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TMI Blog2019 (8) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... for its manufacturing segment and has got absolutely nothing to do with the transactions carried out in its distribution segment. Hence, we hold that the lower authorities have proceeded the entire issue on total misconception of facts ignoring the relevant materials on record. We direct the ld. TPO to apply RPM as the most appropriate method and recompute the margins of the assessee accordingly and make any adjustment to ALP thereon, if warranted. Accordingly, grounds raised by the assessee are allowed for statistical purposes. X X X X Extracts X X X X X X X X Extracts X X X X ..... rading Limited 4 Standard Surfactant Ltd (segmental) 5 Priya International Ltd (segmental) 6 Nikhil Adhesives Ltd (segmental) 7 Nilchem Industries Ltd Mean PLI is 7.62% 3.3. The ld. TPO rejected the RPM and selected TNMM as the Most Appropriate Method of the assessee for its distribution segment on the following grounds:- The annual report of the assessee was perused along with the financials for the year under consideration. On perusal of the financials of the assessee, it was observed that the assessee was having an item of manufactured goods to the tune of ₹ 6,38,99,426 /-. Further, the assessee was reporting Work-in-progress of ₹ 16,48,774 /-, The same was verified from Note 21 to the balance sheet. Further, on perusal of Note 13 "Inventories" to the Balance Sheet, it was observed that the assessee has an inventory of Manufactured goods of Rs, 1,37,35,465 /-. Further, the assessee has a revenue of ₹ 10,08,11,753 /- from sale of manufactured goods. On perusal of Note 19 to the Balance Sheet, it was observed that the assessee has consumed packing materials to the tune of ₹ 39,33,488 /-. As submitted by the assessee, Ecolab India work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of stock-in-trade 11,14.69,696 Changes in inventory (3,01.73,226) Employee Benefit Expenses 7,01,14,715 Depreciation and Amortization 78,98,636 Other expenses 6,97,24,145 Total operating cost 22,90,33,965 Operating profit (9,57,27,472) Adjusted Operating Profit/ Operating Revenue -71.81% 3.5. The ld. TPO adopted the very same seven comparables of the assessee as listed supra and applied PLI at OP/OR on the said comparables and arrived at the mean margin thereon at 1.38% and compared the same with that of assessee at negative 71.81% and proceeded to make an adjustment to ALP as under:- Margin of the assessee -71.81% Margin of comparable companies 1.38% Operating Revenue 13,33,06,493 Difference in margins 73.19% Amount 9,75,60,535 3.6. The assessee has on without prejudice basis submitted that the total value of international transaction is ₹ 8,49,96,214 /- as against the total purchases of ₹ 11,14,69,696 /-. Since the international transactions account for 76.25 % of the total purchases, the TP adjustment should be restricted to 76.25%. The assessee has relied on the decision of Delhi ITAT in the case of Global Vantedge Pvt. Ltd. Vs. DCIT ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no longer appealable by the Department, if the issue is decided in favour of the assessee, it will amount to pre- judging the issue and bringing finality to an issue which is pending before a higher judicial authority. Therefore, in order to keep the issue alive and protect the interest of the Department, the action of the TPO in making a transfer pricing adjustment by considering the entire turnover of the trading segment is upheld." 4. Aggrieved, the assessee is in appeal before us. 5. We have heard rival submissions and perused the materials available on record including the paper book filed by the assessee. We had also gone through the transfer pricing study report enclosed in the paper book. We have gone through the various replies filed by the assessee before the ld. TPO which are enclosed in the paper book. We have gone through the financial statements of the assessee which are enclosed in the paper book. At the outset, we find that assessee has imported finished chemical compound products such as dispensing liquid to be sold to customers in India. The chemical compounds are the disinfectant chemicals that are used as a cleansing agent. In addition, it also imports dispen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods 50,62,054/- Traded goods 3,37,26,200/- Work-in-progress 10,20,089/- Total B 3,98,08,343/- Less: Provision for obsolete and non moving inventories (1,95,447) (Increase) /Decrease in Stocks (A-B) (3,96,70,769)/- 5.3. We also find from page 97 of the paper book containing audited financial statements as under:- Note 19' Cost of materials consumed April1, 2011 to March 31,2012 Rupees Raw material consumed Opening inventory 88,37,002 Add: Purchases (net) 4,34,21,387 Less: Inventory at the end of the year 1,37,35,614 Add: Provision for obsolete and non moving inventories Cost of raw materials consumed during the year 8,74,924 3,93,97,698 Packing material consumed Opening inventory 3,73,834 Add: Purchases (net) 40,88,943 Less: Inventory at the end of the year 5,29,289 Cost of packing materials consumed during the year 39,33,488 4,33,31,186 Details of Consumption (a) Details of raw materials/ Packing materials consumed: April 1, 2011 to March 31,2012 Rupees Organic Chemicals 3,93,97,698 Packing materials 39,33,488 4,33,31,186 (b) Value of imported and indegenious raw materials and packing materials consumed: Imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... most appropriate method, or not, we feel that it would be relevant to cull out Rule 10B(1)(b) of the Income-tax rules, 1962, which envisages the determination of ALP u/s.92C of the Act as per RPM, as under :- "Determination of arm's length price under section 92C . 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) xxxxxxxx (b) resale price method, by which- (i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified,' (ii) such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions; (iii) the price so arrived at is further reduced by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder :- "8. This Court finds that once the ITAT, on considering the relevant facts as well as the order of the TPO, had concluded that the business of the assessee was merely that of a pure trader, and there was no value addition made before re-selling the particular products (i.e. the SIM cards), its consequent finding that RPM is the Most Appropriate Method, is irreproachable. In Nokia India (P) Ltd. v. Dy. CIT[2014] 52 taxmann.com 492/153 ITD 508 (Delhi), the Delhi bench of the ITAT held: "A close scrutiny of the above two sub-clauses along with the remaining sub-clauses of r. 10B(1)(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 presupposes no or insignificant value addition to the goods purchased from foreign AE. In a 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 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isticated product or when the product/service is transformed." 12. Therefore, a contrario, when the reseller does not add any value to the product of the goods, the RP method would be appropriate for determining the arms' length price." 18. We also find that the Hon'ble High Court of Bombay in the case of CIT Vs. L'oreal India Pvt. Ltd., ITA No.1046/2012 had upheld the order of the Tribunal, wherein it was observed that RPM was the most appropriate method in the case of distribution or marketing activities, specifically when goods which are purchased from AEs are thereafter sold to unrelated parties without any further processing. Also, a similar view had been taken by the coordinate benches of the Tribunal viz. (i) Horiba India (P) Ltd. Vs. DCIT, 81 taxamnn.com 209(Delhi); (ii) Fresenius Kabi India Pvt. Ltd. Vs. DCIT (ITA No.235/PUN/2013); and (iii) ACIT Vs. Kobelco Construction Equipment India Pvt. Ltd., ITA NO.6401/De1/2012 (Delhi). Accordingly, in terms of our aforesaid observations, we are of the considered view that in the case of a pure trader RPM is the most appropriate method for bench marking the international transactions. On the other hand, u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her differences including difference in accounting practices, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market. As such, we are of the considered view that in case the AO held a conviction that the comparables selected by the assessee were not found to be appropriate, then the remedy available with him was either to make necessary adjustments as envisaged in Rule 10B(1)(b)(iv) of the Income-tax rules, 1962 or to search for fresh comparables. However, merely for the reason that the comparables selected by the assessee were not found to be appropriate could have by no means justified the rejection of the aforesaid method adopted by the assessee for benchmarking the ALP of its international transactions. Our aforesaid view is fortified by the order of the ITAT Bangalore Bench of the Tribunal in the case of CIT Vs. Sanyo India Pvt. Ltd. [2015] 45 CCH 98 (Bang) and the order of ITAT, Delhi Bench in the case of Burberry India Pvt. Ltd. (supra). Further, we find that another reason given by the TPO/DRP for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g no nexus with the said import transactions were, thus, not relevant for the said benchmarking analysis. 20. We shall now deliberate on the aspect as to whether the TPO/DRP were justified in excluding two of the comparables viz. (i) M/s K. Dhandapani & Co. and (ii) M/s Kusam Electricals Industries Pvt. Ltd. from the final list of comparables. As is discernible from the order of the TPO, the aforesaid parties were rejected as comparables primarily for the reason that while for the assessee's line of business was "trading in high- ended technology related products", on the other hand, the said comparables were dealing in routine electrical equipments. We may herein observe that under the RPM method, the focus is more on the functions rather than the similarity of products because product differentiation does not materially affect the gross profit margin, as it represents gross composition after the cost of sales for specific functions performed. Our aforesaid view is supported by the orders of the ITAT, Mumbai in the case of Mattel Toys (I)(P.) Ltd. Vs. DCIT, Cirlce-6(3), Mumbai, [2013] 34 taxamnn.com 203 (Mumbai-Trib) and ITAT, Delhi Bench in the case of Horiba Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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