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TMI Blog2019 (8) TMI 1766X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that in case of distribution activity the selling and marketing expenses which are borne by the assessee would not lead to any value addition to the product in question. We find substantial force in the contention advanced by the ld. A.R that as per Rule 10B(1)(b) in the Income Tax Rules, 1962, the RPM can safely be taken as the best suited method for determining the ALP of the international transactions in the case of the assessee before us, which as observed by us hereinabove had imported formulations from its AE and resold the same without making any value addition to unrelated parties in the domestic market. We are unable to subscribe to the view taken by the TPO/DRP that merely for the reason that complete information about the business profile and financial data in respect of companies selected by the assessee as comparables in its TP study report was not available in the public domain or furnished by the assessee, therefore, for the said reason the application of the said method for benchmarking the international transactions of the assessee was to be rejected. Rejection of the comparables which were selected by the assessee in its TP study report - As regards the three c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 144C(13) r.w.s 143(3) of the Income Tax Act, 1961 (for short "Act‟), dated 17.01.2014 for A.Y. 2009-10. The assessee has assailed the impugned order on the following grounds of appeal before us: "1. On the facts and in the circumstances of the case and in law, the Dy. Commissioner of Income Tax - 6(1), Mumbai ("learned AO") on the directions of the Hon'ble Dispute Resolution Panel ("DRP") has erred in computing the total income of the appellant at Rs. NIL as against the 'returned income' amounting to Rs.(8,78,65,502). 2. Transfer Pricing Adjustment: ₹ 10,31,20,379/- On the facts and in the circumstances of the case and in law, the learned Transfer Pricing Officer ('TPO') and the learned AO under the directions issued by the Hon'ble DRP, erred in computing the arm's length price of international transaction, and confirming the adjustment of import of goods of ₹ 10,31,20,379/- to the appellant's total income based on the provisions of Chapter X of the Act. 3. Erred in rejecting Resale Price Method adopted by the appellant for benchmarking its international transaction of import of formulations for distribution in India and consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally comparable. On the facts in circumstances of the case and in law, the id. TPO as well as the Hon'ble DRIP erred in not appreciating that the above action is contrary to the provisions of Rule IOB(2) &1 OB(3) of the Rules. 7. Failing to maintain consistency On the facts and in the circumstances of the case and in the law, the learned Hon‟ble DRIP panel has erred in not admitting the evidence produced by the appellant and accepting the action of the Ld. AO and Ld. TPO in not maintaining consistency with regards to selection of RPM as the Most Appropriate Method while benchmarking distribution function of the appellant. 8. Lack of opportunity resulting into hardship On the facts and in the circumstances of the case and in law, the learned TPO erred in passing the order without issuance of any show cause notice with regards to rejecting the segmental financials of the appellant without giving the appellant reasonable opportunity to submit its justification /contention before making adjustments to the total income. 9. Requisite conditions under Section 92C(3) - Not Satisfied On the facts and in the circumstances of the case and in law, the learned TPO erred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al trial activities) 65,456,858 TNMM 3. Fee for office & administrative expenses incurred towards deputation of staff 72,074,866 TNMM 4. Payment of Financial Shared Services charges 6,994,851 TNMM 5. Reimbursement of expenses (Receipts) 206,795,808 CUP 6. Reimbursement of Expenses (Payments) 24,009,161 CUP As regards the purchase of formulation (trading) by the assessee from its AEs, it was observed by the TPO, that the assessee had during the year imported Oncology, Hepatitis B, Virology, critical care and infant nutrition products for distribution in India. As per the functional analysis submitted by the assessee, it was noticed by the TPO, that the assessee had claimed that it was as a distributor buying goods and selling it in the domestic market without adding any significant amount of value to the products. As per the TP study report the assessee had selected "Resale Price Method" (RPM) as the most appropriate method for benchmarking its purchase transactions with the AEs. It was observed by the TPO that the assessee had identified 6 comparables on the basis of search conducted, namely (i) Abbott India Ltd.; (ii) Daga Global Chemicals Ltd.; (iii) Duchem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally to the value of the product. On the basis of his aforesaid observations, the TPO was of the view that while making a comparison the presence of such functions and risks in the case of the comparables and the availability of data for costs of such functions would be required for computing its gross margin. Further, it was noticed by the TPO, that the functions which are generally performed by the reseller included viz. (i) advertising; (ii) marketing; (iii) distribution and guaranteeing risks; (iv). financing the stocks; and (v). warranty risk. Apart therefrom, it was also observed by him that it has also to be seen as to whether the costs attributable to the aforesaid functions were accounted for by the reseller as the costs of the goods or not. In case, if the costs were accounted for as part of the costs of goods, then no separate adjustment was required as the gross profit worked out would also include the costs of the said functions. On the contrary, if the cost of the aforesaid functions were accounted for as part of the operating expenses then there would be distortion in the G.P margin which would be required to be corrected. In the backdrop of his aforesaid deliberatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also a depends on market share of the product etc. These differences in marketing efforts among the comparables as well as with the taxpayer distorts the gross margins as these margins also include the marketing effort which is in built in the sale price. 13. A resale price margin is more accurate where it is realized within a short time of the reseller's purchase of the goods. The more time that elapses between the original purchase and: resale the more likely it is that other factors - changes in the market, in rates of exchange, in costs, etc - will need to be taken into account in any comparison Thus levels of inventories and cost involved in keeping inventories have to be adjusted which may not be possible based on the information available in the public domain. 14. It should be expected that the amount of the resale price margin will be influenced by the level of activities performed by the reseller This level of activities can range widely from the case where the reseller performs only minimal services as a forwarding agent to the case where there seller takes on the full risk of ownership together with the full responsibility for and the risks involved in advertisin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h entity in that chain. Advertising; Marketing; Distribution and guaranteeing the goods; Financing the stocks and Warranty risk. 18. It is also to be seen whether the costs of these functions are accounted for as the cost of goods or not. If the costs are accounted for as part of the cost of goods, no separate adjustments are required as the gross profit worked out would include the cost of functions also However, if the costs of aforesaid functions are accounted for as part of operating expenses, there will be a distortion in the G.P. margin and it is to be corrected. 19. The accounting treatment of the taxpayer and the comparable companies in respect of certain direct expenses may distort the gross margin For example, discount given to the customer or discount availed from suppliers may be shown separately or sales/purchases may be reduced directly. In such cases, discounts in the case of comparable companies, which may be shown some times under the head "selling expenses" have to be reduced from the purchases Such information may not be available in the public domain. 20. It is also likely in some cases that a function is performed by the supplier and not by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sactions by an independent enterprise may serve as a guide A functional analysis of the associated enterprise and in the latter case the independent enterprise is required to determine whether the transactions are comparable and what adjustments may be necessary to obtain reliable results. Further the other requirements for comparability, and in particular those of paragraphs 3.34-3.40, must be applied. b) Strengths and weaknesses 3.27 One strength of the transactional net margin method is that net margins (i.e return on assets operating income to sales and possibly other measures of net profit) are less affected by transactional differences than is the case with price as used in the CPM Method The net margins also may be more tolerant to some functional differences between the controlled and uncontrolled transactions than gross profit margins. Differences in the functions performed between enterprises are often reflected in variations in operating expenses. Consequently enterprises may have a wide range of gross profit margins but still earn broadly similar levels of net profits." On the basis of his aforesaid observations, the TPO rejected RPM and applied TNMM as the most ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was observed by the TPO that as the business model and other organisational management factors of the assessee and the comparables was substantially different, therefore, the RPM could not be applied for benchmarking the international transactions. It was observed by him that as the requisite information viz. inventory maintenance, services provided by the reseller, exclusive rights to resell, brand and trademark of the goods etc. of the comparables which were relevant for application of RPM was neither available in the public domain nor furnished by the assessee, therefore, RPM could not be applied. Accordingly, the TPO applied TNMM for benchmarking the international transactions of the assessee. After taking the ALP at 7.67% the TPO proposed a TP adjustment of ₹ 10,31,20,379/- in the hands of the assessee, as under: Sr. No. Description Amount (in Rs.) 1. Operating Revenue of the Taxpayer 637,922,689 2. Operating Expenses of taxpayer 692,114,398 3. Operating Profit of the assessee -54,191,709 4. ALP of Operating Profit @ 7.67% 48,928,670 5. Purchase of finished goods from AE 186,130,632 6. ALP of Purchase of finished goods from AEs 83,010,253 7. Ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trading good, unlike the assessee which had 100% imports from it AEs. Also, the DRP observed that while for the assessee was into trading of ready to sell/use pharma products, the aforementioned company viz. M/s Daga Global Chemical Ltd. was into trading in bulk chemicals and solvents. Apart there from, it was observed by the DRP that the aforementioned comparable had overseas subsidiaries in Dubai and China. Accordingly, on the basis of its aforesaid observations, it was concluded by the DRP that as M/s Daga Global Chemical Ltd. was functionally dissimilar, therefore, the same for the said reason could not be included as a comparable for benchmarking the international transactions of the assessee. As regards the claim of the assessee that as the TPO in its case for the preceding year had after necessary deliberations applied RPM as the most appropriate method, therefore, it was not permissible on its part to adopt an inconsistent approach and reject the said method during the year under consideration, the same did not find favour with the DRP. It was observed by the DRP, that the assessee had not placed on record any documentary evidence which would support its claim that the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d summarily dealt with the objections of the assessee and had most arbitrarily upheld the rejection of RPM and substitution of the same by TNMM by the TPO. In support of his contention that RPM is accepted as the most appropriate method for benchmarking the international transactions in a case of an assessee who is into distribution and marketing activities, reliance was placed on the orders of the coordinate benches of the Tribunal viz. (i) M/s Videojet Technology (I) Pvt. ltd. Vs. ACIT, Circle 10(3), Mumbai (ITA No. 6956/Mum/2012, dated 28.05.2019); and (ii) ITO-6(3)(1), Mumbai Vs. L‟Oreal India Pvt. Ltd. It was submitted by the ld. A.R that in case RPM is adopted as the most appropriate method, then no adjustment would be called for in the hands of the assessee. 10. Per contra, the ld. Departmental Representative (for short "D.R‟) relied on the orders of the lower authorities. It was submitted by the ld. D.R that as the requisite details about the business profile and financial data in respect of the comparables selected by the assessee were neither available in the public domain nor furnished by the assessee, therefore, in the absence of the said requisite details ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the TPO that as per Rule 10B(4) the companies whose accounts are prepared for the same period are most suitable for comparison than the companies whose accounts cover a different period. On the basis of his aforesaid deliberations, the TPO computed the ALP as per the TNMM after adopting operating profit/operating revenue as the PLI by confining himself to two comparables (out of 6 comparables) selected by the assessee, namely (i) M/s Om Chemical Industries ltd.; and (ii) M/s Priya International ltd. We find that the DRP while disposing off the objections of the assessee as regards the rejection of the comparables did not find any infirmity in the view taken by the TPO, and concurred with his view that as per Rule 10B(4) companies having a different year ending could not have been selected as comparables. Also, the specific claim of the assessee that one of the comparable viz. M/s Daga Global Chemicals ltd. was erroneously rejected by the TPO on the ground that it had a different year ending, despite the fact that the latters financials clearly revealed that it had a similar year ending on 31.03.2009, had not found favour with the DRP. It was observed by the DRP, that the said co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services; (iv) the price 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 [or the specified domestic 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." As is discernible from a perusal of Rule 10B(1)(b) of the Income Tax Rules, 1962, it can safely be gathered that RPM is the best suited method for determining the ALP of an international transaction, in a case where the goods purchased by an assessee from its AE are thereafter resold without any value addition to unrelated parties. Our aforesaid view is supported by the order of the coordinate benches of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder the TNMM, the net margin or operating profit achieved in related party transactions is compared with those entered into between the independent entities. Accordingly, under the TNMM the major thrust is to derive the operating profit at the transactional level and to identify the operating expenses of both the tested party as well as the independent parties, which, thus, requires a lot of adjustments to arrive at the actual operating profit. Thus, if the ALP of a transaction can be determined by applying any of the direct methods like CUP, RPM, CPM then they should be given a preference, and it is only where the said traditional methods have been rendered inapplicable that under such circumstances TNMM should be resorted to. Accordingly, in the backdrop of the aforesaid facts of the case before us, we are of the considered view that the assessee had rightly selected RPM for benchmarking its transactions of importing of formulations from its AEs, as against TNMM. 13. We shall now advert to the observations of the TPO/DRP on the basis of which the application of RPM by the assessee for benchmarking its transactions with the AE had been rejected by them. As is discernible from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee would not lead to any value addition to the product in question. In the backdrop of our aforesaid deliberations, we find substantial force in the contention advanced by the ld. A.R that as per Rule 10B(1)(b) in the Income Tax Rules, 1962, the RPM can safely be taken as the best suited method for determining the ALP of the international transactions in the case of the assessee before us, which as observed by us hereinabove had imported formulations from its AE and resold the same without making any value addition to unrelated parties in the domestic market. Our aforesaid view is further fortified by the orders of the various coordinate benches of the Tribunal viz.(i) Burberry India Pvt. Ltd. Vs. ACIT, Circle-5(1), New Delhi, ITA No.758/Del/2017, dated 22.06.2018;(ii) Horiba India (P.) Ltd. vs. DCIT (81 taxmann.com 209 (Delhi - Trib); (iii)Fresenius Kabi India Pvt. Ltd. vs. DCIT(ITA No. 235/Pun/2013); (iv). ACIT vis. Kobelco Construction Equipment India Ltd (ITA No.6401/Del/2012);(v)Systems Pvt. Ltd. vs. DCIT & vice versa (ITA No. 683/Hyd/2014); and (vi). Frigoglass India (P.) Ltd. vs. DCIT(2014) 149 ITD 429 (Delhi). In terms of our aforesaid observations, we are of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereas the assessee had 100% imports from its AE; (ii) that, the company was into trading in bulk chemicals and solvents whereas the assessee was into ready to sell/use pharma product; and (iii) that, the company had overseas subsidiaries in Dubai & China. Insofar, the observation of the DRP that as the aforesaid company was importing goods different from the assessee, therefore, it could not be selected as a comparable, we are afraid that the same does not find favour with us. In our considered view, in case of RPM the functions performed by the assessee as in comparison to the comparables are more important than the similarity of products. Also, we find that the DRP had concluded that the assessee during the year had overseas subsidiaries in Dubai and China. It is the claim of the assessee that the aforesaid company viz. M/s Daga Global Chemicals ltd. during the year under consideration i.e financial year 2008-09 had only one subsidiary viz. Daga Global Chemical FZCO. It is stated by the assessee that the subsidiaries in Dubai & China viz. Daga Global Chemicals DMCC and Zhangjiagang FTZ Daga Chemical Tr. Co. Ltd., had came into existence only in the F.Y. 2009-10. Accordingly, it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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