TMI Blog2019 (5) TMI 1661X X X X Extracts X X X X X X X X Extracts X X X X ..... wherein it was held that in case of a distribution activity, the selling and marketing expenses which are borne by the assessee would not lead to any value addition to the product in question. We, thus vacate the view taken by the TPO/DRP, who had concluded that the freight, transaction cost, insurance discounts, rebates, packaging, duties, etc. would affect the reliability of gross profit margin as PLI for the purpose of comparison. In terms of our aforesaid observations, we are of the considered view that the TPO/DRP while dislodging the RPM followed by the assessee for benchmarking its international transactions, had lost sight of the fact that only the transaction of import of goods by the assessee from its AEs were to be benchmarked and all the other functions carried out by the assessee having no nexus with the said import transactions were, thus, not relevant for the said benchmarking analysis. Whether the TPO/DRP were justified in excluding two of the comparables viz. (i) M/s K. 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 rejecte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1961 ('the Act') passed by the Assistant Commissioner of Income Tax, Range - 10(3), Mumbai ('learned AO ') for the aforesaid assessment year on the following among other grounds: 1. General 1.1 The learned AO / DRP erred in upholding the upward adjustment of ₹ 4,49,48,022 made by the learned Transfer Pricing Officer (,TPO,) to the value of international transaction entered into by the assessee in relation to import of finished goods. 1.2 The learned AO / DRP erred in appreciating the fact that TPO erred in passing the order without following the principle of natural justice. 2. Erroneous rejection of Resale Price method by the TPO 2.1 The learned AO / DRP erred on the facts and circumstances of the case and in law, in confirming the TPO's-stand of rejection of resale price methodology ('RPM') followed by the Appellant in benchmarking the international transaction relating to import of finished goods, as prescribed under rule 10B(1)(b) of the Incometax Rules, 1962 ('the Rules ') 3. Erroneous selection of Transactional Net M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... horities. 8.1 The learned AO I DRP erred in not appreciating the fact that the price at which finished goods are imported by the assessee has been accepted by the customs authorities. 9. Erroneous rejection of multiple year data for computation of margin of Comparables. 9.1 The learned AO I DRP erred in upholding the rejection of use of multiple year data for computing the margins of the comparables. 10. Erroneous rejection of the benefit of standard deduction of 5% range. 10.1 The learned AO / DRP erred in not granting the benefit of standard deduction of 5% range in computing the arm's length price as provided in the proviso to section 92C(2) of the Act as it stood prior to the amendment by the Finance Act (No.2), 2009 and Finance Act 2012. 11. Others 11.1 The appellant submits that the learned AO, TPO and DRP have erred in arriving at various unwarranted and erroneous conclusions unsupported by any relevant material in deciding the case. Further, they also failed to consider the contrary material and evidence adduced by the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i.e. coding and marking equipments that were imported from the foreign AEs were resold in the domestic market without any value addition in the same form in which they were imported. Further, it was stated that the finished goods purchased by the assessee from its foreign AEs for the purpose of domestic sales were exclusively manufactured by them. On a perusal of TPSR, it was observed by the TPO that the assessee had benchmarked its international transactions by taking Resale Price Method (for short RPM ) as the most appropriate method. Further, taking itself as the tested party, it had adopted the gross profit margin as the appropriate Profit Level Indicator (for short PLI ) for the trading activities. It was noticed by the TPO that as per the TPSR the assessee had selected external comparables on the basis of the search performed on Indian Database i.e Prowess . On the basis of the aforesaid search the assessee had selected 8 comparables in its TPSR and had computed the average gross profit margin of the same at 26.06% as under :- 4. In the backdrop of the aforesaid facts it was submitted by the assessee that as its gross profit margi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vealed that unlike the case of other comparables where the goods were imported on CIF basis, in case of the assessee the insurance in transit was borne by the AEs; (vii) that, a perusal of the FAR analysis revealed that the assessee did not make any separate payments for use of trade names and trade marks, which was not so in the case of the other comparables; (viii). that, the goods were procured by the assessee from the AEs for a credit period of one month which was normally extendable upto 180 days, however, the details as regards the credit period in case of the comparables was not discernible from the records; and (vii) that in the case of the assessee the warranty was provided by the AEs, which however was not so in the case of the comparables. 7. The TPO was further of the view that as the assessee carried on elaborate functions of distribution, marketing, sales promotion, inventory management, personnel management, training, development of training materials etc in the course of its business of trading in coding and marketing equipment and rendering of allied services, and also did bear substantial risks in the form of inventory risk, market risk and credi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . As such, the TPO re-worked out the net margin of the assessee at 2.65%. Further, the TPO in the absence of any details supporting the claim of the assessee that the revenue of ₹ 2.82 crores was on account of sale of spares, thus, inferred that the entire sales revenue of ₹ 36.66 crores pertained to the sale of AE products. On the same footing, it was observed by the TPO that now when the revenue of ₹ 2.82 crores was not being excluded, therefore, the claim for exclusion of expenditure of ₹ 1.63 crores and proportionate depreciation from the operational expenditure would also not arise. As regards six comparables, which were selected by the assessee for benchmarking its international transactions, the TPO excluded two comparables viz. (i) M/s K. Dhandapani Co.; and (ii) M/s Kusam Electrical Industries Ltd. from the final list of comparables. Insofar M/s. K. Dhandapani Co. was concerned, it was observed by the TPO that while for the assessee was carrying on the business of trading in high ended technology related products, while for the aforesaid comparable was dealing in routine electrical items, fuses, meters, switch gears etc. As such, the aforesaid c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was submitted by the ld. AR that as the assessee was engaged in the business of importing of coding and marking printers, consumable and accessories from its AEs and selling the same without making any value addition, hence, it had adopted RPM as the most appropriate method for benchmarking its international transactions. It was submitted by ld. AR that the AO/TPO had most arbitrarily proceeded on the basis of misconceived facts and substituted the RPM by TNMM for benchmarking the international transactions of the assessee. It was vehemently submitted by ld. AR that as per the rule 10B(1)(b) of the Income-tax Rules,1962, RPM is the best suited method for determining the ALP of the international transactions in a case where the assessee purchases goods from AE which are resold as such to the unerelated parties. In support of his contention, ld. AR relied on the certain judicial pronouncements, as under:- i) Burberry India Pvt. Ltd. Vs. ACIT, Circle-5(1), New Delhi, ITA No.758/Del/2017, dated 22.06.2018; ii) Horiba India (P.) Ltd. vs. DCIT (81 taxmann.com 209 (Delhi Trib); iii) Fresenius Kabi India Pvt. Ltd. vs. DCIT(ITA No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r while observing that the average cost price of goods imported during the year was more as in comparison to that of last year, had based such view on wrong facts and figures. It was averred by the ld. AR that while for the assessee in the immediately preceding year had imported 420 machines for a consideration of ₹ 12,56,25,031/-, however, the value of the same on account of an inadvertent mistake had wrongly been stated at ₹ 2,56,25,031/-. It was submitted by him that in case the correct figure for purchase of 420 machines was taken, then the average purchase price per machine worked out at ₹ 2,99,107/- (i.e. ₹ 12,56,25,031/ 420), which was more as in comparison to the average purchase price amounting to ₹ 1,98,207/- for the year under consideration. It was, thus, the contention of ld. AR that the AO/TPO had misconceived both the settled position of law as well as the facts of the case. Insofar the observation of the TPO that the assessee was found to have carried out multiple functions of distribution, marketing, sales promotion, inventory management, personnel management, training, development of training materials, as well as had borne substantial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee in the course of the its business purchases finished goods i.e. coding and marking equipments viz. continuous Inkjet Printers, Labelling Equipments, Laser markers and related consumables spares from its foreign affiliates for the purpose of sale in the domestic market. As such, the assessee does not carry out any value addition to the goods purchased from its AEs and, sells it in the same form in the domestic market. Before adverting to the fact as to whether the international transactions of the assessee with its AEs were rightly benchmarked by it in its TPSR by taking RPM as the most appropriate method, or not, we feel that it would be relevant to cull out Rule 10B(1)(b) of the Income-tax rules, 1962, which envisages the determination of ALP u/s.92C of the Act 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 appropr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the remaining sub-clauses of rule 10B(1)(b) of the Income-tax rules, 1962, makes it clear beyond doubt that RPM is best suited for determining the ALP of an international transaction in the nature of purchases made from an AE which are resold as such to unrelated parties. It was further observed by the Tribunal that ordinarily the said method presupposes no or insignificant value addition to the goods purchased by an assessee from its foreign AE. Further, we find that the aforesaid issue had also been looked into by the Hon'ble High Court of Delhi in the case of PCIT Vs. Matrix Cellular International Services (P.) Ltd. [2018] 90 taxmann.com 54(Delhi). The Hon'ble High Court observing that in case of a pure trader where there was no value addition before reselling the products, RPM was the most appropriate method for benchmarking the transactions, had held as under :- 8. This Court finds that once the ITAT, on considering the relevant facts as well as the order of the TPO, had concluded that the business of the assessee was merely that of a pure trader, and there was no value addition made before re-selling the particular product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. This view has also been affirmed by the Bombay High Court in its judgment dated 07.11.2014 in CIT v. L'Oreal India (P.) Ltd.[2015] 53 taxmann.com 432/228 Taxman 360 , where the Court found that there was no error in law committed by the ITAT when it held that RPM was the Most Appropriate Method in case of distribution or marketing activities especially when goods are purchased from associated entities and there are sales effected to unrelated parties without any further processing. In fact, a Division Bench of this Court in its decision in Bausch Lomb Eyecare (India) (P.) Ltd. v. Addl. CIT[2016] 381 ITR 227/237 Taxman 24/65 taxmann.com 141 (Delhi), while considering the decision of this Court in Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT[2015] 374 ITR 118/231 Taxman 113/55 taxmann.com 240 (Delhi), noted that: The RP Method loses its accuracy and reliability where the reseller adds substantially to the value of the product or the goods are further processed or incorporated into a more sophisticated product or when the product/service is transformed. 12. Therefore, a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the observations of the lower authorities on the basis of which application of RPM for benchmarking the international transactions of the assessee had been rejected by them. We find that a primary reason given by the TPO for rejectingg RPM as the most appropriate method, and the gross profit margin as the PLI, was that as per him the assessee had not demonstrated that uniform accounting norms were followed in the accounting of cost of goods sold by the assessee and the comparables selected by the assessee. As observed hereinabove, we find that though it has been the claim of the assessee that both the assessee and the comparables have used Indian GAAP and accordingly followed the uniform accounting norms, however, the said claim of the assessee was rejected by the TPO/DRP without placing on record any material which could disprove the same. Be that as it may, we are of the considered view that as per the rule 10B(1)(b)(iv) of the Incometax Rules, 1962, while determining the ALP in relation to an international transaction as per RPM, the price so arrived at is to be adjusted to take into account the functional and other differences including difference in accounting practices, if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e determinative factor for benchmarking the international transaction of the assessee with its AE by taking RPM as the most appropriate method. Our aforesaid view is supported by the order of ITAT Pune Bench in the case of Fresenius Kabi India (P) Ltd. Vs. DCIT (ITA No. 235/Pun/2013), wherein it was held that in case of a distribution activity, the selling and marketing expenses which are borne by the assessee would not lead to any value addition to the product in question. We, thus, in terms of our aforesaid observations vacate the view taken by the TPO/DRP, who had concluded that the freight, transaction cost, insurance discounts, rebates, packaging, duties, etc. would affect the reliability of gross profit margin as PLI for the purpose of comparison. In terms of our aforesaid observations, we are of the considered view that the TPO/DRP while dislodging the RPM followed by the assessee for benchmarking its international transactions, had lost sight of the fact that only the transaction of import of goods by the assessee from its AEs were to be benchmarked and all the other functions carried out by the assessee having no nexus with the said import transactions were, thus, not rele ..... X X X X Extracts X X X X X X X X Extracts X X X X
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