USG India Pvt. Ltd., Gurgaon V. ACIT, New Delhi

ITA 3697/DEL/2017

• Counselvise Citation: [2021] 109 COUNSELVISE.COM (IT) 8354 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 7 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-01-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2012-2013
• Appeal Filed On: 07-06-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: YATIKA ARORA
• Keywords: Transfer pricing; International transaction; Working capital adjustments; Set aside
• Section: 143(3)

Judgement Text

PAGE | 1 INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-2: NEW DELHI BEFORE SHRI KULDIP SINGH, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER (THROUGH VIDEO CONFERENCING) ITA NO.3697/DEL/2017 (ASSESSMENT YEAR: 2012-13) USG INDIA PVT. LTD, UNIT NO. 610-13, 6 TH FLOOR, VIPUL TRADE CENTER, SOHNA ROAD, GURGAON PAN: AABCU1151E VS. ACIT, CIRCLE-27(1), NEW DELHI (APPELLANT) (RESPONDENT) ASSESSEE BY : MS. YATIKA ARORA, ADV REVENUE BY: SHRI SARABJEET SINGH, SR. DR DATE OF HEARING 16/10/2020 DATE OF PRONOUNCEMENT 15/01/2021 O R D E R PER PRASHANT MAHARISHI, A. M. 1. THIS APPEAL IS FILED BY THE USG INDIA PRIVATE LIMITED AGAINST THE ORDER PASSED BY THE LD ACIT, CIRCLE-27(1), NEW DELHI DATED 25.01.2017 PASSED U/S 143(3) READ WITH SECTION 144C(13) OF THE ACT DETERMINING THE TOTAL INCOME OF THE ASSESSEE AT A LOSS OF RS. 1,48,81,535/- AGAINST THE RETURN INCOME OF THE ASSESSEE AT A LOSS OF RS. 2,59,14,450/-. THE ONLY DISPUTE IN THIS APPEAL IS WITH RESPECT TO THE ADJUSTMENT MADE BY THE LD TPO OF RS. 1,07,62,915/- IN CONFIRMITY WITH THE DIRECTION OF THE LD DRP. THE ASSESSEE HAS FILED SEVERAL GROUNDS OF APPEAL HOWEVER THE ONLY DISPUTE IS WITH RESPECT TO THE ABOVE ADJUSTMENT. 2. THE ASSESSEE RAISED THE FOLLOWING GROUNDS OF APPEAL:- TRANSFER PRICING-RS. 10,762,915 1. ON FACTS AND IN LAW, THE HONBLE DISPUTE RESOLUTION PANEL (HONBLE DRP), THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 27(1), NEW DELHI [LEARNED ASSESSING OFFICER ('LD. AO)] (ALONG WITH THE LEARNED TRANSFER PRICING OFFICER (DEPUTY COMMISSIONER OF INCOME TAX, TPO - 3(3)( 1)) (LD. TPO) - UNDER REFERENCE FROM THE LD. AO) ERRED IN MAKING THE ADJUSTMENT OF RS. 10,762,915 TO THE TOTAL PAGE | 2 INCOME OF THE APPELLANT ON ACCOUNT OF THE ALLEGED DIFFERENCE IN THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF IMPORT OF FINISHED GOODS UNDER THE PROVISIONS OF SECTION 92CA(4) OF THE INCOME TAX ACT, 1961 (THE ACT). 2. ON FACTS AND IN LAW, THE HONBLE DRP, LD. AO AND LD. TPO WHILE REJECTING THE RESALE PRICE METHOD (RPM) ERRED IN : 2.1 DISREGARDING THE FACTS OF THE CASE AS THE APPELLANT OPERATES AS A ROUTINE DISTRIBUTOR AND SELLS PRODUCTS IMPORTED FROM ITS ASSOCIATED ENTERPRISE (AE) WITHOUT ANY VALUE ADDITION, AND THUS, IS A FIT CASE FOR APPLICATION OF RPM 2.2 DISREGARDING THE PROVISIONS OF RULE 10C OF THE INCOME TAX RULES, 1962 (THE RULES). 2.3 DISREGARDING THE FACT THAT THE SELECTION OF TNMM AS THE MOST APPROPRIATE METHOD BY THE APPELLANT IN ITS TRANSFER PRICING DOCUMENTATION CANNOT ACT AS ESTOPPEL IN THE APPELLANT SELECTING THE RPM AS THE MOST APPROPRIATE METHOD DURING THE COURSE OF TP PROCEEDINGS FOR BENCHMARKING THE INTERNATIONAL TRANSACTION OF IMPORT OF FINISHED GOODS. 2.4 DISREGARDING VARIOUS JUDICIAL PRONOUNCEMENTS BY THE HONBLE HIGH COURT AND HONBLE BENCHES OF THE INCOME TAX APPELLATE TRIBUNAL WITH RESPECT TO GROUNDS 2.1 AND 2.3 ABOVE. 3. ON FACTS AND IN LAW, THE HONBLE DRP, LD. AO AND LD. TPO WHILE SELECTING TNMM AS THE MOST APPROPRIATE METHOD, ERRED IN: 3.1 DISREGARDING THE FRESH SEARCH FOR COMPARABLES CARRIED OUT BY THE APPELLANT USING A SCIENTIFIC APPROACH, TO BE USED IF TNMM WAS TO BE SELECTED AS THE MOST APPROPRIATE METHOD. 3.2 DISREGARDING THE FACT THAT EVEN IF TNMM WAS TO BE ADOPTED AS MOST APPROPRIATE METHOD FOR BENCHMARKING THE APPELLANTS INTERNATIONAL TRANSACTION OF IMPORT OF FINISHED GOODS, APPROPRIATE ADJUSTMENTS SHOULD BE PERFORMED TO ENSURE COMPARABILITY VIS-A-VIS THE COMPARABLE COMPANIES. 4 ON FACTS AND IN LAW, THE LD. AO AND LD. TPO HAS GROSSLY ERRED IN COMPUTING INCORRECT WORKING CAPITAL ADJUSTED NET PROFIT MARGIN OF THE COMPARABLES AND THEREBY ERRED IN COMPUTING INCORRECT TRANSFER PRICING ADJUSTMENT. 5 ON FACTS AND IN LAW, THE LD. AO ERRED IN LEVYING INTEREST UNDER SECTION 234B, 234C AND 234D OF THE ACT. 3. BRIEF FACTS OF THE CASE SHOWS THAT THE ASSESSEE IS A PART OF UNITED STATES GYPSUM (USG) CORPORATION. ASSESSEE IS A COMPANY ENGAGED IN TRADING OF COMPREHENSIVE RANGE OF BUILDING MATERIALS AND TO PROVIDE SERVICES TO ARCHITECTS AND OTHER PROFESSIONALS AND REMODELING OF BUILDING AND COMPLEXES. IT IS A SUBSIDIARY OF USG ASIA PACIFIC PTE. LIMITED. SINGAPORE. PAGE | 3 4. IT FILES ITS RETURN OF INCOME ON 19.11.2012 DETERMINING LOSS OF RS. 2,59,14,450/-. THE ASSESSEE ENTERED INTO AN INTERNATIONAL TRANSACTION OF IMPORT OF FINISHED GOODS OF RS. 6,31,11,109/-. THE ASSESSEE BENCHMARKED IT BY USING TRANSACTIONAL NET MARGIN METHOD AS MOST APPROPRIATE METHOD AND ADOPTED PLI OF OPERATING PROFIT/ SALES. THE ASSESSEE PLI IS (-) 8.29%. THE ASSESSEE HAS SELECTED 2 COMPARABLES AND FOUND THEIR MARGIN AT 16.43 %. SUBSEQUENTLY ASSESSEE ON 28.12.2015 REQUESTED THE TPO TO USE RESALE PRICE METHOD AS THE MOST APPROPRIATE METHOD BY USING PLI OF GROSS PROFIT. ASSESSEE SUBMITTED SET OF 4 COMPARABLES WHICH HAS MARGIN 10.859 %. 5. THE LD TPO CONSIDERED THE ABOVE REQUEST OF THE ASSESSEE AT PARA 6.2 OF HIS ORDER AS UNDER:- 6.2 COMMENTS OF THE TPO RESALE PRICE METHOD VS. TRANSACTIONAL NET MARGIN METHOD THE REPLY OF THE ASSESSEE HAS BEEN CONSIDERED. IT IS SEEN THAT IN ITS TP STUDY, THE ASSESSEE HAD ITSELF ADOPTED TNMM. HOWEVER, CONSIDERING THAT IT HAD MADE A LOSS AND IT WAS NOT ABLE TO JUSTIFY ITSELF ADEQUATELY IN THE TP STUDY ITSELF! THE ASSESSEE HAS CHANGED ITS MAM TO RPM DURING THE TP PROCEEDINGS ITSELF RPM METHOD IS APPLIED WHERE AN ENTERPRISE PURCHASES A PROPERTY M FROM AN ASSOCIATED ENTERPRISE AND THEN RESELLS THE PROPERTY OR THE SERVICES FROM AN ASSOCIATED ENTERPRISE ENTERPRISE. A PERUSAL OF THE RULE 10B(1)(B) WHICH LAYS DOWN THE STEPS FOR THE APPLICATION OF THIS METHOD SHOWS THAT THE MOST IMPORTANT THING FOR PROPER COMPARABILITY ANALYSIS UNDER THIS METHOD IS THAT ADJUSTMENT FOR ALL THE DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, WHICH MAY HAVE A MATERIAL EFFECT ON THE AMOUNT OF THE GROSS PROFIT, SHOULD HE MADE. FOR THE APPLICABILITY OF THIS METHOD, THEREFORE, ONE SHOULD ASCERTAIN THE FUNCTIONS PERFORMED BY THE TESTED PARTY BEFORE IT RESOLD THE PROPERTY OR THE SERVICES AND ALSO THE COST INCURRED FOR PERFORMING THESE FUNCTIONS. THE GROSS PROFIT MARGIN EARNED BY THE/TESTED PARTY CAN THEN HE COMPARED WITH THE GROSS MARGIN OF A COMPARABLE WHICH HAS PERFORMED SIMILAR FUNCTIONS AND HAS CALCULATED THE GROSS MARGIN AFTER CONSIDERING THE COSTS OF THOSE FUNCTIONS. THE GROSS THINGS TO BE CHECKED IN THE CASE OF COMPARABLES BEFORE CONSIDERING THEIR GROSS PROFIT MARGINS CAN HE SUMMARISED AS UNDER: A) WHILE LESS PRODUCT COMPARABILITY MAY HE REQUIRED IN USING THE RESALE PRICE METHOD AS COMPARED TO CUP, IT REMAINS THE CASE THAT CLOSER COMPARABILITY OF PRODUCTS WILL PRODUCE A BETTER RESULT. FOR EXAMPLE, WHERE THERE IS A HIGH-VALUE OR RELATIVELY UNIQUE INTANGIBLE INVOLVED IN THE TRANSACTION, PRODUCT PAGE | 4 SIMILARITY MAY ASSUME GREATER IMPORTANCE AND PARTICULAR ATTENTION SHOULD HE PAID TO IT TO ENSURE THAT THE COMPARISON IS VALID. B) WHEN THE RESALE PRICE MARGIN USED IS THAT OF AN INDEPENDENT ENTERPRISE IN A COMPARABLE TRANSACTION, THE RELIABILITY OF THE RESALE PRICE METHOD MAY BE AFFECTED IF THERE ARE MATERIAL DIFFERENCES. IN THE WAYS THE ASSOCIATED ENTERPRISES AND INDEPENDENT ENTERPRISES CARRY OUT THEIR BUSINESSES. SUCH DIFFERENCES COULD INCLUDE THOSE THAT EFFECT THE LEVEL (IT COST'S TAKEN INTO ACCOUNT (E,G- THE DIFFERENCES COULD INCLUDE THE EFFECT OF MANAGEMENT EFFICIENCY ON LEVELS AND RANGES OF INVENTORY MAINTENANCE), WHICH MAY WELL HAVE AN IMPACT ON THE PROFITABILITY OF AN ENTERPRISE BUT. WHICH MAY NOT NECESSARILY A I LOCI THE PRICE AT WINCH A BUYS OR SELLS ITS GOODS OR SERVICES IN THE OPEN MARKET. THESE TYPES OF CHARACTERISTICS SHOULD HE ANALYZED IN DETERMINING WHETHER AN UNCONTROLLED TRANSACTION IS COMPARABLE FOR PURPOSES OF APPLYING THE RESALE PRICE METHOD. IN THE CASE OF PRODUCTS DISTRIBUTION, MARKETING EXPENSES PLAY A MAJOR ROLE. THUS THE PIECE CHARGED FOR PRODUCTS INCLUDES THE PREMIUM FOR MARKETING. THESE MARKETING EXPENSES CL DIE R FROM PRODUCT TO PRODUCT WITHIN THE FORMULATIONS, ALSO DEPENDS ON MARKET SHARE OF THE PRODUCT ETC. THESE DIFFERENCES IN MARKETING EFFORTS AMONG THE COMPARABLES AS WELL AS WITH THE TAXPAYER DISTORTS THE GROSS MARGINS AS THESE MARGINS ALSO INCLUDE THE MARKETING EFFORT WHICH IS IN BUILT M THE SALE PRICE. C. A RESALE PRICE MARGIN IS MORE ACCURATE WHERE IT IS REALIZED WITHIN A SHORT FAME OR THE RESELLERS PURCHASE OF THE GOODS, THE MORE LIME THAT, ELAPSES BETWEEN THE ORIGINAL PURCHASE AND RESALE THE MORE LIKELY IT IS THAT OTHER FACTORS CHANGES IN THE MM KEF M RATES OF EXCHANGE, IN COSTS, ETC; -- WILL NEED TO BE TAKEN INTO ACCOUNT IN ANY COMPARISON. THUS LEVELS OF INVENTORIES AND COST INVOLVED IN KEEPING INVENTORIES HAVE TO BE ADJUSTED WHICH MAY NOT HE POSSIBLE BASED ON THE INFORMATION AVAILABLE IN THE PUBLIC DOMAIN. D) IT SHOULD BE EXPECTED THAT THE AMOUNT OF THE RESALE PRICE MARGIN WILL BE INFLUENCED BY THE LEVEL OF ACTIVITIES PERFORMED BY THE RESELLER. THIS LEVEL OF ACTIVITIES CAN RANGE WIDELY FROM THE CASE WHERE THE RESELLER PERFORMS ONLY MINIMAL SERVICES AS A FORWARDING AGENT TO THE CASE WHERE THE RESELLER TAKES ON THE FULL RISK OF OWNERSHIP TOGETHER WITH THE FULL RESPONSIBILITY FOR AND THE RISKS INVOLVED IN ADVERTISING, MARKETING, DISTRIBUTING AND GUARANTEEING THE GOODS, FINANCING STOCKS, AND OTHER CONNECTED SERVICES. THUS, MAKING ADJUSTMENTS FOR THESE DIFFERENCES BECOMES DIFFICULT IN THE CASE OF COMPARABLE COMPANIES CONSIDERED BY THE TPO BASED ON THE INFORMATION AVAILABLE IN THE PUBLIC DOMAIN. PAGE | 5 E) THE RESALE PRICE MARGIN SHOULD ALSO BE EXPECTED TO VARY ACCORDING TO WHETHER THE RESELLER HAS THE EXCLUSIVE RIGHT TO RESELL THE GOODS. THE VALUE TO BE ATTRIBUTED TO SUCH AN EXCLUSIVE RIGHT WILL DEPEND TO SOME EXTENT UPON ITS GEOGRAPHICAL SCOPE AND THE EXISTENCE AND RELATIVE COMPETITIVENESS OF POSSIBLE SUBSTITUTE GOODS, THE ARRANGEMENT MAY BE VALUABLE TO BOTH THE SUPPLIER AND THE RESELLER IN AN ARM'S LENGTH TRANSACTION. FOR INSTANCE, IT MAY STIMULATE THE RESELLER TO GREATER EFFORTS TO SELL THE SUPPLIER'S PARTICULAR LINE OF GOODS, ON THE OTHER HAND, SUCH AN ARRANGEMENT MAY PROVIDE THE RESELLER WITH A KIND OF MONOPOLY WITH THE RESULT THAT THE RESELLER POSSIBLY CAN REALIZE A SUBSTANTIAL TURN OVER WITHOUT GREAT: EFFORT. ACCORDINGLY, THE EFFECT OF THIS FACTOR UPON THE APPROPRIATE RESALE PRICE MARGIN MUST BE EXAMINED WITH CARE IN EACH CASE. F. IF THE TESTED PARTY IS DEALING IN BRANDED GOODS, THE COMPARABLES SHOULD ALSO BE DEALING IN BRANDED PRODUCTS. THE FUNCTIONS PERFORMED, WHICH AFFECT THE RESALE PRICE MARGIN, SHOULD ALSO HE SIMILAR OR IT SHOULD BE POSSIBLE TO MAKE ADJUSTMENTS FOR SUCH DIFFERENCES. AN APPROPRIATE RESALE PRICE MARGIN IS EASIEST: TO DETERMINE WHERE THE RESELLER DOES NOT ADD SUBSTANTIALLY TO THE VALUE OF THE PRODUCT. THUS WHILE MAKING A COMPARISON THE PRESENCE OF SUCH FUNCTIONS AND RISKS IN THE CASE OF THE COMPARABLES AND THE AVAILABILITY OF DATA FOR COSTS OF SUCH FUNCTIONS IS REQUIRED FOR COMPUTATION OF THE GROSS MARGIN, WHERE THERE IS A CHAIN OF DISTRIBUTION OF GOODS, IT NEEDS TO BE ASCERTAINED EXACTLY WHICH FUNCTIONS ARE BEING PERFORMED BY EACH ENTITY IN THAT CHAIN. FUNCTIONS GENERALLY PERFORMED BY THE RESELLERS: ADVERTISING; MARKETING; DISTRIBUTION AND GUARANTEEING THE GOODS; FINANCING THE STOCKS AND WARRANTY RISK. IT IS ALSO TO BE SEEN WHETHER THE COSTS OF THESE FUNCTIONS ARE ACCOUNTED FOR IN THE COST OF GOODS OR NOT, IF THE COSTS ARE ACCOUNTED FOR AS PART OF THE COST OF GOODS, NO SEPARATE ADJUSTMENTS ARC REQUIRED AS THE GROSS PROFIT WORKED OUT WOULD INCLUDE THE COST OF FUNCTIONS ALSO. HOWEVER, IF THE COSTS OF AFORESAID FUNCTIONS ARE ACCOUNTED FOR AS PART OF OPERATING EXPENSES, THERE WILL BE A DISTORTION IN THE G.P MARGIN AND IF; HAS TO BE CORRECTED. H) THE ACCOUNTING TREATMENT OF THE TAXPAYER AND THE COMPARABLE COMPANIES IN RESPECT OF CERTAIN DIRECT EXPENSES MAY DISTORT THE GROSS MARGIN. FOR EXAMPLE, DISCOUNT GIVEN TO THE CUSTOMER OR DISCOUNT AVAILED FROM SUPPLIERS MAY BE SHOWN SEPARATELY OR SALES / PURCHASES MAY HE REDUCED PAGE | 6 DIRECTLY, IN SUCH CASES, DISCOUNTS IN THE CASE OF CORN PARABLE COMPANIES, WHICH MAY HE SHOWN SOME LIMES UNDER THE HEAD 'TELLING EXPENSES' HAVE TO HE REDUCED FROM THE PURCHASES. SUCH INFORMATION MAY NOT HE AVAILABLE IN THE PUBLIC DOMAIN. I) IT IS ALSO LIKELY IN SOME CAUSES THAT A FUNCTION IS PERFORMED BY THE SUPPLIER AND NOT BY THE DISTRIBUTOR AND IN SUCH A CASE, THE PURCHASE PRICE WILL GET ENHANCED IN COMPARISON TO A CASE WHERE THE DISTRIBUTOR IS PERFORMING THAT FUNDI CM SO, THE FUNCTIONAL PROFILE OF THE SUPPLIER IS ALSO IMPORTANT. J) APART FRONT COSTS OF THE FUNCTIONS, THERE ARE CERTAIN COSTS LIKE DISCOUNT AND INSURANCE WHICH ARE RELATED TO THE RESALE AND WHICH MAY OR MAY NOT BE ACCOUNTED FOR AS COST OF GOODS SOLD. THE TREATMENT OF SUCH COSTS IS, THEREFORE, ALSO MATERIAL IN THE COMPUTATION OF THE GROSS PROFIT ACCOUNTING CONSISTENCY IS, THEREFORE, TO BE ENSURED, FOR COMPUTING THE GROSS PROFIT MARGINS AND IT MUST BE SHOWN THAT SAME TYPES OF COSTS HAVE BEEN CONSIDERED FOR COMPUTING THE GROSS PROFIT. K) IT IS ALSO SEEN- FROM THE PROFIT & LOSS ACCOUNT THAT THERE ARE CERTAIN EXPENSES LIKE SELLING AND DISTRIBUTION EXPENSES THAT ARE DIRECTLY RELATED WITH THE SELLING AND DISTRIBUTION .FUNCTION OF THE ASSESSEE. HOWEVER, NEITHER IN THE CASE OF DIE ASSESSEE NOR IN THE CASE OF COMPARABLES, THE SAME HAVE BEEN CONSIDERED FOR COMPARABILITY. THEREFORE, THE MANNER, IN WINCH THE PPM HAS BEEN APPLIED, IS NOT GIVING THE TRUE PICTURE OF THE COMPARABILITY ANALYSIS. IF AT ALL THE RPM METHOD IS TO BE ADOPTED, THESE FACTORS CANNOT HE IGNORED AT ALL. FOR PROPER COMPARABILITY IN THE LIGHT OF ABOVE MENTIONED ASPECTS OF BUSINESS OF A DISTRIBUTOR, IT IS AMPLY CLEAR THAT COMPLETE INFORMATION ABOUT BUSINESS PROFILE AND FINANCIAL DATA IS AVAILABLE IN RESPECT OFALL THE PARTIES WHICH ARE EXAMINED AS COMPARABLES, FT IS NOTED THAT, THESE BASIC REQUIREMENTS ARE NOT BEING FULFILLED IN THE SET OF COMPARABLES CHOSEN BY THE ASSESSEE. IN FACT, ALL OF THEM FOIL THE TRADING FILTER ITSELF. IN TERMS OF PRODUCT COMPARABILITY, THE KIND OF PRODUCT COMPARABILITY THAT IS NEEDED IN RPM IS ALSO MISSING IN THE COMPARABLES OFFERED. FURTHERMORE, THE ASSESSEE HAS NOT BEEN ABLE TO SHOW HOW IT HAS WORKED OUT THE RPM MARGINS OF ITSELF AND THE COMPARABLES, DUE TO DIFFERENT, METHODS OF ACCOUNTING ADOPTED BY DIFFERENT COMPANIES, IT; IS OFTEN NOT POSSIBLE TO VERY CLEARLY ASCERTAIN THE GROSS MARGINS BECAUSE VERY OFTEN CERTAIN DIRECT COSTS ARE NOT CLEARLY IDENTIFIED AND ACCOUNTED FOR SIMILARLY ACROSS COMPANIES. IN VIEW OF THESE ISSUES, RESALE PRICE METHOD IS REJECTED AS THE MOST APPROPRIATE METHOD AND TNMM IS CONSIDERED AS MOST APPROPRIATE METHOD AS OTHER METHODS LIKE CUP, CPM ARE NOT APPLICABLE TO THE FACTS OF THE CASE IN FACT, THE STRENGTH OF TNMM TAKES CARE OF ALL THE ABOVE LIMITATIONS. THIS ALSO CLEAR FROM PARA 3.27 OF THE OECD GUIDELINES REPRODUCED BELOW:- PAGE | 7 3.27 ONE STRENGTH OF THE TRANSACTIONAL NET MARGIN METHOD IS THAT NET MARGINS (E.G. RETURN ON ASSETS, OPERATING INCOME TO SALES, AND POSSIBLY OTHER MEOSURES'OF NET PROFIT) ORE LESS AFFECTED BY TRANSACTIONAL DIFFERENCES THAN IS THE CASE WITH PRICE, OS USED IN THE CUP METHOD> THE NET MARGINS ALSO MAY BE MORE TOLERANT TO SOME FUNCTIONAL DIFFERENCES BETWEEN THE CONTROLLED AND UNCONTROLLED TRANSACTIONS THAN GROSS PROFIT MARGINS. DIFFERENCES IN THE FUNCTIONS PERFORMED BETWEEN ENTERPRISES ARE OFTEN REFLECTED IN VARIATIONS IN OPERATING EXPENSES. CONSEQUENTLY, ENTERPRISES MAY HAVE A WIDE RANGE OF GROSS PROFIT MARGINS BUT STILL EARN BROADLY SIMILAR LEVELS OF NET PROFIT THE TNMM TESTS THE ARM'S LENGTH CHARACTER OF TRANSFER PRICES IN THE CONTROLLED TRANSACTIONS BY COMPARING THE OPERATING PROFITS EARNED BY UNCONTROLLED PARTIES ENGAGED IN SIMILAR BUSINESS ACTIVITIES. THIS METHOD MEASURES THE TOTAL RETURN DERIVED FROM THE CONTROLLED TAXPAYER'S DEFINED BUSINESS ACTIVITY FOR WHICH RELIABLE DATA INCORPORATING THE CONTROLLED TRANSACTION UNDER REVIEW IS AVAILABLE. THE STRENGTH OF THIS METHOD IS THAT NET MARGINS ARE LESS AFFECTED BY TRANSACTIONAL DIFFERENCES AND ALSO SOME FUNCTIONAL DIVERSITY BETWEEN THE CONTROLLED AND UNCONTROLLED PARTIES IS ACCEPTABLE. IN THE LIGHT OF THE ABOVE DISCUSSION, THIS OFFICE INTENDS TO USE TNMM, AS THE MOST APPROPRIATE METHOD WITH GP/SALES AS PLI THE IN THIS CASE, MOREOVER, ASSESSEE COMPANY HAS ITSELF USED TNMM AS APPROPRIATE METHOD FOR BENCHMARKING OF ITS INTERNATIONAL TRANSACTIONS IN ITS TP STUDY SUBMITTED BY THE ASSESSEE. 6. THUS, THE LD TPO HELD THAT TNMM SHOULD BE THE MOST APPROPRIATE METHOD. THE LD TPO FURTHER SELECTED 4 COMPARABLES WHOSE MARGIN WAS 4.70 % COMPUTED THE MARGIN OF THE ASSESSEE (-) 26.76% AND PROPOSED AN ADJUSTMENT OF RS. 15,662,156/- BY PASSING AN ORDER DATED 20/01/2016 U/SECTION 92CA(3) OF THE ACT. CONSEQUENTLY DRAFT ASSESSMENT ORDER WAS PASSED ON 18.03.2016. 7. ASSESSEE FILED OBJECTION BEFORE THE LD DRP WHO PASSED DIRECTION ON 22/02/2016. AS PER THOSE DIRECTION WITH RESPECT TO THE MOST APPROPRIATE METHOD, IT SOUGHT REMAND REPORT OF THE AO/ TPO AND THEREAFTER HELD THAT RESALE PRICE METHOD IS NOT THE MOST APPROPRIATE METHOD AND AS THE ASSESSEE ITSELF HAS ADOPTED TRANSACTIONAL NET MARGIN METHOD IN ITS TP STUDY THIS OBJECTION WAS REJECTED. WITH RESPECT TO THE COMPARABLE THE LD DRP ISSUED CERTAIN DIRECTIONS TO THE LD TPO AND CONSEQUENTLY 4 COMPARABLE COMPANIES WERE FOUND TO BE PROPER COMPARABLES AND WORKING CAPITAL ADJUSTMENT WAS IMPUTED THEREFORE THE MARGIN OF THE COMPARABLE PAGE | 8 COMPANIES WAS FOUND TO BE (-) 5.14 % AND THEREAFTER THE ADJUSTMENT WAS MADE OF RS. 1,07,62,915. ASSESSMENT U/ SECTION 143(3) OF THE ACT WAS PASSED ON 25/01/2017 DETERMINING NET LOSS OF THE ASSESSEE OF RS. 1,48,81,535/-. 8. THE LD AR SUBMITTED THAT THE MAJOR BONE OF CONTENTION IN THIS APPEAL IS THE MOST APPROPRIATE METHOD. ASSESSEE THOUGH PREPARED ITS T P STUDY REPORT ADOPTING TNMM AS MOST APPROPRIATE METHOD HOWEVER DURING TP ASSESSMENT IT REQUESTED FOR ADOPTING RPM AS MOST APPROPRIATE METHOD. HE SUBMITTED THAT APPELLANT PERFORM ALL ROUTINE FUNCTIONS SUCH AS INVENTORY MANAGEMENT, SELLING AND DISTRIBUTION FUNCTIONS, ADDITION OF NEW CUSTOMERS, DETERMINATION OF SALE PRICE AND ALSO ASSUME ROUTINE RISK OF THE BUSINESS WHICH ARE SIMILAR TO A NORMAL DISTRIBUTOR. HE SUBMITTED THAT THE REVENUE AUTHORITIES DID NOT FIND RESALE PRICE METHOD AS SUITABLE FOR THE REASON THAT IT LACKS PRODUCT AND FUNCTIONAL COMPARABILITY. HE SUBMITTED THAT UNDER RPM FUNCTIONAL COMPARISON IS OF PARAMOUNT IMPORTANCE. HE FURTHER SUBMITTED THAT THE COMPARABLE SELECTED BY THE TPO ARE ALSO PERFORMING SIMILAR FUNCTIONS AS THAT OF APPELLANT. HE SUBMITTED THAT THE REVENUE AUTHORITIES STATED THAT RESALE PRICE METHOD IS MORE ACCURATE WHEN PRICE IS RELEASED WITHIN THE SHORT TIME OF RESALE AFTER PURCHASE OF THE GOODS. HE SUBMITTED THAT FOR RECOVERY OF THE SALES AMOUNT THERE COULD BE PROPER ADJUSTMENT IN THE WORKING CAPITAL. HE SUBMITTED THAT LD DRP HAS ITSELF COMPUTED THE WORKING CAPITAL ADJUSTMENT EVEN OTHERWISE. HE SUBMITTED THAT THE TRANSACTIONAL NET MARGIN METHOD CANNOT BE THE MOST APPROPRIATE METHOD FOR THE RISK THAT APPELLANT OPERATE IN A UNIQUE INDUSTRY WHICH HAS A LONG GESTATION PERIOD, FURTHER IMPUGNED YEAR IS THE FIRST FULL YEAR OF OPERATION. WITH RESPECT TO THE MOST APPROPRIATE METHOD IT WAS SUBMITTED THAT THE USG BORAL IS THE SISTER CONCERN OF THE APPELLANT WHICH IS ALSO ENGAGED IN THE DISTRIBUTION OF SIMILAR PRODUCTS IN INDIA WHERE THE REVENUE HAS ACCEPTED THE RESALE PRICE METHOD AS THE MOST APPROPRIATE METHOD. IT WAS FURTHER STATED THAT IN CASE OF ONE COMPANY RPM IS ACCEPTED WHEREAS IN CASE OF THE ASSESSEE WHERE SIMILAR FUNCTIONALITY EXISTS, RPM IS REJECTED AND TNMM IS ADOPTED. HE FURTHER SUBMITTED THAT IF TNMM IS TO BE SELECTED AS THE MOST APPROPRIATE METHOD PAGE | 9 FRESH SEARCH CARRIED OUT BY THE ASSESSEE WAS WRONGLY REJECTED. HE SUBMITTED THAT THE GROSS PROFIT MARGIN OF THE COMPARABLE AFTER ADJUSTMENT OF WORKING CAPITAL IS (-) 8.87% WHEREAS THE MARGIN OF THE ASSESSEE IS 8.82 %. IN CASE OF NET PROFIT MARGIN OF THE COMPARABLES AFTER WORKING CAPITAL ADJUSTMENT IS 30.589% WHEREAS THE MARGIN OF THE ASSESSEE IS 26.76%. THEREFORE, THE TRANSACTIONS OF THE ASSESSEE EVEN OTHERWISE COMPARED AT G P RATE IS AT ARM'S LENGTH. HE FURTHER SUBMITTED THAT EVEN OTHERWISE THE COMPARABLE SELECTED BY THE TPO THE ARITHMETIC MEAN OF THE MARGIN AFTER ADJUSTMENT OF WORKING CAPITAL COMPUTED BY THE ASSESSEE IS (-)5.34% WHEREAS BY TPO SAME HAS COMPUTED AT 5.15 %., WHICH IS AN ERROR. THE ASSESSEE HAS NOT BEEN PROVIDED TO THE MARGIN COMPUTED BY THE LD TPO. 9. THE LD DR SUBMITTED THAT ASSESSEE IS A TRADER AND HAS INCURRED A MAJOR EXPENSES ON EMPLOYEES AND OTHER EXPENDITURE. HE REFERRED PAGE NO. 514 OF THE PAPER BOOK TO SHOW THE PROFIT AND LOSS ACCOUNT. HE SUBMITTED THAT THERE ARE MAJOR EXPENSES INCURRED ON THE PRODUCTS AND THEREFORE RESALE PRICE METHOD IS NOT THE MOST APPROPRIATE METHOD. HE FURTHER SUBMITTED THAT THE LD DRP AND TPO / AO HAS GIVEN COMPREHENSIVE REASON FOR ADOPTING THE TRANSACTIONAL NET MARGIN METHOD AS THE MOST APPROPRIATE METHOD. 10. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTION AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES. ADMITTEDLY IN THIS CASE THE ASSESSEE ITSELF HAS ADOPTED THE TRANSACTIONAL NET MARGIN METHOD AS THE MOST APPROPRIATE METHOD FOR BENCHMARKING ITSELF FOR INTERNATIONAL TRANSACTION BY IMPORT OF FINISHED GOODS OF RS. 6,31,11,109/-. SUBSEQUENTLY, DURING THE COURSE OF PROCEEDINGS BEFORE THE LD TPO ON 28/12/2015, ASSESSEE REQUESTED TO USE THE RESALE PRICE METHOD AND ALSO INDICATED THE PLI OF GROSS PROFIT. IT ALSO STATED THAT 4 COMPARABLE HAVING THE AVERAGE MARGIN 10.6%. LD TPO REJECTED THE SAME AND ADOPTED THE TRANSACTIONAL NET MARGIN METHOD AS THE MOST APPROPRIATE METHOD. THE LD DRP HAS ALSO STATED THAT RESALE PRICE METHOD IS NOT SUITABLE IN THE CASE OF THE ASSESSEE BECAUSE OF LACKS PRODUCTS AND FUNCTIONAL COMPARABILITY OF THE COMPARABLES. IT IS STATED THAT THE COMPARABLES CHOSEN BY THE ASSESSEE ARE ALSO FAILING TRADING FILTERS PAGE | 10 AND THEIR MAJOR SOURCE OF REVENUE ARE FROM OTHER THAN TRADING FUNCTIONS. IN CASE OF THE ASSESSEE, THE ENTIRE OPERATIONAL INCOME IS FROM TRADING ACTIVITIES. IF IN CASE OF USD BORAL, SISTER CONCERN, ASSESSEES CONTENTION IS THAT IN CASE OF THAT ASSESSEE THE LD TPO ACCEPTED THE RESALE PRICE METHOD AS THE MOST APPROPRIATE METHOD WHEREAS IN CASE OF THE ASSESSEE RPM METHOD IS NOT ACCEPTABLE. IT IS NECESSARY TO NOTE THAT IN CASE OF USG BORAL ASSESSEE ITSELF SUBMITTED TP STUDY WHERE RESALE PRICE METHOD AS THE MOST APPROPRIATE METHOD WHEREAS IN CASE OF THE ASSESSEE IN THE TRANSFER PRICING STUDY ASSESSEE REJECTED RPM IS THE MOST APPROPRIATE METHOD AND SELECTED TNMM. FURTHER, DURING THE COURSE OF HEARING BEFORE THE LD TPO ASSESSEE SUBMITTED THAT RPM SHOULD BE TAKEN AS THE MOST APPROPRIATE METHOD. IN ITS TP STUDY REPORT ASSESSEE ITSELF SUBMITTED THAT ASSESSES LACKS INFORMATION ABOUT THE OTHER COMPANIES, SO THAT COMPARABLES ARE NOT AVAILABLE IN PUBLIC DOMAIN, SO RESALE PRICE METHOD CANNOT BE THE MOST APPROPRIATE METHOD. OWING TO THIS LIMITATION, THE RPM WAS REJECTED. FURTHER IN CASE OF RESALE PRICE METHOD ONLY THE GROSS PROFIT MARGIN IS REQUIRED TO BE COMPUTED WHEREAS IN THE CASE OF THE ASSESSEE, IT HAS INCURRED SALARIES AND THE EMPLOYEES BENEFIT EXPENSES OF RS. 1.49 CRORES AND HAS INCURRED OPERATING AND OTHER EXPENSES OF RS. 1.93 CRORES OUT OF TOTAL REVENUE OF RS. 7.92 CRORES. THE ASSESSEE HAS INCURRED EMPLOYEE BENEFIT AND OTHER EXPENSES OF APPROXIMATELY RS 3.5 CRORES ON A REVENUE OF RS 7.92 CRORES. IN VIEW OF THIS, WE DID NOT FIND ANY INFIRMITY IN THE ORDER OF THE LOWER AUTHORITIES IN ADOPTING TNMM AS THE MOST APPROPRIATE METHOD. IN VIEW OF THIS GROUND NOS. 1 AND 2 OF THE APPEAL OF THE ASSESSEE ARE DISMISSED. 11. WITH RESPECT TO GROUND NO. 3 WE SET ASIDE THE WHOLE ISSUE BACK TO THE FILE OF THE LD TPO WITH A DIRECTION TO CONSIDER THE FRESH SEARCH OF THE COMPARABLES BY THE ASSESSEE. THE ASSESSEE IS DIRECTED TO SUBMIT THE COMPLETE SEARCH ALONG WITH ACCEPT/ REJECT MATRIX AND THE COMPUTATION OF THE MARGIN OF TNMM METHOD BEFORE THE LD TPO AND THE LD TPO MAY VERIFY IT AND AFTER GIVING PROPER OPPORTUNITY OF HEARING TO THE ASSESSEE MAY COMPUTE THE CORRECT MARGIN AND CONSEQUENT ADJUTSMENT. ACCORDINGLY GROUND NO. 3 AND 4 OF THE APPEAL IS ALLOWED WITH ABOVE DIRECTION PAGE | 11 12. GROUND NO. 5 IS WITH RESPECT TO THE CHARGING OF THE INTEREST WHICH IS CONSEQUENTIAL IN NATURE AND HENCE DISMISSED. 13. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED ORDER PRONOUNCED IN THE OPEN COURT ON 15/01/2021. SD/- SD/- (KULDIP SINGH) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 15/01/2021 A K KEOT COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI PAGE | 12 DATE OF DICTATION 15.01.2021 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 15.01.2021 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER 15.01.2021 DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. PS/ PS 15.01.2021 DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT 15.01.2021 DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. PS/ PS 15.01.2021 DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT 15.01.2021 DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 15.01.2021 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER