TaxTMI 
TaxTMI 
2019 (7) TMI 1899
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....prise (AE). The assessee is a wholly owned Indian subsidiary of Randox Laboratories Ltd., a company based in United Kingdom (hereinafter referred to as AE). The parent company is primarily engaged in the business of manufacturing medical diagnostic reagents and analyzers. The assessee imports reagents and diagnostic equipments (analyzers) from the parent Randox Laboratories (India) P. Ltd. and sells them to independent third parties in India. The question before the AO was, whether the price paid by the Assessee to its AE for purchase of reagents was at Arm's length because as per the provisions of Sec.92 of the Act, income arising from an international transaction has to be determined having regard to Arm's Length Price (ALP). 3. The AO referred to the Transfer Pricing Officer (TPO) the question of determination of ALP of the aforesaid transaction of purchase of reagents, as per provisions of Sec.92CA of the Act. The main dispute between the Assessee and the Revenue is with regard to which is the most appropriate method (MAM) for determination of ALP, whether it is Transaction Net Margin Method (TNMM) as contended by the revenue or the Resale Price Method (RPM) as contende....
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....WDV of the analyzers get reduced to zero and accounting entries to that effect are passed in the books. These facts are evident from the materials available on record. Thus, it is clear, the assessee is merely purchasing reagents from its AE and reselling them to third party customers in India without making any value addition. In fact, the analyzer / spares of the machines are never sold to the third party customers but always remain the property of the assessee. 8. Having examined the nature of transaction carried on by the assessee, it is necessary now to advert to the core issue. Undisputedly, in the transfer pricing analysis, the assessee has selected RPM as the most appropriate method. However, the Transfer Pricing Officer has rejected the RPM primarily on the following reasoning:- i) In the year under consideration, the assessee has made additions to the plant and machinery to the tune of Rs. 2.18 crore; ii) It has capitalized cost of product development to the tune of Rs. 1.07 crore; and iii) The notes to the fixed asset schedule shows that the company is setting up of a manufacturing unit. 9. On the aforesaid reasoning, the Tran....
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....f settingup of the plant. Therefore, the finding of the Transfer Pricing Officer and learned DRP that the assessee is involved in manufacturing activity is factually incorrect. Further the fact that the analyzers were not sold to the third party customers is evident from the sample copy of the agreement placed in the paper book. Insofar as the product development cost is concerned, the material on record indicates that such cost was incurred towards spares for the analyzers and the assessee capitalized such cost. 11. Thus, from the aforesaid facts, it is very much clear that in the year under consideration, assessee has not undertaken any manufacturing activity as the manufacturing unit was still in the process of being set-up. On the contrary, the facts on record clearly reveal that the assessee had purchased reagents and chemicals from its AE and sold to the third party customers without any value addition. Further, the analyzers, spares and consumables, though, were imported, however, they were not sold but were provided in the laboratories / diagnostics units of the third party customers for testing and research activity. Keeping in perspective the aforesaid factu....
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.... a fact that the assessee had bench marked the international transaction relating to purchase of finished goods from A.Es by adopting RPM. However, the Transfer Pricing Officer has rejected RPM primarily on the ground that gross profit computation of comparables was not produced by the assessee. He had also stated that the gross profit margin of the products sold by the assessee cannot be compared with gross profit margin of the products sold by the comparables as they are different in nature. In this context, it is to be noted that at the outset, the Transfer Pricing Officer had opined that the transaction of purchase of finished goods for resale was to be bench marked as per CUP method. We are unable to understand why the Transfer Pricing Officer abandoned bench marking under CUP if he considered it as the most appropriate method to bench mark the international transaction between the assessee and the A.Es. 11. At this stage, it would be appropriate to refer to certain provisions in the statue relating to transfer pricing adjustment. Section 92C of the Act, provides for computation of arm's length price of an international transaction between the assessee and its A.E....
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.... "10.2. Coming to the argument that the assessee himself has adopted TNMM as the MAM for its transfer pricing study and hence it cannot turn around and argue for adoption of RSPM as the MAM, we find that the Mumbai Bench of the Tribunal in the case of Mattel Toys(I) Pvt.Ltd. in ITA no.2476/Mum/2008 held as follows. "41. Now coming to the argument of the Ld.DR that once the assessee itself has chosen TNMM as the MAM in TPR, then it cannot resort to change its method at an assessment or appellate stage. In our opinion, such a contention cannot be upheld because if it is found on the facts of the case that a particular method will not result into proper determination of the ALP, the TPO or the appellate authorities can very well hold that why a particular method can be applied for getting proper determination of ALP or the assessee can demonstrate a particular method to justify its ALP. Thus, even if the assessee had adopted TNMM as the MAM in the TP report, then also it is not precluded from raising the contentions/objections before the TPO or the appellate Courts that such a method was not an appropriate method and is not resulting into proper determination of ALP an....
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....010 as stated hereinabove. On the other hand, ld.AR justified the RPM method adopted by it and also referred to order of TPO in the preceding AY as well as succeeding AY to the AY under consideration to substantiate that RPM is the most appropriate method to determine ALP. He submitted that the assessee made adjustment for marketing and selling expenses to the profits to make it comparable to the comparable companies' profits. We agree with the Ld.CIT(A) that there is no order of priority of methods to determine ALP. RPM is one of the standard method and OECD guidelines also states that in case of distribution and marketing activities when the goods are purchased from AEs which are sold to unrelated parties, RPM is the most appropriate method. In the case before us, there is no dispute to the fact that the assessee buys products from its AEs and sells to unrelated parties without any further processing." (iii) In the case of Danisco (India) Pvt.Ltd. vs. ACIT, Circle 10(1), New Delhi (ITA no.5291/Del/2010), it is held as follows: "22. Considering the above submissions we find that the assessee established in 1998 as a 100% subsidiary of Danisco A/S Denmark. Dan....
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....jectively not correct. Thus the rejection of methods by TPO as adopted by assessee is bereft of any cogency and objectivity. The same is a work of guessing and conjectured. Similarly the TNMM method applied by the TPO suffers from the same inherent aberrations as mentioned above. In these circumstances we are of the view that Assessee's methods of CPM and RPM respectively worked by applying appropriate comparables is to be upheld. Thus the ALP working returned by the assessee is upheld. The Assessee's TP grounds are allowed." (v) Textronic India Pvt.Ltd. vs. DCIT (ITA no. 1334/Bang/ 2010), it is held as follows: "We have considered the rival submissions. The dispute is with regard to the ALP in respect of international transactions whereby the assessee imports equipment from its AE and resells them without any value addition to the Indian customers. In similar circumstances, Mumbai Bench of the Tribunal in the case of L'Oreal India Pvt.Ltd. (supra) has taken the view that the RPM would be the most appropriate method for determining the ALP. The Mumbai Bench of Tribunal in this regard, has referred to the OECD guidelines wherein a view has been expresse....
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....e reason assessee has not challenged the decision of DRP in upholding application of TNMM, assessee cannot be prevented from objecting to adoption of TNMM in the impugned assessment year. In view of the aforesaid, we remit the matter back to the file of the AO/TPO to examine assessee's analysis under the RPM and decide the issue accordingly afterdue opportunity of being heard to the assessee." 13. The facts on record reveal that the Transfer Pricing Officer under a misconception that the assessee has undertaken manufacturing activity has rejected RPM. Learned DRP has also not examined the facts in proper perspective. Rather, learned DRP has recorded an erroneous finding by stating that in the transfer pricing analysis the assessee has chosen TNMM as the most appropriate method. The aforesaid finding of learned DRP is factually incorrect, as, on a perusal of the transfer pricing analysis of the assessee, a copy of which is placed in paper book, it is revealed that the assessee has selected RPM as the most appropriate method and has also explained why TNMM is not applicable to the subject transaction. In view of the aforesaid, we hold that RPM is the most appropriate met....
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....l viz., AY 2011-12. The TPO in AY 2011-12 has proceeded on the basis that the Assessee was making additions to plant and machinery and doing so suggests that the Assessee is not nearly into trading and further is making expenditure on plant and machinery. In the past the Assessee has capitalized cost on product development which is still appearing in its balance sheet. Acquisition of land from KIDBA for construction of factory for manufacture has also been cited by the TPO. The Assessee sells re agents (chemicals) after purchase from AE but to use re agents the customer has to possess analysers, which is given free of cost by the Assessee. Therefore, the Assessee is not merely indulging in simple trading in reagents. Perusal of the order of the Tribunal for AY 2010-11 (Paragraph-8) would show that the same reasons were given by the TPO in AY 2010-11 for coming to the conclusion that the Assessee is not a reseller simpliciter and therefore RPM cannot be the MAM. The findings recorded by the Tribunal in paragraph-11 of its order for AY 2010-11 would show that manufacturing activity had not commenced in that year and this fact remains the same for AY 2011-12 also. The finding in ....
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.... in its very natural meaning thereby failing the test of international transaction. 5. The Honourable DRP and Learned TPO have failed to appreciate that an unilateral delay in payment of debt by the Associated Enterprise cannot be regarded as an arrangement, understanding or action in concert within the meaning of section 92F (v) of IT Act. 6. The Honourable DRP and Learned TPO have failed to appreciate that whether any interest is to be charged or not or what strategy needs to be adopted for carrying out a business activity is the sole prerogative of the assessee, and neither the TPO nor the Assessing Officer has any role in this regard. The legitimate business needs of the assessee cannot be dictated by the revenue authorities as held in the cases of S.A. Builders Ltd. vs. CIT [2006] 288 ITR 1 (SC), Festo Controls (P.) Ltd. vs. DCIT [2013] 30 taxmann.com 16 (Bang.-ITAT), CIT vs. EKL Appliances Ltd. [2012] 345 ITR 241 (Delhi), Dresser-Rand India (P.) Ltd. vs. Addl. CIT [2011] 13 taxmann.com 82 (Mum.) & Abhishek Auto Industries Ltd. vs. DCIT [2012] 15 ITR (Trib) 168 (Delhi). 7. Without prejudice to the above, the Honourable DRP and Learned TPO have f....
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....the nature of amount receivable by the Assessee from its AE. The Assessee explained that amount were receivable from AE for services rendered by the Assessee to the AE like Life Science Support services, Engineering product services, Market Support services and accounting support services rendered by the Assessee to AE during financial year 2007-08 & 2008-09. The outstanding balance also includes a balance which is on account of sale of certain unusable fixed assets. 9. The TPO on perusal of the aforesaid reply of the Assessee was of the view that normal credit period was only 60-90 days whereas the Assessee had allowed credit period of more than 700 to 800 days. According to the TPO allowing larger credit period than the usual period conferred benefit on the AE and was also an international transaction and the income in the form of interest which the Assessee ought to have received for such enlarged credit period ought to be added as income on account of determination of ALP. The TPO also observed that the Assessee was availing loans from HDFC Bank Ltd., and paying interest at 9% p.a. on such borrowings. On the above reasoning the AO made an addition of Rs. 52,33,657/- to ....
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....ses, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of subsection (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise. Explanation.-For the removal of doubts, it is hereby clarified that- (i) the expression "international transaction" shall include- (a) the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing; (b) the pu....
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....the Assessee explained about the nature of receivables from the AE as due for services rendered by the Assessee to the AE like Life Science Support services, Engineering product services, Market Support services and accounting support services rendered by the Assessee to AE during financial year 2007-08 & 2008-09. The outstanding balance also includes a balance which is on account of sale of certain unusable fixed assets. The outstanding has therefore nothing to do with any international transaction. Therefore there is no question of any normal credit period existing for such receivables. There are conflicting decisions of Tribunals on this issue as to whether giving of greater credit period can be regarded as international transaction or not like decision of ITAT Bangalore in the case of IngersollRand India Ltd. Vs.ACIT (2015) 57 taxmann.com 413(Bangalore-Trib.) holding the view that it is not an international transaction and the decision in the case of Logix Micro Systems Vs. ACIT (2011) 136 TTJ 0366 Bangalore Tribunal holding a contrary view. 14. The learned counsel for the Assessee however placed reliance on a decision of the Hon'ble Delhi High Court in the case of Prl.CIT V....
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....tistics over a period of time to discern a pattern which would indicate that vis-à-vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way. 11. The Court finds that the entire focus of the AO was on just one AY and the figure of receivables in relation to that AY can hardly reflect a pattern that would justify a TPO concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself. With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-à-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and recharacterised the transaction. This was clearly impermissible in law as explained by this Court in CIT v. EKL Appliances Ltd. (2012) 345 ITR 241 (Delhi). 12. Consequently, the Court is unable to find any error in the impugned order of the ITAT giving rise to any substantial question of law for determination. The appeal is, accordingly, dismissed." 15. In t....