Elements 14 India Private Limited, Bangalore V. DCIT, Bangalore

ITA 351/BANG/2016

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 6566 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 6 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-09-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 08-09-2020
• Assessment Year: 2011-2012
• Appeal Filed On: 03-03-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: AJIT TOLANI
• Keywords: Transfer pricing; International transaction; Question of law; Wholly owned subsidiary; Set aside
• Section: 143(3); 144C; 192; 13; 92

Judgement Text

IT(TP)A NO.351/BANG/2016 ELEMENT 14 INDIA PVT. LTD., BANGALORE IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH: BANGALORE BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND SHRI B.R. BASKARAN, ACCOUNTANT MEMBER IT(TP)A NO.351/BANG/2016 ASSESSMENT YEAR: 2011-12 M/S. ELEMENT 14 INDIA PVT. LTD. #15, 2 ND FLOOR, THEME HOUSE KRISHNA NAGAR INDUSTRIAL AREA OFF HOSUR MAIN ROAD BANGALORE-560 029. PAN NO : AABCF1609A VS. DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-2(1)(2) BANGALORE APPELLANT RESPONDENT APPELLANT BY : SHRI AJIT TOLANI, A.R. RESPONDENT BY : SHRI SUNIL KUMAR SINGH, D.R. DATE OF HEARING : 08.09.2020 DATE OF PRONOUNCEMENT : 16.09.2020 O R D E R PER B.R. BASKARAN, ACCOUNTANT MEMBER: THE ASSESSEE HAS FILED THIS APPEAL CHALLENGING THE ASSESSMENT ORDER DATED 30-12-2015 PASSED BY THE ASSESSING OFFI CER FOR ASSESSMENT YEAR 2011-12 U/S 143(3) R.W.S 144C OF TH E INCOME-TAX ACT,1961 ['THE ACT' FOR SHORT] IN PURSUANCE OF DIRE CTIONS GIVEN BY LD DISPUTE RESOLUTION PANEL (DRP). 2. THE GROUNDS URGED BY THE ASSESSEE RELATE TO T HE TRANSFER PRICING ADJUSTMENT MADE IN RESPECT OF DISTRIBUTION SEGMENT AND ITES SEGMENT. IT(TP)A NO.351/BANG/2016 ELEMENT 14 INDIA PVT. LTD., BANGALORE PAGE 2 OF 14 3. THE ASSESSEE IS A SUBSIDIARY OF ELEMENT 14 HO LDINGS BV NETHERLANDS AND IS ENGAGED IN THE BUSINESS OF DISTR IBUTION OF ELECTRONIC, ELECTRICAL, INDUSTRIAL AND MAINTENANCE, REPAIR AND OPERATIONS PRODUCTS. IN ADDITION TO IT, THE ASSESS EE IS ALSO PROVIDING TECHNICAL SUPPORT SERVICES AKIN TO IT ENABLES SERVI CES TO ITS ASSOCIATED ENTERPRISES. THUS THE ASSESSEE HAS GOT TWO SEGMENTS, VIZ., DISTRIBUTION SEGMENT AND ITES SEGMENT. 4. THE FIRST ISSUE RELATES TO THE TRANSFER PRICI NG ADJUSTMENT MADE IN RESPECT OF DISTRIBUTION SEGMENT. THE ASSESSEE AD OPTED RESALE PRICE METHOD (RPM) AS MOST APPROPRIATE METHOD FOR THE DISTRIBUTION SEGMENT. THE TPO NOTICED THAT THE ASSESSEE IS REQU IRED TO PERFORM CERTAIN ADDITIONAL FUNCTIONS WITH REGARD TO THE DIS TRIBUTION SEGMENT. FURTHER THE ASSESSEE HAS DECLARED LOSS IN THE DISTR IBUTION SEGMENT. ACCORDINGLY, HE TOOK THE VIEW THAT THE TNM METHOD I S THE MOST APPROPRIATE METHOD FOR THE DISTRIBUTION SEGMENT. THE RELEVANT OBSERVATIONS MADE BY THE TPO ARE EXTRACTED BELOW:- 7.4 SOME OF THE FUNCTIONS THAT THE TAXPAYER IS REQUIRED TO PERFORM AS PER THE AGREEMENTS WITH ITS AES ARE AS UNDER: THE DISTRIBUTOR (READ TAXPAYER) SHALL USE ITS BEST EFFORTS TO PROMOTE THE SALE OF GOODS IN THE TERRITORY. THE DISTRIBUTOR SHALL KEEP THE SUPPLIER INFORMED ON A REGULAR BASIS AS TO THE MARKET CONDITIONS, LAWS AND REGULATIONS W HICH MAY AFFECT THE GOODS, THE DISTRIBUTORS OWN ACTIVITIES AND THO SE OF THE COMPETITION WITHIN THE TERRITORY. THE DISTRIBUTOR SHALL INFORM IMMEDIATELY OF ANY FAU LTS WITH OR LACK OF SUITABILITY OF THE GOODS FOR THE PURPOSES FOR WHICH THEY ARE REQUIRED IN THE TERRITORY AND CO-OPERATE WITH THE SUPPLIER I N SEEKING TO RESOLVE ANY SUCH PROBLEMS. THE DISTRIBUTOR SHALL USE THE TRADE MARKS OR TRADE NAMES OF THE SUPPLIER DURING THE PERIOD OF THE AGREEMENT AND THE DISTRIBUTOR SHALL PROTECT SUCH TRADE MARKS FROM ANY INFRINGEMENT IN T HE TERRITORY ETC. THE RESULT OF THESE ADDED FUNCTIONS ARE EXPENDITURE S INCURRED BY THE TAXPAYER, WHICH HAVE BEEN DISTRIBUTED, ALL OVER TH E PROFIT AND LOSS ACCOUNT, RESULTING IN A HUGE LOSS IN THE DISTRIBUTI ON SEGMENT. THE TAXPAYER HAS ALSO MADE PAYMENT OF ROYALTY TO ITS AE . A ROUTINE TRADER WOULD HAVE EARNED A PROFIT OUT OF ITS TRADIN G ACTIVITY AND NOT IT(TP)A NO.351/BANG/2016 ELEMENT 14 INDIA PVT. LTD., BANGALORE PAGE 3 OF 14 INCURRED SUCH A HUGE LOSS. THEREFORE, THE TPO DOES NOT CONSIDER THE RPM TO BE THE MOST APPROPRIATE METHOD FOR DETERMINI NG ALP OF THE INTERNATIONAL TRANSACTION OF THE TAXPAYER IN THE DI STRIBUTION SEGMENT. THE TPO IS OF THE VIEW THAT, THE TNMM IS THE MOST A PPROPRIATE METHOD FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION OF THE TAXPAYER, IN THE DISTRIBUTION SEGMENT. A DISCU SSION ON THE ADVANTAGES OF TNMM OVER RPM IS MADE BELOW. ACCORDINGLY, THE TPO ADOPTED TNM METHOD AS MOST APP ROPRIATE METHOD AND MADE TRANSFER PRICING ADJUSTMENT OF RS.2 .38 CRORES. THE LD DRP ALSO CONFIRMED THE SAME. 5. THE LD A.R SUBMITTED THAT THE ASSESSEE IS PU RE DISTRIBUTOR AND DOES NOT CARRY OUT ANY VALUE ADDITION TO THE PRODUC TS TRADED BY IT. ACCORDINGLY, HE SUBMITTED THAT THE RPM IS THE MOST APPROPRIATE METHOD FOR THE DISTRIBUTION SEGMENT. HE SUBMITTED THAT, UNDER RPM METHOD, THE GROSS PROFIT MARGIN HAS TO BE COMPARED WITH THE COMPARABLE COMPANIES. THE ASSESSEE HAS INCURRED NE T LOSS DUE TO HUGE EXPENSES INVOLVED IN MARKETING THE PRODUCTS. WHILE MARKETING THE PRODUCTS, THE ASSESSEE USUALLY CARRY OUT CERTAI N FUNCTIONS RELATING TO MARKETING ACTIVITIES. THEY ARE NOT PER SE, RESULT IN VALUE ADDITION TO THE PRODUCTS TRADED BY THE ASSESSEE. A CCORDINGLY HE SUBMITTED THAT THE TPO WAS NOT JUSTIFIED IN GIVING IMPORTANCE TO THOSE ROUTINE MARKETING FUNCTIONS. HE FURTHER SUBM ITTED THAT THE CO- ORDINATE BENCH OF TRIBUNAL HAS HELD IN THE CASE OF ACER INDIA PVT LTD (IT(TP)A NO.2837/BANG/2017 & IT(TP)A NO.3391/BANG/2 018 DATED 05-03-2020) THAT THE RPM IS THE MOST APPROPRIATE ME THOD IN CASE OF DISTRIBUTOR OF PRODUCTS. 6. THE LD D.R, ON THE CONTRARY, SUBMITTED THAT THE ASSESSEE HAS INCURRED HUGE LOSS BY INCURRING HUGE ADVERTISEMENT EXPENSES. NORMALLY A TRADER WOULD NOT INCUR LOSS IN TRADING S EGMENT OF REPUTED PRODUCTS. HENCE THE TPO HAS ADOPTED TNM METHOD AS MOST IT(TP)A NO.351/BANG/2016 ELEMENT 14 INDIA PVT. LTD., BANGALORE PAGE 4 OF 14 APPROPRIATE METHOD, SINCE ALP COULD BE BEST DETERMI NED UNDER THAT METHOD. 7. IN THE REJOINDER, THE LD A.R SUBMITTED THAT THE ASSESSEE IS INVOLVED IN MERE TRADING ACTIVITY AND IT DOES NOT C ARRY OUT ANY VALUE ADDITION FUNCTIONS ON THE PRODUCTS. HENCE RPM IS T HE APPROPRIATE METHOD. 8. WE HEARD THE PARTIES AND PERUSED THE RECORD. WE NOTICE THAT THE CO-ORDINATE BENCH HAS EXAMINED THE ISSUE OF MO ST APPROPRIATE METHOD FOR A DISTRIBUTOR OF PRODUCTS IN THE CASE O F ACER INDIA PVT LTD (SUPRA). THE RELEVANT OBSERVATIONS MADE BY THE CO- ORDINATE BENCH ARE EXTRACTED BELOW:- 10. IN OUR CONSIDERED VIEW, THE VIEW SO ENTERTAINE D BY TPO IS BASED ON SURMISES AND CONJECTURES. HE HAS MERELY RELIED UPON THE FACT THAT THE ASSESSEE WAS MAKING LOSSES IN ITS TRADING SEGMENT. WE NOTICE THAT THE AO HAS NOT BROUGHT ANY MATERIAL ON RECORD TO SUPPORT HIS V IEW. THERE IS NO DISPUTE WITH REGARD TO THE FACT THAT THE ASSESSEE DOES NOT MAKE ANY VALUE ADDITION TO THE PRODUCTS IMPORTED BY IT FROM ITS AE. WHEN TH ERE IS NO VALUE ADDITION AND THE IMPORTED PRODUCTS ARE SOLD AS IT IS, THEN ' RESALE PRICE METHOD' IS HELD TO BE MOST APPROPRIATE METHOD IN THE CASES REL IED UPON BY LD A.R. IN THE CASE OF M/S CELIO FUTURE FASHION P LTD (SUPRA), THE MUMBAI BENCH OF TRIBUNAL HELD SO BY FOLLOWING THE DECISION RENDERED BY DELHI BENCH OF TRIBUNAL IN THE CASE OF BURBERRY INDIA P LTD (ITA N O.758 & 7684/DEL/2017 DATED 22.06.2018). IDENTICAL ISSUE WAS CONSIDERED B Y THE BANGALORE BENCH OF TRIBUNAL IN THE CASE OF M/S A.O. SMITH INDIA WAT ER HEATING P LTD (ITA NO.176/BANG/2015), WHEREIN THE TRIBUNAL, AFTER CONS IDERING VARIOUS CASE LAWS ON THE MATTER, HELD THAT THE RPM IS THE MOST A PPROPRIATE METHOD IN CASE OF A DISTRIBUTOR OF PRODUCTS. FOR THE SAKE OF CONVE NIENCE, WE EXTRACT BELOW THE RELEVANT OBSERVATIONS MADE BY THE TRIBUNAL IN T HE CASE OF A.O SMITH INDIA WATER HEATING P LTD (SUPRA):- 14. NOW THE ASSESSEE IS BEFORE US WITH THE SUBMISSI ON THAT IT IS AN ACCEPTED PRINCIPLE THAT THE COMPUTATION OF ALP BASE D ON A DIRECT METHOD LIKE RPM, WHICH TESTS THE RESULTS AT GROSS L EVEL UNLIKE THE TNMM WHICH TESTS THE RESULTS AT NET LEVEL, EXTINGUI SHES THE REQUIREMENT O MAKING ADJUSTMENT IN RELATION TO THE DIFFERENCE IN OPERATING EXPENSES, WHICH COULD BE DIFFERENT FROM E NTERPRISE TO ENTERPRISE. IT WAS FURTHER CONTENDED THAT AS PROVID ED IN RULE L0B, UNDER RPM PRICE OF INTERNATIONAL TRANSACTION NEEDS TO BE COMPUTED ON THE BASIS OF GROSS PROFIT MARGIN EARNED IN UNCON TROLLED IT(TP)A NO.351/BANG/2016 ELEMENT 14 INDIA PVT. LTD., BANGALORE PAGE 5 OF 14 TRANSACTIONS, WHILE UNDER TNMM PRICE OF INTERNATION AL TRANSACTION IS COMPUTED ON THE BASIS OF NET PROFIT MARGIN OF UN CONTROLLED TRANSACTIONS. AS PER RULE 100(1), THE MOST APPROPRI ATE METHOD FOR DETERMINING THE ALP DEPENDS UPON THE FACTS AND CIRC UMSTANCES OF EACH CASE. SIMILARLY, THE OPERATING EXPENSES INCURR ED BY THE ASSESSEE IS DIFFERENT FROM THE OPERATING EXPENSES INCURRED B Y COMPARABLE COMPANIES. THE LEARNED COUNSEL FOR THE ASSESSEE HAS HIGHLIGHTED THAT INCURS CERTAIN EXPENSES WHICH DOES NOT AFFECT SALE/ PURCHASE PRICE OF THE GOODS SOLD. THEREFORE, IN A SITUATION WHERE INC URRENCE OF ITEM EXPENSES AFFECTS ONLY THE NET PROFIT OF THE ENTITY WITHOUT CORRESPONDING EFFECT OF GROSS PROFIT OR PRICE OF TR ANSACTIONS, THE TNMM WILL NOT PROVIDE THE MOST RELIABLE ARMS LENGTH RESULTS. THE SELECTION OF TNMM WOULD REQUIRE MAKING RELIABLE ADJ USTMENT TO ARRIVE AT THE OPERATING PROFIT I.E., ADJUSTMENT FOR EXPENDITURE INCURRED IN THE CURRENT YEAR, THE BENEFIT OF WHICH WILL BE RECEIVED IN THE FUTURE YEAR. IN THE ABSENCE OF RELIABLE ADJUSTM ENT, THE SELECTION OF TNMM WILL NOT RESULT IN ARRIVING AT THE ALP OF THE INTERNATIONAL TRANSACTION. IN TRANSACTIONS METHOD LIKE RPM OR COS T PLUS METHOD, THE EFFECT OF THESE FACTORS MAY BE ELIMINATED AS NA TURAL CONSEQUENCES OF INSISTING UPON GREATER PRODUCT OF FUNCTION SIMIL ARITY. DEPENDING UPON THE FACTS AND CIRCUMSTANCES OF THE CASE AND PA RTICULAR ON THE EFFECT OF FUNCTIONAL DIFFERENCES ON THE COST STRUCT URE AND THE REVENUE OF THE POTENTIAL COMPARABLES, THE NET PROFIT INDICA TORS CAN BE LESS SENSITIVE THAN THE GROSS MARGIN TO THE DIFFERENCE I N THE EXTENT OF COMPLEXITY OF FUNCTION AND DIFFERENCE IN THE LEVEL OF RISK. 15. IT WAS FURTHER CONTENDED THAT COMPARABILITY SHO ULD NOT BE INTERPRETED IN ISOLATION BECAUSE OF THE CONDITIONS AND CIRCUMSTANCES OF THE CONTROLLED TRANSACTIONS SHOULD BE TAKEN INTO CONSIDERATION WHILE COMPARING THE NET MARGIN. UNDER THE FACTS AND CIRCUMSTANCES OF THE ASSESSEE, THE NET MARGIN COMPARABILITY IS MO RE VOLATILE THAN THE GROSS MARGIN COMPARABLE. IN THE LIGHT OF THE FA CTS, IT WAS CONTENDED THAT IF THE COST STRUCTURE IS SUCH THAT C OSTS ARE EFFECTING IN NET PROFIT DIRECTLY WITHOUT AFFECTING THE PRICE OR GROSS MARGIN, THEN THERE CAN BE NO TWO OPINIONS THAT RPM SHOULD BE PRE FERRED OVER THE TNMM METHOD. IN SUPPORT OF THESE CONTENTIONS, HE PL ACED RELIANCE UPON THE FOLLOWING JUDGMENTS-.- (1) HORIBA INDIA PVT. LTD., V. OCIT, 81 TAXMANN.COM 209 (2) BOSE CORPORATION PVT. LTD., V. ACIT, CIRCLE 3(1), NEW DELHI, 77 TAXMANN.COM 194 (3) ITO V. L'OREAL INDIA PVT. LTD ., (2015) 24 TAXMANN.CORN 192 (BORN) (4) MATTEL TOYS INDIA PVT. LTD., V. DOLT IN ITA NO. 2476/MUM/2008. IT(TP)A NO.351/BANG/2016 ELEMENT 14 INDIA PVT. LTD., BANGALORE PAGE 6 OF 14 THE ID. DR PLACED RELIANCE UPON THE ORDER OF THE AO AND THE DRP. 16. HAVING HEARD THE RIVAL SUBMISSIONS AND FROM A C AREFUL PERUSAL OF THE RECORD, WE FIND THAT UNDISPUTEDLY THE ASSESSEE IS A TRADING COMPANY AND CARRIES OUT DISTRIBUTION AND MARKETING OF PRODUCTS OF AOS GROUP IN INDIA. IT IMPORTS WATER FILTERS FROM A O SMITH CHINA AND SELLS THEM IN INDIA. AO SMITH INDIA IS, ACCORDI NG TO THE TP DOCUMENT, A DISTRIBUTOR OF AOS WATER HEATERS IN IND IA. THE TRIBUNAL HAS EXAMINED THE MOST APPROPRIATE METHOD I N THE CASE OF DISTRIBUTOR TO DETERMINE THE ALP FOR THE INTERNATIO NAL TRANSACTIONS. IN THE CASE OF HORIBA INDIA PVT. LTD. (SUPRA), THE TRIBUNAL HAS HELD THAT IN THE CASE OF A DISTRIBUTOR WHERE THE GOODS A RE PURCHASED FROM THE AE AND RESOLD TO OTHER INDEPENDENT ENTITIES WIT HOUT ANY VALUE ADDITION, THEN THE RESALE PRICE METHOD SHOULD BE RE CKONED AS MOST APPROPRIATE METHOD. ONE OF THE MAIN REASON GIVEN BY THE TPO AS WELL AS THE DRP IS THAT THE ASSESSEE IS FULL FLEDGE D/FULL RISK DISTRIBUTOR AND PERFORMING HOST OF FUNCTIONS, THEREFORE RPM SHO ULD NOT BE TAKEN AS THE MOST APPROPRIATE METHOD, BECAUSE ALL THESE F UNCTIONS REQUIRE HUGE COST WHICH MAY NOT REPRESENT THE GROSS PROFIT MARGIN. THIS CONTENTION OF THE REVENUE WAS REJECTED BY THE TRIBU NAL AND IT WAS HELD THAT IN COMPARABLE CONTROLLED TRANSACTION SCEN ARIO, A NORMAL DISTRIBUTOR WILL UNDERTAKE ALL KINDS OF FUNCTIONS W HICH ARE RELATED TO SALES OF THE PRODUCT. THE THINGS LIKE MARKET RESEAR CH, SALES & MARKETING, WAREHOUSING, CONTROLLED QUALITY AND ALSO RISKS LIKE MARKET RISK, CREDIT RISK, ETC. ARE UNDERTAKEN BY ANY DISTR IBUTOR FOR THE SALE OF THE PRODUCTS. THE TRIBUNAL FURTHER HELD THAT WHAT IS IMPORTANT TO SEE IS WHETHER THERE IS ANY VALUE ADDITION OR NOT ON TH E COST PURCHASED FOR RESALE. IF THERE IS NO VALUE ADDITION TO THE FINISHED GOOD S PURCHASED FROM THE AE ARE SOLD IN THE MARKET AS IT IS, THEN GROSS PROFIT MARGIN EARNED ON SUCH TRANSACTIONS BECOME DETERMINI NG FACTOR TO ANALYSE THE GROSS COMPENSATION AFTER THE COST OF SA LES. ACCORDINGLY THE TRIBUNAL HELD THAT THE RPM IS THE MOST APPROPRI ATE METHOD. 17. SIMILARLY, IN THE CASE OF BOSE CORPORATION PVT. LTD. V ACIT (SUPRA), THE ASSESSEE COMPANY WAS ENGAGED IN THE BU SINESS OF DISTRIBUTION OF SOUND AND AUDIO ASSISTANT FOR INDIV IDUAL CUSTOMERS AND PUBLIC PLACES. IT WAS A WHOLLY OWNED SUBSIDIARY OF BOSE CORPORATION, USA. DURING THE RELEVANT YEAR, ASSESSE E PURCHASED FURNISHED GOODS FROM ITS AE AND RESOLD THE SAME IN INDIA TO UNCONNECTED PARTIES. THE ASSESSEE ADOPTED RESALE PR ICE METHOD (RPM) AS MOST APPROPRIATE METHOD (MAM) FOR DETERMIN ING THE ALP OF THE SAID INTERNATIONAL TRANSACTIONS. THE PROFIT LEVEL INDICATION (PLI) ADOPTED BY THE ASSESSEE WAS GROSS PROFIT/SALE AND THE ASSESSEE HAS MADE ITSELF TESTED PARTY FOR THE PURPOSE OF INT ERNATIONAL TRANSACTIONS. THE TPO REJECTED THE TRANSFER PRICING STUDY OF THE ASSESSEE AND OPINED THAT TRANSACTIONAL NET MARGIN M ETHOD WAS TO BE APPLIED FOR DETERMINING ALP OF INTERNATIONAL TRANSA CTIONS UNDER QUESTION. WHILE DETERMINING THE ISSUE AS TO WHICH I S THE MOST IT(TP)A NO.351/BANG/2016 ELEMENT 14 INDIA PVT. LTD., BANGALORE PAGE 7 OF 14 APPROPRIATE METHOD IN CASE OF DISTRIBUTOR, THE TRIB UNAL HAS HELD THAT THE RESALE PRICE METHOD (RPM) IS THE MOST APPROPRIA TE METHOD AND DIRECTED THE TPO TO CALCULATE MARGIN OF THE COMPARA BLES BY USING RMP. THE RELEVANT OBSERVATION OF THE TRIBUNAL IS EX TRACTED HEREUNDER FOR THE SAKE OF REFERENCE: '8.1 AT THIS JUNCTURE, WE NOTE THE MANDATE OF RULE 10C WHICH DEFINES THE 'MOST APPROPRIATE METHOD'. SUB-RULE (1) OF RULE 10C STATES THAT: 'FOR THE PURPOSES OF SUB- SECTION (1) OF SECTION 92 C, THE MOST APPROPRIATE METHOD SHALL BE THE METHOD WHICH IS BES T SUITED TO THE FACTS AND CIRCUMSTANCES OF EACH PARTICULAR INTERNAT IONAL TRANSACTION, AND WHICH PROVIDES THE MOST RELIABLE MEASURE OF AN ARM'S LENGTH IN RELATION TO THE INTERNATIONAL TRANSACTION.' SUB-RUL E (2) OF RULE 10C LISTS CERTAIN FACTORS WHICH SHOULD BE TAKEN INTO AC COUNT IN SELECTING THE MOST APPROPRIATE METHOD AS SPECIFIED IN SUB-RUL E (1). THESE FACTORS, INTER OLIO, INCLUDE , THE AVAILABILITY CO VERAGE AND RELIABILITY OF DATA NECESSARY APPLICATION OF THE METHOD'; AND ( D) THE DEGREE OF COMPARABILITY EXISTING BETWEEN THE INTERNATIONAL TR ANSACTION AND THE UNCONTROLLED TRANSACTION...........' 8.2 AN OVERVIE W OF THE FACTORS PRESCRIBED FOR CHOOSING THE MOST APPROPRIATE METHOD INDICATES THAT FIRSTLY, THE DATA NECESSARY FOR APPLICATION OF THE GIVEN METHOD SHOULD BE AVAILABLE AND SECONDLY, THE UNCONTROLLED TRANSAC TIONS SHOULD BE FUNCTIONALLY SIMILAR, IF NOT IDENTICAL. A COMPANY, IN ORDER TO BE RANKED AS COMPARABLE UNDER THE RPM, SHOULD PREFERAB LY BE ENGAGED IN DOING SIMILAR ACTIVITY AS THAT OF THE ASSESSEE O R AT LEAST OF THE SOME GENUS OF THE ACTIVITY, WITH A DIFFERENT PRODUCT. TH E LD. TPO HIMSELF HAS CATEGORIZED THE CORN PARABLES CHOSEN BY THE ASS ESSEE AS TRADERS AKIN TO COMPUTER INDUSTRY OR ENGAGED IN TRADING OF INSTRUMENTS. AS THE BASIC REQUIREMENTS UNDER RULE 10(C)(1) ARE FULF ILLED BY THESE CORN PARABLES AND THAT THE LD. TPO HAS NOT BROUGHT ON RE CORD ANY EVIDENCE TO PROVE MATERIAL DIFFERENCE BETWEEN THE A SSESSEE AND THE CORN PARABLES SO SELECTED, WE DIRECT THE LD. TPO TO CALCULATE THE MARGIN OF THE COMPARABLES BY USING RPM.' 18. IN THE CASE OF CIT VS. L'OREAL INDIA PVT. LTD., SIMILAR DISPUTE WAS RAISED BEFORE THE HON'BLE HIGH COURT OF BOMBAY. IN THAT CASE, ASSESSEE HAD BUSINESS IN 2 SEGMENTS VIZ., MANUFACTU RING AND DISTRIBUTION, IN RESPECT OF BUSINESS OF DISTRIBUTIO N, THE TPO SUGGESTED TRANSFER PRICING ADJUSTMENT BY APPLYING THE TNMM AN D REJECTED THE RESALE PRICE METHOD (RPM) ADOPTED BY THE ASSESSEE B ECAUSE THE TPO FOUND THAT ASSESSEE WAS INCURRING LOSS CONSISTENTLY AND HENCE THE PRICE POLICE WAS NOT AT ARM'S LENGTH. THE HON'BLE H IGH COURT, HAVING EXAMINED ALL ASPECTS HAVE FINALLY CONCLUDED THAT RP M IS THE MOST APPROPRIATE METHOD. THE RELEVANT OBSERVATION OF THE HON'BLE HIGH COURT IS EXTRACTED HEREUNDER FOR THE SAKE OF REFERE NCE: '7. AFTER HAVING PERUSED THE RELEVANT PART OF THE O RDER PASSED BY THE COMMISSIONER AND THIS TRIBUNAL ON THIS QUESTION, WE ARE IN IT(TP)A NO.351/BANG/2016 ELEMENT 14 INDIA PVT. LTD., BANGALORE PAGE 8 OF 14 AGREEMENT WITH PARDIWALLA THAT THE TRIBUNAL DID NOT COMMIT ANY ERROR OF LAW APPARENT ON THE FACE OF THE RECORD NOR CAN THE FINDINGS CAN BE SAID TO BE PERVERSE. THE TRIBUNAL HAS FOUND THAT THE TPO HAS PASSED AN ORDER EARLIER ACCEPTING THIS METHOD. THE TRIBUNAL HAS NOTED IN PARA 19 OF THE ORDER UNDER CHALLENGE THAT THIS METHOD IS ONE OF THE STANDARD METHOD AND THE OECD (ORGANIZATION O F ECONOMIC COMMERCIAL DEVELOPMENT) GUIDELINES ALSO STATE IN CA SE OF DISTRIBUTION OR MARKETING ACTIVITIES WHEN THE GOODS ARE PURCHASED FROM ASSOCIATED ENTITIES AND THERE ARE SOLES EFFECT ED TO UNRELATED PARTIES WITHOUT ANY FURTHER PROCESSING, THEN, THIS METHOD CAN BE ADOPTED. THE FINDINGS OF FACT ARE BASED ON THE MATE RIALS WHICH HAVE BEEN PRODUCED BEFORE THE COMMISSIONER AS ALSO THE T RIBUNAL. FURTHER, IT WAS HIGHLIGHTED BEFORE THE COMMISSIONER AS ALSO THE TRIBUNAL THAT THE RPM HAS BEEN ACCEPTED BY THE TPO IN THE PRECEDING AS WELL AS SUCCEEDING ASSESSMENT YEARS. T HAT IS IN RESPECT OF DISTRIBUTION SEGMENT ACTIVITY OF THE ASSESSEE. I N SUCH CIRCUMSTANCES, AND WHEN NO DISTINGUISHING FEATURES WERE NOTED BY THE TRIBUNAL, IT DID NOT COMMIT ANY ERROR IN ALLOWI NG THE ASSESSEE'S APPEAL. SUCH FINDINGS DO NOT RAISE ANY SUBSTANTIAL QUESTION OF LAW. THE APPEAL IS DEVOID OF MERITS AND IS, THEREFORE, D ISMISSED. THERE WOULD BE NO ORDERS AS TO COSTS.' 19. COPY OF THE ORDER OF THE TRIBUNAL IN THE CASE O F L'OREAL INDIA PVT. LTD., IS ALSO PLACED ON RECORD TO DEMONSTRATE AS TO UNDER WHAT CIRCUMSTANCES THE RPM WAS CONSIDERED TO BE MOST APP ROPRIATE METHOD. SIMILARLY, IN THE CASE OF METTAL TOYS INDIA PVT. LTD., V. DCIT (SUPRA), THE TRIBUNAL AGAIN REAFFIRMED ITS VIEW TH AT IN THE CASE OF DISTRIBUTOR, THE RPM IS THE MOST APPROPRIATE MET HOD BY HOLDING THAT ULTIMATE AIM OF THE TRANSFER PRICING IS TO EXA MINE WHETHER PRICE OF THE MARGIN ARISING FROM THE INTERNATIONAL TRANSA CTIONS WITH A RELATED PARTY IS AT ALP OR NOT. THE DETERMINATION O F THE APPROXIMATE ALP IS A KEY FACTOR FOR WHICH MOST APPROPRIATE METH OD IS TO BE FOLLOWED. THEREFORE, IF AT ANY STAGE OF THE PROCEED INGS, IT IS FOUND THAT BY ADOPTING ONE OF THE PRESCRIBED METHOD OTHER THAN CHOOSING EARLIER, THE MOST APPROPRIATE ALP CAN BE DETERMINED , THE ASSESSING AUTHORITIES AS WELL AS THE APPELLATE AUTHORITIES SH OULD TAKE INTO CONSIDERATION SUCH A PLEA RAISED BEFORE THEM PROVID ED IT IS DEMONSTRATED AS TO HOW A CHANGE IN THE METHOD WILL PRODUCE BETTER OR MORE APPROPRIATE ALP ON THE FACTS OF THE CASE. T HE TRIBUNAL ACCORDINGLY REJECTED THE CONTENTION OF THE REVENUE AND DIRECTED THE TPO TO ADOPT RPM INSTEAD OF TNMM FOR COMPUTING THE ALP. 20. TURNING TO THE FACTS OF THE CASE, WE FIND THAT UNDISPUTEDLY, ASSESSEE IS A DISTRIBUTOR OF AO SMITH CHINA WHICH I S INVOLVED IN THE MANUFACTURE OF WATER HEATERS AND SELLS THE WATER HE ATER IMPORTED FROM AO SMITH CHINA IN INDIA WITHOUT MAKING ANY VAL UE ADDITION TO THE PRODUCT IN A SIMILAR TYPE OF CASE, IT HAS BEEN REPEATEDLY HELD BY THE TRIBUNAL AND THE HON'BLE HIGH COURT OF BOMBAY T HAT IN CASE OF IT(TP)A NO.351/BANG/2016 ELEMENT 14 INDIA PVT. LTD., BANGALORE PAGE 9 OF 14 DISTRIBUTOR, WHETHER THE PRODUCT IS BEING SOLD TO T HE UNCONTROLLED ENTITIES WITHOUT MAKING ANY VALUE ADDITION RPM IS T HE MOST APPROPRIATE METHOD AND SHOULD BE PREFERRED OVER TNM M. ACCORDINGLY, WE SET ASIDE THE ORDER OF THE AO, PASS ED CONSEQUENT TO THE DIRECTION OF THE DRP IN THIS REGARD AND DIRECT THE AOITPO TO ADOPT THE RPM AS THE MOST APPROPRIATE METHOD.' 11. SINCE THE FACTS ARE IDENTICAL IN THIS CASE, WE HOLD THAT THE RESALE PRICE METHOD IS MOST APPROPRIATE METHOD IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE. ACCORDINGLY WE DIRECT THE AO/TPO TO A DOPT RESALE PRICE METHOD AS MOST APPROPRIATE METHOD AND DETERMINE THE ALP OF THE TRANSACTIONS ACCORDINGLY. 9. IN THE INSTANT CASE, THE ASSESSEE HAS CLAIMED THAT IT HAS NOT CARRIED OUT ANY VALUE ADDITION TO THE PRODUCTS IMPO RTED BY IT FROM ITS ASSOCIATED ENTERPRISES. IT IS ALSO SUBMITTED THAT THE FUNCTIONS TO BE PERFORMED BY THE ASSESSEE AS A DISTRIBUTOR, WHICH IS HIGHLIGHTED BY THE TPO IS NORMAL FUNCTIONS PERFORMED IN THE TRADE CIRCLES EVEN BY A NON-RELATED PARTY. WE NOTICE THAT THE REVENUE HAS NOT NEGATED BOTH THESE SUBMISSIONS OF THE ASSESSEE. THE TPO HAS ALS O REJECTED THE RPM FOR THE REASON THAT THE ASSESSEE IS INCURRING N ET LOSS. HOWEVER, IT HAS HELD BY THE TRIBUNAL IN VARIOUS CASES THAT T HE GROSS PROFIT MARGIN HAS TO BE COMPARED UNDER RPM. ACCORDINGLY, WE ARE OF THE VIEW THAT RPM IS THE MOST APPROPRIATE METHOD IN THE FACTS AND CIRCUMSTANCES OF THE CASE. ACCORDINGLY, WE DIRECT THE AO/TPO TO ADOPT RESALE PRICE METHOD AS MOST APPROPRIATE METHO D AND DETERMINE THE ALP OF THE TRANSACTIONS ACCORDINGLY. 10. WE SHALL NOW TAKE UP TRANSFER PRICING ADJUS TMENT MADE UNDER ITES SEGMENT. THE ASSESSEE ADOPTED TNM METHOD AS M OST APPROPRIATE METHOD AND OPERATING PROFIT/OPERATING C OST (OP/OC) AS PROFIT LEVEL INDICATOR (PLI). REJECTING THE TRANSF ER PRICING STUDY OF THE ASSESSEE, THE TRANSFER PRICING OFFICER (TPO) CA RRIED OUT HIS OWN SEARCH AND AFTER CONSIDERING THE EXPLANATIONS OF TH E ASSESSEE SELECTED 10 COMPARABLE COMPANIES AS FINAL SET OF CO MPARABLES. THE LIST OF COMPARABLE COMPANIES SELECTED BY THE TPO IS EXTRACTED BELOW:- IT(TP)A NO.351/BANG/2016 ELEMENT 14 INDIA PVT. LTD., BANGALORE PAGE 10 OF 14 SL.NO. NAME OF THE CASE OPERATING INCOME OPERATING COST OP/OC 1 ACCENTIA TECHNOLOGIES LTD. 1,069,026,524 82,93,91,898 28.89% 2 ACROPETAL TECHNOLOGIES 494,399,332 38,97,06,574 26.86% 3 COSMIC GLOBAL LTD. 62,496,615 5,69,15,360 9.81% 4 E4E HEALTHCARE (CAPITALINE) 613,160,587 54,56,25,872 12.38% 5 ICRA ONLINE LTD. (SEG) 156,691,000 11,67,49,267 34.21% 6 JEEVAN SCIENTIFIC TECHNOLOGY LTD. 1,721,400,000 1,00,86,52,592 70.66% 7 INFOSYS BPO LTD. 11,291,147,909 9,57,73,24,546 17.89% 8 JINDAL INTELLICOM (CAPITALINE) 390,358,799 35,12,69,641 11.13% 9 MINDTREE LTD. (SEG) 5,653,000,000 5,10,39,05,999 10.76% 10 IGATE GLOBAL SOLUTIONS LTD. 11,845,540,000 9,47,11,65,000 25.07% AVERAGE MARGIN 24.77% THE AVERAGE MEAN MARGIN OF THE COMPARABLES SELECTED BY THE TPO WAS 24.77%. AFTER GRANTING WORKING CAPITAL ADJUSTM ENT OF 1.47%, THE TPO ARRIVED AT THE ADJUSTED MARGIN AT 23.30%. ACCORDINGLY HE MADE TRANSFER PRICING ADJUSTMENT OF RS.49.93 LAKHS. 11. THE LD A.R SUBMITTED THAT THE DRP EXCLUDED S EVEN COMPARABLE COMPANIES AND CONFIRMED FOLLOWING THREE COMPANIES S ELECTED BY THE TPO:- (A) ACCENTIA TECHNOLOGIES LTD (B) ICRA ONLINE LTD (C) JINDAL INTELLICOM BEFORE US, THE ASSESSEE SEEKS EXCLUSION OF M/S ACCE NTIA TECHNOLOGIES LTD AND M/S ICRA ONLINE LTD. THE ASSESSEE ALSO SEE KS INCLUSION OF TWO COMPANIES, VIZ., M/S INHOUSE PRODUCTION LIMITED AND M/S MICROLAND LTD. IT(TP)A NO.351/BANG/2016 ELEMENT 14 INDIA PVT. LTD., BANGALORE PAGE 11 OF 14 12. THE LD A.R SUBMITTED THAT THE COMPANIES M/ S ACCENTIA TECHNOLOGIES LTD AND M/S ICRA ONLINE LTD HAVE BEEN EXCLUDED BY THE CO-ORDINATE BENCH IN THE CASE OF M/S ACUSIS SOFTWAR E INDIA P LTD VS. ITO (IT(TP)A NO.169/BANG/2016 DATED 06-09-2019). AC CORDINGLY, HE PRAYED FOR EXCLUSION OF THESE TWO COMPARABLES. 13. THE LD D.R, HOWEVER, SUPPORTED THE ORDERS OF TAX AUTHORITIES. 14. WE HEARD THE PARTIES ON THIS ISSUE AND PERUS ED THE RECORD. THE DECISION IN THE CASE OF ACUSIS SOFTWARE INDIA P LTD (SUPRA) HAS CONSIDERED THE COMPARABLE COMPANY M/S ACCENTIA TECH NOLOGIES LTD FOR THE VERY SAME ASSESSMENT YEAR UNDER CONSIDERATI ON, I.E., FOR AY 2011-12. THE CO-ORDINATE BENCH HAS FOLLOWED THE DE CISION RENDERED BY ANOTHER CO-ORDINATE BENCH IN THE CASE OF EMS SOF TWARE SERVICES (INDIA) P LTD (IT(TP)A NO.273/BANG/2016 DATED 25.4. 2018) AND ACCORDINGLY DIRECTED TO BE EXCLUDED. WE NOTICE THA T THE CO-ORDINATE BENCH IN THE CASE OF EMS SOFTWARE SERVICES (INDIA) P LTD HAS FOLLOWED THE DECISION RENDERED BY OTHER CO-ORDINATE BENCHES IN THE CASE OF M/S SWISS RE SHARED SERVICES INDIA P LTD (IT(TP)A NO.380/BANG/2016 DATED 08-07-2016) AND IN THE CASE OF AMBA RESEARCH INDIA P LTD. THUS, WE NOTICE THAT M/S ACC ENTIAL TECHNOLOGIES LTD HAS BEEN HELD TO BE NOT A GOOD COM PARABLE IN MANY CASES. ACCORDINGLY, FOLLOWING THE DECISION RENDERE D BY THE CO- ORDINATE BENCHES IN THE ABOVE SAID CASES, WE DIRECT EXCLUSION OF M/S ACCENTIA TECHNOLOGIES LTD. 15. THE COMPARABLE COMPANY M/S ICRA ONLINE LTD W AS ALSO CONSIDERED BY THE CO-ORDINATE BENCH IN THE CASE OF ACUSIS SOFTWARE INDIA P LTD (SUPRA). WE NOTICE THAT THE CO-ORDINAT E BENCH HAS FOLLOWED THE DECISION RENDERED BY MUMBAI BENCH OF T RIBUNAL IN THE CASE OF SITEL INDIA PVT LTD (ITA NO.1821/MUM/2016 D ATED 03-05- IT(TP)A NO.351/BANG/2016 ELEMENT 14 INDIA PVT. LTD., BANGALORE PAGE 12 OF 14 2019) AND HELD THAT ICRA ONLINE LTD IS NOT A GOOD C OMPARABLE. ACCORDINGLY, FOLLOWING THE DECISION RENDERED BY THE CO-ORDINATE BENCHES IN THE ABOVE SAID CASES, WE DIRECT EXCLUSIO N OF M/S ICRA ONLINE LTD. 16. THE ASSESSEE SEEKS INCLUSION OF M/S INHOUSE PRODUCTION LIMITED AND M/S MICROLAND LTD. 17. WITH REGARD TO M/S INHOUSE PRODUCTION LTD, TH E LD A.R SUBMITTED THAT THE TPO HAS REJECTED THIS COMPANY ON THE GROUND THAT THE DATA RELATING TO THE SAME WAS NOT AVAILABLE. H E SUBMITTED THAT THE ABOVE SAID OBSERVATION OF THE TPO IS AGAINST TH E FACTS AVAILABLE ON RECORD. HE SUBMITTED THAT THE DATA RELATING TO THIS COMPANY HAS BEEN FILED BY THE ASSESSEE. IN FACT, THE LD DRP HA S EXAMINED THE ANNUAL REPORT OF THIS COMPANY AND OFFERED ITS COMME NTS BY OBSERVING THAT THIS COMPANY HAS INCURRED EXPENSES OF RS.4.77 CRORES IN FOREIGN CURRENCY AS PURCHASE OF DATA BASE, WHICH MAKES THIS COMPANY UNCOMPARABLE. THE LD A.R SUBMITTED THAT THE TAX AU THORITIES HAVE NOT PROPERLY EXAMINED THE DETAILS OF THIS COMPANY A ND ACCORDINGLY PRAYED THAT THIS COMPANY SHOULD BE CONSIDERED AS GO OD COMPARABLE. 18. THE LD D.R SUBMITTED THAT THIS COMPANY MA Y BE RESTORED TO THE FILE OF TPO FOR EXAMINING IT AFRESH. 19. WE HEARD THE PARTIES ON THIS ISSUE AND PER USED THE RECORD. SINCE THE ASSESSEE HAS SUBMITTED THAT THE ANNUAL RE PORT OF THIS COMPANY IS AVAILABLE ON RECORD AND SINCE THE LD DRP HAS ALSO EXAMINED THE ANNUAL REPORT, THE TPO WAS NOT CORRECT ON FACTS IN OBSERVING THAT THE DATA ARE NOT AVAILABLE. IT IS T HE SUBMISSION OF THE ASSESSEE THAT THIS COMPANY IS COMPARABLE WITH THE A SSESSEE AND IT HAS NOT BEEN PROPERLY EXAMINED BY LD DRP. ACCORDIN GLY, WE RESTORE IT(TP)A NO.351/BANG/2016 ELEMENT 14 INDIA PVT. LTD., BANGALORE PAGE 13 OF 14 THIS ISSUE TO THE FILE OF AO/TPO FOR EXAMINING THIS COMPARABLE COMPANY AFRESH. 20. WITH REGARD TO M/S MICROLAND LIMITED, THE LD A.R SUBMITTED THAT THE SEGMENTAL DETAILS OF THIS COMPANY IS AVAIL ABLE, BUT THE TAX AUTHORITIES HAVE CONSIDERED THE FINANCIAL RESULTS A T ENTITY LEVEL AND ACCORDINGLY REJECTED THIS COMPANY. HE SUBMITTED TH AT THE SEGMENTAL RESULTS RELATING TO ITES SERVICES SHOULD BE COMPARE D WITH THE ASSESSEE COMPANY. 21. WE HEARD LD D.R, WHO SUPPORTED THE ORDER PA SSED BY LD DRP. HAVING REGARD TO THE SUBMISSION OF THE ASSESSEE THA T THE SEGMENTAL RESULTS IS REQUIRED TO BE COMPARED WITH THE ASSESSE E COMPANY, WE ARE OF THE VIEW THAT THIS ISSUE ALSO REQUIRES FRESH EXAMINATION AT THE END OF THE AO/TPO. ACCORDINGLY WE RESTORE THIS COM PANY ALSO TO THEIR FILE FOR EXAMINING IT AFRESH. 22. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 16 TH SEPT, 2020 SD/- (GEORGE GEORGE K. ) JUDICIAL MEMBER SD/- (B.R. BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED 16 TH SEPT, 2020. VG/SPS IT(TP)A NO.351/BANG/2016 ELEMENT 14 INDIA PVT. LTD., BANGALORE PAGE 14 OF 14 COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.