2022 (12) TMI 670 - AT - Income Tax

TP Adjustment - benchmarking of transaction - whether the transactions being import of finished goods from associated enterprises benchmarked by the assessee adopting the resale price method where the profit level indicator is determined of gross profit ratio and the gross profit ratio of assessee was found to be at 15.35% whereas of the other comparable companies was 14.64% which is stated to be at arm s-length by the assessee, is proper or not? - HELD THAT - When it is claimed undisputedly by the assessee that with respect to the trading of goods, assessee does not undertake any value addition, we failed to understand the reasoning given by the learned dispute resolution panel in rejecting the resale price method as most appropriate method and upholding transactional net margin method. According to rule 10 B (1) (b) resale price methods is the method where the normal gross profit margin earned by a tested party is required to be compared with comparable uncontrolled transactions. When undeniably assessee is selling the goods imported from associated enterprises to the third parties, the resale price method is the most appropriate method, where the segmental results to the gross profit level are available. Direction of the learned dispute resolution panel in rejecting reliance on the decision of L Oreal India private limited 2015 (2) TMI 407 - BOMBAY HIGH COURT is also not proper. The finding of the learned dispute resolution panel that in that case that assessee was engaged only in trading activities is clearly an incorrect fact recorded by the learned dispute resolution panel, which can be gathered from the coordinate bench decision reported 2012 (4) TMI 752 - ITAT MUMBAI which was challenged by the revenue before the honourable Bombay High Court. Thus, in that case honourable Bombay High Court 2015 (2) TMI 407 - BOMBAY HIGH COURT in case of an assessee who was engaged in the business of manufacturing and trading in cosmetics held that for the trading activities in cosmetic segment, adoption of the resale price method by the assessee was upheld. In view of this, we do not have any hesitation in accepting submission of the assessee that for benchmarking of the international transaction of trading activities where assessee imports finished goods and sold it to third party without undertaking any value addition, resale price method should be adopted as most appropriate method. The submission of the assessee is also supported by the order of the honourable jurisdictional High Court. As we already noted that the margin shown by the assessee of gross profit is 15.35% compared to the comparable companies of 14.60% we direct the learned transfer pricing officer/AO to delete the consequent adjustment - Accordingly we reverse the order of the learned lower authorities and allow ground number 2 of the appeal.

Summary

Issues Involved:
1. Transfer Pricing Adjustment.
2. Rejection of Methodical Transfer Pricing Analysis and Selection of Most Appropriate Method for Benchmarking Analysis.
3. Economic Adjustment due to Devaluation of Currency.
4. Business Reasons for Losses.
5. Initiation of Penalty Proceedings.

Detailed Analysis:

1. Transfer Pricing Adjustment:
The Appellant contested the addition of ?29,906,541/- to its total income due to the re-computation of the arm's length price of international transactions under section 92 of the Income-tax Act. The Tribunal noted that the learned Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP) upheld the adjustment, leading to a reduction in the assessed loss.

2. Rejection of Methodical Transfer Pricing Analysis and Selection of Most Appropriate Method for Benchmarking Analysis:
The core issue was the rejection of the Resale Price Method (RPM) by the TPO and the DRP, who instead selected the Transactional Net Margin Method (TNMM) for benchmarking the international transaction of import of finished goods. The Appellant argued that RPM was appropriate as it did not undertake any value addition to the imported goods sold to third parties. The Tribunal found that the DRP's rejection of RPM was not justified, especially since the Appellant maintained segmented financial results up to the gross profit level. The Tribunal referenced the Bombay High Court's decision in the case of L'Oréal India Pvt. Ltd., which upheld the RPM for distribution activities, and concluded that RPM should be the most appropriate method for the Appellant's trading activities.

3. Economic Adjustment due to Devaluation of Currency:
The Appellant argued that the DRP did not appreciate the economic adjustment needed due to the devaluation of the Indian currency vis-à-vis foreign currency, as the Appellant primarily imported finished goods in foreign currency. This issue was not separately adjudicated as the Tribunal's decision on the appropriate method (RPM) rendered this point moot.

4. Business Reasons for Losses:
The Appellant claimed that the DRP failed to consider the commercial expediency for incurring business losses, which were due to factors beyond its control. This issue was also not separately adjudicated due to the Tribunal's decision on the method of benchmarking.

5. Initiation of Penalty Proceedings:
The Appellant contested the initiation of penalty proceedings under section 271(1)(c) for concealment of income or furnishing inaccurate particulars. The Tribunal did not specifically address this issue, as the primary focus was on the method of transfer pricing.

Conclusion:
The Tribunal allowed the appeal, directing the TPO/AO to delete the adjustment of ?2,99,06,541/- based on the acceptance of RPM as the most appropriate method for benchmarking the international transaction of trading activities. Consequently, the other grounds were dismissed as they were either general or consequential in nature. The Tribunal's decision was pronounced in the open court on 22.07.2022.