2018 (7) TMI 2083 - AT - Income Tax

TP Adjustment - MAM selection - Method for benchmarking the international transaction - HELD THAT - findings returned by TPO/DRP that the taxpayer being a full-fledged risk bearing distributor performing numerous functions, RPM is not the MAM, is not sustainable for the reason that in a comparable uncontrolled transaction, normally distributor requires to carry out all the functions necessary to enhance the sales like market research, inventory risk, credit risk etc.. In such circumstances, no comparable instances have been brought on record by the TPO/DRP. So, when finished goods purchased by the taxpayer are resold in the market without any value addition, then gross margin earned on such transaction is the only determinative factor to analyse gross compensation after the cost of sale. So, we are of the considered view that RPM in this case is the MAM to bench mark the international transactions. In these circumstances, addition made by the TPO/AO merely by disputing the method applied by the taxpayer is not sustainable in the eyes of law. Method for benchmarking the international transaction cannot be changed merely because of the fact that the taxpayer has suffered loss at the net level but has positive gross profit in trading segment as it depends on host of circumstances. TP adjustment on account of AMP expenses - HELD THAT - When we examine letter dated December 29, 2015 written by the taxpayer to the ld. DRP, no opportunity of being heard has been given to the taxpayer before making ALP adjustment on account of AMP expenses Bare perusal of the letter dated 29.12.2015, undisputedly received by the ld. DRP, goes to prove that when letter (supra) issued by the taxpayer seeking opportunity to explain the query raised by the ld. DRP but the ld. DRP without affording any opportunity of being heard, ld. DRP has passed the impugned order on 30.12.2015. So, ld. DRP being a quasi-judicial authority is under legal obligation to afford an opportunity of being heard to the taxpayer before passing any order. In these circumstances, TP adjustment made by the ld. DRP/TPO/AO on account of AMP expenses is not sustainable, hence the issue is remitted back to the TPO to decide afresh after providing an opportunity of being heard to the taxpayer.

Summary

Issues Involved:

1. Transfer Pricing Methodology.
2. Adjustment on Advertisement, Marketing, and Promotion (AMP) Expenses.
3. Opportunity of Being Heard.
4. Penalty Proceedings.
5. Interest Charges and TDS Credit.

Detailed Analysis:

1. Transfer Pricing Methodology:

The primary issue in these appeals pertains to the selection of the Most Appropriate Method (MAM) for benchmarking international transactions. The taxpayer, engaged in trading IT solutions and services, selected the Resale Price Method (RPM) with Gross Profit/Sales (GP/Sales) as the Profit Level Indicator (PLI). The Transfer Pricing Officer (TPO) rejected RPM and applied the Transactional Net Margin Method (TNMM) with Operating Profit/Sales (OP/Sales) as the PLI, citing that the taxpayer performed multiple functions beyond those of a normal distributor, including warehousing, inventory control, and marketing.

The Tribunal, referring to precedents like Horiba India (P.) Ltd. v. Dy. CIT, and CIT v. L'oreal India (P.) Ltd., held that RPM is the MAM when the taxpayer purchases finished goods from its Associated Enterprises (AEs) and resells them without value addition. The Tribunal emphasized that the taxpayer's additional functions do not alter its role as a distributor. Consequently, the Tribunal ruled in favor of the taxpayer, stating that RPM should be used for benchmarking the international transactions.

2. Adjustment on Advertisement, Marketing, and Promotion (AMP) Expenses:

The TPO did not initially make any adjustments for AMP expenses. However, the Dispute Resolution Panel (DRP) directed an adjustment, treating AMP expenses as a separate international transaction. The taxpayer contended that AMP expenses are not international transactions and should not be benchmarked separately, citing decisions in cases like Maruti Suzuki India Ltd. vs. CIT and CIT vs. Whirlpool of India Ltd.

The Tribunal noted that the DRP made the adjustment without providing the taxpayer an opportunity to be heard, violating the principles of natural justice. The Tribunal remitted the issue back to the TPO for fresh consideration, ensuring the taxpayer is given an opportunity to present its case.

3. Opportunity of Being Heard:

The Tribunal found that the DRP failed to provide the taxpayer an opportunity to respond to queries regarding AMP adjustments, despite the taxpayer's request for a hearing. This procedural lapse led the Tribunal to remand the matter back to the TPO for reconsideration, emphasizing the necessity of adhering to the principles of natural justice.

4. Penalty Proceedings:

The taxpayer challenged the initiation of penalty proceedings under section 271(1)(c) of the Income-tax Act. The Tribunal deemed these grounds premature and consequential, requiring no specific adjudication at this stage.

5. Interest Charges and TDS Credit:

The taxpayer also contested the charging of interest under sections 234A, 234B, and 234C, and the denial of TDS credit. Similar to the penalty proceedings, the Tribunal considered these issues premature and consequential, thus not warranting detailed adjudication.

Conclusion:

The appeals were partly allowed for statistical purposes, with the Tribunal ruling in favor of the taxpayer on the primary issue of transfer pricing methodology, remanding the AMP adjustment issue for fresh consideration, and deeming the penalty and interest-related grounds premature.