TaxTMI 
TaxTMI 
2019 (8) TMI 1766
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....,379/- On the facts and in the circumstances of the case and in law, the learned Transfer Pricing Officer ('TPO') and the learned AO under the directions issued by the Hon'ble DRP, erred in computing the arm's length price of international transaction, and confirming the adjustment of import of goods of Rs. 10,31,20,379/- to the appellant's total income based on the provisions of Chapter X of the Act. 3. Erred in rejecting Resale Price Method adopted by the appellant for benchmarking its international transaction of import of formulations for distribution in India and considered The entity level Transactional Net Margin Method for the purpose of determining the arm's length. On the facts and in the circumstances of the case and in law, the Ld. TPO erred in and the Hon'ble DRP further erred in rejecting the Resale Price Method adopted by the appellant as the Most Appropriate Method for benchmarking its international transaction of import of formulation for distribution in India. Further the Ld. TPO and Hon'ble DRP rejected the Adjusted Resale Price Margin submitted by the appellant. 4. Without prejudice erred not appreciating the business reasons for ....
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....arking distribution function of the appellant. 8. Lack of opportunity resulting into hardship On the facts and in the circumstances of the case and in law, the learned TPO erred in passing the order without issuance of any show cause notice with regards to rejecting the segmental financials of the appellant without giving the appellant reasonable opportunity to submit its justification /contention before making adjustments to the total income. 9. Requisite conditions under Section 92C(3) - Not Satisfied On the facts and in the circumstances of the case and in law, the learned TPO erred in and the Hon‟ble DRIP further erred in violating the provisions of Section 92C(3) of the Act by failing to justify any reasons or conditions mentioned in clause (a) to (d) therein are not satisfied by the appellant for determining the arm's length price. 10. Initiation of Penalty Proceedings On the facts and in circumstances of the case and in law, the learned AO erred in initiating penalty proceedings under section 271( l ) (c) of the Act as there has been no wi lful concealment or has furnished inaccurate particulars during the course of assessment proceedings. Accordingly, ....
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....e functional analysis submitted by the assessee, it was noticed by the TPO, that the assessee had claimed that it was as a distributor buying goods and selling it in the domestic market without adding any significant amount of value to the products. As per the TP study report the assessee had selected "Resale Price Method" (RPM) as the most appropriate method for benchmarking its purchase transactions with the AEs. It was observed by the TPO that the assessee had identified 6 comparables on the basis of search conducted, namely (i) Abbott India Ltd.; (ii) Daga Global Chemicals Ltd.; (iii) Duchem Laboratories Ltd.; (iv) Lyka Exports Ltd.; (v) Om Chemicals Industries; and (vi) Priya International Ltd. The assessee had used the gross profit margin of the aforementioned 6 comparables for three financial years i.e Financial years: 2006-07, 2007-08 and 2008-09 and computed their weighted average mean of gross profit margin at 25.34%. Against that, the assessee company had shown its gross profit margin at 65.34%. Accordingly, the assessee in its TP study report had on the basis of its aforesaid workings stated that its AE transactions were at ALP. However, the TPO was not persuaded to acc....
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....im that it has also to be seen as to whether the costs attributable to the aforesaid functions were accounted for by the reseller as the costs of the goods or not. In case, if the costs were accounted for as part of the costs of goods, then no separate adjustment was required as the gross profit worked out would also include the costs of the said functions. On the contrary, if the cost of the aforesaid functions were accounted for as part of the operating expenses then there would be distortion in the G.P margin which would be required to be corrected. In the backdrop of his aforesaid deliberations the TPO held a conviction that for achieving proper comparability in light of the abovementioned aspects of the business of a distributor the complete information about the business profile and financial data should be available in respect of all the parties which were examined as comparables. Observing, that as in the case of the assessee the aforesaid information pertaining to the comparables selected by it were not available in the public domain, therefore, RPM was to be rejected and substituted by TNMM as the most appropriate method. As for the reply that was filed by the assessee in....
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.... any comparison Thus levels of inventories and cost involved in keeping inventories have to be adjusted which may not be possible based on the information available in the public domain. 14. 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 there seller 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. 15. 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 substi....
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.... accounting treatment of the taxpayer and the comparable companies in respect of certain direct expenses may distort the gross margin For example, discount given to the customer or discount availed from suppliers may be shown separately or sales/purchases may be reduced directly. In such cases, discounts in the case of comparable companies, which may be shown some times under the head "selling expenses" have to be reduced from the purchases Such information may not be available in the public domain. 20. It is also likely in some cases 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 function. So, the functional profile of the supplier is also important. 21. Apart from 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 ....
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....t profit) are less affected by transactional differences than is the case with price as used in the CPM Method The net margins also may be more tolerant to some functional differences between the controlled and uncontrolled transactions than gross profit margins. Differences in the functions performed between enterprises are often reflected in variations in operating expenses. Consequently enterprises may have a wide range of gross profit margins but still earn broadly similar levels of net profits." On the basis of his aforesaid observations, the TPO rejected RPM and applied TNMM as the most appropriate method. Further, the operating profit to operating revenue was taken as the Profit Level Indicator (PLI). 5. The assessee in the course of the proceedings submitted segmental "profit and loss account‟ therein dividing the distribution segment into two divisions viz. (i) Pharmaceutical Division; and (ii) Mead Johnson Division. It was the claim of the assessee that the losses suffered during the year were mainly due to Mead Johnson Division. However, the TPO pointing out certain factual discrepancies/defects in the segmental accounts of Pharmaceuticals Division and Mead Johns....
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....e, RPM could not be applied. Accordingly, the TPO applied TNMM for benchmarking the international transactions of the assessee. After taking the ALP at 7.67% the TPO proposed a TP adjustment of Rs. 10,31,20,379/- in the hands of the assessee, as under: Sr. No. Description Amount (in Rs.) 1. Operating Revenue of the Taxpayer 637,922,689 2. Operating Expenses of taxpayer 692,114,398 3. Operating Profit of the assessee -54,191,709 4. ALP of Operating Profit @ 7.67% 48,928,670 5. Purchase of finished goods from AE 186,130,632 6. ALP of Purchase of finished goods from AEs 83,010,253 7. Excess being adjustments under Sec.92CA 103,120,379 6. The A.O after receiving the order passed by the TPO under Sec. 92CA(3), dated 29.01.2013 passed a draft assessment order under Sec. 144C r.w.s 143(3), dated 28.03.2013 therein inter alia proposing a TP adjustment of Rs. 10,31,21,379/-. 7. Aggrieved, the assessee filed objections before the Dispute Resolution Panel-1 (for short "DRP‟). The DRP after deliberating at length on the contentions advanced by the assessee was however not persuaded to subscribe to its claim that the TPO was in error in rejecting RPM for be....
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....the said reason could not be included as a comparable for benchmarking the international transactions of the assessee. As regards the claim of the assessee that as the TPO in its case for the preceding year had after necessary deliberations applied RPM as the most appropriate method, therefore, it was not permissible on its part to adopt an inconsistent approach and reject the said method during the year under consideration, the same did not find favour with the DRP. It was observed by the DRP, that the assessee had not placed on record any documentary evidence which would support its claim that the TPO in its case for the immediately preceding year had accepted RPM as the most appropriate method. Apart there from, it was observed by the DRP that consistency would be applicable only if there was no shift in the facts and the A.O had applied a rule in the past which cannot be held to be incorrect on the basis of facts and in law. On the basis of his aforesaid observations the DRP rejected the contentions advanced by the assessee as regards the inconsistent approach adopted by the TPO during the year under consideration. 8. The A.O after receiving the order of the DRP under Sec. 144....
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....3;Oreal India Pvt. Ltd. It was submitted by the ld. A.R that in case RPM is adopted as the most appropriate method, then no adjustment would be called for in the hands of the assessee. 10. Per contra, the ld. Departmental Representative (for short "D.R‟) relied on the orders of the lower authorities. It was submitted by the ld. D.R that as the requisite details about the business profile and financial data in respect of the comparables selected by the assessee were neither available in the public domain nor furnished by the assessee, therefore, in the absence of the said requisite details RPM could not be accepted for benchmarking purposes. It was the claim of the ld. D.R that in the backdrop of the facts of the case, the lower authorities had rightly concluded that TNMM was the most appropriate method for benchmarking the international transactions of the assessee. 11. We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements relied upon by them. Admittedly, the assessee is engaged in the business of importing formulations from its AEs and distr....
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....ion of the comparables did not find any infirmity in the view taken by the TPO, and concurred with his view that as per Rule 10B(4) companies having a different year ending could not have been selected as comparables. Also, the specific claim of the assessee that one of the comparable viz. M/s Daga Global Chemicals ltd. was erroneously rejected by the TPO on the ground that it had a different year ending, despite the fact that the latters financials clearly revealed that it had a similar year ending on 31.03.2009, had not found favour with the DRP. It was observed by the DRP, that the said company viz. M/s Daga Global Chemical Ltd could not be selected as a comparable for three reasons viz. (i) that, the company had about 50% purchases from imports in respect of trading goods whereas the assessee has 100%, imports from its AE; (ii) that, the company was into trading in bulk chemicals and solvents whereas the assessee was into ready to sell/use pharma products; and (iii) that, the company had subsidiaries in Dubai & China. Further, as had been observed by us hereinabove, the DRP also upheld the rejection of segmentation of the distribution segment by the assessee into two parts viz.....
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....arrived at under sub-clause (iv) is taken to be an arm's length price in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise." As is discernible from a perusal of Rule 10B(1)(b) of the Income Tax Rules, 1962, it can safely be gathered that RPM is the best suited method for determining the ALP of an international transaction, in a case where the goods purchased by an assessee from its AE are thereafter resold without any value addition to unrelated parties. Our aforesaid view is supported by the order of the coordinate benches of the Tribunal viz. (i) M/s Videojet Technologies India Pvt. Ltd. Vs. ACIT, Circle-10(3), Mumbai (ITA No. 6956/Mum/2012, dated 28.05.2019; (ii) Burberry India Pvt. ltd. Vs. ACIT, Circle-5(1), new Delhi ITA No.758/Del/2017, dated 22.06.2018; and (iii) Nokia India Pvt. Ltd. Vs. DCIT, Circle-13(1), new Delhi (2014) taxmann.com 492 (Delhi-Trib).In the aforementioned cases, it was observed by the Tribunals that a close scrutiny of sub-clause (i) and (v) along with the remaining sub-clauses of Rule 10B(1)(b) of the Income Tax Rules, 1962, makes it clear beyond any doubt that RPM is best suited f....
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.... is only where the said traditional methods have been rendered inapplicable that under such circumstances TNMM should be resorted to. Accordingly, in the backdrop of the aforesaid facts of the case before us, we are of the considered view that the assessee had rightly selected RPM for benchmarking its transactions of importing of formulations from its AEs, as against TNMM. 13. We shall now advert to the observations of the TPO/DRP on the basis of which the application of RPM by the assessee for benchmarking its transactions with the AE had been rejected by them. As is discernible from the orders of the lower authorities, the core issue that had weighed in the mind of the lower authorities while rejecting the RPM as the most appropriate method was that neither the complete information about the business profile and financial data of the comparables selected by the assessee was available in the public domain, nor the same was furnished by the assessee. We have given a thoughtful consideration to the aforesaid observations of the TPO/DRP and are unable to persuade ourselves to subscribe to the view taken by them. We are of the considered view that in case the A.O was of the view that....
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....r fortified by the orders of the various coordinate benches of the Tribunal viz.(i) Burberry India Pvt. Ltd. Vs. ACIT, Circle-5(1), New Delhi, ITA No.758/Del/2017, dated 22.06.2018;(ii) 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/Del/2012);(v)Systems Pvt. Ltd. vs. DCIT & vice versa (ITA No. 683/Hyd/2014); and (vi). Frigoglass India (P.) Ltd. vs. DCIT(2014) 149 ITD 429 (Delhi). In terms of our aforesaid observations, we are of the considered view that the TPO/DRP while dislodging the RPM adopted by the assessee for benchmarking its international transactions, had lost sight of the fact that only the transaction of import of goods by the assessee from its AEs was to be benchmarked and all other functions carried out by the assessee having no nexus with the said import transactions were thus not relevant for the said benchmarking analysis. Be that as it may, we are unable to subscribe to the view taken by the TPO/DRP that merely for the reason that complete information about the business profile and financial data in respect ....
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....e important than the similarity of products. Also, we find that the DRP had concluded that the assessee during the year had overseas subsidiaries in Dubai and China. It is the claim of the assessee that the aforesaid company viz. M/s Daga Global Chemicals ltd. during the year under consideration i.e financial year 2008-09 had only one subsidiary viz. Daga Global Chemical FZCO. It is stated by the assessee that the subsidiaries in Dubai & China viz. Daga Global Chemicals DMCC and Zhangjiagang FTZ Daga Chemical Tr. Co. Ltd., had came into existence only in the F.Y. 2009-10. Accordingly, it is the claim of the ld. A.R that as the aforementioned subsidiaries were not existing during the year under consideration i.e Financial year 2008-09, therefore, the DRP had erroneously drawn adverse inferences in the hands of the assessee on the basis of the aforesaid misconceived facts. Apart therefrom, we find that it is the claim of the assessee that the import content of Daga Global Chemicals Ltd. in the purchases during the year under consideration worked out at 53.67%. On the basis of the aforesaid facts, it is the claim of the assessee that as the aforementioned company viz. Daga Global Chem....