2015 (9) TMI 1410 - AT - Income Tax

Transfer pricing adjustment - RPM method V/S TNMM method as the most appropriate method - Held that - There is no dispute that the assessee had followed RPM method for analyzing its international transactions relating to goods imported by it from its associated enterprise abroad and sold here in the local market. There is also no dispute that the assessee was importing these goods in the finished stage and selling it without making any value additions thereon. The only work rendered by the assessee was re-packing the cartons received from its supplier abroad. In other words, assessee was acting purely as a trader. Rule 10C of the Rules requires adoption of the most appropriate method which best suits the facts and circumstances of each of particular international transaction and which provide most reliable measure of an ALP in relation to the international transactions. It is an accepted position that the entire trading of the assessee did not comprise of imports from associated enterprise and selling it in local market. There were substantial local purchases as well. That RPM method is the most appropriate method when assessee is selling goods purchased from the associated enterprises as such, has been held by the Mumbai Bench in the case of M/s L Oreal India Pvt. Ltd., (2012 (11) TMI 175 - ITAT MUMBAI). As a necessary corollary to the above discussion, we are of the opinion, that the AO/TPO has to do a fresh analysis of international transaction involving trading of imported goods, considering RPM method as the most appropriate method. Other grounds raised by the assessee were with respect to the comparables, considered by the TPO in TNM method study, and this has become irrelevant in view of our finding that the RPM method was the best suited one. - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Appropriateness of the Resale Price Method (RPM) versus the Transactional Net Margin Method (TNMM) for evaluating international transactions.
2. Exclusion of functionally similar companies as comparables.

Issue-wise Detailed Analysis:

1. Appropriateness of the Resale Price Method (RPM) versus the Transactional Net Margin Method (TNMM):

The Revenue contended that the Dispute Resolution Panel (DRP) erred in directing the Assessing Officer (AO) to adopt the RPM method and reject the TNMM method without ascertaining the nexus with the business activity of the taxpayer. The Tribunal noted that this issue had previously been adjudicated in the taxpayer's favor for A.Y. 2008-09, where the Tribunal held that RPM was the most appropriate method for the taxpayer's business, which involved distributing and marketing consumer durables imported from its Associated Enterprise (AE) abroad without any value addition.

The Tribunal observed that the taxpayer had used RPM in its Transfer Pricing (TP) study, arguing it was the most appropriate method since the goods were sold in the local market without any value addition. The Transfer Pricing Officer (TPO) had rejected RPM and adopted TNMM, which was contested by the taxpayer before the DRP. The DRP directed the AO to evaluate the international transactions based on RPM, but the AO had erroneously deleted the adjustments recommended by the TPO.

The Tribunal reiterated that RPM was suitable for the taxpayer's business model, which involved acting as a trader without adding value to the imported goods. The Tribunal cited previous decisions, including those of the Mumbai Bench and other coordinate benches, which supported the use of RPM in similar circumstances. The Tribunal emphasized that the TPO's rejection of RPM was primarily due to the use of multiple-year data by the taxpayer, which was not a valid reason to reject RPM entirely. The Tribunal directed the AO/TPO to conduct a fresh analysis using RPM as the most appropriate method.

2. Exclusion of functionally similar companies as comparables:

The Revenue argued that the DRP erred in excluding Usha International Ltd. from the list of comparables without appreciating that it was already selected by the TPO after discussion in the showcase notice. The Tribunal noted that when RPM is adopted, the AO/TPO should have the freedom to consider the functional similarities and dissimilarities for each company included in the taxpayer's TP study. Since the Tribunal had already directed the AO/TPO to re-evaluate the international transactions using RPM, the issue of comparables became infructuous. Thus, the Tribunal dismissed this ground as infructuous.

Conclusion:

The Tribunal set aside the orders of the lower authorities regarding the Arm's Length Price (ALP) fixation of international transactions involving the trading of imported goods from AEs and remitted the matter back to the AO for fresh consideration based on RPM. The Tribunal also dismissed the ground related to the exclusion of comparables as infructuous. The appeal of the Revenue was treated as partly allowed for statistical purposes.