ACE ANTENNA INDIA PRIVATE LIMITED,KANCHEEPURAM vs. THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 1(1), CHENNAI , CHENNAI

The assessee is a subsidiary of SHIN AH Limited which is ultimately held by Ace Technologies Corporation ("Ace Korea"). The assessee operates as a distribution affiliate of Ace Group in India which is primarily engaged in trading RF parts and base station antennas which it purchases from Ace Korea and resells them to local customers in India. In addition to trading telecommunication products, the assessee also provides post-sale support services in the nature of repair and maintenance and customer management, etc. The assessee filed the return of income for AY 2022-23 on 28.09.2022 declaring the total income of Rs.2,05,33,789/-. The case was selected for scrutiny, and the statutory notices were duly served on the assessee. Since the assessee had international transactions, a reference was made to the Transfer Pricing Officer (TPO) to determine the Arm’s Length Price (ALP) of the international transactions the assessee is having with its Associated Enterprises (AE). The TPO proposed the downward adjustment with regard to import of traded goods, purchase of consumables, provision of after sales and support services amounting to Rs.8,89,39,764/. The AO passed the draft assessment order incorporating the TP adjustment. Aggrieved, the assessee filed its objections before the DRP who upheld the TP adjustment. The assessee is in appeal before the Tribunal against the final order of assessment passed by the AO as per the directions of the DRP.

The assessee in the TP study has benchmarked the international transactions as given below –

The Ld. TPO, vide order dated 27.01.2025 under Section 92CA of the Act, has undertaken the following course of action:  Rejected the economic analysis undertaken by the Assessee in the trading segment whereby a fresh search was considered and additional 2 comparables were identified (in addition to the comparables identified by the Assessee in the TP documentation). Further the Ld. TPO rejected RPM as the most appropriate method ("MAM") adopted by the Assessee and proceeded to consider TNMM as the MAM citing that the Assessee was undertaking functions beyond trading and which involved value addition.  Rejected the economic analysis undertaken by the Assessee for the after-sales support services and marketing services and combined with the trading segment  Recalculated the margins by treating certain expenses incurred by the Assessee as non-operating.

The assessee contended before the DRP that the TPO is not correct in rejecting the RPM adopted by the assessee MAM for the transaction of Import of Goods and applying TNMM as MAM. The assessee further contended that it is a pure distributor of RF parts and base station antennas, undertaking no manufacturing, assembly or technical value addition. The assessee also submitted a detailed note on the business activities in support of its contentions. The DRP in this regard called for a remand report from the TPO and the relevant part of remand report as extracted in the DRP order is as given below –

The DRP after considering the above remand report held that – 5.5 We have considered assessee's submission and TPO's finding in remand report as well as in TP order. The material on record demonstrates that the assessee incurs several expenses not typical of a simple buy-sell distributor. While the ТРО has accepted that certain expenses such as freight, customs duty, C&F charges, and salaries are consistent with trading activity, the presence of professional charges paid to engineering and technical service providers indicates that the assessee is engaged in activities that extend beyond routine distribution. These professional services, even if claimed to be warranty-related, reflect technical intervention in respect of sophisticated RF products, which cannot be equated with ordinary trading functions. Further, the TP Study itself records that the assessee is involved in after sales support, repair and maintenance, customer management, and design and development activities. The existence of R&D cost recovery arrangements, together with consumables initially identified as R&D-related, supports the finding that the assessee's functions are not limited to mere resale. The assertion that such activities belong exclusively to other segments cannot be accepted when the financials do not clearly segregate these expenses. Before the panel also the assessee could not establish that the assessee involved only in trading without involving in any value addition to those trading such as testing, warranty and consultancy and other services. Though assessee claiming consultancy services not related to trading, could not demonstrate its claim. Given these functional complexities, the use of RPМ, which is appropriate only when goods are resold without value addition, is unsuitable. The TPO was justified in rejection RPM and adopting TNMM as the most appropriate method, as it captures the full functional and cost profile of the assessee. 7. Ground No.1 is general and does not warrant a separate adjudication. The Ld. AR submitted that if the assessee’s contention in Ground No.1 with regard to rejecting RPM as the MAM is considered and held in favour of the assessee, then the rest of the contentions in Ground No.5 to 9 would become academic. Therefore, we will first consider Ground No.4 for adjudication.

The Ld. AR submitted that the assessee is a routine distributor which imports telecommunication products from its AE, Ace Korea, on a principal- to-principal basis. The Ld. AR further submitted that these products are resold to unrelated customers in India without any physical alteration or value addition. The Ld. AR argued that this satisfies the conditions for applying RPM as the MAM under Rule 10B(1)(b) of the Rules and the OECD Guidelines, 2022. In support, the Ld. AR relied on the Dealer Possession Licence, the IEC classification as Merchant Exporter, and the GST registration showing the assessee as "Trader-Retailer". The Ld. AR further submitted a back-to-back documentation trail of purchase and sale transactions. The Ld. AR also submitted a segmental analysis showing that trading contributed about 90% of total revenue and pointed out that the TPO had separately accepted the trading comparables chosen by the assessee in the TP study which means that the TPO has accepted the assessee to be a trader. The Ld. AR argued that operating expenses are not relevant for applying RPM, since RPM tests the transaction at the gross profit level. The Ld. AR submitted that the TPO and DRP had themselves accepted most of the disputed expenses, such as clearing charges, customs duty, freight, salary, and professional fees, as ordinary trading expenses. The Ld. AR pointed out that only a small part of the professional charges remained in dispute, amounting to just 0.0117% of turnover basis which the RPM is rejected as the MAM. The Ld. AR further submitted that the R&D cost recovery was a separate transaction, already benchmarked and accepted by the TPO, and had no bearing on the trading segment. The Ld. AR also submitted that the consumable expenses were ordinary packing costs, and that the TPO had wrongly treated them as R&D lab expenses. The Ld. AR relied heavily on the decision in D Light Energy P. Ltd. (ITAT Delhi, affirmed by the Delhi High Court on 18.03.2025). The Ld. AR submitted that this decision holds RPM to be the MAM for a reseller with no value addition, even where small, allied transactions like warranty claims are aggregated with the main transaction. The Ld. AR further submitted that such minor elements cannot be used to reject RPM in favour of TNMM. The Ld. AR also relied on other judicial precedence in this regard to submit that for the assessee being a trader RPM is the MAM and prayed that the TPO be directed accordingly.

We have heard the parties and perused the material on record. The short issue arising for our consideration under Ground No.4 is whether the TPO/DRP were justified in rejecting RPM as the MAM adopted by the assessee for the import of traded goods, and in adopting TNMM in its place. It is not in dispute that the assessee imports RF parts and base station antennas from its AE, Ace Korea, on a principal-to-principal basis and resells the same to unrelated customers in India. The assessee has placed on record the Dealer Possession Licence, the IEC classification as Merchant Exporter, and the GST registration reflecting its business activity as "Trader-Retailer", together with a sample back-to-back documentation trail of purchase and sale transactions, to demonstrate that the goods are resold without any physical alteration. The segmental analysis furnished by the assessee shows that trading constitutes approximately 90% of its total revenue, and it is significant that the TPO has separately accepted the trading comparables selected by the assessee in its TP study for benchmarking the said segment.

The TPO/DRP have rejected RPM primarily on the ground that the assessee incurs certain expenses not typical of a routine buy-sell distributor, in particular professional charges paid towards engineering and technical service providers, which the DRP has treated as indicative of design and development activity going beyond mere resale. We notice, however, that in the remand proceedings before the DRP itself, the TPO accepted that the majority of the expenses originally objected to in the TP order, including clearing and forwarding charges, customs duty, freight, salary, and the bulk of the professional and consultancy charges, are routine expenses ordinarily incurred by a trader/distributor. We notice that what survived the TPO's own remand report as genuinely in dispute was a sum of Rs.2,32,363, being professional charges paid to four service providers towards engineering and technical services, constituting a mere 0.0117% of the assessee's turnover of Rs.198,93,94,007 from the trading segment which the DRP has itself acknowledged in its directions. In our considered view, once the TPO's own remand report concedes that the greater part of the very expenses cited as evidence of functional complexity are ordinary trading expenses, the residual amount left in dispute is too insubstantial, both in absolute terms and as a percentage of turnover, to dislodge the assessee's basic characterization as a routine distributor or to justify rejection of RPM for the entire trading segment on that ground alone.

As regards the recovery of R&D costs, it is submitted that this pertains to a project undertaken for a customer that did not materialize, the costs of which were recovered from the AE and benchmarked as a separate international transaction, the arm's length nature of which the TPO has not disputed. The Ld. AR during the course of hearing submitted that the consumable expenses of ₹41,28,791 relate to ordinary packing materials used in the course of the trading business and have been erroneously treated by the TPO as relatable to R&D laboratory activity. Neither of these transactions, in our view, has any bearing on the characterization of the trading segment, and both stand outside the ambit of the impugned adjustment. The Hon'ble Delhi High Court, while affirming the decision of the Tribunal in D Light Energy P. Ltd. vs. Assessment Unit (NFAC) (ITA 53/2025 dated 18.03.2025), has held that where goods are purchased from an AE and resold without value addition, RPM remains the MAM, and that minor allied elements aggregated with the principal transaction of purchase and resale do not warrant its rejection in favour of TNMM. The Tribunal in the said case observed that the reimbursement and warranty costs, being merely 1.5% of the value of the principal transaction could not be permitted to displace RPM. We find the ratio of the said decision squarely applicable to the facts of the present case, where the residual disputed expenditure works out to an even smaller fraction of turnover. In light of the above, we are of the considered view that the assessee has been correctly characterized as a routine distributor performing no value addition to the goods purchased from its AE, and that the TPO/DRP were not justified in rejecting RPM as the MAM for the trading segment. We accordingly direct the AO/TPO to adopt RPM as the Most Appropriate Method for benchmarking the transaction of import of goods under the trading segment to determine the ALP. Ground No.4 raised by the assessee is allowed.

In result the appeal of the assessee is allowed.