Roxtec India Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 240/DEL/2017

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 4719 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 9 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-10-2020
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: I
• Assessment Year: 2012-2013
• Appeal Filed On: 13-01-2017
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: NIDHI SHARMA
• Keywords: Related party transaction; Depreciation; Transfer pricing; Business expenditure; International transaction; Wholly owned subsidiary; Arm length price
• Section: 144C; 13; 22; 92CA

Judgement Text

PAGE | 1 INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I - 2 : NEW DELHI BEFORE SHRI BHAVNESH SAINI , JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA NO. 240/DEL/2017 (ASSESSMENT YEAR: 2012 - 13 ) ROXTEC INDIA PVT. LTD, 308, HEMKUNT CHAMBERS, 89, NEHRU PLACE, NEW DELHI PAN: AADCR1329K VS. ACIT, CENTRAL CIRCLE - 21(2), NEW DELHI (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI NIKHIL SURANA, CA SHRI LOKESH JAIN, CA REVENUE BY: MS. NIDHI SHARMA, SR. DR DATE OF HEARING 21/08/2020 DATE OF PRONOUNCEMENT 2 0 / 10 / 2020 O R D E R PER PRASHANT MAHARISHI, A. M. 1. THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LD AO DATED 27.10.2016 FOR THE ASSESSMENT YEAR 2012 - 13 PASSED U/S 143 (3) READ WITH SECTION 144C READ WITH SECTION 92CA ( 3 ) OF THE INCOME TAX ACT , 1961 ON 27/10/2016 WHEREIN THE RETURNED INCOME OF THE ASSESSEE OF LOSS OF 39,796,549 AS PER RETURN OF INCOME FILED ON 30 NOVEMBER 2012 IS ASSESSED AT A LOSS OF 30,329,704/ WHEREIN A TRANSFER PRICING ADJUSTMENT OF 9,404, 349/ - H AS BEEN MADE. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1. THE LD AO AS WELL HONBLE DRP HAS GROSSLY ERRED BOTH ON FACTS AND IN LAW IN CONFIRMING THE ACTION OF THE LD TRANSFER PRICING OFFICER IN RE - COMPUTING THE ARM LENGTH PRICE IN RESPECT OF IMPORT OF MATERIAL AND EXPORT OF FINISHED GOODS BY APPLYING TRANSACT IONAL NET MARGIN METHOD AND REJECTING RESALE PRICE METHOD AS THE MOST APPROPRIATE METHOD, THEREBY MAKING A TP ADJUSTMENT OF RS. 9,404,349/ - . PAGE | 2 3. ASSESSEE IS A PRIVATE LTD COMPANY WHOLLY OWNED SUBSIDIARY OF SWEDEN COMPANY. IT IS ENGAGED IN THE BUSINESS OF MANU FACTURING COMPLETE SEALING SOLUTIONS FOR CABLES AND PIPES. THE ASSESSEE COMPANY IMPORTS SEALING MODULES FROM ITS ASSOCIATED ENTERPRISES AND WEDGES OF FRAMES FROM LOCAL VENDOR S WHO USES THE DESIGN PROVIDED BY THE GROUP COMPANY AND THEN THOSE ARE ASSEMBLE INTO CUSTOMISED READY TO USE PACKS AND SOLD TO THE CUSTOMERS BY ASSESSEE. ASSESSEE HAS ENTERED INTO SIX DIFFERENT INTERNATIONAL TRANSACTIONS AS UNDER: - A. IMPORT OF MATERIAL ( SEMI FINISHED AND FINISHED GOODS AMOUNTING TO 71,316,723 BENCHMARKED ADOPTING R ESALE PRICE METHOD AS THE MOST APPROPRIATE METHOD. B. EXPORT OF FINISHED GOODS AMOUNTING TO 38,284,835 BENCHMARKED ADOPTING THE TRANSACTIONAL NET MARGIN METHOD AS THE MOST APPROPRIATE METHOD C. REIMBURSEMENT OF SECONDMENT EXPENSES INCURRED BY ASSOCIATED ENTER PRISE IS BENCHMARKED APPLYING CUP METHOD FOR A TRANSACTION OF RS 1 38,40,988, REIMBURSEMENT OF EXPENSES INCURRED BY THE COMPANY ON BEHALF OF ITS ASSOCIATED ENTERPRISE AMOUNTING TO 606,460 AND IMPORT OF MARKETING MATERIALS OF RS 20 4814 AND INTEREST FOR TH E LOAN TAKEN FROM ASSOCIATED ENTERPRISE OF 35,899 WERE ALSO BENCHMARKED ADOPTING THE SAME METHOD I.E. CUP. 4. THE LEARNED TRANSFER PRICING OFFICER HELD THAT INTERNATIONAL TRANSACTIONS OF IMPORT OF MATERIAL ( SEMI FINISHED AND FINISHED GOODS OF 7.13 CRORES WHICH IS BENCHMARKED BY THE ASSESSEE ADOPTING RESALE PRICE METHOD AS THE MOST APPROPRIATE METHOD AND THE INTERNATIONAL TRANSACTION OF EXPORT OF FINISHED GOODS OF 3.83 CRORES WHICH IS BENCHMARKED BY THE ASSESSEE ADOPTING TRANSACTIONAL NET MARGIN METHOD AS THE MOST APPROPRIATE METHOD IS IMPROPER AND THEREAFTER HE ADOPTED TRANSACTIONAL NET MARGIN METHOD FOR BOTH THESE TRANSACTION ON COMBINED BASIS. THEREAFTER THE LEARNED TRANSFER PRICING OFFICER AFTER GIVING A DETAILED REASONING THAT WHY RESALE PRICE METHOD IS NOT THE MOST APPROPRIATE METHOD IN CASE OF THE ASSESSEE AND THEREFORE THE TRANSACTIONAL NET PAGE | 3 MARGIN METHOD S HOULD BE ADOPTED. HE THEREAFTER SELECTED FIVE COMPARABLES COMPUTED THE OPERATING MARGIN WHEREIN OPERATING PROFIT/OPERATING RATIO OF THE COMPARABL ES WAS COMPUTED AT ( - ) 3.57 PERCENTAGE. THEREAFTER THE AO STATED THAT ASSESSEE HAS EARNED TOTAL REVENUE OF 222,265,148/ AND HAS INCURRED TOTAL OPERATING COST OF 251,806,217/ AND THEREFORE THE ARMS - LENGTH PROFIT COMPUTING MARGIN OF ( - ) 3.57 PERCENTAG E ASSESSEE SHOULD HAVE INCURRED A LOSS OF 7,934,866 AGAINST WHICH THE ASSESSEE HAS INCURRED LOSS OF 29,541,0 69/ - AND THEREFORE THERE IS A DIFFERENCE OF RS . 2, 16,06,203. THE ABOVE DIFFERENCE HE APPLIED TO THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE OF 109,601,558 AND PROPORTIONATELY ADOPTED 43.53 PERCENTAGE OF THE DIFFERENCE OF RS 2 16,06,203 WHICH COMES TO PROPORTIONATE ADJUSTMENT OF 9,404,349 / - . ACCOR DINGLY THE ORDER WAS PASSED U/S 92CA (3) OF THE ACT ON 23 RD OF JANUARY 2016. THE DRAFT ORDER WAS PASSED BY THE LEARNED ASSESSING OFFICER ON 21 ST OF MARCH 2016. ASSESSEE FILED OBJECTION BEFORE THE LEARNED DISPUTE RESOLUTION PANEL 2, NEW DELHI. THE LEARNED DRP ISSUED DIRECTIONS ON 23 SEPTEMBER 2016 WHEREIN THE METHOD ADOPTED BY THE LEARNED TRANSFER PRICING OFFICER WAS UPHELD AND CONSEQUENTLY THE ADJUSTMENT PROPOSED BY THE TPO WAS ALSO UPHELD. CONSEQUENTLY THE FINAL ASSESSMENT ORDER U/S 143 (3) WAS PASSED ON 27/10/2016 DETERMINING ASSESSED LOSS OF ASSESSEE AT 30,329,704. THE ASSESSEE IS AGGRIEVED WITH THAT ORDER AND IS IN APPEAL BEFORE US. 5. THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT BENCHMARKING ANALYSIS MADE BY THE ASSESSEE IS CORRECT BY ADOPTING THE RESALE PRICE METHOD AS THE MOST APPROPRIATE METHOD. IT WAS STATED THAT THE QUANTUM OF EMPLOYEE BENEFIT EXPENSES CANNOT BE COMPARED WITH THE REVENUE AS THERE HAS BEEN A SUBSTANTIAL SHORTFALL IN THE REVENUE IN THE CURRENT YEAR ON ACCOUNT OF SLOWDOWN I N THE TELECOM SECTOR. HE THEREFORE SUBMITTED THAT SUBSTANTIAL FALL OF THE REVENUE FROM 4 4 .00 CRORES TO 22 CRORES. IT WAS FURTHER STATED THAT HUMAN CAPITAL CANNOT BE REDUCED IN THE SHORT PERIOD OF TIME. CONSIDERING THE FACT THAT THE CORE FUNCTION OF THE AS SESSEE IS SALES AND MARKETING SUCH DEDUCTION WAS NEITHER ADVISABLE NOR FEASIBLE. HE ALSO SUBMITTED THAT THE COMPARATIVE PAYROLL CHARGED IS DESIGNATION PAGE | 4 AND ROLE OF EACH EMPLOYEE FOR FOUR YEARS HAS BEEN PROVIDED AND ON REVIEW OF THE SAME IT CAN BE CLEARLY OB SERVED THAT ALL THE EMPLOYEES HAVE BEEN UNDERTAKING GENERAL SALES AND MARKETING ACTIVITIES. HE FURTHER SUBMITTED THAT EXPENSES IN THE NATURE OF RENT, TRAVELLING AND CONVENTIONS EXPENSES ARE THE NORMAL BUSINESS EXPENDITURE WHICH CANNOT SHOW THAT ASSESSEE IS CARRYING OUT SUBSTANTIAL VALUE ADDITION ON PRODUCTION. WITH RESPECT TO THE ADVERTISEMENT AND SALES MARKETING PROMOTION EXPENDITURE INCURRED BY THE ASSESSEE OF 27.16 LAKHS UNDER THE HEAD ADVERTISEMENT AND SALES PROMOTION , IT WAS STATED THAT THESE ARE MA JORLY ON ACCOUNT OF FREE SAMPLES DISTRIBUTED TO THE CUSTOMERS AND NO EFFORTS HAVE BEEN MADE BY THE LEARNED TRANSFER PRICING OFFICER TO SHOW THE EXACT NATURE OF THESE EXPENSES AND IT HAS BEEN RELIED ON THE NO MENCLATURE USED BY THE ASSESSEE. IT WAS FURTHER S TATED THAT INCURRING OF THE SAID EXPENSES CLEARLY SHOWS THAT ASSESSEE IS ONLY ENGAGED IN DISTRIBUTION FUNCTION. HE OTHERWISE STATED THAT THE AMOUNT OF EXPENDITURE OF 27.16 LAKHS ARE REASONABLE AND NOWHERE CONCLUSIVE OF THE FACT THAT ASSESSEE IS CARRYING OUT SUBSTANTIAL VALUE ADDITION. HE FURTHER STATED THAT THERE IS A WRONG OBSERVATION ABOUT THE IMPORT OF THE GOODS WHICH HAVE BEEN CLEARLY CLASSIFIED AS IMPORT OF MATERIALS IN THE NATURE OF SEMI FINISHED AND FINISHED GOODS. HE FURTHER REFERRED TO THE RISK P ROFILE OF THE ASSESSEE AND STATED THAT THE LOWER AUTHORITIES HAVE INCORRECTLY READ THE RISK PROFILE. IT WAS STATED THAT THE PRODUCT RESEARCH AND DEVELOPMENT FUNCTIONS RISK ONLY REST WITH THE ASSOCIATED ENTERPRISE AND NOT WITH THE ASSESSEE AND FURTHER THE MANUFACTURING FUNCTIONS RISK IS ALSO WITH THE ASSOCIATED ENTERPRISE. WITH RESPECT TO THE PRODUCT LIABILITY RISK AND THE WARRANTY RISK IT WAS SUBMITTED THAT RISK RESTS WITH THE ASSOCIATED ENTERPRISE AND NOT WITH THE ASSESSEE EXCEPT LIMITED WARRANTY TO OB TAIN THE PRODUCT FROM THE CUSTOMERS AND SENDING IT TO ITS ASSOCIATED ENTERPRISE. 6. WITH RESPECT TO THE APPROPRIATENESS OF USING THE RESALE PRICE METHOD AS THE MOST APPROPRIATE METHOD BY THE ASSESSEE , HE ADVOCATED THAT THERE IS NO FINDING IN SUPPORT OF THE C ONCLUSION THAT ASSESSEE IS CARRYING OUT SUBSTANTIAL VALUE ADDITION AND THEREFORE THE RESALE PRICE METHOD IS THE MOST APPROPRIATE METHOD. PAGE | 5 HE SUBMITTED THAT THE ASSESSEE IMPORT SEALING MOULDS AND W EDGES FROM THE ASSOCIATED ENTERPRISE AND ASSEMBLES THEM IN READY TO USE PACKS TO SEND THEM TO CUSTOMERS IN INDIA REMAINS UNCONTROVERTED. HE FURTHER REFERRED TO PAGE NUMBER 40 OF THE PAPER BOOK WHEREIN THE OPERATING MODEL HAS BEEN DISCUSSED IN DETAIL. HE THEREFORE SUBMITTED THAT ASSESSEE IS CARRYING OUT MINIMUM VA LUE ADDITION BECAUSE THERE IS ONLY AN EXPENDITURE OF 10.81 LAKHS WITH RESPECT TO THE WAGES AND THE QUANTUM AND NATURE OF THE PLANT AND MACHINERY ALSO DOES NOT SUGGEST THAT SUBSTANTIAL VALUE ADDITION HAS BEEN CARRIED OUT BY THE ASSESSEE. HE OTHERWISE SUBM ITTED THAT THE TRANSACTIONAL NET MARGIN METHOD IS NOT THE MOST APPROPRIATE METHOD AND SUBMITTED THAT TNMM IS APPLIED WHEN COST PLUS METHOD OR RESALE PRICE METHOD DOES NOT GIVE RELIABLE DATA. HE OTHERWISE SUBMITTED THAT IN CASE OF THE ASSESSEE IT HAS EARNED NEGATIVE MARGIN ON ACCOUNT OF SUBSTANTIAL DROP IN THE REVENUE AS IT IS UNABLE TO ABSORB IT IS FIXED AND SEMI FIXED COST , THEREFORE SUBSTANTIAL LOSSES BEEN INCURRED. HE FURTHER STATED THAT THERE HAS BEEN NO CHANGE IN THE GROSS MARGIN EARNED BY THE ASSES SEE WHICH IS SUBMITTED AT PAGE NUMBER 101 OF THE PAPER BOOK. THEREFORE NEGATIVE MARGIN EARNED BY THE ASSESSEE MUST NOT BE ATTRIBUTED TO THE VALUE ADDITION OF THE ASSESSEE AND THEREFORE THE TRANSACTIONAL NET MARGIN METHOD DOES NOT TRULY REFLECT MARGINS EARN ED FORM THE BUSINESS OF THE ASSESSEE. HE THEREFORE SUBMITTED THAT RESALE PRICE METHOD AS THE MOST APPROPRIATE METHOD ADOPTED BY THE ASSESSEE FOR THE PURPOSE OF IMPORT OF MATERIAL OF SEMI FINISHED AND FINISHED GOODS. HE THEREF ORE SUBMITTED THAT THE LEARNED DRP/TPO ERRED IN ADOPTING TRANSACTIONAL NET MARGIN METHOD ON COMBINED BASES WITH RESPECT TO THE IMPORT OF MATERIAL AND EXPORT OF FINISHED GOODS. 7. THE LEARNED DEPARTMENTAL REPRESENTATIVE VEHEMENTLY SUPPORTED THE ORDER OF THE LEARNED ASSESSING OFFICER/TPO A ND DIRECTION OF THE LEARNED DISPUTE RESOLUTION PANEL. HE ALSO REFERRED TO THE VARIOUS OBSERVATION IN THOSE ORDERS AND SUBSTANTIATED SAME WITH VARIOUS FIGURES IN THE ANNUAL ACCOUNTS. HE ALSO REFERRED TO THE FUNCTIONAL PROFILE OF THE ASSESSEE. PAGE | 6 8. WE HAVE CAREFULLY CONSIDERED RIVAL CONTENTIONS AND PERUSED THE TP STUDY REPORT, ANNUAL ACCOUNTS, SUBMISSIONS OF THE ASSESSEE BEFORE LOWER AUTHORITIES AND ALSO THE ORDERS OF LOWER AUTHORITIES. THE BRIEF PROFILE OF THE ASSESSEE SHOWS THAT ASSESSEE IS DESCRI BED AS NON - EXCLUSIVE DISTRIBUTOR OF ROXTEC INTERNATIONAL AB S PRODUCTS IN THE TERRITORY OF INDIA/SRI LANKA, BANGLADESH. IT OBTAINS MARKETING LEADS, NEGOTIATES THE CONTRACTS AND IS THE PRINCIPLE CONTRACTING ENTITY IN ITS TERRITORY. HOWEVER THE ASSESSEE CO ULD DEAL IN THE PRODUCTS AS LISTED IN THE CATALOGUE OF THE ASSOCIATED ENTERPRISES OR MODIFIED BY IT. THEREFORE BASED ON ITS MARKET LEADS, IT ESTIMATES IT SALES, ORDER S THE PRODUCT FROM ITS ASSOCIATED ENTERPRISE, PURCHASES SEALING MODELS FROM ITS ASSOCIATE D ENTERPRISE, PROCURES FRAMES FROM LOCAL VENDORS , WHO USES THE DESIGN A S PROVIDED BY THE ASSESSEE AND THEN PRODUCT IS ASSEMBLED INTO CUSTOMISED OR READY TO USE PACKS AND SOLD THERE AFTER TO THE CUSTOMERS. ASSESSEE P AYS ITS ASSOCIATED ENTERPRISE ON EVERY PURCHASE BASED ON THE CATALOGUE PRICE OF THE ASSOCIATED ENTERPRISE WITH OR WITHOUT DISCOUNT. THE FINAL DELIVERY TO THE CUSTOMER AND INVOICING FOR THE SALES IS THE RESPONSIBILITY OF ASSESSEE AND ASSESSEE BEING THE FRONT - END ENTITY IS RESPONSIBLE FOR M AINTAINING GOOD RELATIONSHIP WITH THE CUSTOMER. 9. BASED ON THIS BUSINESS MODEL THE ASSESSEE PERFORMS F UNCTIONS AS STATED ON PAGE NUMBER 16 OF 46 OF THE TRANSFER PRICING STUDY REPORT WHERE ASSESSEE FRAMES THE STRATEGY FOR THE TERRITORY FOR WHICH IT IS APPO INTED AS THE DISTRIBUTOR. IT ALSO PERFORMS ITS DAY - TO - DAY FUNCTIONS OF THE MANAGEMENT. THE DESIGN SPECIFICATION IS CARRIED OUT BY THE PRODUCTION SITE OF THE ASSOCIATED ENTERPRISE AND ASSESSEE HAS ALSO CONTRIBUTED TOWARDS THE RESEARCH AND DEVELOPMENT ACTIVI TIES PERTAINING TO CUSTOMISATION OF PRODUCTS FOR THE CUSTOMER IN ITS REGION. THEREFORE ASSESSEE CONTRIBUTES FURTHER RESEARCH AND DEVELOPMENT ACTIVITIES ALSO. THOUGH MANUFACTURING OF THE MULTI - DIAMETER MODULE IS BY THE ASSOCIATED ENTERPRISE , HOWEVER, ASSES SEE IS INVOLVED IN THE ASSEMBLY OF THE FRAME, MODULE AND WEDGE FOR THE CREATION OF THE CUSTOMISED KITS. THE COMPANY DEVELOPED THE VENDORS LOCAL IN INDIA FOR THE PRODUCTS USED IN ASSEMBLY AND THE FRAME IS EXPORTED, WHICH WERE TESTED FOR QUALITY IN SWEDEN TO ADHERE TO THE STRICT PRODUCT PAGE | 7 SPECIFICATION AND QUALITY NORMS DRIVEN BY THE PARENT COMPANY. ASSESSEE ALSO DOES SOURCING AND PURCHASE OF MATERIALS FOR THE PRODUCTION OR ASSEMBLY PROCESS. VENDOR SELECTION, ITS QUALIFICATION, INBOUND LOGISTICS ETC . ARE AL L THE RESPONSIBILITIES OF THE ASSESSEE. THE ASSESSEE IS ALSO RESPONSIBLE FOR THE QUALITY OF MATERIAL THAT IS PURCHASED BY THE COMPANY FROM THE LOCAL VENDORS. THE ASSOCIATED ENTERPRISE IS ONLY RESPONSIBLE FOR THE MATERIAL SUPPLIED BY IT TO THE ASSESSEE. THE ASSESSEE ALSO MARKETS THE ABOVE PRODUCTS AND GENERATES A LEAD FROM THE CUSTOMERS. THE ASSESSEE ALSO ASSUMES THE MARKET RISK AND WARRANTY RISK TO THE EXTENT OF PRODUCT SUPPLIED BY THE VENDORS. IT IS AN ALTOGETHER DIFFERENT THING THAT THE ASSESSEE IS GIVEN A BACK - TO - BACK WARRANTY OF THE GOODS SUPPLIED BY THE ASSOCIATED ENTERPRISES. HOWEVER IT IS APPARENT THAT ASSESSEE IS ALSO RESPONSIBLE FOR WARRANTY TO ITS CUSTOMERS. THE TRANSFER PRICING STUDY REPORT SHOWS THAT IN CASE DEFECT IS ON ACCOUNT OF THE ASSEMBLY ACTIVITY PERFORMED IN INDIA THEN THE WARRANTY RISK WOULD BE WITH THE ASSESSEE. 10. NOW COMING TO THE FINANCIALS OF THE ASSESSEE FOR THE YEAR IT IS APPARENT THAT LOOKING AT NOTE NUMBER 17 WHEREIN REVENUE FROM OPERATIONS ARE SHOWN, THE REVENUE FOR LAST YEAR I.E. 31 /3/ 2011 WAS 25,14,45,769 WHEREAS THE REVENUE FOR THIS YEAR IS 234,303,011/ . THEREFORE THERE IS NO MATERIAL CHANGE IN THE TOTAL REVENUE (SALES). FURTHER THE ASSESSEE IS ALSO INCURRING ADVERTISEMENT AND SALES PROMOTION EXPENDITURE. LAST YEAR IT IN CURRED FOR THAT EXPENDITURE RS 4 2.90 LAKHS WHEREAS FOR THIS YEAR IT IS 27.16 LAKHS. IT HAS ALSO INCURRED ELECTRICITY AND WATER EXPENDITURE OF 11.47 LAKHS. IT SALARY WAGES BONUS EXPENDITURE FOR THE YEAR IS 5,13,00,000 WHEREAS IN THE LAST YEAR IT WAS 4.69 CRORES. EVEN IN THE FINANCIAL STATEMENT AT NOTE NUMBER 29 ASSESSEE IS STATED TO BE ENGAGED IN PRODUCTION OF GOODS. WE HAVE ALSO CAREFULLY CONSIDERED THE CHART OF THE EMPLOYEE EXPENDITURE SUBMITTED BY THE ASSESSEE AT PAGE NUMBER 87 88 OF THE PAPER BOOK. HOWEVER, FROM THE ABOVE CHART IT IS APPARENT THAT ASSESSEE DOES NOT HAVE ANYBODY WHO IS DOING VENDOR SELECTION, VENDOR CONTROL, ASSEMBLY ACTIVITY ET CETERA. THEREFORE THE CHART OF THE EMPLOYEE SUBMITTED BY THE ASSESS EE DOES NOT MATCH WITH THE FUNCTIONS STATED BY THE ASSESSEE IN THE TP STUDY . IT IS PAGE | 8 APPARENT THAT IN RESALE PRICE METHOD IF THERE IS NO SUBSTANTIAL ADDITION, SHOULD BE USED AS THE MOST APPROPRIATE METHOD. HOWEVER AT PAGE NUMBER 86 OF THE PAPER BOOK ASSESSE E SHOWS THAT IT EARNS THE GROSS PROFIT OF 35%, AT PAGE NUMBER 90 OF THE PAPER BOOK ASSESSEE SUBMITS THAT ITS GROSS PROFIT RATIO IS 36.09% AT PAGE NUMBER 8 1 ASSESSEE SHOWN OPERATING MARGIN ON COST AND 17.75%, AT PAGE NUMBER 79 SHOWN ITS GROSS MARGIN ON REV ENUE AT 41.61%. SUCH A KIND OF MARGIN EARNED BY DISTRIBUTOR IS UNHEARD OF, THESE FIGURE ITSELF SHOWS THAT ASSESSEE IS MAKING SUBSTANTIAL VALUE ADDITION TO THE PRODUCT PURCHASED BY IT. FURTHER AT PAGE NUMBER 30 THE SUMMARY OF TRANSACTIONS ANALYZED CLEARLY S HOWS THAT ASSESSEE IS IMPORTING SEMI FINISHED GOODS AND FINISHED GOODS FROM ITS ASSOCIATED ENTERPRISE. THEREFORE IT IS EVIDENT THAT SUCH GOODS CANNOT BE RESOLD LOOKING AT THE MARGINS THAT ASSESSEE HAS EARNED, REQUIRES ONLY MINOR MODIFICATIONS. ASSESSEE SHO WS IN ITS TRANSFER PRICING STUDY REPORT ITSELF THAT IT IS ASSEMBLING THE PRODUCT AFTER OBTAINING CERTAIN RAW MATERIAL FROM ITS ASSOCIATED ENTERPRISE AND CERTAIN RAW MATERIALS FROM ITS DEVELOPED VENDORS. RESALE PRICE METHOD APPLIES WHEN PROPERTY PURCHASE BY THE ENTERPRISE FROM AN ASSOCIATED ENTERPRISES RESOLD. IN THIS CASE THE IT IS NOT THE RESALE OF THE SAME MATERIAL BUT IT IS FURTHER IMPROVED, THROUGH ITS OWN VENDORS AND THEN SOLD TO THE CUSTOMERS WHICH ARE IDENTIFIED BY THE ASSESSEE. ON LOOKING AT PAGE N O 83 - 85 OF THE PAPER BOOK WHERE THE LIST OF PLANT AND MACHINERY USED BY THE ASSESSEE IS GIVEN, IT SHOWS THAT ASSESSEE HAS VARIOUS DIES, MOULDS , TOOLS AND OTHER MACHINES OF RS 2.66 CRORS. THE LEARNED DISPUTE RESOLUTION PANEL WHILE DEALING WITH THE OBJE CTION OF THE ASSESSEE ABOUT THE MOST APPROPRIATE METHOD (OBJECTION NUMBER 1A) HAS DEALT WITH AS UNDER: - FINDINGS : - T HE OBJECTION OF THE A WAS GIVEN AN ANXIOUS CONSIDERATION BY US. BEFORE DELVING DEEP INTO THE SUBJECT MATTER ONCE CONSIDERATION, IT IS CO NSIDERED TO BE IN THE FITNESS OF THINGS TO REFER IN BRIEF TO THE CIRCUMSTANCES IN WHICH RESALE PRICE METHOD (RPM AND THE TRANSACTIONAL NET MARGIN METHOD (TNMM) ARE APPLICABLE. PAGE | 9 REGARDING THE RPM THE AUTHORITIES ON THE SUBJECT ARE UNANIMOUS IN THEIR VIEW THAT RPM AS A DIRECT METHOD WHICH COMPARES THE GROSS MARGIN I.E. GROSS PROFIT OF SALES, ON TRANSACTIONS BETWEEN RELATED AND UNRELATED PARTIES FOR THE DETERMINATION OF THE ARMS - L ENGTH PRICE (ALP). THE RPM METHOD REQUIRES HIGH LEVEL OF FUNCTIONAL COMPARABILITY AND IS MAINLY APPLICABLE WHERE THE CONTROLLED PARTY ARE DISTRIBUTORS. PRACTICALLY THE APPLICATION OF RPM IS FOUND BY WORKING BACKWARDS FROM THE TRANSACTIONS TAKING PLACE A T THE NEXT STAGE IN SUPPLY CHAIN, AND AS DETERMINED BY SUBTRACTING AN APPROPRIATE GROSS MARKUP FROM THE SALE PRICE TO AN UNRELATED THIRD - PARTY, WITH THE APPROPRIATE GROSS MARGIN BEING DETERMINED BY EXAMINING THE CONDITIONS UNDER WHICH THE GOODS OR SERVICES ARE SOLD AND COMPARING THE SAID TRANSACTIONS TO OTHER, THIRD - PARTY TRANSACTIONS. 1, T HE RPM BEGINS WITH THE PRI C E AT WHICH A PRODUCT THAT HAS BEEN PURCHASED FROM AN ASSOCIATED ENTERPRISE IS RESOLD TO AN INDEPENDENT ENTERPRISE. THEREFORE, THE USE OF RP M IS IDEAL FOR DISTRIBUTION ACTIVITY, WHEREBY THE TESTED PARTY PURCHASE THE PRODUCTS OR OBTAINED THE SERVICES FROM ITS ASSOCIATED ENTERPRISES AND RESELLS THE PRODUCTS/SERVICES TO AN INDEPENDENT ENTERPRISE. 2. RPM IS THE MOST APPROPRIATE IN A SITUATION WHERE THE SELLERS ADD RELATIVELY LITTLE VALUE TO THE GOODS AND NOT ALTER THE GOODS PHYSICALLY BEFORE THE RESALE. PACKAGING, REPACKING, LABELING OR MINOR ASSEMBLY DOES NOT ORDINARILY CONSTITUTE PHYSICAL ALTERATION. 3. RPM IS USED IN CASES WHERE RESELLER DOES NOT APPLY INTANGIBLE ASSETS TO ADD VALUE. THE GREATER THE VALUE - ADDED TO THE GOODS BY THE FUNCTIONS PERFORMED BY THE SELLER, THE MORE DIFFICULT IT WILL BE TO DETERMINE AN APPROPRIATE RESALE MARGIN. THIS IS ESPECIALLY TRUE IN A SITUATION WHERE THE SEL LER CONTRIBUTES TO THE CREATION OR MAINTENANCE OF AN INTANGIBLE PROPERTY, SUCH AS MARKETING INTANGIBLE, IN ITS ACTIVITIES. PAGE | 10 THE SUM AND SUBSTANCE OF THE ABOVE NARRATION IS THAT THAT RPM EVALUATES THE PROCESS OF FUNCTIONS PERFORMED RATHER THAN THE PRODUCT. T O PUT IT PLAINLY, THIS METHOD REQUIRES DETAILED COMPARISONS OF FUNCTIONS PERFORMED, RISK BORNE AND CONTRACTUAL TERMS OF CONTROLLED AND UNCONTROLLED TRANSACTIONS. WHEN THE FUNCTIONS OF THE A AT HAND ARE VIEWED AGAINST THE ABOVE BACKGROUND FACTS THE APPLICAB ILITY OF RPM BECOMES A SUSPECT. IN THIS CONTEXT THE TRANSFER P RICING ORDERS PARA NUMBER 5.1.1 TO 5.1.3 PASSED BY THE TRANSFER PRICING OFFICER BECOMES RELEVANT. FOR THE SAKE OF FACILITY THE REASONS SUBSCRIBED BY THE TPO FOR REJECTING RPM IN THE CASE OF THE A ARE REPRODUCED BELOW: - 5.1.1 FURTHER, IT IS SAYING THAT YOU HAVE INCURRED SUBSTANTIAL PERSONNEL EXPENSES OF 54,888,092/ , OUT OF WITH SALARIES AND WAGES ARE 5,13,04,008/ - / ). IF YOU WERE PERFORMING ONLY TRADING FUNCTION, THESE EXPENSES WERE NOT JUSTIFIED IN RELATION TO TOTAL TURNOVER OF 222,242,360 . FURTHER YOU HAVE INCURRED SEVERAL EXPENSES UNDER THE HEAD OPERATING AND OTHER EXPENSES WHICH ARE RELATED TO PRODUCTION LIKE RENT, TRAVELLING AND CONVEYAN CE, WHICH SHOULD HAVE BEEN TAKEN INTO ACCOUNT IN FACTORING THE VALUE ADDITION MADE BY YOU IN RESPECT OF SALES TERMED AS DEEMED MANUFACTURING. IT IS ALSO SEEN THAT YOU ARE ALSO UNDERTAKING OTHER FUNCTIONS LIKE ADVERTISING, SALES PROMOTION AND HAVING A DISTR IBUTION NETWORK. INCURRING OF THESE COSTS ARE ALSO INDICATE THAT YOURE NOT ACTING AS A MERE TRADER BUT BANKING ON SIGNIFICANT OTHER FUNCTIONS ALSO. FURTHER, IT IS ALSO NOT IN DOUBT THESE IMPORTS HAVE BEEN MADE IN THE NATURE OF RAW MATERIAL AS THE INTERNAT IONAL TRANSACTIONS CLEARLY CLASSIFY THEM AS RAW MATERIALS. 5.1,2 SINCE, THE FUNCTIONS PERFORMED BY YOU CANNOT BE TAKEN INTO ACCOUNT WITHOUT CONSIDERING THE COST INCURRED BY YOU AS MENTIONED ABOVE, THE CHOICE OF RESALE PRICE METHOD IS NOT A RIGHT CHOICE. TR ANSACTIONAL NET MARGIN METHOD (TNMM) WHICH TAKES INTO PAGE | 11 ACCOUNT ALL THESE COST IS THE RIGHT METHOD TO BE SELECTED FOR BENCHMARKING THE TRANSACTIONS OF RAW MATERIAL WHICH HAVE BEEN IMPORTED AS RAW MATERIAL AND ARE BEING PROCESSED/PACKAGED BEFORE SALE. REGARDI NG THE CHOICE OF INDICATOR, OPERATING PROFIT/OPERATING REVENUE (OP/OR) IS THE BEST INDICATOR AS IT TAKES INTO ACCOUNT THE PROFIT AFTER INCURRING OF VARIOUS COST LIKE OTHER INDIRECT COST, OPERATING EXPENSES AND DEPRECIATION. OPERATING REVENUE HAS BEEN CHOSE N AS THE DENOMINATOR IS THE SALES ARE TO 3 RD PARTIES WHILE PURCHASES ARE FROM AAE. 5.1.3 THE ASSESSEE HAS STATED THAT RPM IS THE MOST APPROPRIATE METHOD AS IT IS NOT CARRYING OUT ANY VALUE ADDITION ACTIVITIES. FROM THE ABOVE DISCUSSION ON MANUFACTURING ACT IVITY OF THE ASSESSEE, IT IS ABUNDANTLY CLEAR THAT THE ASSESSEE HAS UNDERTAKEN SUBSTANTIAL MANUFACTURING ACTIVITIES AND NOT DISCLOSED IN THE TRUE MANNER. FROM THE ABOVE IT WAS CLEAR THAT A WAS NOT PERFORMING THE FUNCTION OF A SIMPLE TRADER OR DISTRIBUTOR. IT WAS ALSO ENGAGED IN ACTIVITIES RELATING TO MANUFACTURING OF FRAMES THROUGH LOCAL VENDORS AS PER THE DESIGN PROVIDED BY ITS ASSOCIATED ENTERPRISE. THE PANEL IS FORTIFIED IN ITS ABOVE VIEW ALSO BY THE DESCRIPTION GIVEN IN THE TP STUDY REPORT TITLED AS FU NCTIONAL ANALYSIS (PAGE 13 23 ) OF THE FUNCTIONS AND ENTAILING EXPENDITURES OF VARIOUS TYPES INCURRED BY THE A ON SALE OF GOODS IN LOCAL MARKET, EXPORT OF GOODS TO ASSOCIATED ENTERPRISE, EXPLORING INDIAN CUSTOMER BASE, STRATEGIC MANAGEMENT FUNCTIONS, CO RPORATE SERVICE FUNCTIONS, PRODUCT RESEARCH AND DEVELOPMENT FUNCTIONS, MANUFACTURING FUNCTION (PAGE 17 OF TP STUDY PROVIDED BY THE A), SOURCING AND PURCHASING MATERIALS FOR THE PRODUCTION OR ASSEMBLY PROCESS, VENDOR SELECTION, INBOUND LOGISTICS, QUALITY AS SURANCE, STORAGE AND OUTBOUND LOGISTICS TO DELIVER GOODS TO THE AND CUSTOMERS FOR WHICH THE A TOOK MARKET RISK, INVENTORY RISK, CREDIT AND COLLECTION RISK, LIMITED PRODUCT LIABILITY RISK, LIMITED WARRANTY RISK AND FOREIGN EXCHANGE RISK. FOR THE SAKE OF CLA RITY THE RELEVANT EXTRACTS OF THE PAGE | 12 FUNCTIONAL ANALYSIS CASTING REFLECTIONS ON THE CLAIM OF THE A THAT IT WAS A TRADER /DISTRIBUTOR ARE REPRODUCED BELOW: - ROXTEC INDIA BASED ON ITS ESTIMATED SALES, ORDER THE PRODUCTS FROM AE ROXTEC INDIA PURCHASE AND SEALI NG MODULES AND W EDGES FROM AE AND PROCURES FRAMES FORM LOCAL VENDORS WHO USE THE DESIGN AS PROVIDED BY ROXTEC INDIA. THE PRODUCT IS THEN ASSEMBLED INTO CUSTOMISED THE READY TO USE PACKS AND SOLD THEREOF TO THE CUSTOMER. DURING THE YEAR, THE COMPANY EXP ORTED CERTAIN PRODUCTS TO AE. THESE PRODUCTS ARE THE FRAMES MANUFACTURE BY THE LOCAL VENDORS USING THE TECHNOLOGY AND DESIGN PROVIDED BY ROXTEC INDIA. THE PRODUCTION OF SUCH FRAMES ARE OUTSOURCED BY ROXTECK INDIA TO VENDORS IN INDIA. THE VENDORS ARE IDEN TIFIED AND SELECTED BY ROXTEC INDIA IN COLLABORATION WITH THE AE. THE VENDOR IS PROVIDED WITH T HE DESIGNS FOR THE PURPOSE OF SAMPLE PRODUCTION. SUCH SA MPLE PRODUCTION IS APPROVED BY THE AE. SUBSEQUENTLY, THE PURCHASE ORDER IS PLACED BY ROXTEC INDIA ON VEN DOR FOR THE MANUFACTURE OF FRAMES. THE CONSIDERATION PAYABLE TO THE VENDORS FOR THE MANUFACTURING ACTIVITIES IS DETERMINED BY ROXTEC INDIA TAKING CONSENSUS OF INPUTS RECEIVED FROM AE. ROXTEC INDIA ASSEMBLES THE MANUFACTURED FRAMES ALONG WITH THE INCIDENT AL FITTINGS, RUBBER COMPONENTS AND SPARES (COLLECTIVELY REFERRED TO AS KIT S) T HE KI TS OF FRAMES ARE INVO ICED AND SHIPPED TO AE. THE INVOICES RAISED ENTERPRISE AMOUNTING TO COST PLUS MARKUP OF 10%, WHEREIN THE COST COMPONENT SHALL INCLUDE COST OF FRAMES (RECEIVED FROM THIRD - PARTY VENDORS), COST OF ASSEMBLING, COST OF CAR Y ING INVENTORY, PROPORTIONATE COST OF OVER H EADS AND RELATED EXPENSES (A PROPORTIONATE COST OF WAREHOUSE). FROM A PLAIN READING OF THE ABOVE IT IS CLEAR AS THE SKY THAT THE A WAS ENGAGED IN OTHER INEXTRICABLY LINKED ALLIED ACTIVITIES OF DIRECT AND PAGE | 13 PROXIMATE WHICH WERE REQUIRED TO BE PERFORMED REL ATING TO THE SEMI FINISHED GOODS IMPORTED BY IT FROM ITS ASSOCIATED ENTERPRISE TO MAKE THEM MARKETABLE. THUS BY NO STRETCH OF IMAGINATION COULD THE A BE LABELLED AS A DISTRIBUTOR. MOREOVER THE ACTIVITIES INCIDENTAL TO THE SEMI FINISHED GOODS IMPORTED BY THE A FROM ITS AE, AS IS APPARENT FROM THE ABOVE DESCRIPTION OF FACTS, HAD TO UNDERGO SEVERAL PROCESS POST PURCHASES WHICH ENTAILED IN VARIOUS KINDS OF EXPENDITURE OF DIFFERENT VARIETIES WHICH RPM WAS NOT CAPABLE OF FACTORING IN. IN THE ABOVE CONSPECTUS , TNMM IS HELD BY US TO BE THE MOST APPROPRIATE METHOD AS TNMM COMPARES NET MARGINS OF PROFITS EARNED IN UNCONTROLLED TRANSACTIONS BY INDEPENDENT ENTITIES AGAINST THOSE ACHIEVED IN RELATED PARTY TRANSACTIONS. IN COMPARISON THE PROFITS OR MARGINS USING THE TNMM, TYPICALLY SOME FORM OF RATIO MOST COMMONLY USED EXPRESSES NET PROFIT AS A PERCENTAGE OF COST (FULL COST OR OPERATING COST), A PARTICULAR BALANCE SHEET CATEGORY ( EG ASSETS, CAPITAL EMPLOYED, ETC ) OR SALES/SERVICES RECEIPTS. IN THE AFORESAID PREMISES , WE HAVE NO HESITATION IN HOLDING THAT A WAS RIGHTLY HELD AS A MANUFACTURER BY THE TPO WHICH CULMINATED IN THE REJECTION OF THE RPM. ACCORDINGLY GROUND NUMBER TWO IS DISMISSED. 11. THE ASSESSEE HAS RELIED UPON THE DECISION OF ACIT VERSUS MSS INDIA (PRIVATE) LTD REPORTED AT 123 TTJ 657 TO SUPPORT ITS CASE. WE HAVE CAREFULLY CONSIDERED THE FACTS IN THAT CASE WHEREIN THE METHOD ADOPTED BY THE ASSESSEE WAS COST PLUS METHOD AND AGAINST WHICH THE LEARNED TRANSFER PRICING OFFICER ADOPTED TRANSACTIONAL NET MARGIN M ETHOD. ON CAREFUL PERUSAL OF THE FACTS OF THAT DECISION, THEY ARE DISTINCT FROM THE FACTS BEFORE US. IN THAT CASE THE ASSESSEE DETERMINE THE ARMS - LENGTH PRICE OF ITS TRANSACTIONS WITH FOREIGN ASSOCIATES ON THE BASIS OF COST PLUS METHOD BY OFFERING THE COM PARISON OF GROSS PROFIT MARKUP MARGIN ON ITS TRANSACTIONS WITH UNRELATED PARTIES WHICH WAS HELD TO BE CORRECT. IN THAT CASE TPO WAS HELD TO BE NOT JUSTIFIED IN REJECTING THE METHOD AND MAKING AN ADJUSTMENT AS PER TRANSACTIONAL NET MARGIN METHOD EVEN IF THE PAGE | 14 ASSESSEE HAD SUFFERED LOSS IN THOSE TRANSACTION WITH ITS ASSOCIATES. IN THE PRESENT CASE BEFORE US THE ISSUE IS WHETHER THE ASSESSEE IS A DISTRIBUTOR OR A MANUFACTURER AND WHETHER RESALE PRICE METHOD IS APPLICABLE TO THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE. IT IS NOT THE CASE THAT ASSESSEE HAS RESOLD THE SAME GOODS WITH ONLY MINOR MODIFICATIONS TO JUSTIFY THE ADOPTION OF RPM AS THE MOST APPROPRIATE METHOD. IN THE PRESENT CASE THE ASSESSEE HAS ASSEMBLED THE GOODS PARTLY PURCHASED FROM IT S ASSOCIATED ENTERPRISE AND PARTLY DEVELOPED BY ITS OWN VENDOR. THEREFORE, THE DECISION RELIED UPON BY THE LEARNED AUTHORISED REPRESENTATIVE DOES NOT HELP THE CASE OF THE ASSESSEE. 12. IN VIEW OF THE ABOVE FACTS WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LEARNED ASSESSING OFFICER/TRANSFER PRICING OFFICER AS WELL AS THE DIRECTION OF THE LEARNED DISPUTE RESOLUTION PANEL IN REJECTING THE RESALE PRICE METHOD ADOPTED BY THE ASSESSEE AND ADOPTING TRANSACTIONAL NET MARGIN METHOD AS THE MOST APPROPRIATE METHOD. T HEREFORE SOLITARY GROUND OF APPEAL IS DISMISSED. 13. IN THE RESULT APPEAL OF THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 2 0 / 10 / 2020 . - SD/ - - SD/ - ( BHAVNESH SAINI ) ( PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 2 0 / 1 0 / 2020 A K KEOT COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI