TaxTMI 
TaxTMI 
TaxTMI 
2019 (7) TMI 1899
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....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 contended by the Assessee. It is undisputed before us....
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....ing 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 Transfer Pricing Officer has concluded that the assessee is not merely a trader but is also....
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....RP 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 factual position, it has to be examined which is the appropriate method to benchmark the arm's length ....
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....m 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. by following one of the methods prescribed therein. Rule 10C, defines most appropriate method to be one which is best s....
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.... 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 and some other method should be resorted. The ultimate aim of the TP is to examine whether the price or the margin raising from an inter....
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....eeding 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. Danisco India is engaged in the business of manufacturing and trading of food additives. The manufacturing business in respect of food flavours and the trading business is for ....
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.... 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 expressed that RPM would be the best method when a resale takes place without any value addition to a product. In the present case, the assessee buys products from the AE and sells it without any value....
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....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 method to benchmark the subject international taxation relating to purchase of reagents analyzers, etc. Since, neither the Transfer Pricing Officer nor learned DRP has pointed out any other defect in the transfer pricing analys....
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....ure 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 the same paragraph by the Tribunal is that the Assessee purchases and sells re agents and chemicals without any value addition. The tribunal has also recorded a finding that analyzer, spares and consumables, though were imported....
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.... 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 failed to appreciate that Appellant has both trade receivable of Rs. 4,48,35,896/- and trade payable of Rs. 23,16,01,984/- with M/s. Randox Laboratories Ltd., UK and trade payable is more than trade receivable necessitating no adjustment. 8. The Honourable DRP and Learned TPO h....
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....al 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 the total income of the Assessee as adjustment on account of notional interest income as follows:- "6.2.5 During the course of hearing the representatives of the assessee company also could not satisfactorily explain anything. Hence the arm's length price of the benefit extended to the AE shall determine by the cost of borrowing ....
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....nterprise 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 purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature; (c) capital financing, including any ty....
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....ternational 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 Vs. Kusum Health Care Pvt.Ltd. ITA No.765/2016 Judgment dated 25.4.2017 wherein the retrospective amendment to the law referred to in earlier paragraph was also considered by the Court. The facts in the aforesaid case was that the TPO noted that the credit period for the debtors as mentioned in the sale contract with unrelated entities was 180 days. However, in the case of the AEs they were "allowed to linger for long". The said receivables qua the AE was treated as a separa....
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....s 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 the present case, admittedly the receivables relate to transactions in FY 2007-08 & 2008-09. The TPO has not spelt out as to what is the nature of the receivables and whether it had any relation with any international transaction of those years and what is the position with regard to the ALP of those transactions, whether working capital adjustment were made while determining ALP of connected international transaction, what is the effect of payables by the Assessee to the very same AE and on what acc....