2017 (1) TMI 1050 - AT - Income Tax

Transfer pricing adjustment - most appropriate method for determining ALP of business activity carried on by assessee with its AE - Held that - the incurring of high advertisement and marketing expenses by the assessee. does not in any manner affect the determination of ALP under the RPM. It is but natural that only those expenses can have bearing on the gross profits that are debited to the Trading account. As the amount of advertisement and marketing expenses finds its place in the Profit and loss account, the higher or lower spend on it cannot affect the amount of gross profit and the resultant ALP under the RPM. As observed from the order passed by the Ld. TPO for assessment year 2005 - 2006 and 2006 -2007 that the Ld. TPO has accepted RPM as the most appropriate method and gross profit/sales as the relevant profit level indicator for benchmarking international transactions of the assessee . on similar facts. For the year under consideration Ld. TPO appears to have made the transfer pricing adjustment only on account of losses incurred in the year under consideration. In such circumstances we hold assessee to be a Distributor and hold that RPM prima facie appears to be the most appropriate method in the facts and circumstances of the instant case.

Issues Involved:
1. Validity of reference made by the AO to the TPO under section 92CA(3).
2. Confirmation of adjustment made by the TPO in respect of international transactions.
3. Rejection of Resale Price Method (RPM) and substitution with Transaction Net Margin Method (TNMM).
4. Rejection of Gross Profit/Sales as the relevant Profit Level Indicator (PLI) and substitution with Operating Profit/Sales.
5. Use of current year data for comparable companies.
6. Denial of the benefit of (+/-) 5% mentioned in the proviso to section 92C(2).
7. Disregarding judicial pronouncements in confirming the TP adjustment.

Detailed Analysis:

1. Validity of Reference to TPO:
The appellant contended that the reference made by the AO to the TPO under section 92CA(3) was invalid as the AO did not record any reasons under section 92CA of the Act. The Tribunal dismissed this ground, focusing on the primary issue concerning the most appropriate method for determining the arm's length price (ALP).

2. Confirmation of Adjustment by TPO:
The appellant challenged the confirmation of an adjustment of ?1,24,63,602 out of the total adjustment made by the TPO. This issue was intertwined with the method used for determining the ALP, which was addressed in detail under the discussion of the most appropriate method.

3. Rejection of Resale Price Method (RPM) and Substitution with TNMM:
The appellant argued against the rejection of RPM as the most appropriate method and its substitution with TNMM. The Tribunal noted that the appellant was engaged in the business of distribution of sound and audio assistance products, primarily reselling Bose products without any significant value addition. The Tribunal emphasized that RPM is suitable for determining the ALP of international transactions involving the purchase of goods from an AE that are resold as such to unrelated parties. The Tribunal found RPM to be the most appropriate method for the appellant's case and directed the TPO to calculate the margin of the comparables using RPM.

4. Rejection of Gross Profit/Sales as PLI and Substitution with Operating Profit/Sales:
The appellant contended that the CIT(A) erred in rejecting Gross Profit/Sales as the relevant PLI and substituting it with Operating Profit/Sales. The Tribunal observed that the appellant's business model and the nature of its transactions justified the use of Gross Profit/Sales as the PLI. The Tribunal directed the TPO to use Gross Profit/Sales as the PLI in calculating the margin of the comparables.

5. Use of Current Year Data for Comparable Companies:
The appellant argued against the use of current year data for comparable companies, advocating for the use of multiple-year data. The Tribunal dismissed this ground, focusing on the primary issue of the most appropriate method for determining the ALP.

6. Denial of the Benefit of (+/-) 5%:
The appellant contended that the CIT(A) erred in denying the benefit of (+/-) 5% mentioned in the proviso to section 92C(2). The Tribunal dismissed this ground, focusing on the primary issue of the most appropriate method for determining the ALP.

7. Disregarding Judicial Pronouncements:
The appellant argued that the CIT(A) disregarded judicial pronouncements while confirming the TP adjustment. The Tribunal dismissed this ground, focusing on the primary issue of the most appropriate method for determining the ALP.

Conclusion:
The Tribunal found that the appellant's business model and the nature of its transactions justified the use of RPM as the most appropriate method for determining the ALP. The Tribunal directed the TPO to calculate the margin of the comparables using RPM and Gross Profit/Sales as the PLI. The appeal was partly allowed, with the Tribunal emphasizing the suitability of RPM for the appellant's case.

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