|CORAM:||C. M. Garg (JM), Pramod Kumar (AM)|
|CATCH WORDS:||Resale Price Method|
|DATE:||October 13, 2014 (Date of pronouncement)|
|DATE:||October 18, 2014 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|Resale Price Method: If margins of the wholesale distributor can be compared with the margins of the assessee, no adjustment can be made|
The assessee used Resale Price Method for benchmarking its international transactions so far as purchase of books is concerned. The claim of the assessee was that its purchase is at arm’s length price because while its gross margin for the sale of books, other than imported books, is 33.82%, whereas its gross margin for sale of imported books is 38.08%. The TPO, however, rejected this stand on the ground that the comparison of profit earned on imported books with profit earned on other books is incorrect because the latter is an entirely uncomparable activity on the facts of this case. It was pointed out that, apart from distributing books imported from the AEs, the assessee publishes Indian reprints of foreign books by paying royalty thereon, and that this activity cannot be compared with distribution of books …..
A plain look at the computations done by the TPO shows glaring inconsistencies. While the TPO has proceeded on the basis that the assessee has received 85.15% discount on published price of the books and allowed 30% discount on the same published price to the wholesale dealers, the figures reproduced above have a different story to share. Going by the business model as perceived by the TPO, which constitute foundation of the impugned ALP adjustment, for each purchase of Rs 24.85 (100-85.15) by the assessee, the sale price has to be Rs 70 (100-30). The profit margin thus works out to 45.15 which works out to margin of 64.50% of sales whereas the profit margin of the assessee on sale of these books is admittedly 38.08%. Clearly, therefore, there is a discrepancy in the perceptions of the TPO vis-à-vis actual facts of the case. This discrepancy, however, seems to be explained by the assessee’s uncontroverted claim that, as submitted by the assessee before the AO vide chart attached to letter dated 13.12.2006- a copy of which is placed before us at the paper-book page 144, the UK cover price of the book and Indian cover price is not the same. While the discount allowed to the assessee is on the UK published price, the discount allowed to wholesale dealer is on Indian cover price. For example, UK cover price of the book ‘The Age of Kali- Indian Travels and Encounters’ is stated to be UK £ 8.99 whereas Indian cover price for sale is stated to be UK £ 4.99 and the discount allowed to the distributor is on Indian cover price. There are variations in the discount rates also but that aspect, for
the present purposes, is not really material. Similarly, in the case of ‘Sleepover Club Ponies’ the UK cover price is stated to be UK £ 3.99 whereas Indian cover price is stated to be UK £ 2.50. All these details were before the TPO, yet has proceeded to compute the hypothetical sale price of the books in the hands of the distributor on the basis that it will be equivalent to 402.414869% (i.e. 100/ 24.85 X 100) of the purchases in the hands of the assessee. This approach, including the presumption underlying therein, is clearly erroneous. The computation of profit margins of the wholesale distributor, as computed by the AO, are, therefore, are also incorrect. The TPO has not adopted the profit margin by the wholesale distributors on the basis of actual figures or the undisputed discount policies on cover prices but based on certain hypothesis which turns out to be based on misconception of facts and is, in any case, unsubstantiated by material on record. We are, therefore, of the view that the very foundation of impugned ALP adjustment is unsustainable in law.