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TMI Blog2021 (6) TMI 92X X X X Extracts X X X X X X X X Extracts X X X X ..... . Meera Srivastava, CIT DR ORDER PER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER: The present appeals have been filed by the assessee against the order of ld. CIT (A)-XX, New Delhi dated 26.12.2008. 2. At the outset, it is to be mentioned that the assessee has filed application under Rule 11 of the Income Tax (Appellate Tribunal) Rules, 1963 for admission of the additional grounds. The additional ground reads as under: The inappropriate use of Transactional Net Margin Method ( TNMM ) instead of the Resale Price Method ( RPM ) as the most appropriate method ( MAM ) for benchmarking the Appellant s international transaction of import of dental products from its foreign AE i. e. Dentsply International, USA ( international transaction ). 3. It was argued that the grounds taken up involves a legal issue and doesn t require any investigation and can be deciphered from the facts on record. The ld. DR objected to admission of additional ground at this juncture. Keeping in view, the judgment of the Hon ble Apex Court in the case of National Thermal Power Co. Ltd. Vs CIT (1998) 229 ITR 383, the additional ground filed by the assessee is accepted. The relevant portion of the judgment is as under: 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r should exercise his discretion in permitting or not permitting the assessee to raise an additional ground in accordance with law and reason. The same observations would apply to appeals before the Tribunal also. 7. The view that the Tribunal is confined only to issues arising out of the appeal before the Commissioner of Income- tax (Appeals) takes too narrow a view of the powers of the Appellate Tribunal [vide, e.g., C.I.T, v. Anand Prasad (Delhi), C.I.T. v. KaramchandPremchand P. Ltd. and C.I.T. v. Cellulose Products of India Ltd..Undoubtedly, the Tribunal will have the discretion to allow or not allow a new ground to be raised. But where the Tribunal is only required to consider a question of law arising from the facts which are on record in the assessment proceedings we fail to see why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee. 8. The reframed question, therefore, is answered in the affirmative, i.e., the Tribunal has jurisdiction to examine a question of law which arises from the facts as found by the authorities below and having a bearing on the tax liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opted TNMM as the MAM by the Appellant itself to benchmark its international transaction in its Transfer Pricing Study Report in AY 2002-03, which was followed in subsequent AYs too. c. However, given the business model of the Appellant and international transaction entered into by it during the AYs in question, the Appellant is now aware that the RPM is the MAM for benchmarking its international transaction. Thus, the Appellant prays before this Hon ble Tribunal for adjudicating the appropriateness of use of the RPM as the MAM in the present case. d. In this regard, reliance is placed on the Order of the Mumbai Bench of this Hon ble Tribunal in the case of Mattel Toys (I) (P.) Ltd. v. DCIT IT Appeal Nos. 2476 2801 (MUM.) of 2008. In the facts of that case, the assessee (a distributor) imported goods from its foreign AE and re-sold such goods to independent parties in India without any value additions. The assessee had applied TNMM as the MAM in its transfer pricing study report and prayed before the Hon ble Tribunal to change the method of benchmarking to RPM. At para 38 of the Order, the Hon ble Tribunal held that RPM is the MAM method for determining the arm s length price of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not add substantially to the value of the product/ service. However, despite that, the Ld. CIT (A) wrongfully applied TNMM to benchmark the international transaction of the Appellant. 8. The ld. AR further argued that owing to the nascent stage of transfer pricing development in India, the assessee was also not conversant with the different methods, legality demands that most appropriate method should be used for determining ALP under Indian Transfer Pricing Regulations . 9. On the other hand, the ld. DR argued that the assessee themselves are following TNMM in the subsequent years hence the argument of the assessed cannot be accepted. 10. Heard the arguments of both the parties and perused the material available on record. 11. We have gone through the various decisions rendered on this issue. For the sake convenience and ready reference, the relevant part containing the entire facts and ratio in the case of Mattel Toys (I) (P.) Ltd. Vs DCIT in ITA Nos. 2476 2801/Mum/2008 is reproduced as under: 17. Facts in brief: The assessee is an indirect wholly owned subsidiary of Mattel Inc., U. S.A., which is the worldwide leader in manufacturing and marketing of variety of toy products and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is heavily influenced by the scope and function performed and may also vary widely among uncontrolled parties. Further, the assessee could not identify the comparables with the product lines similar to that of the assessee. For the purpose of determining the ALP under the TNMM, the assessee selected six comparables with the average operating profit margin ratio at 0.91% as compared to (-) 51.22% shown by the assessee for the domestic distribution segment for the year ending 31 st March 2002. On such margin, the assessee made an adjustment on account Mattel Toys (I) Pvt. Ltd. 9 of advertisement distribution cost and worked out the average operating margins of the six comparables at ( ) 17.41%. The TPO has incorporated the original profit margin and the adjusted operating profit margin of the six comparables in Para 6.3 in the following manner: Sl.no. Comparables Original Operating Profit Margin Adjusted Operating Profit Margin 1. Balsara Hygiene Products Ltd. 4.36 % ( ) 3.2 % 2. Detergents India Ltd. ( ) 0.43 % ( ) 22.46 % 3. Henkel Spic India Ltd. 5.40 % ( ) 19.74 % 4. Mueller and Phipps India Ltd. ( ) 0.10 % ( ) 20.15 % 5. Nirma Consumer Care Ltd. ( ) 0.83 % ( ) 19.15 % 6. Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ternational transactions is calculated as per the segmental costs and revenues submitted by the assessee in its submissions dated 17.11.2004 (segmented costs I revenue for Domestic segment) and submission dated 01.12.2004 (for segment costs and Revenue for remaining 2 export segments). (b) The import of finished goods of ₹ 3,08,16,302/- is considered under the Domestic segment. (c) The assessee has made adjustments to the margin of the comparables on account of difference in advertisement costs. As a result of this, the average operating profit margin of the comparables has been determined at (-) 17.4% which appears very improbable in a distribution activity. The assessee has filed no evidence to support the adjustment made. Hence, the adjustment made by the assessee in this regard is rejected. (d) The average operating profit on sales ratio of 0.91% as calculated by the assessee is applied for the Domestic segment. Separate relief on account of advertisement costs of the assessee has been given while calculating the ALP. For the segment consisting of export to A. E. ratio of operating profit on costs of 0.92% is applied to determine the ALP. 13. The Arm s Length Price for al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gross profit margin by adopting RPM. Further, it was also stated that the assessment year 2002 03 was the first year of assessee s business in India and, therefore, they have to incur very high administrative cost including advertisement and such expenditures accounted for almost 80% of the sales revenue. To administer the gross profit margin and actual operating profit margin, the assessee furnished chart for six years starting from the years 2001 02 to 2006 07, which has been incorporated in appellate order at Para 6.8 in the following manner: Profitability Statement Particulars 2001 02 2002 03 2003 04 2004 05 2005 06 2006 07 Sales 111441770 304112782 305011664 321028703 427450318 550000867 Less: Sales Tax 16740887 13479686 19160394 36392568 Net Sales 117441770 304112782 288270777 307549017 408289924 523608299 Less: Gross Cost Cost of Goods Sold 84080485 202386334 139965922 157037068 217642512 237802154 Gross profit (A) 33361285 101726448 148304855 150511949 190647412 285806145 Gross profit (%) 28 % 33 % 51 % 49 % 47 % 55 % Opr. Margin (%) 51 % 36 % 15 % 11 % 5 % 10 % Adm. Cost as % of sales Mattel India 80 % 69 % 66 % 60 % 52 % 45 % Adm. Cost as a % of sales comparables 12 % 21 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee s contentions. This aspect would be discussed in the Revenue s appeal. 27. Before us, the learned Counsel, Mr. Mukesh Butani, representing the assessee, narrated the entire facts of the case which has been, by and large, discussed in the forgoing paragraphs and the issue involved. He submitted that due to high administrative cost and advertisement expenses, the TNMM method cannot be taken as most appropriate method in the assessee s case because the net profit margin even after various kinds of adjustment will not result into determination of proper arm s length result. Even though the assessee has adopted the most appropriate method as TNMM in the transfer pricing report, however, such a method fails in this case due to peculiar circumstances in this case and further in the case of companies which are engaged in the distribution activities, RPM is more preferable method. The assessment year 2002 03 being the first year of application of transfer price mechanism, it was not clear even to the professionals what should have been the best methodology and comparability analysis for arriving at ALP for particular type of business transactions. Before the learned Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Commissioner (Appeals) s objection that the assessee cannot change the method for determining the ALP at a later stage, he submitted that if the ALP in a particular case can be determined by following any one of the methods, then the same can be raised at any stage after duly explaining as to why such method should be followed. In support of this contention, he relied upon the following decisions of the Tribunal: i) DCIT vs MCI Com India P. Ltd., ITA no.2766 4187/Del./ 2010; and ii) ACIT vs MSS India P. Ltd., [2009] 32 SOT 132 (Pune); and iii) Gap International Sourcing India P. Ltd., 149 TTJ 437. 29. Relying on these decisions, he submitted that RPM should be followed in the present case for determination of ALP while evaluating the controlled transactions of the assessee. 30. Regarding the comparables as selected by the assessee and accepted by the TPO, he submitted that even though there was no product comparability with that of the assessee but all were functionally comparable, therefore, the same comparables can be taken for the purpose of RPM. In support of this contention that product comparability is not required in RPM, he relied upon the contents of Para 2.26 of the OEC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He also referred to the United Nation Manual on transfer pricing, specifically Para 9.2.9.4, wherein it has been stated that distributors engaged in the sale of markedly different products cannot be compared in resale price method. 32. Moreover, he submitted that the assessee has not given any cogent reason as to why resale price method should be adopted now when TNMM has been accepted by it in the transfer pricing report. The only reason for now adopting the resale price method is to justify the ALP based on the average gross profit rate of six comparables chosen by it though initially selected for the purpose of TNMM. Even after the adjustment of advertisement on the operating profits of six comparables, then also the average net profit margin of comparables comes to ( ) 17.41%. Even if that is also accepted as suggested by the assessee, then also the assessee s margin is not at ALP and that is why the assessee has taken a turn around for adopting RPM so as to justify the ALP of it s A. E. transactions. Thus, he submitted that the submissions of the learned Counsel for adopting the RPM should be rejected out rightly. 33. By way of alternative arguments, the learned Departmental R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed on the operating profit margin of the comparables, then on the peculiar facts of the case such adjustments would result into improbable scenario as the value of imported goods would be determined at a value less than zero, therefore, no adjustment is required and, hence, its margin is at ALP. One of the other main contention of the assessee before the TPO was that the gross profit margin should be compared instead of operating profit of its distribution activities segment following RPM instead of TNMM. Such a submission was made vide letter dated 6 th October 2004. This has been rejected by the TPO mainly on the ground that the assessee has itself adopted TNMM as the most appropriate method and has itself rejected the RPM. This objection / submission of the assessee has also been rejected by the learned Commissioner (Appeals) on the same ground. One of the main issues before us at this stage is, as to what should be the most appropriate method on the facts of the assessee s case which has been discussed at length in the earlier paragraphs. 36. According to the provisions of sections 92C r/w 10B, the ALP in relation to an international transactions has to be determined by follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so arrived at is adjusted to take into account the functional and other differences, including differences 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; (v) 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; 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any value addition, the RPM would be the most appropriate method for determining the ALP. This 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the learned Commissioner (Appeals) that the assessee cannot resort to adoption of RPM method instead of TNMM. 42. Now, coming to the comparables selected by the assessee, we agree with the contention of the learned Departmental Representative that these comparables were chosen for the purpose of carrying out comparability analysis under the TNMM and even the TPO or the assessee has not carried out any functional analysis of these comparables with regard to the gross profit margin level. In our considered opinion, this matter needs to be restored to the file of the TPO for denovo adjudication. Consequently, we set aside the impugned order passed by the learned Commissioner (Appeals) and restore the issue back to the file of the Assessing Officer who shall decide the issue afresh after requiring the assessee to furnish fresh comparables after considering the RPM as the most appropriate method for determination of ALP. The TPO will also provide due and effective opportunity of hearing and determine the ALP after considering the fresh comparables and following the RPM. Thus, ground no.3,raised by the assessee is partly allowed for statistical purposes. 43. The assessee has also rai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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