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TMI Blog2020 (10) TMI 240X X X X Extracts X X X X X X X X Extracts X X X X ..... namely, P L Enterprise Ltd. and PAE Ltd. from the economic analysis of the Appellant, which were comparable to the Appellant's distribution activity in relation to the international transaction of purchase of finished goods in terms of functions, asset base and risk profile. 3. On the facts and in the circumstances of the case and in law, in relation to the international transaction of purchase of finished goods, the benefit of (+/-) 5% range available under proviso to section 92C(2) of the Act, be granted to the Appellant, if eligible. 4. On the facts and in the circumstances of the case and in law, the AO erred in charging interest under Section 234B and 234C of the Act. 5. On the facts and in the circumstances of the case and in law, the AO erred in initiating penalty proceedings under section 271(1)(c) of the Act. I 3. Briefly stated, the facts of the case are that the appellant filed its return of income for the assessment year (AY) 2011-12 on 30.09.2011 declaring total income at Rs. 9,92,01,580/-. Subsequently, it revised the return of income on 21.02.2012 declaring total income at Rs. 9,04,85,647/-. As per the documents filed before the Assessing Officer (AO), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - The company is involved in trading of voltage stabilisers and other electronic appliances. The TPO has observed that the company is involved in trading of Voltage stabilizers. The TPO has failed to appreciate and take cognisance of the detailed explanation submitted by the assessee vide Annexure C along with supporting document i.e. extract of Annual report of the Company as Annexure C2 (yellow highlighted paras) vide submission dated January 19, 2015.The assessee would like to reiterate that, ".... on perusal of this, you would appreciate that the company is involved in the trading / distribution of voltage stabilisers, DVD's and other electronic appliances". Further, from the extract of Annual report, it can be clearly observed that (i) company has 100% of trading sales; and (ii) cost of goods sold also shows that the company has opening stock, purchases as well as closing stock of finished goods (trading) only. Hence, this company can be considered as comparable to ETPL's distribution business of measuring and surveying equipments. 3. P A E Ltd. - Company is involved in the trading of industrial batteries and power solutions. Its products include automotive parts, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancials it is seen that the company has received INR 2.16 crores from AMC and installation charges. Further, Adtech has 2 vertical business segments namely Retail Chain Segment in the supply and installation of antishop lifting systems and Commercial industrial segment where the company supplies electronic article surveillance equipments. The company has given segmental accounts. The assessee however, worked PLI at entity level despite segmental available. The TPO has failed to appreciate and take cognisance of the detailed explanation submitted by the assessee vide Annexure C along with supporting document i.e. extract of Annual report and Website of the Company as Annexure C5 (yellow highlighted paras) vide submission dated January 19, 2015. The assessee would like to reiterate that, ".... on perusal of this, you would appreciate that the company is in the business of Electronic Article Surveillance Systems, Access Control Systems, CCTV video surveillance through Closer Circuit Television system, Fire Alarm System etc. Installation is an activity conducted by the company along with its main business and income corresponding to installation is also minuscule". The Hon'ble P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AE business is a standalone product selling business in which the assessee acts as a distributor. This business is primarily driven by the brand value of the AE and much less efforts and risks are involved. In its non-AE business, the assessee is benefitted from the expertise developed by it over a period of time in integration of various non-AE products and also from the fact that it has got very little competition." On the basis of the above observations, the DRP held that the AO was not justified in applying internal RPM (based on sale price quoted for goods in the tender documents) for benchmarking the payments made to AE towards purchase of finished goods. Further, the DRP observed that the appellant was not justified in benchmarking the transactions with the AE by considering gross profit at entity level because profit margin in non-AE transactions is much higher. Thus holding that RPM should have been applied to the AE transaction only, the DRP directed the AO to compare the gross profit of the AE business with the comparables selected by the appellant. While giving the above direction, the DRP directed the AO to reject the comparable PL Enterprises which was rejected by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P Study OP/OC as per DRP OP/OC as per Appellant Respondent's contention 1. Adtech Systems Ltd. 36.27% 36.27% 36.27% - 2. Alert Fire Protection Systems Ltd. 31.88% 31.38% 31.88% - 3. Kusam Electricals Industries Ltd. 41.74% 41.74% 41.74% - 4. PL Enterprises Ltd. (now known as "MatraKaushal Enterprises Ltd.) 22.24% - - - 5. PAE Ltd. 9.76% - 9.76% * The DRP has excluded this comparable on the reason that this company is engaged into trading of auto batteries, solar and power back systems which is different from the Appellant. * In this regard, the appellant submits that the same comparable has been retained by the TPO as well as by the DRP in the previous Assessment Year i.e. 2010-11. Further, the appellant relies on the following decisions wherein it has been held that under RPM, the focus is more on similarity of functions (which in present case is trading) and not on products: * Mattel Toys (I) Pvt. Ltd. v. DCIT (144 ITD 76 (Mum) (page 12- 13, para 36-38) * ACIT v. Kobelco Construction Equipment India Ltd. (186 TTJ 790) (Del) (Page 6-8, Para 11-13) Arithmetic Mean 28.28% 36.46% 29.78% Appellant's Margin (AE Segmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed the relevant materials on record. The reasons for our decision are given below. The dispute here, as per the contentions of the Ld. counsel which has been extracted fully at para 4 hereinabove, is the exclusion of PAE Ltd. as a comparable by the AO in the impugned assessment year. Before adjudicating the issue, we may refer to the background facts of the case. The appellant has selected itself as a tested party to the transaction and adopted Resale Price Method (RPM) as the most appropriate method. It considered gross profit to sales ('GP/Sales') as the profit level indicator (PLI) since the finished goods were purchased from AEs and then sold to the customers without much value addition. The appellant reported the 5 companies mentioned below as comparables : Sr. No. Name of the Company As per TP Report Single Year Margin 1. Kusam Electrical Inds. Ltd. 41.74% 41.46% 2. PAE Ltd. 9.76% 11.30% 3. Alert Fire Protection Systems Pvt. Ltd. 31.38% 33.63% 4. Adtech Systems Ltd. 36.27% 34.93% 5. Matra Kaushal Enterprises Ltd. (PL Enterprises) 22.24% 14.74% Mean 28.28% 27.21% The appellant submitted before the TPO that as its gross profit margin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee itself had given a detailed analysis as to why RPM could not be taken in its TP report. On appeal, the Tribunal held that (i) RPM is the most appropriate for benchmarking ALP, where resale takes place without any value addition to the product by the assessee, (ii) where, at any stage of proceedings, it is demonstrated by the assessee that most appropriate ALP can be determined by adopting a prescribed method than that chosen by it earlier, same should be considered and (iii) where internal comparables are available, they are preferred over external comparables. Having gone through the above decision, we may mention here that there is no dispute on the findings in the above case. We are concerned here only with the comparability of PAE Ltd. In the case of Kobelco Construction Equipment India Ltd. (supra), relied on by the Ld. counsel, the assessee imported finished goods manufactured by its AE, like earthmoving equipment, hydraulic excavators, etc. for resale in India. It undertook the entire function of a 'distributor'. It mainly sold finished goods directly to the customers at high sea sales and some of the finished goods were sold through network of deale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... twithstanding the functional similarity, many times a company ceases to be comparable because of other reasons as well. For example, if company 'X', though functionally similar to company 'Y', but has related party transactions (RPTs) breaching a particular level, then, such company should not be considered as comparable to company 'X' in the year in which the RPTs breach has occurred. Also, a company might have been treated as non-comparable due to the TPO adopting its entity level results for comparable with the segmental results of the case before him, but in the later case, the TPO may take only the related segment results. In such a later case, the company treated as non-comparable to the first company may become comparable to the second company. The comparability of each company needs to be ascertained only after matching the functional profile and the other relevant reasons of the other company. Functional analysis enables comparison of controlled transactions with uncontrolled transactions. The Hon'ble Supreme Court in the case of Morgan Stanley & Company Inc (2007) 292 ITR 416(SC) has placed significant emphasis on FAR (functions performed, assets owned and risks assumed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... land (subsidiary company of Hexagon Group, Sweden) for positioning technologies, which includes geodesy, high-end GPS and the highly specialized Industrial Measurement Systems (IMS) and high definition surveying systems. The assessee is engaged in the trading of above related surveying and measurement equipments. PAE Ltd. During the financial year 2010-2011, PAE restructured operations and transitioned from a horizontal organization structure to a more defined, vertical structure. Under the revised organization layout, PAE's business will be divided into 5 business verticals for better internal monitoring: * Auto Batteries * Auto Parts * Industrial Batteries * Power Backup Systems * Solar Each vertical will perform as an independent Strategic Business Unit (SBU), focused on growing sales and optimizing operations. D 6.4 What is the architecture of RPM? In this context, we seek guidance from (i) OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (July 2017), (ii) United Nations Practical Manual on Transfer Pricing for Developing Countries (2017) and (iii) Guidance Note on Report u/s 92E of the Income-Tax Act, 1961 (Transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fferent products cannot be compared. The price of a washing machine will, of course, differ from the price of a dryer, as the two products are not substitutes for each other. Although product comparability is less important under the Resale Price Method, greater product similarity is likely to provide more reliable transfer pricing results. It is not always necessary to conduct a resale price analysis for each individual product line distributed by the sales company. Instead, the Resale Price Method can be applied more broadly, for example based on the gross margin a sales company should earn over its full range of broadly similar products. " Guidance Note on Report Under Section 92E of The Income-Tax Act, 1961 (Transfer Pricing) (Revised 2019), issued by the Institute of Chartered Accountants of India states the following : "6.16 On application of RPM, the UN in the Practical Manual on Transfer Pricing has observed as under: "6.2.9.3 While product differences may be more acceptable in applying the Resale Price Method as compared to the CUP Method, the property transferred should still be broadly similar in the controlled and uncontrolled transactions. Broad differences are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owave ovens in controlled transactions can be compared with gross profit margin earned by unrelated parties from trading of Toasters. Gross profit margin earned from trading of Laptops in controlled transactions can be compared with gross profit margin earned by unrelated parties from trading of Desktops. This is because, both are consumer durables and fall in within the same industry. RPM is unlikely to give accurate result, if there is difference in level of market, functions performed, or product sold. For example, Gross profit margin of a chocolate distributor cannot be compared with Gross profit margin of a cosmetics distributor even though both products fall under FMCG category. This is because, there are huge differences in the products which affect the Gross profit margin. The fact remains that prices for different products would tend to equalize only to the extent that those products were substitutes for one another. RPM is a GP margin based method. It is a traditional transaction method. It primarily compares controlled and uncontrolled transactions. Under RPM we can tolerate slight differences in the products distributed by the two types of distributors as long as th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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