2023 (11) TMI 289 - HC - Income Tax

TP Adjustment - MAM selection - RPM v/s TNMM - Tribunal rejecting the Transactional Net Margin Method (TNMM) as used by TPO in ascertaining ALP - As per assessee it should be Resale Price Method (RPM) as it is a distributor which did not make any value addition to the goods received by it from its principal - HELD THAT - Having regard to the findings of fact returned by the Tribunal and the principle of law enunciated by the coordinate bench of this court in Matrix Cellular International Services (P.) Ltd 2017 (11) TMI 1655 - DELHI HIGH COURT held that once the ITAT, on considering the relevant facts as well as the order of the TPO, had concluded that the business of the assessee was merely that of a pure trader, and there was no value addition made before re-selling the particular products (i.e. the SIM cards), its consequent finding that RPM is the Most Appropriate Method, is irreproachable. Decided in favour of the assessee.

Summary

Issues involved:
The judgment concerns Assessment Years 2011-12, 2012-13, and 2013-14, focusing on the rejection of the Transactional Net Margin Method (TNMM) in favor of the Resale Price Method (RPM) for determining the Arm's Length Price (ALP) in international transactions.

Assessment Year 2011-12 (ITA 243/2019):
The Assessing Officer (AO) passed orders under Section 144C read with Section 143(3) of the Income Tax Act, 1961, relying on TNMM for ALP determination. However, the Tribunal found that the respondent, a distributor without value addition, should use RPM as the Most Appropriate Method (MAM) due to the lack of comparable instances supporting TNMM.

Assessment Year 2012-13 (ITA 224/2019):
Similar to the previous year, the AO made upward adjustments based on TNMM, which was contested by the respondent. The Tribunal's factual findings highlighted the distributor's lack of value addition, leading to the conclusion that RPM was the suitable MAM for benchmarking international transactions.

Assessment Year 2013-14 (34/2019):
Once again, the AO's reliance on TNMM for ALP calculations was challenged by the respondent, advocating for RPM due to the distributor's resale of goods without value addition. The Tribunal concurred, emphasizing the importance of gross margin analysis under RPM for determining appropriate compensation after the cost of sale.

Significant Legal Precedents:
The judgment referenced a previous case involving Matrix Cellular International Services, where the court upheld the use of RPM when no value addition was made before resale. This decision was supported by various rulings emphasizing the applicability of RPM in cases where goods are resold without substantial value addition, aligning with the Tribunal's findings in the present case.

Conclusion:
Considering the factual findings and legal principles established by the coordinate bench, the Tribunal's decision to apply RPM over TNMM for determining ALP in the international transactions of the distributor was upheld. As a result, the appeals were disposed of in favor of the respondent, emphasizing the importance of accurate benchmarking methods in transfer pricing assessments.