TMI Blog2020 (10) TMI 933X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer pricing officer as well as the direction of the learned dispute resolution panel in rejecting the resale price method adopted by the assessee and adopting transactional net margin method as the most appropriate method. - Decided against assessee. - ITA No. 240/Del/2017 - - - Dated:- 20-10-2020 - SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER Assessee by : Shri Nikhil Surana, CA Shri Lokesh Jain, CA Revenue by : Ms. Nidhi Sharma, Sr. DR ORDER PER PRASHANT MAHARISHI, A. M. 1. This appeal is filed by the assessee against the order of the ld AO dated 27.10.2016 for the Assessment Year 2012-13 passed u/s 143 (3) read with Section 144C read with Section 92CA (3) of The Income Tax Act, 1961 on 27/10/2016 wherein the returned income of the assessee of loss of ₹ 39,796,549 as per return of income filed on 30 November 2012 is assessed at a loss of ₹ 30,329,704/ wherein a transfer pricing adjustment of ₹ 9,404,349/- has been made. 2. The assessee has raised the following grounds of appeal:- 1. The ld AO as well Hon ble DRP has grossly erred both on facts and in law in confirming the action of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. He thereafter selected five comparables computed the operating margin wherein operating profit/operating ratio of the comparables was computed at (-) 3.57 percentage. Thereafter the AO stated that assessee has earned total revenue of ₹ 222,265,148/ and has incurred total operating cost of ₹ 251,806,217/ and therefore the arm s-length profit computing margin of (-) 3.57 percentage assessee should have incurred a loss of ₹ 7,934,866 against which the assessee has incurred loss of ₹ 29,541,069/- and therefore there is a difference of ₹ 2,16,06,203. The above difference he applied to the international transactions of the assessee of ₹ 109,601,558 and proportionately adopted 43.53 percentage of the difference of ₹ 2 16,06,203 which comes to proportionate adjustment of ₹ 9,404,349/- . Accordingly the order was passed u/s 92CA (3) of the act on 23rd of January 2016. The draft order was passed by the learned assessing officer on 21st of March 2016. Assessee filed objection before the learned Dispute Resolution Panel 2, New Delhi. The learned DRP issued directions on 23 September 2016 wherein the method adopted by the learned transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the nature of semi finished and finished goods. He further referred to the risk profile of the assessee and stated that the lower authorities have incorrectly read the risk profile. It was stated that the product research and development functions risk only rest with the associated enterprise and not with the assessee and further the manufacturing functions risk is also with the associated enterprise. With respect to the product liability risk and the warranty risk it was submitted that risk rests with the associated enterprise and not with the assessee except limited warranty to obtain the product from the customers and sending it to its associated enterprise. 6. With respect to the appropriateness of using the Resale Price Method as the most appropriate method by the assessee , he advocated that there is no finding in support of the conclusion that assessee is carrying out substantial value addition and therefore the Resale Price Method is the most appropriate method. He submitted that the assessee import sealing moulds and wedges from the associated enterprise and assembles them in ready to use packs to send them to customers in India remains uncontroverted. He further ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ple contracting entity in its territory. However the assessee could deal in the products as listed in the catalogue of the associated enterprises or modified by it. Therefore based on its market leads, it estimates it sales, orders the product from its associated enterprise, purchases sealing models from its associated enterprise, procures frames from local vendors, who uses the design as provided by the assessee and then product is assembled into customised or ready to use packs and sold there after to the customers. Assessee pays its associated enterprise on every purchase based on the catalogue price of the associated enterprise with or without discount. The final delivery to the customer and invoicing for the sales is the responsibility of assessee and assessee being the front-end entity is responsible for maintaining good relationship with the customer. 9. Based on this business model the assessee performs functions as stated on page number 16 of 46 of the Transfer Pricing Study Report where assessee frames the strategy for the territory for which it is appointed as the distributor. It also performs its day-to-day functions of the management. The design specification is car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the year is 5,13,00,000 whereas in the last year it was 4.69 crores. Even in the financial statement at note number 29 assessee is stated to be engaged in production of goods. We have also carefully considered the chart of the employee expenditure submitted by the assessee at page number 87 88 of the paper book. However, from the above chart it is apparent that assessee does not have anybody who is doing vendor selection, vendor control, assembly activity et cetera. Therefore the chart of the employee submitted by the assessee does not match with the functions stated by the assessee in the TP Study . It is apparent that in Resale Price Method if there is no substantial addition, should be used as the most appropriate method. However at page number 86 of the paper book assessee shows that it earns the gross profit of 35%, at page number 90 of the paper book assessee submits that its gross profit ratio is 36.09% at page number 8 1 assessee shown operating margin on cost and 17.75%, at page number 79 shown its gross margin on revenue at 41.61%. Such a kind of margin earned by distributor is unheard of, these figure itself shows that assessee is making substantial value addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions. 1, The RPM begins with the price at which a product that has been purchased from an associated enterprise is resold to an independent enterprise. Therefore, the use of RPM is ideal for distribution activity, whereby the tested party purchase the products or obtained the services from its associated enterprises and resells the products/services to an independent enterprise. 2. RPM is the most appropriate in a situation where the sellers add relatively little value to the goods and not alter the goods physically before the resale. Packaging, repacking, labeling or minor assembly does not ordinarily constitute physical alteration. 3. RPM is used in cases where reseller does not apply intangible assets to add value. The greater the value-added to the goods by the functions performed by the seller, the more difficult it will be to determine an appropriate resale margin. This is especially true in a situation where the seller contributes to the creation or maintenance of an intangible property, such as marketing intangible, in its activities. The sum and substance of the above narration is that that RPM evaluates the process of functions performed ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see has stated that RPM is the most appropriate method as it is not carrying out any value addition activities. From the above discussion on manufacturing activity of the assessee, it is abundantly clear that the assessee has undertaken substantial manufacturing activities and not disclosed in the true manner. From the above it was clear that A was not performing the function of a simple trader or distributor. It was also engaged in activities relating to manufacturing of frames through local vendors as per the design provided by its associated enterprise. The panel is fortified in its above view also by the description given in the TP study report titled as functional analysis (page 13 23) of the functions and entailing expenditures of various types incurred by the A on sale of goods in local market, export of goods to associated enterprise, exploring Indian customer base, strategic management functions, corporate service functions, product research and development functions, manufacturing function (page 17 of TP study provided by the A), sourcing and purchasing materials for the production or assembly process, vendor selection, inbound Logistics, quality assurance, storag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imported by the A from its AE, as is apparent from the above description of facts, had to undergo several process post purchases which entailed in various kinds of expenditure of different varieties which RPM was not capable of factoring in. In the above conspectus, TNMM is held by us to be the most appropriate method as TNMM compares net margins of profits earned in uncontrolled transactions by independent entities against those achieved in related party transactions. In comparison the profits or margins using the TNMM, typically some form of ratio most commonly used expresses net profit as a percentage of cost (full cost or operating cost), a particular balance sheet category ( eg assets, capital employed, etc ) or sales/services receipts. In the aforesaid premises, we have no hesitation in holding that A was rightly held as a manufacturer by the TPO which culminated in the rejection of the RPM. Accordingly ground number two is dismissed. 11. The assessee has relied upon the decision of ACIT versus MSS India (private) Ltd reported at 123 TTJ 657 to support its case. We have carefully considered the facts in that case wherein the method adopted by the assessee was cost plus m ..... 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