2021 (11) TMI 1132 - AT - Income Tax

Tribunal orders TPO to use RPM for transfer pricing analysis, appeal partly allowed 'sLengthPrice

The Tribunal directed the Transfer Pricing Officer (TPO) to adopt the Resale Price Method (RPM) as the Most Appropriate Method (MAM) for benchmarking the ... TP adjustment - international transaction pertaining to purchase of traded goods - selection of MAM - HELD THAT:- We have also perused the order of the coordinate bench in assessee’s own case in earier years. We appreciate the arguments of the parties with respect to the risk assumed by the normal distributor as well as the risk assumed by the assessee. However we find that the issue is squarely covered by the decision of the coordinate bench in assessee’s own case [2018 (7) TMI 2083 - ITAT DELHI] findings returned by TPO/DRP that the taxpayer being a full-fledged risk bearing distributor performing numerous functions, RPM is not the MAM, is not sustainable for the reason that in a comparable uncontrolled transaction, normally distributor requires to carry out all the functions necessary to enhance the sales like market research, inventory risk, credit risk etc.. In such circumstances, no comparable instances have been brought on record by the TPO/DRP. When finished goods purchased by the taxpayer are resold in the market without any value addition, then gross margin earned on such transaction is the only determinative factor to analyse gross compensation after the cost of sale. So, we are of the considered view that RPM in this case is the MAM to bench mark the international transactions. In these circumstances, addition made by the TPO/AO merely by disputing the method applied by the taxpayer is not sustainable in the eyes of law. Method for benchmarking the international transaction cannot be changed merely because of the fact that the taxpayer has suffered loss at the net level but has positive gross profit in trading segment as it depends on host of circumstances. We allow ground of the appeal of the assessee and direct the ld TPO to adopt the resale price as the most appropriate method and compute the difference in ALP thereafter. TPO is directed to examine the transfer pricing analysis and decide the issue afresh. Issues Involved:1. Adjustment of INR 14,48,65,293 on account of international transaction pertaining to purchase of traded goods.2. Assessment of loss of INR 10,36,15,530 at an income of INR 4,12,49,763.3. Disregarding multiple year/prior years' data in Transfer Pricing (TP) documentation.4. Incorrect characterization of the appellant as a super normal/high risk distributor.5. Rejection of Resale Price Method (RPM) and substitution with Transactional Net Margin Method (TNMM).6. Non-compliance with directions of the Income Tax Appellate Tribunal (ITAT) in previous assessment years.7. Initiation of penalty proceedings under section 271(1)(c) read with section 274 of the Act.8. Charging of interest under sections 234A, 234B, 234C of the Act.Issue-wise Detailed Analysis:1. Adjustment of INR 14,48,65,293 on account of international transaction pertaining to purchase of traded goods:The appellant contested the adjustment made by the Assistant Commissioner of Income Tax (ACIT) under section 143(3) read with section 144C of the Act. The Transfer Pricing Officer (TPO) rejected the Resale Price Method (RPM) adopted by the appellant and substituted it with the Transactional Net Margin Method (TNMM), leading to an adjustment of INR 14,48,65,293. The TPO argued that the appellant performed additional functions and assumed considerable risks, which were not captured by RPM.2. Assessment of loss of INR 10,36,15,530 at an income of INR 4,12,49,763:The appellant's declared loss of INR 10,36,15,530 was reassessed by the ACIT, resulting in an assessed income of INR 4,12,49,763. This reassessment was based on the transfer pricing adjustment and the rejection of the RPM method.3. Disregarding multiple year/prior years' data in TP documentation:The appellant argued that the TPO erred in disregarding multiple year/prior years' data used in the TP documentation and insisted on using current year data (FY 2013-14) for comparable companies, which was not available to the appellant at the time of preparing its TP documentation.4. Incorrect characterization of the appellant as a super normal/high risk distributor:The appellant contended that the TPO and the Dispute Resolution Panel (DRP) incorrectly characterized it as a super normal/high risk distributor, failing to appreciate its functional profile accurately.5. Rejection of Resale Price Method (RPM) and substitution with Transactional Net Margin Method (TNMM):The TPO rejected RPM as the Most Appropriate Method (MAM) and substituted it with TNMM, arguing that the appellant performed additional functions and assumed various risks. The appellant contended that RPM was upheld as the MAM in previous assessment years by the ITAT, and the principle of consistency demanded its application in the current year as well.6. Non-compliance with directions of the ITAT in previous assessment years:The appellant argued that the DRP did not follow the ITAT's directions in its own case for AY 2011-12, AY 2012-13, and AY 2013-14, where RPM was upheld as the MAM for benchmarking the international transaction of purchase of traded goods.7. Initiation of penalty proceedings under section 271(1)(c) read with section 274 of the Act:The appellant contended that the ACIT erred in initiating penalty proceedings under section 271(1)(c) read with section 274 of the Act mechanically and without recording any adequate satisfaction for such initiation.8. Charging of interest under sections 234A, 234B, 234C of the Act:The appellant argued that the ACIT erred in charging interest under sections 234A, 234B, 234C of the Act without assigning cogent reasons for the same.Judgment Summary:The Tribunal noted that the issue of the most appropriate method for benchmarking the international transaction of purchase of traded goods was squarely covered by the decision of the coordinate bench in the appellant’s own case for previous assessment years. The Tribunal emphasized the principle of judicial discipline and consistency, directing the TPO to adopt RPM as the MAM and compute the difference in the Arm's Length Price (ALP) accordingly. The Tribunal allowed the appellant's grounds 5 and 6, directing the TPO to re-examine the transfer pricing analysis and decide the issue afresh. Consequently, the appeal was partly allowed, and other grounds were not adjudicated in light of the decision on grounds 5 and 6.