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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: AMIT SHUKLA & MS. PADMAVATHY S.
O R D E R PER : MS PADMAVATHY S. (AM)
This appeal by the Revenue and cross objection by assessee are against the order of the Commissioner of Income-tax (Appeals)-55, Mumbai [hereinafter ‘Ld.CIT(A)’] dated 23/03/2022 for the assessment year 2013-14. The Revenue raised the following grounds of appeal:- “1 "Whether on the facts and circumstances of the case, and in law, the Ld. CIT(A) has erred by not appreciating the fact that TPO has widely discussed and clarified the reasons for rejection of RPM as MAM and application of TNMM as MAM in the case of the assessee for the International Transaction of purchase of formulations.?
2. "Whether on the facts and circumstances of the case, and in law, the Ld. CIT(A) has erred by not appreciating the fact that aseessee has not benefitted from the said expenses as the assessee is running into losses year after other. The prime purpose of the said expenses is to create and strengthen the brand of the AEs in India and rendering TNMM as the MAM instead of RPM in the case of the assessee for the International Transaction of Purchase of formulations.”
(Revenue appeal) 2. The assessee is a company engaged in the business of distribution of oncology, hepatitis B, virology, immunology and critical care products in India. The assessee filed the return of income for A.Y. 2013-14 on 28/11/2013 declaring a loss of Rs.90,63,11,233/-. The case was selected for scrutiny and statutory notices were duly served on the assessee. Since the assessee had international transactions, a reference was made to the Transfer Pricing Officer (in short,TPO) to determine the arm’s length price (ALP) of the international transaction. The TPO computed an adjustment of Rs.43,39,27,130/- and an assessment order was passed incorporating the TP adjustment. The TPO, while making the TP adjustment, rejected the resale price method (RPM) adopted by the assessee for the 3 ITA 175/Mum/2022 M/s Bristol Myers Squibb India Pvt Ltd reason that the assessee is carrying out significant advertising and brand promotion expenses. The TPO, for this reason adopted transaction net margin method (TNMM) as the most appropriate method and accordingly arrived at the TP addition. The assessee preferred appeal against the order of assessment. The CIT(A) allowed the appeal in favour of the assessee by relying on the decision of the co-ordinate bench of the Tribunal in assesse’s own case for A.Y. 2009-10. The Revenue is in appeal before the Tribunal against the order of the Ld.CIT(A).
The issue arising out of this appeal is that in assessee’s case, for the trading segment, whether RPM is the most appropriate method. During the year under consideration, the assessee has purchased formulations worth Rs.93,34,84,656/- from its AE. The assessee selected RPM as the most appropriate method since, according to the assessee, there is no value addition done to the products imported from the AE. The margin of the assessee as per RPM work out to 47.41% whereas the weighted average gross profit margin of the comparable was 33.15%. Accordingly, the assessee concluded that the international transactions with respect to purchase of formulations from AE is within the arm’s length. The TPO, during the course of TP proceedings, noticed that the assessee has debited a sum of Rs.12.22 crores in the P&L Account after reducing reimbursement of Rs.22.38 crores from its AE towards sales promotional fees for sazaglaptin products. The TPO was of the view that the significant expenses incurred by the assessee towards advertising and marketing expenses affect the margins of any entity in a big way and since the below the line expenses are affecting the margins of the assessee, the RPM was rejected and TNMM is taken as the most appropriate method. The TPO
4 ITA 175/Mum/2022 M/s Bristol Myers Squibb India Pvt Ltd called on the assessee to furnish the AMP to sales ratio of the comparables. The details furnished by the assessee and the reasons given by the TPO are as under:-
Sr.No. Company Name Advertisement / OP / sales (%) Remark Sales (%) 1 Aarey Drugs & 0.01 0.91 Rejected because Pharmaceuticals Ltd of low advertisement expenses 2 Kalgov Labs Ltd 0.01 0.55 Rejected because of low advertisement expenses 3 Kee Pharma Ltd 4.92 (1.07) 4 Pharmed Ltd 24.46 6.39 5 Hindustan Bio Sciences Ltd 2.12 (17.87) 6 Solumiks Herbaceuticals Ltd 11.28 7.35 7 Trimurthi Drugs & 0.12 (4.49) Rejected because Pharmaceuticals Ltd of low advertisement expenses 8 All India Origin Chemists & 1.74 (10.22) Rejected because Distributors Ltd of low advertisement expenses Average 5.58% (2.31) Assessee 6.50% (24.32)
The TPO proceeded to make the TP adjustment by applying TNMM for the following reasons:-
(i) The RPM has been rejected because the assessee is carrying out significant advertisement and brand promotion activities and since below line expenses are affecting the margins of the assessee in a big way TNMM has been adopted as the most appropriate method;
5 ITA 175/Mum/2022 M/s Bristol Myers Squibb India Pvt Ltd
(ii) The rejection of comparables with very low advertisement and marketing expenses is in line with decision of Delhi High Court in the case of Sony India. Accordingly, the TPO selected fresh set of comparables as listed below:- Sr.No Company Name OP / sales 1 Solumiks Herbaceuticals limited 7.35% 2 Pharmed Limited 6.39% 3 Hindustan Bio Sciences Limited (17.87)% 4 Kee Pharma Limited (1.07)% Average Arithmetic mean) (1.30)% 5. The TPO arrived at the PLI of the trading segment and the TP adjustment as per below working: Description Amount (in Rs.) Operating revenue 1,885,317,718 Operating cost 2.343.753,978 Operating Profit (458,436,260) OP / OR (24.32)% Accordingly, the adjustment in respect of this international transaction is worked out as under:- Description Amount (in Rs.) Operating Revenue of the Taxpayer 1,885,317,718 Operating Expenses of taxpayer 2,343,753,978 Operating Profit / (Loss) of the assessee (458,436,260) Purchase of formulations from AE or international 933,484,666 transaction Other cost 1,410,269,312 ALP of Operating Profit / Loss @(1.30)% (24,509,130) Total operating cost at ALP rate 1,909,826,848
6 ITA 175/Mum/2022 M/s Bristol Myers Squibb India Pvt Ltd ALP of international transaction 499,557,536 0.97% of International Transaction 905,480,126 Adjustment 433,927,130 6. Aggrieved, the assessee filed appal before the CIT(A). the Ld.CIT(A) held that the issue is covered by the decision of the Hon’ble Tribunal in assessee’s own case for A.Y. 2009-10 where it is held that – 8. The A.O after receiving the order of the DRP under Sec. 144C(5), dated 20.12.2013 framed the assessment under Sec.l44C(13) r.w.s 143(3), dated 17.01.2014. The A.O while framing the assessment made a TP adjustment under Sec.92CA(4) of Rs.10,31,20,379/- and assessed the income of the assessee at Rs.3,03,69,990/-.
The assessee being aggrieved with the order passed by the A.O under Sec.l44C(13) r.w.s 143(3) has carried the matter in appeal before us. The Id. Authorized Representative (for short 'A.R') for the assessee at the very outset of the hearing of the appeal took us through the facts of the case. It was submitted by the Id. A.R that the assessee was engaged in distribution of oncology, hepatitis B, virology, critical care and infant nutrition products in India. It was the claim of the Id. A.R, that the assessee imported the formulations from its AE, and without making any value addition distributed the same to unrelated parties in India. The Id. A.R submitted that the assessee in order to benchmark its international transactions had adopted RPM as the most appropriate method. It was the claim of the Id. A.R that in case of a distributor importing goods from its AE and reselling the same without any value addition RPM was recognised as the most appropriate method for benchmarking the international transactions. Further, it was submitted by the Id. A.R, that now when the TPO had in the immediately preceding year accepted RPM as the most appropriate method, therefore, in the absence of any change in the facts he was not justified in rejecting the said method during the year under consideration. Apart therefrom, it was submitted by the Id. A.R that no cogent reasoning was given by the TPO for rejecting RPM and substituting the same by TNMM. The Id. A.R took us through the observations of the DRP and submitted that it had summarily dealt with the objections of the assessee and had most arbitrarily upheld the rejection of RPM and substitution of the same by TNMM by the TPO. In support of his contention that RPM is accepted as the most appropriate method for benchmarking the international transactions in a case of an assessee who is into distribution and marketing activities, reliance was 7 ITA 175/Mum/2022 M/s Bristol Myers Squibb India Pvt Ltd placed on the orders of the coordinate benches of the Tribunal viz. (i) M/s Videojet Technology (I) Pvt. ltd. Vs. ACIT, Circle 10(3), Mumbai (ITA No. 6956/Mum/2012, dated 28.05.2019); and (ii) ITO-6(3)(1), Mumbai Vs. L'Oreal India Pvt. Ltd. It was submitted by the Id. A.R that in case RPM is adopted as the most appropriate method, then no adjustment would be called for in the hands of the assessee.
Per contra, the Id. Departmental Representative (for short 'D.R') relied on the orders of the lower authorities. It was submitted by the Id. D.R that as the requisite details about the business profile and financial data in respect of the comparables selected by the assessee were neither available in the public domain nor furnished by the assessee, therefore, in the absence of the said requisite details RPM could not be accepted for benchmarking purposes. It was the claim of the Id. D.R that in the backdrop of the facts of the case, the lower authorities had rightly concluded that TNMM was the most appropriate method for benchmarking the international transactions of the assessee.
We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements relied upon by them. Admittedly, the assessee is engaged in the business of importing formulations from its AEs and distributing them to unrelated parties in India. Apart therefrom, it was also engaged in providing coordination and back office support services to its AEs viz. Bristol Myers Squibb Company, USA. As observed by us hereinabove, the TPO had proposed TP adjustment of Rs.10,31,20,379/- only as regards the purchase of formulations (trading) by the assessee from its AEs. The aforesaid TP adjustment was upheld by the DRP vide its order passed under Sec.l44C(5), dated 20.12.2013. As observed by us hereinabove, the assessee had in its TP study report benchmarked the aforesaid transactions of purchase of formulations from its AE by adopting resale price method (RPM) as the most appropriate method. The core controversy involved in the present appeal hinges around the view taken by the lower authorities that RPM adopted by the assessee for benchmarking its international transactions, in the absence of complete information about business profile and financial data of the comparables selected by the assessee could not be accepted as the most appropriate method. As is discernible from the order of the TPO, he had after rejecting RPM adopted TNMM at entity level as the most appropriate method for benchmarking the international transactions of the assessee. In fact, the TPO while rejecting the RPM had observed that as the amount of the resale price margin would be influenced by the level of activities
8 ITA 175/Mum/2022 M/s Bristol Myers Squibb India Pvt Ltd performed by the reseller, therefore, the functions performed, which affects the resale price margin should either be similar or it should be possible to make adjustments for such differences. Also, the TPO after rejecting the RPM method had declined to accept 4 comparables (out of 6 comparables) selected by the assessee, for the reason, that they had a different year ending. It was observed by the TPO that as per Rule 10B(4) the companies whose accounts are prepared for the same period are most suitable for comparison than the companies whose accounts cover a different period. On the basis of his aforesaid deliberations, the TPO computed the ALP as per the TNMM after adopting operating profit/operating revenue as the PLI by confining himself to two comparables (out of 6 comparables) selected by the assessee, namely (i) M/s Om Chemical Industries ltd.; and (ii) M/s Priya International ltd. We find that the DRP while disposing off the objections of the assessee as regards the rejection of the comparables did not find any infirmity in the view taken by the TPO, and concurred with his view that as per Rule 10B(4) companies having a different year ending could not have been selected as comparables. Also, the specific claim of the assessee that one of the comparable viz. M/s Daga Global Chemicals ltd. was erroneously rejected by the TPO on the ground that it had a different year ending, despite the fact that the latters fmancials clearly revealed that it had a similar year ending on 31.03.2009, had not found favour with the DRP. It was observed by the DRP, that the said company viz. M/s Daga Global Chemical Ltd could not be selected as a comparable for three reasons viz. (i) that, the company had about 50% purchases from imports in respect of trading goods whereas the assessee has 100%, imports from its AE; (ii) that, the company was into trading in bulk chemicals and solvents whereas the assessee was into ready to sell/use pharma products; and (iii) that, the company had subsidiaries in Dubai & China. Further, as had been observed by us hereinabove, the DRP also upheld the rejection of segmentation of the distribution segment by the assessee into two parts viz. (i) Pharma division; and (ii) Mead Johnson division.
As observed by us hereinabove, the assessee company is engaged in the business of import of oncology, hepatitis B, virology critical care and infant nutrition products from its foreign affiliates, for the purpose of sale in the domestic market. Admittedly, the assessee does not carry out any value addition to the goods purchased from its AE and sells it in the same form in the domestic market. Before deliberating on the issue as to whether the assessee had rightly benchmarked its international transactions with its AEs in its TP study report by adopting RPM as the most appropriate method, or not, we feel that it would be relevant to cull
9 ITA 175/Mum/2022 M/s Bristol Myers Squibb India Pvt Ltd out Rule 10B(l)(b) of the Income Tax Rules, 1962, which contemplates the determination of ALP under Sec.92C of the Act as per RPM, as under: "Determination of arm's length price under section 92C. 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) xxxxxxxxxxxx (b) resale price method, by which- , . . (i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold 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 unrelated enterprise from the purchase, and resale of the same or similar property 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 purchase of property or obtaining of services; (iv) the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect 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 arm's length price in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise." As is discernible from a perusal of Rule 10B(l)(b) of the Income Tax Rules, 1962, it can safely be gathered that RPM is the best suited method for determining the ALP of an international transaction, in a case where the goods purchased by an assessee from its AE are thereafter resold without any value addition to unrelated parties. Our aforesaid view is supported by 10 ITA 175/Mum/2022 M/s Bristol Myers Squibb India Pvt Ltd the order of the coordinate benches of the Tribunal viz. (i) M/s Videojet Technologies India Pvt. Ltd. Vs. ACIT, Circle-lO(S), Mumbai (ITA No. 6956/Mum/2012, dated 28.05.2019; (ii) Burberry India Pvt. ltd. Vs. ACIT, Circle-S(l), new Delhi dated 22.06.2018; and (iii) Nokia India Pvt. Ltd. Vs. DCIT, Circle-lS(l), new Delhi (2014) taxmann.com 492 (Delhi-Trib).In the aforementioned cases, it was observed by the Tribunals that a close scrutiny of sub-clause (i) and (v) along with the remaining sub-clauses of Rule 10B(l)(b) of the Income Tax Rules, 1962, makes it clear beyond any doubt that RPM is best suited for determining the ALP of an international transaction in the nature of purchases made from the AE which are resold as such to unrelated parties. Apart therefrom, we also find that the said aspect has also been looked into by the Hon'ble High Court of Delhi in the case of PCIT Vs. Matrix Cellular International Services (P) Ltd. (2018) 90 taxman.com 54 (Del). In the aforementioned case, it was observed by the Hon'ble High Court that in case of a pure trader where there was no value addition before selling the products RPM was the most appropriate method for benchmarking the said transactions. Also, the Hon'ble High Court of Bombay in the case of CIT Vs. L'Oreal India Pvt. ltd., (ITA No.l046/Mum/2012) had upheld the order of the Tribunal, wherein it was observed that RPM was the most appropriate method in the case of distribution or marketing activities, specifically when goods which were purchased from AEs were thereafter sold by the assessee to unrelated parties without any further processing. Also, a similar view had been taken by the coordinate benches of the Tribunal viz. (i) Horiba India (P) Ltd. Vs. DCIT, 81 taxmann.com 209 (Delhi); (ii) Fresenius Kabi India Pvt. Ltd. Vs. DCIT (ITA No. 235/PUN/2013); and (iii) ACIT Vs. Kobelco Construction Equipment India Pvt. ltd., ITA No. 6401/Del/2012 (Delhi). On the basis of our aforesaid observations, we are of a strong conviction that in the case of a pure distributor RPM is the most appropriate method for benchmarking its international transactions. On the other hand, under the TNMM, the ALP is determined by comparing the operating profit related to an appropriate base i.e. cost or sale or assets of the "tested party" with the operating profit of an uncontrolled party engaged in comparable transactions. As such, ur/der the TNMM, the net margin or operating profit achieved in /elated party transactions is compared with those entered into between the independent entities. Accordingly, under the TNMM the major thrust is to derive the operating profit at the transactional level and to identify the operating expenses of both the tested party as well as the independent parties, which, thus, requires a lot of adjustments to arrive at the actual operating profit. Thus, if the ALP of a transaction can be determined by 11 ITA 175/Mum/2022 M/s Bristol Myers Squibb India Pvt Ltd applying any of the direct methods like CUP, RPM, CPM then they should be given a preference, and it is only where the said traditional methods have been rendered inapplicable that under such circumstances TNMM should be resorted to. Accordingly, in the backdrop of the aforesaid facts of the case before us, we are of the considered view that the assessee had rightly selected RPM for benchmarking its transactions of importing of formulations from its AEs, as against TNMM.
13. We shall now advert to the observations of the TPO/DRP on the basis of which the application of RPM by the assessee for benchmarking its transactions with the AE had been rejected by them. As is discernible from the orders of the lower authorities, the core issue that had weighed in the mind of the lower authorities while rejecting the RPM as the most appropriate method was that neither the complete information about the business profile and financial data of the comparables selected by the assessee was available in the public domain, nor the same was furnished by the assessee. We have given a thoughtful consideration to the aforesaid observations of the TPO/DRP and are unable to persuade ourselves to subscribe to the view taken by them. We are of the considered view that in case the A.O was of the view that the complete information about the business profile and financial data in respect of the aforesaid comparables was not available, then the remedy available with him was to search for fresh comparables. However, merely for the reason that the comparable selected by the assessee were not found to be appropriate could not have by any means justified rejection of the aforesaid method adopted by the assessee for benchmarking the ALP of its international transactions. Our aforesaid view is fortified by the order of the ITAT, Bangalore bench in the case of CIT Vs. Sanyo India Pvt. Ltd. (2015) 45 CCH 98 (Bang) and also the order of the ITAT, Delhi Bench in the case of Burberry India Pvt. Ltd. Vs. ACIT Circle-5(1), New Delhi (ITA No. 758/Del/2017, dated 22.06.2018). Also, a similar view had been taken by the ITAT "J" bench, Mumbai, in the case of M/s Videojet Technology (I) Pvt. Ltd. Vs. ACIT, Circle-10(3), Mumbai (ITA No.6956/Mum/2012, dated 28.05.2019). We are of the considered view that for the purpose of application of RPM what is relevant is that as to whether there is any value addition or not to the goods purchased by the assessee for resale or not. In case, there is no significant value addition and the finished goods which are purchased from the AE are resold in the domestic market in the same form, then the gross profit margin earned on such transactions becomes the determinative factor for benchmarking the international transactions of the assessee with its AE by taking RPM as the most appropriate method. Our aforesaid view is supported by the order of the ITAT Pune, Bench in the case of Fresenious
12 ITA 175/Mum/2022 M/s Bristol Myers Squibb India Pvt Ltd Kabi India (P) Ltd. Vs. DCIT (ITA No. 235/Mum/2013), wherein it was held that in case of distribution activity the selling and marketing expenses which are borne by the assessee would not lead to any value addition to the product in question. In the backdrop of our aforesaid deliberations, we find substantial force in the contention advanced by the Id. A.R that as per Rule 10B(l)(b) in the Income Tax Rules, 1962, the RPM can safely be taken as the best suited method for determining the ALP of the international transactions in the case of the assessee before us, which as observed by us hereinabove had imported formulations from its AE and resold the same without making any value addition to unrelated parties in the domestic market. Our aforesaid view is further fortified by the orders of the various coordinate benches of the Tribunal viz.(i) Burberry India Pvt. Ltd. Vs. ACIT, Circle-S(l), New Delhi, dated 22.06.2018;(ii)Horiba India (P.) Ltd. vs. DCIT (81 taxmann.com 209 (Delhi - Trib); (iii)Fresenius Kabi India Pvt. Ltd. vs. DCIT(ITA No. 235/Pun/2013); (iv). ACIT vis. Kobelco Construction Equipment India Ltd (ITA No.6401/Del/2012);(v)Systems Pvt. Ltd. vs. DCIT & vice versa (ITA No. 683/Hyd/2014); and (vi). Frigoglass India (P.) Ltd. vs. DCIT(2014) 149 ITD 429 (Delhi). In terms of our aforesaid observations, we are of the considered view that the TPO/DRP while dislodging the RPM adopted by the assessee for benchmarking its international transactions, had lost sight of the fact that only the transaction of import of goods by the assessee from its AEs was to be benchmarked and all other functions carried out by the assessee having no nexus with the said import transactions were thus not relevant for the said benchmarking analysis. Be that as it may, we are unable to subscribe to the view taken by the TPO/DRP that merely for the reason that complete information about the business profile and financial data in respect of companies selected by the assessee as comparables in its TP study report was not available in the public domain or furnished by the assessee, therefore, for the said reason the application of the said method for benchmarking the international transactions of the assessee was to be rejected.
We shall now advert to the rejection of the comparables which were selected by the assessee in its TP study report. As regards the three companies which were rejected by the TPO as comparables viz. (i) Abbott India Ltd; (ii) Duchem Laboratories Ltd.; and (iii) Lyka Exports Ltd., we are in agreement with the view taken by the TPO/DRP that as the said companies had a different year ending, therefore, the results emerging therefrom was not contemporaneous, and hence as per RulelOB(4) they were not suitable for being considered for arriving at a feasible comparison. However, at the same time, we are unable to persuade
13 ITA 175/Mum/2022 M/s Bristol Myers Squibb India Pvt Ltd ourselves to accept the rejection of one of the comparable selected by the assessee company viz. M/s Daga Global Chemicals Ltd. As is discernible from the orders of the lower authorities, the aforesaid company was rejected by the TPO as a comparable for the reason that it had a different year ending as in comparison to the assessee. Objecting to the aforesaid observation of the TPO, it was submitted by the assessee before the DRP that as the said company had a similar period ending on 31.03.2009, therefore, the same on the basis of a misconceived view had wrongly been excluded from the final list of comparables. As observed by us hereinabove, the DRP sustained the exclusion of the aforesaid company from the final list of comparables by assigning three fresh reasons viz. (i) that, the company had about 50% of purchases from imports in respect of trading goods, whereas the assessee had 100% imports from its AE; (ii) that, the company was into trading in bulk chemicals and solvents whereas the assessee was into ready to sell/use pharma product; and (iii) that, the company had overseas subsidiaries in Dubai 85 China. Insofar, the observation of the DRP that as the aforesaid company was importing goods different from the assessee, therefore, it could not be selected as a comparable, we are afraid that the same does not find favour with us. In our considered view, in case of RPM the functions performed by the assessee as in comparison to the comparables are more important than the similarity of products. Also, we find that the DRP had concluded that the assessee during the year had overseas subsidiaries in Dubai and China. It is the claim of the assessee that the aforesaid company viz. M/s Daga Global Chemicals ltd. during the year under consideration i.e financial year 2008-09 had only one subsidiary viz. Daga Global Chemical FZCO. It is stated by the assessee that the subsidiaries in Dubai 85 China viz. Daga Global Chemicals DMCC and Zhangjiagang FTZ Daga Chemical Tr. Co. Ltd., had came into existence only in the F.Y. 2009-10. Accordingly, it is the claim of the Id. A.R that as the aforementioned subsidiaries were not existing during the year under consideration i.e Financial year 2008-09, therefore, the DRP had erroneously drawn adverse inferences in the hands of the assessee on the basis of the aforesaid misconceived facts. Apart therefrom, we find that it is the claim of the assessee that the import content of Daga Global Chemicals Ltd. in the purchases during the year under consideration worked out at 53.67%. On the basis of the aforesaid facts, it is the claim of the assessee that as the aforementioned company viz. Daga Global Chemicals Ltd. alike the assessee was engaged in the business of distribution, therefore, it was rightly selected as a comparable for benchmarking analysis. We have given a thoughtful consideration to the aforesaid contentions advanced by the Id. A.R and find substantial force in the same. In our considered view, as the 14 ITA 175/Mum/2022 M/s Bristol Myers Squibb India Pvt Ltd DRP had declined to include the aforementioned company i.e Daga Global Chemicals Ltd. as a comparable, apparently on the basis of misconceived facts as had been canvassed by the Id. A.R before us, therefore, in all fairness the matter requires to be restored to the file of the TPO for fresh adjudication. The TPO after considering the aforesaid claim of the assessee in respect of the aforementioned company, viz. Daga Global Chemical ltd, is directed to readjudicate the issue as regards inclusion of the same in the final list of comparables for benchmarking the international transactions of the assessee as per RPM.
Accordingly, on the basis of our aforesaid observations we set aside the view taken by the TPO/DRP as regards the rejection of RPM as the most appropriate method for benchmarking the international transactions of the assessee and substituting the same by applying TNMM. The matter is restored to the file of the TPO, who is directed to re-determine the ALP of the international transactions of the assessee after accepting RPM as the most appropriate method. The assessee shall in the course of the 'set aside' proceedings file with the TPO the details as regards the business profile and financial data of its aforesaid comparables viz. (i).Om Chemical Industries ltd.; (ii) Priya International ltd.; and (iii).Daga Global Chemicals Ltd. (subject to inclusion of the same in the final list of comparables by the TPO), which shall be considered by the TPO for benchmarking the ALP of its international transactions as per RPM. In case, the assessee fails to file the requisite details, then the TPO shall be at a liberty to search for fresh comparables for benchmarking the ALP of the international transactions of the assessee as per RPM. Needless to say, the TPO shall in the course of the 'set aside' proceedings afford a reasonable opportunity of being heard to the assessee. In terms of our aforesaid observations the matter is restored to the file of the TPO.” Accordingly, the Ld.CIT(A) held that RPM is the most appropriate method to benchmark the transaction of purchase of formulations in the trading segment.
Aggrieved the revenue is in appeal before us. The Ld.DR submitted that in assessee’s own case for A.Y. 2009-10 the TPO has rejected RPM for the reason that there is no proper information available with regard to the comparable companies and the Tribunal held the appeal in favour of the 15 ITA 175/Mum/2022 M/s Bristol Myers Squibb India Pvt Ltd assessee based on the said contention of the TPO. The Ld.DR therefore submitted that the ratio cannot be applied for the year under consideration for the reason that the TPO in the year under consideration has rejected the RPM for the reason that the assessee has incurred significant expenses towards advertisements and marketing expenses which was not an issue in the earlier year in assessee’s case.
7.1 The Ld.DR drew our attention to the break up of the advertising and marketing expenses submitted by the assessee before the TPO and submitted that the assessee’s claim that there is no value addition to the products imported cannot be accepted, since the assessee is incurring expenses towards lab testing, training, etc. Therefore, the Ld.DR submitted that the assessee is not a mere distributor and, therefore, RPM cannot be held to be the most appropriate method.
The Ld.AR, on the other hand, submitted that the TPO has not rejected the computation of gross margin done by the assessee, but has rejected the method adopted for the reason that the AMP expenses vs sales ratio of comparable companies are low. Therefore, the Ld.AR submitted that the reason given by the TPO for rejecting the method adopted by the assessee is not tenable.
9. We heard the parties and perused the material available on record. We notice that the issue per se is covered by the decision of the co-ordinate bench in assessee’s own case for .AY.2009-10. Though the TPO’s reason for rejecting the RPM is different in AY 2009-10 the Tribunal while adjudicating the which is the most appropriate method to be applied, in paragraph 12 as 16 ITA 175/Mum/2022 M/s Bristol Myers Squibb India Pvt Ltd extracted above, has given a categorical finding that when the assessee is a pure distributor, RPM is the most appropriate method for benchmarking all the international transactions. We also see merit in the submissions of the Ld.AR that the gross profit ratio as computed by the assessee has not been rejected by the TPO. The reason for rejection by the TPO of RPM as the most appropriate method is that the assessee has incurred significant expenses towards advertising and marketing which has an impact on the operating margin. This, in our view, cannot be accepted for the reason that the Assessing Officer has not given any specific finding with regard to any value addition done by the assessee to the products imported to counter the claim that the assessee is not a mere distributor. The TPO mainly relied on the fact that the comparables have incurred lesser cost of AMP expenses, which again, in our view is not correct reason for rejecting RPM. The comparison here is at a gross margin level and the TPO has not given any adverse finding with regard to the gross margin ratio of the asessee. We also notice that the Pune Bench of the Tribunal in the case of Fresenius Kabi India Pvt Ltd vs DCIT order dated 15/06/2017 has considered a similar issue wherein it is held that –
“23. From the above, it is settled legal position at the various Benches of the Tribunal that, in case of distribution activity, even when there are selling and marketing expenses are borne by the assessee, there cannot be any value addition to the product in question. In such cases, Resale Price Method is the most appropriate one and accordingly we reverse the decision given by the AO/TPO/DRP in thrusting on the assessee the TNM method to the transaction under consideration. In any case, it is not the case of the Revenue the assessee is not into distribution activity. Accordingly, in principle, Ground No.3 raised by the assessee is allowed.”
17 ITA 175/Mum/2022 M/s Bristol Myers Squibb India Pvt Ltd
10. In view of the above discussion, we hold that RPM is the most appropriate method in assessee’s case. However with regard to the trading segment, there is a need for deciding the benchmarking analysis of the transactions as has been done by the assessee in its transfer pricing study. It is noticed that the TPO has proceeded on the basis that TNMM is the most appropriate method and in the process, has not decided the comparability analysis done by the assessee under RPM method. We, therefore, deem it fit to restore the issue of benchmarking analysis under RPM to the file of the TPO with a direction to re-determine the ALP of international transactions of the assessee after accepting RPM as the most appropriate method. The assessee shall, in the course of the remand proceedings, file with the TPO, the relevant details with regard to the functionality, assets employed and the risks (FAR) of the comparables, to be considered by the TPO for benchmarking the ALP of the international transactions, as per RPM. It is ordered accordingly.
C.O. No.128/Mum/2022
11. The assessee has raised the following effective grounds in the cross objection:- “1. Transfer Pricing 1.1 The Assessing Officer ("Ld AO") erred in considering Transactional Net Margin Method ("TNMM") and not Resale Price Method ("RPM") as the most appropriate method for the purpose of benchmarking the transaction of trading of formulations. 1.2 On the facts and circumstances of the case, the Ld AO erred in not understanding the business profile of the Appellant. The Appellant is purely a distributor wherein it purchases goods from its AEs and sells it to third-parties without any value additions. 1.3 On the facts and circumstances of the case, the Ld AO erred in linking the said expenses to the losses incurred by the Appellant without any basis and has not brought anything on record to justify the same 1.4 On the facts and circumstances of the case, the Ld AO erred in not considering that the expenses incurred by the Appellant are in the nature of selling expenses and not to create and strengthen the brand of the AEs in India.”
18 ITA 175/Mum/2022 M/s Bristol Myers Squibb India Pvt Ltd
12. Since we have already set aside the issues agitated in the cross objection to the TPO for benchmarking the ALP of the international transactions, as per RPM, the grounds in the cross objection become infructuous, hence, dismissed.
In the result, appeal of the Revenue is partly allowed and the assessee’s cross objections are dismissed.
Order pronounced in the open court on 08 /05/2023.