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2019 (5) TMI 1661 - AT - Income TaxTP Adjustment - most appropriate method - comparable selection - whether the international transactions of the assessee with its AEs were rightly benchmarked by it in its TPSR by taking RPM as the most appropriate method or not ? - Whether freight transaction cost insurance discounts rebates packaging duties etc. would affect the reliability of gross profit margin as PLI for the purpose of comparison? - HELD THAT - For the purpose of application of RPM what is relevant is that as to whether there is any value addition or not to the goods purchased for resale or not. In case there is no value addition and the finished goods which are purchased from the AE are resold in the market in the same form then the gross profit margin earned on such transactions becomes the determinative factor for benchmarking the international transaction of the assessee with its AE by taking RPM as the most appropriate method. Our aforesaid view is supported by the order of ITAT Pune Bench in the case of Fresenius Kabi India (P) Ltd. Vs. DCIT 2017 (6) TMI 1298 - ITAT PUNE wherein it was held that in case of a distribution activity the selling and marketing expenses which are borne by the assessee would not lead to any value addition to the product in question. We thus vacate the view taken by the TPO/DRP who had concluded that the freight transaction cost insurance discounts rebates packaging duties etc. would affect the reliability of gross profit margin as PLI for the purpose of comparison. In terms of our aforesaid observations we are of the considered view that the TPO/DRP while dislodging the RPM followed by the assessee for benchmarking its international transactions had lost sight of the fact that only the transaction of import of goods by the assessee from its AEs were to be benchmarked and all the other functions carried out by the assessee having no nexus with the said import transactions were thus not relevant for the said benchmarking analysis. Whether the TPO/DRP were justified in excluding two of the comparables viz. (i) M/s K. Dhandapani Co. and (ii) M/s Kusam Electricals Industries Pvt. Ltd. from the final list of comparables - As is discernible from the order of the TPO the aforesaid parties were rejected as comparables primarily for the reason that while for the assessee s line of business was trading in highended technology related products on the other hand the said comparables were dealing in routine electrical equipments. We may herein observe that under the RPM method the focus is more on the functions rather than the similarity of products because product differentiation does not materially affect the gross profit margin as it represents gross composition after the cost of sales for specific functions performed. Our aforesaid view is supported by the orders of the ITAT Mumbai in the case of Mattel Toys (I)(P.) Ltd. Vs. DCIT Cirlce-6(3) Mumbai 2013 (10) TMI 555 - ITAT MUMBAI and Horiba India (P) Ltd. Vs.DCIT 2017 (4) TMI 962 - ITAT DELHI . As we have upheld the RPM as the most appropriate method in the case of the assessee as against TNMM applied by the TPO therefore we find no justifiable reason for exclusion of the aforementioned comparables from the final list of comparables. Accordingly we direct the AO/TPO to include the aforementioned two comparables viz. (i) M/s K. Dhandapani Co. and (ii) M/s Kusam Electricals Industries Pvt. Ltd. in the final list of comparables for the purpose of benchmarking the ALP of the international transactions of the assessee as per the RPM adopted by it in its TPSR. Direct the AO/TPO to benchmark the ALP of the assessee as per RPM after including the aforementioned two comparables in the final list of comparables. Accordingly we allow the appeal of the assessee in terms of our aforementioned observations.
Issues Involved:
1. Upward adjustment to the value of international transactions. 2. Rejection of Resale Price Method (RPM) by the Transfer Pricing Officer (TPO). 3. Selection of Transactional Net Margin Method (TNMM) by the TPO. 4. Rejection of two comparables by the TPO. 5. Inclusion of expenses not pertaining to the international transaction. 6. Computation of margins of comparable companies. 7. Disregard of Rule 10B(2) and Rule 10B(3) of the Income-tax Rules. 8. Non-consideration of import price accepted by customs authorities. 9. Rejection of multiple year data for computation of margins. 10. Rejection of the benefit of standard deduction of 5% range. 11. Miscellaneous errors by AO, TPO, and DRP. Detailed Analysis: 1. Upward Adjustment to the Value of International Transactions: The assessee objected to the upward adjustment of ?4,49,48,022 made by the TPO to the value of international transactions concerning the import of finished goods. The assessee argued that the TPO erred in passing the order without following the principle of natural justice. 2. Rejection of Resale Price Method (RPM) by the TPO: The TPO rejected the RPM adopted by the assessee for benchmarking international transactions. The TPO's reasons included the failure to demonstrate uniform accounting norms and the elaborate functions performed by the assessee, which involved substantial risks. The Tribunal, however, held that RPM is the best-suited method for determining the ALP of international transactions where goods are purchased from an AE and resold without any value addition. The Tribunal cited various judicial pronouncements supporting this view. 3. Selection of Transactional Net Margin Method (TNMM) by the TPO: The TPO adopted TNMM at the entity level as the most appropriate method for benchmarking international transactions. The Tribunal disagreed, stating that if direct methods like RPM can be applied, they should be preferred over TNMM. The Tribunal emphasized that RPM is more suitable for pure trading activities without value addition. 4. Rejection of Two Comparables by the TPO: The TPO excluded two comparables, M/s K. Dhandapani & Co. and M/s Kusam Electrical Inds. Ltd., on the grounds that they dealt in different types of electrical equipment. The Tribunal found no justifiable reason for their exclusion and directed their inclusion in the final list of comparables. 5. Inclusion of Expenses Not Pertaining to the International Transaction: The TPO included expenses not related to the international transaction while computing the operating margin of the assessee. The Tribunal did not specifically address this issue due to its decision to uphold RPM as the most appropriate method. 6. Computation of Margins of Comparable Companies: The assessee contended that the TPO wrongly computed the margins of independent comparable companies and did not accept the correct computation submitted by the assessee. The Tribunal did not delve into this issue separately due to its decision on the appropriateness of RPM. 7. Disregard of Rule 10B(2) and Rule 10B(3) of the Income-tax Rules: The assessee argued that the TPO/DRP disregarded comparability factors specified under Rule 10B(2) and the provisions of Rule 10B(3) that require adjustments for differences affecting the price. The Tribunal's decision to uphold RPM implicitly addressed this concern. 8. Non-consideration of Import Price Accepted by Customs Authorities: The assessee argued that the TPO/DRP did not consider that the import price was accepted by customs authorities. The Tribunal did not specifically address this issue due to its decision on the appropriateness of RPM. 9. Rejection of Multiple Year Data for Computation of Margins: The TPO rejected the use of multiple-year data for computing the margins of comparables. The Tribunal did not specifically address this issue due to its decision on the appropriateness of RPM. 10. Rejection of the Benefit of Standard Deduction of 5% Range: The TPO did not grant the benefit of the standard deduction of 5% range in computing the arm's length price. The Tribunal did not specifically address this issue due to its decision on the appropriateness of RPM. 11. Miscellaneous Errors by AO, TPO, and DRP: The assessee claimed that the AO, TPO, and DRP arrived at various erroneous conclusions unsupported by relevant material and failed to consider contrary evidence. The Tribunal's decision to uphold RPM and include the two comparables implicitly addressed these concerns. Conclusion: The Tribunal allowed the appeal of the assessee, directing the AO/TPO to benchmark the ALP of the assessee as per RPM after including the two comparables in the final list. The Tribunal emphasized that RPM is the most appropriate method for benchmarking international transactions of a pure trader without value addition.
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