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TMI Blog2017 (4) TMI 962X X X X Extracts X X X X X X X X Extracts X X X X ..... of the international transactions of purchase of goods for resale entered into by the Appellant with its Associated Enterprise ('AE') during the relevant previous year. 2. On facts and in law, the Ld. AO/ Ld. TPO and Hon'ble Dispute Resolution Panel ('DRP') erred in disregarding Resale Price Method ("RPM") as the most appropriate method for benchmarking the Appellant's international transactions based on erroneous reasons and instead, applying, Transactional Net Margin Method ("TNMM") as the most appropriate method. 3. On facts and in law, the Ld.AO/Ld.TPO and Hon'ble DRP erred in aggregating the medical and automotive trading segments while determining the arm's length price of international transaction. 4. On facts and in law, the Ld.AO/Ld.TPO and Hon'ble DRP erred in determination of arm's length price for the trading transactions based on an ad-hoc allocation methodology and segmental profitability. 5. On facts and in law, the Ld.AO/Ld.TPO and Hon'ble DRP erred in disregarding cash profits as an appropriate profit level indicator while applying TNMM as the most appropriate method. 6. On facts and in law, the Ld. AO /Ld. TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... margins. * Secondly, the assessee is distributing medical equipment and automotive equipment and both these products have been clubbed together for the application of RPM which will not give correct gross profit margins for each segment. He also required the assessee to give the segmental gross profit margin for the automotive components and for the medical equipment. As per the working submitted by the assessee, he noted that the gross margin from automotive component was at 44% and from sale of medical equipment, gross margin was at 25%.Thus, he came to the conclusion that the pricing structures of both these classes of products are different. * Lastly, he re-characterized the assessee as full risk distributor and observed that a full-fledged distributor performs a whole range of marketing and selling functions; employs and develops valuable marketing intangible assets; and assumes a range of risk associated with its activity such as inventory risk, bad debt risk and market risks etc. From the transfer pricing report he also highlighted the functional analysis and noted the following functions performed by the assessee:- i. Market research ii. Purchase order iii. Provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is performing pure distribution functions and the business model is based on distribution of various finished products of its AE, then RPM is to be considered as MAM. In support, he relied upon the following judicial pronouncements: "Judicial Pronouncements: i. Mattel Toys India Pvt. Ltd. (Mumbai ITAT)- (2013)158 TTJ 461, wherein it has been held that where the assessee is a distributor and gets the finished goods from its AE and resells the same to independent parties without any value addition, in such a situation, RPM can be the best method to evaluate the transactions whether they are at ALP. Thus in case of distribution activities i.e., import of products and services from the AE and resale to the independent parties without any value addition, the RPM would be the most appropriate method on for determining the ALP. ii. Danisco (India) Pvt. Ltd. (Delhi ITAT) - (2014) 151 ITD 460- wherein it has been held that first examine whether there as any value addition on imported goods and if the answer is in the negative then apply RPM as a most appropriate method for trading transaction of imported goods. iii. Star Diamond Group (Mumbai ITAT) - (2011) 141 TTJ 21 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egments for distribution of finished goods with different gross profit margins, he first of all submitted that, there is no restriction imposed by law that RPM cannot be applied where there are distribution of two different products. Under the RPM method the focus is more on functions rather than similarity of products because product differentiation does not materially affect the gross profit margins, as it represents gross composition after the cost of sales for specific functions performed. Though product similarity is most desired but for applying RPM it is not mandatory that product should be similar as in the case of CUP method. The main focus is on the functions performed. In support of, he strongly relied upon the decision of ITAT Mumbai Bench in the case of Mattel Toys India P. Ltd. (supra). Without prejudice, he submitted that during the course of transfer pricing proceedings when assessee was required to give the separate working of the gross profit margins for the sale of automotive components and medical equipment, the same was duly provided and it was reported that under the automotive products the gross margin was44% and from medical equipment the gross profit margin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts as a full risk distributor. Thus, on the 'principle of consistency' also RPM should be applied in this year also to benchmark the transaction of sale and purchase of goods from the AE for resale in India. 11. On the other hand, Ld. CIT DR, Shri TM Shiv Kumar, submitted that, whence the assessee is purchasing two different products which has different gross profit margins then these two different products cannot be clubbed together to arrive at appropriate gross profit margin for the purpose of bench marking. The huge variation in the gross profit margin (i.e. 44% for the automotive products and 25% for the medical equipment) together cannot give proper benchmarking analysis. On this factor alone RPM cannot be said to be the correct method to apply in the present case. The reason being the manner of pricing for both the products is different and so also the income. Further the cost related to all the various functions as highlighted by the TPO would again is vital factor, because under the distribution function, only the gross compensation after the cost of sales is taken and, therefore, it is different to apply RPM in the case of full risk distributor. He also pointed out to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market; (iv) the adjusted price arrived at under sub-clause (iv) is taken to be an arm's length price in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise; Thus, the RPM method identifies the price at which the product purchased from the A.E. is resold to an unrelated party. Such price is reduced by normal gross profit margin, i.e., the gross profit margin accruing in a comparable controlled transaction on resale of same or similar property or services. The RPM is mostly applied in a situation in which the reseller purchases tangible property or obtain services from an A.E. and reseller does not physically alter the tangible goods and services or use any intangible assets to add substantial value to the property or services, i.e., resale is made without any value addition having been made. 13. In the case of Mattel Toys India P. Ltd. (supra), the Tribunal after analyzing the RPM method, observed and held as under:- "-------------Since in RPM only margins are seen with reference to ite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his view has been upheld by the Tribunal, Mumbai Bench, in Textronix India P. Ltd. (supra), L'oreal India P. Ltd. (supra and Star Diamond Group v/s DDIT, 141 TTJ 21. The OECD guidelines and ICAI guidelines as have been referred to by the learned Counsel have also expressed on the similar line that RPM would be the best method when resale takes place without any value addition to a product for bench 23 marking the ALP. 40. On the other hand, under the TNMM, the ALP is determined by comparing the operating profit related to an appropriate base i.e., cost or sale or assets of the "tested party" with the operating profit of an uncontrolled party engaged in comparable transactions. Under the TNMM, net margin or operating profit is compared against with the independent entities against those achieved in related party transactions. Under the TNMM, the major thrust is to derive at the operating profit at the transactional level and to identify the operating expenses of both the tested party as well as the independent parties. This requires a lot of adjustments to derive at the actual operating profit. If the ALP of any transaction can be determined by applying any of the direct metho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee before the authorities below as well as before us that, assessee has separately worked out the gross profit margin for both the items distributed and even then the assessee's gross profit margin is higher than the comparables. However, in order to examine whether the gross profit margin for both the products are at arm's length margin or not vis-a-vis the comparables, we are of the opinion that for the limited purpose of benchmarking the gross margins of the comparables selected by the assessee for both the products, i.e., automotive components and medical equipment should be separately benchmarked; and if on comparison it is found that the gross profit margin of these comparables chosen by the assessee as well as accepted by the Department are within the arm's length range, then no adjustment should be made. With this limited direction the matter is remitted back to the TPO/AO only to verify the gross margins of the comparable companies. 16. In the result, grounds no. 1 & 2 are allowed. 17. In view of the finding given above that RPM is the MAM, then the issues raised in ground nos. 3 to 6 will become infructuous and purely academic, because these are the grounds relati ..... X X X X Extracts X X X X X X X X Extracts X X X X
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