2021 (6) TMI 92 - AT - Income Tax

Admission of additional ground - TP Adjustment - inappropriate use of Transactional Net Margin Method ( TNMM ) instead of the Resale Price Method ( RPM ) as the most appropriate method ( MAM ) for benchmarking the Appellant s international transaction of import of dental products from its foreign AE i. e. Dentsply International, USA ( international transaction ) - HELD THAT - Keeping in view, the judgment of the Hon ble Apex Court in the case of National Thermal Power Co. Ltd. 1996 (12) TMI 7 - SUPREME COURT , the additional ground filed by the assessee is accepted. Selection of MAM - As relying on Mattel Toys (I) (P.) Ltd. Vs DCIT 2013 (10) TMI 555 - ITAT MUMBAI we hereby direct to revenue to determine Arm s Length Price (ALP) considering Resale Price Method (RPM) as Most Appropriate Method (MAM).

Summary

Issues Involved:
1. Admission of additional grounds under Rule 11 of the Income Tax (Appellate Tribunal) Rules, 1963.
2. Appropriateness of Transactional Net Margin Method (TNMM) vs. Resale Price Method (RPM) for benchmarking international transactions.

Detailed Analysis:

1. Admission of Additional Grounds:
The assessee filed an application under Rule 11 of the Income Tax (Appellate Tribunal) Rules, 1963, for the admission of additional grounds, arguing that the issue was legal and did not require further investigation. The additional ground pertained to the use of TNMM instead of RPM for benchmarking the appellant’s international transactions. The Tribunal, referencing the judgment of the Hon’ble Apex Court in National Thermal Power Co. Ltd. Vs CIT (1998) 229 ITR 383, accepted the additional ground. The judgment emphasized that the Tribunal has wide discretionary power to consider questions of law arising from the facts on record to correctly assess the tax liability of an assessee.

2. Appropriateness of TNMM vs. RPM:
The assessee, a wholly-owned subsidiary of a foreign entity, was engaged primarily in trading dental products purchased from its Associated Enterprises (AE) and reselling them without significant value addition. Initially, the assessee used TNMM as the most appropriate method (MAM) for benchmarking its international transactions. However, the assessee later contended that RPM should be the MAM, as it better suited their business model of reselling products without value addition.

The Tribunal reviewed various precedents, including the case of Mattel Toys (I) (P.) Ltd. v. DCIT, where it was held that RPM is the MAM for determining the arm's length price (ALP) in transactions where goods purchased from the AE are resold without any value addition. The Tribunal also considered decisions in similar cases, such as Luxottica India Eyewear Pvt. Ltd., L'oreal India (P.) Ltd., and Nokia India (P.) Ltd., which supported the use of RPM in similar contexts.

The Tribunal noted that the Transfer Pricing Officer (TPO) had used net operating margin as the Profit Level Indicator (PLI) against the gross profit margin selected by the appellant, resulting in a significant adjustment to the international transactions. The Tribunal acknowledged the assessee's argument that due to the nascent stage of transfer pricing regulations in India, the RPM was not initially considered but should now be recognized as the MAM.

The Tribunal concluded that the RPM is indeed the most appropriate method for the assessee’s business model, as it involves reselling products without significant value addition. It directed the revenue to determine the ALP considering RPM as the MAM, thereby allowing the assessee's appeals.

Conclusion:
The Tribunal admitted the additional grounds raised by the assessee and directed that the ALP be determined using RPM as the MAM, aligning with the business model of the assessee that involves reselling products without substantial value addition. The Tribunal's decision was based on established precedents and a thorough analysis of the facts and legal principles involved.