|CORAM:||D. Karunakara Rao (AM), Vikas Awasthy (JM)|
|CATCH WORDS:||Arms length price, RPM, TNMM, Transfer Pricing|
|DATE:||June 16, 2017 (Date of pronouncement)|
|DATE:||September 12, 2017 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|Transfer Pricing: In the case of an assessee engaged in distribution activity there is no value addition to the product in question even if the selling and marketing expenses are borne by the assessee. Accordingly, the Resale Price Method is the most appropriate method for bench marking the transaction and determining whether it is at arms' length. The TPO is not entitled to thrust TNMM to evaluate the transaction|
(i) We heard both the sides on this issue, i.e. most appropriate method for benchmarking the international transaction of a distribution segment of the assessee. We have also given special attention to the fact of incurring selling and marking expenses by the distributor qua the appropriate method for benchmarking. On perusal of the decisions cited by the Ld. Authorised Representative for the assessee, we find the Bangalore Bench of the Tribunal in Textronix India Pvt. Ltd. Vs. DCIT (ITA No.1334/Bang/2010 order dated 31-10-2011) is on identical issue and relevant observations (sub-paragraph of Para No.5) are extracted as under:
“We have considered the rival submissions. The dispute is with regard to the ALP in respect of international transactions whereby the assessee imports equipments from its AE and re-sells them without any value addition to the Indian customers. In similar circumstances, Mumbai Bench of the Tribunal in the case of L’Oreal India Pvt. Ltd. (supra) has taken the view that the RPM would be the most appropriate method for determining the ALP. The Mumbai Bench of Tribunal, in this regard, has referred to the OECD guidelines wherein a view has been expressed that RPM would be the best method when a resale takes place without any value addition to a product. In the present case, the assessee buys products from the AE and sells it without any value addition to the Indian customers. In such circumstances, we are of the view that the ratio laid down by the Mumbai Bench of the Tribunal in the case of L’Oreal India Pvt. Ltd. (supra) would be squarely applicable to the facts of the assessee’s case. In that event, the GP as a percentage of sales arrived at by the TPO in Annexure to the TPO’s order insofar as trading activity of comparables identified by the TPO at 12.90%. The GP as a percentage of sales of the assessee is at 35.6% which is much above the percentage of comparables identified by the TPO. In such circumstances, we are of the view that no adjustment could be made by way of ALP. We, therefore, accept the alternative plea of the assessee and delete the addition made by the AO. In view of the above conclusion, we are not going into the other issues on merits raised by the assessee on the approach adopted by the TPO in arriving at the ALP. Thus, ground Nos.2 to 7 are allowed.”
(ii) Further, the Delhi Bench of the Tribunal in the case of M/s. Frigoglass India Pvt. Ltd. Vs. DCIT in ITA No.463/Del./2013 (order dated 11-04-2014) held that Resale Price Method is the most appropriate method in case of a distributor. Relevant operational Para No.5 reads as under:
“5. We have heard the rival contentions and perused the material available on record. In our considered view, once assessee has given a methodology for working of ALP on selection of a particular method supported by appropriate comparables, the working can be dislodged by TPO on the basis of cogent reasons and objective findings. In this case except theoretical assertions and generalized observations, no objective findings have been given to come to a reasoned conclusion that assessee’s adoption of CPM for manufacturing segment and RPM for trading segment was factually and objectively not correct. Thus the rejection of methods by TPO as adopted by assessee is bereft of any cogency and objectivity. The same is a work of guessing and conjectured. Similarly the TNMM method applied by the TPO suffers from the same inherent aberrations as mentioned above. In these circumstances we are of the view that Assessees methods of CPM and RPM respectively worked by applying appropriate cornparables is to be upheld. Thus the ALP working returned by the assessee is upheld. Assessees TP grounds are allowed.”
(iii) We further find the Delhi Bench of the Tribunal in the case of Bose Corporation India Pvt. Ltd. Vs. ACIT reported in 77 taxmann.com 194 (Delhi Tribunal) held that Resale Price Method is the best suited method for determining the ALP of an international transaction in nature of purchase of goods from Associated Enterprises which are sold as such to related parties. Operational Para No.7.6 reads as under:
“7.6 We are unable to accept the contention advanced on behalf of the Revenue. The obvious reason for this is that the incurring of high advertisement and marketing expenses by the assessee does not in any manner affect the determination of ALP under the RPM. It is but natural that only those expenses can have bearing on the gross profits that are debited to the Trading account. As the amount of advertisement and marketing expenses finds its place in the Profit and loss account, the higher or lower spend on it cannot affect the amount of gross profit and the resultant ALP under the RPM.”
(iv) Our view is further fortified by the order of the Tribunal in the case of M/s. OSI Systems Pvt. Ltd. Vs. DCIT in ITA Noo.683/Hyd/2014 order dated 12-08-2015 where all the above referred decisions were considered before deciding the issue in faovur of the assessee and in favour of ‘Resale Method Price method’ in case of distribution activity of the assessee.
(v) 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 the decision given by the AO/TPO/DRP in thrusting on the assessee the TNM method to the transaction under consideration. In any case, it is not the case of the Revenue the assessee is not into distribution activity.