TaxTMI 
TaxTMI 
2016 (8) TMI 204
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....he learned Dispute Resolution Panel (,Panel') erred in upholding the rejection of Transfer Pricing (TP) documentation by the learned Assistant Director of Income tax (Transfer Pricing) - IV, Bangalore (,Transfer Pricing Officer' or 'TPO'). 3. That the learned AO and the learned Panel erred both in facts and law in malting an adjustment of Rs. 70,951,686 to the transfer price of the Appellant by, holding that the international transactions do not satisfy the arm's length principle envisaged under the Income Tax Act, 1961 (the 'Act') and in doing so grossly erred in: 3.1. Upholding application of Transactional Net Margin Method ("TNMM") as the most appropriate method with selection of Operating Profit to Sales ratio as the Profit Level Indicator as against Resale Price Method ('RPM') with Gross Profit to Sales ratio as the relevant Profit Level Indicator adopted by the Appellant in the TP Documentation in respect of its distribution activity. 3.2. Upholding the rejection of comparability analysis of the Appellant in the TP documentation and confirming the comparability analysis as adopted by the learned TPO in the TP Order. 3.3. Disrega....
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....determining the Arm's Length Price ('ALP'). Accordingly, the TPO has made a search and selected 6 comparables as under : Sl.No. Company Name Sales OP OP/Sales 1 Advanced Micronic Devices Ltd. (Seg.) 29.12 2.77 9.50% Accordingly, the TPO proposed an adjustment under Section 92CA of Rs. 7,77,36,983. The assessee challenged the action of the TPO before the DRP and the DRP rejected two companies and retained the four companies in the list of comparables. 4. Ground Nos.1, 2 & 3 are regarding rejection of the resale price method and adopting TNMM. 5. The learned Authorised Representative of the assessee has submitted that the assessee is distributing the ophthalmic lenses imported from Associated Enterprise ('AE'). The assessee is doing trading activity without any value addition in the goods imported from AE and sold to third party therefore, RPM is the MAM for the international transactions by the assessee is purely trading in nature. In support of his contention, he has relied upon the following decisions : i. OSI Systems Pvt. Ltd. Vs. DCIT dt.12.8.2015 in ITA No.683/Hyd/2014. ii. Loreal India PVt. Ltd. Vs. ITO dt.25.4.2012 in IT(....
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....ntative then referred to the finding of the DRP and submitted that the functions performed with effect to the resale price method should also be similar or it should be possible to make adjustment for such differences. While making a comparison, the presence of such functions and risk in the case of comparable and availability of data is required for computation of gross margin. He has relied upon the orders of the authorities below. 7. In a rejoinder the learned Authorised Representative has submitted that the adjustment under Rule 10B is made only in respect of the expenditure incurred for purchase of the property and for not sale of the property. 8. We have considered the rival submissions as well as the relevant material on record. There is no dispute that in case of distribution of goods without any value addition the RPM can be considered as MAM. However, while applying the resale price method, the activity of trading and connected activity carried out by the assessee as well as comparables must be similar. In the case on hand there is no dispute that the assessee has incurred huge expenditure on account of selling and distribution as well as promotion amounting to more....
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.... the rival submissions and relevant material on record, we note that there is no dispute on the fact that the assessment under consideration is the initial years of the distribution activity of the assessee and therefore it cannot be ruled out that the expenditure incurred by the assessee towards the marketing, advertisement and sales promotion activity is substantially higher because of the initial year. The Pune Bench of the ITAT in the case of Skoda Auto India Pvt. Ltd. (supra) while dealing with an identical issue in para 19 as under : " 19. One of the things which is clearly discernable from the facts of this case is that so far as the year before us is concerned, which was incidentally first full year of assessee's operations, the import content of the raw materials was as high at 98.55 per cent. This is materially different from the import content of the raw material in the cases of the comparables selected by the Revenue authorities. The import content of raw material in these cases ranged from 26 per cent to 56.83 per cent (Hindustan Motors-31 per cent; Honda Siel-48.2 per cent; Hyundai Motors-25.29 per cent; General Motors-56.83 per cent and Maruti Udyog-26 per cent). ....
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.... the unusually high costs are incurred. The adjustments are thus required either way. It is, therefore, permissible in principle to make adjustments in the costs and profits in fit cases. We also do not agree with the authorities below that the onus is on the assessee to get all such details of the comparable concerns so as to make this comparison possible. The assessee cannot be expected to get the details and particulars which are not in public domain. In such a situation, i.e. when information available in public domain is not sufficient to make these comparisons possible, it is inevitable that some approximations are to be made and reasonable assumptions are to be made. The argument before us was that it was first year of assessee's operations and complete facilities ensuring a reasonable indigenous raw material content was not in place. The assessee's claim is that it was in these circumstances that the assessee had to sell the cars with such high import contents, and essentially high costs, while the normal selling price of the car was computed in the light of the costs as would apply when the complete facilities of regular production are in place. None of these arguments wer....
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.... the matter to the file of the TPO, we are alive to the fact that it is difficult to miss, even on a cursory glance, that many of the arguments and facts in support of arguments are indeed taken up before us for the first time, and, to that extent, the authorities below never had an opportunity to examine these aspects of the matter. Take, for example, the submissions regarding capacity underutilization. It was never taken up before the TPO in the first place. Similarly, the issues regarding product cycles and impact of these product cycles on operating profit margins was never before the AO. The relevance of multiple year data hinges on acceptance of this theory about relevance of product cycle. The crisil report which has been repeatedly referred before us was apparently not available to the TPO. In these circumstances and bearing in mind the fact the year before us was only second year of implementation of transfer pricing regime and it was a new area of taxation laws in which law had not developed, we think that it will meet the ends of justice that the assessee has liberty to raise all these arguments before the TPO so that the TPO can examine all the relevant contentions and ....