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2020 (10) TMI 933 - AT - Income Tax


Issues Involved:
1. Re-computation of arm's length price for 'Import of Material' and 'Export of finished goods'.
2. Appropriateness of the Resale Price Method (RPM) versus the Transactional Net Margin Method (TNMM) for transfer pricing adjustments.

Detailed Analysis:

1. Re-computation of Arm's Length Price:
The appeal concerns the assessment order dated 27.10.2016 for the Assessment Year 2012-13, where the Assessing Officer (AO) assessed the assessee's loss at ?30,329,704, making a transfer pricing adjustment of ?9,404,349. The assessee, a wholly-owned subsidiary of a Swedish company, engaged in manufacturing sealing solutions, had benchmarked its international transactions using different methods: Resale Price Method (RPM) for 'Import of Material' and Transactional Net Margin Method (TNMM) for 'Export of finished goods'. The Transfer Pricing Officer (TPO) rejected these methods and applied TNMM for both transactions on a combined basis, leading to the adjustment.

2. Appropriateness of RPM versus TNMM:
The assessee argued that RPM was the correct method for benchmarking 'Import of Material' as it involved minimal value addition. The TPO disagreed, stating that the assessee carried out substantial value addition and incurred significant expenses, making TNMM more appropriate. The TPO's analysis showed that the assessee's functions, risks, and costs were inconsistent with those of a mere distributor, justifying the use of TNMM. The Dispute Resolution Panel (DRP) upheld the TPO's method, leading to the final assessment order.

Assessee's Contentions:
The assessee contended that RPM was suitable as it performed minimal value addition, merely assembling imported components. It argued that the substantial employee expenses were due to a revenue shortfall in the telecom sector, not indicative of value addition. The assessee also highlighted that its marketing and promotional expenses were normal business expenditures, not reflective of production activities.

Revenue's Contentions:
The revenue supported the TPO's findings, emphasizing that the assessee's activities went beyond mere distribution, involving significant manufacturing and assembly functions. The revenue pointed to the assessee's financials, which showed substantial expenses related to production and assembly, justifying the rejection of RPM.

Tribunal's Findings:
The Tribunal examined the assessee's business model, financials, and functional analysis. It noted that the assessee was not a simple distributor but engaged in manufacturing activities, including vendor selection, quality assurance, and assembly of products. The Tribunal found that the assessee's significant margins and expenses indicated substantial value addition, making RPM inappropriate. It upheld the TPO's application of TNMM, dismissing the assessee's appeal.

Conclusion:
The Tribunal concluded that the TPO and DRP correctly rejected RPM and adopted TNMM as the most appropriate method for the assessee's transactions. The appeal was dismissed, affirming the transfer pricing adjustment and the final assessed loss.

 

 

 

 

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