RFS India Telecom Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 2040/DEL/2017

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 3484 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 7 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-11-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2012-2013
• Appeal Filed On: 06-04-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary; Set aside
• Section: 143(3); 142(1); 92E; 234B; 10B; 144C; 143(2); 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-2, NEW DELHI BEFORE SH. ANIL CHATURVEDI, ACCOUNTANT MEMBER AND SH. KULDIP SINGH, JUDICIAL MEMBER (THROUGH VIDEO CONFERENCING) ITA NO.2040/DEL/2017 (FOR ASSESSMENT YEAR 2012-13) RFS INDIA TELECOM PVT. LTD. E-8/1, LOWER GROUND FLOOR NEAR GEETA BHAWAN MANDIR, MALVIYA NAGAR PAN NO. AADCR 5389 R VS. ACIT CIRCLE 21(1), NEW DELHI (APPELLANT) (RESPONDENT) A SSESSEE BY SHRI NEERAJ JAIN, ADV. SHRI ABHISHEK AGARWAL, ADV. RE VENUE BY SHRI ANUPAM KANT GARG , CIT - D.R. DATE OF HEARING: 0 4 / 1 1 /2020 DATE OF PRONOUNCEMENT: 11 / 11 /2020 ORDER PER ANIL CHATURVEDI, AM: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE ASSESSING OFFICER U/S 143(3)/ 144C/ 92CA(4) OF THE ACT, 1961, PURSUANT TO THE DIRECTIONS GIVEN BY THE DRP, PASSED U/S 144C(5) OF THE INCOME-TAX ACT, 1961 DATED 19.12.2016 RELATING TO ASSESSMENT YEAR 2012-13. ITA NO.2040/DEL/2017 RFS INDIA TELECOM PVT. LTD. VS. ACIT A.Y. 2012-13 2 2. THE RELEVANT FACTS AS CULLED FROM THE MATERIAL ON RECORDS ARE AS UNDER: 3. ASSESSEE IS A COMPANY WHICH IS WHOLLY OWNED SUBSIDIARY OF RADIO FREQUENCY SYSTEM, GMBH (RFS GERMANY). RFS INDIA IS A STATED TO BE PRIMARILY ENGAGED IN THE BUSINESS OF TRADING OF TELECOM NETWORK EQUIPMENTS MAINLY BASE STATION ANTENNAS, CABLES AND ACCESSORIES AND OTHER ASSOCIATED SERVICES AND PRE AND POST SALES SUPPORT SERVICES IN RELATION TO THE TELECOM PRODUCTS. ASSESSEE ELECTRONICALLY FILED ITS RETURN OF INCOME FOR A.Y. 2012-13 ON 30.09.2012 DECLARING LOSS OF RS.10,89,39,514/-. THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE U/S 143(2) DATED 20.09.2013 WAS ISSUED AND SERVED UPON THE ASSESSEE. THEREAFTER, NOTICE U/S 142(1) ALONG WITH QUESTIONNAIRE WAS ISSUED AND SERVED ON THE ASSESSEE. AO HAS NOTED THAT DURING THE YEAR ASSESSEE ENTERED INTERNATIONAL TRANSACTIONS WITH ITS AES AND ACCORDINGLY MADE REFERENCE TO TPO U/S 92CA(3) TO DETERMINE THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS. THE TPO VIDE ORDER DATED 20.01.2016 PASSED U/S 92CA(3) PROPOSED ADJUSTMENT OF RS.1,73,97,217/- TO THE INCOME OF THE ASSESSEE ON ACCOUNT OF INTERNATIONAL TRANSACTIONS. AFTER CONSIDERING THE ADJUSTMENT PROPOSED BY TPO, AO IN THE DRAFT ASSESSMENT ORDER DATED 16.03.2016 PROPOSED ADDITION OF RS.1,73,97,217/-. THE ASSESSEE FILED OBJECTIONS AGAINST THE PROPOSED ADDITION BEFORE THE HONBLE DRP WHO VIDE ORDER DATED 19.12.2016 UPHELD THE ADJUSTMENT PROPOSED BY TPO/AO. THEREAFTER, AO PASSED AN ORDER U/S ITA NO.2040/DEL/2017 RFS INDIA TELECOM PVT. LTD. VS. ACIT A.Y. 2012-13 3 143(3)/144C/92CA(4) VIDE ORDER DATED 31.01.2017 AND DETERMINED THE TOTAL INCOME AT RS.75,60,413/-. AGGRIEVED BY THE ORDER OF AO, PURSUANT TO THE DIRECTIONS OF DRP, ASSESSEE IS NOW BEFORE US AND HAS RAISED THE FOLLOWING GROUNDS: 1. THAT THE ASSESSING OFFICER (AO) ERRED ON FACTS AND IN LAW IN COMPLETING ASSESSMENT UNDER SECTION 144C READ WITH SECTION 143(3) OF THE INCOME TAX ACT (THE ACT) AT AN INCOME OF RS.75,60,413/- AS AGAINST THE RETURNED LOSS OF RS.10,89,39,514/-. 2. THAT THE AO ERRED ON FACTS AND IN LAW IN MAKING AN ADJUSTMENT OF RS.1,73,97,217/- ON ACCOUNT OF DIFFERENCE IN ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS UNDERTAKEN WITH THE ASSOCIATED ENTERPRISES ON THE BASIS OF THE ORDER PASSED UNDER SECTION 92CA(3) OF THE ACT BY THE TRANSFER PRICING OFFICER (TPO). 2.1 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN REJECTING RESALE PRICE METHOD (RPM) APPLIED BY THE APPELLANT AND INSTEAD APPLIED TNMM AS THE MOST APPROPRIATE METHOD, ALLEGEDLY HOLDING THAT THE APPELLANT WAS NOT A SIMPLE TRADER AND PERFORMS ADDITIONAL FUNCTIONS. 2.2 THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT QUA INTERNATIONAL TRANSACTION OF PURCHASE OF FINISHED GOODS (TELECOM EQUIPMENT), THE APPELLANT WAS ONLY ACTING AS A DISTRIBUTOR AND HENCE THE INTERNATIONAL TRANSACTIONS WERE APPROPRIATELY AND CORRECTLY BENCHMARKED APPLYING RESALE PRICE METHOD AS THE MOST APPROPRIATE METHOD. 2.3 WITHOUT PREJUDICE THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP/ TPO ERRED IN NOT ALLOWING COMPARABILITY ADJUSTMENT ON ACCOUNT OF UNDERUTILIZATION OF CAPACITY ALLEGEDLY ON THE GROUND THAT THE APPELLANT FAILED TO FURNISHED EVIDENCES IN SUPPORT OF THE CLAIM. ITA NO.2040/DEL/2017 RFS INDIA TELECOM PVT. LTD. VS. ACIT A.Y. 2012-13 4 2.4 WITHOUT PREJUDICE THAT THE DRP/ TPO ERRED ON FACTS AND IN LAW IN EXCLUDING SALORA INTERNATIONAL LIMITED FROM THE SET OF COMPARABLE COMPANIES ALLEGEDLY ON THE GROUND THAT THE COMPANY WAS A PERSISTENT LOSS MAKING COMPANY. 3. THAT THE DRP/ AO ERRED ON FACTS AND IN LAW IN DISALLOWING A SUM OF RS.9,91,02,710/- ALLEGEDLY ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION LOSS HOLDING THAT THE SAID LOSS WAS NOT ACTUALLY SUFFERED/ INCURRED BY THE APPELLANT. 3.1 THAT THE DRP/AO ERRED ON FACTS AND IN LAW IN ENHANCING THE DISALLOWANCE OF RS.19,38,20,542/- MADE BY THE ASSESSING OFFICER OUT OF THE FOREIGN EXCHANGE FLUCTUATION LOSS OF RS.7,92,82,168/- AND INSTEAD DISALLOWING A SUM OF RS.9,91,02,710/-, WHICH CONSTITUTED 125% OF THE TOTAL ACTUAL FOREIGN EXCHANGE LOSS INCURRED DURING THE YEAR. 3.2 THAT THE DRP/AO ERRED ON FACTS AND IN LAW IN MAKING AN ADHOC DISALLOWANCE OF RS.9,91,02,710/- ALLEGEDLY HOLDING THAT THE APPELLANT FAILS TO FURNISH DETAILS OF FOREIGN EXCHANGE FLUCTUATION AND VALUATION OF CLOSING STOCK. 3.3 THAT THE DRP/ AO ERRED ON FACTS AND IN LAW IN NOT CONSIDERING REPLY DATED 19.12.2016 DULY PLACED ON RECORD WITH APPROVAL OF THE HONBEL PANEL, ALLEDGLY HOLDING THAT NO DETAILS WERE FILED BY THE APPELLANT TILL THE END OF THE TIME GIVEN, I.E. 11 AM ON 19.12.2016. 3.4 THAT THE DRP/ AO ERRED ON FACTS AND IN LAW IN HOLDING THAT THE APPELLANT WAS TAKING VALUE OF SOME OF THE ITEMS INCLUDING CLOSING STOCK AT NIL WITHOUT ANY BASIS AND THEREBY POSTPONING THE TAX LIABILITY. 3.5 THAT THE AO ERRED ON FACTS AND IN LAW IN NOT GIVING EFFECT TO THE DIRECTIONS OF THE DRP AND THEREBY DISALLOWING CRYSTALLIZED FOREIGN EXCHANGE LOSS. 3.6 THAT THE DRP/AO ERRED ON FACTS AND IN LAW IN MAKING AN ADHOC DISALLOWANCE OF RS.9,91,02,710/- BEING 125% OF THE ITA NO.2040/DEL/2017 RFS INDIA TELECOM PVT. LTD. VS. ACIT A.Y. 2012-13 5 FOREIGN EXCHANGE LOSS INCURRED DURING THE YEAR, WITHOUT BINGING SPECIFIC MATERIAL ON RECORD. 3.7 THAT THE DRP/AO ERRED ON FACTS AND IN LAW IN DISALLOWING FOREIGN EXCHANGE LOSS OF RS.9,91,02,710/- ON ACCOUNT OF REINSTATEMENT ASSETS/ LIABILITIES HOLDING THAT THE APPELLANT FAILED TO ADJUST PAYABLES TOWARDS GROUP COMPANIES, EVEN THOUGH INVENTORIES HAS BEEN REDUCED BY 70% OF THE VALUE. 3.8 THAT THE DRP/AO ERRED ON FACTS AND IN LAW IN DISALLOWING FOREIGN EXCHANGE LOSS SUFFERED BY THE APPELLANT ON ACCOUNT OF REINSTATEMENT BY APPLYING INSTRUCTION NO.3 DATED 23.03.2010. 3.9 THAT THE DRP/AO ERRED ON FACTS AND IN LAW IN ERRONEOUSLY HOLDING THAT THE METHOD OF ACCOUNTING FOLLOWED BY THE APPELLANT FOR VALUATION OF INVENTORIES IS WITHOUT ANY REASONABLE BASIS. 3.10 THAT THE DRP/AO ERRED ON FACTS AND IN LAW IN REJECTING THE CLAIM OF THE APPELLANT WHICH HAS BEEN CONSISTENTLY FOLLOWED AND ACCEPTED BY THE DEPARTMENT IN THE PRECEDING YEARS. 4. THAT THE AO ERRED ON FACTS AND IN LAW IN LEVYING INTEREST UNDER SECTION 234A, 234B AND SECTION 234C OF THE ACT. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER OR VARY, ANY OF THE AFORESAID GROUNDS OF APPEAL BEFORE OR AT THE TIME OF HEARING OF THE APPEAL. 4. BEFORE US, AT THE OUTSET, LEARNED AR SUBMITTED THAT THOUGH THE ASSESSEE HAS RAISED VARIOUS GROUNDS BUT THE GROUNDS RAISED AT SERIAL NO.2 AND SUB GROUNDS ARE WITH RESPECT TO ONE ISSUE AND GROUND NO.3 AND SUB GROUNDS ARE WITH RESPECT TO ANOTHER ISSUE AND THE ADJUDICATION IS REQUIRED ONLY FOR THE AFORESAID GROUNDS. ITA NO.2040/DEL/2017 RFS INDIA TELECOM PVT. LTD. VS. ACIT A.Y. 2012-13 6 WE FIRST PROCEED WITH DECIDING THE GROUND NO.2 AND SUB GROUND WHICH IS WITH RESPECT TO ADDITION OF RS.1,73,97,217/-. 5. ON PURSUING THE TRANSFER PRICING REPORT FURNISHED BY THE ASSESSEE, TPO NOTED THAT THE ASSESSEE HAD BENCHMARKED THE TRANSACTION FOR PURCHASE AND SALE OF TRADING GOODS BY USING TNMM METHOD AND USED GP/SALES AS THE PROFIT LEVEL INDICATOR (PLI) INSTEAD OF USING OP/OR AS THE PLI. CONSIDERING THE FUNCTIONS PERFORMED BY THE ASSESSEE, TPO WAS OF THE VIEW THAT CHOICE OF GP/SALES AS THE PLI WAS NOT A RIGHT CHOICE UNDER TNMM METHOD AND THE OP/OC SHOULD BE THE CORRECT PLI. THE ASSESSEE WAS ACCORDINGLY ISSUED SHOW-CAUSE NOTICE. ASSESSEE INTER ALIA SUBMITTED THAT IT IS PURELY A TRADER ENGAGED IN THE BUSINESS OF TRADING OF NETWORK EQUIPMENTS AND THEREFORE, RESALE PRICE METHOD (RPM) IS A MOST APPROPRIATE METHOD FOR THE PURPOSE OF BENCHMARKING THE INTERNATIONAL TRANSACTIONS OF PURCHASE AND SALE OF GOODS AND PROVISION OF SUPPORT SERVICES. IT WAS FURTHER STATED THAT IN THE TRANSFER PRICING DOCUMENTATION, THE ASSESSEE HAD INADVERTENTLY STATED THAT TNMM WAS BEING APPLIED FOR THE PURPOSE OF BENCHMARKING THE INTERNATIONAL TRANSACTIONS BUT THE ASSESSEE HAD CONSIDERED GROSS PROFIT TO SALES RATIO AS THE PLI WHICH ESTABLISHES THE FACT THAT IN REALITY THE RESALE PRICE METHOD (RPM) WAS APPLIED BY THE ASSESSEE TO BENCHMARK THE INTERNATIONAL TRANSACTIONS. IT WAS FURTHER SUBMITTED BY THE ASSESSEE THAT THE GROSS PROFIT MARGIN OF THE ASSESSEE WAS COMPARED WITH WEIGHTED AVERAGE GROSS PROFIT MARGIN OF THE ITA NO.2040/DEL/2017 RFS INDIA TELECOM PVT. LTD. VS. ACIT A.Y. 2012-13 7 COMPARABLE AND SINCE ITS GROSS PROFIT MARGIN WAS HIGHER THAN THE WEIGHTED AVERAGE GROSS PROFIT MARGIN OF THE COMPARABLE COMPANIES, THE INTERNATIONAL TRANSACTIONS WERE CONSIDERED TO BE AT ARMS LENGTH PRICE AND NO ADJUSTMENT WAS CALLED FOR. THE SUBMISSIONS OF THE ASSESSEE WERE NOT FOUND ACCEPTABLE TO THE TPO. TPO THEREAFTER, AFTER CONSIDERING THE COMPARABLES (STATED IN PARA-9 OF PAGE 21 OF HIS ORDER) NOTED THAT AVERAGE OP/OR OF THE COMPARABLES TO BE 1.88% AND APPLYING IT TO THE PURCHASE (RS 18,43,93,983) AND SALE OF GOODS (RS 7,95,17,520) WORKED OUT THE DIFFERENCE AT RS.1,73,97,217/- AND PROPOSED ITS ADDITION. WHEN THE MATTER WAS CARRIED BEFORE THE DRP, THE DRP UPHELD THE ORDER OF TPO. AGGRIEVED BY THE ORDER OF AO PASSED PURSUANT TO THE DIRECTION OF DRP, THE ASSESSEE IS NOW BEFORE US. 6. BEFORE US, LEARNED AR SUBMITTED THAT ASSESSEE HAD ENTERED INTO FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES : S. NO. DESCRIPTION AMOUNT OF TRANSACTION (IN RS.) 1. PURCHASE OF FINISHED GOODS 184,393,983 2. SALE OF FINISHED GOODS 79,517,520 3. SERVICE PROVIDED (MARKETING SUPPORT SERVICES AGAINST RECEIPT OF COMMISSION) 14,32,650 7. HE SUBMITTED THAT IN THE TRANSFER PRICING DOCUMENT, FOR THE PURPOSE OF BENCHMARKING THE INTERNATIONAL TRANSACTION OF ITA NO.2040/DEL/2017 RFS INDIA TELECOM PVT. LTD. VS. ACIT A.Y. 2012-13 8 PURCHASE AND SALE OF FINISHED GOODS, THE ASSESSEE HAD APPLIED RESALE PRICE METHOD BY CONSIDERING ITSELF TO BE THE TESTED PARTY AND GROSS PROFIT TO SALES WAS CONSIDERED AS PROFIT LEVEL INDICATOR BUT INADVERTENTLY THE METHOD SELECTED WAS REFERRED AS TNMM. FOR APPLICATION OF RPM, THE ASSESSEE HAD CONSIDERED THE COMPUNICS INFORMATION SYSTEM LTD. HAVING WEIGHTED AVERAGE OF GROSS PROFIT/SALES OF 6.07% AND MOBILE TELECOMMUNICATIONS LTD. HAVING WEIGHTED AVERAGE OF GP/SALES OF 4.77% AND THE ARITHMETIC MEAN COMPARABLE WAS 5.42%. SINCE THE GROSS PROFIT TO SALES RATIO OF THE ASSESSEE WAS 5.95%, WHICH WERE HIGHER THAN THE AVERAGE GROSS PROFIT TO SALES RATIO OF THE COMPARABLE COMPANIES AT 5.42%, THEREFORE, IT CONSIDERED THE INTERNATIONAL TRANSACTION OF PURCHASE AND SALE OF TRADED GOODS TO BE AT ARMS LENGTH PRICE. HE SUBMITTED THAT TPO REJECTED THE BENCHMARKING ANALYSIS UNDERTAKEN BY THE ASSESSEE AND INSTEAD APPLIED TRANSACTION NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD WITH OPERATING PROFIT TO OPERATING REVENUE AS THE PLI. FURTHER, FOR BENCHMARKING THE TPO COMPUTED THE MARGIN OF THE ASSESSEE AT -5.04% AND AFTER APPLYING VARIOUS FILTERS, TPO ARRIVED AT A SET OF FOLLOWING FOUR COMPARABLE COMPANIES WITH AN AVERAGE OPERATING PROFIT TO OPERATING REVENUE RATIO OF 1.88%: SR. NO. COMPANY NAME OP/OR 1. COMPUAGE INFOCOM LTD. 1.78% 2. ESSEL SHYAM TECHNOLOGIES LTD. 2.72% 3. MAHAVEER INFOWAY LTD. 1.90% 4. MOBILE TELECOMMUNICATIONS LTD. 1.11% AVERAGE 1.88% ITA NO.2040/DEL/2017 RFS INDIA TELECOM PVT. LTD. VS. ACIT A.Y. 2012-13 9 8. THE TPO THUS MADE AN ADJUSTMENT OF RS. 1,73,97,217 ON ACCOUNT OF DIFFERENCE IN ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS OF PURCHASE AND SALE OF GOODS. 9. BEFORE US, LD AR SUBMITTED THAT IN TERMS OF SECTION 92C(1) OF THE ACT, THE ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF METHOD BEING THE MOST APPROPRIATE METHOD HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASSOCIATED PERSONS OR FUNCTIONS PERFORMED BY SUCH PERSONS. HE SUBMITTED THAT RULE 10B(1)(B) OF THE INCOME- TAX RULES PROVIDES THAT FOR APPLICATION OF RESALE PRICE METHOD AS ONE OF THE METHOD AND THAT METHOD IS APPLICABLE IN THE SITUATION INVOLVING THE BENCHMARKING OF INTERNATIONAL TRANSACTIONS RELATING TO PURCHASE AND SALE OF FINISHED GOODS. HE SUBMITTED THAT SINCE THERE IS A SPECIFIC METHOD SPECIFIED IN RULE 10B FOR DETERMINING THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS OF RESALE OF THE GOODS, THE SAME SHOULD BE APPLIED IN PREFERENCE OVER THE OTHER METHODS AND IN SUPPORT OF AFORESAID CONTENTIONS HE PLACED RELIANCE ON THE DECISION OF HONBLE APEX COURT IN THE CASE OF BRITANNIA INDUSTRIES LTD REPORTED IN 278 ITR 546 AND IN THE CASE OF NEW OKHLA INDUSTRIAL DEVELOPMENT AUTHORITY VS CCIT REPORTED IN [2018] 95 TAXMANN.COM 58 (SC). HE FURTHER SUBMITTED THAT THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA IN ITS GUIDANCE NOTE ON REPORT UNDER SECTION 92E OF THE INCOME TAX ACT, 1961, ALSO ITA NO.2040/DEL/2017 RFS INDIA TELECOM PVT. LTD. VS. ACIT A.Y. 2012-13 10 STATES THAT RPM METHOD SHOULD BE APPLIED IN A SITUATION WHEREIN THE RESELLER DOES NOT ADD SIGNIFICANT VALUE TO THE PRODUCT. HE FURTHER PLACING RELIANCE ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF MATRIX CELLULAR INTERNATIONAL SERVICES (P.) LTD REPORTED IN 90 TAXMANN.COM 54 SUBMITTED THAT THE HONBLE HIGH COURT HAS ALSO UPHELD THE APPLICATION OF RPM AS THE MOST APPROPRIATE METHOD IN THE CASE OF A DISTRIBUTOR WHO ARE NOT ADDING ANY VALUE TO THE GOODS. HE ALSO RELIED ON THE OTHER DECISIONS OF THE TRIBUNAL WHICH ARE CITED IN THE WRITTEN SUBMISSION FOR THE PROPOSITION THAT RPM TO BE THE MOST APPROPRIATE METHOD OF BENCHMARKING THE TRANSACTION OF PURCHASE OF FINISHED GOODS. 10. WITH RESPECT TO THE OBSERVATION OF THE DRP THAT ASSESSEE IS NOT A SIMPLE TRADE IN VIEW OF THE FACT THAT ASSESSEE HAS UNDERTAKEN VARIOUS FUNCTIONS LIKE PRE AND POST SALES SERVICES, ADVERTISING AND BUSINESS PROMOTION ETC, HE SUBMITTED THAT THE CONDITION PRECEDENT FOR APPLICATION OF RPM IS RESELLING OF GOODS AS SUCH WITHOUT MAKING ANY VALUE ADDITION TO THE PRODUCT ITSELF, AND NOT THE INTENSITY OF FUNCTIONS PERFORMED BY TRADER IN RESELLING THE GOODS/ DISTRIBUTING THE GOODS. HE FURTHER SUBMITTED THAT FUNCTIONS LIKE BUSINESS PROMOTION, AND MAINTENANCE OF DISTRIBUTION NETWORK ARE GENERAL FUNCTIONS OF A TRADER/ DISTRIBUTOR. HE FURTHER POINTING TO THE TRANSFER PRICING REPORT SUBMITTED THAT THE PRE AND POST SALES SERVICES IS RENDERED BY THE APPELLANT DOES NOT, IN ANY WAY, RELATE TO THE INTERNATIONAL ITA NO.2040/DEL/2017 RFS INDIA TELECOM PVT. LTD. VS. ACIT A.Y. 2012-13 11 TRANSACTION OF PURCHASE OF FINISHED GOODS UNDERTAKEN WITH THE ASSOCIATED ENTERPRISE AND AGAINST THE PROVISION OF AFORESAID PRE AND POST SALES SERVICES, ASSESSEE HAD EARNED COMMISSION COMPUTED AT THE RATE OF 6% AMOUNTING TO RS. 14,32,650/- WHICH CONSTITUTED 0.24% OF THE TOTAL SALES. HE FURTHER SUBMITTED THAT REVENUE HAD RAISED SIMILAR OBJECTIONS IN THE CASE OF CELIO FUTURE FASHION PVT. LTD. VS. ACIT (ITA NO. 1928/MUM/2016) AND IN THE CASE OF M/S VIDEOJET TECHNOLOGIES (I) PVT. LTD. VS. ACIT (ITA NO 6956/MUM/2012), BUT THE OBJECTIONS OF THE REVENUE WERE DISCARDED BY THE CO-ORDINATE BENCH OF THE TRIBUNAL. HE FURTHER SUBMITTED THAT THE DELHI BENCH OF TRIBUNAL RECENTLY IN THE CASE OF TOPCON SOKKIA INDIA P. LTD. VS. DCIT [ITA NO. 8110/DEL/2018] HAS UPHELD THE APPLICATION OF RPM AS THE MOST APPROPRIATE METHOD. HE FURTHER SUBMITTED THAT THE COMPARABLE COMPANIES CONSIDERED BY THE TPO ARE FUNCTIONALLY COMPARABLE TO THE ASSESSEE AND ARE ENGAGED IN THE BUSINESS OF TRADING SIMILAR TELECOM NETWORK EQUIPMENTS, EXCEPT FOR ESSEL SHYAM TECHNOLOGIES LIMITED. HE SUBMITTED THAT EVEN IF ALL THE COMPANIES SELECTED BY THE TPO ARE TO BE CONSIDERED AS APPROPRIATE COMPARABLE COMPANIES, THE GROSS PROFIT MARGIN OVER SALES OF THE ABOVE COMPANIES WORKS OUT TO 6.93% AS AGAINST THE GROSS PROFIT MARGIN OF 5.9%. HE FURTHER SUBMITTED AND EVEN IF ESSEL SHYAM TECHNOLOGIES LIMITED IS EXCLUDED, THE GROSS PROFIT MARGIN OVER SALES OF THE COMPARABLE COMPANIES WORK OUT TO 3.26% AND EVEN IN THAT SITUATION, THE GROSS PROFIT TO SALES MARGIN OF THE ASSESSEE AT 5.9% IS HIGHER OR WITHIN THE RANGE OF +/-5% OF THE MARGIN OF COMPANIES AND THEREFORE NO ADDITION IS CALLED FOR. HE THEREFORE ITA NO.2040/DEL/2017 RFS INDIA TELECOM PVT. LTD. VS. ACIT A.Y. 2012-13 12 SUBMITTED THAT NO ADJUSTMENT ON ACCOUNT OF INTERNATIONAL TRANSACTION IS CALLED FOR. HE FURTHER SUBMITTED THAT THE ASSESSEE HAS APPLIED RPM METHOD IN AY 2011-12 AND NO ADJUSTMENT TO THE INTERNATIONAL TRANSACTION WAS MADE BY THE TPO IN THE ORDER FRAMED U/S 92CA(3) DATED 14.01.2015. HE POINTED TO THE COPY OF THE ORDER PLACED AT PAGE 243 TO 244 OF THE PAPER BOOK. 11. LEARNED DR ON THE OTHER HAND SUPPORTED THE ORDER OF LOWER AUTHORITIES AND FURTHER SUBMITTED THAT SINCE THE ASSESSEE DOES PRE AND POST SALES SUPPORT SERVICES IN RELATION TO TELECOM PRODUCT ITSELF,IT RESULTS INTO VALUE ADDITION AND THEREFORE THE RPM METHOD CANNOT BE CONSIDERED TO BE AN APPROPRIATE METHOD. HE FURTHER SUBMITTED THAT THE ISSUE IN A.Y. 2011-12 IS NOT COMPARABLE TO A.Y. 2012-13 AS IN THE EARLIER YEAR NO SERVICES WERE PROVIDED BY THE ASSESSEE BUT IN THE CURRENT YEAR SERVICES HAVE BEEN PROVIDED. HE FURTHER SUBMITTED THAT WHEN THE ASSESSEE IS SEEKING ADJUSTMENT OF CAPACITY UTILIZATION IT SHOWS THAT IT IS NOT A MERE DISTRIBUTOR. HE THUS SUPPORTED THE ORDER OF LOWER AUTHORITIES. 12. LEARNED AR IN THE REJOINDER WITH RESPECT TO THE PROVISION OF SERVICES POINTED OUT THAT ASSESSEE HAS EXCLUSIVE JURISDICTION TO SALE PRODUCTS IN INDIA AND ANY DIRECT SALE BY ANY GROUP ENTITY TO ANY INDIAN CUSTOMER WILL GIVE RISE COMMISSION TO THE ASSESSEE. HE SUBMITTED THAT THE AMOUNT OF RS.14,32,650/- WAS RECEIVED ON ACCOUNT OF COMMISSION FROM ITS AE FOR THE SALES MADE BY ITS AE IN ITA NO.2040/DEL/2017 RFS INDIA TELECOM PVT. LTD. VS. ACIT A.Y. 2012-13 13 INDIA DIRECTLY AND IT IS NOTHING BUT PART OF INCOME FOR TRADING ACTIVITY UNDERTAKING BY ASSESSEE. HE SUBMITTED THAT AFORESAID COMMISSION INCOME RECEIVED IS ADDED TO THE INCOME OF TRADE ACTIVITY. 13. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED ALL THE MATERIALS AVAILABLE ON RECORD. THE ISSUE IN THE PRESENT GROUND IS WITH RESPECT TO THE ADDITION OF RS.1,73,97,217/- MADE TO THE TPO. IT IS AN UNDISPUTED FACT THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF TRADING TO TELECOM NETWORK EQUIPMENTS AND IT IS THE ASSESSEES SUBMISSION THAT THE ASSESSEE WAS PURCHASING GOODS FROM THE ASSOCIATED ENTERPRISES AND WAS SELLING IT WITHOUT ANY VALUE ADDITION. IT IS ALSO A FACT THAT ASSESSEE HAD APPLIED RPM METHOD (THOUGH IT IS ASSESSEES CONTENTION THAT INADVERTENTLY IT IS STATED TO HAVE FOLLOWED TNMM METHOD IN TPO STUDY REPORT) TPO CONSIDERED THE TNMM METHOD TO BE MOST APPROPRIATE METHOD AND PROCEEDED TO WORK OUT THE ADJUSTMENT ACCORDINGLY. 14. WE FIND THAT RPM METHOD HAS BEEN HELD TO BE A MOST APPROPRIATE METHOD FOR DETERMINING OF ALP TRANSACTION WHEN THE ASSESSEE IS TRADING IN GOODS WITHOUT MAKING ANY VALUE ADDITION. WE FURTHER FIND THAT RECENTLY THE CO-ORDINATE BENCH OF TRIBUNAL IN THE CASE OF TOPCON SOKKIA INDIA PVT. LTD. (SUPRA) HAS OBSERVED AS UNDER: ITA NO.2040/DEL/2017 RFS INDIA TELECOM PVT. LTD. VS. ACIT A.Y. 2012-13 14 16. WE FIND THAT VARIOUS BENCHES OF THE TRIBUNAL HAVE HELD THAT WHEN THE ASSESSEE PURCHASES THE PRODUCTS FROM ITS AE'S AND RESALES THE SAME WITHOUT ANY FURTHER VALUE ADDITION OR FURTHER PROCESSING THAN RPM IS THE MOST APPROPRIATE METHOD FOR DETERMINATION OF ALP OF INTERNATIONAL TRANSACTIONS FOR WHICH REFERENCE CAN BE MADE TO THE DECISION OF H'BLE DELHI HIGH COURT IN THE CASE OF MATRIX CELLULAR INTERNATIONAL SERVICES P LTD (90 TAXMANN.COM 54), DELHI BENCH OF TRIBUNAL IN CASE OF SWAROVSKI INDIA PVT. LTD. VS ACIT [(2017) 78 TAXMANN.COM 325 (DEL)], MUMBAI TRIBUNAL IN THE CASE OF MATTEL TOYS INDIA P LTD VS DCIT [(2013) 34 TAXMANN.COM 203], DELHI TRIBUNAL IN THE CASE OF NOKIA (INDIA) PVT. LTD.(ITA NO.242/DEL/2010) AND VIDEOJET TECHNOLOGIES (I) P LTD VS ACIT (ITA NO 6956/MUM/2012). 17. WE FURTHER FIND THAT THE PUNE BENCHES OF THE TRIBUNAL IN THE CASE OF ACIT VS MSS INDIA PVT LTD ((2009) 123 TTJ 657 (PUNE) HAS OBSERVED AS UNDER: 'WHILE THERE IS NO PARTICULAR ORDER OR PRIORITY OF METHODS WHICH THE ASSESSEE MUST FOLLOW, AND NO METHOD CAN INVARIABILITY BE CONSIDERED TO BE MORE RELIABLE THAN OTHERS, ON A CONCEPTUAL NOTE, TRANSACTIONAL PROFIT METHODS (I.E. TRANSACTIONAL NET MARGIN METHOD AND PROFIT SPLIT METHOD) ARE TREATED AS METHODS OF LAST RESORT WHICH ARE PRESSED INTO SERVICE ONLY WHEN THE STANDERED METHODS, WHICH ARE ALSO TERMED AS 'TRADITIONAL METHODS', (I.E. COMPARABLE UNCONTROLLED PRICE METHOD, RESALE PRICE METHOD AND COST PLUS METHOD) CANNOT BE REASONABLY APPLIED.' 18. WE FURTHER FIND THAT IT IS ASSESSEE'S CONTENTIONS THAT THE PURCHASE OF TRADING GOODS UNDERTAKEN BY THE ASSESSEE AND APPLICATION OF RESELLING PRICE METHODS FOR DETERMINING THE ARM'S LENGTH PRICE HAS BEEN ACCEPTED BY THE REVENUE IN PRECEDING AND SUCCEEDING ASSESSMENT YEARS. THE AFORESAID CONTENTION OF THE LD AR IS FOUND CORRECT IN VIEW OF THE ASSESSMENT ORDERS OF THE ASSESSEE FOR AY 2012-13,2013-14 AND AY 2015-16 (WHICH ARE PLACED AT PAGE 460 TO 465 OF THE PAPER BOOK). FURTHER BEFORE US, THE AFORESAID CONTENTIONS OF THE LD AR HAVE NOT BEEN CONTROVERTED ITA NO.2040/DEL/2017 RFS INDIA TELECOM PVT. LTD. VS. ACIT A.Y. 2012-13 15 BY REVENUE. WE ARE AWARE OF THE FACT THAT RES JUDICTA PRINCIPLES ARE NOT APPLICABLE TO THE INCOME TAX PROCEEDINGS BUT AT THE SAME TIME WE FIND THAT THE HONORABLE SUPREME COURT IN THE CASE OF RADHASOAMI SATSANG VS. CIT (SUPRA) HAS HELD THAT WHERE A FUNDAMENTAL ASPECT PERMEATING THROUGH THE DIFFERENT ASSESSMENT YEARS IS ACCEPTED ONE WAY OR THE OTHER, A DIFFERENT VALUE IN THE MATTER IS NOT WARRANTED UNLESS THERE ARE ANY MATERIAL CHANGE OF FACTS. 19. BEFORE US, NO DISTINGUISHING FEATURE IN THE FACTS FOR THE YEAR UNDER CONSIDERATION AND THAT OF EARLIER AND SUBSEQUENT YEARS, WHEREIN THE RPM METHOD WHICH BEEN FOLLOWED BY THE ASSESSEE, HAS BEEN BROUGHT BY THE REVENUE. CONSIDERING THE TOTALITY OF THE AFORESAID FACTS, WE ARE OF THE VIEW THAT DRP WAS NOT JUSTIFIED IN REJECTING THE RPM METHOD FOLLOWED BY ASSESSEE. WE, THEREFORE SET ASIDE THE ORDER AND DIRECT THE AO TO COMPUTE THE ALP BY FOLLOWING THE RPM METHOD. THUS, THE GROUNDS OF APPEAL OF THE ASSESSEE ARE ALLOWED. 15. FURTHER, BEFORE US ASSESSEE HAS ALSO POINTED THAT IF THE COMPARABLES SELECTED BY THE TPO ARE CONSIDERED THEN ALSO THE MARGINS OF THE ASSESSEE ARE HIGHER OR FALL WITHIN +/-5% OF THE FINAL COMPARABLE COMPANIES SELECTED BY TPO. CONSIDERING THE TOTALITY OF THE AFORESAID FACTS, WE ARE OF THE VIEW THAT DRP WAS NOT JUSTIFIED IN REJECTING THE RPM METHOD FOLLOWED BY ASSESSEE. WE THEREFORE, SET ASIDE THE ORDER OF TPO (PURSUANT TO THE DIRECTIONS OF DRP) TO COMPUTE THE ALP BY FOLLOWING THE TNMM METHOD. THUS THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. ITA NO.2040/DEL/2017 RFS INDIA TELECOM PVT. LTD. VS. ACIT A.Y. 2012-13 16 16. GROUND NO.3 AND ITS SUB GROUNDS: AO NOTED THAT ASSESSEE HAD CLAIMED FOREIGN EXCHANGE FLUCTUATION LOSS OF RS.7,92,82,168/- IN THE PROFIT AND LOSS ACCOUNT. THE ASSESSEE WAS ASKED TO JUSTIFY THE SAME. THE SUBMISSIONS MADE BY THE WERE NOT FOUND ACCEPTABLE TO AO. AO ALSO NOTED THAT ASSESSEE HAS ALSO CLAIMED DEPLETION IN THE VALUE OF CLOSING STOCK AMOUNTING TO RS.11,22,64,093/-. AO NOTED THAT THE REDUCTION IN VALUE OF INVENTORY WAS MORE THAN 70% OF THE VALUE AND AMOUNTS SOUGHT TO BE DEPLETED HAD BEEN PURCHASED MAINLY FROM RADIO FREQUENCY SYSTEM HONGKONG OR RADIO FREQUENCY SYSTEM FRANCE, ITS ASSOCIATED COMPANIES. HE ALSO NOTED THAT THE PURCHASES WERE MADE DURING THE YEAR ITSELF AND IT WAS NOT CLEAR AS TO HOW THERE COULD BE A DEPLETION IN THE VALUE OF STOCK WHICH HAS BEEN PURCHASED RECENTLY TO THE EXTENT OF 70% OF THE VALUE. HE ALSO NOTED THAT THOUGH THE VALUE OF STOCK WAS REDUCED BUT ASSESSEE HAD NOT ADJUSTED THE AMOUNT PAYABLE TOWARDS THE GROUP COMPANIES. HE THUS CONCLUDED THAT BY NOT RAISING DEBIT NOTES ON THE SUPPLIERS, DOUBT ARISES ABOUT THE GENUINENESS OF THE ACCOUNTS AND ITS CORRECTNESS. HE THEREFORE HELD THAT THE COMPANY HAS BOOKED HUGE LOSSES ON REINSTATEMENT OF THE ACCOUNTS OF THE ASSOCIATED CONCERNS WITHOUT ANY JUSTIFICATION. HE ACCORDINGLY HELD 20% OF SUCH NET FOREIGN EXCHANGE FLUCTUATION TO BE NOT JUSTIFIED AND MADE ADDITION OF RS.1,98,20,542/- IN THE PROPOSED DRAFT ORDER. WHEN THE MATTER WAS CARRIED BEFORE THE DRP, DRP DIRECTED THE AO TO VERIFY THE CRYTALISATION OF FOREIGN EXCHANGE LOSSES AND ALSO DIRECTED THE AO TO ADD THE ENTIRE DIFFERENCE IN CLOSING STOCK WHICH RESULTED BECAUSE OF REVALUATION I.E. RS. 99,102,710/- AS ITA NO.2040/DEL/2017 RFS INDIA TELECOM PVT. LTD. VS. ACIT A.Y. 2012-13 17 AGAINST THE ADDITION OF RS.1,98,20,542/- MADE BY AO. AO THEREAFTER, PURSUANT TO THE DIRECTION OF DRP MADE ADDITION OF RS.99,102,710/-. AGGRIEVED BY THE ORDER OF AO, ASSESSEE IS NOW BEFORE US. 17. BEFORE US, LEARNED AR REITERATED THE SUBMISSION BEFORE THE AO AND CIT(A) AND FURTHER SUBMITTED THAT THE FOREIGN EXCHANGE LOSS INCURRED BY THE ASSESSEE WAS ON ACCOUNT OF ACTUAL PAYMENT TO SUPPLIERS AND REINSTATEMENT OF BOOKS OF ACCOUNT AT THE END OF THE YEAR. WITH RESPECT TO REVALUATION OF CLOSING STOCK, HE SUBMITTED THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE MADE PROVISION OF OBSOLETE STOCK OF RS. 11,39,08,949/- AND THE DRP HAD MISTAKENLY CONSIDERED THE DISALLOWANCE OF FOREIGN EXCHANGE LOSS OF RS.1,98,20,542/- MADE BY THE ASSESSING OFFICER IN THE DRAFT ORDER AS DISALLOWANCE OF OBSOLETE STOCK AND DIRECTED THE ASSESSING OFFICER TO MAKE DISALLOWANCE OF RS. 9,91,02,710/-. HE SUBMITTED THAT ASSESSEE IN THE YEAR UNDER CONSIDERATION HAS ALREADY MADE DISALLOWANCE OF ENTIRE PROVISION OF OBSOLETE STOCK OF RS.11,39,08,949/- AND OFFERED THE SAME TO TAX AND IN SUPPORT OF WHICH HE POINTED THE COMPUTATION OF INCOME. HE SUBMITTED THAT THE AFORESAID LOSS OF STOCK HAS NOT BEEN CLAIMED AS DEDUCTION IN THE RETURN OF INCOME AT ALL AND THEREFORE NO FURTHER DISALLOWANCE OF THE SAME EXPENDITURE OUGHT TO BE MADE IN TAXABLE INCOME OF THE ASSESSEE. ITA NO.2040/DEL/2017 RFS INDIA TELECOM PVT. LTD. VS. ACIT A.Y. 2012-13 18 18. LEARNED DR ON THE OTHER HAND SUPPORTED THE ORDER OF DRP AND AO POINTED THAT ASSESSEE WAS ASKED TO SUBMIT VALUATION OF STOCK ITEM WISE AND IF ANY ITEM WAS VALUED AT A PRICE LESS THAN THE COST PRICE, THE BASIS OF ITS VALUATION. HE SUBMITTED THAT ASSESSEE WAS ALSO ASKED TO SUPPORT THE VALUATION WITH SUBSEQUENT SALE OF THE ITEMS BUT NO SUCH DETAILS WERE FURNISHED BY THE ASSESSEE. HE THEREFORE SUBMITTED THAT THE ADDITIONS HAVE RIGHTLY BEEN MADE. HE THUS SUPPORTED THE ORDER OF LOWER AUTHORITIES. HE AS AN ALTERNATE, SUBMITTED THAT METHOD OF VALUATION OF STOCK MAY BE REMITTED TO THE AO FOR VERIFICATION. THE LEARNED AR DID NOT SERIOUSLY OBJECT TO REMITTANCE THE MATTER FOR VERIFICATION OF METHOD OF VALUATION TO THE AO. 19. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THE ISSUE IN THE PRESENT GROUND IS WITH RESPECT TO THE ADDITION OF RS.9,91,02,710/-. IT IS THE CONTENTION OF THE REVENUE THAT THE DETAILS OF THE VALUATION OF CLOSING STOCK WAS NOT SUBMITTED BY THE ASSESSEE AND ON THE OTHER HAND IT IS ASSESSEES CONTENTION THAT IT THE METHOD OF VALUATION HAS BEEN REGULAR FOLLOWED BY THE ASSESSEE AND REQUIRED DETAILS WERE ALSO SUBMITTED BEFORE THE AUTHORITIES. WE HOWEVER DO NOT FIND ANY FINDINGS TO THE LOWER AUTHORITIES ON THE METHOD OF VALUATION ADOPTED BY THE ASSESSEE AND THE BASIS FOR ITS WRITE DOWN IN THE VALUE OF STOCK. CONSIDERING THE TOTALITY OF THE AFORESAID FACTS, WE ARE OF THE VIEW THAT THE MATTER NEEDS REEXAMINATION AT THE END OF AO. WE THEREFORE RESTORE RESTORE THE ITA NO.2040/DEL/2017 RFS INDIA TELECOM PVT. LTD. VS. ACIT A.Y. 2012-13 19 ISSUE TO THE FILE OF AO. THE AO IS DIRECTED TO VERIFY THE SUBMISSIONS OF THE ASSESSEE AND THEREAFTER, DECIDE THE ISSUE IN ACCORDANCE WITH LAW. THE ASSESSEE IS ALSO DIRECTED TO CO-OPERATE FOR FURNISHING ALL THE DETAILS WHICH IS CALLED BY THE AO. IN CASE THE ASSESSEE FAILS TO FURNISH THE REQUIRED DETAILS, THE AO SHALL BE FREE TO PROCEED ON THE BASIS OF MATERIAL AVAILABLE ON RECORD. THUS, GROUND OF APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. 20. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 11.11.2020 SD/- SD/- /- (KULDIP SINGH) (ANIL CHATURVEDI) JUDICIAL MEMBER ACCOUNTANT MEMBER *PRITI YADAV, SR.PS* DATE:- 11.11.2020 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI