2022 (12) TMI 1072 - AT - Income Tax

TP Adjustment - selection of MSM - RPM or TNMM - Transaction pertaining to purchase of goods for the purpose of resale in India - TPO objected to the arm s length margin computed in relation to trading segment, by rejecting RPM adopted by the assessee for the trading segment and applied Transactional Net Margin Method ( TNMM ) to benchmark the trading segment - HELD THAT - We have no hesitation to hold that the assessee is a pure trading company involved in the distribution activity without adding any value to the purchased product and hence the RPM is the most appropriate method. We, accordingly, direct the Assessing Officer/TPO to accept RPM as the most appropriate method and decide the issue accordingly. Since we have held that RPM is the most appropriate method, on the facts of the case in hand, all the other issues raised by the assessee will be decided accordingly.

Summary

Issues: Transfer pricing method selection, Comparable companies selection, Functional, Asset, and Risk (FAR) analysis, Value addition in distribution activities, High advertisement and marketing expenses impact on ALP determination.

Transfer Pricing Method Selection:
The appeal pertains to the rejection of the Resale Price Method (RPM) by the Transfer Pricing Officer (TPO) in favor of the Transactional Net Margin Method (TNMM) for benchmarking the trading segment. The Tribunal considered the functions performed by the assessee as that of a normal distributor, not adding value to goods purchased from related parties. The Tribunal held that RPM is the most appropriate method, emphasizing that the characterization of a reseller remains unchanged despite varying levels of expenses incurred by the tested party and comparables.

Comparable Companies Selection:
The TPO selected 3 out of 4 comparable companies chosen by the assessee for benchmarking. The Tribunal noted the operating margins of the final comparable companies selected by the TPO, providing partial relief based on the segmental margin earned by one of the comparable companies.

Functional, Asset, and Risk (FAR) Analysis:
The assessee presented a FAR analysis in its Transfer Pricing (TP) documentation to support its characterization as a normal distributor. The Tribunal acknowledged the functions performed by the assessee, such as advertising, marketing, distribution, and guaranteeing goods, in line with a typical distributor/reseller in an uncontrolled transaction.

Value Addition in Distribution Activities:
The Tribunal emphasized that the assessee, engaged in trading activities without adding value to purchased goods, is akin to a pure trading company. It highlighted that expenses incurred for functions like marketing and distribution are business decisions, not altering the characterization of the company as a reseller.

High Advertisement and Marketing Expenses Impact on ALP Determination:
Citing precedents, the Tribunal held that high advertisement and marketing expenses do not affect the determination of Arm's Length Price (ALP) under RPM. It referenced cases where such expenses did not impact the ALP determination, reinforcing the acceptance of RPM as the most appropriate method in the case at hand.

In conclusion, the Tribunal allowed the appeal, directing the Assessing Officer/TPO to accept RPM as the most appropriate method for benchmarking. The decision was based on the characterization of the assessee as a pure trading company without value addition in distribution activities, emphasizing the relevance of RPM in such scenarios.