TaxTMI 
TaxTMI 
2017 (4) TMI 767
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....onal transaction. 3. Whether on the facts and in the circumstances of the case, the learned CIT(A) erred in accepting RPM the most appropriate method with GP/Sales as PLI instead of TNMM as done by TPO despite the fact that proper adjustments required for the application of the method were not carried out by the assessee. 4. Whether on the facts and in the circumstances of the case, the learned CIT(A) erred in rejecting the comparable T&I Global as product similarity is not very vital in TNMM and functions are more important. 5. Whether on the facts and in the circumstances of the case, the learned CIT(A) has erred in admitting the additional evidence when assessee could not give any sufficient cause as to why he could not furnished that evidence during the proceeding before TPO in violation of Rule 46A of the Income Tax Rules. 6. Whether on the facts and in the circumstances of the case, the learned CIT(A) erred in giving decision on the applicability of CUP when there are geographical differences." 3. The brief facts qua the issue of transfer pricing adjustment are that the assessee company is engaged in the distribution of heavy machines like earthmoving equipment....
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...."Resale Price Method" (RPM) as the "Most Appropriate Method" (MAM) and PLI was taken as gross profit/operating income. The assessee had shown gross margin of 14.86% and to benchmark the said margin, the assessee had identified seven comparable companies for comparative analysis and the average GP margin of the comparables was arrived at 16.78% based on multiple year data. Since the gross margin by the assessee vis-a-vis the comparables was within arm's length range of plus/minus 5%, hence, it was reported that its international transactions are at arm's length price. 5. The learned TPO, however, rejected the selection of RPM as MAM and instead held that TNMM should be adopted as MAM. While rejecting the assessee's method, he tried to explain the concept of RPM in his order from pages 12 to 15 of the order. However, the entire discussion by the TPO is mere reproduction of OECD guidelines wherein he has highlighted the strengths and weaknesses of the RPM method. He has not analyzed the FAR analysis of the assessee and the overall business model under which assessee operates. At page 13 of his order, he also made reference that the assessee is maintaining very high inventory which ....
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....he Ld. CIT(A). 7. The learned CIT(A), after considering the entire submissions and material placed on record, observed that assessee is clearly a full-fledged distributor of earth moving equipments and some of the observations of the TPO are incorrect when he says that assessee is a seller of jewellery and luxury watches. This shows that the TPO has not applied his mind and rejection of RPM is not based on sound analysis of FAR. The TPO has not brought any evidence to show that the assessee is performing additional function other than the distribution activities. The advantages or disadvantages of the methods given in OECD cannot be the basis unless it is analyzed on facts. After holding that single year data should be used and also analyzing the comparables of the assessee as well as the TPO, he held that RPM was the correct method on the facts of the assessee's case and out of the two comparables selected by the TPO, he included one comparable viz., TIL Limited. The final set of comparables taken by the learned CIT(A) is as under :- S.No. Name of Comparable Companies GP/Sales (%) 2007-08 1. Cuprum Bagrodia Limited 28.41 2. Gmmco Limited 18.26 3. ....
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.... pointed out that in the case of one of the comparables i.e., Gmmco Limited, this company is also into manufacturing and, from the financial statements which were enclosed in the paper book, he pointed out that if the comparable is into manufacturing, then its gross margin cannot be accepted to be comparable and therefore, by selection of comparables itself, it can be seen that RPM cannot be the MAM in the present case. 10. By way of rejoinder, the learned counsel clarified that in the case of Gmmco Limited, the RPM has been taken for segment of "Caterpillar Dealership Division" which relates to trading of Caterpillar brand of products. The other segment of "Chemical Division" which is engaged in manufacturing has not been used. Not only that TPO has accepted this comparable. Therefore, such contention raised by the learned DR cannot be accepted. 11. We have heard the rival submissions and perused the relevant finding given in the impugned order as well as the material placed on record. It is an admitted fact that the assessee imports finished goods manufactured by its AE, like earthmoving equipment, hydraulic excavators, etc. for resale in India and it undertakes the entire ....
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....tering into such transactions, which could materially affect the amount of gross profit margin in the open market; (v) the adjusted price arrived at under sub-clause (iv) is taken to be an arm's length price in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise; 12. Thus, the RPM method identifies the price at which the product purchased from the A.E. is resold to an unrelated party. Such price is reduced by normal gross profit margin, i.e., the gross profit margin accruing in a comparable controlled transaction on resale of same or similar property or services. As per OECD guidelines and also now it is quite settled by various judicial precedence that the RPM is mostly applied in a situation in which the reseller purchases tangible property or obtained services from an A.E. and reseller does not physically alter the tangible goods and services or use any intangible assets to add substantial value to the property or services i.e., resale is made without any value addition having been made. In the case of Mattel Toys (I) Pvt.Ltd. reported in (2013) 158 TTJ 461 (Mumbai), the Tribunal has analyzed the RPM as ensh....
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....st appropriate method for determining the ALP. This view has been upheld by the Tribunal, Mumbai Bench, in Textronix India P. Ltd. (supra), L'oreal India P. Ltd. (supra) and Star Diamond Group v/s DDIT, 141 TTJ 21. The OECD guidelines and ICAI guidelines as have been referred to by the learned Counsel have also expressed on the similar line that RPM would be the best method when resale takes place without any value addition to a product for bench marking the ALP. 40. On the other hand, under the TNMM, the ALP is determined by comparing the operating profit related to an appropriate base i.e., cost or sale or assets of the "tested party" with the operating profit of an uncontrolled party engaged in comparable transactions. Under the TNMM, net margin or operating profit is compared against with the independent entities against those achieved in related party transactions. Under the TNMM, the major thrust is to derive at the operating profit at the transactional level and to identify the operating expenses of both the tested party as well as the independent parties. This requires a lot of adjustments to derive at the actual operating profit. If the ALP of any transaction can be det....