TMI Blog2020 (9) TMI 1159X X X X Extracts X X X X X X X X Extracts X X X X ..... e method in the facts and circumstances of the case. Accordingly, we direct the AO/TPO to adopt Resale Price Method as most appropriate method and determine the ALP of the transactions accordingly Transfer pricing adjustment made under ITES segment - assessee adopted TNM method as most appropriate method and Operating Profit/Operating Cost (OP/OC) as Profit Level Indicator (PLI) - Comparable selection - HELD THAT:- Having regard to the submission of the assessee that the segmental results is required to be compared with the assessee company, we are of the view that this issue also requires fresh examination at the end of the AO/TPO. Accordingly we restore this company also to their file for examining it afresh. - IT(TP)A No.351/Bang/2016 - - - Dated:- 16-9-2020 - Shri George George K., Judicial Member And Shri B.R. Baskaran, Accountant Member Appellant by: Shri Ajit Tolani, A.R. Respondent by: Shri Sunil Kumar Singh, D.R. ORDER B.R. Baskaran, The assessee has filed this appeal challenging the assessment order dated 30-12-2015 passed by the assessing officer for assessment year 2011-12 u/s 143(3) r.w.s 144C of the Income-tax Act,1961 ['the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty to its AE. A routine trader would have earned a profit out of its trading activity and not incurred such a huge loss. Therefore, the TPO does not consider the RPM to be the most appropriate method for determining ALP of the international transaction of the taxpayer in the Distribution segment. The TPO is of the view that, the TNMM is the most appropriate method for determining the ALP of the international transaction of the taxpayer, in the distribution segment. A discussion on the advantages of TNMM over RPM is made below. Accordingly, the TPO adopted TNM method as most appropriate method and made transfer pricing adjustment of ₹ 2.38 crores. The Ld DRP also confirmed the same. 5. The Ld A.R submitted that the assessee is pure distributor and does not carry out any value addition to the products traded by it. Accordingly, he submitted that the RPM is the most appropriate method for the distribution segment. He submitted that, under RPM method, the Gross profit margin has to be compared with the comparable companies. The assessee has incurred net loss due to huge expenses involved in marketing the products. While marketing the products, the assessee usually carry ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RPM is the most appropriate method in case of a distributor of products. For the sake of convenience, we extract below the relevant observations made by the Tribunal in the case of A.O Smith India Water Heating P Ltd (supra):- 14. Now the assessee is before us with the submission that it is an accepted principle that the computation of ALP based on a direct method like RPM, which tests the results at gross level unlike the TNMM which tests the results at net level, extinguishes the requirement o making adjustment in relation to the difference in operating expenses, which could be different from enterprise to enterprise. It was further contended that as provided in Rule l0B, under RPM price of international transaction needs to be computed on the basis of gross profit margin earned in uncontrolled transactions, while under TNMM price of international transaction is computed on the basis of net profit margin of uncontrolled transactions. As per Rule 100(1), the most appropriate method for determining the ALP depends upon the facts and circumstances of each case. Similarly, the operating expenses incurred by the assessee is different from the operating expenses incurred by compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usal of the record, we find that undisputedly the assessee is a trading company and carries out distribution and marketing of products of AOS group in India. It imports water filters from AO Smith China and sells them in India. AO Smith India is, according to the TP document, a distributor of AOS Water Heaters in India. The Tribunal has examined the most appropriate method in the case of distributor to determine the ALP for the international transactions. In the case of Horiba India Pvt. Ltd. (supra), the Tribunal has held that in the case of a distributor where the goods are purchased from the AE and resold to other independent entities without any value addition, then the resale price method should be reckoned as most appropriate method. One of the main reason given by the TPO as well as the DRP is that the assessee is full fledged/full risk distributor and performing host of functions, therefore RPM should not be taken as the most appropriate method, because all these functions require huge cost which may not represent the gross profit margin. This contention of the revenue was rejected by the Tribunal and it was held that in comparable controlled transaction scenario, a normal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an arm's length in relation to the international transaction. Sub-rule (2) of Rule 10C lists certain factors which should be taken into account in selecting the most appropriate method as specified in sub-rule (1). These factors, inter olio, include , the availability coverage and reliability of data necessary application of the method'; and (d) the degree of comparability existing between the international transaction and the uncontrolled transaction...........' 8.2 An overview of the factors prescribed for choosing the most appropriate method indicates that firstly, the data necessary for application of the given method should be available and secondly, the uncontrolled transactions should be functionally similar, if not identical. A company, in order to be ranked as comparable under the RPM, should preferably be engaged in doing similar activity as that of the assessee or at least of the some genus of the activity, with a different product. The Ld. TPO himself has categorized the corn parables chosen by the assessee as traders akin to computer industry or engaged in trading of instruments. As the basic requirements under rule 10(c)(1) are fulfilled by these corn p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . There would be no orders as to costs. 19. Copy of the order of the Tribunal in the case of L'Oreal India Pvt. Ltd., is also placed on record to demonstrate as to under what circumstances the RPM was considered to be most appropriate method. Similarly, in the case of Mettal Toys India Pvt. Ltd., v. DCIT (supra), the Tribunal again reaffirmed its view that in the case of distributor, the RPM is the most appropriate method by holding that ultimate aim of the transfer pricing is to examine whether price of the margin arising from the international transactions with a related party is at ALP or not. The determination of the approximate ALP is a key factor for which most appropriate method is to be followed. Therefore, if at any stage of the proceedings, it is found that by adopting one of the prescribed method other than choosing earlier, the most appropriate ALP can be determined, the assessing authorities as well as the appellate authorities should take into consideration such a plea raised before them provided it is demonstrated as to how a change in the method will produce better or more appropriate ALP on the facts of the case. The Tribunal accordingly rejected the conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied out his own search and after considering the explanations of the assessee selected 10 comparable companies as final set of comparables. The list of comparable companies selected by the TPO is extracted below:- Sl.No. Name of the case Operating income Operating cost OP/OC 1 Accentia Technologies Ltd. 1,069,026,524 82,93,91,898 28.89% 2 Acropetal Technologies 494,399,332 38,97,06,574 26.86% 3 Cosmic Global Ltd. 62,496,615 5,69,15,360 9.81% 4 e4e Healthcare (capitaline) 613,160,587 54,56,25,872 12.38% 5 ICRA Online Ltd. (seg) 156,691,000 11,67,49,267 34.21% 6 Jeevan Scientific Technology Ltd. 1,721,400,000 1,00,86,52,592 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iss Re Shared Services India P Ltd (IT(TP)A No.380/Bang/2016 dated 08-07-2016) and in the case of Amba Research India P Ltd. Thus, we notice that M/s Accential Technologies Ltd has been held to be not a good comparable in many cases. Accordingly, following the decision rendered by the coordinate benches in the above said cases, we direct exclusion of M/s Accentia Technologies Ltd. 15. The comparable company M/s ICRA online Ltd was also considered by the co-ordinate bench in the case of Acusis Software India P Ltd (supra). We notice that the co-ordinate bench has followed the decision rendered by Mumbai bench of Tribunal in the case of Sitel India Pvt Ltd (ITA No.1821/Mum/2016 dated 03-052019) and held that ICRA online Ltd is not a good comparable. Accordingly, following the decision rendered by the co-ordinate benches in the above said cases, we direct exclusion of M/s ICRA online Ltd. 16. The assessee seeks inclusion of M/s Inhouse Production Limited and M/s Microland Ltd. 17. With regard to M/s Inhouse Production Ltd, the Ld A.R submitted that the TPO has rejected this company on the ground that the data relating to the same was not available. He submitted that the above ..... X X X X Extracts X X X X X X X X Extracts X X X X
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