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TMI Blog2025 (3) TMI 937X X X X Extracts X X X X X X X X Extracts X X X X ..... , marketing and trading of solar lights and power products and sells the same to various customers in different countries. The assessee had filed its return of income on 30.11.2017 declaring a total income of Rs.NIL. The assessee had claimed a loss of Rs. 9,45,78,855/-. The case was selected for scrutiny and a notice dated 10.08.2018 under Section 143 (2) of the Act was issued to the assessee through Income Tax Business Application (ITBA). (ii) During the assessment proceedings, the appellant claims to have noticed from Form No.3CEB that the assessee had entered into various transactions with Associate Enterprises (hereafter referred to as 'AE') and the aggregate value of international transactions amounted to Rs. 13,85,442,925/-. The following international transactions were reported in the said Form:- SI. No. Nature of Transaction Method Applied Amount (in INR) 1 Purchase of lights and other accessories RPM 1,36,63,99,221 2 Reimbursement of expenses Other Method 25,53,734 3 Warranty cost claim Other Method 1,64,89,970 Total 1,38,54,42,925 In view of the aforesaid transactions with AE, the case was referred to the Transfer Pricing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned ITAT against the final assessment order dated 31.01.2022. (vii) The learned ITAT, while partly allowing the appeal, agreed with the submissions of the assessee and held that the most appropriate method adopted by the assessee of RPM to benchmark the transaction of solar goods was correct. It was observed that the international transaction of purchase of solar products was to the tune of Rs. 136.63 crores whereas, the total cost of reimbursement of expenses and warranty cost claims put together, is only Rs. 1.9 crores. The learned ITAT was of the opinion that the reimbursement expenses and warranty claims put together were miniscule part of the total transaction, roughly a little over 1.5% of the purchase cost of solar products from the AE. Accordingly, the findings of TPO and DRP on selection of TNMM as the most appropriate method were overturned. While reaching such conclusions, the learned ITAT also relied upon the judgements rendered by this Court in PCIT-6 vs. Matrix Cellular International Services (P) Ltd.; 90 taxmann.com 54 (Del) and PCIT-3 vs. Fujitsu India Private Ltd., 156 taxmann.com 310 (DEL). (viii) Aggrieved thereof, the present appeal has been preferred by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sition, learned counsel referred to the provisions of Section 93CA (3) of the Act relating to the manner of determination of ALP by the TPO read with Rule 10(1)(f) of the Income Tax Rules (hereafter referred to as 'the Rules'). He also referred to Rule 10B of the Rules which refers to various methods for determining the ALP under Section 92C of the Act. He also points out to clause (f) of sub-rule (1) of Rule 10B which refers to "any other method as provided in Rule 10AB". Following this, learned counsel also refers to Rule 10AB which refers to "other method of determination of ALP". In order to support the submission that the value of the solar products purchased from the AE, the warranty cost claimed and the reimbursement expenses are "transactions" which are closely linked, he relies upon the definition of "associate enterprise" and "transaction" as provided in sub Rule (a) and (d) respectively of Rule 10A of the Rules. 6. Predicated on the above rule position, learned counsel forcefully contended that sub-section (3) of Section 92CA of the Act mandates an obligation upon the TPO to consider the evidence brought before him on a particular specified point and after taking into a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgement in the case of Avery Dennison (India) Pvt. Ltd. The relevant extract of the Show Cause Notice is reproduced hereunder: UNQUOTE In the present case, Purchase of lights/other accessories and Warranty cost claim are closely linked transaction and needs to be aggregated for the purpose of benchmarking the same. In a case Avery Dennison (India) Pvt. Ltd. [TS-527-HC-2016 (Del)], the honorable Delhi High Court upheld the order of ITAT which has rejected the approach of the TPO and accepted the ALP determined by aggregating/ clubbing transactions under TNMM, observing that the assessee was predominantly a manufacturer, and that services received by it from its AE were intrinsically linked to the core business operation. Similarly, in another case a bench of ITAT (Pune) concluded that import/ export of spare parts, IT support services, access to customized part catalogue and amount received for warranty consideration were inter-related transactions, which were sourcing activities of assessee company and, therefore, same had to be aggregated in order to benchmark international transaction [Cummins India Ltd. (2015) 53 taxmann.Com 53 (Pune Tribunal)] 5. Given the above, the appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an. It is pertinent to note that above amounts recovered from AEs does not comprise of any service element, as the AEs would have borne these expenses directly had Assessee not incurred the same. Hence, in such cases it was appropriate to recover these amounts without a mark-up, given such expenses have been incurred out of administrative convenience, with no service element involved. Therefore, your goodself would appreciate that purchase of lights and warranty claim are two unrelated transactions. Hence, the said transactions cannot be clubbed, nor they are so inextricably linked that one cannot survive without other. A. RPM is the most appropriate method for benchmarking The Assessee selected RPM as the most appropriate method for benchmarking its international transaction to determine the arm's length price of distribution activity. RPM evaluates the arm's length nature of a controlled transaction by reference to the gross profit margin realized in a comparable uncontrolled transaction. RPM measures the value of functions performed and is appropriate in cases involving the purchase and resale of tangible goods/services in which the buyer/reseller does not add va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Apart from the judgements of this Court in Matrix Cellular (supra) and Fujitsu India (supra), learned counsel relied upon the judgement of this Court in Pr. CIT-2, Delhi vs. M/s Burberry India Pvt. Ltd., ITA 471/2019 decided on 24.10.2024 reiterating the aforesaid principles laid down in Matrix Cellular (supra) and Fujitsu India (supra). On the aforesaid basis, he prays that the present appeal be dismissed. ANALYSIS AND CONCLUSION:- 11. We have heard learned counsel for the parties, perused the impugned judgement of the learned ITAT and examined the judgements relied upon and are of the opinion that the issue required to be considered by this Court is whether in the given facts, the learned ITAT's conclusion that RPM is the most appropriate method, is erroneous. 12. Undoubtedly, the edifice of the entire issue would have to be premised on the fact that the assessee is a distributor and not a manufacturer. Undeniably, the assessee is engaged in importing of various solar products manufactured by the AE and resale of the said products. The fact that the assessee makes necessary arrangements for rectification of the defects, which are necessarily in the nature of manufacturing de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of the activities for purchase of the goods from related parties and resale to the unrelated parties. It was the main contention of the assessee that the RPM would be the most appropriate method in cases where the distributor/reseller does not add any value to the products purchased and sold. 14. In the present case, the TPO and the DRP concluded that RPM, in the facts of the case, was not the most appropriate method, essentially based on the assumption that the warranty cost claim and the reimbursement of expenses are inextricably inter-linked with the transaction of purchase of the solar products and cannot survive without the other. This assumption is erroneous. It was equally erroneous to conclude that these three transactions were required to be aggregated or clubbed together for benchmarking or determination of the ALP. This is for the reason that there is no value addition done by the assessee on the products purchased and subsequently sold by it. The construction and interpretation sought to be proposed by the learned counsel for the Revenue is fundamentally flawed on that ground. The reliance on sub-section (3) of Section 92CA of the Act is misplaced. Undoubtedly, und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sold in the same condition as imported. It is in these given facts that the learned Tribunal had concluded that RPM method would be the most appropriate method. 28. The United Nations Practical Manual on Transfer Pricing for Developing Countries (2021) briefly describes the RPM as under:- "4.3 Traditional Transaction Methods: Resale Price Method (RPM) 4.3.1 Introduction to RPM 4.3.1.1 The Resale Price Method (RPM) is one of the traditional transaction methods that can be used to determine whether a transaction reflects the arm's length principle. The Resale Price Method focuses on the related sales company which performs marketing and selling functions as the tested party in the transfer pricing analysis. This is depicted in Figure 4.D.2 below. 4.3.1.2 The Resale Price Method analyzes the price of a product that a related sales company (i.e. Associated Enterprise 2 in Figure 4.D.2) charges to an unrelated customer (i.e. the resale price) to determine an arm's length gross margin, which the sales company retains to cover its sales, general and administrative (SG&A) expenses, and still make an appropriate profit. The appropriate profit level is based on the functions it p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thod applied on a functional basis than for the CUP Method, because it is less probable that product differences will have a material effect on profit margins than on price. One would expect a similar level of compensation for performing similar functions across different activities. 4.3.4.3 While product differences may be more acceptable in applying the Resale Price Method as compared to the CUP Method, the property transferred should still be broadly similar in the controlled and uncontrolled transactions. Significant differences between the nature of the products sold in the controlled and uncontrolled transactions may reflect differences in functions performed, assets used or risks assumed. Such differences might suggest differences in arm's length gross margins. 4.3.4.4 The compensation for a distribution company should generally be the same whether it sells washing machines or dryers, because the functions performed (including risks assumed and assets used) are similar for the two activities. It should also be noted, however, that distributors engaged in the sale of markedly different products cannot be compared. The price of a washing machine will, of course, differ fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es where the reseller does not add any value to the products purchased and sold. 31. In the present case, the DRP had accepted the TPO's conclusion that RPM was not the most appropriate method, essentially, for the reason that the assessee had incurred about Rs.5.44 Crores towards AMP expenses, which the DRP considered as substantial. Accordingly, the DRP had also concluded that the assessee is not a simple distributor." Even otherwise, apart from a bald argument, no documentary evidence has been placed on record to substantiate the aforesaid contention. Thus, even on that count, the said submission is untenable. 17. The judgement in the case of Burberry India (supra) also reiterated the principles settled in Matrix Cellular (supra) and Fujitsu India (supra) with regard to adoption of RPM as the most appropriate method in the case of a distributor without value addition to the imported products before sale. The relevant paragraphs of Burberry India (supra) in this regard, are reproduced hereunder:- "35. The question whether RPM is the most appropriate method in cases of the distributor that purchases the products from its AE and resells the same to unrelated parties without a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TAT erred in adopting the RPM in order to determine the arms' length price in relation to the assessee's business. In the relevant assessment year, the assessee had four AEs. Three of them were wholly owned subsidiaries, whereas in the fourth, the assessee held 49% shareholding. The ITAT found that the AEs were engaged in the business of identifying, negotiating and buying SIM cards from the networks of different countries and selling them to the assessee. This arrangement, according to the assessee, foreign networks were reluctant to deal with foreign companies. The ITAT, relying on the TPO's order, found that the business of the assessee only involved re- selling or distributing the SIM cards imported from the AEs, without making any value addition. The ITAT also found that there was no distinction between airtime and SIM cards, as no value could be added to the airtime resold by the assessee. Since the SIM cards are resold without making any value addition, the ITAT concluded that the assessee carried out purely trading business, and hence the RPM was the Most Appropriate Method for calculating arms' length price. 8. This Court finds that once the ITAT, on considering the rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale is made without any value addition having been made." 11. This view has also been affirmed by the Bombay High Court in its judgment dated 07.11.2014 in CIT v. L'Oreal India (P.) Ltd. (2015) 53 taxmann.com 432/228 Taxman 360, where the Court found that there was no error in law committed by the ITAT when it held that RPM was the Most Appropriate Method in case of distribution or marketing activities especially when goods are purchased from associated entities and there are sales effected to unrelated parties without any further processing. In fact, a Division Bench of this Court in its decision in Bausch & Lomb Eyecare (India) Pvt. Ltd. v. Addl. CIT (2016) 381 ITR 227/237 Taxman 24/65 taxmann.com 141 (Delhi), while considering the decision of this Court in Sony Ericsson Mobile Communications India Pvt. Ltd. v. CIT (2015) 374 ITR 118/231 Taxman 113/55 taxmann.com 240 (Delhi), noted that: "The RP Method loses its accuracy and reliability where the reseller adds substantially to the value of the product or the goods are further processed or incorporated into a more sophisticated product or when the product/service is transformed." 38. The aforesaid decision was also followed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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