2018 (1) TMI 976 - AT - Income Tax

TP adjustment - adoption of RPM method as against TNMM method - Held that - As relying on assessee s own case for the assessment year 2008-09 as relying in the case of DCIT Vs Delta Power Solution India P. Ltd. 2016 (4) TMI 803 - ITAT DELHI are of the view that the ld. CIT(A) was fully justified in directing the AO/TPO to adopt RPM as the most appropriate method instead of TNMM applied by them. Accordingly, we do not see any infirmity in the impugned order and do not see any merit in this appeal of the department.

Summary

Issues Involved:
1. Deletion of addition of ?1,05,50,000 on account of TP adjustments.
2. Adoption of RPM method instead of TNMM method by the AO/TPO.

Detailed Analysis:

1. Deletion of Addition of ?1,05,50,000 on Account of TP Adjustments:
The primary issue in this appeal is the deletion of an addition of ?1,05,50,000 made by the Assessing Officer (AO) on account of Transfer Pricing (TP) adjustments. The AO had initially adopted the Transactional Net Margin Method (TNMM) for determining the arm's length price, which led to the impugned addition. However, the Commissioner of Income Tax (Appeals) [CIT(A)] directed the AO to adopt the Resale Price Method (RPM) instead of TNMM, resulting in the deletion of the addition. The department's grievance is that the CIT(A) erred in deleting this addition and in directing the adoption of RPM over TNMM.

2. Adoption of RPM Method Instead of TNMM Method by the AO/TPO:
The facts of the case reveal that the assessee filed a return of income declaring a loss of ?36,08,670, which was processed under section 143(1) of the Income Tax Act, 1961. The case was selected for scrutiny, and the AO referred it to the Transfer Pricing Officer (TPO) to determine the arm's length price. The TPO observed that certain expenses related to selling and distribution were not considered in comparability analysis, leading to the adoption of TNMM instead of RPM. The CIT(A), however, directed the AO to apply RPM, citing detailed submissions and relevant material, including judgments from Hon'ble Pune ITAT and Mumbai ITAT, and OECD guidelines.

Detailed Observations by CIT(A):
The CIT(A) referenced the Hon'ble Pune ITAT judgment in the case of Asst. Commissioner of Income Tax vs MSS India Pvt. Ltd., which emphasized that the revenue authorities must demonstrate the appropriateness of a particular method over the one adopted by the assessee, based on Rule 10C(2). The judgment highlighted that transactional profit methods like TNMM should be used only when traditional methods like RPM cannot be reasonably applied. Similar views were discussed in the Hon'ble Mumbai ITAT judgment in the case of M/s STAR DIAMOND GROUP Vs DEPUTY DIRECTOR OF INCOME TAX, which supported the use of RPM for trading activities without substantial value addition.

The CIT(A) also referred to OECD guidelines, which prioritize traditional transaction methods like RPM over transactional profit methods like TNMM. The guidelines state that traditional methods are preferable when they can be applied reliably, and transactional profit methods should be used only when traditional methods are unworkable. The CIT(A) concluded that the assessee, being a pure trader engaged in reselling finished goods without adding value, was a suitable candidate for RPM. The CIT(A) also noted that the TPO had accepted RPM as the most appropriate method in subsequent assessment years (2005-06, 2008-09, and 2009-10).

Department's Appeal:
The department argued that the CIT(A) admitted additional evidence without proper opportunity given by the AO/TPO and contended that TNMM was correctly adopted by the TPO/AO. However, the assessee's counsel argued that RPM had been accepted in subsequent assessment years and cited various ITAT and High Court decisions supporting RPM as the most appropriate method for trading activities without value addition.

Tribunal's Decision:
The Tribunal considered the submissions and noted that the TPO had accepted RPM in subsequent assessment years. The Tribunal also referenced the Hon'ble Bombay High Court's decision in CIT Vs L’Oreal India (P.) Ltd., which supported RPM for distribution or marketing activities involving resale without further processing. Additionally, the Tribunal cited the ITAT Delhi Bench's decision in DCIT Vs Delta Power Solution India P. Ltd., which upheld RPM as the most appropriate method for trading segments.

Based on these observations and precedents, the Tribunal upheld the CIT(A)'s direction to adopt RPM as the most appropriate method and dismissed the department's appeal, finding no merit in the arguments presented.

Conclusion:
In conclusion, the Tribunal affirmed the CIT(A)'s decision to delete the addition of ?1,05,50,000 on account of TP adjustments and to adopt RPM instead of TNMM. The appeal of the department was dismissed.