price at which a product has been purchased from an associated enterprise is resold to an independent enterprise. The price (the resale price) is then reduced by an appropriate gross margin on this price (the "resale price margin") representing the amount out of which the reseller would seek to cover its selling and other operating expenses and, in the light .....

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ucceeding years, i.e., AY 2012-13 and AY 2013-14 the Ld. TPO has himself accepted RPM as the most appropriate method even though the assessee 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 th .....

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ason 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 different to apply RPM in the case of full risk distributor. He also pointed out to the observations of the DRP that assessee had two models one outright sale of equipment and .....

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of goods for resale from its AE is purely into distribution of finished goods in India. It purchases automotive test equipment and medical diagnostic equipments, manufactured by its AE and is sold to third party customer in India without any further value addition. Since it was purely performing the distribution function, therefore, to benchmark the arm s length transaction, assessee adopted RPM is the Most Appropriate Method (MAM). The RPM has been described in Rule 10B(1) and (b) in the follo .....

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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 purcha .....

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m'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 r .....

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ed by an independent enterprise in comparable uncontrolled transactions vis-a- vis 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 comparability than the product itself can produce a reliable measure of arm's length conditions. The m .....

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ain criteria while evaluating 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 in comparable uncontrolled transactions is served as a guidance factor. This is also what happens in the case of a distributor wherein the p .....

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te the transactions whether they are at ALP. 39. Some of the case laws relied upon by the learned Counsel 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 St .....

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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 derive at the actual operating profit. If the .....

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determining the ALP of the transactions between the assessee and the AE. 14. From the aforesaid decision it is quite ostensible that in case of a distributor, wherein the goods are purchased from AE and resold to other independent entities without any value addition, then resale price method should be reckoned as MAM. One of the main reason given by the TPO as well as the DRP is that the assessee is a full-fledged/full risk distributor and performing host of functions, therefore, RPM should not .....

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etc all are undertaken by any distributor for sale of products. No 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 de .....

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