ACIT, New Delhi V. M/s. Kobelco Construction Equipment India Ltd., New Delhi

ITA 6401/DEL/2012

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 3483 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 3 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-04-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I2
• Next Hearing Date: 22-03-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 27-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: T M SHIVAKUMAR
• Keywords: Related party transaction; Business income; Transfer pricing; International transaction; Additional evidence
• Section: 143(3); 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-2: NEW DELHI BEFORE SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA NO.6401/DEL/2012 ASSESSMENT YEAR : 2008-09 ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-5(1), NEW DELHI. VS. M/S KOBELCO CONSTRUCTION EQUIPMENT INDIA LIMITED, C-20, SOUTH EXTENSION, PART-II, NEW DELHI 110 049. PAN : AACCK9469N. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI T.M. SHIVAKUMAR, CIT-DR. RESPONDENT BY : SHRI TARANDEEP SINGH, ADVOCATE. DATE OF HEARING : 22.03.2017 DATE OF PRONOUNCEMENT : 17.04.2017 ORDER PER AMIT SHUKLA, JM :- THE AFORESAID APPEAL HAS BEEN FILED BY THE REVENUE AGAINST IMPUGNED ORDER DATED 15 TH OCTOBER, 2012, PASSED BY LEARNED CIT(APPEALS)-XX, NEW DELHI, FOR THE QUANTUM OF ASSE SSMENT PASSED U/S 143(3) OF THE INCOME-TAX ACT, 1961, FOR THE ASS ESSMENT YEAR 2008-09. ITA-6401/DEL/2012 2 2. IN THE GROUNDS OF APPEAL, THE REVENUE HAS RAISED FOLLOWING GROUNDS :- 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, THE LEARNED CIT(A) ERRED IN DELETING THE ADJUSTMENT OF RS.7,33,66,467/- IN ARMS LENGTH PRICE AS PROPOSED BY THE TPO. 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) ERRED IN ACCEPTING TNMM AS THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTION. 3. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) ERRED IN ACCEPTING RPM T HE MOST APPROPRIATE METHOD WITH GP/SALES AS PLI INSTEA D OF TNMM AS DONE BY TPO DESPITE THE FACT THAT PROPER ADJUSTMENTS REQUIRED FOR THE APPLICATION OF THE METH OD WERE NOT CARRIED OUT BY THE ASSESSEE. 4. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) ERRED IN REJECTING THE COMPARABLE T&I GLOBAL AS PRODUCT SIMILARITY IS NOT VERY VITAL IN TNMM AND FUNCTIONS ARE MORE IMPORTANT. 5. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED IN ADMITTING T HE ADDITIONAL EVIDENCE WHEN ASSESSEE COULD NOT GIVE ANY SUFFICIENT CAUSE AS TO WHY HE COULD NOT FURNISHED THA T EVIDENCE DURING THE PROCEEDING BEFORE TPO IN VIOLATIO N OF RULE 46A OF THE INCOME TAX RULES. 6. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) ERRED IN GIVING DECISIO N ON THE APPLICABILITY OF CUP WHEN THERE ARE GEOGRAPHICA L DIFFERENCES. 3. THE BRIEF FACTS QUA THE ISSUE OF TRANSFER PRICIN G ADJUSTMENT ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE DIS TRIBUTION OF HEAVY MACHINES LIKE EARTHMOVING EQUIPMENT, HYDRAULI C EXCAVATORS MANUFACTURED BY ITS ASSOCIATED ENTERPRISES (AE), K OBELCO CONSTRUCTION MACHINERY COMPANY LIMITED, JAPAN. ITS PRIME ITA-6401/DEL/2012 3 ACTIVITIES INCLUDE SALE OF MACHINES; SPARE PART STO CK; AND SALES AND SERVICE OF KOBELCO HYDRAULIC EXCAVATORS. THE FUNCTI ONAL ANALYSIS CARRIED OUT BY THE ASSESSEE AS REPORTED IN TP STUDY REPORT CAN BE SUMMARISED IN THE FOLLOWING MANNER :- (I) TRADING: - (A) PURCHASE ACTIVITIES: WHEREBY THE ASSESSEE PURCH ASED PRODUCTS WITHIN GROUP COMPANIES; (B) DISTRIBUTION: THE ASSESSEE COMPANY MAINTAINS DE ALERSHIP NETWORKS, WAREHOUSES FOR THE FINISHED GOODS AND PER FORMS INVENTORY CONTROL FUNCTIONS; (C) SALES : SALE OF FINISHED GOODS DIRECTLY TO THE CUSTOMERS AT HIGH SEA SALES AND IN SOME CASES, FINISHED GOODS ARE SOL D THROUGH DEALERS. SPARE PARTS ARE PRIMARILY SOLD THROUGH DEA LERS TO THE CUSTOMERS; AND (D) THE ENTIRE INVENTORY MANAGEMENT IS THE RESPONSI BILITY OF THE ASSESSEE. (II) MARKETING AND ADMINISTRATIVE ACTIVITIES : THE ENTIRE MARKETING STRATEGY, ADVERTISEMENT ETC. FOR SALE OF GOODS ARE DONE BY THE ASSESSEE. (III) POST SALES ACTIVITIES ARE DONE BY THE ASSESSEE BUT COST IS BEING REIMBURSED BY THE AE. (IV) ASSETS : THE MANUFACTURING AND R&D IS DONE BY THE AE AND ASSESSEE, BEING A NORMAL DISTRIBUTOR, DOES NOT HAVE ANY TANGIBLE OR INTANGIBLE ASSETS. ITA-6401/DEL/2012 4 (V) RISK ANALYSIS : THE MARKET RISK IS BORNE BY THE ASSESSEE. SO FAR AS THE HIGH SEA SALES ARE CONCERNED AND WITH RE SPECT TO INDIAN OPERATIONS, THE NORMAL MARKET RISK IS ALSO ON THE A SSESSEE. THE WARRANTY/PRODUCT LIABILITY RISK IS ONLY FOR A LIMIT ED PERIOD AND THAT TOO IS REIMBURSED BY THE AE. CUSTOMER CREDIT RISK I S ALSO BORNE BY THE ASSESSEE AND ALSO THE FOREIGN EXCHANGE RISK. AL L OTHER RISK COMPLIANCE IS BORNE BY THE ASSESSEE. IN OTHER WORDS , THE RISKS UNDERTAKEN BY THE ASSESSEE ARE THE NORMAL DISTRIBUT ION RISKS WHICH ARE TAKEN BY A FULL-FLEDGED DISTRIBUTOR. 4. DURING THE YEAR, THE ASSESSEE HAD UNDERTAKEN TH E FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS AE :- NATURE OF TRANSACTION VALUE IN INR MAM PURCHASE OF FINISHED GOODS 70,78,75,417 RPM PURCHASE OF SPARE PARTS 4,62,82,136 RPM PURCHASE OF HYDRAULIC EXCAVATORS (IN THE NATURE OF FIXED ASSETS) 22,25,324 CUP REIMBURSEMENT OF EXPENSES 48,502 CUP RECOVERY OF EXPENSES 1,50,68,075 CUP IN THE TRANSFER PRICING STUDY REPORT, THE ASSESSEE HAS CHOSEN RESALE PRICE METHOD (RPM) AS THE MOST APPROPRIAT E METHOD (MAM) AND PLI WAS TAKEN AS GROSS PROFIT/OPERATING I NCOME. THE ASSESSEE HAD SHOWN GROSS MARGIN OF 14.86% AND TO BEN CHMARK THE SAID MARGIN, THE ASSESSEE HAD IDENTIFIED SEVEN COMP ARABLE COMPANIES FOR COMPARATIVE ANALYSIS AND THE AVERAGE GP MARGIN OF THE COMPARABLES WAS ARRIVED AT 16.78% BASED ON MULTI PLE YEAR DATA. SINCE THE GROSS MARGIN BY THE ASSESSEE VIS-A- VIS THE ITA-6401/DEL/2012 5 COMPARABLES WAS WITHIN ARMS LENGTH RANGE OF PLUS/M INUS 5%, HENCE, IT WAS REPORTED THAT ITS INTERNATIONAL TRANS ACTIONS ARE AT ARMS LENGTH PRICE. 5. THE LEARNED TPO, HOWEVER, REJECTED THE SELECT ION OF RPM AS MAM AND INSTEAD HELD THAT TNMM SHOULD BE ADOPTED AS MAM. WHILE REJECTING THE ASSESSEES METHOD, HE TRIED TO EXPLAIN THE CONCEPT OF RPM IN HIS ORDER FROM PAGES 12 TO 15 OF THE ORDER. HOWEVER, THE ENTIRE DISCUSSION BY THE TPO IS MERE R EPRODUCTION OF OECD GUIDELINES WHEREIN HE HAS HIGHLIGHTED THE STRE NGTHS AND WEAKNESSES OF THE RPM METHOD. HE HAS NOT ANALYZED T HE FAR ANALYSIS OF THE ASSESSEE AND THE OVERALL BUSINESS M ODEL UNDER WHICH ASSESSEE OPERATES. AT PAGE 13 OF HIS ORDER, H E ALSO MADE REFERENCE THAT THE ASSESSEE IS MAINTAINING VERY HIG H INVENTORY WHICH IS ALMOST 6.25% OF THE PURCHASES. HOWEVER, THI S OBSERVATION IS SANS ANY DATA FROM THE COMPARABLES AS TO WHETHER 6.25% INVENTORY IS VERY HIGH OR NOT. IN HIS ORDER HE HAS ALSO GONE OFF-TRACK BY NOTING THAT ASSESSEE IS A SELLER OF JEWELLERY AN D LUXURY WATCHES. THIS MERELY REFERS TO HIS CALLOUSNESS. THE TPO HAS FURTHER OBSERVE THAT THE COMPARABLES SELECTED BY THE ASSESSEE WERE HAVING DIFFERENT PRODUCT PROFILE AND THEREFORE, RPM COULD NOT BE SEL ECTED AS CORRECT METHOD IN SUCH CASE. WHILE ADOPTING TNMM, THE LEARN ED TPO HAS TAKEN THREE COMPARABLES OF THE ASSESSEE (OUT OF SEV EN SELECTED BY THE ASSESSEE), VIZ., I) CUPRUM BAGRODIA LTD.; II) G MMCO LIMITED; AND III) INDIA TECH LIMITED. APART FROM THAT, HE A LSO TOOK TWO FRESH COMPARABLES VIZ., TIL LIMITED; AND T & I GLOBAL LIM ITED. AFTER DISCUSSING THE ISSUE IN DETAIL, HE HELD THAT, FIRSTLY, RPM IS NOT THE MOST APPROPRIATE METHOD IN THE CASE OF THE ASSESSEE ; SECONDLY, ITA-6401/DEL/2012 6 TNMM SHOULD BE ADOPTED AS MAM FOR BENCHMARKING NET PROFIT MARGIN OF THE ASSESSEE; AND LASTLY, MADE AN ADJUSTMENT OF RS. 7,33,66,467/- BY TAKING THE AVERAGE MARGIN OF THE C OMPARABLES AT 6.56% AND CALCULATED THE ARMS LENGTH PRICE IN THE F OLLOWING MANNER :- CALCULATION OF ARMS LENGTH PRICE TOTAL SALES (A) 91,22,16,382 TOTAL COST (B) 92,57,41,454 OPERATING PROFIT OF THE TESTED PARTY (C=A - B) ( - ) 1,35,25,072 ARMS LENGTH MEAN MARGIN (OP/SALES) % (D) 6.56% ARMS LENGTH OPERATING PROFIT (E=D*A) 5,98,41,395 DIFFERENCE F=(E - C) 7,33,66,467 TOTAL PURCHASES OF FINIS HED GOODS MADE FROM AE (AS PER FORM 3CEB) G 70,78,75,417 ALP OF ABOVE PURCHASES (G - F) 63,45,08,950 % OF ADJUSTMENT W.R.T. TOTAL PURCHASES (F/G) 10.36% 6. BEFORE THE LEARNED CIT(A), APART FROM CONTESTING THAT THE RPM SHOULD BE THE MOST APPROPRIATE METHOD, ADDITIONAL E VIDENCE WAS SUBMITTED BY THE ASSESSEE BY WAY OF SECONDARY ANALY SIS BY GIVING CUP DATA WHICH WAS IN THE FORM OF INVOICES OF THE A E FOR SALE OF HYDRAULIC EXCAVATORS TO THE INDEPENDENT PARTIES DUR ING THE SAME FINANCIAL YEAR. IT WAS POINTED OUT THAT THE ASSESSE E HAS SOLD FIVE MODELS IN INDIA AND SAME MODELS WERE ALSO SOLD TO T HIRD PARTIES BY THE AE. THIS INFORMATION WAS ALREADY SUBMITTED BEFO RE THE TPO IN THE COURSE OF TRANSFER PRICING PROCEEDINGS. ASSESSE ES DETAIL SUBMISSION ON THE ISSUE AND REBUTTAL OF TPOS ORDER HAS BEEN ELABORATELY INCORPORATED BY THE LD. CIT(A). ITA-6401/DEL/2012 7 7. THE LEARNED CIT(A), AFTER CONSIDERING THE EN TIRE SUBMISSIONS AND MATERIAL PLACED ON RECORD, OBSERVED THAT ASSESS EE IS CLEARLY A FULL-FLEDGED DISTRIBUTOR OF EARTH MOVING EQUIPMENTS AND SOME OF THE OBSERVATIONS OF THE TPO ARE INCORRECT WHEN HE SAYS THAT ASSESSEE IS A SELLER OF JEWELLERY AND LUXURY WATCHES. THIS SHOW S THAT THE TPO HAS NOT APPLIED HIS MIND AND REJECTION OF RPM IS NO T BASED ON SOUND ANALYSIS OF FAR. THE TPO HAS NOT BROUGHT ANY E VIDENCE TO SHOW THAT THE ASSESSEE IS PERFORMING ADDITIONAL FUN CTION OTHER THAN THE DISTRIBUTION ACTIVITIES. THE ADVANTAGES OR DISA DVANTAGES OF THE METHODS GIVEN IN OECD CANNOT BE THE BASIS UNLESS IT IS ANALYZED ON FACTS. AFTER HOLDING THAT SINGLE YEAR DATA SHOUL D BE USED AND ALSO ANALYZING THE COMPARABLES OF THE ASSESSEE AS W ELL AS THE TPO, HE HELD THAT RPM WAS THE CORRECT METHOD ON THE FACT S OF THE ASSESSEES CASE AND OUT OF THE TWO COMPARABLES SELE CTED BY THE TPO, HE INCLUDED ONE COMPARABLE VIZ., TIL LIMITED. THE FINAL SET OF COMPARABLES TAKEN BY THE LEARNED CIT(A) IS AS UNDER :- S.NO. NAME OF COMPARABLE COMPANIES GP/SALES (%) 2007-08 1. CUPRUM BAGRODIA LIMITED 28.41 2. GMMCO LIMITED 18.26 3. INDIA TECHS LIMITED 5.76 4. TIL LIMITED 16.50 ARITHMETIC MEAN 17.23 SINCE THE SAID MARGIN WAS WITHIN THE TOLERANCE RANG E OF PLUS/MINUS 5%, HENCE THE LD. CIT(A) HELD THAT NO TP ADJUSTMENT ITA-6401/DEL/2012 8 SHOULD BE MADE. HE FURTHER HELD THAT THE ASSESSEE W AS ALSO ABLE TO JUSTIFY ITS ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION BY OF SECONDARY ANALYSIS BY WAY OF CUP METHOD. 8. BEFORE US, THE LEARNED COUNSEL SUBMITTED AFTER EXPLAINING THE FACTS SUBMITTED THAT EVEN AS PER THE OECD GUIDELINE S, RPM HAS BEEN RECKONED AS ONE OF THE STANDARD METHODS FOR DI STRIBUTION AND MARKETING ACTIVITIES WHERE THE GOODS ARE PURCHASED FROM THE AE AND SOLD TO UNRELATED PARTIES WITHOUT ANY VALUE ADD ITIONS. IN SUPPORT, HE HAD RELIED UPON THE FOLLOWING TWO DECIS IONS :- (I) LOREAL INDIA (P) LTD. 53 SOT 263 (MUM)(URO) THIS DECISION HAS ALSO BEEN APPROVED BY HONBLE BOMBAY H IGH COURT IN 228 TAXMAN 360 (BOM). (II) LUXOTTICA INDIA EYEWEAR PVT. LTD. 2014-TII-2 36-DEL-TP HON'BLE DELHI HIGH COURT HAS UPHELD THIS DECISION I N 2015- TII-50-HC-DEL-TP. AFTER REFERRING TO THE FAR ANALYSIS, HE SUBMITTED TH AT THE ENTIRE FUNCTIONS ARE THAT OF A NORMAL DISTRIBUTOR WITH NOR MAL DISTRIBUTION RISK AND THEREFORE, UNDER SUCH SITUATION, THE MOST APPROPRIATE METHOD SHOULD BE RPM WHEREIN THE DISTRIBUTION ACTIV ITIES ARE BEST SUITED TO BE ANALYZED UNDER RPM. SO FAR AS THE TPO S OBSERVATION THAT RPM CANNOT BE ACCEPTED BECAUSE THE COMPARABLES DID NOT HAVE SIMILAR PRODUCT PROFILE, HE SUBMITTED THAT UND ER THE RPM, SIMILAR PRODUCT IS NOT VERY ESSENTIAL BUT SIMILAR FA R IS AN IMPORTANT FACTOR. IN THE CASE OF THE ASSESSEE, THE COMPARABLES GIVEN WERE THOSE OF THE DISTRIBUTORS OF COMPUTER PARTS/PE RIPHERALS AND ALSO DISTRIBUTORS OF EQUIPMENT WHICH IS AKIN TO THE ASSESSEE. HE ITA-6401/DEL/2012 9 THUS STRONGLY RELIED UPON THE OBSERVATIONS AND FIND INGS OF THE LEARNED CIT(A). 9. ON THE OTHER HAND, LEARNED CIT-DR SUBMITTED THAT EVEN THOUGH THE TPOS OBSERVATIONS MAY BE GENERAL IN NAT URE AND SOME OF THE OBSERVATIONS ARE NOT CORRECT, BUT HE HAS ANA LYZED THE ASSESSEES FAR AND ALSO THE FACT THAT PRODUCT SIMILA RITY IS TO BE SEEN TO ANALYZE THE GROSS MARGIN UNDER THE DISTRIBU TION OF VARIOUS KINDS OF PRODUCTS. FOR EXAMPLE, THE MARGIN ON A SIMI LAR PRODUCT WOULD BE DIFFERENT THAN THE GROSS MARGIN IN A PRODU CT LIKE HEAVY MACHINES LIKE HYDRAULIC EXCAVATORS ETC., WHICH THE ASSESSEE IS SELLING. HE ALSO POINTED OUT THAT IN THE CASE OF ON E OF THE COMPARABLES I.E., GMMCO LIMITED, THIS COMPANY IS AL SO INTO MANUFACTURING AND, FROM THE FINANCIAL STATEMENTS WH ICH WERE ENCLOSED IN THE PAPER BOOK, HE POINTED OUT THAT IF THE COMPARABLE IS INTO MANUFACTURING, THEN ITS GROSS MARGIN CANNOT BE ACCEPTED TO BE COMPARABLE AND THEREFORE, BY SELECTION OF COMPARABL ES ITSELF, IT CAN BE SEEN THAT RPM CANNOT BE THE MAM IN THE PRESENT C ASE. 10. BY WAY OF REJOINDER, THE LEARNED COUNSEL CLARI FIED THAT IN THE CASE OF GMMCO LIMITED, THE RPM HAS BEEN TAKEN FOR S EGMENT OF CATERPILLAR DEALERSHIP DIVISION WHICH RELATES TO TRADING OF CATERPILLAR BRAND OF PRODUCTS. THE OTHER SEGMENT OF CHEMICAL DIVISION WHICH IS ENGAGED IN MANUFACTURING HAS NOT BEEN USED. NOT ONLY THAT TPO HAS ACCEPTED THIS COMPARABLE. THE REFORE, SUCH CONTENTION RAISED BY THE LEARNED DR CANNOT BE ACCEP TED. ITA-6401/DEL/2012 10 11. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE RELEVANT FINDING GIVEN IN THE IMPUGNED ORDER AS WEL L AS THE MATERIAL PLACED ON RECORD. IT IS AN ADMITTED FACT THAT THE A SSESSEE IMPORTS FINISHED GOODS MANUFACTURED BY ITS AE, LIKE EARTHMO VING EQUIPMENT, HYDRAULIC EXCAVATORS, ETC. FOR RESALE IN INDIA AND IT UNDERTAKES THE ENTIRE FUNCTION OF A DISTRIBUTOR. IT MAINLY SELLS FINISHED GOODS DIRECTLY TO THE CUSTOMERS AT HIGH SE A SALES AND SOME OF THE FINISHED GOODS ARE SOLD THROUGH NETWORK OF D EALERS. FOR THE SALE OF SPARE PARTS, THE ASSESSEE IMPORTS AND THEN SELLS THEM THROUGH THE NETWORK OF DEALERS TO THE CUSTOMERS. FRO M THE FAR ANALYSIS AS DISCUSSED ABOVE, IT IS OSTENSIBLE THAT THE ASSESSEE IS PERFORMING THE FUNCTION OF A NORMAL DISTRIBUTOR WIT H NORMAL RISK AND THE GOODS WHICH HAVE BEEN PURCHASED HAVE BEEN R ESOLD WITHOUT ANY VALUE ADDITION. THIS FACT IS UNDISPUTED THAT THERE IS NO VALUE ADDITION BY THE ASSESSEE. AS DISCUSSED ABOVE, THE LEARNED TPO HAS MAINLY GONE ON GENERAL PROPOSITION OF THE G UIDELINES GIVEN IN THE OECD WHICH MAINLY HIGHLIGHTS THE STRENGTHS A ND WEAKNESSES OF THE RPM METHOD. HE HAS NOT ANALYZED T HE ACTUAL FACTS OF THE CASE AS WELL AS THE FAR ANALYSIS VIS-A- VIS THE COMPARABLES. OUT OF THE SEVEN COMPARABLES, THREE CO MPARABLES OF THE ASSESSEE HAVE BEEN ACCEPTED BY THE TPO FOR ANAL YZING THE SAME UNDER TNMM. THE RPM HAS BEEN PRESCRIBED IN RULE 10B (1)(B) IN THE FOLLOWING MANNER :- DETERMINATION OF ARM'S LENGTH PRICE UNDER SECTION 92 C. 10B. (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SEC TION 92C, THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER, NAMELY : ITA-6401/DEL/2012 11 (B) RESALE PRICE METHOD, BY WHICH, (I) THE PRICE AT WHICH PROPERLY PURCHASED OR SERVIC ES OBTAINED BY THE ENTERPRISE FROM AN ASSOCIATED ENTERPRISE IS RESO LD 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 U NRELATED ENTERPRISE FROM THE PURCHASE AND RESALE OF THE SAME OR SIMILAR PROPERTY OR FROM OBTAINING AND PROVIDING THE SAME O R SIMILAR SERVICES, IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS; (III) THE PRICE SO ARRIVED AT IS FURTHER REDUCED BY TH E EXPENSES INCURRED BY THE ENTERPRISE IN CONNECTION WITH THE PU RCHASE OF PROPERTY OR OBTAINING OF SERVICES; (IV) THE PRICE SO ARRIVED AT IS ADJUSTED TO TAKE INTO ACCOUNT THE FUNCTIONAL AND OTHER DIFFERENCES, INCLUDING DIFFEREN CES IN ACCOUNTING PRACTICES, IF ANY, BETWEEN THE INTERNATI ONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETW EEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF GROSS PROFIT MARGIN IN THE OPE N 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 THE ASSOCIATED ENTERPRISE; 12. THUS, THE RPM METHOD IDENTIFIES THE PRICE AT W HICH THE PRODUCT PURCHASED FROM THE A.E. IS RESOLD TO AN UNR ELATED PARTY. SUCH PRICE IS REDUCED BY NORMAL GROSS PROFIT MARGIN , I.E., THE GROSS PROFIT MARGIN ACCRUING IN A COMPARABLE CONTROLLED T RANSACTION ON RESALE OF SAME OR SIMILAR PROPERTY OR SERVICES. AS PER OECD GUIDELINES AND ALSO NOW IT IS QUITE SETTLED BY VARI OUS JUDICIAL PRECEDENCE THAT THE RPM IS MOSTLY APPLIED IN A SITU ATION IN WHICH THE RESELLER PURCHASES TANGIBLE PROPERTY OR OBTAINE D SERVICES FROM AN A.E. AND RESELLER DOES NOT PHYSICALLY ALTER THE TANGIBLE GOODS AND SERVICES OR USE ANY INTANGIBLE ASSETS TO ADD SU BSTANTIAL VALUE ITA-6401/DEL/2012 12 TO THE PROPERTY OR SERVICES I.E., RESALE IS MADE WI THOUT ANY VALUE ADDITION HAVING BEEN MADE. IN THE CASE OF MATTEL TOYS (I) PVT.LTD. REPORTED IN (2013) 158 TTJ 461 (MUMBAI), THE TRIBUNAL HAS ANALYZED THE RPM AS ENSHRINED IN THE AFORESAID RULE S IN THE FOLLOWING MANNER :- 38. XXXX SINCE IN RPM ONLY MARGINS ARE SEEN WITH REFERENCE T O ITEMS PURCHASED AND SOLD OR EARNED BY AN INDEPENDENT ENTERPRISE IN COMPARABLE UNCONTROLLED TRANSACTIONS VIS-A- VIS THE ONE IN THE CONTROLLED TRANSACTIONS, THEREFOR E, IN SUCH A SITUATION, THE NATURE OF PRODUCTS HAS NOT MU CH RELEVANCE THOUGH THEIR CLOSER COMPARABLE MAY PRODUCE A BETTER RESULT. THE FOCUS IS MORE ON SAME OR SIMILAR NATURE OF PROPERTIES OR SERVICES RATHER THAN SIMILARITY OF PRODUCTS. IN RPM OTHER ATTRIBUTES OF COMPARABILITIE S THAN THE PRODUCT ITSELF CAN PRODUCE A RELIABLE MEASURE OF ARMS LENGTH CONDITIONS. THE MAIN REASON IS THAT THE PRODU CT DIFFERENTIATION DOES NOT MATERIALLY AFFECT THE GROSS PROFIT MARGIN AS IT REPRESENTS GROSS COMPENSATION AFTER TH E COST OF SALES FOR SPECIFIC FUNCTION PERFORMED. THE FUNCTI ONAL ATTRIBUTE IS MORE IMPORTANT WHILE UNDERTAKING THE COMPARABILITY ANALYSIS UNDER THIS METHOD. THUS, IN OUR OPINION, UNDER THE RPM, PRODUCTS SIMILARITY IS NOT A VITAL ASPECT FOR CARRYING OUT COMPARABILITY ANALYSIS BUT OPERATIONAL COMPARABILITY IS TO BE SEEN. SINCE THE GROSS PROFIT MARGIN IS THE MAIN CRITERIA WHILE EVALUATING THE TRANSACTIONS IN THE RPM WHEREIN PRICE IS IDENTIFIED A T WHICH PROPERTY OR SERVICES ARE RESOLD AND NORMAL GRO SS PROFIT MARGIN IS DERIVED AT BY THE ENTERPRISE WHICH IS DEDUCTED FROM THE RESALE PRICE OF SUCH PROPERTY OR SER VICE IN COMPARABLE UNCONTROLLED TRANSACTIONS. THE GROSS P ROFIT MARGIN EARNED BY THE INDEPENDENT ENTERPRISE IS ALSO WHAT HAPPENS IN THE CASE OF A DISTRIBUTOR WHEREIN T HE PROPERTY AND SERVICE ARE PURCHASED FROM THE A.E. AND ARE ITA-6401/DEL/2012 13 RESOLD TO OTHER INDEPENDENT ENTITIES, WITHOUT ANY VAL UE ADDITIONS. THE GROSS PROFIT MARGIN EARNED IN SUCH TRANSACTIONS BECOMES THE DETERMINATION FACTOR TO SEE THE GROSS COMPENSATION AFTER THE COST OF SALES. IN THE INSTANT CASE, THE ASSESSEE IS A DISTRIBUTOR OF MATTEL TOYS AND GETS THE FINISHED GOODS FROM ITS A.E. AND RESELLS THE SAME TO INDEPENDENT PARTIES WITHOUT ANY VALUE ADDITION. IN S UCH A SITUATION, RPM CAN BE THE BEST METHOD TO EVALUATE THE TRANSACTIONS WHETHER THEY ARE AT ALP. 39. SOME OF THE CASE LAWS RELIED UPON BY THE LEARNED COUNSEL ALSO SUPPORT OUR ABOVE CONCLUSION THAT IN C ASE OF DISTRIBUTION ACTIVITIES I.E., IMPORT OF PRODUCTS AND SERVICES FROM THE A.E. AND RESALE TO THE INDEPENDENT PARTIES WITHOUT ANY VALUE ADDITION, THE RPM WOULD BE THE MOS T APPROPRIATE METHOD FOR DETERMINING THE ALP. THIS VIE W HAS BEEN UPHELD BY THE TRIBUNAL, MUMBAI BENCH, IN TEXTRONIX INDIA P. LTD. (SUPRA), LOREAL INDIA P. L TD. (SUPRA) AND STAR DIAMOND GROUP V/S DDIT, 141 TTJ 21. THE OECD GUIDELINES AND ICAI GUIDELINES AS HAVE BEEN REFERRED TO BY THE LEARNED COUNSEL HAVE ALSO EXPRESS ED ON THE SIMILAR LINE THAT RPM WOULD BE THE BEST METHO D WHEN RESALE TAKES PLACE WITHOUT ANY VALUE ADDITION TO A PRODUCT FOR BENCH MARKING THE ALP. 40. ON THE OTHER HAND, UNDER THE TNMM, THE ALP IS DETERMINED BY COMPARING THE OPERATING PROFIT RELATED T O AN APPROPRIATE BASE I.E., COST OR SALE OR ASSETS OF THE TESTED PARTY WITH THE OPERATING PROFIT OF AN UNCON TROLLED PARTY ENGAGED IN COMPARABLE TRANSACTIONS. UNDER THE TNMM, NET MARGIN OR OPERATING PROFIT IS COMPARED AGA INST WITH THE INDEPENDENT ENTITIES AGAINST THOSE ACHIEVED IN RELATED PARTY TRANSACTIONS. UNDER THE TNMM, THE MAJO R THRUST IS TO DERIVE AT THE OPERATING PROFIT AT THE TRANSACTIONAL LEVEL AND TO IDENTIFY THE OPERATING EX PENSES OF BOTH THE TESTED PARTY AS WELL AS THE INDEPENDENT PARTIES. THIS REQUIRES A LOT OF ADJUSTMENTS TO DER IVE AT ITA-6401/DEL/2012 14 THE ACTUAL OPERATING PROFIT. IF THE ALP OF ANY TRA NSACTION CAN BE DETERMINED BY APPLYING ANY OF THE DIRECT METHO DS LIKE CUP, RPM, CPM THEN THEY SHOULD BE GIVEN THE PREFERENCE AND ONCE THESE TRADITIONAL METHODS HAVE BE EN RENDERED INAPPLICABLE THEN ONLY TNMM SHOULD BE RESORTED TO. ON THE FACTS OF THE ASSESSEES CASE, IN OUR OPINION, THE ASSESSEE BEING A DISTRIBUTOR WHO IS PURCHASING THE GOODS FROM ITS A.E. AND RESELLING THEM TO INDEPENDENT PARTIES/UNRELATED PARTIES, RESALE PRICE METHOD WOULD BE THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF THE TRANSACTIONS BETWEEN THE ASSESSEE AND THE A.E. 13. THE AFORESAID DECISION CLEARLY CLINCHES THE I SSUE THAT UNDER THE RPM, THE FOCUS IS MORE ON SAME OR SIMILAR NATUR E OF PROPERTIES OR SERVICES RATHER THAN SIMILARITY OF PRODUCTS AND FUNCTIONAL ATTRIBUTE IS A PRIMARY FACTOR WHILE UNDERTAKING THE COMPARABILITY ANALYSIS UNDER RPM. FURTHER, RPM IS MOSTLY APPLIED I N THE CASE OF A DISTRIBUTOR WHERE RESELLER PURCHASES TANGIBLE PRO PERTY AND OBTAINS SERVICES FROM THE AE AND WITHOUT MAKING ANY VALUE ADDITION, RESELLS THE SAME TO THIRD PARTIES. UNDER THESE CIRCUMSTANCES AND LOOKING TO THE FACT THAT FUNCTION S PERFORMED BY THE ASSESSEE IS OF DISTRIBUTOR ONLY, THEREFORE, RPM SHOULD BE RECKONED AS THE MOST APPROPRIATE METHOD AND ACCORDI NGLY, WE AGREE WITH THE LEARNED CIT(A) THAT ON THE FACTS OF THE PRESENT CASE, RPM SHOULD BE THE ADOPTED AS THE MOST APPROPRIATE M ETHOD FOR BENCHMARKING ASSESSEES INTERNATIONAL TRANSACTIONS. SO FAR AS THE TWO COMPARABLES CHOSEN BY THE TPO APART FROM ASSESS EES COMPARABLES ARE CONCERNED, WE FIND THAT, T & I GLOB AL LIMITED HAS RIGHTLY BEEN REJECTED BY LEARNED CIT(A), BECAUSE TH IS COMPANY WAS MANUFACTURING MACHINERY, THEREFORE, SAME CANNOT BE COMPARED ITA-6401/DEL/2012 15 WITH THE ASSESSEE WHICH IS PURELY PERFORMING THE DI STRIBUTION FUNCTION. THUS, THE FINAL LIST OF COMPARABLES, I.E. , THREE CHOSEN BY THE ASSESSEE AND ACCEPTED BY THE TPO AND ONE AS SEL ECTED BY THE TPO AND UPHELD BY THE LEARNED CIT(A), IS SUSTAINED FOR COMPARING THE MARGINS UNDER RPM. AS A CONSEQUENCE, WE HOLD TH AT THE TP ADJUSTMENT MADE BY THE LEARNED TPO HAS RIGHTLY BEEN DELETED BY LD CIT(A). ACCORDINGLY, THE GROUNDS RAISED BY THE REVENUE ARE DISMISSED. 14. AS REGARDS THE SECONDARY ANALYSIS GIVEN BY THE ASSESSEE BY ADOPTING CUP METHOD TO JUSTIFY THE ARMS LENGTH PRI CE OF ITS INTERNATIONAL TRANSACTIONS, WE ARE NOT ADJUDICATING THE SAME AS IT IS PURELY AN ACADEMIC EXERCISE WHEN RPM HAS BEEN HELD TO BE THE MOST APPROPRIATE METHOD AND ENTIRE TP ADJUSTMENT ST ANDS DELETED. 15. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. DECISION PRONOUNCED IN THE OPEN COURT ON 17.04.2017 . SD/- SD/- (J. SUDHAKAR REDDY) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER VK. ITA-6401/DEL/2012 16 COPY FORWARDED TO: - 1. APPELLANT : ASSISTANT COM MISSIONER OF INCOME TAX, CIRCLE-5(1), NEW DELHI. 2. RESPONDENT : M/S KOBELCO CONSTRUCTION EQUIPMENT INDIA LIMITED, C-20, SOUTH EXTE NSION, PART-II, NEW DELHI 110 049. 3. CIT 4. CIT(A) 5. DR, ITAT ASSISTANT REGISTRAR