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TMI Blog2025 (3) TMI 937X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee from the AE. In other words, the said warranty cost claim shall be reimbursed by the AE apart from reimbursement of expenses. Pertinently, the amounts so recovered/reimbursed do not comprise any service element as the AE would have borne these expenses directly, had the assessee not incurred the same. Thus, there is no service element involved. Ergo, the purchase of solar products/lights on the one hand and warranty cost claim on the other, are unrelated transactions and can neither be aggregated/clubbed nor are they so inextricably linked as to not survive without the other, so far as the present facts are concerned. Selection of MAM - In the present case, the TPO and the DRP concluded that RPM, in the facts of the case, was not the most appropriate method, essentially based on the assumption that the warranty cost claim and the reimbursement of expenses are inextricably inter-linked with the transaction of purchase of the solar products and cannot survive without the other. This assumption is erroneous. It was equally erroneous to conclude that these three transactions were required to be aggregated or clubbed together for benchmarking or determination of the AL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeared in this case: For the Appellant : Mr. Sanjay Kumar, Ms. Monica Benjamin and Ms. Esha Kadian, Advocates. For the Respondent : Mr. Ved Jain, Mr. Nischay Kantoor and Ms. Soniya Dodeja, Advocates. JUDGMENT TUSHAR RAO GEDELA, J. 1. Present appeal has been filed by the appellant/Revenue (hereafter referred to as 'Revenue') under Section 260A of the Income Tax Act, 1961 (hereafter referred to as 'the Act') assailing the order dated 10.06.2024 passed by learned Income Tax Appellate Tribunal (hereafter referred to as 'the ITAT') in ITA No.516/Del/2022 which was allowed in favour of the respondent/assessee (hereinafter referred to as 'assessee'). 2. In brief, the facts germane to the issues in this appeal are as under:- (i) The assessee company is stated to be a part of D Light Group which is engaged in manufacturing, marketing and trading of solar lights and power products and sells the same to various customers in different countries. The assessee had filed its return of income on 30.11.2017 declaring a total income of Rs.NIL. The assessee had claimed a loss of Rs. 9,45,78,855/-. The case was selected for scrutiny and a notice dated 10.08.2018 under Section 143 (2) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RP on 30.04.2021. However, the DRP vide its order dated 29.12.2021 agreed with the view held by TPO on selecting the TNMM over the Resale Price Method (hereafter referred to as 'RPM') as the most appropriate method, observing that the transactions in question are closely linked and therefore, the aggregation. Pursuant thereto, the DRP issued directions under Section 144C(5) of the Act directing the AO to complete the assessment. A direction for inclusion/exclusion of some comparables was also passed. Following such directions, the earlier transfer pricing adjustment of Rs. 10,61,91,407/- was reduced to Rs. 6,94,53,297/-. The AO passed the final assessment order dated 31.01.2022 under Section 143 (3) of the Act determining the total income of Rs. 2,51,25,559/-. (vi) Being aggrieved, the assessee filed an appeal before the learned ITAT against the final assessment order dated 31.01.2022. (vii) The learned ITAT, while partly allowing the appeal, agreed with the submissions of the assessee and held that the most appropriate method adopted by the assessee of RPM to benchmark the transaction of solar goods was correct. It was observed that the international transaction of purchase of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is fact has been admitted by the assessee in the risk profile. In other words, learned counsel for the Revenue submits that the "rendering of services" after sales is "value addition" made by the assessee. On this score, he forcefully submits that since there is value addition, the view taken by the TPO and DRP are in consonance with the fact situation obtaining in the present case in contradistinction to the view taken by the learned ITAT. In the same breath, he also vociferously contends that the reliance on the judgements of this Court in Matrix Cellular (supra) and Fujitsu India (supra) is wholly misplaced. In order to buttress the aforesaid submissions, learned counsel referred to relevant paragraphs of the impugned judgement of the learned ITAT as also the examination conducted by the TPO and the DRP. 5. On the rule position, learned counsel referred to the provisions of Section 93CA (3) of the Act relating to the manner of determination of ALP by the TPO read with Rule 10(1)(f) of the Income Tax Rules (hereafter referred to as 'the Rules'). He also referred to Rule 10B of the Rules which refers to various methods for determining the ALP under Section 92C of the Act. He also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oposed by your goodself In the show cause notice, your goodself have arbitrarily rejected the RPM method (the most appropriate method as applied by the Assessee) adopted by Assessee without providing any cogent reasons/ evidence. Accordingly, your goodself have proceeded to reject the functional analysis carried out by the Assessee without appropriately comprehending the same. Thereafter, your goodself has proposed to select TNMM as the most appropriate method to benchmark the international transaction pertaining to purchase of traded goods from AEs. Further, your goodself has stated that in the present case, purchase of lights/ other accessories and warranty cost claim are closely linked transaction and the same needs to aggregated for the purpose of benchmarking applying TNMM as the MAM by relying on Delhi High Court Judgement in the case of Avery Dennison (India) Pvt. Ltd. The relevant extract of the Show Cause Notice is reproduced hereunder: UNQUOTE In the present case, Purchase of lights/other accessories and Warranty cost claim are closely linked transaction and needs to be aggregated for the purpose of benchmarking the same. In a case Avery Dennison (India) Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrangements for rectification of the defects by way of replacement/ refurbishment/ repairment of the products/ part of the same. The cost of the rectification of the manufacturing defects of the products during the warranty period shall be recovered by the Assessee from the AE. The relevant extract from the inter-company agreement is provided below for your reference and records: Further, during the warranty period, in case the products/any part of the same are found to be in the nature of manufacturing defect, d.light India shall make necessary arrangements for rectification of the defects by way of replacement/refurbishment /repairment of the products/part of the same. The cost of rectification of the manufacturing defects of the products during the warranty period shall be recovered by d.light India from d.light Cayman. It is pertinent to note that above amounts recovered from AEs does not comprise of any service element, as the AEs would have borne these expenses directly had Assessee not incurred the same. Hence, in such cases it was appropriate to recover these amounts without a mark-up, given such expenses have been incurred out of administrative convenience, with no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ursed by the AE including the other relatable expenses, would not impair the applicability of RPM as the most appropriate method, as rightly adopted by the assessee. 10. Additionally, learned counsel also referred and relied upon the terms of agreement dated 01.04.2016 entered into between the assessee and its AE. It provided that during the warranty period, in case the product/any part of the same are found to be in the nature of a manufacturing defect, the assessee would make necessary arrangements for rectification of defects by way of replacement/refurbishment/repairment of the products/part of the same, the cost/expenses of which were to be recovered by the assessee from the AE. Thus, he contended that both the issues are squarely in favour of the assessee which was not appreciated correctly either by the TPO or the DRP. Apart from the judgements of this Court in Matrix Cellular (supra) and Fujitsu India (supra), learned counsel relied upon the judgement of this Court in Pr. CIT-2, Delhi vs. M/s Burberry India Pvt. Ltd., ITA 471/2019 decided on 24.10.2024 reiterating the aforesaid principles laid down in Matrix Cellular (supra) and Fujitsu India (supra). On the aforesaid basi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me. Thus, there is no service element involved. Ergo, the purchase of solar products/lights on the one hand and warranty cost claim on the other, are unrelated transactions and can neither be aggregated/clubbed nor are they so inextricably linked as to not survive without the other, so far as the present facts are concerned. 13. So far as the issue of determining the ALP on the basis of most appropriate method, we find that the assessee had adopted the RPM as a method for benchmarking the international transactions relating to the import of finish goods. Apart from the procedure prescribed regarding comparable entities, the assessee also relied on the OECD guidelines in support of its contention regarding use of RPM as the most appropriate method for benchmarking international transactions in question, the same being in respect of the activities for purchase of the goods from related parties and resale to the unrelated parties. It was the main contention of the assessee that the RPM would be the most appropriate method in cases where the distributor/reseller does not add any value to the products purchased and sold. 14. In the present case, the TPO and the DRP concluded that RPM, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imbursed by the AE to the assessee as per the term of the inter-company agreement which would not tantamount to value addition made by the assessee at its end. 16. So far as the argument regarding value addition in the nature of advertising and marketing strategy is concerned, the same is no more res integra with the view taken by this Court in the case of Burberry India (supra). It would be worthwhile to reproduce hereunder the relevant paragraph nos. 27 to 31 of the said judgement:- "27. At the outset, it is material to note that there is no cavil as to the functional profile of the assessee. Admittedly, the assessee is engaged in importing of goods bearing brand name 'Burberry' from its Associate Enterprise (AE) and retailing the same through its stores. The 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant to refer to the following passage from the said text relating to the issue of the required comparability in RPM:- "4.3.4 Comparability in Applying the Resale Price Method 4.3.4.1 An uncontrolled transaction is considered comparable to a controlled transaction if: ◻ There are no differences between the transactions being compared that materially affect the gross margin (for example, contractual terms, freight terms etc.); or ◻ Reasonably accurate adjustments can be performed to eliminate the effect of such differences. 4.3.4.2 As noted above, the Resale Price Method is more typically applied on a functional than on a transactional basis so that functional comparability is typically more important than product comparability. Product differences will probably be less critical for the Resale Price Method applied on a functional basis than for the CUP Method, because it is less probable that product differences 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 Res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the assessee had used the RPM as a corroborative method for benchmarking the international transactions relating to the import of the finished goods. The assessee had compared gross profit margin from the sale of such imported luxury products with the gross profit margin of comparable entities in respect of the similar transaction (namely sale of the imported products in domestic markets). The assessee also relied upon the OECD Guidelines as well as the Guidance Note issued by the ICAI in support of its contention regarding use of RPM as the most appropriate method for benchmarking the international transactions in question. The same being in respect of the activities for purchase of the goods from related parties and resale to the unrelated parties. The assessee had highlighted that RPM would be the most appropriate in cases where the reseller does not add any value to the products purchased and sold. 31. In the present case, 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 ₹5.44 Crores towards AMP expenses, which the DRP considered as substantial. Accordingly, the DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 imported from AEs. The relevant extract of the said decision is set out below:- "7. The dispute before the Court is whether the ITAT erred in adopting the RPM in order to determine the arms' length price in relation to the assessee's business. In the relevant assessment year, the assessee had four AEs. Three of them were wholly owned subsidiaries, whereas in the fourth, the assessee held 49% shareholding. The ITAT found that the AEs were engaged in the business of identifying, negoti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining 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 alter the tangible goods and services or use any intangible assets to add substantial value to the property or services i.e., resale is made without any value addition having been made." 11. This view has also been affirmed by the Bombay High Court in its judgment dated 07.11.2014 in CIT v. L'Oreal India (P.) Ltd. (2015) 53 taxmann.com 432/228 Taxman 360, where the Court found that there was no error in law committed by the ITAT when it held that RPM was the Most Appropriate Metho ..... X X X X Extracts X X X X X X X X Extracts X X X X
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