Fresenius Kabi India Pvt. Ltd., Pune V. DCIT, Circle-1(2), Pune

ITA 235/PUN/2013

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 9310 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 4 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-06-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 18-01-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 22-01-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ADARSH KUMAR MODI
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Wholly owned subsidiary
• Section: 92C; 143(3)

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE . . . . , , BEFORE SHRI D.KARUNAKARA RAO, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO. 235/PUN/2013 / ASSESSMENT YEAR : 2008-09 FRESENIUS KABI INDIA PRIVATE LIMITED, A-3, MIDC, RANJANGAON GANPATI, TALUKA-SHIRUR, PUNE 412 220 PAN : AAACF2614E . / APPELLANT V/S D CIT, CIRC LE - 1( 2 ) , PUNE . / RESPONDENT ASSESSEE BY : SHRI KETAN VED REVENUE BY : SHRI ADARSH KUMAR MODI / ORDER PER D. KARUNAKARA RAO, AM : THIS APPEAL FILED BY THE ASSESSEE IS AGAINST THE OR DER OF AO/TPO/DRP FOR THE ASSESSMENT YEAR 2008-09. 2. THE GROUNDS RAISED BY THE ASSESSEE READS AS UNDE R : THE APPELLANT OBJECTS TO THE ORDER DATED OCTOBER 2 5,2012 PASSED BY THE LEARNED DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 1(2) , PUNE ['DCIT ' ] UNDER SECTION 143(3) R.W . S . 144C(13) OF THE INCOME-TAX ACT , 1961 [ ' THE ACT ' ] IN PURSUANCE OF THE DIRECTIONS OF THE LEARNED DISPU TE RESOLUTION PANEL , PUNE [ ' DRP ' ] DATED SEPTEMBER 5 , 2012 FOR THE ASSESSMENT YEAR 2008-09 ON THE FOLLOWING AMONG OTHER GROUNDS: 1. THE LEARNED DCIT PURSUANT TO THE DIRECTIONS OF T HE LEARNED DRP ERRED IN LAW AND ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE IN MAKING AN ADJUSTMENT AMOUNTING TO RS. 5,95 , 47,550 TO THE VALUE OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE APPELLANT WITH ITS ASSOCIATED ENTERPRISES IN RESPECT OF INTERNATIONAL TRANSACTIONS RELATING TO M ANUFACTURING AND TRADING ACTIVITIES. / DATE OF HEARING :12.06.2017 / DATE OF PRONOUNCEMENT: 16.06.2017 2 ITA NO.235/PUN/2013 2. BENCHMARKING OF TRANSACTION BY TRANSACTION APPROACH REJECTED - MANUFACTURING ACTIVITY 2.1 THE LEARNED DCIT PURSUANT TO THE DIRECTIONS OF THE LEARNED DRP ERRED IN LAW AND ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE IN NOT A CCEPTING THE BENCHMARKING OF MANUFACTURING ACTIVITY DONE BY THE APPELLANT USING ' TRANSACTION BY TRANSACTION' APPROACH AND HAS INSTEA D ADOPTED THE ' AGGREGATION ' APPROACH. 2.2 THE LEARNED DCIT PURSUANT TO THE DIRECTIONS OF THE L E ARNED DRP ERRED IN LAW AND ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE IN NOT ACCEPTING THE ALTERNATI V E BENCHMARKING OF INTERNATIONAL TRANSACTIONS IN RES PECT OF EXPORT OF GOODS TO AES AND RECEIPT OF IT SUPPORT SERVICES FRO M AES . 3. REJECTION OF RESALE PRICE METHOD (RPM) AND SELEC TING OF TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD - TRADING ACTIVITY 3.1 THE LEARNED DCIT PURSUANT TO THE DIRECTIONS OF THE LEARNED DRP ERRED IN LAW AND ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE IN NOT ACCEPTING THE BENCHMARKING OF TRADING ACTIVITY DONE BY THE APPELL ANT USING ' RESALE PRICE METHOD ' AND ADOPTING ' TRANSACTIONAL NET MARGIN METHOD ' AS THE MOST APPROPRIATE METHOD. 3.2 THE LEARNED DCIT PURSUANT TO THE DIRECTIONS OF THE LEARNED DRP ERRED IN LAW AND ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE IN WRONGLY APPLYING THE TURNOVER FILTER WHILE SELECTION OF COMPARAB L E COMPANIES . 3.3 THE LEARNED DCIT PURSUANT TO THE DIRECTIONS OF THE LEARNED DRP ERRED IN LAW AND ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE IN NOT ACCEPTING THE ALTERNATIVE BENCHMARKING OF IMPORT OF FINISHED GOOD S FOR RESALE SUBMITTED BY THE APPELLANT. 4. THE LEARNED DCIT PURSUANT TO THE DIRECTIONS OF L EARNED DRP HAS ERRED IN LAW AND ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE IN NOT GRANTING THE BENEFIT OF + / - 5 PERCENT AS PER PROVISO TO SECTION 92C (2) OF TH E ACT. 5. EACH ONE OF THE ABOVE GROUNDS OF APPEAL IS WITHO UT PREJUDICE TO THE OTHER. 6. THE APPELLANT RESERVES THE RIGHT TO AMEND, ALTER OR ADD TO THE GROUNDS OF APPEAL. 3. FROM THE ABOVE GROUNDS, IT IS EVIDENT THAT GROUN D NOS. 1, 5 AND 6 ARE GENERAL IN NATURE. ACCORDINGLY, THEY ARE DISMISSED AS GENERAL AS THEY DO NOT REQUIRE SPECIFIC ADJUDICATION. GROUND NO.4 IS ALSO DISMISSED AS NOT PRESSED BY THE LD. COUNSEL FOR THE ASSESSEE. THAT LEAVE GROUN D NO. 2 AND 3 FOR SPECIFIC ADJUDICATION. TO START , WE SHALL TAKE UP GROUND N O.2 ALONG WITH ITS SUB- GROUNDS IN THE SUCCEEDING PARAGRAPH. 3 ITA NO.235/PUN/2013 4. GROUND NO. 2 RELATES TO BENCHMARKING OF TRANSACT IONS INVOLVING THE MANUFACTURING SEGMENT OF THE ASSESSEE. BRIEF FACTS RELATING TO THE ISSUE ARE THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFAC TURE AND TRADING OF WIDE RANGE OF INTRAVENOUS (IV) FLUIDS. COMPANY IS WHOL LY OWNED SUBSIDIARY OF M/S.FRESENIUS KABI AG, GERMANY (FKAG). THIS, FKAG I S, INTURN, A WHOLLY OWNED SUBSIDIARY OF FRESENIUS AG, GERMANY (IN SHORT FAG). THERE WAS IMPORT OF FINISHED GOODS FROM THE ASSOCIATED ENTERP RISES AND SELLING THEM IN THE DOMESTIC MARKET. IT IS A PART OF THE TRADING SEGMENT OF THE ASSESSEE. FURTHER, RAW MATERIAL NECESSARY FOR MANUFACTURING A CTIVITY OF INTRAVENOUS FLUIDS ARE ALSO IMPORTED FROM THE COMPANYS ASSOCIA TED ENTERPRISES. THUS, THE IMPORT OF RAW MATERIALS, FINISHED GOODS AND FIXTURE S, ASSETS AS WELL AS EXPORT OF MANUFACTURING GOODS, RECEIPT OF SALES COMMISSION , RECEIPT OF I.T. SERVICES, PAYMENT OF TESTING CHARGES AND PAYMENT OF INTEREST ON LOANS ARE THE COMPANYS INTERNATIONAL TRANSACTIONS WHICH ARE SUBJ ECT MATTER OF TPOS ANALYSIS ARE TABULATED AS UNDER : NAME OF THE ACTIVITY MANUFACTURING ACTIVITY TRADING ACTIVITY INTERNATIONAL TRANSACTIONS IMPORT OF RAW MATERIALS IMPORT OF FINISHED GOODS EXPORT OF FINISHED GOODS RECEIPT OF SALES COMMISSION RECEIPT OF IT SUPPORT SERVICES PAYMENT OF TESTING CHARGES 4.1 FROM THE ABOVE EXTRACT, IT IS EVIDENT THAT THE EXPORTS TO RELATED COMPANIES AMOUNTING TO RS.1,06,31,811/- IS THE TRAN SACTION BENCHMARKED BY THE TPO ADOPTING THE PLI OF THE MANUFACTURING SEGM ENT OF THE ASSESSEE, I.E. 0.54%. OTHERWISE, PLI OF THIS SUB-SEGMENT IS 17.97 %. 5. SO FAR AS THE MANUFACTURING ACTIVITY IS CONCERNE D, THE TPO IN HIS ORDER DATED 21-10-2011 BENCHMARKED THE RELEVANT TRANSACTI ONS AND THE ADJUSTMENTS 4 ITA NO.235/PUN/2013 ADDED BY HIM WORKS OUT TO RS.13,45,500/- AND THE RE LEVANT PARA NO. 7.2 OF THE TPOS ORDER IN THIS REGARD READS AS UNDER : 7.2 THE MAJOR TRANSACTION IS OF EXPORTS AT RS.1,06 ,31,811/-. THE OTHER RECEIPTS ARE FOR IT SERVICES AT RS.66,18,055/-. TH E MARGIN IN MANUFACTURING ACTIVITY IS 0.54%. THE PLI OF COMPARABLES IS 8.34% FOR F.Y. 2007-08 (ANNEXURE 8 B OF TP REPORT). HENCE ADJUSTMENT OF ( 8.34-0.54) X (1,06,31,811 + 66,18,055/100) = RS.13,45,500/- IS MADE TO THE IN TERNATIONAL TRANSACTIONS REPORTED. 6. IN SHORT, THE REASONS GIVEN BY THE TPO IN SUPPOR T OF HIS FINDING AND AS PER THE DISCUSSION GIVEN IN PARA 7 OF HIS ORDER, IN CLUDES THAT THE SUB-SEGMENTS OF THE MANUFACTURING ACTIVITY NAMELY; (1) TRANSACTI ON WITH THE RELATED COMPANIES, (2) RAW MATERIAL IMPORT FROM RELATED PAR TIES AND FINISHED GOODS SOLD TO EXPORTS THIRD PARTY, (3) THIRD PARTIES AND (4) TOTAL MANUFACTURED EXPORTS, WERE NOT AUDITED BY THE STATUTORY AUDITORS IN THE TP STUDY FURNISHED BY THE ASSESSEE. TPO IS OF THE VIEW THAT THERE IS NO AUDITED SEGMENTAL OR SUB-SEGMENTAL ACCOUNTS TO SUPPORT THE CONCLUSIONS O F THE TP STUDY. THEREFORE, THE ASSESSEES MARGIN IN MANUFACTURING A CTIVITY, I.E. OPERATING PROFIT/SALES AT 0.54% IS UNSUPPORTED BY THE AUDITED ACCOUNTS. FURTHER, THE TPO IS OF THE VIEW THAT THE EXPENDITURE ALLOCATED A MONG THE SAID SUB- SEGMENTS IS ARBITRARY AND ARE NOT BASED ON THE ACTU AL EXPENDITURE. THEREFORE, AS PER THE TPO, THE FIGURES AND EXPENDITURE ALLOCAT ED AMONG THE 4 SUB- SEGMENTS OF MANUFACTURING ACTIVITY ARE LINKED TO TH E SALES ON THE BASIS OF SOME KEYS IS UNSUSTAINABLE. THUS, THE MARGINS OF E ACH OF THE SUB-SEGMENT ARE NOT CREDIBLE FOR BENCHMARKING STUDY. OTHERWISE , IT IS UNDISPUTED THAT SIGNIFICANT EXPENDITURE IS ALLOCATED ON KEYS, SUCH AS PRODUCTION, MANUFACTURE OF BOTTLES, RATIO OF SALES REVENUE, ETC. AS PER TH E TPO, ALL TRANSACTIONS ARE INTRINSICALLY CLOSELY LINKED AND THEY ARE REQUIRED TO BE AGGREGATED. IN THAT CASE, THE PLI OF THIS SEGMENT IS WORKED AT 0.54%. IT IS THE REASONING OF THE REVENUE AUTHORITIES THAT THE TRANSACTION WITH ASSOC IATED ENTERPRISES ARE PROFIT 5 ITA NO.235/PUN/2013 ORIENTED AND THE DOMESTIC TRANSACTIONS ARE LOSS O RIENTED. THE SEGREGATION MADE BY THE ASSESSEE AMONG THE SUB-SEGMENTS IS SELF -SERVING. THEREFORE, THERE IS REQUIREMENT OF BENCHMARKING THE TRANSACTIO NS LEADING TO THE ADJUSTMENT OF RS.11,45,500/-. IN THE DRAFT ASSESSM ENT ORDER, THE AO ADOPTED THE SAID ADJUSTMENTS TO THE MANUFACTURING ACTIVITY AND THEY WERE SUBJECT MATTER OF SCRUTINY BEFORE THE DRP. 7. IN RESPONSE TO THE ASSESSEES OBJECTION ON THE A BOVE SAID ADJUSTMENTS, AS PER THE DISCUSSION GIVEN IN PARA 3.1, THE DRP CO NFIRMED THE TPOS ADJUSTMENTS. ON SCRUTINIZING THE SAID PARA, IT IS PRIMA-FACIE NOTICED THAT THE DRP HAS NOT REALLY EXAMINED THE REQUIREMENTS OF SUB -SEGMENTS. THEY MERELY REJECTED THE ASSESSEES CONTENTION BY MENTIONING TH AT : 3.4 . . . . . . AS REGARDS THE SEGMENTAL ANALYSIS IN RESPECT OF IN RESPECT OF IMPORT OF RAW MATERIALS AND EXPORT OF FINISHED GOOD S, THE CONTENTION OF THE ASSESSEE THAT THERE IS NO STATUTORY REQUIREMENT NEC ESSITATING THE ASSESSEE TO PROVIDE AUDITED SEGMENTAL INFORMATION AND HENCE CON TENTION OF THE LEARNED TPO THAT SEGMENTS MADE FOR THE TRANSFER PRICING STU DY NEEDS TO BE SUPPORTED BY AUDITED SEGMENTAL ACCOUNTS IS NOT JUSTIFIED, IS NOT ACCEPTABLE. 8. FROM THE ABOVE, THE DRP DID NOT JUSTIFY THE LEGA L REQUIREMENT OF AUDITED SEGMENTAL/SUB-SEGMENTAL INFORMATION AND THE STATUTORY REQUIREMENTS, IF ANY, IN THIS REGARD. FURTHER, REGARDING ALLOCAT ION OF EXPENSES ALSO, AS PER THE DRP, THE ASSESSEE COULD NOT COUNTER-COMMENT SAT ISFACTORILY WITH THE WORKING DEMONSTRATING THE ACTUAL ALLOCATION OF EXPE NDITURE. THUS, THE AO WAS DIRECTED BY THE DRP TO PROCEED TO MAKE ADJUSTMENTS AS PROPOSED IN THE DRAFT ASSESSMENT ORDER. 9. BEFORE US, LD. COUNSEL FOR THE ASSESSEE MADE VAR IOUS SUBMISSIONS. TO START WITH, BRINGING OUR ATTENTION TO THE CONTENTS OF PARA 452 OF THE PAPER BOOK, LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT T HE MANUFACTURING ACTIVITY HAS 4 DISTINCT SUB-SEGMENTS AND THE ALLOCATION OF E XPENDITURE WAS MADE SUBSTANTIALLY ON THE BASE OF ACTUAL EXPENDITURE. H E ALSO SUBMITTED THAT THERE 6 ITA NO.235/PUN/2013 IS NO REQUIREMENT FOR COMPULSORY AUDIT OF THE SEGME NTAL ACCOUNTS/SUB- SEGMENTAL ACCOUNTS OR MANDATED BY ANY STATUTE. BRI NGING OUR ATTENTION TO VARIOUS SUB-PARAGRAPHS TO PARA 8.2 IN GENERAL, AND SUB-PARA 3.1, IN PARTICULAR, THE LD. COUNSEL DEMONSTRATED THAT THE ALLOCATION OF EXPENSES WAS MOSTLY BASED ON THE ACTUAL EXPENDITURE WITH THE EXCEPTION OF EXPENDITURE RELATING TO OTHER EXPENSES AND GENERAL ADMIN EXPENSES. THE SE ARE ALLOCATED BASED ON PRODUCTION UNITS AND SALES BASIS RESPECTIVELY. LD. COUNSEL FOR THE ASSESSEE IS OF THE OPINION THAT EXPENDITURE RELATING TO PAYM ENT OF EMPLOYEES AND SELLING AND MARKETING EXPENSES IS ALLOCATED BASED O N COST CENTRES. THE EXPENDITURE, WHICH IS ALLOCATED NOT BASED ON THE AC TUAL, IS EXTREMELY NEGLIGIBLE AGAINST RS.55 CRORES OUT OF GROSS EXPENDITURE OF RS .106 CRORES DETERMINED BY THE TPO. THUS THE SAME CONSTITUTES A PATENT MISTAK E WHICH REQUIRES AMENDMENT. THIS MISTAKE HAS DRIVEN THE OFFICERS TO THE WRONG CONCLUSIONS IN THE MATTER. 10. FURTHER, REGARDING THE STATUTORY AUDITING OF TH E SEGMENTS/SUB- SEGMENTS OF MANUFACTURING ACTIVITY AND FURTHER, BRI NGING OUR ATTENTION TO CERTAIN JUDICIAL DECISIONS (M/S. 3I INFOTECH LTD. I N ITA NO.21/MDS/2013 ORDER DATED 07-05-2013), LD. COUNSEL SUBMITTED THAT THERE IS NO REQUIREMENT FOR AUDITING OF THE VARIOUS SEGMENT/SUB-SEGMENTS OF THE ASSESSEE. THUS, IT IS THE ARGUMENT OF THE LD. COUNSEL THAT THE TPOS TWIN FOL D OBJECTION THAT THE SEGMENTAL/SUB-SEGMENTAL ACCOUNTS ARE REQUIRED TO BE STATUTORILY AUDITED AND THE ALLOCATION EXPENSES BEING INTERLACED ARE NOT PR OPERLY ALLOCATED, ARE UNSUSTAINABLE. THEREFORE, THE ADJUSTMENTS MADE BY THE TPO ARE REQUIRED TO BE DELETED. 11. IN REPLY TO THE SAME, LD. DEPARTMENTAL REPRESEN TATIVE FOR THE REVENUE BROUGHT OUR ATTENTION TO THE FACT THAT THE ACCOUNTS OF THE ASSESSEE SUGGEST THE SEGMENTAL AUDITING OF ITS ACCOUNTS. IN THAT CA SE, IT IS NOT CLEAR AS TO WHY 7 ITA NO.235/PUN/2013 THE ASSESSEE FAILED TO FURNISH SUB-SEGMENTAL ACCOUN TS DULY AUDITED BY THE QUALIFIED AUDITORS. FURTHER, JUSTIFYING THE TPOS F INDING REGARDING THE INTERLACING OF EXPENDITURE THEREBY THE DOMESTIC SAL ES REGISTERED HUGE LOSSES UNLIKE THE INTERNATIONAL SALES, WHERE HUGE PROFITS ARE REGISTERED. REPLYING TO THE LD. AUTHORISED REPRESENTATIVES ARGUMENT THAT T HERE ARE EXTRAORDINARY CIRCUMSTANCES THAT LED TO THE REGISTERING OF LOSS I N THE DOMESTIC SALES, LD. DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE SUBMITT ED THAT NONE OF THESE EVENTS ARE DULY AUDITED BY THE STATUTORY AUDITORS I N WHICH CASE THE ARGUMENTS OF THE LD. AUTHORISED REPRESENTATIVE IS UNSUSTAINAB LE. 12. ON HEARING BOTH THE PARTIES ON THESE ISSUES RAI SED BY THE TPO, ON PERUSAL OF THE ORDER OF THE DRP DATED 12-01-2012 IN GENERAL AND PARA 3.4 IN PARTICULAR, WHICH WAS ALREADY EXTRACTED ABOVE, WE A RE OF THE OPINION THAT THE DRP ORDER DOES NOT PROVIDE REASONS HOW THE REQUIREM ENT FOR THE ASSESSEE TO FURNISH AUDITED SEGMENTAL/SUB-SEGMENTAL ACCOUNTS IN THE TP STUDY IS NEEDED. WE UNDERSTAND THE REQUIREMENT OF AUDITING THE ACCOU NTS OF THE ASSESSEE AND IT HAS THE STRENGTH OF THE PROVISIONS OF SECTION 44 AB OF THE ACT. BUT WHEN IT COMES TO THE TP STUDY MATTERS, THERE IS RESPONSIBIL ITY CAST ON THE ASSESSEE TO CONDUCT TP STUDY AND THERE IS A ROLE/PARTICIPATION OF THE ASSESSEE. AS IN THE MATTER DRP SHOULD HAVE GIVEN REASONS AS TO HOW THE TP STUDY ALSO DEMANDS THE AUDITING OF THE SEGMENTAL ACCOUNTS OR SUB-SEGME NTAL ACCOUNTS. AS SUCH, IT IS NOT CLEAR AS TO WHY THE CONTENTS OF PAGE 492 OF THE PAPER BOOK IS NOT AUDITED BEFORE FILING THE SAME BEFORE THE LOWER AUT HORITIES OR THE TRIBUNAL. ASSESSEE IS UNDER OBLIGATION TO DISCHARGE THE ONUS AS TO HOW SAID ARTIFICIAL ALLOCATION OF EXPENSES DOES NOT CONSTITUTE A SELF-S ERVING EXERCISE RATHER THAN THE RELIABLE/CREDIBLE TP STUDY NEEDED FOR BENCHMARK ING OF THE INTERNATIONAL TRANSACTIONS UNDER CONSIDERATION. IN THE ABSENCE O F THE SAME, THE ROLE OF THE AO OR THE TPO IN MAKING ADJUSTMENTS IS SUSTAINABLE IN LAW. HOWEVER, HOLDING 8 ITA NO.235/PUN/2013 THIS VIEW AT THIS POINT OF TIME CONSTITUTES PREMATU RE. IT IS ALSO NOTICED THAT THE DECISIONS FURNISHED BY THE ASSESSEES COUNSEL REGAR DING THE NON-REQUIREMENT OF FURNISHING OF THE AUDITED ACCOUNTS OF THE SEGMEN TAL ACCOUNTS AND SUB- SEGMENTAL ACCOUNTS, WERE IGNORED BY THE TPO/DRP WIT HOUT GIVING REASONS. REGARDING OTHER ASPECTS RELATING TO ALLOCATION OF I NTERLACED EXPENDITURE, SUCH AS EMPLOYEES COST, SELLING AND MARKETING EXPENSES, GENERAL ADMIN EXPENSES ETC., WE ARE OF THE OPINION THAT BASIS FOR ALLOCATI NG THE SAID EXPENSES AMONG THE 4 SUB-SEGMENTS DOES NOT APPEAR TO BE THE ACTUA L EXPENDITURE ALTHOUGH THEY WERE ARGUED BY THE LD. COUNSEL FOR THE ASSESSE E AS ACTUALS. THERE IS SOME ADHOC ALLOCATION BASED ON CERTAIN KEYS/PARAMET ERS SUCH AS SALES, COST CENTRES, PRODUCTION UNITS IS INVOLVED. IN OUR VIEW , PRIMA FACIE, THE DECISIOIN OF THE TPO/DRP CONSTITUTES REEXAMINATION. THEREFORE, WE ARE OF THE CONSIDERED OPINION THE ISSUE OF ADJUSTMENT TO THE MANUFACTURIN G SEGMENT IS REQUIRED TO BE REMANDED TO THE FILE OF AO/TPO/DRP FOR FRESH ADJ UDICATION OF THE ISSUE. AO IS DIRECTED TO GRANT REASONABLE OPPORTUNITY OF B EING HEARD TO THE ASSESSEE IN ACCORDANCE WITH THE PRINCIPLES OF NATURAL JUSTIC E. THUS, THE RELEVANT ISSUE RAISED IN GROUND NO.2 WITH ITS SUB-GROUNDS ARE ALLO WED FOR STATISTICAL PURPOSES. 13. GROUND NO.3 RELATES TO THE MOST APPROPRIATE ME THOD IN CASE OF THE TRADING ACTIVITY OF THE ASSESSEE THE DISTRIBUTOR ACTIVITY. THE ASSESSEE CONSIDERED HIMSELF AS THE ONE IN DISTRIBUTION ACTIV ITY. ASSESSEE IMPORTS THE FINISHED GOODS AND SELLS THE SAME IN THE DOMESTIC M ARKET WITH A MARKUP. DURING THE STUDIES BY THE TPO, IT IS NOTICED THAT T HE ASSESSEE DEBITED HUGE EXPENDITURE ON ACCOUNT OF SELLING AND MARKETING EXP ENSES. THUS, THE TPO IS OF THE VIEW THAT THE DISTRIBUTOR, WHO MERELY IMPORT S THE ITEMS FOR SELLING WITHOUT ANY VALUE ADDITION, IS NOT REQUIRED TO INCU R SUCH EXPENSES. FURTHER, HE DISCUSSED ABOUT THE BRANDED NATURE OF THE PRODUC TS IN QUESTION AND GIVEN 9 ITA NO.235/PUN/2013 VARIOUS REASONS DISCUSSED IN PARA 8.2 OF THE TPOS ORDER AND CAME TO THE CONCLUSION THAT THE RESALE PRICE METHOD (RPM) ADOPT ED BY THE ASSESSEE AS MOST APPROPRIATE METHOD FOR TP STUDIES OF THE SEGME NT, IS NOT APPROPRIATE. THERE IS AN OBSERVATION THAT DISTRIBUTOR SEGMENT SH OWN THE OPERATING LOSS BEFORE INTEREST AND DEPRECIATION. AS PER THE TPO/A O, THE DISTRIBUTOR DOES NOT SUFFER LOSSES NORMALLY. THERE WAS ALSO DISCUSSION ABOUT THE QUALITY OF THE COMPARABLES CONSIDERED FOR TP STUDY BEFORE CONCLUDI NG THAT THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE TRADING ACT IVITY OF THE ASSESSEE IS TNMM AND REJECTED THE RESALE PRICE METHOD CHOSEN BY THE ASSESSEE. 14. IN THE DRP PROCEEDINGS, ASSESSEE CONTESTED THE FINDINGS OF THE TPO. AS PER THE DISCUSSION GIVEN IN PARA NO.5.4 AND ITS SUB-PARAGRAPHS, THE DRP UPHELD THE VIEWS OF THE TPO. 15. AGGRIEVED WITH THE SAME, THE ASSESSEE RAISED GR OUND NO.3 BEFORE US. IN THIS REGARD, LD. COUNSEL FOR THE ASSESSEE BROUGH T OUR ATTENTION TO THE SAID PARA NO.5.4 AND DEMONSTRATED THAT THE DRP MERELY EX TRACTED SOME PARAGRAPHS FROM THE OECD TRANSFER PRICING GUIDELINE S 2010 WITHOUT APPLYING THE SAME TO THE FACTS OF THE ASSESSEE. RELEVANT OP ERATIONAL PARA FROM THE DRPS ORDER (PAGE 15) IS EXTRACTED AS UNDER : 5.4 . . . . . . . . . . . . . . . . . . . . . . . . . . FOR ACHIEVING PROPER COMPARABILITY IN THE LIGHT OF ABOVE MENTIONED ASPECTS OF BUSINESS OF A DISTRIBUTOR, IT IS AMPLY CLEAR THAT C OMPLETE INFORMATION ABOUT BUSINESS PROFILE AND FINANCIAL DATA IS NOT AVAILABL E IN RESPECT OF ALL THE PARTIES WHICH ARE EXAMINED AS COMPARABLES. UNDER THE CIRCU MSTANCES THE TPO HAS REJECTED THE RESALE PRICE METHOD AND TNMM IS CONSID ERED AS MOST APPROPRIATE METHOD AS OTHER METHODS LIKE CUP, CPM A RE NOT APPLICABLE TO THE FACTS OF THE CASE. IN VIEW OF THE ABOVE, THE A.O. IS DIRECTED TO PROCEED AS PROPOSED IN DRAFT ASSESSMENT ORDER. 16. CRITICIZING THE ABOVE FINDING OF THE DRP, LD. C OUNSEL FOR THE ASSESSEE SUBMITTED THAT THE DRP FAILED TO CONSIDER THE FACT THAT THE ASSESSEE MERELY IS A DISTRIBUTOR ENGAGED IN THE TRADING ACTIVITY OF IM PORTING FINISHED GOODS AND 10 ITA NO.235/PUN/2013 SELLING THE SAME IN THE DOMESTIC MARKET. DRP HAS N OT GIVEN ANY REASONS HOW RESALE PRICE METHOD IS NOT APPLICABLE TO SUCH DISTR IBUTION ACTIVITY OF THE ASSESSEE AND HOW THE TNM METHOD IS MOST APPROPRIATE AS HELD BY THE TPO. 17. REACTING TO THE REASONING OF THE TPO REGARDING THE SELLING AND MARKETING EXPENSES DEBITED TO THE PROFIT AND LOSS A CCOUNT, LD. COUNSEL SUBMITTED THAT THERE IS NO VALUE ADDITION TO THE PR ODUCTS DISTRIBUTED BY THESE EXPENSES INCURRED BY THE ASSESSEE. ACCORDING TO LD . AUTHORISED REPRESENTATIVE, SO LONG AS THERE IS NIL VALUE ADDIT ION TO THE PRODUCTS DISTRIBUTED BY THE SAID EXPENDITURE, THE RESALE PRI CE METHOD IS THE MOST APPROPRIATE ONE. RELYING ON THE FOLLOWING DECISION S, LD. COUNSEL FOR THE ASSESSEE READ OUT THE CONTENTS OF RELEVANT PARAS ON THIS ISSUE : (1) TEXTRONIX INDIA PVT. LTD. VS. DCIT IN ITA NO.13 34/BANG/2010 ORDER DATED 31-10-2011. (2) M/S. FRIGOGLASS INDIA PVT. LTD. VS. DCIT IN ITA NO.463/DEL./2013 ORDER DATED 11-04-2014 (3) NOKIA INDIA PVT. LTD. VS. DCIT AND VICE VERSA I N ITA NOS.242/DEL/2010, 178/DEL/2010 AND CO NO.77/DEL/2010 ORDER DATED 31-1 0-2014 (4) BOSE CORPORATION INDIA PVT. LTD. VS. ACIT REPOR TED IN 77 TAXMANN.COM 194 (DELHI TRIBUNAL) (5) M/S. OSI SYSTEMS PVT. LTD. VS. DCIT IN ITA NOS. 683 AND 542/HYD/2014 ORDER DATED 12-08-2015 18. ON THE OTHER HAND, LD. DEPARTMENTAL REPRESENTAT IVE FOR THE REVENUE HEAVILY RELIED ON THE ORDERS OF THE AO/TPO/DRP DUTI FULLY. 19. WE HEARD BOTH THE SIDES ON THIS ISSUE, I.E. MOS T APPROPRIATE METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTION OF A DIS TRIBUTION SEGMENT OF THE ASSESSEE. WE HAVE ALSO GIVEN SPECIAL ATTENTION TO THE FACT OF INCURRING SELLING AND MARKING EXPENSES BY THE DISTRIBUTOR QUA THE APP ROPRIATE METHOD FOR BENCHMARKING. ON PERUSAL OF THE DECISIONS CITED BY THE LD. AUTHORISED REPRESENTATIVE FOR THE ASSESSEE, WE FIND THE BANGAL ORE BENCH OF THE TRIBUNAL 11 ITA NO.235/PUN/2013 IN THE CASE OF TEXTRONIX INDIA PVT. LTD. (SUPRA) IS ON IDENTICAL ISSUE AND RELEVANT OBSERVATIONS (SUB-PARAGRAPH OF PARA NO.5) ARE EXTRACTED AS UNDER: WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE DISP UTE IS WITH REGARD TO THE ALP IN RESPECT OF INTERNATIONAL TRANSACTIONS WHEREB Y THE ASSESSEE IMPORTS EQUIPMENTS FROM ITS AE AND RE-SELLS THEM WITHOUT AN Y VALUE ADDITION TO THE INDIAN CUSTOMERS. IN SIMILAR CIRCUMSTANCES, MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF LOREAL INDIA PVT. LTD. (SUPRA) HAS TAK EN THE VIEW THAT THE RPM WOULD BE THE MOST APPROPRIATE METHOD FOR DETERMININ G 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 BES T METHOD WHEN A RE- SALE TAKES PLACE WITHOUT ANY VALUE ADDITION TO A PR ODUCT. 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 LOREAL INDIA PVT. LTD. (SUPRA) WOULD BE SQUARELY APPLICABL E TO THE FACTS OF THE ASSESSEES CASE. IN THAT EVENT, THE GP AS A PERCENT AGE OF SALES ARRIVED AT BY THE TPO IN ANNEXURE TO THE TPOS ORDER INSOFAR AS T RADING 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 ABO VE THE PERCENTAGE OF COMPARABLES IDENTIFIED BY THE TPO. IN SUCH CIRCUMST ANCES, 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 ADD ITION 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 T HE TPO IN ARRIVING AT THE ALP. THUS, GROUND NOS.2 TO 7 ARE ALLOWED. 20. FURTHER, THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF M/S. FRIGOGLASS INDIA PVT. LTD. (SUPRA) HELD THAT RESALE PRICE METH OD IS THE MOST APPROPRIATE METHOD IN CASE OF A DISTRIBUTOR. RELEVANT OPERATIO NAL PARA NO.5 READS AS UNDER : 5. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSE D THE MATERIAL AVAILABLE ON RECORD. IN OUR CONSIDERED VIEW, ONCE A SSESSEE HAS GIVEN A METHODOLOGY FOR WORKING OF ALP ON SELECTION OF A PA RTICULAR METHOD SUPPORTED BY APPROPRIATE COMPARABLES, THE WORKING C AN BE DISLODGED BY TPO ON THE BASIS OF COGENT REASONS AND OBJECTIVE FI NDINGS. IN THIS CASE EXCEPT THEORETICAL ASSERTIONS AND GENERALIZED OBSER VATIONS, NO OBJECTIVE FINDINGS HAVE BEEN GIVEN TO COME TO A REASONED CONC LUSION THAT ASSESSEE'S ADOPTION OF CPM FOR MANUFACTURING SEGMENT AND RPM F OR TRADING SEGMENT WAS FACTUALLY AND OBJECTIVELY NOT CORRECT. THUS THE REJECTION OF METHODS BY TPO AS ADOPTED BY ASSESSEE IS BEREFT OF ANY COGE NCY AND OBJECTIVITY. THE SAME IS A WORK OF GUESSING AND CONJECTURED. SIM ILARLY THE TNMM METHOD APPLIED BY THE TPO SUFFERS FROM THE SAME INH ERENT ABERRATIONS AS MENTIONED ABOVE. IN THESE CIRCUMSTANCES WE ARE OF T HE VIEW THAT ASSESSEES METHODS OF CPM AND RPM RESPECTIVELY WORKE D BY APPLYING APPROPRIATE CORNPARABLES IS TO BE UPHELD. THUS THE ALP WORKING RETURNED BY THE ASSESSEE IS UPHELD. ASSESSEES TP GROUNDS ARE ALLOWED. 12 ITA NO.235/PUN/2013 21. WE FURTHER FIND THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF BOSE CORPORATION INDIA PVT. LTD.(SUPRA) HELD THAT RESALE PRICE METHOD IS THE BEST SUITED METHOD FOR DETERMINING THE ALP OF AN INTERNA TIONAL TRANSACTION IN NATURE OF PURCHASE OF GOODS FROM ASSOCIATED ENTERPR ISES WHICH ARE SOLD AS SUCH TO RELATED PARTIES. OPERATIONAL PARA NO.7.6 R EADS AS UNDER : 7.6 WE ARE UNABLE TO ACCEPT THE CONTENTION ADVANCE D ON BEHALF OF THE REVENUE. THE OBVIOUS REASON FOR THIS IS THAT THE IN CURRING OF HIGH ADVERTISEMENT AND MARKETING EXPENSES BY THE ASSESSE E DOES NOT IN ANY MANNER AFFECT THE DETERMINATION OF ALP UNDER THE RP M. IT IS BUT NATURAL THAT ONLY THOSE EXPENSES CAN HAVE BEARING ON THE GROSS P ROFITS THAT ARE DEBITED TO THE TRADING ACCOUNT. AS THE AMOUNT OF ADVERTISEMENT AND MARKETING EXPENSES FINDS ITS PLACE IN THE PROFIT AND LOSS ACC OUNT, THE HIGHER OR LOWER SPEND ON IT CANNOT AFFECT THE AMOUNT OF GROSS PROFI T AND THE RESULTANT ALP UNDER THE RPM. 22. OUR VIEW IS FURTHER FORTIFIED BY THE ORDER OF T HE 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 W ERE CONSIDERED BEFORE DECIDING THE ISSUE IN FAOVUR OF THE ASSESSEE AND IN FAVOUR OF RESALE METHOD PRICE METHOD IN CASE OF DISTRIBUTION ACTIVITY OF T HE ASSESSEE. 23. FROM THE ABOVE, IT IS SETTLED LEGAL POSITION AT THE VARIOUS BENCHES OF THE TRIBUNAL THAT, IN CASE OF DISTRIBUTION ACTIVITY, EV EN 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 MET HOD TO THE TRANSACTION UNDER CONSIDERATION. IN ANY CASE, IT IS NOT THE CA SE OF THE REVENUE THE ASSESSEE IS NOT INTO DISTRIBUTION ACTIVITY. ACCORD INGLY, IN PRINCIPLE, GROUND NO.3 RAISED BY THE ASSESSEE IS ALLOWED. 24. ON HAVING HELD THE RESALE PRICE METHOD IS THE MOST APPROPRIATE METHOD TO THE DISTRIBUTOR SEGMENT OF THE ASSESSEE, THERE IS A NEED FOR 13 ITA NO.235/PUN/2013 BENCHMARKING OF THE TRANSACTIONS APPLYING THE GOOD COMPARABLES. WE FIND THE TPO HAS GIVEN A FINDING IN PARA (XI) OF PARA 8. 2 WITH REGARD TO THE ADJUSTMENTS EVEN IF RESALE PRICE METHOD IS APPLIED. AS STATED BY THE LD. COUNSEL FOR THE ASSESSEE BEFORE BENCH, THAT THIS PA RT OF BENCHMARKING THE TRANSACTIONS APPLYING THE RESALE PRICE METHOD SHOUL D BE REFERRED TO THE FILE OF AO/TPO/DRP FOR A FRESH DECISION AFTER GRANTING REAS ONABLE OPPORTUNITY OF BEARING HEARD TO THE ASSESSEE. 25. FURTHER, LD. COUNSEL FOR THE ASSESSEE BROUGHT O UR ATTENTION TO THE ADDITIONAL GROUND FILED ON 08-03-2015 AND 08-06-2 015 AND SUBMITTED THAT THESE GROUNDS RELATE TO BENCHMARKING OF THE TRANSA CTIONS FROM THE TRADING SEGMENTS. DECISION ON THE MOST APPROPRIATE METHOD (RESALE PRICE METHOD) MAKES MOST OF THESE ADDITIONAL GROUNDS INFRUCTUOUS. HOWEVER, IT IS THE PRAYER OF THE LD. COUNSEL FOR THE ASSESSEE THAT THESE ADDI TIONAL GROUNDS MAY BE ADMITTED AND REMITTED TO THE FILE OF THE AO/TPO/DRP FOR CONSIDERING THE SAME AT THE TIME OF BENCHMARKING STUDY OF THE INTERNATIO NAL TRANSACTIONS IN THE TRADING SEGMENT APPLYING RESALE PRICE METHOD. 26. ON HEARING BOTH THE SIDES ON THE ISSUES OF ADDI TIONAL GROUND, WE FIND THE ADDITIONAL GROUND, BEING LEGAL IN NATURE, ARE R EQUIRED TO BE ADMITTED AND SHOULD BE REMITTED TO THE FILE OF THE AO/TPO/DRP FO R CONSIDERING HIS BENCHMARKING STUDIES APPLYING RESALE PRICE METHOD. WE FIND THESE GROUNDS RELATE TO THE ASPECTS OF BENCHMARKING OF INTERNATIO NAL TRANSACTIONS OF TRADING ACTIVITY. IN OUR VIEW, TPO SHOULD BE DIRECTED TO A PPLY RESALE PRICE METHOD AS MOST APPROPRIATE METHOD FOR THE REASONS DISCUSSED A BOVE AND UNDERTAKE THE EXERCISE OF BENCHMARKING THEM AS PER THE RULES ON T HE SUBJECT. AO/TPO SHALL GRANT REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE IN ACCORDANCE WITH THE SET PRINCIPLES OF NATURAL JUSTICE. HENCE, FOR THE TIME BEING, THESE 14 ITA NO.235/PUN/2013 ADDITIONAL GROUNDS ARE TREATED AS ACADEMIC AND ARE REMANDED TO THE FILE OF AO. 27. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 16 TH DAY OF JUNE, 2017. SD/- SD/- (VIKAS AWASTHY) (D. KARUNAKARA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE; DATED : 16 TH JUNE, 2017. / COPY OF THE ORDER FORWARDED TO : / BY ORDER , // TRUE COPY // //TRUE COPY// /ASSISTANT REGISTRAR , / ITAT, PUNE 1. / THE APPELLANT 2. / THE RESPONDENT 3. THE CIT(A) - 11, PUNE 4. CIT - 11, PUNE 5. DR, ITAT, B BENCH PUNE; 6. / GUARD FILE.