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TMI Blog2021 (11) TMI 1132X X X X Extracts X X X X X X X X Extracts X X X X ..... in the impugned assessment order; 2. That on facts and circumstances of the case and in law, the ld/AO following the directions of the Hon‟ble DRP, erred in assessing the loss of INR 10,36,15,530 at an income of INR 4,12,49,763; 3. That on facts and circumstances of the case and in law, Ld. AO/Ld. Transfer Pricing Officer ("TPO‟)/Hon‟ble DRP erred in disregarding multiple year/ prior years‟ data as used by the Appellant in the TP documentation and holding that current year (i.e. FY 2013-14) data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing its TP documentation; 4. That on the facts and circumstances of the case and in law, the Ld. AO/ TPO/ Hon‟ble DRP grossly erred in not appreciating the functional profile of the Appellant and incorrectly characterizing the Appellant to be akin to a super normal/ high risk distributor. 5. That on facts and circumstances of the case and in law, Ld. AO/TPO/Hon‟ble DRP grossly erred in enhancing the income by INR 14,48,65,293 by rejecting Resale Price Method ("RPM‟) as the Most Appropriate Method and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ational transaction is within 3% band and hence it is at arm's length. The ld TPO rejected the compatibility analysis. It rejected the resale price method as the most appropriate method stating that the appellant was also performing certain additional functions including purchase order, warehousing and inventory control, quality control to purchasing and forecasting, pricing and sales and marketing services. Therefore, the assessee assumes considerable risk in the form of market risk. credit risk, inventory risk foreign exchange risk, contract risk, service liability risk and manpower risk. He further held that since all the relevant cost incurred to discharge these functions cannot be captured in the recent price method, it cannot be taken as most appropriate method. Therefore, the ld TPO adopted the Transactional Net Margin Method as the most appropriate method and substituted the profit level indicator with OP/ sales. The ld TPO did not disturb the comparable selected by the assessee however denied the working capital adjustment. He computed the margin of the comparable at 1.64 % and proposed a adjustment of Rs. 17.64 Crores. He further held that the assessee has outstanding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price method as the most appropriate method for benchmarking the international transaction of purchase of traded goods. He also referred to para No. 22 onwards of that decision. He also admitted that the revenue has filed an appeal against order of the coordinate bench before the Hon'ble Delhi High Court which is pending. It was further stated that for this year the ld DRP has merely relied on its finding for earlier years which have been reversed by the co-ordinate bench. He therefore, submitted that the issue is with respect to the most appropriate method is squarely covered in favour of the assessee. He submits that the rule of consistency also demands that the orders of the co-ordinate bench should be followed. 5. The ld DR vehemently opposed the argument of the ld AR and submitted that admittedly in earlier years the most appropriate method has been accepted by the co-ordinate bench as resale price method. He submitted that the co-ordinate bench has not considered the several risk that assessee undertakes the functional profile of the assessee and therefore that order should not be followed. He submitted that finding of the coordinate bench is also challenged before hono ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roper warehousing arrangement or has proper inventory control, its goods will not move to the point of sale which can be said of the marketing efforts of the taxpayer. 16. TPO also proceeded to change the method on the premises that the taxpayer has incurred AMP expenses of Rs.15,425,168/-against the trading revenue of Rs.81,738,810 which is 18.87% which is definitely much higher than the expenses of a routine distributor. TPO also not entertained the arguments of the taxpayer that the net level loss the taxpayer has suffered is due to failure of the business/ project plans for the financial years on the ground that AE ought to have been supported the taxpayer either by reimbursement of cost or some price support in the international transaction of purchase of finished goods by the taxpayer. So, the TPO proceeded to believe that the net loss of the taxpayer is linked to the transfer price that the taxpayer has agreed with its AE and in these circumstances, TNMM is the most appropriate method. 17. However, when we examine the arguments addressed by both the ld. Representative for the parties to the appeal in the light of the undisputed facts, it goes to prove that the taxpayer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rket research, sales and marketing, ware-housing, inventory control, quality control etc. and also risk like market risk, inventory risk, credit risk etc all are undertaken by any distributor for sale of products. No comparable instances have been brought either by the TPO or by the Ld. DRP that the other distributors are not performing such functions. What is important is to see is, whether there is any value addition or not on the goods purchased for resale? If there is no value addition and if the finished goods which are purchased from AE are resold in the market as it is, then gross profit margin earned on such transaction becomes the determinative factor to analyse the gross compensation after the cost of sales. Thus, we hold that under the facts of the present case, RPM should be held as MAM." 21. Co-ordinate Bench of the Tribunal in Asstt. CIT v. Kobelco Construction Equipment India Ltd. [2017] 81 taxmann.com 31 (Delhi - Trib.) also decided the identical issue by relying upon Mattel Toys (I.)(P.) Ltd. (supra) and ITO v. L'oreal India (P.) Ltd. [2012] 24 taxmann.com 192/53 SOT 263 (Mum.) (URo) in favour of the assessee by returning following findings :- "13. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not sustainable for the reason that in a comparable uncontrolled transaction, normally distributor requires to carry out all the functions necessary to enhance the sales like market research, inventory risk, credit risk etc.. In such circumstances, no comparable instances have been brought on record by the TPO/DRP. So, when finished goods purchased by the taxpayer are resold in the market without any value addition, then gross margin earned on such transaction is the only determinative factor to analyse gross compensation after the cost of sale. So, we are of the considered view that RPM in this case is the MAM to bench mark the international transactions. In these circumstances, addition made by the TPO/AO merely by disputing the method applied by the taxpayer is not sustainable in the eyes of law. Method for benchmarking the international transaction cannot be changed merely because of the fact that the taxpayer has suffered loss at the net level but has positive gross profit in trading segment as it depends on host of circumstances. So, Grounds No.4, 5 & 6 in ITA No.1674/Del./2016 (AY : 2011-12) & ITA No.1982/Del./2017 (AY : 2012-13) and Grounds No.3, 4 & 5 in ITA No.7088/De ..... X X X X Extracts X X X X X X X X Extracts X X X X
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