2018 (7) TMI 734

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....Transactional Net Margin Method (TNMM). For this assessee has raised the following grounds: - "1. Transfer pricing adjustment of Rs. 5,02,05,493/- 1.1 On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) - 15 [CIT(A)] has erred, in confirming the action of the learned Dy. Commissioner of Income-Tax, Circle 3(3) [AO] of making an adjustment, of Rs, 5,02,05493/- to the international transactions (of purchase of finished goods for distribution) and consequently, an addition to the total income of the Appellant for the year under consideration. 1.2 The appellant submits that the learned CIT(A) has erred in not accepting and considering the appellant's basis and data submitted for adopting the Comparable Uncontrolled Price (CUP) method as the most appropriate method and rejecting the said CUP method. 1.3 Without prejudice to above, appellant submits that the learned CIT(A) has erred in also not accepting Resale Price Method (RPM) despite the fact the learned AO himself had proposed to adopt RPM in his show-cause notice. The CIT(A) has also wrongly observed that the appellant had rejected th....

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....Knives, Watches, Travel Gear, Accessories and Cutlery, etc. The AO during the course of assessment proceedings noted that the assessee has submitted transfer pricing report in respect of international transaction entered with its AE as per form No. 3CEB. The assessee adopted CUP to benchmark the purchases of its product from its AE. The AO rejected the CUP Method and also rejected the Retail Price Method (RPM) by giving following findings in Para 5.3 as under: - "5.3 In response, the assessee made written submissions on 18.02.2013 and 08.03.2013. The submissions of the assessee have been carefully considered and have been contemplated as under: i. Rejection of CUP method a. In the detailed submissions, the assessee argued that CUP is the most appropriate method for benchmarking the international transactions relating to purchase of goods from Ae. In support of the same, it has produced list of transactions of the ae with third parties as substantiation for CUP. Apart from the above, it has also stated that the purchases made from AE and non AE are for different products and accordingly contended that there is no CUP available in respect of purchase using ....

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....he assessee. With regard to RPM the CIT(A) held that RPM was rejected by the assessee in the transfer pricing study report and further the internal RPM cannot be considered since for the application of internal RPM thereon as to protect the comparability which is not there in the case of assessee. The CIT(A) finally upheld the action of the AO regarding the applicability of TNMM despite the fact that before him, it was contended that comparables selected by the TPO were without applying proper search methodology and the same were not comparable to the assessee since the business of the comparable companies were functionally different than that of the assessee. He particularly referred to Hawkins Cookers Ltd. of which the profit margin is 19.3%. But CIT(A) rejected the contention of the assessee and upheld the TNMM and dismiss the appeal of the assessee. Aggrieved, assessee came in appeal before Tribunal. 7. Before us, it was contended that in subsequent years the assessee worked out its margin using RPM method and the same was also incorporated in the transfer pricing study report of the subsequent years and accepted by the TPO under section 92C(3) of the Act while passing order....

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.... appropriate method. We find that the assessee has also justified the ALP of the transaction using the RPM method whereby, gross margin earned by the assessee from sales of its products purchased from AE, where more than the gross margin earned from sales of product purchased from non AE's. We have noticed that in the assessment order certain external comparables were given by the AO whose margin was 41.07% which in any case was lesser than the assessee margin of 48.16% in respect of ALP. The basis and justification for working out gross profit margin on purchases from AE is to be given. It is fact that the assessee is a whole seller and one to one particulars of products purchased and sold are available. The gross profit margin on purchases made from AE and non AE has been worked out accordingly by the assessee. We also find that for subsequent years similar working has been accepted by the TPO. Non AE transactions are in respect of different products which are not comparable to AE segment. It is also a fact that Margin of non AE segment stands at 10.13%. In this regard, as stated above, the goods/ products purchased from both AE and Non-AE relate to the same category and as per O....

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....ignored when applying these methods, because it may be that product differences entail or applying these methods, because it may be that product difference entail or reflect different functions performed, assets used and / or risks assumed by the tested party. See paragraph 3.18-3.19 for a discussion of the notice of tested party. 1.41 In practice, it has been observed that comparability analyses for methods based on gross or net profit indicators often put more emphasis on functional similarities than on product similarities. Depending on the facts and circumstances of the case, it may be acceptable to broaden the scope of the comparability analysis to include uncontrolled transactions involving products that are different, but where similar functions are undertaken. However, the acceptance of such an approach depends on the effects that the product differences have on the reliability of the comparison and on whether or not more reliable data are available. Before broadening the search to include a larger number of prudentially comparable uncontrolled transactions based on similar functions being undertaken thought should be given to whether such transactions are likely t....