TMI Blog2019 (8) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... d out in its distribution segment. Hence, we hold that the lower authorities have proceeded the entire issue on total misconception of facts ignoring the relevant materials on record. We direct the ld. TPO to apply RPM as the most appropriate method and recompute the margins of the assessee accordingly and make any adjustment to ALP thereon, if warranted. Accordingly, grounds raised by the assessee are allowed for statistical purposes. - ITA No.1715/Mum/2017 - - - Dated:- 26-7-2019 - SHRI M. BALAGANESH, AM AND SHRI RAVISH SOOD, JM For the Appellant : Shri Ketan Ved For the Respondent : Shri M C Omi Ningshen ORDER PER M. BALAGANESH (A.M): This appeal in ITA No.1715/Mum/2017 for A.Y.2012-13 preferred by the order against the final assessment order passed by the Assessing Officer dated 30/12/2016 u/s.143(3) r.w.s.144C(13) of the Income Tax Act, hereinafter referred to as Act, pursuant to the directions of the ld. Dispute Resolution Panel (DRP in short) u/s.144C(5) of the Act dated 01/11/2016 for the A.Y.2012-13. 2. Though the assessee had raised several grounds of appeal, we find that the principal issue involved in this appeal is with regard to ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt (TPSR). The assessee was asked to submit the updated PLI of the 7 comparable companies for FY 2011-12, which was 7.62%. The comparable used by the assessee are tabulated as under :- Sr. No. Name of comparable company 1 Black Rose Industries Ltd (segmental) 2 Guljag Industries Ltd (segmental) 3 PH trading Limited 4 Standard Surfactant Ltd (segmental) 5 Priya International Ltd (segmental) 6 Nikhil Adhesives Ltd (segmental) 7 Nilchem Industries Ltd Mean PLI is 7.62% 3.3. The ld. TPO rejected the RPM and selected TNMM as the Most Appropriate Method of the assessee for its distribution segment on the following grounds:- The annual report of the assessee was perused along with the financials for the year under consideration. On perusal of the financials of the assessee, it was observed that the assessee was having an item ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d along with the use of Resale Price Method for the purpose of benchmarking. 3.4. The ld. TPO observed in his order that assessee is not a pure trader but does subsequent value addition to the goods brought by the AE before selling the same to the end customers and it is also engaged in manufacturing activity. Accordingly, he resorted to adopt TNMM as the MAM. The PLI was taken by the ld. TPO at OP/OR (operating profit / operating revenue). The PLI margins of the assessee were worked out by the ld. TPO as under:- Particulars Amount (in Rupees) Income Net sales 13.33,06,493 Total operating income 13.33,06,493 Expenditure Purchase of stock-in-trade 11,14.69,696 Changes in inventory (3,01.73,226) Employee Benefit Expenses 7,01,14,715 Depreciation and Amortization 78,98,636 Other expenses 6,97,24,145 Total o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r March 2014 2015, Excise Duty paid of ₹ 2.19 crores ₹ 3.29 crores are seen suggesting major manufacturing activity. The assessee has also not given the basis for GP/Sale ratio of 33% purportedly reflected by it We, therefore, filed substantial merit in the TPO's findings that the assessee was involved in major value addition in terms of manufacturing some of the products. Accordingly, rejection of TP study of the assessee and application of TNMM by the TPO is upheld. 3.9. The ld. DRP also enhanced the addition made by the ld. TPO by not resorting the ALP adjustment only to international transactions by observing as under:- 4.2.3 So far as ground of objection relating to entity level vis-a-vis transaction level is concerned, the issue of entity level adjustment versus transaction level adjustment is pending before Hon'ble Supreme Court which has admitted SLP filed by the Department in the case of CIT v Firestone International Pvt. Ltd [ITA No 1354 of 2013] - TS-401-HC-2015(BOM)-TP against the decision of Hon'ble High Court holding that transfer pricing adjustment should be made with reference to the international transaction and not with referenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ured Goods - ₹ 10,81,15,753/- Traded Goods - ₹ 13,26,97,839/- Sale of Services Services Income - ₹ 10,57,191/- ₹ 24,18,70,783/- Less Excise Duty - ₹ 1,03,26,374/- Net Sales of Manufacturing Segment and Distribution Segment Service Segment- ₹ 23,15,44,409/- 5.1. We find from the said audited financial statements, revenue earned has been further detailed as under:- (i) Details of Sales (Manufactured goods) Chemical and allied - ₹ 10,81,15,753/- (ii) Details of Sales (Traded goods) Chemical and allied ₹ 12,83,77,154/ Merchandising equipments ₹ 43,20,685/ ₹ 13,26,97,839/ 5.2. We further find from page 98 of the paper book containing the audited financial statements that assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng inventory 3,73,834 Add: Purchases (net) 40,88,943 Less: Inventory at the end of the year 5,29,289 Cost of packing materials consumed during the year 39,33,488 4,33,31,186 Details of Consumption (a) Details of raw materials/ Packing materials consumed: April 1, 2011 to March 31,2012 Rupees Organic Chemicals 3,93,97,698 Packing materials 39,33,488 4,33,31,186 (b) Value of imported and indegenious raw materials and packing materials consumed: Imported 28,46,628/- 6.57% Indigenous 4,04,84,558 93.43% 4,33,31,186 100% 5.4. The aforesaid break-up of revenue system and the purchase of goods for re-sale and cost of materials ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per RPM, as under :- 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 an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) xxxxxxxx (b) resale price method, by which- (i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided 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 purchase of property or obtaining of services; (iv) the price so arrived at is adjusted to take into account the fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a pure trader, and there was no value addition made before re-selling the particular products (i.e. the SIM cards), its consequent finding that RPM is the Most Appropriate Method, is irreproachable. In Nokia India (P) Ltd. v. Dy. CIT[2014] 52 taxmann.com 492/153 ITD 508 (Delhi), the Delhi bench of the ITAT held: A close scrutiny of the above two sub-clauses along with the remaining sub-clauses of r. 10B(1)(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. Ordinarily, this method presupposes no or insignificant value addition to the goods purchased from foreign AE. In a case the goods so purchased are used either as raw material for manufacturing finished products or are further subjected to processing before resale, then RPM cannot be characterized as a proper method for benchmarking the international transaction of purchase of goods by the Indian enterprise from the foreign AE. 9. Similarly, in Swarovski India (P.) Ltd. v. Asstt. CIT[2017] 78 taxmann.com 325 (Delhi - Trib.) the ITAT held: Adverting to the facts of the ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he arms' length price. 18. We also find that the Hon'ble High Court of Bombay in the case of CIT Vs. L'oreal India Pvt. Ltd., ITA No.1046/2012 had upheld the order of the Tribunal, wherein it was observed that RPM was the most appropriate method in the case of distribution or marketing activities, specifically when goods which are purchased from AEs are thereafter sold to unrelated parties without any further processing. Also, a similar view had been taken by the coordinate benches of the Tribunal viz. (i) Horiba India (P) Ltd. Vs. DCIT, 81 taxamnn.com 209(Delhi); (ii) Fresenius Kabi India Pvt. Ltd. Vs. DCIT (ITA No.235/PUN/2013); and (iii) ACIT Vs. Kobelco Construction Equipment India Pvt. Ltd., ITA NO.6401/De1/2012 (Delhi). Accordingly, in terms of our aforesaid observations, we are of the considered view that in the case of a pure trader RPM is the most appropriate method for bench marking the international transactions. 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 comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the amount of gross profit margin in the open market. As such, we are of the considered view that in case the AO held a conviction that the comparables selected by the assessee were not found to be appropriate, then the remedy available with him was either to make necessary adjustments as envisaged in Rule 10B(1)(b)(iv) of the Income-tax rules, 1962 or to search for fresh comparables. However, merely for the reason that the comparables selected by the assessee were not found to be appropriate could have by no means justified the rejection of the aforesaid method adopted by the assessee for benchmarking the ALP of its international transactions. Our aforesaid view is fortified by the order of the ITAT Bangalore Bench of the Tribunal in the case of CIT Vs. Sanyo India Pvt. Ltd. [2015] 45 CCH 98 (Bang) and the order of ITAT, Delhi Bench in the case of Burberry India Pvt. Ltd. (supra). Further, we find that another reason given by the TPO/DRP for rejecting the RPM is that the assessee as per them was a full-fledged/full risk distributor and was performing a host of functions which would involve huge costs and, hence, the said method may not represent correct gross profit margin. We a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Dhandapani Co. and (ii) M/s Kusam Electricals Industries Pvt. Ltd. from the final list of comparables. As is discernible from the order of the TPO, the aforesaid parties were rejected as comparables primarily for the reason that while for the assessee's line of business was trading in high- ended technology related products , on the other hand, the said comparables were dealing in routine electrical equipments. We may herein observe that under the RPM method, the focus is more on the functions rather than the similarity of products because product differentiation does not materially affect the gross profit margin, as it represents gross composition after the cost of sales for specific functions performed. Our aforesaid view is supported by the orders of the ITAT, Mumbai in the case of Mattel Toys (I)(P.) Ltd. Vs. DCIT, Cirlce-6(3), Mumbai, [2013] 34 taxamnn.com 203 (Mumbai-Trib) and ITAT, Delhi Bench in the case of Horiba India (P) Ltd. Vs.DCIT, 81 taxamnn.com 209(Delhi). As we have upheld the RPM as the most appropriate method in the case of the assessee as against TNMM applied by the TPO, therefore, we find no justifiable reason for exclusion of the aforementioned compar ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
