TaxTMI 
TaxTMI 
2019 (5) TMI 1661
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....learned Transfer Pricing Officer (,TPO,) to the value of international transaction entered into by the assessee in relation to import of finished goods. 1.2 The learned AO / DRP erred in appreciating the fact that TPO erred in passing the order without following the principle of natural justice. 2. Erroneous rejection of Resale Price method by the TPO 2.1 The learned AO / DRP erred on the facts and circumstances of the case and in law, in confirming the TPO's-stand of rejection of resale price methodology ('RPM') followed by the Appellant in benchmarking the international transaction relating to import of finished goods, as prescribed under rule 10B(1)(b) of the Incometax Rules, 1962 ('the Rules ') 3. Erroneous selection of Transactional Net Margin Method by the TPO 3.1 The learned AO / DRP erred in confirming the use of transactional net margin method ('TNMM') as opposed to the RPM adopted by the Appellant while benchmarking the transfer price relating to import of finished goods . 4. Erroneous rejection of 2 comparables by the TPO 4.1 The learned AO/DRP erred in upholding the rejection of 2....
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....arned AO / DRP erred in not granting the benefit of standard deduction of 5% range in computing the arm's length price as provided in the proviso to section 92C(2) of the Act as it stood prior to the amendment by the Finance Act (No.2), 2009 and Finance Act 2012. 11. Others 11.1 The appellant submits that the learned AO, TPO and DRP have erred in arriving at various unwarranted and erroneous conclusions unsupported by any relevant material in deciding the case. Further, they also failed to consider the contrary material and evidence adduced by the appellant 11.2 The learned AO erred in levying interest under section 234B of the Act. 11.3 The learned AO erred in initiating penalty proceedings under section 271 (1)( c ) of the Act. 11.4 The Appellant submits that each grounds of appeal are without prejudice to one another. 11.5 The Appellant craves leave to add, alter, amend, substitute and/or modify in any manner whatsoever all or any of the foregoing grounds of appeal at or before the hearing of the appeal. 2. Briefly stated, the assessee company which is engaged in the business of trading of coding and marking equipment ....
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....he TPSR the assessee had selected external comparables on the basis of the search performed on Indian Database i.e "Prowess". On the basis of the aforesaid search the assessee had selected 8 comparables in its TPSR and had computed the average gross profit margin of the same at 26.06% as under :- 4. In the backdrop of the aforesaid facts it was submitted by the assessee that as its gross profit margin of 42.08% was higher than the average mean margin of 26.06% of the aforementioned comparables, hence, its international transactions were found to be at Arms Length. The TPO not being impressed by the fact that the assessee had taken three years margin in so far the aforementioned comparables were concerned, thus, directed him to submit the gross profit margin of the comparable companies by using the single year data for financial year 2007-2008. As the gross profit margin of two comparable companies was not available with the assessee, therefore, it used the single year gross profit margin data as regards the remaining six comparables, as under :- 5. As such, it was claimed by the assessee that as its gross profit margin of 42.08% was more than the average mean margin of 29.53%....
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....ons of distribution, marketing, sales promotion, inventory management, personnel management, training, development of training materials etc in the course of its business of trading in coding and marketing equipment and rendering of allied services, and also did bear substantial risks in the form of inventory risk, market risk and credit risk, thus, it could not be considered as a limited risk distributor as claimed in FAR analysis. As such, the contention of the assessee that as it was involved in the business of purchase and re-sale without any value addition, therefore, the RPM was most appropriate method for benchmarking its international transactions with its AEs, was rejected by the TPO. Apart therefrom, it was also observed by the TPO that a perusal of "Schedule 16" to the balance sheet of the assessee for the year under consideration revealed that the average cost price of the goods imported during the year was substantially more as in comparison to the last year, as under :- 8. In the backdrop of the aforesaid observations, it was concluded by the TPO that the assessee's business model clearly revealed that it was not merely purchasing goods and immediately reselling th....
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.... observed by the TPO that while for the assessee was carrying on the business of trading in high ended technology related products, while for the aforesaid comparable was dealing in routine electrical items, fuses, meters, switch gears etc. As such, the aforesaid comparable was held by the TPO to be functionally incomparable. As regards the other company viz. M/s Kusum Electrical Industries Ltd., it was observed by the TPO that the same could not be selected as a comparable for benchmarking the international transactions of the assessee for two reasons viz. (i) that, the turnover of the said comparable was only Rs. 2.07 crores as against the turnover of the assessee of Rs. 36.99 crores; and (ii) that, as the said comparable was dealing in routine electrical equipments such as meters and testing equipments, hence in view of the entirely different line of products dealt by it as in comparison to the high ended technology related products traded in by the assessee, it could not feasibly taken as a comparable for benchmarking the international transactions of the assessee. Accordingly, on the basis of his aforesaid deliberations the TPO worked out the average mean margin of the remaini....
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....Horiba India (P.) Ltd. vs. DCIT (81 taxmann.com 209 (Delhi Trib); iii) Fresenius Kabi India Pvt. Ltd. vs. DCIT(ITA No. 235/Pun/2013); iv) ACIT vis. Kobelco Construction Equipment India Ltd (ITA No.6401/0el/2012); v) Systems Pvt. Ltd. vs. DCIT & vice versa (ITA No. 683/Hyd/2014); and vi) Frigoglass India (P.) Ltd. vs. DCIT(2014) 149 ITO 429 (Delhi). 14. It was submitted by the ld. AR that in all the aforementioned orders it had consistently been concluded that in a case where goods are purchased and sold without any value addition, the RPM would be the most appropriate method for benchmarking the international transactions. The ld. AR submitted that the view taken by the TPO that as the assessee had not demonstrated that uniform accounting norms were followed in the accounting of "cost of goods sold" by the assessee and the comparables selected by it, therefore, the RPM could not be accepted for benchmarking the international transactions of the assessee was not only backed by misconceived facts, but all the more was devoid and bereft of any force of law. It was submitted by ld. AR that in case the TPO was of the view that the comparables were ....
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....t of training materials, as well as had borne substantial risk in the form of inventory risk, market risk and credit risks, it was submitted by ld. AR that such functions would be carried out by any assessee engaged in the business as that of a distributor. Further, ld. AR also assailed the exclusion of two comparables which were selected by the assessee for benchmarking its international transactions and took us through his relevant "written submissions" in context of the issue under consideration. Apart therefrom, the ld. AR also submitted that the TPO had erred in declining to exclude certain extraordinary expenses which were claimed by the assessee while working out its operating margin for the year under consideration. Also, the dislodging of the claim of the assessee wherein it had sought exclusion of revenue of Rs. 2.82 crores from its operational revenue for the reason that the same did not pertain to the sales of AE products was also challenged before us. Lastly, the declining on the part of the TPO to exclude the proportionate costs pertaining to revenue generated from customers of M/s Control Print Limited of Rs. 1,63,57,121/- and the proportionate depreciation was also ....
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.... (a) xxxxxxxx (b) resale price method, by which- (i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated 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; ....
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....he above two sub-clauses along with the remaining sub-clauses of r. 10B(1)(b) makes it clear beyond doubt that RPM is best suited for determining ALP of an international transaction in the nature of purchase 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 a....
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....eting activities, specifically when goods which are purchased from AEs are thereafter sold to unrelated parties without any further processing. Also, a similar view had been taken by the coordinate 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 leve....
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....ged in Rule 10B(1)(b)(iv) of the Income-tax rules, 1962 or to search for fresh comparables. However, merely for the reason that the comparables selected by the assessee were not found 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 ....
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....hended technology related products", on the other hand, the said comparables were dealing in routine electrical equipments. We may herein observe that under the RPM method, the 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....