9911796707
TMI Blog2023 (7) TMI 1076X X X X Extracts X X X X X X X X Extracts X X X X ..... d in law, the Ld. CIT(A) has erred by not appreciating the fact that assessee has not benefitted from the said expenses as the assessee is running into losses year after other. The prime purpose of the said expenses is to create and strengthen the brand of the AEs in India and rendering TNMM as the MAM instead of RPM in the case of the assessee for the International Transaction of Purchase of formulations." I.T.A. No.1175 /Mum/2022 (Revenue appeal) 2. The assessee is a company engaged in the business of distribution of oncology, hepatitis B, virology, immunology and critical care products in India. The assessee filed the return of income for A.Y. 2013-14 on 28/11/2013 declaring a loss of Rs. 90,63,11,233/-. The case was selected for scrutiny and statutory notices were duly served on the assessee. Since the assessee had international transactions, a reference was made to the Transfer Pricing Officer (in short, TPO) to determine the arm's length price (ALP) of the international transaction. The TPO computed an adjustment of Rs. 43,39,27,130/- and an assessment order was passed incorporating the TP adjustment. The TPO, while making the TP adjustment, rejected the resale price metho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 Solumiks Herbaceuticals Ltd 11.28 7.35 7 Trimurthi Drugs & Pharmaceuticals Ltd 0.12 (4.49) Rejected because of low advertisement expenses 8 All India Origin Chemists & Distributors Ltd 1.74 (10.22) Rejected because of low advertisement expenses Average 5.58% (2.31) Assessee 6.50% (24.32) 4. The TPO proceeded to make the TP adjustment by applying TNMM for the following reasons:- (i) The RPM has been rejected because the assessee is carrying out significant advertisement and brand promotion activities and since below line expenses are affecting the margins of the assessee in a big way TNMM has been adopted as the most appropriate method; (ii) The rejection of comparables with very low advertisement and marketing expenses is in line with decision of Delhi High Court in the case of Sony India. Accordingly, the TPO selected fresh set of comparables as listed below:- Sr.No Company Name OP / sales 1 Solumiks Herbaceuticals limited 7.35% 2 Pharmed Limited 6.39% 3 Hindustan Bio Sciences Limited (17.87)% 4 Kee Pharma Limited (1.07)% Average Arithmetic mean) (1.30)% 5. The TPO arrived at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her, it was submitted by the Id. A.R, that now when the TPO had in the immediately preceding year accepted RPM as the most appropriate method, therefore, in the absence of any change in the facts he was not justified in rejecting the said method during the year under consideration. Apart therefrom, it was submitted by the Id. A.R that no cogent reasoning was given by the TPO for rejecting RPM and substituting the same by TNMM. The Id. A.R took us through the observations of the DRP and submitted that it had 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 Id. A.R that in case RPM is adopted as the mos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the RPM had observed that as the amount of the resale price margin would be influenced by the level of activities performed by the reseller, therefore, the functions performed, which affects the resale price margin should either be similar or it should be possible to make adjustments for such differences. Also, the TPO after rejecting the RPM method had declined to accept 4 comparables (out of 6 comparables) selected by the assessee, for the reason, that they had a different year ending. It was observed 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 concu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 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 resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Equipment India Pvt. ltd., ITA No. 6401/Del/2012 (Delhi). On the basis of our aforesaid observations, we are of a strong conviction that in the case of a pure distributor RPM is the most appropriate method for benchmarking its international transactions. 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. As such, ur/der the TNMM, the net margin or operating profit achieved in /elated 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 inappl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E are resold in the domestic market in the same form, then the gross profit margin earned on such transactions becomes the determinative factor for benchmarking the international transactions of the assessee with its AE by taking RPM as the most appropriate method. Our aforesaid view is supported by the order of the ITAT Pune, Bench in the case of Fresenious Kabi India (P) Ltd. Vs. DCIT (ITA No. 235/Mum/2013), wherein it was held 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. In the backdrop of our aforesaid deliberations, we find substantial force in the contention advanced by the Id. A.R that as per Rule 10B(l)(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 Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the aforesaid observation of the TPO, it was submitted by the assessee before the DRP that as the said company had a similar period ending on 31.03.2009, therefore, the same on the basis of a misconceived view had wrongly been excluded from the final list of comparables. As observed by us hereinabove, the DRP sustained the exclusion of the aforesaid company from the final list of comparables by assigning three fresh reasons viz. (i) that, the company had about 50% of purchases from imports in respect of trading goods, whereas 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 85 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 D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directed to re-determine the ALP of the international transactions of the assessee after accepting RPM as the most appropriate method. The assessee shall in the course of the 'set aside' proceedings file with the TPO the details as regards the business profile and financial data of its aforesaid comparables viz. (i).Om Chemical Industries ltd.; (ii) Priya International ltd.; and (iii).Daga Global Chemicals Ltd. (subject to inclusion of the same in the final list of comparables by the TPO), which shall be considered by the TPO for benchmarking the ALP of its international transactions as per RPM. In case, the assessee fails to file the requisite details, then the TPO shall be at a liberty to search for fresh comparables for benchmarking the ALP of the international transactions of the assessee as per RPM. Needless to say, the TPO shall in the course of the 'set aside' proceedings afford a reasonable opportunity of being heard to the assessee. In terms of our aforesaid observations the matter is restored to the file of the TPO." Accordingly, the Ld.CIT(A) held that RPM is the most appropriate method to benchmark the transaction of purchase of formulations in the tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing and marketing which has an impact on the operating margin. This, in our view, cannot be accepted for the reason that the Assessing Officer has not given any specific finding with regard to any value addition done by the assessee to the products imported to counter the claim that the assessee is not a mere distributor. The TPO mainly relied on the fact that the comparables have incurred lesser cost of AMP expenses, which again, in our view is not correct reason for rejecting RPM. The comparison here is at a gross margin level and the TPO has not given any adverse finding with regard to the gross margin ratio of the asessee. We also notice that the Pune Bench of the Tribunal in the case of Fresenius Kabi India Pvt Ltd vs DCIT ITA No.235/PUN/2013 order dated 15/06/2017 has considered a similar issue wherein it is held that - "23. From the above, it is settled legal position at the various Benches of the Tribunal that, in case of distribution activity, even when there are selling and marketing expenses are borne by the assessee, there cannot be any value addition to the product in question. In such cases, Resale Price Method is the most appropriate one and accordingly we reverse ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
