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TMI Blog2020 (10) TMI 933X X X X Extracts X X X X X X X X Extracts X X X X ..... y applying Transactional Net Margin Method and rejecting resale Price Method as the most appropriate method, thereby making a TP adjustment of Rs. 9,404,349/-. 3. Assessee is a private Ltd company wholly owned subsidiary of Sweden company. It is engaged in the business of manufacturing complete sealing solutions for cables and pipes. The assessee company imports sealing modules from its associated enterprises and wedges of frames from local vendors who uses the design provided by the group company and then those are assemble into customised ready to use packs and sold to the customers by assessee. Assessee has entered into six different international transactions as Under:- a. Import of material (semi finished and finished goods amounting to Rs. 71,316,723 benchmarked adopting Resale Price Method as the most appropriate method. b. Export of finished goods amounting to Rs. 38,284,835 benchmarked adopting the Transactional Net Margin Method as the most appropriate method c. reimbursement of secondment expenses incurred by associated enterprise is benchmarked applying CUP method for a transaction of Rs. 1 38,40,988, reimbursement of expenses incurred by the company on behalf of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Rs. 30,329,704. The assessee is aggrieved with that order and is in appeal before us. 5. The learned authorised representative submitted that benchmarking analysis made by the assessee is correct by adopting the resale price method as the most appropriate method. It was stated that the quantum of employee benefit expenses cannot be compared with the revenue as there has been a substantial shortfall in the revenue in the current year on account of slowdown in the telecom sector. He therefore submitted that substantial fall of the revenue from 44.00 Crores to 22 crores. It was further stated that human capital cannot be reduced in the short period of time. Considering the fact that the core function of the assessee is sales and marketing such deduction was neither advisable nor feasible. He also submitted that the comparative payroll charged is designation and role of each employee for four years has been provided and on review of the same it can be clearly observed that all the employees have been undertaking general sales and marketing activities. He further submitted that expenses in the nature of rent, travelling and conventions expenses are the normal business expenditure wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... akhs with respect to the wages and the quantum and nature of the plant and machinery also does not suggest that substantial value addition has been carried out by the assessee. He otherwise submitted that the Transactional Net Margin Method is not the most appropriate method and submitted that TNMM is applied when cost plus method or resale price method does not give reliable data. He otherwise submitted that in case of the assessee it has earned negative margin on account of substantial drop in the revenue as it is unable to absorb it is fixed and semi fixed cost , therefore substantial losses been incurred. He further stated that there has been no change in the gross margin earned by the assessee which is submitted at page number 101 of the paper book. Therefore negative margin earned by the assessee must not be attributed to the value addition of the assessee and therefore the Transactional Net Margin Method does not truly reflect margins earned form the business of the assessee. He therefore submitted that Resale Price Method as the most appropriate method adopted by the assessee for the purpose of import of material of semi finished and finished goods. He therefore submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tributes further research and development activities also. Though manufacturing of the multi-diameter module is by the associated enterprise, however, assessee is involved in the assembly of the frame, module and wedge for the creation of the customised kits. The company developed the vendor's local in India for the products used in assembly and the frame is exported, which were tested for quality in Sweden to adhere to the strict product specification and quality norms driven by the parent company. Assessee also does sourcing and purchase of materials for the production or assembly process. Vendor selection, its qualification, inbound logistics etc. are all the responsibilities of the assessee. The assessee is also responsible for the quality of material that is purchased by the company from the local vendors. The associated enterprise is only responsible for the material supplied by it to the assessee. The assessee also markets the above products and generates a lead from the customers. The assessee also assumes the market risk and warranty risk to the extent of product supplied by the vendors. It is an altogether different thing that the assessee is given a back-to-back warranty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be resold looking at the margins that assessee has earned, requires only minor modifications. Assessee shows in its transfer pricing study report itself that it is assembling the product after obtaining certain raw material from its associated enterprise and certain raw materials from its developed vendors. Resale price method applies when property purchase by the enterprise from an associated enterprises resold. In this case the it is not the resale of the same material but it is further improved, through its own vendors and then sold to the customers which are identified by the assessee. On looking at page no 83 -85 of the paper book where the list of plant and machinery used by the assessee is given, it shows that assessee has various dies, Moulds , tools and other machines of Rs. 2.66 crors. The learned dispute resolution panel while dealing with the objection of the assessee about the Most Appropriate Method (objection number 1A) has dealt with as Under:- "Findings :- The objection of the A was given an anxious consideration by us. Before delving deep into the subject matter once consideration, it is considered to be in the fitness of things to refer in brief to the circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icability of RPM becomes a suspect. In this context the transfer pricing orders para number 5.1.1 to 5.1.3 passed by the transfer pricing officer becomes relevant. For the sake of facility the reasons subscribedby the TPO for rejecting RPM in the case of the A are reproduced below:- "5.1.1 further, it is saying that you have incurred substantial personnel expenses of Rs. 54,888,092/-, out of with salaries and wages are 5,13,04,008/- /-). If you were performing only trading function, these expenses were not justified in relation to total turnover of Rs. 222,242,360 -. Further you have incurred several expenses Under the head operating and other expenses which are related to production like rent, travelling and conveyance, which should have been taken into account in factoring the value addition made by you in respect of sales termed as deemed manufacturing. It is also seen that you are also undertaking other functions like advertising, sales promotion and having a distribution network. Incurring of these costs are also indicate that you're not acting as a mere trader but banking on significant other functions also. Further, it is also not in doubt these imports have been made in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s casting reflections on the claim of the A that it was a trader/distributor are reproduced below:- "Roxtec India based on its estimated sales, order the products from AE Roxtec India purchase and sealing modules and wedges from AE and procures frames form local vendors who use the design as provided by Roxtec India. The product is then assembled into customised the ready to use packs and sold thereof to the customer. During the year, the company exported certain products to AE. These products are the frames manufacture by the local vendors using the technology and design provided by Roxtec India. The production of such frames are outsourced by Roxteck India to vendors in India. The vendor's are identified and selected by Roxtec India in collaboration with the AE. The vendor is provided with the designs for the purpose of sample production. Such sample production is approved by the AE. Subsequently, the purchase order is placed by Roxtec India on vendor for the manufacture of frames. The consideration payable to the vendors for the manufacturing activities is determined by Roxtec India taking consensus of inputs received from AE. Roxtec India assembles the manufactured fra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of cost plus method by offering the comparison of gross profit markup margin on its transactions with unrelated parties which was held to be correct. In that case TPO was held to be not justified in rejecting the method and making an adjustment as per transactional net margin method even if the assessee had suffered loss in those transaction with its associates. In the present case before us the issue is whether the assessee is a distributor or a manufacturer and whether resale price method is applicable to the international transactions entered into by the assessee. It is not the case that assessee has resold the same goods with only minor modifications to justify the adoption of RPM as the most appropriate method. In the present case the assessee has assembled the goods partly purchased from its associated enterprise and partly developed by its own vendor. Therefore, the decision relied upon by the learned authorised representative does not help the case of the assessee. 12. In view of the above facts we do not find any infirmity in the order of the learned assessing officer/transfer pricing officer as well as the direction of the learned dispute resolution panel in rejecting t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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