TaxTMI 
TaxTMI 
TaxTMI 
2021 (1) TMI 682
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....t Commissioner of Income Tax, Circle 27(1), New Delhi [Learned Assessing Officer ('Ld. AO')] (along with the Learned Transfer Pricing Officer (Deputy Commissioner of Income Tax, TPO - 3(3)( 1)) ("Ld. TPO") - under reference from the Ld. AO) erred in making the adjustment of Rs. 10,762,915 to the total income of the Appellant on account of the alleged difference in the arm's length price of the international transaction of import of finished goods under the provisions of Section 92CA(4) of the Income Tax Act, 1961 ("the Act"). 2. On facts and in law, the Hon'ble DRP, Ld. AO and Ld. TPO while rejecting the Resale Price Method ("RPM") erred in : 2.1 disregarding the facts of the case as the Appellant operates as a routine distributor and sells products imported from its associated enterprise ("AE") without any value addition, and thus, is a fit case for application of RPM 2.2 disregarding the provisions of Rule 10C of the Income Tax Rules, 1962 ("the Rules"). 2.3 disregarding the fact that the selection of TNMM as the most appropriate method by the Appellant in its Transfer Pricing documentation cannot act as estoppel in the Appellant selecting the RPM as the most appr....
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....et Margin Method The reply of the assessee has been considered. It is seen that in its TP Study, the assessee had itself adopted TNMM. However, considering that it had made a loss and it was not able to justify itself adequately in the TP study itself! the assessee has changed its MAM to RPM during the TP proceedings itself RPM method is applied where an enterprise purchases a property m from an associated enterprise and then resells the property or the services from an associated enterprise enterprise. A perusal of the Rule 10B(1)(b) which lays down the steps for the application of this method shows that the most important thing for proper comparability analysis under this method is that adjustment for all the differences between the international transaction and the comparable uncontrolled transactions, which may have a material effect on the amount of the gross profit, should he made. For the applicability of this method, therefore, one should ascertain the functions performed by the tested party before it resold the property or the services and also the cost incurred for performing these functions. The gross profit margin earned by the/tested party can then he compared with the....
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....mparison. Thus levels of inventories and cost involved in keeping inventories have to be adjusted which may not he possible based on the information available in the public domain. d) It should be expected that the amount of the resale price margin will be influenced by the level of activities performed by the reseller. This level of activities can range widely from the case where the reseller performs only minimal services as a forwarding agent to the case where the reseller takes on the full risk of ownership together with the full responsibility for and the risks Involved in advertising, marketing, distributing and guaranteeing the goods, financing stocks, and other connected services. Thus, making adjustments for these differences becomes difficult in the case of comparable companies considered by the TPO based on the information available in the public domain. e) The resale price margin should also be expected to vary according to whether the reseller has the exclusive right to resell the goods. The value to be attributed to such an exclusive right will depend to some extent upon its geographical scope and the existence and relative competitiveness of possible substitute....
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....may not he available in the public domain. i) It Is also likely in some causes that a function is performed by the supplier and not by the distributor and in such a case, the purchase price will get enhanced in comparison to a case where the distributor is performing that fundi cm So, the functional profile of the supplier is also important. j) Apart front costs of the functions, there are certain costs like discount and insurance which are related to the resale and which may or may not be accounted for as cost of goods sold. The treatment of such costs is, therefore, also material in the computation of the gross profit Accounting consistency is, therefore, to be ensured, for computing the gross profit margins and it must be shown that same types of costs have been considered for computing the gross profit. k) It is also seen- from the Profit & Loss account that there are certain expenses like selling and distribution expenses that are directly related with the selling and distribution .function of the assessee. However, neither in the case of die assessee nor in the case of comparables, the same have been considered for comparability. Therefore, the manner, in winch the P....
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....ontrolled taxpayer's defined business activity for which reliable data incorporating the controlled transaction under review is available. The strength of this method is that Net margins are less affected by transactional differences and also some functional diversity between the controlled and uncontrolled parties is acceptable. in the light of the above discussion, this office intends to use TNMM, as the most appropriate method with GP/Sales as PLI the in this case, Moreover, assessee company has itself used TNMM as appropriate method for benchmarking of its international transactions in its TP Study submitted by the assessee." 6. Thus, the ld TPO held that TNMM should be the most appropriate method. The ld TPO further selected 4 comparables whose margin was 4.70 % computed the margin of the assessee (-) 26.76% and proposed an adjustment of Rs. 15,662,156/- by passing an order dated 20/01/2016 u/section 92CA(3) of the Act. Consequently draft assessment order was passed on 18.03.2016. 7. Assessee filed objection before the ld DRP who passed direction on 22/02/2016. As per those direction with respect to the most appropriate method, it sought remand report of the AO/ TPO and....
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....e price method as the most appropriate method. It was further stated that in case of one company RPM is accepted whereas in case of the assessee where similar functionality exists, RPM is rejected and TNMM is adopted. He further submitted that if TNMM is to be selected as the most appropriate method fresh search carried out by the assessee was wrongly rejected. He submitted that the gross profit margin of the comparable after adjustment of working capital is (-) 8.87% whereas the margin of the assessee is 8.82 %. In case of net profit margin of the comparables after working capital adjustment is 30.589% whereas the margin of the assessee is 26.76%. Therefore, the transactions of the assessee even otherwise compared at G P Rate is at arm's length. He further submitted that even otherwise the comparable selected by the TPO the arithmetic mean of the margin after adjustment of working capital computed by the assessee is (-)5.34% whereas by TPO same has computed at 5.15 %., which is an error. The assessee has not been provided to the margin computed by the ld TPO. 9. The ld DR submitted that assessee is a trader and has incurred a major expenses on employees and other expenditure.....