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2019 (8) TMI 49 - AT - Income TaxTP adjustment - adoption of most appropriate method - RPM v/s TNMM - assessee had adopted Resale Price Method (RPM) whereas TPO had adopted Transactional Net Margin Method (TNMM) in the distribution segment of the assessee - HELD THAT - As find from the TP study report that assessee had separately benchmarked its international transactions with AE under manufacturing segment as well as under distribution segment. We find from Paper Book that assessee had duly submitted the segmental profitability statement from manufacturing segment and trading segment before the TPO vide letter dated 16/12/2015. All the aforesaid evidences would squarely go to prove that assessee had separately benchmarked its manufacturing segment and its distribution segment. Only for its distribution segment the assessee had applied resale price method as most appropriate method. The fact of the assessee holding inventories paying excise duty are all relevant for its manufacturing segment and has got absolutely nothing to do with the transactions carried out in its distribution segment. Hence we hold that the lower authorities have proceeded the entire issue on total misconception of facts ignoring the relevant materials on record. We direct the ld. TPO to apply RPM as the most appropriate method and recompute the margins of the assessee accordingly and make any adjustment to ALP thereon if warranted. Accordingly grounds raised by the assessee are allowed for statistical purposes.
Issues Involved:
1. Adoption of the Most Appropriate Method (MAM) for determining the Arm’s Length Price (ALP). 2. Rejection of Resale Price Method (RPM) by the Transfer Pricing Officer (TPO) and adoption of Transactional Net Margin Method (TNMM). 3. Segmental profitability and its impact on the choice of MAM. 4. Application of RPM in the context of a pure trading entity. 5. Relevance of judicial precedents in determining the MAM. Detailed Analysis: 1. Adoption of the Most Appropriate Method (MAM) for determining the Arm’s Length Price (ALP): The principal issue in this appeal was the adoption of the most appropriate method for determining the ALP. The assessee had adopted the Resale Price Method (RPM), whereas the TPO had adopted the Transactional Net Margin Method (TNMM) for the distribution segment of the assessee. 2. Rejection of Resale Price Method (RPM) by the Transfer Pricing Officer (TPO) and adoption of Transactional Net Margin Method (TNMM): The TPO rejected RPM and selected TNMM as the MAM for the assessee’s distribution segment, citing that the assessee was not a pure trader but engaged in substantial value addition and manufacturing activities. The TPO observed that the assessee’s financials indicated significant manufacturing activities, including reporting work-in-progress and consumption of packing materials. The TPO argued that RPM is suitable where the reseller does not add substantially to the value of the product, which was not the case here. 3. Segmental profitability and its impact on the choice of MAM: The assessee argued that it had separately benchmarked its manufacturing and distribution segments, applying RPM only for the distribution segment. The financial statements and segmental profitability statements provided by the assessee demonstrated distinct revenue streams and costs for manufacturing and trading activities. The assessee contended that the TPO’s analysis was based on a misconception of facts by not distinguishing between the two segments. 4. Application of RPM in the context of a pure trading entity: The assessee maintained that it imported products from its AE for mere resale without any value addition, earning a gross margin of 33.33%. The assessee compared this margin with the gross margins of comparable companies, which was 7.62%, and concluded that the international transactions were at arm’s length. The Tribunal referred to several judicial precedents, including the cases of M/s. Videojet Technologies (I) Pvt. Ltd., Burberry India Pvt. Ltd., and Nokia India Pvt. Ltd., which supported the application of RPM for pure trading entities where no substantial value addition is made. 5. Relevance of judicial precedents in determining the MAM: The Tribunal emphasized that RPM is the most appropriate method for determining the ALP in cases where the goods purchased from an AE are resold without any value addition. The Tribunal cited various judicial precedents, including decisions from the Hon’ble High Court of Delhi and Bombay, which upheld the use of RPM for benchmarking international transactions of pure trading entities. The Tribunal concluded that the TPO/DRP had erred in rejecting RPM and directed the TPO to apply RPM as the MAM and recompute the margins of the assessee accordingly. Conclusion: The Tribunal allowed the appeal of the assessee for statistical purposes, directing the TPO to apply RPM as the MAM and make any necessary adjustments to the ALP. The Tribunal’s decision was based on a thorough analysis of the facts, financial statements, and relevant judicial precedents, emphasizing the importance of selecting the appropriate method based on the nature of the transactions and the functions performed by the assessee.
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