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2025 (3) TMI 937 - HC - Income TaxTP Adjustment - selection of MAM - Whether ITAT has fallen in error in considering RPM adopted by the assessee as the most appropriate method for benchmarking the international transactions? - HELD THAT - Assessee is a distributor and not a manufacturer. Undeniably the assessee is engaged in importing of various solar products manufactured by the AE and resale of the said products. The fact that the assessee makes necessary arrangements for rectification of the defects which are necessarily in the nature of manufacturing defect by way of replacement/refurbishment/repair of the products/parts of the same is also not disputed. Revenue has also neither disputed nor brought any contrary material on record doubting the existence of the agreement dated 01.04.2016 executed between the assessee and its AE covering the aforesaid warranty. As the cost of rectification of the manufacturing defect during the warranty period shall be recovered by the assessee from the AE. In other words the said warranty cost claim shall be reimbursed by the AE apart from reimbursement of expenses. Pertinently the amounts so recovered/reimbursed do not comprise any service element as the AE would have borne these expenses directly had the assessee not incurred the same. Thus there is no service element involved. Ergo the purchase of solar products/lights on the one hand and warranty cost claim on the other are unrelated transactions and can neither be aggregated/clubbed nor are they so inextricably linked as to not survive without the other so far as the present facts are concerned. Selection of MAM - In the present case the TPO and the DRP concluded that RPM in the facts of the case was not the most appropriate method essentially based on the assumption that the warranty cost claim and the reimbursement of expenses are inextricably inter-linked with the transaction of purchase of the solar products and cannot survive without the other. This assumption is erroneous. It was equally erroneous to conclude that these three transactions were required to be aggregated or clubbed together for benchmarking or determination of the ALP. This is for the reason that there is no value addition done by the assessee on the products purchased and subsequently sold by it. The construction and interpretation sought to be proposed by the learned counsel for the Revenue is fundamentally flawed on that ground. The reliance on sub-section (3) of Section 92CA of the Act is misplaced. Undoubtedly under that sub-section the TPO is mandated to determine the ALP consequent upon taking into account all relevant materials gathered yet would have to necessarily or essentially examine as to whether (i) the assessee is a manufacturer or a distributor and; (ii) any value addition has been made to such imported products by the distributor prior to putting such products for sale. In case such examination has not been conducted by the TPO the determination of ALP may become questionable depending on the facts of each case. For the same reason the directions of the DRP concurring with the determination of ALP adopting TNMM as the most appropriate method too is erroneous and unmerited. Value addition in the nature of advertising and marketing strategy - This issue is no more res integra with the view taken by this Court in the case of Burberry India 2024 (11) TMI 434 - DELHI HIGH COURT DRP had accepted the TPO s conclusion that RPM was not the most appropriate method essentially for the reason that the assessee had incurred AMP expenses which the DRP considered as substantial. Accordingly the DRP had also concluded that the assessee is not a simple distributor. The judgement in the case of Burberry India (supra) also reiterated the principles settled in Matrix Cellular 2017 (11) TMI 1655 - DELHI HIGH COURT and Fujitsu India 2023 (11) TMI 289 - DELHI HIGH COURT with regard to adoption of RPM as the most appropriate method in the case of a distributor without value addition to the imported products before sale. Aggregation/clubbing of the transactions is entirely a fact dependent exercise which cannot ipso facto be treated as a question of law. In the present case too the Revenue seeks aggregation of the purchase value with that of the warranty cost claim and reimbursement of expenses which would in our opinion be wholly a foundational fact. No substantial question of law.
ISSUES PRESENTED and CONSIDERED
The core legal question considered in this appeal was whether the Income Tax Appellate Tribunal (ITAT) was justified in law and on facts in rejecting the Transactional Net Margin Method (TNMM) adopted by the Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP) for benchmarking the international transactions in question, and instead upholding the Resale Price Method (RPM) as the most appropriate method as adopted by the assessee. ISSUE-WISE DETAILED ANALYSIS Relevant Legal Framework and Precedents The legal framework involves Section 92CA of the Income Tax Act, 1961, which mandates the TPO to determine the arm's length price (ALP) for international transactions. Rule 10B of the Income Tax Rules outlines various methods for determining ALP, including RPM and TNMM. The case also references precedents like Avery Dennison (India) Pvt. Ltd. and Matrix Cellular International Services (P) Ltd., which discuss the applicability of RPM and TNMM. Court's Interpretation and Reasoning The Court examined whether the ITAT's decision to adopt RPM over TNMM was erroneous. It emphasized that the assessee is a distributor, not a manufacturer, and does not add value to the products purchased from the Associate Enterprise (AE). The Court noted that the warranty costs and reimbursement of expenses are unrelated to the purchase of solar products and do not involve value addition by the assessee. Key Evidence and Findings The Court found that the assessee's role was limited to distributing products manufactured by the AE, with no value addition. The warranty costs incurred by the assessee were reimbursed by the AE, negating any service element. The agreement between the assessee and the AE confirmed that warranty costs would be recovered from the AE. Application of Law to Facts The Court applied the legal principles to determine that RPM was the most appropriate method for benchmarking the transactions. It concluded that the transactions involving warranty costs and reimbursement of expenses were not inextricably linked to the purchase of solar products, thus supporting the use of RPM. Treatment of Competing Arguments The Revenue argued that the TPO and DRP correctly adopted TNMM, asserting that warranty costs and reimbursement expenses were linked to the purchase transactions. The Court rejected this argument, emphasizing the lack of value addition by the assessee and the distinct nature of the transactions. Conclusions The Court concluded that the ITAT correctly adopted RPM as the most appropriate method, given the facts of the case and the precedents supporting RPM for distributors without value addition. SIGNIFICANT HOLDINGS Preserve Verbatim Quotes of Crucial Legal Reasoning The Court highlighted, "The RPM would be the most appropriate method in cases where the reseller does not add any value to the products purchased and sold." Core Principles Established The decision reinforced the principle that RPM is suitable for distributors who do not alter products, and that transactions should not be aggregated without clear linkage. Final Determinations on Each Issue The Court dismissed the Revenue's appeal, affirming the ITAT's decision to use RPM, and found no substantial question of law warranting a different conclusion.
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