KARCHER CLEANING SYSTEMS PVT. LTD.,NEW DELHI vs. ADDL. CIT, NEW DELHI

This appeal by the assessee is preferred against the order dated 20.10.2016 framed u/s 143(3) r.w.s 144C(13) of the Income-tax Act, 1961 [hereinafter referred to as 'The Act'] pertaining to Assessment Year 2012- 13.

Briefly stated, the facts of the case are that the assessee is a subsidiary of Karcher Beteilgungs GmbH which started its commercial activities on 16.04.2011 and is primarily engaged in the business of importing and resale of industrial cleaning systems in India.

In its TP documentation, a brief summary of economic analysis in respect of trading activities can be summarized as under:

Transaction pertaining to purchase of goods for the purpose of resale in India has also been analyzed using Internal Comparable Uncontrolled Price Method.

During the course of transfer pricing assessment proceedings, the TPO objected to the arm’s length margin computed in relation to trading segment, by rejecting RPM adopted by the assessee for the trading segment and applied Transactional Net Margin Method (‘TNMM’) to benchmark the trading segment.

The TPO selected 3 out of the 4 comparable companies selected by the assessee. A summary of the operating margins of the final comparable companies selected by the TPO is as below :

Objections were raised before the DRP wherein a partial relief was provided to the assessee by considering segmental margin earned by

Before us, the ld. counsel for the assessee vehemently stated that the assessee is primarily engaged in trading of goods and it does not add value to the goods purchased from relates party which are further resold to unrelated parties.

It is the say of the ld. counsel for the assessee that the assessee has provided functional, asset and risk [FAR] analysis in its TP documentation which substantiates the characterization of the assessee as a normal distributor. The ld. counsel for the assessee further pointed out that it has already been substantially demonstrated before the Customs Office that the goods imported by the assessee are not for the purpose of local assembly into finished goods which has been accepted by the Customs Department.

The ld. counsel for the assessee vehemently objected to the rejection of most appropriate method adopted by the assessee.

Per contra, the ld. DR strongly supported the findings of the Assessing Officer/TPO.

We have given thoughtful consideration to the orders of the authorities below. It is not in dispute that the assessee is engaged in trading of goods. It is also not in dispute that the assessee does not add value to the goods purchased from related parties. The scope of inter company agreement is mentioned as “AKW grants to KFC according to the following terms the right of importation and sale of products determined by AKW in the Republic of India. Re-export to other countries is principally not allowed”.

Under the clause ‘Relationship’, it has been mentioned “The relationship between AKW and KFC is that of manufacturer and distributor or that of licensor and licensee respectively. KFC is not the agent of AKW and has no right to bind AKW in any way whatsoever”.

We further find that the TPO himself observed that the reseller generally performs the functions of advertising, marketing, distribution and guaranteeing the goods, financing the stocks and warranty risk. We find that the assessee is also performing all these functions which a normal distributor/reseller would undertake in a comparable uncontrolled transaction.

We are of the considered view that the extent of incurring expenses including employee costs for performing these functions is the prerogative /business decision of a company’s management based on the market penetration policies adopted by a company. The characterization of a reseller, who does not add value to the purchased product would not change owing to the mere fact that the tested party and comparables have incurred varying levels of employee costs, or selling and distribution, or marketing and promotion expenses for boosting company’s own sales volume.

In our humble opinion, since the expats came to help the assessee to set up its business and employee costs included an exceptional expenditure amounting to Rs. 1,61,62,594/- for two of its expatriate employees towards payment for salaries and other expenses for the purpose of stabilizing the business in India as it was the first year of the company’s operations.

This fact has also been appreciated by the DRP.

The co-ordinate bench of the Tribunal Mumbai Bench in in the case of M/s Videojet Technologies [I] Pvt Ltd. has made the following observations:

This Tribunal in Nokia India Pvt Ltd 153 ITD 508 has held that incurring of high advertisement and marketing expenses by the assessee vis-a-vis the other comparable companies does not in any manner affect the determination of ALP under RPM.

Similar view was taken by the Pune Bench of the Tribunal in ITA No. 235/PUN/2013.

Considering the facts of the case in totality, we have no hesitation to hold that the assessee is a pure trading company involved in the distribution activity without adding any value to the purchased product and hence the RPM is the most appropriate method. We, accordingly, direct the Assessing Officer/TPO to accept RPM as the most appropriate method and decide the issue accordingly.

Since we have held that RPM is the most appropriate method, on the facts of the case in hand, all the other issues raised by the assessee will be decided accordingly.

In the result, the appeal of the assessee in is allowed.