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TMI Blog2017 (1) TMI 1050X X X X Extracts X X X X X X X X Extracts X X X X ..... A) completely failed to appreciate that the Ld. AO had not recorded any reasons under section 92CA of the Act which made it expedient and necessary for him to make a reference under that provision. 3. That the Ld. CIT(A) grossly erred on facts and in law in confirming an adjustment of Rs. 1,24,63,602/-out of the total adjustment of Rs. 1,24,97,000 made by the Ld. TPO in respect of the international transactions entered into by the Appellant with its overseas associated enterprises (AEs). 4. That the Ld. CIT(A) has grossly erred on facts and in law by confirming the AO's/ TPO's action of rejecting Resale Price Method (RPM) as the Most Appropriate method and substituting the same with Transaction Net Margin Method (TNMM) and correspondingly rejecting Gross profit/ Sales (GP/Sales) as the relevant Profit Level Indicator (PLT) and substituting the same with Operating Profit/ Sales (OP/Sales) to ascertain the arm's length price in the Appellant's case based on several subjective presumptions, without taking due cognizance of the submissions/ arguments/ data provided by the Appellant. 4.1 That the Ld. CIT(A) has grossly erred on facts and in law in upholding the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its business cycle and had accordingly achieved low sales volume and low contribution to absorb the selling and administrative expenses even though it had earned healthy gross margins during the year and that the appellant has constantly earned higher net margins with similar gross margin level. 5. That the Ld. CIT(A) has grossly erred on facts and in law in confirming the action of the Ld. TPO in applying TNMM and OPI sales as the PLI, as against RPM as most appropriate method and GPI Sales as an appropriate PLI accepted by the Ld. TPO in the Appellant's case for the subsequent financial years i.e. FY 2003-04 and FY 2004-05. 6. That the Ld. CIT(A) has grossly erred on facts and in law in rejecting the multiple year data and using current year data for comparable companies, i.e., data for financial year 2002-03. 6.1 That the Ld. CIT(A) erred on facts and in law in not appreciating that without prejudice to the above ground no. 6 , even the current year data for comparables can be taken only upto the date specified for the compliance of the Transfer pricing documentation i.e. the due date of filing the Return of income. 7. That the Ld. CIT(A) grossly erred on facts and law i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O detailed the international transaction undertaken by the assessee during the year under consideration as below: S.N. Description of transaction Method Value (Rs.) 1 Purchase of finished goods and spare parts. RPMs 4.58 cr. 2 Service support income RPM . 1.59 cr. 3.3 The ld. TPO observed that for the purposes of determining arms length price(ALP) of these transactions, assessee applied resale price method (RPM) as the most appropriate method (MAM). The profit level indicator (PLI) adopted by the assessee was gross profit/sales (GP/S) and the assessee had made itself the tested party for the purposes of the international transactions. 3.4 Ld. TPO observed that the assessee used aggregate approach in view of the transactions undertaken, and selected the following companies as comparables: S. N. Name Functions performed Gross margin (%) 1 ACI Infocom Ltd. Distribution & Marketing of IT products and services. 4% 2 Adam Comsof Ltd. Trading in computer hardware 33% 3 Ascho Industries Ltd. Trading in analytical instruments 39% 4 Compuage Infocom Ltd. Distribution of IT products 6% 5 Dynacons Systems & Solutions Ltd. Retailer of computer softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rend in the gross margin and operating margin ratio has been tabulated which is as under: Particulars FY 2001-02 FY 2002-03 FY 2003-04 FY 2004-05 OP/ Sales -7% -7% 4% 15% GP/Sales 51% 50% 50% 55% 5.1 From this table the Ld. counsel submitted that the assessee has been consistently earning high gross margins over the years, and all other expenses especially the selling, general and administrative expenses are incurred by the assessee in its capacity as a distributor. 5.2 To substantiate the arguments that assessee is a distributor the ld. Counsel referred to page 221 of the pap&& book which is an order passed by Customs Department in respect of the valuation of imported goods by the assessee from its AE. He submitted that the said order testifies that the prizes declared by the assessee commensurate with the export price lists published. He placed his reliance upon the following case laws of various benches of this Tribunal where it has been held that RPM is the MAM when the functional profile of an assessee is that of a Trader/Distributor: * ITO v. L'oreal India P.Ltd. in ITA No. 5423/Mum/2009 for assessment year 2003-04. The decision has been upheld b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e TP study it also appears that assessee is primarily a sales organization that is also involved in creating brand awareness in India. It has been stated therein that the product sold by the assessee is of high quality and performance oriented and is into two major lines of businesses being retail sales and professional sales. The marketing effort in both the business lines is different in that for the retail segment the company maintains specific demonstrations facilities in a few locations however in case of professional sales the sales team would approach prospective customers on referral basis. From the TP report it is further clear that the assessee does not own any significant intangibles, does not undertake any scientific research and development on its own account, that leads to the development of non routine intangibles and Bose US (AE) holds title to the brand name and is involved in the primary responsibility of R&D. The AE has all the expertise to manufacture these high end audio products. Bose India the assessee here in does not hold the tent or any of the products developed by Bose US. It is also observed from the audit profit and loss account filed at pages 1-16 of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, sub-clause (v) provides that the adjusted price found under sub-clause (iv) is taken as arm's length price in respect of purchase of goods from the AE. When we consider the methodology given under RPM, more specifically sub-clauses (i) and (v), it becomes patent that sub-clause (i) refers to property purchased by the enterprise is resold and sub-clause (v) refers to 'arm's length price in respect of the purchase of the property by the enterprise. A close scrutiny of the above two sub-clauses along with the remaining sub-clauses of rule 10B(l)(b) makes it clear beyond doubt that RPM is best suited for determining ALP of an international transaction in the nature of purchase of goods from an AE, which are resold as such to unrelated parties. Ordinarily, this method pre-supposes no or insignificant value addition to the goods purchased from foreign AE. In case the goods so purchased are used either as raw material for manufacturing finished products or are further subjected to processing before resale, then RPM cannot be characterized as a proper method for benchmarking the international transaction of purchase of goods by the Indian enterprise from the foreign AE. 7. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 8. It is observed that the Ld.TPO without rejecting the comparables has calculated the margins of such comparables by replacing RPM with TNMM on the ground that broad difference exists between the assessee and the comparables selected on account of functions, product, risk profile, etc. In observing so they Ld. TPO has not brought any material on record to substantiate the contention. The ld.TPO while framing assessment has accepted selection of comparables submitted by the assessee but did not accept the selection of MAM. He was of the opinion the comparables were more comparables at the operating levels and not at the gross level. Should TNMM be selected as an appropriate method, then the differences would be captured in e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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