TMI Blog2019 (6) TMI 601X X X X Extracts X X X X X X X X Extracts X X X X ..... argin of the assessee with that of the comparables. We direct AO/TPO to examine this aspect and decide the issue accordingly after due opportunity of being heard to the assessee. With the aforesaid observations, grounds are allowed. Disallowance of expenditure by treating them as capital in nature - HELD THAT:- From the nature of expenditure incurred by the assessee, it is very much clear that they are for day to day running of the business and have not brought into existence any asset of enduring benefit to the assessee. Merely because the assessee has capitalized the expenditure in its accounts it will not change the nature and character of the expenditure. It is well settled principle of law that accounting entries are not conclusive and one has to look to the actual nature of expenditure. In this context, we rely upon the decision of Kedarnath Jute Mfg. Co. Ltd. [ 1971 (8) TMI 10 - SUPREME COURT] . Moreover, the AO himself has allowed 25% of the expenditure as revenue in nature. In view of the aforesaid, we uphold the decision of learned DRP on the issue. However, it is made clear, depreciation, if any, has been allowed to the assessee on the aforesaid expenditure has to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be at arm's length. In the course of proceedings before him, the Transfer Pricing Officer called upon the assessee to submit updated margin of comparables using the data for the financial year relevant to the assessment year under dispute. In response, the assessee submitted the updated margin of the comparables as per which the arithmetic mean worked out to 13.9%. Thus, on the basis of the aforesaid updated margin also, the international transaction under consideration was claimed to be at arm's length. The Transfer Pricing Officer, however, was of the view that RPM cannot be the most appropriate method to benchmark the international transaction with the AE since the assessee is not merely a trader but is also involved in manufacturing activity. Thus, he called upon the assessee to explain why RPM should not be rejected and TNMM should not be applied as the most appropriate method to benchmark the international transaction. Though, the assessee objected to the show cause notice issued by the Transfer Pricing Officer with elaborate submissions justifying applicability of RPM, however, the Transfer Pricing Officer did not find merit in the submissions of the assessee. Ulti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e terms of the agreement with the customers, analyzers are given to the diagnostics units / laboratories for analyzing the reagents purchased from the assessee. In this context, he drew our attention to a sample copy of the agreement with one of the third party customers in India. He submitted, as per the terms of the agreement with third party customers in India, the analyzers are to be given to them for a period of five years on the condition that the customer purchases the reagents from the assessee at the schedule price. He submitted, after expiry of five years, the analyzers are taken back from the laboratories and the written down value of the analyzers become nil, hence, the assessee passes entries to that effect in the books. He submitted, the main reason for the Transfer Pricing Officer to reject the RPM and apply TNMM is, the assessee is involved in manufacturing activity, which is not a fact borne out from the material on record. He submitted, since the assessee is merely a reseller of products imported from the AE, RPM is the most appropriate method and in the transfer pricing analysis, the assessee having analyzed all aspects had preferred RPM over all o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c reagents, analyzers and consumables. Assessee imports these reagents form the AE and sells them to diagnostic units / laboratories in India for use in various chemical analysis. These reagents are analyzed in machines / equipments known as analyzers. For the purpose of sale of reagents, the assessee enters into specific agreements with third party customers. As per the terms of the agreement, a sample copy of which is placed in the paper book, the customer in India is required to purchase reagents from the assessee and in the event of such purchase, the assessee provides them the analyzer for carrying out the chemical analysis with the reagents. As per the terms of the agreement, the analyzer is made available to the customer for a period of five years without any extra cost. Further, as per the terms of agreement, the assessee is required to provide spares for the analyzer and also provide services including repairs. The analyzers were kept with the third party customers since the assessee was undertaking a research regarding its products as per Indian norms for clinical tests and to provide feedback to the Head Office. Thus, as could be seen from the facts on record, the analyz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fixed asset schedule forming part of the Balance Sheet of the assessee. On a perusal of the said Note, it becomes clear that, though, the assessee was intending to set up a manufacturing unit in India and for that purpose has acquired lease hold land from Karnataka Industrial Area Development Board (KIADB), however, the assessee was in the process of setting up of manufacturing unit which is evident from Note no.16 to the Notes to the Account forming part of Annual Report. It is seen that in December 2005, the assessee had entered into an agreement with KIADB for lease hold land to set up its manufacturing unit. As per the agreement, lease period was for six years. The agreement further provided, if the assessee sets up the unit within the lease period and other conditions of the agreement are fulfilled, title of the lease hold land is to be conveyed to the assessee after the end of six year period. However, if the assessee fails to invest the minimum amount of project cost within the aggregate period penalty could be levied on the assessee. It is further evident, time for implementation of the manufacturing unit was extended till 16th May 2011, since, the assessee was in the proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mining the arm's length price is RPM and TNMM cannot be the most appropriate method in such type of transaction. 12. Having held so, it is necessary to deal with the decisions relied upon by the learned Counsel for the assessee. The Co ordinate Bench in L oreal India Ltd. (supra) while deciding the dispute of similar nature held that in such type of transaction RPM is the most appropriate method. While deciding Revenue s appeal against the aforesaid order of the Tribunal, the Hon'ble Jurisdictional High Court, in the decision referred to above, held that in case of distribution or marketing activities when the goods are purchased from associate entities and sales of those goods are effected to unrelated parties without any further processing, RPM has to be adopted. The Co ordinate Bench in case of Airport Retail Pvt. Ltd. (supra) has held as under: 10. We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. As could be seen from the transfer pricing order as well as the facts materials on record, there is no dispute to the fact that the assessee is a reseller o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncontrolled transactions and after making necessary adjustment with regard to expenditure incurred, functionally and other differences the arm's length price is determined. Thus, when there is no dispute to the fact that the assessee is purchasing finished products from the A.Es for the purpose of reselling to unrelated parties without any value addition, under normal circumstances, the most appropriate method to bench mark the arm's length price of such transaction in terms of 10B is RPM. The Tribunal, Mumbai Bench, in Mattel Toys India Pvt. Ltd. (supra), after analyzing the applicability of most appropriate method in respect of such kind of international transactions has observed, under RPM product similarity is not a vital aspect for carrying out comparability analysis but operational comparability is to be seen. The Bench observed, gross profit margin earned by the independent enterprise in comparable uncontrolled transaction will serve as a guiding factor which is also the case in case of a distributor wherein property and service purchased from the A.E. are resold to other independent entities without any value addition. Thus, it was concluded by the Bench that in suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TNMM. 10.3 The case of the assessee is much better than the case of M/s Mattel Toys (I) Pvt.Ltd. (supra) for the reason that the assessee in its transfer pricing report has also used RSPM as the MAM. Hence this argument of the Revenue is rejected. 10.4. As the undisputed fact is that the functional profile of the assessee is that of a trader and as the characterisation of the transaction is purchase and sale of goods, we hold that RSPM is the MAM by applying the following decisions of the Co-Ordinate Bench of the Tribunal. 13. This finding in our humble opinion is wrong for the reason that the CIT(A) has adopted these very comparables, along with three others while arriving at the operating margins at Para 7.16 of his order. As the assessee is a trader, without value addition to the goods, we find force in the submissions of the assessee that resale price method is the most appropriate method for determining the ALV with respect to AE transaction. In fact, the Revenue has accepted this method in earlier two years. The TPO in his order dt. 7.3.2005 for the AY 2002-03 and order dt. 20.3.2006 for the AY 2003-04, has agreed with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee in this regard. Considering these grievances as discussed herein above by us in the arguments advanced by the parties/their submissions and having gone through the decision relied upon, we find substance in the submission of the assesse3e and thus we are of the view that it is a fit case to set aside the matter to the file of the Ld.TPO for his fresh consideration and decide the issue afresh after affording opportunity of being heard to the assessee and discussing their submissions in the order and reasons, if any, for not agreeing or agreeing with them. It is ordered accordingly with direction to the Ld.TPO to: a) first examine as to whether, was there any value addition on imported goods, and if answer is in negative then apply RPM as a most appropriate method for trading transactions of imported goods and in consequence examine the application of appropriate method as commission payment; (iv) Frigoglass India P.Ltd. (ITA no.463/Del/2013), it is held as follows: We have heard the rival contentions and perused the material available on record. In our considered view, once assessee has given a methodology for working of ALP on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO. In such circumstances, we are of the view that no adjustment could be made by way of ALP. We, therefore, accept the alternative plea of the assessee and delete the addition made by the AO. In view of the above conclusion, we are not going into the other issues on merits raised by the assessee on the approach adopted by the TPO in arriving at the ALP. Thus, ground Nos. 2 to 7 are allowed. 10.5 In view of the above discussion, we direct the TPO to adopt RPM as the MAM in this case. 12. The aforesaid decision of the Tribunal, Delhi Bench, was challenged before the Hon'ble Delhi High Court by the Department. However, the High Court dismissed the appeal of the Revenue on the issue of acceptance of RPM selected by the assessee over TNMM applied by the Department. It is further necessary to observed, in case of OSI Systems Pvt. Ltd. (supra), the Tribunal, Hyderabad Bench, following the decision in case of Luxottica India Eyeware Pvt. Ltd. (supra) held as under: 44. On a perusal of the extracted portion from the order of the Coordinate Bench, it is very much clear that after considering a number of decisions on the very sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue accordingly after due opportunity of being heard to the assessee. With the aforesaid observations, grounds are allowed. Since, we have allowed assessee s claim that RPM is the most appropriate method, the other issue relating to computation of margin of comparables under TNMM does not require adjudication. Further, we direct the Assessing Officer / Transfer Pricing Officer to adopt the correct purchase figure as debited to the Profit Loss account after due verification. 14. In the result, assessee s appeal is allowed. IT(TP)A no.1568/Mum./2015 Revenue s Appeal 15. The Registry has pointed out a delay of six days in filing the appeal. The Department has filed application seeking condonation of delay. After considering the submissions of learned Departmental Representative, we are inclined to condone the delay and admit the appeal for adjudicating on merit. 16. The only issue raised by the Department is with regard to deletion of disallowance of expenditure amounting to ₹ 44,69,880, made by the Assessing Officer by treating them as capital in nature. 17. During the assessment pro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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