TaxTMI 
TaxTMI 
2024 (11) TMI 434
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....spute Resolution Panel (DRP) in respect of the AY 2012-13. In addition, the assessee had also filed an appeal (being ITA No. 7684/Del/2017) before the learned Tribunal impugning an order dated 19.12.2016 passed by the AO in respect of the AY 2013-14. The AO had passed the aforesaid order pursuant to the directions issued by the DRP on 15.09.2017. Since both the appeals (ITA Nos. 758/Del/2017 and 7684/Del/2017) involved a common question, the same were taken up by the learned Tribunal together. These appeals were disposed of by a common order dated 22.06.2018 - that is, the impugned order. However, the present appeal is confined to the learned Tribunal's decision in ITA No. 758/Del/2017 in respect of the AY 2012-13. 3. The controversy involved in the present appeal relates to the most appropriate method required to be used for benchmarking the international transaction entered by the assessee for determining the Arms Length Price (ALP). The learned Tribunal held that the Resale Price Method (RPM) would be the most appropriate method and had accordingly, directed the Transfer Pricing Officer (TPO) to adopt the same for benchmarking the international transaction - import of the fin....
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....ver, the TPO did not accept the assessee's transfer pricing study in respect of the international transactions relating to the import of finished goods for a value of Rs. 28,88,97,371/- 11. The assessee had used a Comparable Uncontrolled Price (CUP) method as the most appropriate method and had corroborated the same by RPM method to establish the ALP. The TPO did not accept that the CUP or the RPM are the most appropriate method. The TPO adopted the Transactional Net Margin Method (TNMM) as the most appropriate method and selected operating profit/operating cost (OP/OC) as the profit level indicator (PLI) for determining the ALP. The TPO also proceeded to finalise the set of comparable entities. The TPO rejected two out of the three entities selected by the assessee as comparable on the ground that the functional profile of the said entities was different. However, the TPO accepted the remaining third entity (Shoppers stop Limited) as a comparable entity. 12. In addition, the TPO also selected four other entities as comparable to the assessee for determining the ALP. 13. The assessee raised the objections to the inclusion of some of the entities. Whilst the TPO accepted th....
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....ng capital adjustment in accordance with the specific directions issued by the DRP and to further restrict the transfer pricing adjustment to the international transactions in question. 21. Thereafter, the AO passed the final assessment order dated 30.11.2016, based on the directions issued by the DRP. 22. The assessee appealed the said assessment order dated 30.11.2016 before the learned Tribunal, which was allowed in terms of the impugned order. 23. A plain reading of the impugned order indicates that the assessee had confined its challenge to the final assessment order dated 30.11.2016 and the order passed by the TPO in respect of the findings pertaining to the rejection of the CUP method as corroborated by the RPM and substituting the same with TNMM as the most appropriate method. 24. The TPO and the DRP had rejected RPM as a most appropriate method for computing the ALP on the ground that the assessee had incurred significant advertisement, marketing and promotion (AMP) expenses. The learned Tribunal faulted the TPO and the DRP for rejecting RPM on the aforesaid ground and held,in the given facts, that RPM is the most appropriate method. The learned Tribunal also h....
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....e profit. The appropriate profit level is based on the functions it performs, the assets it uses and the risks it assumes. The remainder of the product's price is regarded as the arm's length price for the intragroup transactions between the sales company (i.e. Associated Enterprise 2) and a related company (i.e. Associated Enterprise 1). As the method is based on arm's length gross profits rather than directly determining arm's length prices (as with the CUP Method) the Resale Price Method requires less direct transactional (product) comparability than the CUP Method. Figure 4.D.2 Resale Price Method Resale price = US$100 Resale price margin (25%) = US$ 25 Arm's length transfer price = US$ 75 4.3.1.3 Consequently, under the RPM the starting point of the analysis for using the method is the sales company. Under this method the transfer price for the sale of products between the sales company (i.e. Associated Enterprise 2) and a related company (i.e. Associated Enterprise 1) can be described in the following formula: TP = RSP x (1-GPM), where: • TP = the Transfer Price of a product sold between a sales compa....
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....ashing machine will, of course, differ from the price of a dryer, as the two products are not substitutes for each other. Although product comparability is less important under the Resale Price Method, greater product similarity is likely to provide more reliable transfer pricing results. It is not always necessary to conduct a resale price analysis for each individual product line distributed by the sales company. Instead, the Resale Price Method can be applied more broadly, for example based on the gross margin a sales company should earn over its full range of broadly similar products. 4.3.4.5 As the gross profit margin remunerates a sales company for performing marketing and selling functions; the Resale Price Method especially depends on comparability regarding functions performed, risks assumed and assets used. The Resale Price Method thus focuses on functional comparability. A similar level of compensation is expected for performing similar functions (using similar assets and assuming similar risks) across different activities. If there are material differences that affect the gross margins earned in the controlled and the uncontrolled transactions, adjustments shou....
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....In its P&L account, the assessee has debited about Rs.28.97 Cr. Towards 'other expenses' and shown substantial loss. The assessee has incurred about Rs.5.44 Cr. towards 'advertisement and marketing expenses' on a turnover of about Rs.61.55 Cr. It is claimed that about Rs.2.42 Cr. has been reimbursed towards advertisement and marketing expenses however, it is clear that the assessee has incurred substantial AMP, and other expenses, in relation to its turnover, and is therefore, not a simple distributor in terms of the requirements of using RPM. The assessee has failed to demonstrate that the comparables have also incurred similar expenditure and have a similar functional profile required for RPM analysis." 33. Before the learned Tribunal, the assessee contended that it had not incurred heavy expenditure on AMP expenses and other comparable entities had also incurred similar expenses. 34. The learned Tribunal accepted the said contention and faulted the DRP for finding that the assessee is not a simple distributor. The learned Tribunal noted that there was no dispute as to the assessee merely purchased and sold the products without adding any value to the core products. And, th....
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....this Court considered the question whether the Tribunal had erred in adopting RPM for determining the ALP in relation to the assessee's business of reselling and distributing the sim cards imported from AEs. The relevant extract of the said decision is set out below:- "7. The dispute before the Court is whether the ITAT erred in adopting the RPM in order to determine the arms' length price in relation to the assessee's business. In the relevant assessment year, the assessee had four AEs. Three of them were wholly owned subsidiaries, whereas in the fourth, the assessee held 49% shareholding. The ITAT found that the AEs were engaged in the business of identifying, negotiating and buying SIM cards from the networks of different countries and selling them to the assessee. This arrangement, according to the assessee, foreign networks were reluctant to deal with foreign companies. The ITAT, relying on the TPO's order, found that the business of the assessee only involved re-selling or distributing the SIM cards imported from the AEs, without making any value addition. The ITAT also found that there was no distinction between airtime and SIM cards, as no value could be added to t....
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.... 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 alter the tangible goods and services or use any intangible assets to add substantial value to the property or services i.e., resale is made without any value addition having been made." 11. This view has also been affirmed by the Bombay High Court in its judgment dated 07.11.2014 in CIT v. L'Oreal India (P.) Ltd. (2015) 53 taxmann.com 432/228 Taxman 360, where the Court found that there was no error in law committed by the ITAT when it held that RPM was the Most Appropriate Method in case of distribution or marketing activities especially when goods are purchased from associated entities and there are sales effected to unrelated parties without any further processing. In fact, a Division Bench of this Court in its decision in Bausch & Lomb Eyecare (India) Pvt. Ltd. v. Addl. CIT (2016) 381 ITR 227/237 Taxman 24/65 taxmann.com 141 (Delhi), while considering the decision of this Court in Sony Ericsson Mobile Communications India Pvt. Ltd....