TaxTMI 
TaxTMI 
2021 (2) TMI 456
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.... up as a preliminary issue. A decision of the preliminary issue will render decision on Revenue's appeal on merits of determination of ALP academic. 3. The assessee is one of the leading manufacturer of telecommunication connectivity and equipment. The assessee entered into several international transactions during the previous year with its Associated Enterprises (AE). One of the transaction which is the subject matter of this appeal is the international transaction of import of structured cabling systems and accessories for the purpose of trading. The details of the international transactions were as follows: Import of finished goods for trading ADC Communications (Australia) Pty.Ltd. 5,201,848 ADC GmBH 24,627,506 ADC Communications (UK) Ltd 9,027,895 ADC Communications Hong Kong Ltd 7,951,632 ADC Telecommunications Inc 38,092,535 Total 84,901,416 4. In its TP study, the assessee adopted Resale Price Method (RPM) as the Most Appropriate Method (MAM) for determining ALP. The claim of the assessee in this regard for choosing RPM as the MAM was based on Rule 10B(1)(B) of the Income Tax Rules, 1962 (Rules), OECD Commentaries etc. The s....
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.... products. Further it was submitted that RPM can be applied as the gross margin is identifiable for the Assessee and the comparable companies. Hence, RPM would be an appropriate method." The profit level indicator (PLI) chosen for the purpose of comparison of Assessee's margin with that of the comparable companies was Return on revenue the Assessee would have earned had it dealt with uncontrolled parties at arm's length. The Assessee chose 6 comparable companies. The Assessee took data relating to the financial year in which the international transaction has been entered into and also the data relating to two prior years. The plea of the Assessee was that such a course is permitted if such data reveals facts which could have an influence on the determination of transfer prices in relation to comparability as per the Proviso to Rule 10B. Sl. No. Name of the Company F Y 2009- 10 F Y 2008-09 FY 2007- 08 Average 1. Chloride International Ltd. Prowess NA * 10.61% 10.61% 2. Globus Cororation Ltd. Prowess NA NA NA NA 3. K Dhandapani & Co. Ltd. Prowess NA - 0.48%** 9.17% 4.35% ....
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....quested to furnish a set of uncontrolled comparables using financial data for FY: 2009-10 only and also furnish copies of the Annual Reports of the companies for examination. 8. The TPO thereafter adopted TNMM and identified 14 comparable companies with an average arithmetic mean profit margin of 6.79% and determined the ALP as follows: "10. Determination of Arm's Length Price: 10.1 The Arm's Length Price of the international transactions in the trading segment of the taxpayer, is determined as under, by using the TNMM as the most appropriate method and using the set of 14 uncontrolled comparables selected by the TPO with arithmetic mean margin of 6.79% on Sales as above. 10.2 Arithmetic mean PLI 6.79% on Sales Operating Revenues Rs. 38,06,68,324/- Arms Length Margin 6.79% of Operating Revenue Total Arms Length Cost (ALP) @ 93.21% of Operating Revenue Rs. 35,48,20,945/- Operating Co....
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....see. The TPO has pointed out that the assessee has incurred huge expenses below the GP level which has neutralized the profit and resulted in a loss at the net margin level. Thus it is evident that the assessee has performed functions which no routine trader would perform resulting in high expenses. The assessee has not been compensated for the functions performed by the A.E. In our view the reasons given by the TPO for rejecting the RPM method and adopting TNMM are logical and well founded. Given the fact that certain specific expenses have been incurred the assessee as a reseller and the lack of availability of data for costs incurred for similar functions in the case of the comparables the analysis of net margins presents a more reliable perspective. TPO was justified in adopting the TNMM method, This objection is therefore not accepted." 11. The DRP excluded certain comparables selected by the TPO under the TNMM method against which the Revenue has filed appeal before the Tribunal. As far as the appeal for the assessee is concerned, the learned Counsel for the assessee submitted at the time of hearing that he would press only ground No. 5 which reads as follows: "5.....
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...., Vs. DCIT (2016) 67 taxmann.com 200 (Bangalore Trib) wherein it was held that when RPM is adopted as the MAM, it was necessary to have close analysis of the products that are subject matter of trading with the products traded by the comparable companies. 14. We have given a careful consideration to the rival submissions. In the case of Mattel Toys (I) Pvt. Ltd., Vs. DCIT, in ITA No. 2476/Mum/2008 order dated 12.06.2013, the Mumbai Bench of the Tribunal had an occasion to examine the correctness of adopting RPM as MAM in the case of assessees who purchase products from AE and resell to unrelated parties. In that case, the Tribunal emphasised the importance of comparing only the gross margin in the following words: "38. Thus, the RPM method identifies the price at which the product purchased from the A.E. is resold to a unrelated party. Such price is reduced by normal gross profit margin i.e., the gross profit margin accruing in a comparable controlled transaction on resale of same or similar property or services. The RPM is mostly applied in a situation in which the reseller purchases tangible property or obtain services from an A.E. and reseller does not physically alt....
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....0 order dated 31.10.2015, the Tribunal dealt with the plea of the Revenue on incurring of expenses which does not effect on the gross margins and observed as follows: "11. The Ld. DR vehemently argued against the application of RPM in the given circumstances as the most appropriate method by contending that the assessee incurred huge advertisement and ITA Nos. 242 & 178/Del/2010 CO No. 77/Del/2010 marketing expenses. In view of such incurring of expenses, the Ld. DR stated that the better course would be to apply TNMM which would consider operating profit. We are unable to accept the contention advanced on behalf of the Revenue. The obvious reason for this is that the incurring of high advertisement and marketing expenses by the assessee vis-a-vis the other comparable companies does not in any manner affect the determination of ALP under the RPM. When we consider gross profit in numerator and net sales in denominator, all the expenses debited to the Profit & loss account automatically stand excluded. It is but natural that only those expenses can have bearing on the gross profit that are debited to the Trading account. As the amount of advertisement and marketing expenses ....