2020 (1) TMI 128 - AT - Income Tax

Taxpayer appeal partly allowed, RPM directed as MAM for international transactions.

M/s. Alcoa India Private Ltd. Versus ACIT, Circle 1 (1), New Delhi.

The appeal filed by the taxpayer was partly allowed. The Tribunal directed the TPO/AO to apply Resale Price Method (RPM) as the Most Appropriate Method ... TP Adjustment - MAM selection - RPM OR TNMM - HELD THAT:- From the TP analysis made by the taxpayer, we are of the considered view that it is proved on file that the taxpayer is a pure distributor/ trader which resale the goods after purchasing from its AE without any value addition. Reasons for rejection of RPM applied by the taxpayer given by the ld. TPO are generic in nature. When apparently there is no value addition to the goods purchased and resold by the taxpayer, RPM is the MAM. Not an iota of evidence is there on the file if the taxpayer has made any value addition to the goods purchased from the AE before the reselling the same to the third party or has created any intangible in favour of AE. TPO/DRP/AO have erred in applying the TNMM as the MAM in case of taxpayer who is a pure distributor of goods purchased from its AE and resell the same to third party without any value addition. So, TPO/AO are directed to apply the TNMM as the MAM to benchmark the international transactions undertaken by the taxpayer qua its trading segment by providing an opportunity of being heard to the taxpayer. So, Ground No.3.2 is determined in favour of the taxpayer. Adjustment to the entire income of the taxpayer and not confined to the addition of the international transactions as mandated by law - HELD THAT:- In view of the settled principle of law that transfer pricing adjustment is required to be restricted to the amount of international transactions only and not to the entire income of the taxpayer, the TPO is directed to make the adjustment accordingly. - Decided in favour of assessee Issues Involved:1. Validity of the order passed by the AO.2. Adjustment of arm's length price (ALP) for international transactions.3. Rejection of Resale Price Method (RPM) and application of Transactional Net Margin Method (TNMM).4. Selection of comparable companies for TNMM.5. Adjustment to the entire income of the taxpayer instead of limiting it to international transactions.Detailed Analysis:Issue 1: Validity of the Order Passed by the AOThe taxpayer argued that the order passed by the AO was 'bad in law.' However, this issue was not specifically addressed in the judgment as it was deemed general in nature and required no findings.Issue 2: Adjustment of Arm's Length Price (ALP) for International TransactionsThe taxpayer challenged the adjustment of the ALP of its international transactions with its Associated Enterprises (AEs) by the AO/TPO/DRP, which resulted in an enhancement of returned income by Rs. 25,811,607. The taxpayer contended that the AO/TPO/DRP erred in disturbing the ALP without satisfying the conditions under section 92C(3) of the Income Tax Act.Issue 3: Rejection of Resale Price Method (RPM) and Application of Transactional Net Margin Method (TNMM)The taxpayer applied RPM with Gross Profit/Sales (GP/Sales) as the Profit Level Indicator (PLI) to benchmark its international transactions. The TPO rejected RPM and applied TNMM with Operating Profit/Sales (OP/Sales) as the PLI. The taxpayer argued that since it is a pure distributor without adding any value to the goods sold, RPM is the Most Appropriate Method (MAM). The TPO, however, contended that RPM requires high comparability and is more accurate when the resale of goods occurs in a short time after purchase. The TPO also noted that the taxpayer performed various market functions, adding intangibles to the goods, and therefore, TNMM was more suitable.In the judgment, it was concluded that the taxpayer is a pure distributor/trader reselling goods without any value addition. The reasons for rejecting RPM by the TPO were deemed generic, and it was determined that RPM is the MAM for the taxpayer's transactions. The Tribunal directed the TPO/AO to apply RPM as the MAM for benchmarking the international transactions.Issue 4: Selection of Comparable Companies for TNMMThe TPO rejected six of the eight comparables chosen by the taxpayer and introduced four new comparables using modified filters. The taxpayer challenged this selection. However, this issue was not pressed during the course of arguments and was dismissed.Issue 5: Adjustment to the Entire Income of the Taxpayer Instead of Limiting it to International TransactionsThe taxpayer argued that the TPO erred in making an adjustment to the entire income instead of confining the addition to the international transactions. The Tribunal agreed, stating that transfer pricing adjustment should be restricted to the amount of international transactions only. The TPO was directed to make the adjustment accordingly.Conclusion:The appeal filed by the taxpayer was partly allowed. The Tribunal directed the TPO/AO to apply RPM as the MAM for benchmarking the international transactions and to restrict the transfer pricing adjustment to the amount of international transactions only. The other grounds not pressed during the arguments were dismissed. The judgment emphasized the importance of selecting the appropriate method for determining the ALP based on the functional profile of the taxpayer and the nature of the transactions.