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TMI Blog2024 (11) TMI 434X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee s contention that its AMP expenses were not excessive and were similar to those incurred by other comparable entities.There is no cavil that the AMP activities are a part of the functional profile of the assessee. In the given facts, the DRP s decision that the assessee was not a routine distributor is clearly sustainable. No merits in the Revenue s challenge to the decision of the learned Tribunal. No substantial question of law. X X X X Extracts X X X X X X X X Extracts X X X X ..... nal Holdings Ltd. UK and Genesis Colours Private Limited, India. The said entities owned equity capital of the assessee in the ratio of 51:49. 6. The assessee retails the said luxury products from outlets, which are directly managed by it. The assessee operates seven luxury retail stores - two in Delhi and one each in Gurgaon, Hyderabad, Chennai, Mumbai and Bangalore. 7. The assessee filed its return of income for the AY 2012-13 on 30.11.2012, declaring a loss of Rs. 1,80,33,018/- during the said AY. The assessee had undertaken the following international transactions and reflected the same in Form-3 CEB: "Nature of transactions Value (in Rs.) Import of finished goods 28,88,97,371 Cost reimbursement received/ receivable 90,32,791 Receipt of marketing contribution 1,96,54,640 Accounts payable 10,54,36,618" 8. The AO made a reference to the TPO for determining the ALP under Section 92CA (3) of the Act. 9. The assessee furnished its Transfer Pricing Documentation to the TPO to establish that its international transactions were based on ALP's basis. 10. Insofar as the international transactions relating to reimbursement of the costs received / receivable; receipt of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment order dated 04.03.2016 under Section 143 (3) of the Act assessing the assessee's income at Rs. 5,14,25,573/-. This was computed by adding the sum of Rs. 6,94,58,591/- to the returned loss of Rs. 1,80,33,018/-. 18. The assessee filed the objections to the draft assessment order dated 04.03.2016 before the Dispute Resolution Panel (DRP). Apart from contending that the AO had committed a jurisdictional error in referring the matter to the TPO without recording any reasons, the assessee also objected to the rejection of the CUP and RPM as the most appropriate method. The assessee also objected to the use of one of the entity Avenue Supermarts Limited as a comparable entity to the assessee on the ground that it was not functionally similar to the assessee. 19. In addition, the assessee also objected to the TPO in rejecting the working capital adjustment and lease rent adjustment for determining the PLI of the selected comparable entities. 20. The DRP accepted the assessee's objection regarding the requirement to make an adjustment on account of working capital and to confine the application of mean PLI only to the value of the international transactions in question. The DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee does not add any value to the said goods; the same are sold in the same condition as imported. It is in these given facts that the learned Tribunal had concluded that RPM method would be the most appropriate method. 28. The United Nations Practical Manual on Transfer Pricing for Developing Countries (2021) briefly describes the RPM as under:- "4.3 Traditional Transaction Methods: Resale Price Method (RPM) 4.3.1 Introduction to RPM 4.3.1.1 The Resale Price Method (RPM) is one of the traditional transaction methods that can be used to determine whether a transaction reflects the arm's length principle. The Resale Price Method focuses on the related sales company which performs marketing and selling functions as the tested party in the transfer pricing analysis. This is depicted in Figure 4.D.2 below. 4.3.1.2 The Resale Price Method analyzes the price of a product that a related sales company (i.e. Associated Enterprise 2 in Figure 4.D.2) charges to an unrelated customer (i.e. the resale price) to determine an arm's length gross margin, which the sales company retains to cover its sales, general and administrative (SG&A) expenses, and still make an appropriate profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rences will have a material effect on profit margins than on price. One would expect a similar level of compensation for performing similar functions across different activities. 4.3.4.3 While product differences may be more acceptable in applying the Resale Price Method as compared to the CUP Method, the property transferred should still be broadly similar in the controlled and uncontrolled transactions. Significant differences between the nature of the products sold in the controlled and uncontrolled transactions may reflect differences in functions performed, assets used or risks assumed. Such differences might suggest differences in arm's length gross margins. 4.3.4.4 The compensation for a distribution company should generally be the same whether it sells washing machines or dryers, because the functions performed (including risks assumed and assets used) are similar for the two activities. It should also be noted, however, that distributors engaged in the sale of markedly different products cannot be compared. The price of a washing machine will, of course, differ from the price of a dryer, as the two products are not substitutes for each other. Although product comparabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the DRP had accepted the TPO's conclusion that RPM was not the most appropriate method, essentially, for the reason that the assessee had incurred about Rs. 5.44 Crores towards AMP expenses, which the DRP considered as substantial. Accordingly, the DRP had also concluded that the assessee is not a simple distributor. 32. The relevant extract of the DRP's order dated 18.10.2016 is as under:- "6. In his order, the TPO has discussed this issue in considerable detail. This discussion is not being repeated here for the sake of brevity. The TPO has pointed out that RPM can only be used as the MAM if the products/services are similar. The TPO has also pointed out that similarity of market conditions, functions performed, accounting treatment and products/services rendered, between the assessee and the comparables, is essential for use of RPM, and the assessee has failed to demonstrate such similarity. 7. As per its Form no. 3CD, the assessee has a gross profit rate of 54.96% and a net profit rate of (-) 14.73%. In its P&L account, the assessee has debited about Rs.28.97 Cr. Towards 'other expenses' and shown substantial loss. The assessee has incurred about Rs.5.44 Cr. towards 'adver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distribution or marketing activities when the goods are purchased from associated entities and there are sales effected to unrelated parties without any further processing, then, this method can be adopted. The findings of fact are based on the materials which have been produced before the Commissioner as also the Tribunal. Further, it was highlighted before the Commissioner as also the Tribunal that the RPM has been accepted by the TPO in the preceding as well as succeeding assessment years. That is in respect of distribution, segment activity of the Assessee. In such circumstances, and when no distinguishing features were noted by the Tribunal, it did not commit any error in allowing the Assessee's Appeal. Such findings do not raise any substantial question of law. The Appeal is devoid of merits and is, therefore, dismissed. There would be no orders as to costs." 37. In Principal Commissioner of Incometax-6 v. Matrix Cellular International Services (P) Ltd : (2018) 90 taxman.com 54 (Delhi) this Court considered the question whether the Tribunal had erred in adopting RPM for determining the ALP in relation to the assessee's business of reselling and distributing the sim cards imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ational transaction of purchase of goods by the Indian enterprise from the foreign AE." 9. Similarly, in Swarovski India (P.) Ltd. v. Asstt. CIT (2017) 78 taxmann.com 325 (Delhi - Trib.), the ITAT held: "Adverting to the facts of the instant case, we find that the assessee purchased Crystal goods and Crystal components from its AE. No value addition was made to such imports. The goods were sold as such. In the given circumstances, the RPM is the most appropriate method for determining the ALP of the international transaction of' Import of Crystal goods and Crystal components." 10. A similar view has been adopted by the Mumbai bench of the ITAT in Mattel Toys India (P.) Ltd. v. Dy. CIT (2013) 34 taxmann.com 203/144 ITD 76: "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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