TMI Blog2021 (6) TMI 92X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT DR ORDER PER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER: The present appeals have been filed by the assessee against the order of ld. CIT (A)-XX, New Delhi dated 26.12.2008. 2. At the outset, it is to be mentioned that the assessee has filed application under Rule 11 of the Income Tax (Appellate Tribunal) Rules, 1963 for admission of the additional grounds. The additional ground reads as under: The inappropriate use of Transactional Net Margin Method ( TNMM ) instead of the Resale Price Method ( RPM ) as the most appropriate method ( MAM ) for benchmarking the Appellant s international transaction of import of dental products from its foreign AE i. e. Dentsply International, USA ( international transaction ). 3. It was argued that the grounds taken up involves a legal issue and doesn t require any investigation and can be deciphered from the facts on record. The ld. DR objected to admission of additional ground at this juncture. Keeping in view, the judgment of the Hon ble Apex Court in the case of National Thermal Power Co. Ltd. Vs CIT (1998) 229 ITR 383, the additional ground filed by the assessee is accepted. The relevant portion of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons. The Appellate Assistant Commissioner should exercise his discretion in permitting or not permitting the assessee to raise an additional ground in accordance with law and reason. The same observations would apply to appeals before the Tribunal also. 7. The view that the Tribunal is confined only to issues arising out of the appeal before the Commissioner of Income- tax (Appeals) takes too narrow a view of the powers of the Appellate Tribunal [vide, e.g., C.I.T, v. Anand Prasad (Delhi), C.I.T. v. KaramchandPremchand P. Ltd. and C.I.T. v. Cellulose Products of India Ltd..Undoubtedly, the Tribunal will have the discretion to allow or not allow a new ground to be raised. But where the Tribunal is only required to consider a question of law arising from the facts which are on record in the assessment proceedings we fail to see why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee. 8. The reframed question, therefore, is answered in the affirmative, i.e., the Tribunal has jurisdiction to examine a question of law which arises from the facts as found by the autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... priate method if adequate comparable companies are available. However, the Appellant has adopted TNMM as the MAM by the Appellant itself to benchmark its international transaction in its Transfer Pricing Study Report in AY 2002-03, which was followed in subsequent AYs too. c. However, given the business model of the Appellant and international transaction entered into by it during the AYs in question, the Appellant is now aware that the RPM is the MAM for benchmarking its international transaction. Thus, the Appellant prays before this Hon ble Tribunal for adjudicating the appropriateness of use of the RPM as the MAM in the present case. d. In this regard, reliance is placed on the Order of the Mumbai Bench of this Hon ble Tribunal in the case of Mattel Toys (I) (P.) Ltd. v. DCIT IT Appeal Nos. 2476 2801 (MUM.) of 2008. In the facts of that case, the assessee (a distributor) imported goods from its foreign AE and re-sold such goods to independent parties in India without any value additions. The assessee had applied TNMM as the MAM in its transfer pricing study report and prayed before the Hon ble Tribunal to change the method of benchmarking to RPM. At para 38 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is order dated 26 December 2008 (for Assessment Year 2002- 03) (at page 32 of the order, page 39 of the Appeal Set) also observed that RPM is appropriate where the reseller does not add substantially to the value of the product/ service. However, despite that, the Ld. CIT (A) wrongfully applied TNMM to benchmark the international transaction of the Appellant. 8. The ld. AR further argued that owing to the nascent stage of transfer pricing development in India, the assessee was also not conversant with the different methods, legality demands that most appropriate method should be used for determining ALP under Indian Transfer Pricing Regulations . 9. On the other hand, the ld. DR argued that the assessee themselves are following TNMM in the subsequent years hence the argument of the assessed cannot be accepted. 10. Heard the arguments of both the parties and perused the material available on record. 11. We have gone through the various decisions rendered on this issue. For the sake convenience and ready reference, the relevant part containing the entire facts and ratio in the case of Mattel Toys (I) (P.) Ltd. Vs DCIT in ITA Nos. 2476 2801/Mum/2008 is reprod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sl. no Sales (Rs.) Returned income/loss (Rs.) Method Applied 1. Purchase materials of raw 2,19,94,477 Cost Method plus 2. Purchase of finished goods 3,08,16,302 TNMM method 3. Sale of goods finished 3,28,21,040 TNMM method 4. Reimbursement 38,21,597 CUP method 19. Insofar as manufacturing activities were concerned, the TPO accepted the assessee s determination of ALP and there is no dispute before us. 20. For the distribution activities which related to purchase of finished goods and sale thereof, the assessee in the transfer pricing report has selected Transactional Net Margin Method (TNMM) as the most appropriate method to arrive at the ALP. In the said report itself, the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o A. E. and lastly, imported goods from the A. E. and exported to third parties outside India. Based on these three segments of the distribution activity, he worked out the operating profit margin and gross profit in the following manner: Particulars Import from AE resale in domestic market (Rs.) Import from AE and export to AE (Rs.) Import from AE and export to third parties (Rs.) Total distribution activity (Rs.) Sales 11,74,41,770 4,61,57,312 7,49,07,171 23,85,06,253 Less: Cost of Sales 8,40,80,455 4,80,71,836 7,88,74,978 21,10,27,269 Gross Profit 3,33,61,315 (19,14,524) (39,67,807) 2,74,78,984 Other Costs 9,35,13,477 1,77,22,486 2,87,61,235 13,99 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vity. The assessee has filed no evidence to support the adjustment made. Hence, the adjustment made by the assessee in this regard is rejected. (d) The average operating profit on sales ratio of 0.91% as calculated by the assessee is applied for the Domestic segment. Separate relief on account of advertisement costs of the assessee has been given while calculating the ALP. For the segment consisting of export to A. E. ratio of operating profit on costs of 0.92% is applied to determine the ALP. 13. The Arm s Length Price for all the three segments is calculated in the following manner: I. Import from A. E and sale in Domestic. Particulars Amount (Rs.) Operating profit margin on sales of the comparables 0. 91% Assessee s sales in domestic 11,74,41,770 Operating profit required on sales @ 0. 91% 10,68,720 (A) Actual loss of assessee (6, 01,52,162) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned by the comparable companies. Further, the TPO has failed to appreciate that the assessee had huge administrative cost to the extent of 79.62% of its total sales and because of such administrative cost, the assessee had to incur huge negative profit. Thus, TNMM cannot be an appropriate method for bench marking its operating net profit. Since the international transactions pertain to import of finished goods from the A. E. and resale in the domestic market, the best way for bench marking such international transaction was to compare gross profit margin by adopting RPM. Further, it was also stated that the assessment year 2002 03 was the first year of assessee s business in India and, therefore, they have to incur very high administrative cost including advertisement and such expenditures accounted for almost 80% of the sales revenue. To administer the gross profit margin and actual operating profit margin, the assessee furnished chart for six years starting from the years 2001 02 to 2006 07, which has been incorporated in appellate order at Para 6.8 in the following manner: Profitability Statement Particulars ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounds. The sum and substance of such reasoning are (i)) that the assessee s contention that the current year was the first year of operation and, therefore, they had to incur heavy high administrative cost is not tenable because the assessee has been operating in India for around 3 to 4 years in the past and in the earlier years also, the assessee had significant turnover. Therefore, there is no justification in assessee s contentions about adjustment of administrative cost; (ii)) the assessee s contention that prices charged by Mattel Europa is at par with the prices charged to other A. Es cannot be accepted because the transfer pricing adjustments have to be based on FAR analysis and if lower prices are being charged in Asia region, the same cannot justify lower profits, because the assessee has not given PLI indices of it s A. Es for operating in this region to justify its claim and whether they are also showing abnormal losses in respective markets; (iii)) the gross profit rate in the preceding year was 37.64% whereas in the current year is only 19. 90% which supports the TPO s contentions and refute the assessee s claim that negative profits are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvertisement cost which has resulted into negative operating margin of ( ) 51.22%. This working of the assessee of the actual net margin at ( ) 51.22% has not been disputed by the TPO or the learned Commissioner (Appeals) even after adjustment of advertisement expenses. He submitted that net sales under the distribution segment was at ₹ 11,74,41,770, as against the total cost incurred by the assessee which was ₹ 17,75,93,932 and operating profit was Rs. ( ) 6,01,52,162, thereby giving negative operating profit ratio of ( ) 51.22%. The reason for such a huge administrative and advertisement cost in this year was that the assessee has started its distribution activities on its own and all the earlier arrangements under the joint venture with Blowplast was discontinued. If the assessee s gross profit margin has to be analysed, then the assessee s margin as compared to the six comparables are much better. Before the Assessing Officer and the learned Commissioner (Appeals), the revised margin using resale price method was filed which has been rejected by them simply on the ground that the assessee itself has adopted TNMM in the transfer pricing report. He submitted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o get the companies with similar product comparability and, therefore, one has to go for functional comparability. Thus, the same comparables can be considered for the purpose of RPM also. He pointed out that if the transfer pricing adjustment as done by the TPO is carried out, then the gross profit margin will become so high which is improbable in any kind of distribution business and in the case of the assessee, the purchase price will almost become negligible. Lastly, by way of alternative arguments, he pointed out that there was certain computational error in the working of TPO. In support of the same, he furnished a chart before us. 31. Per contra, the learned Departmental Representative, Mr. Ajit Kumar Jain, representing the Revenue, submitted that the assessee has, first of all, chosen TNMM as most appropriate method in the transfer pricing study. Based on this method, the assessee has selected six comparable companies which were for the purpose of carrying out functional comparability based on TNMM only. These comparables were not selected for the purpose of resale price method. Had the assessee chosen resale price method in the transfer pricing report then th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be the most appropriate method for bench marking the ALP, then the matter should be restored back to the file of the TPO and the assessee should furnish a list of fresh comparables for carrying comparability analysis for the purpose of RPM. 34. The learned Counsel, in the rejoinder, submitted that in case of RPM, there cannot be any similarity of product comparability but functional comparability has to be seen. He referred to the same OECD guidelines which were referred by the learned Departmental Representative during the course of his arguments. Regarding the learned Departmental Representative s argument that the assessee has adopted RPM before the TPO and the learned Commissioner (Appeals) so as to justify the ALP at gross profit margin level is not correct because the assessee has given a detail reasons before the TPO and the learned Commissioner (Appeals) as to why the RPM should be adopted and none of the authorities have given any cogent reason for rejecting the RPM or assessee s contention. 35. We have carefully considered the rival contentions, perused the relevant findings of the Assessing Officer and the learned Commissioner (Appeals) as well as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... most appropriate method viz. (i) Comparable Uncontrolled Price method (CUP); (ii) Resale Price Method (RPM); (iii) Cost Plus Method (CPM); (iv) Profits Split Method (PSM) and (v) Transactional Net Margin Method (TNMM). In CUP method, the focus is directly on the price of the product sold or transferred requiring both functional and product comparability. The RPM and CPM operate at gross profit margin level requiring functional rather than product comparability. The PSM and TNMM operate on operating profit margin level used for a complex and integrated enterprise. These methods are based on price or profit. The centre point of these methods is comparability analysis with the comparables and the method which provides most reliable way of arriving at the ALP, is considered as most appropriate method. A comparability analysis is done for the comparison of controlled transaction(s) with an uncontrolled transaction(s) and controlled and uncontrolled transactions are comparable if none of the differences between the transactions can materially affect the factor being examined by adopting any of the methodologies as mentioned in section 92C or if any reasonable accura ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dd substantial value to the property or services i.e., resale is made without any value addition having been made. Since in RPM only margins are seen with reference to items purchased and sold or earned by an independent enterprise in comparable uncontrolled transactions vis a vis the one in the controlled transactions, therefore, in such a situation, the nature of products has not much relevance though their closer comparable may produce a better result. The focus is more on same or similar nature of properties or services rather than similarity of products. In RPM other attributes of comparabilities than the product itself can produce a reliable measure of arm s length conditions. The main reason is that the product differentiation does not materially effect the gross profit margin as it represents gross compensation after the cost of sales for specific function performed. The functional attribute is more important while undertaking the comparability analysis under this method. Thus, in our opinion, under the RPM, products similarity is not a vital aspect for carrying out comparability analysis but operational comparability is to be seen. Since the gross profit margin is the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ependent parties. This requires a lot of adjustments to derive at the actual operating profit. If the ALP of any transaction can be determined by applying any of the direct methods like CUP, RPM, CPM then they should be given the preference and once these traditional methods have been rendered inapplicable then only TNMM should be resorted to. On the facts of the assessee s case, in our opinion, the assessee being a distributor who is purchasing the goods from it s A. E. and reselling them to independent parties / unrelated parties, resale price method would be the most appropriate method for determining the ALP of the transactions between the assessee and the A.E. 41. Now coming to the argument of the learned Departmental Representative that once the assessee itself has chosen TNMM as most appropriate method in TPR, then it cannot resort to change its method at an assessment or appellate stage. In our opinion, such a contention cannot be upheld because if it is found on the facts of the case that a particular method will not result into proper determination of the ALP, the TPO or the appellate authorities can very well hold that why a particular method can be appli ..... X X X X Extracts X X X X X X X X Extracts X X X X
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