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2023 (7) TMI 1076 - AT - Income TaxTPA - selection of MAM - rejection of RPM as MAM and application of TNMM as MAM - International Transaction of purchase of formulations - HELD THAT - TPO mainly relied on the fact that the comparables have incurred lesser cost of AMP expenses which again in our view is not correct reason for rejecting RPM. The comparison here is at a gross margin level and the TPO has not given any adverse finding with regard to the gross margin ratio of the asessee. Thus we hold that RPM is the most appropriate method in assessee s case. However with regard to the trading segment there is a need for deciding the benchmarking analysis of the transactions as has been done by the assessee in its transfer pricing study. TPO has proceeded on the basis that TNMM is the most appropriate method and in the process has not decided the comparability analysis done by the assessee under RPM method. We therefore deem it fit to restore the issue of benchmarking analysis under RPM to the file of the TPO with a direction to re-determine the ALP of international transactions of the assessee after accepting RPM as the most appropriate method. The assessee shall in the course of the remand proceedings file with the TPO the relevant details with regard to the functionality assets employed and the risks (FAR) of the comparables to be considered by the TPO for benchmarking the ALP of the international transactions as per RPM.
Issues Involved:
1. Whether RPM or TNMM is the most appropriate method for benchmarking the international transaction of purchase of formulations. 2. Whether the assessee has benefitted from the said expenses, considering the continuous losses and the purpose of the expenses. Summary: Issue 1: Most Appropriate Method for Benchmarking The core issue in this appeal is whether the Resale Price Method (RPM) or the Transaction Net Margin Method (TNMM) is the most appropriate method for benchmarking the international transaction of purchase of formulations. The assessee, engaged in the distribution of various medical products, selected RPM as the most appropriate method, arguing no value addition to the imported products. The Transfer Pricing Officer (TPO) rejected RPM, citing significant advertising and brand promotion expenses, and adopted TNMM instead. The Commissioner of Income-tax (Appeals) [CIT(A)] favored the assessee, relying on the Tribunal's decision in the assessee's own case for A.Y. 2009-10, which upheld RPM as the most appropriate method for a pure distributor. The Tribunal, upon review, reiterated that RPM is the best-suited method for determining the arm's length price (ALP) when goods purchased from an Associated Enterprise (AE) are resold without value addition. This view aligns with various judicial pronouncements, including those from the High Courts and coordinate benches of the Tribunal, which have consistently recognized RPM as the most appropriate method for benchmarking transactions of a pure distributor. The Tribunal also noted that the TPO's rejection of RPM based on advertising and marketing expenses was not tenable, as these expenses do not constitute value addition to the products. The Tribunal directed the TPO to re-determine the ALP of the international transactions using RPM, considering the business profile and financial data of the comparables provided by the assessee. If the assessee fails to provide the necessary details, the TPO is at liberty to search for fresh comparables. Issue 2: Benefit from Expenses The Revenue argued that the assessee had not benefitted from the expenses incurred, as the assessee was running into continuous losses, and the primary purpose of the expenses was to create and strengthen the brand of the AEs in India. The Tribunal, however, found no specific findings from the Assessing Officer (AO) regarding any value addition by the assessee to the imported products. The Tribunal emphasized that the comparison should be at the gross margin level and noted that the TPO had not provided any adverse findings regarding the gross margin ratio of the assessee. The Tribunal dismissed the cross objections raised by the assessee as infructuous, given the decision to remand the issue of benchmarking analysis under RPM to the TPO. Conclusion: The Tribunal held that RPM is the most appropriate method for benchmarking the international transactions of the assessee, a pure distributor, and directed the TPO to re-determine the ALP using RPM. The Revenue's appeal was partly allowed, and the assessee's cross objections were dismissed.
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