AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2019 (8) TMI 49
X X X X Extracts X X X X
X X X X Extracts X X X X
....brief facts of this issue are that the assessee is engaged in the manufacturing and trading of cleaning, sanitizing, food safety and infection control products and services. The traded goods are procured from other group companies and manufacturing operations mainly involves mixture of chemicals at third party manufacturer. The assessee is a 99.99% subsidiary of Ecoiabone BV Netherlands. 3.1. The international transactions reported by the assessee in Form 3CEB are as under: Sr. No. Nature of Transactions Value of Transaction 1 Import of materials 28,81,748 2 Import of finished chemical products for resale 8,78,77,963 3 Export of finished chemical products 8,41,051 4 Purchase of assets 217,951 5 Reimbursement of expenses 2,90,82,906 3.2. Import of finished chemical products for resale and export of finished chemicals The assessee submitted that during the financial year ending 31.3.2012, the assessee has imported finished chemical products from AEs and exported finished chemical products to its overseas Group entities. Further, the assessee also imported raw materials from the A.E. to the tune of Rs. 28,81,748 /-. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....B division was engaged in distributing the products locally in India without any value addition. Both the other divisions were either selling manufactured goods or were selling the goods imported from A.E. after subsequent value addition. The Resale Price Method can be used where a product which has been purchased from A.E. has been sold to independent party without any significant value addition. Further, use of Resale Price Margin is justified in a situation where the assessee does not make significant value addition to the goods bought from the A.E. before selling them to independent enterprise. The OECD guidelines in para 2.22 are reproduced for ease of reference as under :- "2.22 An appropriate resale price margin is easiest to determine where the reseller does not add substantially to the value of the product. In contrast, it may be more difficult to use the resale price method to arrive at an arm's length price where, before resale, me goods are further processed or incorporated into a more complicated product so that their identity is lost or transformed." As can be seen from the financials of assessee, that the assessee is doing substantial v....
X X X X Extracts X X X X
X X X X Extracts X X X X
....No.s 2763 and 2764/De!/2009). However, relying on the decision of Hon'ble Bombay High Court in the case of of Fire Stone international P. Ltd. in ITA No. 1354 of 2013, the claim of assessee is allowed as such and the adjustment is restricted to Rs. 7,43,89,908 (being 76.25 % of 9,75,60,535 /-. The ld TPO noted the fact that the department had filed an appeal before Hon'ble Supreme Court against the above mentioned order of Bombay High Court. However, he proceeded to follow the decision of Hon'ble Jurisdictional High Court and restricted the ALP adjustment to the extent of international transactions as stated supra. 3.7 Therefore an adjustment of Rs. 7,43,89,908 /- was proposed to the ALP of international transaction. 3.8. The ld. DRP upheld the action of the ld. TPO by observing as under:- "4.2.2 On the perusal of above, it is apparent that the assessee was engaged in manufacturing activity and it has not refuted the TPO's observation regarding manufacturing activities with any cogent evidences. Further, from the company's financial for March 2014 & 2015, Excise Duty paid of Rs. 2.19"crores & Rs. 3.29 crores are seen suggesting major manufacturi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....spensing equipment from its AEs. The dispensing equipment functions as a means to store the chemical compounds and release them in an effective manner. The dispensing equipment is more permanent and has a reasonably long shelf life. We find that assessee had engaged in importing products from its AE for mere resale without any value addition thereon. The assessee has earned the gross margin of 33.33% and had applied RPM as MAM and compared the gross margin of 7.62% earned by the comparable companies. Accordingly, assessee concluded that the international transaction of import of finished goods from its AE for resale was at arm's length. There is no dispute with regard to the comparables chosen by the assessee and by the ld. TPO. The only dispute is with regard to the Most Appropriate Method. We find from the audited financial statements that assessee is having both manufacturing segment as well as distribution segment. The revenue from operations of the assessee in the year 31/03/2012 are as under:- Sale of Products Manufactured Goods - Rs. 10,81,15,753/- Traded Goods - Rs. 13,26,97,839/- Sale of Services Services Income - Rs. 10,57,191/- ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Details of Consumption (a) Details of raw materials/ Packing materials consumed: April 1, 2011 to March 31,2012 Rupees Organic Chemicals 3,93,97,698 Packing materials 39,33,488 4,33,31,186 (b) Value of imported and indegenious raw materials and packing materials consumed: Imported 28,46,628/- 6.57% Indigenous 4,04,84,558 93.43% 4,33,31,186 100% 5.4. The aforesaid break-up of revenue system and the purchase of goods for re-sale and cost of materials consumed would go to prove that assessee is having separately manufacturing segment as well as distribution segment. We also find from the TP study report that assessee had separately benchmarked its international transactions with AE under manufacturing segment as well as under distribution segment. We find from pages 110 & 111 of the paper book that assessee had duly submitted the segmental profitability statement from manufacturing segment and trading segment before the ld. TPO vide letter dated 16/12/2015. All the aforesaid evidences would squarely go to prove that assessee had separately benchmarked its manufa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted enterprise, is identified,' (ii) such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions; (iii) the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services; (iv) the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....chase of goods from an AE which are resold as such to unrelated parties. Ordinarily, this method presupposes no or insignificant value addition to the goods purchased from foreign AE. In a case the goods so purchased are used either as raw material for manufacturing finished products or are further subjected to processing before resale, then RPM cannot be characterized as a proper method for benchmarking the international transaction of purchase of goods by the Indian enterprise from the foreign AE." 9. Similarly, in Swarovski India (P.) Ltd. v. Asstt. CIT[2017] 78 taxmann.com 325 (Delhi - Trib.) the ITAT held: "Adverting to the facts of the instant case, we find that the assessee purchased Crystal goods and Crystal components from its AE. No value addition was made to such imports. The goods were sold as such. In the given circumstances, the RPM is the most appropriate method for determining the ALP of the international transaction of' Import of Crystal goods and Crystal components." 10. A similar view has been adopted by the Mumbai bench of the ITAT in Mattel Toys India (P.) Ltd. v. Dy. CIT[2013] 34 taxmann.com 203/144 ITD 76: "Thus, the RP....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e benches of the Tribunal viz. (i) Horiba India (P) Ltd. Vs. DCIT, 81 taxamnn.com 209(Delhi); (ii) Fresenius Kabi India Pvt. Ltd. Vs. DCIT (ITA No.235/PUN/2013); and (iii) ACIT Vs. Kobelco Construction Equipment India Pvt. Ltd., ITA NO.6401/De1/2012 (Delhi). Accordingly, in terms of our aforesaid observations, we are of the considered view that in the case of a pure trader RPM is the most appropriate method for bench marking the international transactions. 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. As such, under the TNMM, the net margin or operating profit achieved in related party transactions is compared against with those entered into between the independent entities. Accordingly, under the TNMM the major thrust is to derive the operating profit at the transactional level and to identify the operating expenses of both the tested party as well as the independent parties, which, thus, requires a lot of adjustments to arrive at the actual operating profit. Thu....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to be appropriate could have by no means justified the rejection of the aforesaid method adopted by the assessee for benchmarking the ALP of its international transactions. Our aforesaid view is fortified by the order of the ITAT Bangalore Bench of the Tribunal in the case of CIT Vs. Sanyo India Pvt. Ltd. [2015] 45 CCH 98 (Bang) and the order of ITAT, Delhi Bench in the case of Burberry India Pvt. Ltd. (supra). Further, we find that another reason given by the TPO/DRP for rejecting the RPM is that the assessee as per them was a full-fledged/full risk distributor and was performing a host of functions which would involve huge costs and, hence, the said method may not represent correct gross profit margin. We are unable to persuade us to accept the said observations of the lower authorities, because, in our considered view, in a comparable uncontrolled transaction scenario also a normal distributor will undertake all such functions which are related to sales of a product viz. market research, sales and marketing, warehousing, inventory control, quality control etc., and would also bear risks viz. market risk, inventory risk, credit risk etc. As a matter of fact, the TPO/DRP had not ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e focus is more on the functions rather than the similarity of products because product differentiation does not materially affect the gross profit margin, as it represents gross composition after the cost of sales for specific functions performed. Our aforesaid view is supported by the orders of the ITAT, Mumbai in the case of Mattel Toys (I)(P.) Ltd. Vs. DCIT, Cirlce-6(3), Mumbai, [2013] 34 taxamnn.com 203 (Mumbai-Trib) and ITAT, Delhi Bench in the case of Horiba India (P) Ltd. Vs.DCIT, 81 taxamnn.com 209(Delhi). As we have upheld the RPM as the most appropriate method in the case of the assessee as against TNMM applied by the TPO, therefore, we find no justifiable reason for exclusion of the aforementioned comparables from the final list of comparables. Accordingly, we direct the AO/TPO to include the aforementioned two comparables viz. (i) M/s K. Dhandapani & Co. and (ii) M/s Kusam Electricals Industries Pvt. Ltd. in the final list of comparables for the purpose of benchmarking the ALP of the international transactions of the assessee as per the RPM adopted by it in its TPSR. 21. As we have set aside the order of the AO/TPO insofar the assessee's claim for benchmar....