2017 (10) TMI 688 - AT - Income Tax

TPA - selection of MAM - addition by applying RPM instead of TNMM - Held that - DRP rightly directed the AO/TPO to consider the RPM as the most appropriate method instead of TNMM proposed by the TPO. Accordingly, we do not see any merit in this appeal of the department.

Summary

Issues Involved:
1. Appropriateness of Resale Price Method (RPM) versus Transactional Net Margin Method (TNMM) for determining the arm’s length price of international transactions.

Detailed Analysis:

1. Appropriateness of Resale Price Method (RPM) versus Transactional Net Margin Method (TNMM):

*Facts of the Case:*
The assessee filed a return of income declaring a carried forward loss and engaged in international transactions with its associated enterprises (AEs). The Transfer Pricing Officer (TPO) was tasked with determining the arm's length price under Section 92CA(3) of the Income Tax Act, 1961. The TPO noted that the assessee had purchased food supplements and health equipment from its AE in China and had applied the RPM method in its Transfer Pricing (TP) study report, showing a gross profit margin of 55.48% compared to 39.68% of 15 comparables.

*Observations by TPO:*
The TPO rejected the RPM method, stating that the TNMM with Operating Profit/Sales (OP/Sales) as the Profit Level Indicator (PLI) was more appropriate. The TPO argued that the RPM was not suitable due to the nature of the assessee's business model, which involved multi-level marketing with no direct retail sales, and significant selling commissions and awards integral to the pricing policy. The TPO used TNMM and accepted only four comparables out of the 15 selected by the assessee, resulting in a TP adjustment of ?18,58,14,299.

*Objections by Assessee:*
The assessee objected to the TPO's rejection of RPM, emphasizing that it acted as a reseller without any value addition to the goods and that RPM was the most appropriate method for such transactions. The assessee referred to previous ITAT rulings and the fact that RPM had been accepted in subsequent years.

*DRP's Direction:*
The Dispute Resolution Panel (DRP) directed the TPO to use RPM as the Most Appropriate Method (MAM), citing that the assessee was a retailer and there was no evidence of value addition. The DRP referenced the ITAT's decision for the assessment year 2007-08, which had remitted the issue to the AO/TPO to decide on the application of RPM.

*ITAT's Findings:*
The ITAT considered the submissions and previous rulings, noting that the TPO had accepted RPM as the MAM in subsequent years (AY 2010-11, AY 2011-12, and AY 2012-13) for similar transactions. The ITAT upheld the DRP's direction to use RPM, emphasizing consistency in approach and the absence of value addition by the assessee. Consequently, the ITAT dismissed the department's appeal and the assessee's cross-objection.

*Conclusion:*
The ITAT concluded that the RPM was the most appropriate method for benchmarking the international transactions of the assessee, who acted as a reseller without any value addition. The appeal by the department was dismissed, and the cross-objection by the assessee was withdrawn.

Outcome:
The appeal of the department and the cross-objection of the assessee were dismissed. The RPM was upheld as the most appropriate method for determining the arm's length price of the international transactions in question.