2020 (12) TMI 1366 - AT - Income Tax

TP Adjustment - MAM selection for distribution segment - assessee has taken Resale Price Method (RPM) to anlayse the segment - TPO said that RPM method can be used only for pure traders who do not do any local value addition - HELD THAT - In this case, the TPO himself has recorded that the assessee manufactured goods at Rs.83,35,010 and traded goods of Rs.1,73,77,415. However he clubbed the entire turnover and applied TNMM method to determine the ALP. With regard to sale of traded goods, it is appropriate to apply the RPM method if there was no value added to the traded goods. In case pure sale of traded goods, RPM method is Most Appropriate Method and it does not involve any manufacturing activity. Accordingly, we remit this issue to the file of AO/TPO with direction to the assessee to furnish the segmented details of sale of traded goods and then the AO/TPO shall apply RPM method in respect of sale of traded goods. This additional ground is partly allowed for statistical purposes.

Summary

Issues:
1. Transfer Pricing - Acceptance of Mutual Agreement Procedure (MAP) Resolution
2. Transfer Pricing - Rejection of Resale Price Method (RPM) in favor of Transactional Net Margin Method (TNMM)

Issue 1: Transfer Pricing - Acceptance of Mutual Agreement Procedure (MAP) Resolution

The appeal was against the order of the Assessing Officer for the Assessment Year 2014-15 under the Income Tax Act, 1961. The assessee initially raised Transfer Pricing (TP) grounds but later withdrew them as they had filed a Mutual Agreement Procedure (MAP) Application with the competent authority of the US and India. The MAP Resolution letter was received, and adjustments were made to US related transactions for Software Development Services. The assessee requested withdrawal of TP grounds related to US entities, which was allowed by the tribunal.

Issue 2: Transfer Pricing - Rejection of Resale Price Method (RPM) in favor of Transactional Net Margin Method (TNMM)

The assessee filed additional grounds challenging the rejection of Resale Price Method (RPM) by the Transfer Pricing Officer (TPO) in favor of Transactional Net Margin Method (TNMM) for benchmarking the distribution of traded goods. The Authorized Representative argued that the additional ground arose from the order of the Dispute Resolution Panel (DRP) and should be admitted for adjudication. The tribunal, following the judgment of the Hon'ble Supreme Court, admitted the additional ground for consideration.

The TPO rejected the RPM method for determining the Arm's Length Price (ALP) due to the assessee's manufacturing activities in the distribution segment. The TPO observed that the assessee assembled various components in the distribution process, leading to the application of TNMM. The assessee contended that RPM was the most suitable method for determining ALP for traded goods, emphasizing the lack of value addition to those goods. The tribunal agreed with the assessee, stating that for pure sale of traded goods, RPM is the Most Appropriate Method and directed the Assessing Officer/TPO to apply RPM method after receiving segmented details of sale of traded goods. The additional ground was partly allowed for statistical purposes, resulting in partial allowance of the assessee's appeal.

In conclusion, the judgment addressed the issues of accepting the MAP Resolution and the choice between RPM and TNMM for transfer pricing analysis, providing detailed reasoning and directions for further assessment.