TMI Blog2023 (7) TMI 1076X X X X Extracts X X X X X X X X Extracts X X X X ..... of international transactions of the assessee after accepting RPM as the most appropriate method. The assessee shall, in the course of the remand proceedings, file with the TPO, the relevant details with regard to the functionality, assets employed and the risks (FAR) of the comparables, to be considered by the TPO for benchmarking the ALP of the international transactions, as per RPM. - I.T.A. No. 1175/Mum/2022, C.O. No.128/Mum/2022 (Arising out of I.T.A. No.1175/Mum/2022) - - - Dated:- 8-5-2023 - Amit Shukla (Judicial Member) And Ms. Padmavathy S. (Accountant Member) For the Assessee : Shri Jehangir D Mistri / Shri Madhur Agrawal For the Department : Dr. Yogesh Kamat, CIT DR ORDER PER : MS PADMAVATHY S. (AM) This appeal by the Revenue and cross objection by assessee are against the order of the Commissioner of Income-tax (Appeals)-55, Mumbai [hereinafter Ld.CIT(A) ] dated 23/03/2022 for the assessment year 2013-14. The Revenue raised the following grounds of appeal:- 1 Whether on the facts and circumstances of the case, and in law, the Ld. CIT(A) has erred by not appreciating the fact that TPO has widely discussed and clarified the reasons fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducts imported from the AE. The margin of the assessee as per RPM work out to 47.41% whereas the weighted average gross profit margin of the comparable was 33.15%. Accordingly, the assessee concluded that the international transactions with respect to purchase of formulations from AE is within the arm s length. The TPO, during the course of TP proceedings, noticed that the assessee has debited a sum of Rs. 12.22 crores in the P L Account after reducing reimbursement of Rs. 22.38 crores from its AE towards sales promotional fees for sazaglaptin products. The TPO was of the view that the significant expenses incurred by the assessee towards advertising and marketing expenses affect the margins of any entity in a big way and since the below the line expenses are affecting the margins of the assessee, the RPM was rejected and TNMM is taken as the most appropriate method. The TPO called on the assessee to furnish the AMP to sales ratio of the comparables. The details furnished by the assessee and the reasons given by the TPO are as under:- Sr.No. Company Name Advertisement / Sales (%) OP / sales (%) Remar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pharma Limited (1.07)% Average Arithmetic mean) (1.30)% 5. The TPO arrived at the PLI of the trading segment and the TP adjustment as per below working: Description Amount (in Rs.) Operating revenue 1,885,317,718 Operating cost 2.343.753,978 Operating Profit (458,436,260) OP / OR (24.32)% Accordingly, the adjustment in respect of this international transaction is worked out as under:- Description Amount (in Rs.) Operating Revenue of the Taxpayer 1,885,317,718 Operating Expenses of taxpayer 2,343,753,978 Operating Profit / (Loss) of the assessee (458,436,260) Purchase of formulations from AE or international transaction 933,484,666 Other cost 1,410,269,312 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TNMM. The Id. A.R took us through the observations of the DRP and submitted that it had summarily dealt with the objections of the assessee and had most arbitrarily upheld the rejection of RPM and substitution of the same by TNMM by the TPO. In support of his contention that RPM is accepted as the most appropriate method for benchmarking the international transactions in a case of an assessee who is into distribution and marketing activities, reliance was placed on the orders of the coordinate benches of the Tribunal viz. (i) M/s Videojet Technology (I) Pvt. ltd. Vs. ACIT, Circle 10(3), Mumbai (ITA No. 6956/Mum/2012, dated 28.05.2019); and (ii) ITO-6(3)(1), Mumbai Vs. L'Oreal India Pvt. Ltd. It was submitted by the Id. A.R that in case RPM is adopted as the most appropriate method, then no adjustment would be called for in the hands of the assessee. 10. Per contra, the Id. Departmental Representative (for short 'D.R') relied on the orders of the lower authorities. It was submitted by the Id. D.R that as the requisite details about the business profile and financial data in respect of the comparables selected by the assessee were neither available in the public dom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the assessee, for the reason, that they had a different year ending. It was observed by the TPO that as per Rule 10B(4) the companies whose accounts are prepared for the same period are most suitable for comparison than the companies whose accounts cover a different period. On the basis of his aforesaid deliberations, the TPO computed the ALP as per the TNMM after adopting operating profit/operating revenue as the PLI by confining himself to two comparables (out of 6 comparables) selected by the assessee, namely (i) M/s Om Chemical Industries ltd.; and (ii) M/s Priya International ltd. We find that the DRP while disposing off the objections of the assessee as regards the rejection of the comparables did not find any infirmity in the view taken by the TPO, and concurred with his view that as per Rule 10B(4) companies having a different year ending could not have been selected as comparables. Also, the specific claim of the assessee that one of the comparable viz. M/s Daga Global Chemicals ltd. was erroneously rejected by the TPO on the ground that it had a different year ending, despite the fact that the latters fmancials clearly revealed that it had a similar year ending on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions; (iii) the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services; (iv) the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market; (v) the adjusted price arrived at under sub-clause (iv) is taken to be an arm's length price in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise. As is discernible from a perusal of Rule 10B(l)(b) of the Income Tax Rules, 1962, it can safely be gathered that RPM is the best suited method for determining the ALP of an international transaction, in a case where the goods purchased by an assessee from its AE a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost or sale or assets of the tested party with the operating profit of an uncontrolled party engaged in comparable transactions. As such, ur/der the TNMM, the net margin or operating profit achieved in /elated party transactions is compared with those entered into between the independent entities. Accordingly, under the TNMM the major thrust is to derive the operating profit at the transactional level and to identify the operating expenses of both the tested party as well as the independent parties, which, thus, requires a lot of adjustments to arrive at the actual operating profit. Thus, if the ALP of a transaction can be determined by applying any of the direct methods like CUP, RPM, CPM then they should be given a preference, and it is only where the said traditional methods have been rendered inapplicable that under such circumstances TNMM should be resorted to. Accordingly, in the backdrop of the aforesaid facts of the case before us, we are of the considered view that the assessee had rightly selected RPM for benchmarking its transactions of importing of formulations from its AEs, as against TNMM. 13. We shall now advert to the observations of the TPO/DRP on the basi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Vs. DCIT (ITA No. 235/Mum/2013), wherein it was held that in case of distribution activity the selling and marketing expenses which are borne by the assessee would not lead to any value addition to the product in question. In the backdrop of our aforesaid deliberations, we find substantial force in the contention advanced by the Id. A.R that as per Rule 10B(l)(b) in the Income Tax Rules, 1962, the RPM can safely be taken as the best suited method for determining the ALP of the international transactions in the case of the assessee before us, which as observed by us hereinabove had imported formulations from its AE and resold the same without making any value addition to unrelated parties in the domestic market. Our aforesaid view is further fortified by the orders of the various coordinate benches of the Tribunal viz.(i) Burberry India Pvt. Ltd. Vs. ACIT, Circle-S(l), New Delhi, ITA No.758/Del/2017, dated 22.06.2018;(ii)Horiba India (P.) Ltd. vs. DCIT (81 taxmann.com 209 (Delhi - Trib); (iii)Fresenius Kabi India Pvt. Ltd. vs. DCIT(ITA No. 235/Pun/2013); (iv). ACIT vis. Kobelco Construction Equipment India Ltd (ITA No.6401/Del/2012);(v)Systems Pvt. Ltd. vs. DCIT vice versa (ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ist of comparables by assigning three fresh reasons viz. (i) that, the company had about 50% of purchases from imports in respect of trading goods, whereas the assessee had 100% imports from its AE; (ii) that, the company was into trading in bulk chemicals and solvents whereas the assessee was into ready to sell/use pharma product; and (iii) that, the company had overseas subsidiaries in Dubai 85 China. Insofar, the observation of the DRP that as the aforesaid company was importing goods different from the assessee, therefore, it could not be selected as a comparable, we are afraid that the same does not find favour with us. In our considered view, in case of RPM the functions performed by the assessee as in comparison to the comparables are more important than the similarity of products. Also, we find that the DRP had concluded that the assessee during the year had overseas subsidiaries in Dubai and China. It is the claim of the assessee that the aforesaid company viz. M/s Daga Global Chemicals ltd. during the year under consideration i.e financial year 2008-09 had only one subsidiary viz. Daga Global Chemical FZCO. It is stated by the assessee that the subsidiaries in Dubai 85 Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ational ltd.; and (iii).Daga Global Chemicals Ltd. (subject to inclusion of the same in the final list of comparables by the TPO), which shall be considered by the TPO for benchmarking the ALP of its international transactions as per RPM. In case, the assessee fails to file the requisite details, then the TPO shall be at a liberty to search for fresh comparables for benchmarking the ALP of the international transactions of the assessee as per RPM. Needless to say, the TPO shall in the course of the 'set aside' proceedings afford a reasonable opportunity of being heard to the assessee. In terms of our aforesaid observations the matter is restored to the file of the TPO. Accordingly, the Ld.CIT(A) held that RPM is the most appropriate method to benchmark the transaction of purchase of formulations in the trading segment. 7. Aggrieved the revenue is in appeal before us. The Ld.DR submitted that in assessee s own case for A.Y. 2009-10 the TPO has rejected RPM for the reason that there is no proper information available with regard to the comparable companies and the Tribunal held the appeal in favour of the assessee based on the said contention of the TPO. The Ld.DR the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the comparables have incurred lesser cost of AMP expenses, which again, in our view is not correct reason for rejecting RPM. The comparison here is at a gross margin level and the TPO has not given any adverse finding with regard to the gross margin ratio of the asessee. We also notice that the Pune Bench of the Tribunal in the case of Fresenius Kabi India Pvt Ltd vs DCIT ITA No.235/PUN/2013 order dated 15/06/2017 has considered a similar issue wherein it is held that 23. From the above, it is settled legal position at the various Benches of the Tribunal that, in case of distribution activity, even when there are selling and marketing expenses are borne by the assessee, there cannot be any value addition to the product in question. In such cases, Resale Price Method is the most appropriate one and accordingly we reverse the decision given by the AO/TPO/DRP in thrusting on the assessee the TNM method to the transaction under consideration. In any case, it is not the case of the Revenue the assessee is not into distribution activity. Accordingly, in principle, Ground No.3 raised by the assessee is allowed. 10. In view of the above discussion, we hold that RPM is the mos ..... X X X X Extracts X X X X X X X X Extracts X X X X
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