AI Drafter 
TaxTMI 
TaxTMI 
2021 (6) TMI 92
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....ued that the grounds taken up involves a legal issue and doesn' t require any investigation and can be deciphered from the facts on record. The ld. DR objected to admission of additional ground at this juncture. Keeping in view, the judgment of the Hon'ble Apex Court in the case of National Thermal Power Co. Ltd. Vs CIT (1998) 229 ITR 383, the additional ground filed by the assessee is accepted. The relevant portion of the judgment is as under: "5. Under Section 254 of the Income-tax Act, the Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, we do not see any reason why the assessee should be prevented from raising that question before the tribunal fo....
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.... the facts which are on record in the assessment proceedings we fail to see why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee. 8. The reframed question, therefore, is answered in the affirmative, i.e., the Tribunal has jurisdiction to examine a question of law which arises from the facts as found by the authorities below and having a bearing on the tax liability of the assessee. We remand the proceedings to the Tribunal for consideration of the new grounds raised by the assessee on the merits." 4. Respectfully following the above judgment of the Hon'ble Apex Court, the additional grounds taken up by the assessee are hereby admitted. 5. The assessee company is a wholly owned subsidiary of Dentsply International, USA. The assessee company is engaged in manufacturing and trading of dental products. The total sale of the assessee during the year was Rs. 14.05 crores. The raw material, for the dental products manufactured by the assessee, is procured from unrelated parties. The products traded by the assessee are entirely purchased from its Associated Enterpri....
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....tel Toys (I) (P.) Ltd. v. DCIT IT Appeal Nos. 2476 & 2801 (MUM.) of 2008. In the facts of that case, the assessee (a distributor) imported goods from its foreign AE and re-sold such goods to independent parties in India without any value additions. The assessee had applied TNMM as the MAM in its transfer pricing study report and prayed before the Hon'ble Tribunal to change the method of benchmarking to RPM. At para 38 of the Order, the Hon' ble Tribunal held that RPM is the MAM method for determining the arm's length price of an international transaction wherein goods, purchased from the AE, are resold by the assessee without any value additions. Relevant part of the Order is reproduced below for ready reference: ".... This is also what happens in the case of a distributor wherein the property and service are purchased from the A.E. and are resold to other independent entities, without any value additions. The gross profit margin earned in such transactions becomes the determination factor to see the gross compensation after the cost of sales. In the instant case, the assessee is a distributor of Mattel toys and gets the finished goods from its A. E. and resells the same t....
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....subsequent years hence the argument of the assessed cannot be accepted. 10. Heard the arguments of both the parties and perused the material available on record. 11. We have gone through the various decisions rendered on this issue. For the sake convenience and ready reference, the relevant part containing the entire facts and ratio in the case of Mattel Toys (I) (P.) Ltd. Vs DCIT in ITA Nos. 2476 & 2801/Mum/2008 is reproduced as under: "17. Facts in brief:- The assessee is an indirect wholly owned subsidiary of Mattel Inc., U. S.A., which is the worldwide leader in manufacturing and marketing of variety of toy products and games. The entire share capital of the assessee company is owned by Mattel Inc., U. S.A. and partly through its other subsidiary. The assessee is engaged in marketing and selling of toy brands of Mattel Group in India and recorded its turnover of Rs. 36 crores during the relevant previous year. Its operations consisted of import of finished goods from the group companies and selling them in India and also manufacturing of the toy after importing the raw materials from the A.E. The toy brands dealt by the assessee in India included Barbie ....
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....rage operating profit margin ratio at 0.91% as compared to (-) 51.22% shown by the assessee for the domestic distribution segment for the year ending 31 st March 2002. On such margin, the assessee made an adjustment on account Mattel Toys (I) Pvt. Ltd. 9 of advertisement distribution cost and worked out the average operating margins of the six comparables at (-) 17.41%. The TPO has incorporated the original profit margin and the adjusted operating profit margin of the six comparables in Para- 6.3 in the following manner:- Sl.no. Comparables Original Operating Profit Margin Adjusted Operating Profit Margin 1. Balsara Hygiene Products Ltd. 4.36 % (-) 3.2 % 2. Detergents India Ltd. (-) 0.43 % (-) 22.46 % 3. Henkel Spic India Ltd. 5.40 % (-) 19.74 % 4. Mueller and Phipps India Ltd. (-) 0.10 % (-) 20.15 % 5. Nirma Consumer Care Ltd. (-) 0.83 % (-) 19.15 % 6. Paramount Cosmetics India Ltd. 0.00 % (-) 19.68 % Average operating margin of comparables 0.91 % (-) 17.41 % 21. The TPO further noted that within the distribution activity, the assessee has determined its gross prof....
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....ulated as per the segmental costs and revenues submitted by the assessee in its submissions dated 17.11.2004 (segmented costs I revenue for Domestic segment) and submission dated 01.12.2004 (for segment costs and Revenue for remaining 2 export segments). (b) The import of finished goods of Rs. 3,08,16,302/- is considered under the Domestic segment. (c) The assessee has made adjustments to the margin of the comparables on account of difference in advertisement costs. As a result of this, the average operating profit margin of the comparables has been determined at (-) 17.4% which appears very improbable in a distribution activity. The assessee has filed no evidence to support the adjustment made. Hence, the adjustment made by the assessee in this regard is rejected. (d) The average operating profit on sales ratio of 0.91% as calculated by the assessee is applied for the Domestic segment. Separate relief on account of advertisement costs of the assessee has been given while calculating the ALP. For the segment consisting of export to A. E. ratio of operating profit on costs of 0.92% is applied to determine the ALP. 13. The Arm' s Length Price for a....
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.... marking its operating net profit. Since the international transactions pertain to import of finished goods from the A. E. and resale in the domestic market, the best way for bench marking such international transaction was to compare gross profit margin by adopting RPM. Further, it was also stated that the assessment year 2002 - 03 was the first year of assessee' s business in India and, therefore, they have to incur very high administrative cost including advertisement and such expenditures accounted for almost 80% of the sales revenue. To administer the gross profit margin and actual operating profit margin, the assessee furnished chart for six years starting from the years 2001- 02 to 2006- 07, which has been incorporated in appellate order at Para- 6.8 in the following manner:- Profitability Statement Particulars 2001 - 02 2002 - 03 2003 - 04 2004 - 05 2005 - 06 2006 - 07 Sales 111441770 304112782 305011664 321028703 427450318 550000867 Less: Sales Tax 16740887 13479686 19160394 36392568 Net Sales 117441770 304112782 288270777 307549017 408289924 523608299 Less: Gross Cost ....
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....rther, the learned Commissioner (Appeals) observed that the assessee itself did not make the required adjustment to its profit and left it to the TPO to make the adjustments. Based on these reasons, he upheld the TPO' s determination of ALP on the ground that the TPO, while determining the ALP had already excluded the advertisement expenses and, therefore, there remains no valid grievance of the assessee to be considered. Thus, he upheld the adjustment of Rs. 1,32,65,320. Insofar as the adjustment on account of import of A. E. and export back to the A. E. is concerned, the learned Commissioner (Appeals) has accepted the assessee's contentions. This aspect would be discussed in the Revenue's appeal. 27. Before us, the learned Counsel, Mr. Mukesh Butani, representing the assessee, narrated the entire facts of the case which has been, by and large, discussed in the forgoing paragraphs and the issue involved. He submitted that due to high administrative cost and advertisement expenses, the TNMM method cannot be taken as most appropriate method in the assessee' s case because the net profit margin even after various kinds of adjustment will not result into determination of prop....
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....or the transactions where there is distribution of goods and there is no value addition. Further, he referred to the various decisions of the Tribunal which are listed below wherein it has been held that in case of distribution, RPM is the most appropriate method:- i) DCIT vs Quark Systems Pvt. Ltd. [2010] 38 SOT 307 (Chd.)(SB); ii) DCIT vs Mitsuiosk Lines Meretime India P. Ltd., ITA no. 6397/ Mum./2006; iii) Textronix India P. Ltd. vs DCIT, ITA no.1334 /Bang./2010 order dated 31st October 2012; and iv) ITO vs L'oreal India P. Ltd., ITA no.5423 /Mum./2009, order dated 25th April 2012. 28. Regarding the Assessing Officer' s and learned Commissioner (Appeals)'s objection that the assessee cannot change the method for determining the ALP at a later stage, he submitted that if the ALP in a particular case can be determined by following any one of the methods, then the same can be raised at any stage after duly explaining as to why such method should be followed. In support of this contention, he relied upon the following decisions of the Tribunal:- i) DCIT vs MCI Com India P. Ltd., ITA no.2766 & 4187/Del./ 2010; and ....
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....g when it does not suits its determination of ALP by the TPO or at a later stage. Further, six comparables as chosen by the assessee were dealing in different product lines so they cannot be held to be comparables for the purpose of RPM, however, for the purpose of TNMM, such kind of comparables can be taken as a good comparables for the purpose of comparability analysis. He referred to the various product lines in which these comparables were dealing with like soap, toiletries, etc. He referred to the various paragraphs of OECD guidelines specifically Para- 2.25, 2.29 that same kind of products similarities are desirable in RPM and also that in case of the assessee, the trade name is owned by the A.E., therefore, the RPM is not advisable in such case. He also referred to the United Nation Manual on transfer pricing, specifically Para- 9.2.9.4, wherein it has been stated that distributors engaged in the sale of markedly different products cannot be compared in resale price method. 32. Moreover, he submitted that the assessee has not given any cogent reason as to why resale price method should be adopted now when TNMM has been accepted by it in the transfer pricing report. ....
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....en six comparables which has been accepted by the TPO. The assessee' s operating margin in relation to the transactions of import of finished goods from the A. E. and resale in the domestic market was at (-) 51.22% and the majority of the operating cost was on account of administrative and advertisement costs. In the transfer pricing report, the assessee had submitted that if the adjustment on account of advertisement is made on the average operating profit margin of the six comparables, the operating margin will come down to (-)17.41%. The details of actual operating profit margin and the adjusted operating profit margin had already been incorporated in the forgoing paragraphs. It was submitted by the assessee before the TPO as well as in the transfer pricing report that if the adjustment is made in the ALP based on the operating profit margin of the comparables, then on the peculiar facts of the case such adjustments would result into improbable scenario as the value of imported goods would be determined at a value less than zero, therefore, no adjustment is required and, hence, its margin is at ALP. One of the other main contention of the assessee before the TPO was that the gro....
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....elation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (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 and the comparable uncontrolled transactions, or between the enterprises entering....
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....n earned by the independent enterprise in comparable uncontrolled transactions is served as a guidance factor. This is also what happens in the case of a distributor wherein the property and service are purchased from the A. E. and are resold to other independent entities, without any value additions. The gross profit margin earned in such transactions becomes the determination factor to see the gross compensation after the cost of sales. In the instant case, the assessee is a distributor of Mattel toys and gets the finished goods from its A. E. and resells the same to independent parties without any value addition. In such a situation, RPM can be the best method to evaluate the transactions whether they are at ALP. 39. Some of the case laws relied upon by the learned Counsel also support our above conclusion that in case of distribution activities i.e., import of products and services from the A. E. and resale to the independent parties without any value addition, the RPM would be the most appropriate method for determining the ALP. This view has been upheld by the Tribunal, Mumbai Bench, in Textronix India P. Ltd. (supra), L'oreal India P. Ltd. (supra and Star Diamond Gr....
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....e TPO or the appellate Courts that such a method was not an appropriate method and is not resulting into proper determination of ALP and some other method should be resorted. The ultimate aim of the transfer pricing is to examine whether the price or the margin arising from an international transactions with the related party is at ALP or not. The determination of approximate ALP is the key factor for which most appropriate method is to be followed. Therefore, if at any stage of the proceedings, it is found that by adopting one of the prescribed methods other than chosen earlier, the most appropriate ALP can be determined, the assessment authorities as well as the appellate Courts should take into consideration such a plea before them provided, it is demonstrated as to how a change in the method will produce better or more appropriate ALP on the facts of the case. Accordingly, we reject the contentions of the learned Departmental Representative and also the observations of the Assessing Officer and the learned Commissioner (Appeals) that the assessee cannot resort to adoption of RPM method instead of TNMM. 42. Now, coming to the comparables selected by the assesse....