TMI Blog2021 (1) TMI 682X X X X Extracts X X X X X X X X Extracts X X X X ..... ses of ₹ 1.49 crores and has incurred operating and other expenses of ₹ 1.93 crores out of total revenue of ₹ 7.92 crores - Assessee has incurred employee benefit and other expenses of approximately ₹ 3.5 Crores on a revenue of ₹ 7.92 Crores. In view of this, we did not find any infirmity in the order of the lower authorities in adopting TNMM as the most appropriate method. In view of this ground Nos. 1 and 2 of the appeal of the assessee are dismissed. We set aside the whole issue back to the file of the ld TPO with a direction to consider the fresh search of the comparables by the assessee. The assessee is directed to submit the complete search along with accept/ reject matrix and the computation of the margin of TNMM method before the ld TPO and the ld TPO may verify it and after giving proper opportunity of hearing to the assessee may compute the correct margin and consequent adjutsment. Accordingly ground No. 3 and 4 of the appeal is allowed with above direction - ITA No. 3697/Del/2017 - - - Dated:- 15-1-2021 - SHRI KULDIP SINGH, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER Assessee by : Ms. Yatika Arora, Adv R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect to grounds 2.1 and 2.3 above. 3. On facts and in law, the Hon ble DRP, Ld. AO and Ld. TPO while selecting TNMM as the most appropriate method, erred in: 3.1 disregarding the fresh search for comparables carried out by the Appellant using a scientific approach, to be used if TNMM was to be selected as the most appropriate method. 3.2 disregarding the fact that even if TNMM was to be adopted as most appropriate method for benchmarking the Appellant s international transaction of import of finished goods, appropriate adjustments should be performed to ensure comparability vis-a-vis the comparable companies. 4 On facts and in law, the Ld. AO and Ld. TPO has grossly erred in computing incorrect working capital adjusted net profit margin of the comparables and thereby erred in computing incorrect transfer pricing adjustment. 5 On facts and in law, the Ld. AO erred in levying interest under section 234B, 234C and 234D of the Act. 3. Brief facts of the case shows that the assessee is a part of United States Gypsum (USG) Corporation. Assessee is a company engaged in trading of comprehensive range of building materials and to provide services to ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir gross profit margins can he summarised as under: a) While less product comparability may he required in using the resale price method as compared to CUP, it remains the case that closer comparability of products will produce a better result. For example, where there is a high-value or relatively unique intangible involved in the transaction, product similarity may assume greater importance and particular attention should he paid to it to ensure that the comparison is valid. b) When the resale price margin used is that of an independent enterprise in a comparable transaction, the reliability of the resale price method may be affected if there are material differences. In the ways the associated enterprises and independent enterprises carry out their businesses. Such differences could include those that effect the level (it cost's taken into account (e,g- the differences could include the effect of management efficiency on levels and ranges of inventory maintenance), which may well have an impact on the profitability of an enterprise but. which may not necessarily a i loci the price at winch a buys or sells its goods or services in the open market. These types of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne of goods, On the other hand, such an arrangement may provide the reseller with a kind of monopoly with the result that the reseller possibly can realize a substantial turn over without great: effort. Accordingly, the effect of this factor upon the appropriate resale price margin must be examined with care in each case. f. If the tested party is dealing in branded goods, the comparables should also be dealing in branded Products. The functions performed, which affect the resale price margin, should also he similar or it should be possible to make adjustments for such differences. An appropriate resale price margin is easiest: to determine where the reseller does not add substantially to the value of the product. Thus while making a comparison the presence of such functions and risks in the case of the comparables and the availability of data for costs of such functions is required for computation of the gross margin, Where there is a chain of distribution of goods, it needs to be ascertained exactly which functions are being performed by each entity in that chain. Functions generally performed by the resellers: Advertising; Marketing; Distribution an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparability in the light of above mentioned aspects of business of a distributor, it is amply clear that complete information about business profile and financial data is available in respect ofall the parties which are examined as comparables, ft is noted that, these basic requirements are not being fulfilled in the set of comparables chosen by the assessee. In fact, all of them foil the trading filter itself. In terms of product comparability, the kind of product comparability that is needed In RPM is also missing in the comparables offered. Furthermore, the assessee has not been able to show how it has worked out the RPM margins of itself and the comparables, Due to different, methods of accounting adopted by different companies, it; is often not possible to very clearly ascertain the gross margins because very often certain direct costs are not clearly identified and accounted for similarly across companies. In view of these issues, Resale Price Method is rejected as the most appropriate method and TNMM is considered as most appropriate method as other methods like CUP, CPM are not applicable to the facts of the case in fact, the strength of TNMM takes care of all the above li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is objection was rejected. With respect to the comparable the ld DRP issued certain directions to the ld TPO and consequently 4 comparable companies were found to be proper comparables and working capital adjustment was imputed therefore the margin of the comparable companies was found to be (-) 5.14 % and thereafter the adjustment was made of ₹ 1,07,62,915. Assessment u/ section 143(3) of the act was passed on 25/01/2017 determining net loss of the assessee of ₹ 1,48,81,535/-. 8. The ld AR submitted that the major bone of contention in this appeal is the most appropriate method. Assessee though prepared its T P study report adopting TNMM as Most appropriate Method however during TP assessment it requested for adopting RPM as most appropriate Method. He submitted that appellant perform all routine functions such as inventory management, selling and distribution functions, addition of new customers, determination of sale price and also assume routine risk of the business which are similar to a normal distributor. He submitted that the revenue authorities did not find resale price method as suitable for the reason that it lacks product and functional comparability. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore Resale price method is not the most appropriate method. He further submitted that the ld DRP and TPO / AO has given comprehensive reason for adopting the transactional net margin method as the most appropriate method. 10. We have carefully considered the rival contention and perused the orders of the lower authorities. Admittedly in this case the assessee itself has adopted the transactional net margin method as the most appropriate method for benchmarking itself for international transaction by import of finished goods of ₹ 6,31,11,109/-. Subsequently, during the course of proceedings before the ld TPO on 28/12/2015, assessee requested to use the resale price method and also indicated the PLI of gross profit. It also stated that 4 comparable having the average margin 10.6%. Ld TPO rejected the same and adopted the transactional net margin method as the most appropriate method. The ld DRP has also stated that resale price method is not suitable in the case of the assessee because of lacks products and functional comparability of the comparables. It is stated that the comparables chosen by the assessee are also failing trading filters and their major source of reve ..... X X X X Extracts X X X X X X X X Extracts X X X X
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