TaxTMI 
TaxTMI 
2020 (9) TMI 1159
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....ts Associated Enterprises. Thus the assessee has got two segments, viz., Distribution segment and ITES segment. 4. The first issue relates to the Transfer pricing adjustment made in respect of distribution segment. The assessee adopted "Resale Price Method" (RPM) as most appropriate method for the distribution segment. The TPO noticed that the assessee is required to perform certain additional functions with regard to the distribution segment. Further the assessee has declared loss in the distribution segment. Accordingly, he took the view that the TNM method is the most appropriate method for the distribution segment. The relevant observations made by the TPO are extracted below:- "7.4 Some of the functions that the taxpayer is required to perform as per the Agreements with its AEs are as under: * The distributor (read taxpayer) shall use its best efforts to promote the sale of goods in the territory. * The distributor shall keep the supplier informed on a regular basis as to the market conditions, laws and regulations which may affect the goods, the Distributor's own activities and those of the competition within the territory. * The distributor shall inform immediately ....
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....ssee has incurred huge loss by incurring huge advertisement expenses. Normally a trader would not incur loss in trading segment of reputed products. Hence the TPO has adopted TNM method as most appropriate method, since ALP could be best determined under that method. 7. In the rejoinder, the Ld A.R submitted that the assessee is involved in mere trading activity and it does not carry out any value addition functions on the products. Hence RPM is the appropriate method. 8. We heard the parties and perused the record. We notice that the co-ordinate bench has examined the issue of "most appropriate method" for a distributor of products in the case of Acer India Pvt Ltd (supra). The relevant observations made by the co-ordinate bench are extracted below:- "10. In our considered view, the view so entertained by TPO is based on surmises and conjectures. He has merely relied upon the fact that the assessee was making losses in its trading segment. We notice that the AO has not brought any material on record to support his view. There is no dispute with regard to the fact that the assessee does not make any value addition to the products imported by it from its AE. When there is no val....
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....ch will be received in the future year. In the absence of reliable adjustment, the selection of TNMM will not result in arriving at the ALP of the international transaction. In transactions method like RPM or Cost Plus method, the effect of these factors may be eliminated as natural consequences of insisting upon greater product of function similarity. Depending upon the facts and circumstances of the case and particular on the effect of functional differences on the cost structure and the revenue of the potential comparables, the net profit indicators can be less sensitive than the gross margin to the difference in the extent of complexity of function and difference in the level of risk. 15. It was further contended that comparability should not be interpreted in isolation because of the conditions and circumstances of the controlled transactions should be taken into consideration while comparing the net margin. Under the facts and circumstances of the assessee, the net margin comparability is more volatile than the gross margin comparable. In the light of the facts, it was contended that if the cost structure is such that costs are effecting in net profit directly without affec....
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....ctions become determining factor to analyse the gross compensation after the cost of sales. Accordingly the Tribunal held that the RPM is the most appropriate method. 17. Similarly, in the case of Bose Corporation Pvt. Ltd. v ACIT (supra), the assessee company was engaged in the business of distribution of sound and audio assistant for individual customers and public places. It was a wholly owned subsidiary of Bose Corporation, USA. During the relevant year, assessee purchased furnished goods from its AE and resold the same in India to unconnected parties. The assessee adopted resale price method (RPM) as most appropriate method (MAM) for determining the ALP of the said international transactions. The profit level indication (PLI) adopted by the assessee was gross profit/sale and the assessee has made itself tested party for the purpose of international transactions. The TPO rejected the transfer pricing study of the assessee and opined that transactional net margin method was to be applied for determining ALP of international transactions under question. While determining the issue as to which is the most appropriate method in case of distributor, the Tribunal has held that the ....
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.... price method (RPM) adopted by the assessee because the TPO found that assessee was incurring loss consistently and hence the price police was not at arm's length. The Hon'ble High Court, having examined all aspects have finally concluded that RPM is the most appropriate method. The relevant observation of the Hon'ble High Court is extracted hereunder for the sake of reference: "7. After having perused the relevant part of the order passed by the Commissioner and this Tribunal on this question, we are in agreement with Pardiwalla that the Tribunal did not commit any error of law apparent on the face of the record nor can the findings can be said to be perverse. The Tribunal has found that the TPO has passed an order earlier accepting this method. The Tribunal has noted in para 19 of the order under challenge that this method is one of the standard method and the OECD (Organization of Economic Commercial Development) guidelines also state in case of distribution or marketing activities when the goods are purchased from associated entities and there are soles effected to unrelated parties without any further processing, then, this method can be adopted. The findings of ....
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....making any value addition RPM is the most appropriate method and should be preferred over TNMM. Accordingly, we set aside the order of the AO, passed consequent to the direction of the DRP in this regard and direct the AOITPO to adopt the RPM as the most appropriate method." 11. Since the facts are identical in this case, we hold that the Resale Price Method is most appropriate method in the facts and circumstances of the present case. Accordingly we direct the AO/TPO to adopt Resale Price Method as most appropriate method and determine the ALP of the transactions accordingly." 9. In the instant case, the assessee has claimed that it has not carried out any value addition to the products imported by it from its Associated Enterprises. It is also submitted that the functions to be performed by the assessee as a "distributor", which is highlighted by the TPO is normal functions performed in the trade circles even by a non-related party. We notice that the revenue has not negated both these submissions of the assessee. The TPO has also rejected the RPM for the reason that the assessee is incurring Net loss. However, it has held by the Tribunal in various cases that the Gross Prof....
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....he case of M/s Acusis Software India P Ltd vs. ITO (IT(TP)A No.169/Bang/2016 dated 06-09-2019). Accordingly, he prayed for exclusion of these two comparables. 13. The Ld D.R, however, supported the orders of tax authorities. 14. We heard the parties on this issue and perused the record. The decision in the case of Acusis Software India P Ltd (supra) has considered the comparable company M/s Accentia Technologies Ltd for the very same assessment year under consideration, i.e., for AY 2011-12. The co-ordinate bench has followed the decision rendered by another co-ordinate bench in the case of EMS Software Services (India) P Ltd (IT(TP)A No.273/Bang/2016 dated 25.4.2018) and accordingly directed to be excluded. We notice that the co-ordinate bench in the case of EMS Software Services (India) P Ltd has followed the decision rendered by other co-ordinate benches in the case of M/s Swiss Re Shared Services India P Ltd (IT(TP)A No.380/Bang/2016 dated 08-07-2016) and in the case of Amba Research India P Ltd. Thus, we notice that M/s Accential Technologies Ltd has been held to be not a good comparable in many cases. Accordingly, following the decision rendered by the coordinate benches in....