Stryker India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 3009/DEL/2011

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 7902 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 11 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-05-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 24-02-2016
• Assessment Year: 2002-2003
• Appeal Filed On: 07-06-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIJAY CHAUDHARY
• Assessee Lawyers: RAVI SHARMA CAS
• Keywords: Transfer pricing; Opportunity of being heard; International transaction
• Section: 143(3); 92E

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I - 1 , NEW DELHI BEFORE SH. N. K. SAINI, AM AND SMT. BEENA PILLAI , JM IT A NO. 3009/DEL/2011 : ASSTT. YEAR : 2002 - 0 3 STRYKER INDIA PVT. LTD., C - 5, 1 ST FLOOR, SDA, COMMERCIAL COMPLEX, NEW DELHI - 110016 VS DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 9(1), NEW DELHI (APPELLANT) (RESPONDENT) PAN NO. A A ECS2513F ASSESSEE BY : SH. KANCHAN KAUSHAL, & RAVI SHARMA, CAS, REVENUE BY : SH. VIJAY CHAUDHARY , SR. DR DATE OF HEARING : 24 .02 .201 6 DATE OF PRONOUNCE MENT : 13 .05 .201 6 ORDER PER N. K. SAINI, AM : THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 29.03.2011 OF LD. CIT(A) - XX , NEW DELHI . 2. FOL LOWING GROUNDS HAVE BEEN RAISED IN THIS APPEAL: 1. THE APPELLATE ORDER PASSED BY THE LD. COMMISSIONER OF INCOME - TAX (APPEALS) - XX [LD. CIT (A)], IN RELATION TO THE IMPUGNED AS SESSMENT ORDER PASSED U/S 143(3) OF THE INCOME - TAX ACT, 1961 ('THE ACT') BY TH E LD. DEPUTY COMMISSIONER OF INCOME - TAX (LD. AO) IS BAD IN LAW AND IN FACTS. 2. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW, IN ENHANCING THE INCOME OF THE APPELLANT BY ITA NO . 3009 /DE L/2011 STRYKER INDIA PVT. LTD. 2 RS. 20,075,857, ON ACCOUNT OF THE TRANSFER P R ICING ( TP ) ADJUSTMENT U/S 92C(3) OF THE 'ACT' MADE BY THE LD. JOINT COMMISSIONER OF INCOME - TAX, TRANSFER PRICING OFFICER - II ('LD. TPO'), BY HOLDING THAT THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE APPELLANT DURING THE YEAR WITH ITS ASSOCIATED ENTERPRISES ('AES') DO NOT SATISFY THE ARM'S LENGTH PRINCIPLE ENVIS AGED UNDER THE ACT. THE LD. CIT( A) HAS GROSSLY ERRED IN CONFIRMING THE FOLLOWING ACTIONS OF THE LD. TPO: 2.1 R EJECTING THE METHODOLOGY ADOPTED BY THE APPELLANT (NAMELY RESALE PRICE METHOD) AND SUBSTITUTING THE SAME WITH THE TRANSACT IONAL NET MARGIN METHOD, BASED UPON SEVERAL SUBJECTIVE PRESUMPTIONS, WITHOUT TAKING COGNIZANCE OF THE SUBMISSIONS, ARGUMENTS, AND DATA PROVIDED BY THE APPELLANT. 2.2 C OMPLETELY IGNORING AND FAILING TO APPRECIATE THE TRUE BUSINESS CIRCUMSTANCES AND COMME RCIAL REASONS PREVALENT IN THE APPELLANT'S CASE FOR THE RELEVANT FINANCIAL YEAR WHICH HAS LEAD TO THE OPERATING LOSSES AND THE FACT THAT SUCH LOSSES ARE ABSOLUTELY NOT LINKED TO OR RESULTING FROM ANY INAPPROPRIATE TRANSFER PRICING BY THE APPELLANT OR ITS A ES. 2.3 NOT APPRECIATING THE FACT THAT IF THE ADJUSTMENT MADE BY THE TPO WERE TO BE GIVEN EFFECT, THEN THE POST ADJUSTMENT GROSS PROFIT PERCENTAGE WOULD WORK OUT TO APPROXIMATELY 50%, WHICH IN ITSELF IS EXORBITANT AND AN ABSOLUTELY ABSURD PERCENTAGE OF GR OSS PROFIT EARNED BY A DISTRIBUTOR LIKE THE ITA NO . 3009 /DE L/2011 STRYKER INDIA PVT. LTD. 3 APPELLANT ONLY IN THE START - UP PHASE OF ITS OPERATIONS. 2.4 IN REJECTING ADVANCED MICRONIC DEVICES LTD., WHICH IS OTHERWISE FUNCTIONALLY COMPARABLE. 2.5 NOT ALLOWING THE BENEFIT OF THE +/ - 5% RANGE MENTIONED IN THE PROVISO TO SECTION 92C(2) OF THE ACT WHILE COMPUTING THE ARM'S LENGTH PRICE FOR THE APPELLANT'S SAID INTERNATIONAL TRANSACTIONS. 3. THE LD. CIT(A) GROSSLY ERRED IN COMPUTING AN INCO RRECT GROSS MARGIN [GROSS PROFIT/SALES (GP/ SALES)] OF THE APPELLANT B Y NOT CONSIDERING AN ADD - BACK OF AN EXTRAORDINARY COST RELATING TO PROVISIONING OF INVENTORY TO THE APPELLANT'S INPUT COST. 3. FROM THE ABOVE GROUND S , IT IS GATHERED THAT THE ONLY GRIEVANCE OF THE ASSESSEE RELATES TO THE ENHANCEMENT ON ACCOUNT OF TRANSFE R PRICING ADJUSTMENT AMOUNTING TO RS.2,00,75,857/ - U/S 92C(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT). 4 . FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESSEE FILED THE RETURN OF INCOME ON 31.10.2002 DECLARING A LOSS OF RS.96,16,480/ - . THE SAID RETURN WAS PROCESSED U/S 14 3(1) OF THE ACT ON 03.02.2003. SUBSEQUENTLY, THE CASE WAS SELECTED FOR SCRUTINY. THE ASSESSEE WAS ENGAGED IN IMPORTING MEDICAL/SURGICAL PRODUCTS FROM ITS ASSOCIATED ENTERPRISES ITA NO . 3009 /DE L/2011 STRYKER INDIA PVT. LTD. 4 (AES) AND SELLING THEM IN INDIA. DURING T HE YEAR UNDER CONSIDERATION THE ASSESSEE ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS AES: S. NO. DESCRIPTION OF THE INTERNATIONAL TRANSACTION AMOUNT (IN RS.) 1. IMPORT OF SURGICAL IMPLANTS AND HOSPITAL EQUIPMENTS 53,880,364 2. PURCHAS E OF SURGICAL EQUIPMENT SETS 757,330 3. PURCHASE OF ADVERTISING MATERIAL 122,809 4. REIMBURSEMENTS 103,579 5 . THE AO MADE A REFERENCE TO THE TPO TO DETERMINE THE ARM S LENGTH PRICE U/S 92CA(3) OF THE ACT IN RESPECT OF I NTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE DURING THE FINANCIAL YEAR 2001 - 02. THE TPO ACCEPTED ALL THE INTERNATIONAL TRANSACTIONS AT ARM S LENGTH PRICE EXCEPT THE TRANSACTION PERTAINING TO PURCHASE OF FINISHED GOODS. IN THE TP REPORT THE ASSESSEE HAD BEEN CHARACTERIZED AS A DI STRIBUTOR , UNDERTAKING NORMAL RISKS AND EMPLOYING ROUTINE TANGIB L E ASSETS AND FOR THE PURPOSES OF BENCHMARKING ITS INTERNATIONAL TRANSACTIONS , THE ASSESSEE SELECTED RESALE PRICE METHOD (RPM) AS THE MOST APPROPRIATE METHOD USING GROSS PROFIT/SALES (GP/SALES ) AS THE PROFIT LEVEL INDICATOR (PLI). WHILE APPLYING RPM, THE ASSESSEE SELECTED 10 COMPARABLE COMPANIES WITH AN AVERAGE GP/SALES MARGIN OF 22.60% AS AGAINST 22.92% EARNED BY THE ASSESSEE . BASED ON A ITA NO . 3009 /DE L/2011 STRYKER INDIA PVT. LTD. 5 COMPARISON OF THE GP/SALES MARGIN OF THE ASSESSEE WITH T HE GP/SALES MARGIN OF THE COMPARABLE COMPANIES, THE ASSESSEE S INTERNATIONAL TRANSACTIONS IN RESPECT OF THE DISTRIBUTION SEGMENT WERE ESTABLISHED TO BE IN THE LINE W ITH THE ARM S LENGTH STANDARD. HOWEVER, T HE TPO WORKED OUT THE ADJUSTMENT OF RS.2,00,75,857 / - IN RESPECT OF PURCHASE OF FINISHED GOODS BY OBSERVING AS UNDER: 'THE ARM'S LENGTH MARGIN HAS ALREADY BEEN COMPUTED AT 5.96%. THE ASSESSEE'S LOSS MARGIN WORKS OUT TO BE ( - ) 18.42% OF SALES (AFTER TAKING INTO ACCOUNT THE AMOUNT WRITTEN BACK IN THE COMPUT ATION OF INCOME ON ACCOUNT OF CLOSING STOCK VALUATION). THE DIFFERENCE BETWEEN THE ASSESSEE'S MARGIN AND THE MEAN MARGIN IS THE AMOUNT OF ADJUSTMENT TO BE MADE. THIS WORKS OUT TO BE 24.38% OF SALES. AMOUNT OF ADJUSTMENT TO BE MADE RS. 20,0 75,857/ - THE VALUE OF INTERNATIONAL TRANSACTIONS PERTAIN ING TO IMPORT OF FINISHED GOODS RS. 53,880,364/ - ARM'S LENGTH PRICE RS.33,804,507/ - DIFFERENCE BETWEEN ALP AND INTERNATIONAL TRANSACTION 59.38% SINCE THE PURCHASE OF FINISHED GOODS HAVE BEEN MADE FROM DIFFERENT STRYKER COMPANIES, ALL THE TRANSACTIONS HAVE TO BE ADJUSTED INDIVIDUALLY TO BRING THEM AT ARM'S LENGTH. THE TABLE BELOW GIVES THE ALP OF ALL INDIVI DUAL TRANSACTIONS. NAME OF THE AE VALUE (IN RS.) ARM'S LENGTH PRICE STRYKER BENOIST 6559748 4114930 ITA NO . 3009 /DE L/2011 STRYKER INDIA PVT. LTD. 6 STRYKER SPINE 324794 203743 STRYKER ENDOSCOPY 6770637 4247221 HOWMEDICA IRELAND 16848376 10568986 STRYKER HOWMEDICA 3497248 2193824 STRYKER PACIFIC 1 226482 769372 STRYKER IRELAND 36852 23117 STRYKER TRAUMA 5885821 3692176 STRYKER LEIBINGER 266817 167375 STRYKER TRAUMA SEIZECH 1786025 11 20373 STRYKER INSTRUMENTS 8281564 5195025 STRYKER SINGAPORE 484611 303996 LEIBINGER GERMANY 1911389 1199014 5 3880364 33804507 THE ARM S LENGTH PRICES OF THE ABOVE TRANSACTIONS HAVE BEEN ACCORDINGLY DETERMINED AND ADDITION OF RS. 2 , 00 , 75,857 / - WA S DIRECTED TO BE MADE TO THE TOTAL INCOME OF THE ASSESSEE . 6 . THE TPO MADE THE AFORESAID ADJUSTMENT IN THE FOLLOWING MANNER: I ) R EJECTED THE RPM APPLIED BY THE ASSESSEE IN ITS TP DOCUMENTATION AND APPLIED TNMM USING O PERATING P ROFIT/ S ALES AS THE PROFIT LEVEL INDICATOR . I I) R EJECTED CERTAIN COMPANIES FROM THE COMPARABLE SET ON ACCOUNT OF BEING FUNCTIONALLY UNCOMPRABL E TO THE ASSESSEE. III) USED THE OP/SALES MARGIN OF THE REMAINING 9 COMPARABLE COMPANIES COMPUTED AT 5.96% AS THE ARM S LENGTH MARGIN. ITA NO . 3009 /DE L/2011 STRYKER INDIA PVT. LTD. 7 7 . THE AO AFTER GETTING THE DIRECTION FROM THE TPO, ASKED THE ASSESSEE TO SHOW CAUSE AS TO WHY THE ADDITION OF RS.2, 00,75,857/ - BE NOT ADDED BACK TO ITS INCOME. THE AO DID NOT FIND MERIT IN THE SUBMISSION OF THE ASSESSEE AND MADE THE ADDITION OF RS.2,00,75,857/ - . 8 . BEING AGGRIEVED THE ASSESSEE CARRIED THE MATTER TO THE LD. CIT(A) AND SUBMITTED THAT THE AO/TPO REJECTED THE METHODOLOGY ADOPTED BY THE ASSESSEE I.E. RESALE PRICE METHOD AND SUBSTITUTED THE SAME WITH HIS OWN METHODOLOGY I.E. TRANSACTIONAL NET MARGIN METHOD (TNMM), BASED UPON SEVERAL SUBJECTIVE PRESUMPTIONS, WITHOUT TAKING DUE COGNIZANCE OF THE SUBMISSIONS/AR GUMENTS/DATA PROVIDED BY THE ASSESSEE. IT WAS FURTHER SUBMITTED THAT THE AO/TPO HAD NOT APPR E C I ATED THE FACTS RELATIN G TO INTERNATIONAL TRANSACTION OF PURCHASE OF FINI SHED GOODS FROM AES IN RIGHT PER SPECTIVE AND IF THE ADJUSTMENT MADE BY THE TPO WERE TO BE GIVEN EFFECT, THEN THE POST ADJUSTMENT WOULD WORK ED OUT TO APPROXIMATELY 50% , WHICH ITSELF WAS EXORBITANT AND ABSOLUTELY ABSURD PERCENTAGE OF GROSS PROFIT EARNED BY ANY DISTRIBUTOR IN THE TRADE. IT WAS ALSO STATED THAT THE AO/TPO HAD NOT ALLOWED THE +/ - 5 % RANGE MENTIONED IN PROVISO TO SECTION 92C(2) OF THE ACT WHILE COMPUTING THE ARM S LENGTH PRICE. ITA NO . 3009 /DE L/2011 STRYKER INDIA PVT. LTD. 8 9. THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE OBSERVED THAT RPM EVALUATES THE ARM S LENGTH NATURE OF TRANSACTION WITH REFERENCE TO THE GROSS PROFIT MARGIN IN A COMPARABLE UNCONTROLLED TRANSACTION AND MEASURES THE VALUE OF FUNCTIONS PERFORMED AND THIS METHOD IS APPROPRIATE IN THE CASES INVOLVING THE PURCHASE AND RESALE OF TANGIBLE GOODS/SERVICES IN WHICH THE BUYER/RESELLER DOES NOT ADD VA LUE TO THE GOODS BY PHYSICALLY ALTERING THEM. HE FURTHER OBSERVED THAT RPM BEGINS WITH THE PRICE AT WHICH A PRODUCT THAT HAS BEEN PURCHASED FROM AN AE IS RESOLD TO AN INDEPENDENT ENTERPRISE AND THIS PRICE (THE RESALE PRICE) IS REDUCED BY AN APPROPRIATE GRO SS MARGIN REPRESENTING THE AMOUNT OUT OF WHICH THE RESELLER/DISTRIBUTOR WOULD SEEK TO COVER ITS SELLING AND OTHER OPERATING EXPENSES AND IN THE LIGHT OF THE DISTRIBUTION OF RESALE FUNCTIONS PERFORMED (TAKING INTO ACCOUNT ASSETS USED AND RISKS ASSUMED), MAK E AN APPROPRIATE PROFIT. THE LD. CIT(A) DISCUSSED THE PROVISIONS CONTAINED IN RULE 10C(1) AND 10B(1)(B)(I) OF THE ACT AND TRANSFER PRICING GUIDELINES ISSUED BY OECD. THE LD. CIT(A) REPRODUCED THE ABSTRACTS FROM TPO S ORDER IN PARA 10.7 OF T HE IMPUGNED ORD ER FOR THE COST OF REPETITION THE SAME A RE NOT REPRODUCED HEREIN. THE LD. CIT(A) WAS OF ITA NO . 3009 /DE L/2011 STRYKER INDIA PVT. LTD. 9 THE VIEW THAT NONE OF THE COMPARABLE COMPANY PROVIDE D A KIND OF WARRANTY OR AFTER SALES SERVICE WHICH THE ASSESSEE OFFERED UNDER WARRANTY PERIOD. ACCORDING TO HIM THE F OLLOWING FACTORS MILITATE AGAINST THE USE OF RPM: A) IT IS NOT KNOWN THAT THE COMPARABLES ARE PLACED AT WHAT LEVEL IN THE DISTRIBUTION CHANNEL, I.E., WHETHER THERE ARE ANY MORE INTERMEDIARIES ABOVE OR BELOW THEM; PRESENCE OF SUCH INTERMEDIARIES IMPACTS GROSS MARGINS; B) STRYKER BRAND IS AN INTERNATIONALLY KNOWN BRAND; THE BRAND EQUITY CARRIES ITS OWN PREMIUM; THE COMPARABLES DON T SEEM TO BE WELL KNOWN COMPANIES; C) STRYKER IS THE EXCLUSIVE DISTRIBUTOR OF ITS PRODUCTS IN INDIA; WHEREAS IT IS NOT KNOWN WHETHER THE COMPARABLES HAVE ANY SUCH EXCLUSIVE RIGHTS; MANUAL; AND D) AS THERE IS NO UNIFORMITY IN REGARD TO ACCOUNTING METHODS OF COMPUTING GROSS MARGINS INSOFAR AS SOME EXPENSE ITEMS MAY BE ACCOUNTED FOR ABOVE THE LINE WHILE OTHERS MAY ACCOUNT FOR TH E SAME ITEMS BELOW THE LINE. 10 . THE LD. CIT(A) WAS OF THE VIEW THAT THE TNMM WAS THE MOST SUITABLE METHOD AS IT WAS MORE TOLERANT TO FUNCTIONAL AND PRODUCT DIFFERENCES AND TAKES CARE OF THE PROBLEMS IN ACCOUNTING AT GROSS LEVEL COMPARISON. HE ALSO ITA NO . 3009 /DE L/2011 STRYKER INDIA PVT. LTD. 10 OBSER VED THAT AS THERE WAS NO UNCONTROLLED TRANSACTION S PERTAINING TO PURCHASE OF STRYKER PRODUCTS BY OTHER INDEPENDENT ENTERPRISES IN INDIA OR THE ASSESSEE PURCHASING IDENTICAL ITEMS FROM THIRD PARTIES, COMPARABLE UNCONTROLLED PRICE (CUP) CANNOT BE USED . HE AL SO OBSERVED THAT THE COST PLUS METHOD WAS NOT APPLICABLE TO RESALE AND TRADING TRANSACTIONS AND THAT THE P ROFIT SPLIT M ETHOD COULD NOT BE APPLIED AS NO INFORMATION WA S AVAILABLE ABOUT THE PROFIT EARNED BY THE AES , IN SUCH CONDITIONS, TNMM WAS THE MOST SUIT ABLE METHOD AS IT WAS MORE TOLERANT TO FUNCTIONAL AND PRODUCT DIFFERENCES AND TAKES CARE OF THE PROBLEM IN ACCOUNTING THAT CANNOT BE CHECKED AT GROSS LEVEL COMPARISON . THE LD. CIT(A) HELD THAT OPERATING PROFIT/SALES WAS THE APPROPRIA TE PROFIT LEVEL INDICAT OR (PLI) AND THAT THE CONTENTION OF THE ASSESSEE THAT THE RISK PROFILE OF THE ASSESSEE WERE SAME AS THAT OF OTHER INDEPENDENT RISK BEARING DISTRIBUTOR WAS NOT ENTIRELY CORRECT BECAUSE THE INVENTORY HOLDING AND OBSOLESCENCE RISK FOR THE ASSESSEE WAS MUCH HI GHER THAN THAT OF OTHER COMPANIES . THE LD. CIT(A) ALSO OBSERVED THAT IN CAPITAL GOODS WHICH WERE HIGH VALUE , THE PRODUCT LIABILITY RISK WAS MUCH HIGHER THAT IN CAPSULES & OINTMENTS AND THAT THE ASSESSEE OFFERED 1 - 2 YEARS OF REPAIR AND REPLACEMENT WARRANTY TO ITS CUSTOMERS. THE LD. CIT(A) ITA NO . 3009 /DE L/2011 STRYKER INDIA PVT. LTD. 11 ALSO DID NOT ACCEPT THIS CONTENTION OF THE ASSESSEE THAT THE LOSSES INCURRED BY IT WERE ON ACCOUNT OF COMMERCIAL FACTORS AND DUE TO HIGH LEVEL OF OPERATIONAL EXPENSES THE SAME COULD NOT BE RECOVERED FROM LOW VOLUME OF SALES . THE LD. CIT(A) ALSO DISCUSSED THE FINANCIAL RESULTS OF THE ASSESSEE FO R THE YEARS ENDING ON 31.03.2000 TO 31.03.2004 AS UNDER: 31.03.2000 31.03.2001 31.03.2002 31.03.2003 31.03.2004 SALES 17.9 61.4 80.9 83.5 93.1 COGS 12.6 42.9 73.5 73.4 64.370 OE 1 3.6 33.6 37.8 40.7 43.4 OE/SALES 76% 55% 47% 49% 47% TOTAL EXP. 26.2 76.5 111.3 111.1 107.7 LOSS 7.9 14.6 27.8 30.1 12.2 % LOSS MARGIN - 44% - 24% - 34% - 36% - 3% GP% 30% 30% 10% 12% 31% 11 . THE LD. CIT(A) HELD THAT THE RPM WAS NOT APPLICABLE IN T HE ASSESSEE S CASE BY OBSERVING IN PARAS 11.8 & 11.9 OF THE IMPUGNED ORDER AS UNDER: 11.8 AS IT IS EVIDENT FROM THE ABOVE TABLE THAT THE ASSESSEE'S OPERATING EXPENSES (OTHER THAN COST OF GOODS SOLD) RATIO TO SALES HAS REMAINED MORE OR LESS THE SAME SINCE 31/3/02. THE STARTUP PHASE OF THE COMPANY WHEN THE OPERATING EXPENSES FORMED A VERY HIGH PROPORTION OF THE SALES WAS ONLY IN THE FIRST TWO YEARS WHEN THE PROPORTION WAS AS HIGH AS 76% AND 55% RESPECTIVELY. IN THIS YEAR, THE PROPORTION CAME DOWN TO 47% AND HAS REMAINED AT THE SAME LEVEL EVER SINCE. THE CONTENTION OF THE ASSESSEE THAT DURING THE YEAR ITS OPERATING EXPENSES WERE VERY HIGH AND THAT IT HAD NOT ITA NO . 3009 /DE L/2011 STRYKER INDIA PVT. LTD. 12 ATTAINED ENOUGH TURNOVER TO ABSORB THESE EXPENSES IS NOT BORNE BY FACTS. THE REAL REASON OF THE LOSSES SEEMS TO BE THE HIGH VALUE OF COST OF GOODS SOLD. THE COMPANY HAS BEEN CONSISTENTLY SHOWING EXTRAORDINARY LOSSES DUE TO INADEQUATE GROSS PROFIT MARGIN IN THE YEAR ENDING 31/3/04 ITS LOSS MARGIN HAS GONE DOWN CONSIDERABLY DUE TO STEEP INCREASE IN GROSS PRO FIT MARGIN FROM 12% AND 31%. 11.9 IT IS RELEVANT TO MENTION HERE THAT WHILE MAKING A RPM ANALY SIS THE ASSESSEE HAD COMPUTED ITS GROSS PROFIT MARGIN AT 23% AS COMPARED TO 10% COMPUTED IN THE TABLE ABOVE. APPENDIX B OF THE TP REPORT PROVIDES FOR THE COMPUTA TION. IT IS SEEN THAT THE ASSESSEE HAS MADE AN UPWARD ADJUSTMENT TO THE VALUE OF THE CLOSING STOCK LEADING TO INCREASE IN GROSS PROFIT. THIS ADJUSTMENT OF RS. 10M HAS BEEN STATED TO THE INVENTORY VALUATION POLICY OF THE ASSESSEE VIS - A - VIS THE STRYKER GROUP . IT HAS BEEN STATED THAT SINCE STRYKER CORP. US IS LISTED IN NYSE. IT FOLLOWS A VERY AGGRESSIVE INVENTORY VALUATION POLICY WHEREIN 50% OF THE STOCK THAT DOES NOT MOVE FOR MORE THAN ONE YEAR IS WRITTEN OFF. THIS POLICY IS CONTRARY TO ACTUAL SHELF LIFE OF T HE PRODUCTS SOLD BY THE ASSESSEE. THEREFORE, A PART OF THE WRITTEN OFF INVENTORY HAS BEEN ADDED BACK TO REVISE THE COST OF GOODS SOLD THAT LED TO THE INCREASE OF GROSS PROFIT MARGIN. THIS IS ANOTHER REASON WHICH MAKES RPM PARTICULARLY PROBLEMATIC IN THIS C ASE. 12 . THE LD. CIT(A) ALSO HELD THAT THE PERSISTENT LOSSES OF THE ASSESSEE WERE ON ACCOUNT OF IMPROPER TRANSFER PRICES RATHER THAN HIGH OPERATING LEVEL EXPENSES . THE LD. CIT(A) ITA NO . 3009 /DE L/2011 STRYKER INDIA PVT. LTD. 13 CONFIRMED THE ADJUSTMENT OF RS.2,00,75,857/ - MADE BY THE AO/TPO . 1 3 . NOW T HE ASSESSEE IS IN APPEAL. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND FURTHER SUBMITTED THAT THE ASSESSEE SELECTED COMPARABLE ON THE B ASIS OF FUNCTIONAL ANALYSIS AND THAT RPM WAS THE MOST APPROPRIATE ME THOD IN THE CASE OF THE ASSESSEE WHO WAS EN GAGED IN DISTRIBUTION OF HEALTH CARE DEVICE S OR CARDIAC CARE EQUIPMENTS. IT WAS CONTENDED THAT THE TPO REJECTED RPM SELECTED BY THE ASSESSEE ALLEGING THAT THERE WAS HIGH DEGREE OF PRODUCT DISSIMILARITY BETWEEN THE COMPARABLES AND THE ASSESSEE. HOWEVER, HE HAD SELECTED THE SAME SET OF COMPARABLES WHILE USING TNMM AS THE MOST APPROPRIATE METHOD EVEN INSPITE OF NOTING THAT THERE WAS HIGH DEGREE OF PRODUCT DISSIMILARITY. THEREFORE, THE APPROACH OF THE TPO WAS CONTRADICT ORY AND HE COULD NOT HAVE BLOW N HOT AND COLD IN THE SAME TIME . THE RELIANCE WAS PLACED ON THE JUDGMENT OF HON BLE SUPREME COURT IN THE CASE OF ENRON OIL & GAS INDIA LTD . REPORTED AT (2008) 173 TAXMAN 346. 1 4 . IT WAS FURTHER STATED THAT THE RPM SELECTED B Y THE ASSESSEE FOR BENCHMARKING AS THE MOST APPROPRIATE METHOD ITA NO . 3009 /DE L/2011 STRYKER INDIA PVT. LTD. 14 EVALUATES THE ARM S LENGTH NATURE OF CONTROLLED TRANSACTION BY REFERENCE TO THE GROSS PROFIT MARGIN REALIZED IN A COMPARABLE UNCONTROLLED TRANSACTION AND MEASURES THE VALUE OF FUNCTIONS PERFORM ED AND IT WAS APPROPRIATE IN T HE CASES INVOLVING THE PURCHASE AND RESALE OF TANGIBLE GOODS/ SERVICES IN WHICH THE BUYER/RESELLER DID NOT ADD VALUE TO THE GOODS BY PHYSICALLY ALTERING THEM. IT WAS ALSO STATED THAT THIS METHOD BEGINS WITH THE PRICE AT WHICH T HE PRODUCT THAT HAD BEEN PURCHASED FROM AN AE AND WAS RESOLD TO AN INDEPENDENT ENTERPRISE, THIS RESALE PRICE WA S THEN REDUCED BY AN APPROPRIATE GROSS MARGIN (THE RESALE PRICE MARGIN) REPRESENTING THE AMOUNT OUT OF WHICH THE RESELLER WOULD SEEK TO COVER ITS SELLING AND OTHER OPERATING EXPENSES AND IN THE LIGHT OF THE FUNCTIONS PERFORMED (TAKING INTO ACCOUNT ASSETS USED RISK ASSUMED) MADE AN APPROPRIATE PROFIT. THE LD. COUNSEL FOR THE ASSESSEE CONTENDED TH AT THE RPM WAS THE MOST USEFUL W HEN APPLIED TO MARKETI NG OPERATIONS WHEREIN THE RESELLER/DISTRIBUTOR DID NOT ADD SUBSTANTIAL VALUE OF THE PRODUCT THROUGH USE O F TANGIBLE OR INTANGIBLE PROPERTY AND THAT THIS METHOD REQUIRES SIMILARITY IN THE FUNCTIONS AND CONTRACTUAL TERMS BETWEEN THE ASSESSEE COMPANY AND ITS AE, ALTHOUGH THE SIMILARITY IN THE PRODUCT UNDER CONSIDERATION WAS LESS IMPORTANT. IT WAS ALSO STATED THAT EVEN THE RULE ITA NO . 3009 /DE L/2011 STRYKER INDIA PVT. LTD. 15 10C(1) READ WI TH RULE 10B(1)(B)(I), THE OECD G UIDELINES AND P ARAGRAPHS 19.2 AND 19.3 OF THE GUIDANCE NOTE R EPORT ON INTERNATIONAL TRANS ACTIONS U/S 92E OF THE ACT ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, HIGHLIGHT & EMPHASIZE THE APPROPRIATE NESS OF USING RPM. THE RELIANCE WAS PLACED ON THE DECISION OF THE ITAT BOMBAY BENCH IN THE CASE OF L OREAL INDIA PVT. LTD. REPORTED A T TS - 293 - ITAT - 2012 WHICH HAS BEEN CONFIRMED BY THE HON BLE BOMBAY HIGH COURT. THE RELIANCE WAS ALSO PLACED ON THE DECISION OF THE ITAT DELHI BENCH IN THE CASE OF TUPPERWARE INDIA PVT. LTD. IN ITA NO. 2140/DEL/2011 AND 1323/DEL/2012 WHEREIN THE RPM WAS HELD TO BE THE MOST APPROPRIATE METHOD FOR TESTING THE TRANSACTION FROM ITS AES FOR RESALE TO THIRD PARTIES. THE RELIANCE WAS ALSO PLACED ON THE FOLLOWING CASE LAWS: LUXOTTICA INDIA EYEWEAR P. LTD. (TS - 375 - ITAT - 2014 (DEL( - TP) SANYO INDIA PVT. LTD. (TS - 368 - ITA T - 2014 (BANG) - TP) NOKIA INDIA (P) LTD. (TS - 349 - ITAT - 2014(DEL) - TP) DANISCO (INDIA) PVT. LTD. (TS - 169 - ITAT - 2014(DEL) - TP) THE LD. COUNSEL FOR THE ASSESSEE FURTHER STATED THAT THE TPO OBJECTED TO THE USE OF RPM DUE TO PRODUCT ITA NO . 3009 /DE L/2011 STRYKER INDIA PVT. LTD. 16 DISSIMILARITY BETWEEN THE ASSESS EE AND THE COMPARABLES WHICH WAS A NON - ISSUE SO FAR AS APPLICATION OF RPM METHOD WAS CONCERNED. THE RELIANCE WAS PLACED ON THE DECISION OF THE ITAT BOMBAY BENCH IN THE CASE OF MATTEL TOYS (I) PVT. LTD. VS DCIT IN ITA NO. 2476/BOM/2008. IT WAS EMPHASIZED THAT THE RPM HAD BEEN ACCEPTED AS THE MOST APPROPRIATE METHOD IN THE SUBSEQUENT YEARS IN SIMILAR CIRCUMSTANCES. THEREFORE, THERE WAS NO REASON TO DEVIATE FROM THE SAID METHOD AND CONSIDERING THE TNMM AS THE MOST APPROPRIATE METHOD. 1 5 . IN HIS RIVAL SUBMI SSIONS THE LD. DR REITERATED THE OBSERVATION MADE BY THE TPO AND THE LD. CIT(A) AND STRONGLY SUPPORTED THE IMPUGNED ORDER. 1 6 . WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON THE RECORD. IN THE PRESENT CASE, THE ONLY CONTROVERSY TO BE RESOLVED RELATES TO THE METHOD TO BE CONSIDERED AS MOST APPROPRIATE WHILE DETERMINING THE ARM S LENGTH PRICE. IN THE PRESENT CASE, THE ASSESSEE APPLIED RPM WHICH WAS REJECTED BY THE TPO ALTHOUGH THE SAME COMPARABLES WERE CONSIDERED BY TH E TPO WHILE APPLYING THE TNMM AS MOST APPROPRIATE ITA NO . 3009 /DE L/2011 STRYKER INDIA PVT. LTD. 17 METHOD TO DETERMINE THE ARM S LENGTH PRICE . IN THE INSTANT CASE RPM HAS BEEN ACCEPTED AS THE MOST APPROPRIATE METHOD IN THE SUBSEQUENT YEARS I.E. ASSESSMENT YEAR 2007 - 08 ONWARDS TO DET ERMINE THE ARM S LENGTH PRICE OF THE ASSESSED INTERNATIONAL TRANSACTION OF PURCHASE OF FINISHED GOODS WHICH THE ASSESSEE CONSIDERED AS THE MOST APPROPRIATE METHOD , WHICH IS EVIDENT FROM PAGE NOS. 22 TO 95 OF THE ASSESSEE S PAPER BOOK WHICH ARE THE COPIES O F THE ASSESSMENT ORDERS FOR THE ASSESSMENT YEARS 2007 - 08 TO 2011 - 12. IT IS ALSO NOTICED THAT THE TPO FOR THE ASSESSMENT YEAR UNDER CONSIDERATION WHILE REJECTING THE RPM AND SELECTING THE TNMM CONSIDERED THE SAME COMPARABLES. THEREFORE, I T IS NOT CLEAR WHEN THE DEPARTMENT ITSELF HAS CONSIDERED THE RPM AS MOST APPROPRIATE METHOD WHILE DETERMI NI NG THE ARM S LENGTH PRICE ON THE IMPORT OF FINISHED GOODS IN THE SUCCEEDING YEARS AND THERE IS NO DISPUTE AS REGARDS TO THE COMPARABLES SELECTED BY THE ASSESSEE THEN WH Y THE TNMM WAS CONSIDERED AS MOST APPROPRIATE METHOD BY THE TPO/CIT(A) . WE, THEREFORE, IN THE ABSENCE OF THE CLEAR FACTS ON RECORD , DEEM IT APPROPRIATE TO SET ASIDE THIS ISSUE BACK TO THE FILE OF THE AP/TPO TO BE DECIDED AFRESH IN ACCORDANCE WITH LAW AFTER PROVIDING DUE AND REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. ITA NO . 3009 /DE L/2011 STRYKER INDIA PVT. LTD. 18 17 . IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES . ( ORDER PRON OUNCED IN THE COURT ON 13 /05 / 2016 ) SD/ - SD/ - ( BEENA PILLAI ) ( N. K. SAINI ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 13 /05 /2016 *SUBODH* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR