2020 (7) TMI 18 - AT - Income Tax

Tribunal favors Resale Price Method over TNMM for transfer pricing adjustment

The tribunal allowed the appeal, setting aside the assessment order and directing the computation of the Arm's Length Price using the Resale Price Method ... TP Adjustment - addition on account of the ALP on purchase of goods - MAM selection - Assessee had applied RPM method to benchmark the international transactions of the goods purchased for resale - HELD THAT:- We are aware of the fact that Res Judicta principles are not applicable to the income tax proceedings but at the same time we find that the Honorable Supreme Court in the case of Radhasoami Satsang vs. CIT [1991 (11) TMI 2 - SUPREME COURT] has held that where a fundamental aspect permeating through the different assessment years is accepted one way or the other, a different value in the matter is not warranted unless there are any material change of facts. Before us, no distinguishing feature in the facts for the year under consideration and that of earlier and subsequent years, wherein the RPM method which been followed by the assessee, has been brought by the Revenue. Considering the totality of the aforesaid facts, we are of the view that DRP was not justified in rejecting the RPM method followed by assessee. We, therefore set aside the order and direct the AO to compute the ALP by following the RPM method. Thus, the grounds of appeal of the assessee are allowed. Issues Involved:1. Validity of the assessment order under section 144C read with section 143(3) of the Income-tax Act, 1961.2. Transfer Pricing Adjustment on Account of Import of Finished Goods.3. Levy of interest under section 234D of the Act.4. Initiation of penalty proceedings under section 271(1)(c) of the Act.Detailed Analysis:1. Validity of the Assessment Order:The assessee challenged the validity of the assessment order dated 26.10.2018, passed under section 144C read with section 143(3) of the Income-tax Act, 1961, claiming it was bad in law and unsustainable. The tribunal did not find merit in this ground and focused on the core issue of transfer pricing adjustment.2. Transfer Pricing Adjustment on Account of Import of Finished Goods:The primary issue was the addition of Rs. 1,80,55,010 on account of the Arm’s Length Price (ALP) adjustment of international transactions concerning the import of finished goods. The assessee, a wholly-owned subsidiary of a Japanese corporation, used the Resale Price Method (RPM) to benchmark its international transactions, arguing it was the most appropriate method as the goods were resold without any value addition. The TPO rejected RPM, opting for the Transactional Net Margin Method (TNMM) instead.The TPO’s rationale for rejecting RPM included:- No adjustments for differences in functions affecting gross margins.- Uncertainty regarding accounting consistency between the assessee and comparables.- Potential variation in gross margins due to differences in activity levels.The TPO selected five comparable companies and concluded an upward adjustment to the income of Rs. 1,75,60,240. The DRP upheld the TNMM method but directed adjustments to the comparables, resulting in a final adjustment of Rs. 1,80,55,010.The tribunal, however, noted that the assessee had consistently used RPM in previous and subsequent years without any adjustments by the revenue authorities. The tribunal cited several judicial precedents supporting RPM as the most appropriate method for distributors reselling without value addition, including decisions from the Delhi High Court and various benches of the Tribunal. The tribunal found no material change in facts from previous years and concluded that RPM should be preferred over TNMM in this case. Consequently, the tribunal set aside the order and directed the AO to compute the ALP using RPM.3. Levy of Interest under Section 234D:The assessee contested the levy of interest under section 234D of the Act. The tribunal did not provide a separate detailed analysis for this ground, implying it was secondary to the main issue of transfer pricing adjustment.4. Initiation of Penalty Proceedings under Section 271(1)(c):The assessee also challenged the initiation of penalty proceedings under section 271(1)(c) of the Act. Similar to the interest levy, the tribunal did not delve into this issue separately, focusing primarily on the transfer pricing adjustment.Conclusion:The tribunal allowed the appeal filed by the assessee, setting aside the order of the AO and directing the computation of ALP using the RPM method. The grounds related to the validity of the assessment order, levy of interest, and initiation of penalty proceedings were not separately addressed in detail, indicating the primary focus was on the transfer pricing adjustment. The tribunal's decision emphasized the consistency of applying RPM in previous years and the judicial precedence favoring RPM for distributors without value addition.