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TMI Blog2021 (2) TMI 456X X X X Extracts X X X X X X X X Extracts X X X X ..... ted to furnish all the required information necessary for determination of ALP in the set aside proceedings. In view of the decision and the MAM, we are of the view that the grounds raised by the Revenue in its appeal viz., grounds 1 to 4 on the exclusion of comparable companies by the DRP under the TNMM does not require any adjudication. Addition made u/s. 40A(7) - assessee company had incorporated certain changes for which no approval from the CIT was acquired and the contribution to fund is only a provision not an actual expense under the purview of section 37(1) - HELD THAT:- Gratuity fund had been approved by the CIT vide approval dated 12.02.1993. The assessee was previously known as Krone Communications Ltd. Since the name of the assessee at the time of assessment had been changed to M/s. ADC India Communications Ltd., the AO took the view that the approval on which the assessee sought to place reliance was not valid and accordingly he disallowed the claim for deduction of the aforesaid sum by relying on the provisions of section 40A(7) of the Act. On objections by the assessee, the DRP deleted the addition made by the AO by following the decision of the IT AT, Hyderaba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Communications Hong Kong Ltd 7,951,632 ADC Telecommunications Inc 38,092,535 Total 84,901,416 4. In its TP study, the assessee adopted Resale Price Method (RPM) as the Most Appropriate Method (MAM) for determining ALP. The claim of the assessee in this regard for choosing RPM as the MAM was based on Rule 10B(1)(B) of the Income Tax Rules, 1962 (Rules), OECD Commentaries etc. The same was as follows: Rule 10B(1)(b) of the rules describe RPM as follows:- (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 the expenses incurred by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts which could have an influence on the determination of transfer prices in relation to comparability as per the Proviso to Rule 10B. Sl. No. Name of the Company F Y 2009- 10 F Y 2008-09 FY 2007- 08 Average 1. Chloride International Ltd. Prowess NA * 10.61% 10.61% 2. Globus Cororation Ltd. Prowess NA NA NA NA 3. K Dhandapani Co. Ltd. Prowess NA - 0.48%** 9.17% 4.35% 4. Mobile Telecommunications Ltd. Prowess NA * 6.41% 6.41% 5. Pointred Telecom Pvt. Ltd., Prowess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or determining the arm's length price of the international transactions of the taxpayer in the trading segment. The taxpayer was also requested to furnish a set of uncontrolled comparables using financial data for FY: 2009-10 only and also furnish copies of the Annual Reports of the companies for examination. 8. The TPO thereafter adopted TNMM and identified 14 comparable companies with an average arithmetic mean profit margin of 6.79% and determined the ALP as follows: 10. Determination of Arm's Length Price: 10.1 The Arm's Length Price of the international transactions in the trading segment of the taxpayer, is determined as under, by using the TNMM as the most appropriate method and using the set of 14 uncontrolled comparables selected by the TPO with arithmetic mean margin of 6.79% on Sales as above. 10.2 Arithmetic mean PLI 6.79% on Sales Operating Revenues ₹ 38,06,68,324/- Arms Length Margin 6.79% of Operating Revenue Total Arms Length Cost (ALP) @ 93.21% of Operating Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s: 5.1 The grounds above are related and taken up together. We have considered the issue before us and the arguments of the assessee. The TPO has pointed out that the assessee has incurred huge expenses below the GP level which has neutralized the profit and resulted in a loss at the net margin level. Thus it is evident that the assessee has performed functions which no routine trader would perform resulting in high expenses. The assessee has not been compensated for the functions performed by the A.E. In our view the reasons given by the TPO for rejecting the RPM method and adopting TNMM are logical and well founded. Given the fact that certain specific expenses have been incurred the assessee as a reseller and the lack of availability of data for costs incurred for similar functions in the case of the comparables the analysis of net margins presents a more reliable perspective. TPO was justified in adopting the TNMM method, This objection is therefore not accepted. 11. The DRP excluded certain comparables selected by the TPO under the TNMM method against which the Revenue has filed appeal before the Tribunal. As far as the appeal for the assessee is concerned, the learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed reliance on the decision of the IT AT Bangalore Bench in the case of Kohler India Corporation Pvt. Ltd., Vs. DCIT (2016) 67 taxmann.com 200 (Bangalore Trib) wherein it was held that when RPM is adopted as the MAM, it was necessary to have close analysis of the products that are subject matter of trading with the products traded by the comparable companies. 14. We have given a careful consideration to the rival submissions. In the case of Mattel Toys (I) Pvt. Ltd., Vs. DCIT, in ITA No. 2476/Mum/2008 order dated 12.06.2013, the Mumbai Bench of the Tribunal had an occasion to examine the correctness of adopting RPM as MAM in the case of assessees who purchase products from AE and resell to unrelated parties. In that case, the Tribunal emphasised the importance of comparing only the gross margin in the following words: 38. Thus, the RPM method identifies the price at which the product purchased from the A.E. is resold to a 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they are at ALP. 15. Similarly, in the case of Nokia India Pvt. Ltd., Vs. DCIT in ITA No. 242/Del/2010 order dated 31.10.2015, the Tribunal dealt with the plea of the Revenue on incurring of expenses which does not effect on the gross margins and observed as follows: 11. The Ld. DR vehemently argued against the application of RPM in the given circumstances as the most appropriate method by contending that the assessee incurred huge advertisement and ITA Nos. 242 178/Del/2010 CO No. 77/Del/2010 marketing expenses. In view of such incurring of expenses, the Ld. DR stated that the better course would be to apply TNMM which would consider operating profit. We are unable to accept the contention advanced on behalf of the Revenue. The obvious reason for this is that the incurring of high advertisement and marketing expenses by the assessee vis-a-vis the other comparable companies does not in any manner affect the determination of ALP under the RPM. When we consider gross profit in numerator and net sales in denominator, all the expenses debited to the Profit loss account automatically stand excluded. It is but natural that only those expenses can have bearing on the gross ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s only a provision not an actual expense under the purview of section 37(1) of the Act. 18. As far as ground No. 5 of the Revenue is concerned, the facts are that the assessee contributed a sum of ₹ 13,23,232/- towards recognized gratuity fund. Gratuity fund had been approved by the CIT vide approval dated 12.02.1993. The assessee was previously known as Krone Communications Ltd. Since the name of the assessee at the time of assessment had been changed to M/s. ADC India Communications Ltd., the AO took the view that the approval on which the assessee sought to place reliance was not valid and accordingly he disallowed the claim for deduction of the aforesaid sum by relying on the provisions of section 40A(7) of the Act. On objections by the assessee, the DRP deleted the addition made by the AO by following the decision of the IT AT, Hyderabad Bench in the case of Capital IQ Information Systems (India) Pvt. Ltd., Vs. ACIT (2014) taxpub (DT) 0556 (Hyderabad - Trib) wherein it was held that even if the payment is made to an unapproved gratuity fund, the same has to be allowed as a deduction under section 37(1) of the Act. In coming to the aforesaid conclusion, the Tribunal f ..... 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