TaxTMI 
TaxTMI 
2025 (3) TMI 937
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....t of D Light Group which is engaged in manufacturing, marketing and trading of solar lights and power products and sells the same to various customers in different countries. The assessee had filed its return of income on 30.11.2017 declaring a total income of Rs.NIL. The assessee had claimed a loss of Rs. 9,45,78,855/-. The case was selected for scrutiny and a notice dated 10.08.2018 under Section 143 (2) of the Act was issued to the assessee through Income Tax Business Application (ITBA). (ii) During the assessment proceedings, the appellant claims to have noticed from Form No.3CEB that the assessee had entered into various transactions with Associate Enterprises (hereafter referred to as 'AE') and the aggregate value of international transactions amounted to Rs. 13,85,442,925/-. The following international transactions were reported in the said Form:- SI. No. Nature of Transaction Method Applied Amount (in INR) 1 Purchase of lights and other accessories RPM 1,36,63,99,221 2 Reimbursement of expenses Other Method 25,53,734 3 Warranty cost claim Other Method 1,64,89,970 Total 1,38,54,42,925 ....
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....termining the total income of Rs. 2,51,25,559/-. (vi) Being aggrieved, the assessee filed an appeal before the learned ITAT against the final assessment order dated 31.01.2022. (vii) The learned ITAT, while partly allowing the appeal, agreed with the submissions of the assessee and held that the most appropriate method adopted by the assessee of RPM to benchmark the transaction of solar goods was correct. It was observed that the international transaction of purchase of solar products was to the tune of Rs. 136.63 crores whereas, the total cost of reimbursement of expenses and warranty cost claims put together, is only Rs. 1.9 crores. The learned ITAT was of the opinion that the reimbursement expenses and warranty claims put together were miniscule part of the total transaction, roughly a little over 1.5% of the purchase cost of solar products from the AE. Accordingly, the findings of TPO and DRP on selection of TNMM as the most appropriate method were overturned. While reaching such conclusions, the learned ITAT also relied upon the judgements rendered by this Court in PCIT-6 vs. Matrix Cellular International Services (P) Ltd.; 90 taxmann.com 54 (Del) and PCIT-3 ....
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....red to relevant paragraphs of the impugned judgement of the learned ITAT as also the examination conducted by the TPO and the DRP. 5. On the rule position, learned counsel referred to the provisions of Section 93CA (3) of the Act relating to the manner of determination of ALP by the TPO read with Rule 10(1)(f) of the Income Tax Rules (hereafter referred to as 'the Rules'). He also referred to Rule 10B of the Rules which refers to various methods for determining the ALP under Section 92C of the Act. He also points out to clause (f) of sub-rule (1) of Rule 10B which refers to "any other method as provided in Rule 10AB". Following this, learned counsel also refers to Rule 10AB which refers to "other method of determination of ALP". In order to support the submission that the value of the solar products purchased from the AE, the warranty cost claimed and the reimbursement expenses are "transactions" which are closely linked, he relies upon the definition of "associate enterprise" and "transaction" as provided in sub Rule (a) and (d) respectively of Rule 10A of the Rules. 6. Predicated on the above rule position, learned counsel forcefully contended that sub-section (3) of Sectio....
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.... warranty cost claim are closely linked transaction and the same needs to aggregated for the purpose of benchmarking applying TNMM as the MAM by relying on Delhi High Court Judgement in the case of Avery Dennison (India) Pvt. Ltd. The relevant extract of the Show Cause Notice is reproduced hereunder: UNQUOTE In the present case, Purchase of lights/other accessories and Warranty cost claim are closely linked transaction and needs to be aggregated for the purpose of benchmarking the same. In a case Avery Dennison (India) Pvt. Ltd. [TS-527-HC-2016 (Del)], the honorable Delhi High Court upheld the order of ITAT which has rejected the approach of the TPO and accepted the ALP determined by aggregating/ clubbing transactions under TNMM, observing that the assessee was predominantly a manufacturer, and that services received by it from its AE were intrinsically linked to the core business operation. Similarly, in another case a bench of ITAT (Pune) concluded that import/ export of spare parts, IT support services, access to customized part catalogue and amount received for warranty consideration were inter-related transactions, which were sourcing activities of assessee c....
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.... way of replacement/refurbishment /repairment of the products/part of the same. The cost of rectification of the manufacturing defects of the products during the warranty period shall be recovered by d.light India from d.light Cayman. It is pertinent to note that above amounts recovered from AEs does not comprise of any service element, as the AEs would have borne these expenses directly had Assessee not incurred the same. Hence, in such cases it was appropriate to recover these amounts without a mark-up, given such expenses have been incurred out of administrative convenience, with no service element involved. Therefore, your goodself would appreciate that purchase of lights and warranty claim are two unrelated transactions. Hence, the said transactions cannot be clubbed, nor they are so inextricably linked that one cannot survive without other. A. RPM is the most appropriate method for benchmarking The Assessee selected RPM as the most appropriate method for benchmarking its international transaction to determine the arm's length price of distribution activity. RPM evaluates the arm's length nature of a controlled transaction by referen....
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....ment/repairment of the products/part of the same, the cost/expenses of which were to be recovered by the assessee from the AE. Thus, he contended that both the issues are squarely in favour of the assessee which was not appreciated correctly either by the TPO or the DRP. Apart from the judgements of this Court in Matrix Cellular (supra) and Fujitsu India (supra), learned counsel relied upon the judgement of this Court in Pr. CIT-2, Delhi vs. M/s Burberry India Pvt. Ltd., ITA 471/2019 decided on 24.10.2024 reiterating the aforesaid principles laid down in Matrix Cellular (supra) and Fujitsu India (supra). On the aforesaid basis, he prays that the present appeal be dismissed. ANALYSIS AND CONCLUSION:- 11. We have heard learned counsel for the parties, perused the impugned judgement of the learned ITAT and examined the judgements relied upon and are of the opinion that the issue required to be considered by this Court is whether in the given facts, the learned ITAT's conclusion that RPM is the most appropriate method, is erroneous. 12. Undoubtedly, the edifice of the entire issue would have to be premised on the fact that the assessee is a distributor and not a manufacturer. ....
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....nish goods. Apart from the procedure prescribed regarding comparable entities, the assessee also relied on the OECD guidelines in support of its contention regarding use of RPM as the most appropriate method for benchmarking international transactions in question, the same being in respect of the activities for purchase of the goods from related parties and resale to the unrelated parties. It was the main contention of the assessee that the RPM would be the most appropriate method in cases where the distributor/reseller does not add any value to the products purchased and sold. 14. In the present case, the TPO and the DRP concluded that RPM, in the facts of the case, was not the most appropriate method, essentially based on the assumption that the warranty cost claim and the reimbursement of expenses are inextricably inter-linked with the transaction of purchase of the solar products and cannot survive without the other. This assumption is erroneous. It was equally erroneous to conclude that these three transactions were required to be aggregated or clubbed together for benchmarking or determination of the ALP. This is for the reason that there is no value addition done by the a....
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....hat there is no cavil as to the functional profile of the assessee. Admittedly, the assessee is engaged in importing of goods bearing brand name 'Burberry' from its Associate Enterprise (AE) and retailing the same through its stores. The assessee does not add any value to the said goods; the same are sold in the same condition as imported. It is in these given facts that the learned Tribunal had concluded that RPM method would be the most appropriate method. 28. The United Nations Practical Manual on Transfer Pricing for Developing Countries (2021) briefly describes the RPM as under:- "4.3 Traditional Transaction Methods: Resale Price Method (RPM) 4.3.1 Introduction to RPM 4.3.1.1 The Resale Price Method (RPM) is one of the traditional transaction methods that can be used to determine whether a transaction reflects the arm's length principle. The Resale Price Method focuses on the related sales company which performs marketing and selling functions as the tested party in the transfer pricing analysis. This is depicted in Figure 4.D.2 below. 4.3.1.2 The Resale Price Method analyzes the price of a product that a related sales company (i.e.....
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....r example, contractual terms, freight terms etc.); or ◻ Reasonably accurate adjustments can be performed to eliminate the effect of such differences. 4.3.4.2 As noted above, the Resale Price Method is more typically applied on a functional than on a transactional basis so that functional comparability is typically more important than product comparability. Product differences will probably be less critical for the Resale Price Method applied on a functional basis than for the CUP Method, because it is less probable that product differences will have a material effect on profit margins than on price. One would expect a similar level of compensation for performing similar functions across different activities. 4.3.4.3 While product differences may be more acceptable in applying the Resale Price Method as compared to the CUP Method, the property transferred should still be broadly similar in the controlled and uncontrolled transactions. Significant differences between the nature of the products sold in the controlled and uncontrolled transactions may reflect differences in functions performed, assets used or risks assumed. Such differences might sugges....
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....he imported products in domestic markets). The assessee also relied upon the OECD Guidelines as well as the Guidance Note issued by the ICAI in support of its contention regarding use of RPM as the most appropriate method for benchmarking the international transactions in question. The same being in respect of the activities for purchase of the goods from related parties and resale to the unrelated parties. The assessee had highlighted that RPM would be the most appropriate in cases where the reseller does not add any value to the products purchased and sold. 31. In the present case, the DRP had accepted the TPO's conclusion that RPM was not the most appropriate method, essentially, for the reason that the assessee had incurred about Rs.5.44 Crores towards AMP expenses, which the DRP considered as substantial. Accordingly, the DRP had also concluded that the assessee is not a simple distributor." Even otherwise, apart from a bald argument, no documentary evidence has been placed on record to substantiate the aforesaid contention. Thus, even on that count, the said submission is untenable. 17. The judgement in the case of Burberry India (supra) also reiterated the pri....
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.... is, therefore, dismissed. There would be no orders as to costs." 37. In Principal Commissioner of Incometax-6 v. Matrix Cellular International Services (P) Ltd : (2018) 90 taxman.com 54 (Delhi) 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- sel....
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....PM method identifies the price at which the product purchased from the A.E. is resold to a unrelated party. Such price is reduced by normal gross profit margin i.e., the gross profit margin accruing in a 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 & ....