2023 (10) TMI 1026 - AT - Income Tax

ITAT Delhi confirms Resale Price Method as most appropriate for arm's length pricing in international transactions

ITAT Delhi held that Resale Price Method (RPM) is the most appropriate method for determining arm's length price of international transactions, following ... Resale Price Method (RPM) - arm's length price - transfer pricing - characterisation of distributor - principle of consistency in transfer pricing - comparability analysis - related party transaction filter - remand for de-novo considerationResale Price Method (RPM) - arm's length price - characterisation of distributor - principle of consistency in transfer pricing - Appropriateness of Resale Price Method as the most appropriate method to determine the arm's length price for the assessee's international transactions - HELD THAT: - The Tribunal, following the coordinate-bench decision in the assessee's own case for AY 2012-13, held that the assessee is a trading/distribution entity which does not add value to the goods purchased from its associated enterprise. The Tribunal accepted that the functional profile of the assessee corresponds to a normal distributor/reseller performing routine distribution functions (marketing, warehousing, inventory control, sales support and bearing normal distribution risks) and that incurrence of higher selling/marketing or employee costs does not convert the function into value-adding activities for the purpose of method selection. On that basis, the Tribunal directed the Assessing Officer/TPO to accept RPM as the most appropriate method and decide the transfer-pricing adjustment accordingly. [Paras 13]RPM accepted as the most appropriate method; direction to AO/TPO to apply RPM to determine ALP.Comparability analysis - related party transaction filter - remand for de-novo consideration - Inclusion of certain companies in the final comparable set despite failing the related party transaction (25%) filter - HELD THAT: - The Tribunal found that the question of inclusion of certain companies in the final comparable set (allegedly failing the 25% related party transaction filter) required fresh consideration. The Revenue did not object to remand. Consequently, the Tribunal remitted this issue to the TPO for de novo consideration after hearing the assessee, thereby leaving the comparability determination to be re-examined and decided by the TPO. [Paras 15]Issue remanded to the TPO for de novo consideration on hearing the assessee.Non-pressing grounds and dismissal - Grounds 4 to 7 and 9 to 11 (benchmarked transactions and related issues) not pressed and dismissed - HELD THAT: - The assessee expressly did not press Grounds 4-7 and 9-11 before the Tribunal; Ground 11 being consequential. The Tribunal therefore dismissed these grounds without adjudicating them on merit. [Paras 14]Grounds 4-7 and 9-11 dismissed.Final Conclusion: Appeal partly allowed: RPM held to be the most appropriate method and AO/TPO directed to apply it for AY 2014 15; issue concerning inclusion of certain comparables remanded to the TPO for fresh consideration; remaining unpressed grounds dismissed; order allowed in part for statistical purposes. Issues Involved:1. Validity of the impugned order.2. Assessment of loss.3. Transfer Pricing adjustments.4. Rejection of fresh search and audited segmental accounts.5. Transaction by transaction analysis.6. Comparability adjustments.7. Inclusion of certain companies in the final set of comparable companies.8. Judicial pronouncements disregarded.9. Penalty proceedings initiation.Summary:1. Validity of the Impugned Order:The assessee contended that the order passed by the Learned Commissioner of Income Tax (Appeals) - 44, New Delhi ('Ld. CIT(A)') is 'bad in law.'2. Assessment of Loss:The assessee argued that the Ld. CIT(A), Ld. AO, and Ld. TPO erred in assessing/upholding the assessment of loss at INR 21,916,349 instead of the returned loss of INR 69,121,104.3. Transfer Pricing Adjustments:The primary issue revolved around the adjustments to the price of goods purchased from the associated enterprise (AE). The assessee contended that the Ld. TPO/A.O. erroneously characterized it as performing more functions than a normal risk-taking distributor and disregarded the economic analysis and application of the Resale Price Method (RPM). The Tribunal, following the principles of consistency and previous judicial pronouncements, held that RPM is the most appropriate method for determining the arm's length price (ALP) and directed the Assessing Officer/TPO to accept RPM.4. Rejection of Fresh Search and Audited Segmental Accounts:The assessee's grounds related to the rejection of fresh search and audited segmental accounts were not pressed.5. Transaction by Transaction Analysis:The assessee argued that the Ld. CIT(A), Ld. AO, and Ld. TPO erred in disregarding the transaction by transaction analysis and upholding the aggregation approach. However, these grounds were not pressed.6. Comparability Adjustments:The assessee contended that the Ld. CIT(A), Ld. AO, and Ld. TPO erred in disregarding various comparability adjustments, including working capital and foreign currency adjustments. These grounds were not pressed.7. Inclusion of Certain Companies in the Final Set of Comparable Companies:The assessee argued against the inclusion of certain companies that failed the related party transaction filter of 25%. The Tribunal remanded this issue to the TPO for de-novo consideration.8. Judicial Pronouncements Disregarded:The assessee contended that the Ld. CIT(A), Ld. AO, and Ld. TPO disregarded judicial pronouncements related to the issues raised. These grounds were not pressed.9. Penalty Proceedings Initiation:The assessee argued that the initiation of penalty proceedings under section 271(l)(c) of the Act was erroneous. This ground was not pressed.Conclusion:The Tribunal partly allowed the appeal for statistical purposes, directing the Assessing Officer/TPO to accept RPM as the most appropriate method and remanding the issue of comparable companies to the TPO for de-novo consideration. Grounds not pressed by the assessee were dismissed.