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TMI Blog2019 (6) TMI 601X X X X Extracts X X X X X X X X Extracts X X X X ..... are, as stated by the Transfer Pricing Officer, the assessee is a wholly owned Indian subsidiary of Randox Laboratories Ltd., a company based in United Kingdom. The parent company is primarily engaged in the business of manufacturing medical diagnostic reagents and analyzers. Whereas, the assessee is engaged in import of reagents and diagnostic equipments (analyzers) from the parent company and selling them to independent third parties in India. During the year under consideration, the assessee entered into various international transactions with its overseas Associated Enterprise (AE). However, in the present appeal, we are concerned with the international transaction relating to purchase of reagents, spares, analyzers etc. amounting to Rs. 9,55,52,538. In the transfer pricing analysis, the assessee benchmarked the aforesaid transaction by selecting RPM as the most appropriate method. It selected four independent comparables having arithmetic mean of 13.61% on the basis of three years weighted average. Since, the gross profit margin shown by the assessee @ 47.09% was much higher than the arithmetic mean of the comparables, the international transaction with the AE was claimed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsel for the assessee submitted, the assessee is a simple reseller of goods imported from the AE without any value addition. He submitted, the assessee imports reagents from the AE and sells them to third party customers in India. Whereas, analyzers imported from AE are not for trading. Explaining further, he submitted, assessee does not undertake any manufacturing activity. He submitted, the assessee imports reagents which are required for clinical analysis in analyzers (diagnostic equipments). He submitted, in the impugned assessment year, the assessee has not started its manufacturing activity as it was in the process of setting-up of its factory. In this context, he drew our attention to the notes to the accounts forming part of the annual report of the assessee. Drawing our attention to the schedule of fixed assets forming part of the Balance Sheet, he submitted, in the year under consideration there is no plant; hence, there is no manufacturing activity. The learned Counsel submitted, analyzers are imported not for resale but for providing them to the customers in India who purchased reagents from the assessee. He submitted, as per the terms of the agreement with the custome ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited, hence, not reliable. Thus, he submitted, learned DRP was justified in sustaining the adjustment made to the arm's length price by the Transfer Pricing Officer. 6. In rejoinder, the learned Counsel for the assessee submitted, there is no requirement in law that the assessee has to furnish audited segmental accounting. In this context, he drew our attention to the decision of the Tribunal, Delhi Bench, in 3i Infotech Ltd. v/s ITO, ITA no.21/Mds./2013, dated 7th May 2013. 7. We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. The core issue arising for consideration is, whether the international transaction relating to purchase of reagents, spares, consumables from the AE is a simple trading activity, hence, can be benchmarked under RPM. Before we advert to the core issue, it is necessary to understand the activities of the assessee with its AE. As stated earlier in the order, assessee's AE is manufacturing medical diagnostic reagents, analyzers and consumables. Assessee imports these reagents form the AE and sells them to diagnostic units / laboratories in India for use in various chemical a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e aforesaid reasoning, the Transfer Pricing Officer has concluded that the assessee is not merely a trader but is also engaged in manufacturing and research activity. Learned DRP has simply endorsed the aforesaid view of the Transfer Pricing Officer without discussing much on the issue. However, while doing so, learned DRP has observed that in the transfer pricing analysis, the assessee has applied TNMM. Further, learned DRP while rejecting the contention of the assessee for adopting segmental results of the assessee and comparables, has observed that since the segmental accounting of the assessee is unaudited, it cannot be accepted. 10. Be that as it may, it is necessary to examine whether the finding of the Transfer Pricing Officer that the assessee is also involved in manufacturing activity is factually borne out from record. In this regard, the Transfer Pricing Officer has referred to the Notes to the fixed asset schedule forming part of the Balance Sheet of the assessee. On a perusal of the said Note, it becomes clear that, though, the assessee was intending to set-up a manufacturing unit in India and for that purpose has acquired lease hold land from Karnataka Industrial Are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e examined which is the appropriate method to benchmark the arm's length price of the transaction. On going through the provisions of rule 10B and more particularly sub-rule-1(b) of the aforesaid rule, it is evident that RPM is applicable to a case where the price at which property purchased or service obtained by a enterprise from the AE is resold or provided to an unrelated enterprise. The gross profit margin of such a transaction is thereafter compared to the gross profit margin of similar comparable uncontrolled transactions after making necessary adjustment with regard to the expenditure incurred, functional and other differences, the arm's length price is determined. Thus, in the facts of the present case, since the assessee has resold the goods imported from the AE without any value addition, the most appropriate method which can be applied for determining the arm's length price is RPM and TNMM cannot be the most appropriate method in such type of transaction. 12. Having held so, it is necessary to deal with the decisions relied upon by the learned Counsel for the assessee. The Co-ordinate Bench in L'oreal India Ltd. (supra) while deciding the dispute of simila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 10C, defines most appropriate method to be one which is best suited to the facts and circumstances of each particular transaction and which provides the most reliable measure of arm's length price in relation to the international transaction. Sub-rule (2) of rule 10C, specifies the factors to be considered for selecting most appropriate method. Rule 10B provides the mode and manner of determination of arm's length price under different methods. As per rule 10B(1)(b), determination of arm's length price under RPM is applicable to a case where the price at which property purchased or service obtained by the enterprise from the A.E. is resold or is provided to an unrelated enterprise. The gross profit margin in respect of such a transaction is thereafter compared to the gross profit margin of similar comparable uncontrolled transactions and after making necessary adjustment with regard to expenditure incurred, functionally and other differences the arm's length price is determined. Thus, when there is no dispute to the fact that the assessee is purchasing finished products from the A.Es for the purpose of reselling to unrelated parties without any value addition, und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether the price or the margin raising from an international transaction with the related party is at ALP or not. The determination of approximate ALP is the key factor for which the MAM is to be followed. Therefore, if at any stage of the proceedings, it is found that by adopting one of the prescribed methods other than chosen earlier, the most appropriate ALP can be determined, the assessment authorities as well as the appellate Courts should take into consideration such a plea before them provided, it is demonstrated as to how a change in the method will produce better or more appropriate ALP on the facts of the case. Accordingly, we reject the contentions of the Ld.DR and also the observations of the AO and the Ld.CIT(A) that the assessee cannot resort to adoption of RPM method instead of TNMM." 10.3 The case of the assessee is much better than the case of M/s Mattel Toys (I) Pvt.Ltd. (supra) for the reason that the assessee in its transfer pricing report has also used RSPM as the MAM. Hence this argument of the Revenue is rejected. 10.4. As the undisputed fact is that the functional profile of the assessee is that of a trader and as the characterisation of the transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... flavours and the trading business is for products for falling under the category of food ingredients. The main grievances of the assessee against the order of the Ld. TPO upheld by the Ld.DRP are regarding their approach in the manner in which transfer pricing adjustment has been made, the approach adopted by the Ld.TPO in granting 17 comparable companies denying the economic adjustment claim made by the assessee, regarding computation of margins of the assessee, non consideration of supplementary transaction and denial of adequate opportunity of being heard to the assessee by the authorities below as well as their failure to examine the contentions and arguments of the assessee in this regard. Considering these grievances as discussed herein above by us in the arguments advanced by the parties/their submissions and having gone through the decision relied upon, we find substance in the submission of the assesse3e and thus we are of the view that it is a fit case to set aside the matter to the file of the Ld.TPO for his fresh consideration and decide the issue afresh after affording opportunity of being heard to the assessee and discussing their submissions in the order and reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and sells it without any value addition to the Indian customers. In such circumstances, we are of the view that the ratio laid down by the Mumbai Bench of the Tribunal in the case of L'Oreal India Pvt. Ltd. (supra) would be squarely applicable to the facts of the assessee's case. In that event, the GP as a percentage of sales arrived at by the TPO in Annexure to the TPO's order insofar as trading activity of comparables identified by the TPO at 12.90%. The GP as a percentage of sales of the assessee is at 35.6% which is much above the percentage of comparables identified by the TPO. In such circumstances, we are of the view that no adjustment could be made by way of ALP. We, therefore, accept the alternative plea of the assessee and delete the addition made by the AO. In view of the above conclusion, we are not going into the other issues on merits raised by the assessee on the approach adopted by the TPO in arriving at the ALP. Thus, ground Nos. 2 to 7 are allowed. 10.5 In view of the above discussion, we direct the TPO to adopt RPM as the MAM in this case." 12. The aforesaid decision of the Tribunal, Delhi Bench, was challenged before the Hon'ble Delhi High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer pricing analysis of the assessee except that the assessee is involved in manufacturing activity, we are of the view that the benchmarking done by the assessee under RPM has to be accepted. More so, when the Transfer Pricing Officer has accepted the comparables selected by the assessee. That being the case, only thing which requires verification is the gross margin of the assessee with that of the comparables. We direct the Assessing Officer / Transfer Pricing Officer to examine this aspect and decide the issue accordingly after due opportunity of being heard to the assessee. With the aforesaid observations, grounds are allowed. Since, we have allowed assessee's claim that RPM is the most appropriate method, the other issue relating to computation of margin of comparables under TNMM does not require adjudication. Further, we direct the Assessing Officer / Transfer Pricing Officer to adopt the correct purchase figure as debited to the Profit & Loss account after due verification. 14. In the result, assessee's appeal is allowed. IT(TP)A no.1568/Mum./2015 Revenue's Appeal 15. The Registry has pointed out a delay of six days in filing the appeal. The Department has filed ap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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