2018 (6) TMI 1232 - AT - Income Tax

Resale Price Method upheld for routine distributor in transfer pricing dispute

The Tribunal determined that the Resale Price Method (RPM) was the most appropriate benchmarking method for the international transactions of the ... TPA - MAM selection - TPO proceeded to apply an indirect method i.e. TNMM as the MAM over the direct method RPM - Held that:- It is an admitted fact that in this case the assessee is merely purchasing and selling the products without adding any value to the core product. Further, Ld. TPO did not dispute the characterisation of the assessee as in the TP document and also accepted the functional profile of the assessee as a routine distributor. Ld. DRP, however, recorded that the assessee has incurred substantial AMP, and other expenses, in relation to its turnover, and is therefore, not a simple distributor in terms of the requirement of using RPM. In respect of the observations of the Ld. DRP that the assessee has incurred substantial AMP, and other expenses, in relation to its turnover, and is therefore, not a simple distributor in terms of the requirement of using RPM, Ld. AR has rightly placed reliance on the decision reported in Nokia India Private Limited vs. DCIT [2014 (11) TMI 101 - ITAT DELHI] wherein it was held that the incurring of high advertisement and marketing expenses by the assessee vis-avis the other comparable companies does not in any manner affect the determination of ALP under the RPM Thus the RPM is the most appropriate method in the facts and circumstances of this case and accordingly direct the Ld. TPO to adopt the RPM as the most appropriate method for benchmarking the international transaction. - Decided in favour of assessee. Issues Involved:1. Determination of the most appropriate method for benchmarking international transactions.2. Appropriateness of the Resale Price Method (RPM) versus the Transactional Net Margin Method (TNMM).3. Impact of advertisement and marketing expenses on the determination of the Arm's Length Price (ALP).Issue-wise Detailed Analysis:1. Determination of the most appropriate method for benchmarking international transactions:The primary issue in this case is the determination of the most appropriate method for benchmarking the international transactions undertaken by the assessee, Burberry India Private Limited. The assessee used the Comparable Uncontrolled Price (CUP) method corroborated by the Resale Price Method (RPM) for benchmarking, whereas the Transfer Pricing Officer (TPO) used the Transactional Net Margin Method (TNMM).2. Appropriateness of the Resale Price Method (RPM) versus the Transactional Net Margin Method (TNMM):The assessee argued that RPM is the most appropriate method as it merely purchases and resells products without adding any value. The TPO, however, rejected RPM and applied TNMM, stating that RPM was not suitable due to the substantial advertisement and marketing expenses incurred by the assessee. The Dispute Resolution Panel (DRP) upheld the TPO's decision, citing that the assessee's expenses indicated it was not a simple distributor.The Tribunal, however, referenced multiple case laws, including Nokia India Pvt. Ltd. v. Deputy Commissioner of Income-tax, Circle -13(1), New Delhi [2014] 52 taxmann.com 492 (Delhi - Trib.) and Principal Commissioner of Income-tax-6 v. Matrix Cellular International Services (P.) Ltd. [2018] 90 taxmann.com 54 (Delhi), which supported the use of RPM for resellers who do not add significant value to the products. The Tribunal concluded that RPM is indeed the most appropriate method for the assessee, given its role as a routine distributor without significant value addition.3. Impact of advertisement and marketing expenses on the determination of the Arm's Length Price (ALP):The Tribunal examined whether the substantial advertisement and marketing expenses (AMP) incurred by the assessee affected the determination of ALP under RPM. The Tribunal cited the decision in Nokia India Private Limited vs. DCIT (2015) 153 ITD 508 (Delhi-Trib.), which held that high AMP expenses do not impact the determination of ALP under RPM. The Tribunal noted that such expenses are accounted for below the gross profit line and thus do not affect the gross profit margin used in RPM. If AMP expenses were deemed to contribute to brand building for an associated enterprise, a separate transfer pricing adjustment would be necessary, which was not done by the TPO in this case.Conclusion:The Tribunal concluded that RPM is the most appropriate method for benchmarking the international transactions of the assessee, given its role as a routine distributor without significant value addition to the products. Consequently, the Tribunal directed the TPO to adopt RPM for benchmarking the international transactions. All other grounds raised by the assessee became academic and did not require adjudication. The appeals were allowed in favor of the assessee.