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TMI Blog2022 (1) TMI 413X X X X Extracts X X X X X X X X Extracts X X X X ..... to as AE). The parent company is primarily engaged in the business of manufacturing medical diagnostic reagents and analyzers. Diagnostic reagents are used to diagnose a range of health issues by screening for pathogens, antigens, co-infections, genetic diseases, and a host of other physical diseases. Analyzer is a medical laboratory instrument designed to measure different chemicals and other characteristics in a number of biological samples quickly, with minimal human assistance. These measured properties of blood and other fluids may be useful in the diagnosis of disease. 4. The Assessee imports reagents and diagnostic equipments (analyzers) from the parent Randox Laboratories (India) P. Ltd. and sells them to independent third parties in India. The question before the AO was, whether the price paid by the Assessee to its AE for purchase of reagents was at Arm's length because as per the provisions of Sec. 92 of the Act, income arising from an international transaction (transaction with a related party) has to be determined having regard to Arm's Length Price (ALP). Section 92F define Arm's Length Price is the price applied (or proposed to be applied) when two unrel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e usage of RPM which the Assessee had considered as the Most Appropriate Method (MAM) and instead chose Transactional Net Margin Method (TNMM) as the MAM. Further, the TPO also rejected the TP study conducted by the Assessee and passed the order u/s.92CA of the Act on 29.10.2018 making an addition of Rs. 3,01,91,170 as TP adjustment. 9. The Assessee in its objection to the draft assessment order in which the addition proposed by the TPO was added to the total income, before the Dispute Resolution Panel (DR) contended that the Assessee is merely a distributor and the activity conducted by the Assessee is that of buying and reselling reagents and analysers without any change in the product. It was reiterated that in order to better the sale of the reagents, it has adopted a model for Indian market, which the Assessee calls it as 'Reagent Rental Contract (RRC)', where the analyser machine in which such reagents are used are placed in the premises of the customer and a certain commitment for sales is taken from them. This is a mode to increase the sale of reagents, to cater to the customer requirement of ensuring that the capital investment that they will have to do in buying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivities conducted in selling, which entails such a higher margin. The TPO has gone by presumptions that as a distributor, the gap between Gross Profit and Net Profit cannot be higher. It is the plea of the Assessee that merely, because the selling model that the Assessee has adopted is unique and not ordinary, this presumption does not hold good. 13. It was the plea of the Assessee that the TPO presumed that distributors do not do any activities other than distribution. It was the plea of the Assessee that it is very clearly mentioned in the risk analysis of the Assessee in the Transfer Pricing Documentation that the Assessee bears the risk of marketing and creating demand for the product. It is responsible for ensuring that the product sales increase. In order to do that, the Assessee has adopted such methods and functions which will create more demand and products can be sold. The TPO's assumption that distributor will not carry out such functions in baseless. Further, by the TPO's admission itself, the Gross margin earned by the Assessee is huge. This is a clear indication that because of the additional activities in selling the product that the Assessee is adopting, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tock in trade Nil 28,05,80,849 28,05,80,849 Cost of Materials consumed 7,72,410 Nil 7,72,410 Change in inventory of stock in trade 2,495 (95,81,460) (95,78,965) Gross profit 3,64,070 13,13,57,725 13,17,21,795 GP/ Sales 29.16% 31.16% 31.16% 17. It was submitted that light of the above-mentioned fact, it is clearly evident that the facts of the case remains the same as AY 2010-11 and 2011-12 as it is a deemed manufacturing activity as per excise and no modifications are done on the product. Also, the contribution of the manufacturing segment as compared to the gross profit of the company as a whole is very insignificant (0.30% of total turnover for AY 2015-16) and such activity of repacking the bulk reagent into non-standard quantity of reagents are done to cater to demand of some of the customers. It was submitted that as per the OECD TP guidelines para 3.9, though comparability analysis should be done for individual transactions, however for the sake of practical difficulties arising in the case of combined transactions, they should be analysed on the basis of pre-dominant nature. 18. The learned DR relied on the order of the DRP. 19. We have considered the ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y customers who buy the reagents from the assessee, but, were only installed in their premises for chemical analysis and research work for a period of five years. After expiry of five year period, the WDV of the analyzers get reduced to zero and accounting entries to that effect are passed in the books. These facts are evident from the materials available on record. Thus, it is clear, the assessee is merely purchasing reagents from its AE and reselling them to third party customers in India without making any value addition. In fact, the analyzer/spares of the machines are never sold to the third party customers but always remain the property of the assessee. 8. Having examined the nature of transaction carried on by the assessee, it is necessary now to advert to the core issue. Undisputedly, in the transfer pricing analysis, the assessee has selected RPM as the most appropriate method. However, the Transfer Pricing Officer has rejected the RPM primarily on the following reasoning:- i) In the year under consideration, the assessee has made additions to the plant and machinery to the tune of Rs. 2.18 crore; ii) It has capitalized cost of product development to the tune of 1.07 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee it is evident that the assessee has not started its manufacturing activity in the impugned assessment year as it was still in the process of setting-up of the plant. Therefore, the finding of the Transfer Pricing Officer and learned DRP that the assessee is involved in manufacturing activity is factually incorrect. Further the fact that the analyzers were not sold to the third party customers is evident from the sample copy of the agreement placed in the paper book. Insofar as the product development cost is concerned, the material on record indicates that such cost was incurred towards spares for the analyzers and the assessee capitalized such cost. 11. Thus, from the aforesaid facts, it is very much clear that in the year under consideration, assessee has not undertaken any manufacturing activity as the manufacturing unit was still in the process of being set-up. On the contrary, the facts on record clearly reveal that the assessee had purchased reagents and chemicals from its AE and sold to the third party customers without any value addition. Further, the analyzers, spares and consumables, though, were imported, however, they were not sold but were provided in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etc., are purchased from A.Es and sold to customers without any value addition or material change to such products. It is a fact that the assessee had bench marked the international transaction relating to purchase of finished goods from A.Es by adopting RPM. However, the Transfer Pricing Officer has rejected RPM primarily on the ground that gross profit computation of comparables was not produced by the assessee. He had also stated that the gross profit margin of the products sold by the assessee cannot be compared with gross profit margin of the products sold by the comparables as they are different in nature. In this context, it is to be noted that at the outset, the Transfer Pricing Officer had opined that the transaction of purchase of finished goods for resale was to be bench marked as per CUP method. We are unable to understand why the Transfer Pricing Officer abandoned bench marking under CUP if he considered it as the most appropriate method to bench mark the international transaction between the assessee and the A.Es. 11. At this stage, it would be appropriate to refer to certain provisions in the statue relating to transfer pricing adjustment. Section 92C of the Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are Pvt. Ltd. (supra), the Tribunal, Delhi Bench, following a number of other decisions held as under:- "10.2. Coming to the argument that the assessee himself has adopted TNMM as the MAM for its transfer pricing study and hence it cannot turn around and argue for adoption of RSPM as the MAM, we find that the Mumbai Bench of the Tribunal in the case of Mattel Toys(I) Pvt. Ltd. in ITA no. 2476/Mum/2008 held as follows. "41. Now coming to the argument of the Ld. DR that once the assessee itself has chosen TNMM as the MAM in TPR, then it cannot resort to change its method at an assessment or appellate stage. In our opinion, such a contention cannot be upheld because if it is found on the facts of the case that a particular method will not result into proper determination of the ALP, the TPO or the appellate authorities can very well hold that why a particular method can be applied for getting proper determination of ALP or the assessee can demonstrate a particular method to justify its ALP. Thus, even if the assessee had adopted TNMM as the MAM in the TP report, then also it is not precluded from raising the contentions/objections before the TPO or the appellate Courts that such a m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered by TPO and referred to Para 2.29 of OECD price guidelines 2010 as stated hereinabove. On the other hand, ld. AR justified the RPM method adopted by it and also referred to order of TPO in the preceding AY as well as succeeding AY to the AY under consideration to substantiate that RPM is the most appropriate method to determine ALP. He submitted that the assessee made adjustment for marketing and selling expenses to the profits to make it comparable to the comparable companies' profits. We agree with the Ld. CIT(A) that there is no order of priority of methods to determine ALP. RPM is one of the standard method and OECD guidelines also states that in case of distribution and marketing activities when the goods are purchased from AEs which are sold to unrelated parties, RPM is the most appropriate method. In the case before us, there is no dispute to the fact that the assessee buys products from its AEs and sells to unrelated parties without any further processing." (iii) In the case of Danisco (India) Pvt. Ltd. vs. ACIT, Circle 10(1), New Delhi (ITA no. 5291/Del/2010), it is held as follows: "22. Considering the above submissions we find that the assessee establis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and RPM for trading segment was Factually and objectively not correct. Thus the rejection of methods by TPO as adopted by assessee is bereft of any cogency and objectivity. The same is a work of guessing and conjectured. Similarly the TNMM method applied by the TPO suffers from the same inherent aberrations as mentioned above. In these circumstances we are of the view that Assessee's methods of CPM and RPM respectively worked by applying appropriate comparables is to be upheld. Thus the ALP working returned by the assessee is upheld. The Assessee's TP grounds are allowed." (v) Textronic India Pvt. Ltd. vs. DCIT (ITA no. 1334/Bang/2010), it is held as follows: "We have considered the rival submissions. The dispute is with regard to the ALP in respect of international transactions whereby the assessee imports equipment from its AE and resells them without any value addition to the Indian customers. In similar circumstances, Mumbai Bench of the Tribunal in the case of L'Oreal India Pvt. Ltd. (supra) has taken the view that the RPM would be the most appropriate method for determining the ALP. The Mumbai Bench of Tribunal in this regard, has referred to the OECD guide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for some reason assessee has not challenged the decision of DRP in upholding application of TNMM, assessee cannot be prevented from objecting to adoption of TNMM in the impugned assessment year. In view of the aforesaid, we remit the matter back to the file of the AO/TPO to examine assessee's analysis under the RPM and decide the issue accordingly after due opportunity of being heard to the assessee." 13. The facts on record reveal that the Transfer Pricing Officer under a misconception that the assessee has undertaken manufacturing activity has rejected RPM. Learned DRP has also not examined the facts in proper perspective. Rather, learned DRP has recorded an erroneous finding by stating that in the transfer pricing analysis the assessee has chosen TNMM as the most appropriate method. The aforesaid finding of learned DRP is factually incorrect, as, on a perusal of the transfer pricing analysis of the assessee, a copy of which is placed in paper book, it is revealed that the assessee has selected RPM as the most appropriate method and has also explained why TNMM is not applicable to the subject transaction. In view of the aforesaid, we hold that RPM is the most appropriate me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act towards Bonus and Leave encashment, which has been reversed in the subsequent periods and which are already considered in the income of AY 2016-17 upon such reversal. 23. The AO added a sum of Rs. 519,776/- u/s. 43B of the Act for AY 215-16 towards Bonus and Leave encashment as amount was not paid within the due date of filing the return which was confirmed by the DRP. 24. It is the plea of the Assessee that excess provision made have been reversed subsequently in FY 2015-16 and on such reversal, the excess provision has already been offered to tax in the subsequent year. Therefore, there is no requirement to again add that to the income u/s. 43B of the Act in AY 2015-16, otherwise, it would lead to double taxation of the same income. 25. Below table provides the details of the amounts as mentioned in above points: Particulars Provision as at 31st March 2015 Paid before 139(1) due date Reversed and considered as income in subsequent year before 139(1) due date Bonus 40,216 38,211 2,005 Leave encashment 517,771 - 517,771 Total 5,57,987 38,211 5,19,776 26. The learned Counsel for the Assessee therefore submitted that the addition made needs to be reverse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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