DCIT, New Delhi V. M/s. Rayban Sun Optics India Ltd, Gurgaon

ITA 4203/DEL/2010

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 8231 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 7 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-04-2016
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 13-04-2016
• Assessment Year: 2004-2005
• Appeal Filed On: 10-09-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: DEEPAK CHOPRA MS RASHI KHANNA; NEHA SINGH S
• Keywords: Business income; Transfer pricing; International transaction

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-1 : NEW DELHI BEFORE SHRI R.S. SYAL, AM AND SHRI C.M. GARG, JM ITA NO.4203/DEL/2010 ASSESSMENT YEAR : 2004-05 DCIT, CIRCLE 15(1), CR BUILDING, IP ESTATE, NEW DELHI. VS. RAYBAN SUN OPTICS INDIA LTD., 7 TH FLOOR, DLF BLDG., NO.9, TOWER-B, PHASE-III, DLF CYBER CITY, GURGAON. PAN: AABCR5209G (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI DEEPAK CHOPRA, MS RASHI KHANNA & MS NEHA SINGH, ADVOCATES DEPARTMENT BY : SHRI HEMANT GUPTA, SR. DR DATE OF HEARING : 13.04.2016 DATE OF PRONOUNCEMENT : 19.04.2016 ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER PASSED BY THE CIT(A) ON 30.6.2010 IN RELATION TO THE ASSESSME NT YEAR 2004-05. ITA NO.4203/DEL/2010 2 2. THE ONLY ISSUE RAISED IN THIS APPEAL IS AGAINS T THE DELETION OF ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IN RESPEC T OF TWO INTERNATIONAL TRANSACTIONS. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE, AN INDIAN COMPANY, IS HELD 44.15% BY BAUSCH & LOMB INDIAN HOL DINGS INC., USA, WHICH, IN TURN, IS INDIRECTLY HELD 100% OF LUXOTTIC A SPA, ITALY. THE ASSESSEE IS PRIMARILY ENGAGED IN THE BUSINESS OF MA NUFACTURING, IMPORTING AND SELLING OF SUNGLASSES AND PRESCRIPTION FRAMES I N INDIA BESIDES EXPORTING SOME FINISHED FRAMES TO LUXOTTICA GROUP. THE ASSESSEE REPORTED SIX INTERNATIONAL TRANSACTIONS IN FORM NO. 3CEB CLA SSIFIED INTO THREE CATEGORIES, NAMELY, CLASS I, CLASS II AND CLASS III . THE TRANSACTIONAL NET MARGIN METHOD (TNMM) WAS APPLIED IN RESPECT OF TRAN SACTIONS FALLING IN CLASS I AND CLASS II AND THE COMPARABLE UNCONTROLLE D PRICE (CUP) METHOD IN RESPECT OF TRANSACTION FALLING IN CLASS III. ON A REFERENCE MADE BY THE ASSESSING OFFICER (AO) TO THE TRANSFER PRICING OFFI CER (TPO) FOR DETERMINING THE ARMS LENGTH PRICE (ALP) OF THE INT ERNATIONAL TRANSACTIONS, THE LATTER TOOK UP TRANSACTIONS FALLING UNDER CLASS I, ON WHICH THE ASSESSEE ITA NO.4203/DEL/2010 3 ADOPTED PROFIT LEVEL INDICATOR (PLI) OF OPERATING P ROFIT/TOTAL COST (OP/TC) AND COMPUTED THE SAME AT 17.87%, AS AGAINS T AVERAGE NET PROFIT MARGIN OF COMPARABLES AT 6.23%. THAT IS HOW, IT WA S SHOWN THAT THESE INTERNATIONAL TRANSACTIONS WERE AT ALP. THE TPO DI D NOT ACCEPT APPLICATION OF THE TNMM AS THE MOST APPROPRIATE MET HOD BY OBSERVING THAT THERE WERE TRANSACTIONS BOTH OF PURCHASE AND S ALE, NAMELY, IMPORT OF RAW MATERIAL, COMPONENTS AND SEMI FINISHED GOODS, I MPORT OF CAPITAL GOODS AND EXPORT OF SEMI FINISHED GOODS. IN HIS OPINION, THE OPERATING PROFIT MARGIN FROM THE INTERNATIONAL TRANSACTION PER SE WAS NOT IDENTIFIABLE. HE OPINED THAT AGGREGATION OF ALL THE INTERNATIONAL TR ANSACTIONS BY THE ASSESSEE WAS NOT APPROPRIATE INASMUCH AS CONTROLLED TRANSACT IONS COULD BE AGGREGATED WITH CONTROLLED TRANSACTIONS ALONE AND U NCONTROLLED TRANSACTIONS WITH UNCONTROLLED TRANSACTIONS. HE HELD THAT THERE WAS NO PROVISION UNDER WHICH AGGREGATION OF CONTROLLED TRANSACTIONS WITH U NCONTROLLED TRANSACTIONS WAS PERMISSIBLE. HE, THEREFORE, TREATED CUP AS THE MOST APPROPRIATE METHOD FOR INTERNATIONAL TRANSACTIONS UNDER CLASS I . HE PROCEEDED TO DETERMINE THE ALP OF ONE OF THE INTERNATIONAL TRANS ACTIONS UNDER CLASS I, NAMELY, IMPORT OF RAW MATERIALS, COMPONENTS AND S EMI FINISHED GOODS ITA NO.4203/DEL/2010 4 WITH TRANSACTED VALUE OF RS.2,54,95,801/-, WITHOUT QUESTIONING THE ALP OF THE OTHER THREE INTERNATIONAL TRANSACTIONS UNDER TH IS CLASS. GOING WITH THE FIRST INTERNATIONAL TRANSACTION OF `IMPORT OF RAW M ATERIALS, COMPONENTS AND SEMI FINISHED GOODS, THE TPO NOTICED THAT AN ORDER DATED 26.8.2004 WAS PASSED BY THE ASSISTANT COMMISSIONER OF CUSTOMS, WH EREIN SUCH IMPORTS OF RAW MATERIAL, COMPONENTS AND SEMI FINISHED GOODS WERE EXAMINED IN DETAIL. IT WAS NOTICED FROM SUCH ORDER THAT THE AS SESSEE SUBMITTED BEFORE THE ASSISTANT COMMISSIONER OF CUSTOMS THAT THE RAW MATERIAL IMPORTED BY IT FROM ITS AE WAS, IN TURN, PURCHASED BY THE AE FR OM OTHER PARTIES AND : THE IMPORTS WERE MADE AT SUBSTANTIALLY HIGHER PRIC ES THAN THE PRICE AT WHICH THE AE HAS PURCHASED THE RAW MATERIAL. IT WA S, THUS, OBSERVED THAT THE RAW MATERIAL IMPORTED BY THE ASSESSEE FROM ITS AE WAS NOT MANUFACTURED BY SUCH AE, BUT, PROCURED FROM A SUPPL IER IN THE SAME GEOGRAPHICAL LOCATION I.E., ITALY ITSELF AND THEN S OLD TO THE ASSESSEE AT A HIGHER PRICE. HE INFERRED FROM THIS THAT THE COMPAR ABLE UNCONTROLLED PRICE OF THE IMPORTS MADE BY THE ASSESSEE WAS AVAILABLE. ON BEING CALLED UPON TO EXPLAIN ITS STAND ON THE APPLICATION OF CUP AND TREATING THE TRANSACTION OF PURCHASE BY THE AE AS A COMPARABLE TRANSACTION, THE ASSESSEE PUT FORTH ITA NO.4203/DEL/2010 5 THAT THE THIRD PARTY SUPPLIER PRICES DID NOT CONSTI TUTE A VALID CUP BECAUSE THERE WERE SEVERAL DIFFERENCES IN THE THIRD PARTY S UPPLIER PRICES VIS--VIS THE PRICES CHARGED FROM IT. THESE DIFFERENCES WERE EXPL AINED, BEING, A TIME GAP BETWEEN THE THIRD PARTY SUPPLYING GOODS TO THE ASSE SSEES AE AND, IN TURN, THE ASSESSEE IMPORTING THEM FROM ITS AE. IN THIS REGARD, IT WAS SUBMITTED THAT THE RAW MATERIALS WERE PURCHASED BY ITS AE FRO M THIRD PARTIES DURING THE PERIOD DECEMBER, 2001 TO MAY, 2002 AND IMPORTS WERE MADE BY THE ASSESSEE DURING THE PERIOD APRIL, 2003 TO MARCH, 20 04. THE OTHER DISTINGUISHING FEATURE POINTED OUT BY THE ASSESSEE WAS THAT ITS AE WAS MAKING BULK PURCHASES, THEREBY AVAILING HUGE VOLUME DISCOUNTS. STILL ANOTHER DISTINGUISHING FEATURE WAS PUT ACROSS THAT THE DETAILS OF THIRD PARTY RAW MATERIAL PURCHASE PRICES, SUBMITTED BEFORE THE CUSTOMS AUTHORITIES, WERE ON A SAMPLE BASIS. IN THE LIGHT OF THE ABOVE DISTINGUISHING FEATURES, IT WAS ARGUED BEFORE THE TPO THAT THERE WAS NO INTERNA L CUP AVAILABLE TO BENCHMARK THE INTERNATIONAL TRANSACTION OF IMPORT O F RAW MATERIAL/COMPONENTS FROM GROUP COMPANIES. THE TPO D ID NOT ACCEPT THE ASSESSEES CONTENTIONS. HE NOTICED FROM THE SUBMIS SIONS MADE BEFORE THE CUSTOMS AUTHORITIES THAT THE COMPARABLE UNCONTROLLE D PRICE OF VARIOUS ITA NO.4203/DEL/2010 6 ITEMS PURCHASED WAS ASCERTAINABLE. A CHART HAS BEE N DRAWN IN THE TPOS ORDER SHOWING AVERAGE MARGIN OF 11.75% CHARGED BY T HE AE FROM THE ASSESSEE. AS THE AE WAS NOT DOING ANY TRADING OF T HE RAW MATERIAL AND MERELY PROCURING THE SAME FOR DISTRIBUTION TO GROUP S CONCERNS, THE TPO HELD THIS MARGIN OF 11.75% AS THE BASIS FOR DETERMI NING THE ALP OF THE INTERNATIONAL TRANSACTION. BY REDUCING SUCH PROFIT MARGIN AT 11.75% FROM THE TRANSACTED VALUE OF IMPORT OF RAW MATERIAL, THE TPO DETERMINED COMPARABLE UNCONTROLLED PRICE AT RS.2,28,15,034/- A GAINST THE PURCHASE PRICE SHOWN BY THE ASSESSEE AT RS.2,54,95,801/-, TH EREBY RECOMMENDING TRANSFER PRICING ADJUSTMENT OF RS.26,80,767/-. THE ASSESSEE ASSAILED THE ASSESSMENT ORDER CONTAINING THIS ADDITION BEFORE TH E LD. CIT(A), WHO DELETED THE ADDITION BY ACCEPTING THE ASSESSEES CO NTENTION THAT THE PERCENTAGE VARIATION COMPUTED BY THE TPO WAS NOT ON ACCOUNT OF MARGIN CHARGED BY THE AE ON SALE TO THE ASSESSEE, BUT, TOW ARDS THE WEIGHTED AVERAGE PRICING METHODOLOGY FOLLOWED BY THE AE AND THE SAME BEING FURTHER SUPPORTED BY A CERTIFICATE RECEIVED FROM LU XOTTICA SPA, ITALY, CONFIRMING THAT NO MARK-UP WAS CHARGED ON RAW MATER IAL AND COMPONENTS PURCHASED BY THE ASSESSEE. ERGO, HE HELD THAT THE TPOS CONCLUSION THAT ITA NO.4203/DEL/2010 7 THE AE EARNED AVERAGE MARGIN OF 11.75% ON SALE OF R AW MATERIAL AND COMPONENTS ETC. TO THE ASSESSEE WAS NOT JUSTIFIED, WHICH RESULTED INTO ERASING THE ADDITION . THE REVENUE IS AGGRIEVED AG AINST THE DELETION OF ADDITION. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS NOTICED THAT THE ASSESSEE HAS DRAWN UP ITS ACCOUNTS ON ENTITY LEVEL WITHOUT THERE BEING ANY SEPARATE AC COUNTS FOR CLASS I, CLASS II AND CLASS III INTERNATIONAL TRANSACTIONS. IT IS ONLY FOR THE PURPOSE OF DETERMINING THE ALP OF THESE INTERNATIONAL TRANSACT IONS THAT THE ASSESSEE SPLIT UP COMMON EXPENSES/INCOMES INTO THESE THREE C LASSES. IN DOING SO, THE ASSESSEE BENCHMARKED ALL THE INTERNATIONAL TRAN SACTIONS UNDER CLASS I AS PER THE TNMM BY SHOWING THAT ITS PLI OF 17.87% WAS BETTER THAN 6.23% OF COMPARABLES. THE TPO HAS DISPUTED ONLY IM PORT OF RAW MATERIALS, COMPONENTS AND FINISHED GOODS FROM THE INTERNATIONAL TRANSACTIONS UNDER CLASS I AND DETERMINED ITS ALP B Y APPLYING THE CUP METHOD. ITA NO.4203/DEL/2010 8 5. THE FIRST ISSUE IS ASCERTAINING THE MOST AP PROPRIATE METHOD ON IMPORT OF RAW MATERIALS ETC. THERE IS HARDLY ANY NEED TO E MPHASIZE THAT THE CUP IS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF PURCHASE OR SALE OF GOODS OR SERVICES BECAUSE IT SEEKS TO COMPARE TH E EXACT PRICE CHARGED OR PAID RATHER THAN THE PROFIT RATE. OPERATING PROFIT UNDER TNMM IS AFFECTED BY SEVERAL FACTORS, SOME OF WHICH MAY SIGNIFICANTLY IMPACT THE DETERMINATION OF ALP WHILE OTHERS MAY NOT. THUS, I F SOME DIRECT COMPARABLE UNCONTROLLED INSTANCE OF PURCHASE OR SAL E OF SIMILAR GOODS OR SERVICES IS AVAILABLE, THEN, CUP SERVES AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF SUCH AN INTERNATIONAL TRANSA CTION. ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE DISPUTE IS ONLY QUA THE DETERMINATION OF ALP OF THE INTERNATIONAL TRANSACTI ON OF IMPORT OF RAW MATERIALS, COMPONENTS AND SEMI FINISHED GOODS UNDE R CLASS I TRANSACTIONS. IT IS OBVIOUS THAT IF SOME COMPARABLE UNCONTROLLED INSTANCES CAN BE FOUND, THEN, THERE CAN BE NO OTHER METHOD MORE APPROPRIATE THAN THE CUP METHOD FOR DETERMINING THE ALP OF SUCH IMPORT OF GOODS ETC . AS THE LD. CIT(A) HAS ALSO UPHELD THE APPLICATION OF CUP AS THE MOST APPROPRIATE METHOD, WHICH ASPECT HAS NOT BEEN CHALLENGED BY THE ASSESSE E, WE HOLD THAT THE ITA NO.4203/DEL/2010 9 TPO WAS RIGHT IN APPLYING THE CUP METHOD FOR DETERM INING THE ALP OF THE INTERNATIONAL TRANSACTION OF IMPORT OF RAW MATERIAL S, COMPONENTS AND SEMI FINISHED GOODS. 6. NOW, TURNING TO THE APPLICATION OF THE CUP MET HOD, WE FIND THAT THE LD. CIT(A) HAS DELETED THE ADDITION BY SIMPLY ACCEPTING THE ASSESSEES CONTENTION THAT THE PERCENTAGE VARIATION COMPUTED B Y THE TPO WAS NOT ON ACCOUNT OF MARGIN CHARGED BY THE AE ON SALE TO THE ASSESSEE, BUT, DUE TO WEIGHTED AVERAGE PRICE METHODOLOGY FOLLOWED BY THE AE. THIS IS IN COMPLETE CONTRAST TO WHAT THE ASSESSEE ARGUED BEFOR E THE CUSTOMS AUTHORITIES, NAMELY, THAT: THE IMPORTS WERE MADE AT SUBSTANTIALLY HIGHER PRICES THAN THE PRICE AT WHICH THE AE HAS PURCHASED THE RAW MATERIAL. THE LD. CIT(A) WAS SWAYED BY THE ASSESSEES SUBMISSION WITHOUT RECONCILING THE CONFLICTING STANDS OF THE ASSESSEE TAKEN BEFORE THE CUSTOMS AUTHORITIES ON ONE HAND AND THAT TAKEN BEFORE HIM ABOUT THE WEI GHTED AVERAGE PRICE METHODOLOGY INDICATING NO MARGIN CHARGED BY THE AE ON THE SALE TO THE ASSESSEE ON THE OTHER HAND. WE CANNOT COUNTENANCE THE VIEW POINT OF THE LD. CIT(A) IN DELETING THE ADDITION ON THIS COUNT. ITA NO.4203/DEL/2010 10 7. AT THE SAME TIME, WE FIND THAT THE TPO HAS TA KEN ASSISTANCE FROM THE ORDER OF THE CUSTOMS AUTHORITIES, DURING WHICH PROC EEDINGS THE ASSESSEE CONTENDED THAT THE IMPORTS WERE MADE AT SUBSTANTIAL LY HIGHER PRICES THAN THE PRICE AT WHICH THE AE HAD PURCHASED THE RAW MAT ERIAL. THE TPO SOUGHT DETAILS FROM THE ASSESSEE WHICH DIVULGED THA T THE AE CHARGED AVERAGE MARGIN OF 11.75% ON THE GOODS SUPPLIED TO T HE ASSESSEE. IT IS WITH THIS APPLICATION OF AVERAGE PROFIT RATE OF 11.75% T HAT THE TPO HAS COMPUTED TRANSFER PRICING ADJUSTMENT OF RS.26,80,76 7/-. IN ORDER TO EVALUATE THE ACTION OF THE TPO, IT WOULD BE BEFITTI NG TO TAKE NOTE OF THE MANDATE OF RULE 10B(1)(A) WHICH PRESCRIBES THE METH OD FOR COMPUTATION OF THE ALP UNDER THE CUP METHOD AS UNDER : - (A) COMPARABLE UNCONTROLLED PRICE METHOD, BY WHICH , (I) THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFERRED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS IDENTIFIED ; (II) SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFEREN CES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UN CONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANS ACTIONS, WHICH COULD MATERIALLY AFFECT THE PRICE IN THE OPEN MARKET ; (III) THE ADJUSTED PRICE ARRIVED AT UNDER SUB-CLAUS E (II) IS TAKEN TO BE AN ARMS LENGTH PRICE IN RESPECT OF THE PROPERTY TR ANSFERRED OR SERVICES PROVIDED IN THE INTERNATIONAL TRANSACTION ; ITA NO.4203/DEL/2010 11 8. SUB-CLAUSE (I) OF 10B(1)(A) PROVIDES FOR IDENTIF YING THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFERRED IN A COMPARABLE UNCONTROLLED TRANSACTION. UNDER SUB-CLAUSE (II), THE PRICE IDENTIFIED UNDER S UB-CLAUSE (I) IS ADJUSTED TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE INT ERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS. SUCH ADJUSTED PRICE ARR IVED AT UNDER SUB-CLAUSE (II) BECOMES ALP OF THE INTERNATIO NAL TRANSACTION OF PROPERTY TRANSFERRED AS PER SUB-CLAUSE (III). WHEN WE ESPOUSE THE FACTS OF THE INSTANT CASE, IT IS FOUND THAT THE TPO HAS PROC EEDED TO DETERMINE THE ALP UNDER CUP METHOD BY CONSIDERING THE TRANSACTION BETWEEN THE ASESSEES AE IN ITALY AND THIRD PARTY ALSO IN ITALY . SUCH A GEOGRAPHICAL DIFFERENCE, WHERE IN BOTH THE BUYER AND SELLER ARE FOREIGN PARTIES, CANNOT CONSTITUTE A `COMPARABLE UNCONTROLLED TRANSACTION, MORE SO, WHEN THE ASSESSEE ITSELF HAS BEEN TREATED AS A TESTED PARTY . AN EXTERNAL COMPARABLE UNCONTROLLED TRANSACTION WILL EXIST WHEN SIMILAR GO ODS ARE PURCHASED BY SOME ANOTHER INDIAN PARTY FROM A NON-AE. SIMILARLY , SOME INTERNAL COMPARABLE UNCONTROLLED TRANSACTION WILL EXIST WHEN THE ASSESSEE PURCHASES SIMILAR GOODS FROM A NON-AE. THE ESSENCE OF THE MATTER IS THAT A PRE-TRANSACTION OF PURCHASE BY THE FOREIGN AE FRO M ANOTHER UNRELATED ITA NO.4203/DEL/2010 12 FOREIGN PARTY CANNOT CONSTITUTE AN INTERNAL CUP FOR DETERMINING THE ALP OF THE SAME GOODS PURCHASED BY AN INDIAN ASSESSEE FROM ITS AE. 9. FURTHER, WHAT THE TPO HAS DONE IS TO APPLY TH E ALLEGED PROFIT RATE OF 11.75% CHARGED BY THE AE FROM THE ASSESSEE FOR COMP UTING THE ALP. THE CUP METHOD CONTEMPLATES COMPARING THE ADJUSTED COMP ARABLE UNCONTROLLED PRICE WITH THE PRICE CHARGED OR PAID I N AN INTERNATIONAL TRANSACTION. THE TPO HAS NOT COMPARED ANY PRICE CH ARGED IN A COMPARABLE UNCONTROLLED TRANSACTION WITH THE PRICE PAID BY THE ASSESSEE. IT IS AXIOMATIC THAT THE CUP METHOD REQUIRES COMPARISON OF THE PRIC E CHARGED IN A COMPARABLE UNCONTROLLED TRANSACTION AND THEN MAKING TRANSFER PRICING ADJUSTMENT FOR THE DIFFERENCE, IF REQUIRED. IT DOES NOT SAY THAT THE INTERNATIONAL TRANSACTION MUST BE ON COST TO COST B ASIS AND NO PROFIT ELEMENT CAN BE CHARGED. IN OUR CONSIDERED OPINION, PROFIT MARGIN, IF ANY CHARGED BY THE AE FROM THE ASSESSEE CANNOT BE CONSIDERED FO R DETERMINING THE ALP OF A COMPARABLE UNCONTROLLED TRANSACTION. EVEN IF T HE AE CHARGES A REASONABLE MARK-UP ON ITS CHEAP COMPARABLE PURCHASE PRICE, THE PRICE SO CHARGED WILL BE ALP SO LONG SUCH PRICE CHARGED IS L ESS THAN WHAT OTHER ITA NO.4203/DEL/2010 13 COMPARABLE COMPANIES CHARGE IN UNCONTROLLED TRANSAC TIONS. HAVING SET ASIDE THE VIEW POINT OF THE LD. CIT(A) IN DELETING THE ADDITION AND APPROVING IN PRINCIPLE, THE ADOPTION OF THE CUP MET HOD AND THE FURTHER FACT THAT THE TPO HAS NOT APPLIED THE CUP METHOD IN THE MANNER AS DISCUSSED ABOVE, WE ARE OF THE CONSIDERED OPINION T HAT IT WOULD BE IN THE FITNESS OF THINGS IF THE MATTER IS RESTORED TO THE FILE OF AO/TPO FOR DETERMINING THE ALP OF THIS INTERNATIONAL TRANSACTI ON UNDER THE CUP METHOD AS PER LAW. WE ORDER ACCORDINGLY. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF BEING H EARD IN SUCH FRESH PROCEEDINGS. 10. NOW, WE TAKE UP THE SOLITARY INTERNATIONAL TRAN SACTION OF IMPORT OF FINISHED GOODS WITH VALUE OF RS.5,30,25,583 UNDER CLASS II. THE ASSESSEE BENCHMARKED THIS INTERNATIONAL TRANSACTION UNDER TH E TNMM BY SHOWING ITS PROFIT MARGIN AT 5.61% AS AGAINST 2.37% OF COMP ARABLES. THE TPO DID NOT APPROVE APPLICATION OF TNMM FOR BENCHMARKING TH IS INTERNATIONAL TRANSACTION ON THE GROUND THAT IT WAS A TRANSACTION OF IMPORT OF FINISHED GOODS FROM ITS AE, WHICH WERE SOLD AS SUCH WITHOUT ANY VALUE ADDITION BY ITA NO.4203/DEL/2010 14 THE ASSESSEE IN THE CAPACITY OF A DISTRIBUTOR. HE A GAIN WENT THROUGH THE ORDER DATED 26.8.2004 PASSED BY THE CUSTOMS AUTHORI TIES, DURING THE COURSE OF WHICH IT WAS ARGUED BY THE ASSESSEE THAT THE PRICE TO THE ASSESSEE WAS HIGHER THAN THE PRICE TO THE UNRELATED PARTIES. THE ASSESSEE HAD ALSO CONTENDED BEFORE THE CUSTOMS AUTHORITIES THAT IT SO LD THE IMPORTED SUNGLASSES, ETC. TO THE DEALERS/RETAILERS AT ALMOST 50% OF THE MRP, WHEREAS THE DEALERS/RETAILERS WERE SELLING AT 40% MARK UP. FROM THIS SUBMISSION MADE BEFORE THE CUSTOMS AUTHORITIES, THE TPO INFERR ED THAT THE TRANSACTION OF IMPORT OF FINISHED GOODS FROM AE WAS NOT AT ALP AS THE ASSESSEE ITSELF ADMITTED THAT THE PRICE CHARGED BY ITS AE WAS HIGHE R THAN WHAT THE AE WAS CHARGING FROM OTHER UNRELATED INDIAN ENTERPRISES. C ONSIDERING THESE AND HOST OF OTHER FACTORS, WHICH WERE NOTED WHILE NOT A PPROVING TNMM FOR CLASS I TRANSACTIONS, THE TPO HELD THAT THE TNMM CO ULD NOT BE ACCEPTED AS THE MOST APPROPRIATE METHOD. HE CHANGED THE MOS T APPROPRIATE METHOD TO THE RESALE PRICE METHOD (RPM) FOR DETERMINING TH E ALP OF THIS INTERNATIONAL TRANSACTION OF `IMPORT OF FINISHED GO ODS. IN DETERMINING THE ALP UNDER THE RPM, THE TPO NOTICED THAT THE ASSESSE E CONTENDED BEFORE THE CUSTOMS AUTHORITIES THAT THE GROSS MARGIN OF DO WN THE LINE DISTRIBUTORS ITA NO.4203/DEL/2010 15 WAS 100% ON COST OR 50% IF COMPUTED ON SALES. HE, T HEREFORE, ADOPTED NORMAL GROSS PROFIT MARGIN UNDER RULE 10B(1)(B)(II) AT 50% AND COMPUTED THE ALP OF THE IMPORT OF FINISHED GOODS AT RS.4.24 CRORE, THEREBY PROPOSING TRANSFER PRICING ADJUSTMENT OF RS.105,57, 553/- AS UNDER:- TOTAL SALES OF TRADED GOODS MADE DURING THE YEAR : RS.13,02,21,637/- GP ON SALES AS COMPUTED BY THE ASSESSEE : 37.57% VALUE OF THE IMPORT OF FINISHED GOODS : RS.5,30,25,583/- RE-SALE PRICE COMPUTED ON THE SAME GP MARGIN : RS.8,49,36,061/- ARMS LENGTH GP ON SALE : 50% ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION @ 50% OF RESALE PRICE : RS.4,24,68,030/- 11. THE AO MADE THIS ADDITION. WHEN CHALLENGED, TH E LD. CIT(A) DELETED THE SAME BY ACCEPTING THE ASSESSEES CONTE NTION THAT THE SO-CALLED ALP MARGIN (I.E. 50% ON SALES EARNED BY DOWN THE LI NE DISTRIBUTORS) WAS NOT THE ACTUAL GROSS MARGIN OF THE DISTRIBUTORS AS THEY ALSO PAID VAT/SALES TAX AT AROUND 12.5% ON SALE TO END CUSTOMER, THEREB Y BRINGING THEIR GROSS MARGIN OF 37.50%, WHICH WAS IN CLOSE VICINITY TO TH E ASSESSEES GROSS ITA NO.4203/DEL/2010 16 PROFIT MARGIN OF 37.57%. THE REVENUE IS AGGRIEVED AGAINST DELETION OF THIS ADDITION. 12. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL. THE FIRST ISSUE IS DETERMINATION OF THE MOST APPROPRIATE METHOD, BEING EITHER THE TNMM OR RPM. THE INTERNATIONAL TR ANSACTION UNDER CONSIDERATION IS `IMPORT OF FINISHED GOODS WHICH H AVE BEEN SOLD BY THE ASSESSEE IN INDIA AS SUCH, WITHOUT ANY VALUE ADDITI ON. THE TPO APPLIED THE RPM, WHICH HAS NOT BEEN DISTURBED BY THE LD. CIT(A) AND FURTHER THERE IS NO CHALLENGE TO IT BY THE ASSESSEE. IN OUR CONSIDE RED OPINION, THE RPM IS QUITE A USEFUL METHOD WHERE THE GOODS PURCHASED BY THE INDIAN AE ARE SOLD WITHOUT DOING ANY VALUE ENAHNCEMENT. WE, THER EFORE, APPROVE THE APPLICATION OF RPM AS THE MOST APPROPRIATE METHOD. 13. NOW COMING TO THE MERITS, WE FIND THAT THE L D. CIT(A) CHOSE TO DELETE THE ADDITION BY SIMPLY ACCEPTING THE ASSESSEES CON TENTION THAT THE VAT/SALES TAX WAS AROUND 12.5% ON SALE TO END CUSTO MER AND THUS THE ACTUAL ADJUSTED GROSS MARGIN OF DISTRIBUTORS SHOULD BE CONSIDERED AS DOWN TO 37.5%. WHEN WE TALK OF PROFIT MARGIN, THE SAME COVERS ALL THE COSTS. ITA NO.4203/DEL/2010 17 VAT/SALES TAX IS AN INDIRECT TAX AND UNLIKE INCOME- TAX IS A CHARGE AGAINST INCOME AND NOT APPROPRIATION OF INCOME. ITS INCLUS ION FIRSTLY IN THE SALE PRICE AND THEN CLAIM OF DEDUCTION, NEUTRALIZES BOTH THE SIDES. THE NET RESULT IS THAT ITS SIMULTANEOUS RECEIPT AND PAYMENT DO NOT IMPACT THE ULTIMATE PROFIT MARGIN SO AS TO WARRANT A SEPARATE ADJUSTMENT ON ACCOUNT OF ITS PAYMENT ALONE. THE LD. CIT(A) FAILED TO TAKE NO TE OF THIS IMPORTANT ASPECT AND WENT ON TO CONSIDER ONLY THE PAYMENT PAR T IN ISOLATION OF THE RECEIPT PART OF VAT/SALES TAX. HE FURTHER FAILED TO CONSIDER THE ASSESSEES CONTENTION BEFORE THE CUSTOMS AUTHORITIES THAT: TH EY HAVE SUBMITTED THE DETAILS OF THESE IMPORTS AND THAT THIS SHOWS THAT T HE PRICE TO THE INDIAN COMPANY IS HIGHER THAN THE PRICE TO THE UNRELATED P ARTIES. AS SUCH, WE ARE CONSTRAINED TO DISAPPROVE THE VIEW TAKEN BY THE LD. CIT(A) IN DELETING THE ADDITION ON THIS SLIPPERY REASONING. 14. NOW, LET US EXAMINE WHETHER THE DETERMINATION O F THE ALP BY THE TPO UNDER RPM IS JUSTIFIED. IN THIS REGARD, WE FIN D THAT RULE 10B(1)(B), DEALING WITH THE MECHANISM FOR DETERMINATION OF THE ALP UNDER THIS METHOD, READS AS UNDER :- ITA NO.4203/DEL/2010 18 (B) RESALE PRICE METHOD, BY WHICH, (I) THE PRICE AT WHICH PROPERTY PURCHASED OR SERVICES OBTAINED BY THE ENTERPRISE FROM AN ASSOCIATED ENTERPRISE IS RES OLD OR ARE PROVIDED TO AN UNRELATED ENTERPRISE, IS IDENTIFIED ; (II) SUCH RESALE PRICE IS REDUCED BY THE AMOUNT OF A NORMAL GROSS PROFIT MARGIN ACCRUING TO THE ENTERPRISE OR TO AN UNRELATE D ENTERPRISE FROM THE PURCHASE AND RESALE OF THE SAME OR SIMILAR PROP ERTY OR FROM OBTAINING AND PROVIDING THE SAME OR SIMILAR SERVICES, IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS ; (III) THE PRICE SO ARRIVED AT IS FURTHER REDUCED BY THE EXPENSES INCURRED BY THE ENTERPRISE IN CONNECTION WITH THE P URCHASE OF PROPERTY OR OBTAINING OF SERVICES ; (IV) THE PRICE SO ARRIVED AT IS ADJUSTED TO TAKE IN TO ACCOUNT THE FUNCTIONAL AND OTHER DIFFERENCES, INCLUDING DIFFERE NCES IN ACCOUNTING PRACTICES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFE CT THE AMOUNT OF GROSS PROFIT MARGIN IN THE OPEN MARKET ; (V) THE ADJUSTED PRICE ARRIVED AT UNDER SUB-CLAUSE (IV) IS TAKEN TO BE AN ARMS LENGTH PRICE IN RESPECT OF THE PURCHASE OF THE PROPERTY OR OBTAINING OF THE SERVICES BY THE ENTERPRISE FROM TH E ASSOCIATED ENTERPRISE; 15. A PERUSAL OF THE ABOVE MANDATE TRANSPIRES THAT SUB-CLAUSE (I) OF RULE 10B(1)(B) PROVIDES THAT THE PRICE AT WHICH THE GOOD S PURCHASED BY THE ENTERPRISE FROM ITS AE IS RESOLD IS IDENTIFIED. SUC H RESALE PRICE UNDER SUB- CLAUSE (II) IS REDUCED BY THE AMOUNT OF NORMAL GROS S PROFIT MARGIN FROM THE PURCHASE AND RESALE OF THE SAME GOODS IN A COMPARAB LE UNCONTROLLED TRANSACTION. THE PRICE SO ARRIVED AT IS REVISED UN DER SUB-CLAUSE (III) BY THE ITA NO.4203/DEL/2010 19 EXPENSES INCURRED BY THE ASSESSEE AND THE PRICE SO ARRIVED AT IS ADJUSTED TO TAKE INTO ACCOUNT THE FUNCTIONAL AND OTHER DIFFEREN CES BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONT ROLLED TRANSACTION. THE ADJUSTED PRICE SO ARRIVED UNDER SUB-CLAUSE (IV) IS TAKEN AS ALP IN RESPECT OF PURCHASE OF GOODS FROM THE AE. WE FIND THAT SUB -CLAUSE (II) TALKS OF REDUCING THE RESALE PRICE OF THE ENTERPRISE BY THE AMOUNT OF A NORMAL GROSS PROFIT MARGIN ARISING FROM THE PURCHASE AND RESALE OF SIMILAR GOODS IN A COMPARABLE UNCONTROLLED TRANSACTION . THE TERM UNCONTROLLED TRANSACTION HAS BEEN DEFINED IN RULE 10A(A) TO MEAN: A TRANSACTION BETWEEN ENTERPRISES OTHER THAN ASSOCIATED ENTERPRISES WHETHER RESIDENT OR NON- RESIDENT. WHEN WE SUBSTITUTE THE DEFINITION OF THE TERM UNCONTROLLED TRANSACTION IN RULE 10B(1)(B)(II), THE RELEVANT PA RT WOULD READ THAT THE RESALE PRICE OF THE ENTERPRISE IS REDUCED BY THE AM OUNT OF NORMAL GROSS PROFIT MARGIN ACCRUING IN A COMPARABLE TRANSACTION BETWEEN ENTERPRISES OTHER THAN THE ASSOCIATED ENTERPRISES . THE CRUX OF THE MATTER IS THAT ALP OF AN INTERNATIONAL TRANSACTION OF PURCHASE OF GOOD S IS ALWAYS DETERMINED ON THE BASIS OF THE GROSS PROFIT MARGIN ON THE RESA LE PRICE CHARGED IN A COMPARABLE TRANSACTION BETWEEN ENTERPRISES OTHER TH AN THE ASSOCIATED ITA NO.4203/DEL/2010 20 ENTERPRISES. IT CANNOT BE ANYTHING ELSE. ONLY WHE N SOME GROSS PROFIT MARGIN IN COMPARABLE TRANSACTION BETWEEN TWO INDEPE NDENT ENTERPRISES IS AVAILABLE, SUB-CLAUSE (II) OF RULE 10B(1)(B) WORKS. IN OTHER WORDS, THE EXISTENCE OF A COMPARABLE UNCONTROLLED TRANSACTION GIVING GROSS PROFIT MARGIN ACCRUING FROM PURCHASE AND RESALE OF SIMILAR GOODS IS AN ESSENTIAL CONDITION FOR DETERMINING THE ALP UNDER RPM. ADVER TING TO THE FACTS OF THE INSTANT CASE, WE FIND FROM THE CALCULATION OF T HE ALP UNDER RPM AS EXTRACTED ABOVE THAT THE TPO HAS TAKEN ARMS LENGTH MARGIN OF GP ON SALES AT 50%, WHICH HAS BEEN CONSIDERED FOR DETERMINING T HE ALP OF THIS INTERNATIONAL TRANSACTION AT RS.4.24 CRORE LEADING TO TRANSFER PRICING ADJUSTMENT OF RS.1.05 CRORE. THIS 50% ARMS LENGTH GROSS PROFIT MARGIN ON SALES HAS BEEN TAKEN BY THE TPO ON THE BASIS OF WHA T THE ASSESSEE STATED BEFORE THE CUSTOMS AUTHORITIES IN A GENERALIZED MAN NER. THE TPO HAS NOT BROUGHT ON RECORD ANY COMPARABLE UNCONTROLLED CASE AND THUS HAS NOT EVENTUALLY DETERMINED GROSS PROFIT MARGIN FROM PURC HASE AND RESALE OF SIMILAR GOODS IN A COMPARABLE UNCONTROLLED TRANSACT ION. IN THE ABSENCE OF AVAILABILITY OF ANY COMPARABLE UNCONTROLLED TRANSAC TION, WE CANNOT APPROVE THE ACTION OF THE AO IN MAKING SUCH AN ADDITION, AS THE SAME HAS NOT BEEN ITA NO.4203/DEL/2010 21 DONE IN THE MANNER PRESCRIBED UNDER THE RULE. AS WE HAVE UPHELD THE APPLICATION OF RPM AS THE MOST APPROPRIATE METHOD A ND FOUND THE VIEW POINT OF THE LD. CIT(A) IN DELETING ADDITION TO BE UNTENABLE, WE CONSIDER IT EXPEDIENT TO SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF TPO/AO FOR A FRESH DETERMINATION OF THE ALP OF THIS TRANSACTION UNDER THE RPM IN THE MANNER DISCUSSED HEREINABOVE. 16. TO SUM UP, WE SET ASIDE THE IMPUGNED ORDER DE LETING THE ADDITIONS MADE BY THE AO ON ACCOUNT OF TRANSFER PRICING ADJUS TMENT IN CLASS I AND II INTERNATIONAL TRANSACTIONS AND SEND THE MATTER BACK TO THE TPO/AO FOR DETERMINING AFRESH THE ALP OF CLASS I INTERNATIONAL TRANSACTION UNDER THE CUP METHOD AND OF CLASS II INTERNATIONAL TRANSACTIO N UNDER THE RPM AS PER LAW. 17. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 19.04.201 6. SD/- SD/- [C.M. GARG] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 19 TH APRIL, 2016. ITA NO.4203/DEL/2010 22 DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.