RFS INDIA TELECOM PVT. LTD.,NEW DELHI vs. ACIT, NEW DELHI

This appeal filed by the assessee is directed against the order of the Assessing Officer u/s 143(3)/ 144C/ 92CA(4) of the Act, 1961, pursuant to the directions given by the DRP, passed u/s 144C(5) of the Income-tax Act, 1961 dated 19.12.2016 relating to Assessment Year 2012-13.

Assessee is a company which is wholly owned subsidiary of Radio Frequency System, GmbH (RFS Germany). RFS India is a stated to be primarily engaged in the business of trading of telecom network equipments mainly base station antennas, cables and accessories and other associated services and pre and post sales support services in relation to the telecom products. Assessee electronically filed its return of income for A.Y. 2012-13 on 30.09.2012 declaring loss of Rs.10,89,39,514/-. The case was selected for scrutiny and notice u/s 143(2) dated 20.09.2013 was issued and served upon the assessee. Thereafter, notice u/s 142(1) along with questionnaire was issued and served on the assessee. AO has noted that during the year assessee entered international transactions with its AEs and accordingly made reference to TPO u/s 92CA(3) to determine the arm’s length price of the International transactions. The TPO vide order dated 20.01.2016 passed u/s 92CA(3) proposed adjustment of Rs.1,73,97,217/- to the income of the assessee on account of international transactions. After considering the adjustment proposed by TPO, AO in the Draft Assessment Order dated 16.03.2016 proposed addition of Rs.1,73,97,217/-. The assessee filed objections against the proposed addition before the Hon’ble DRP who vide order dated 19.12.2016 upheld the adjustment proposed by TPO/AO. Thereafter, AO passed an order u/s RFS India Telecom Pvt. Ltd. vs. ACIT A.Y. 2012-13 3 143(3)/144C/92CA(4) vide order dated 31.01.2017 and determined the total income at Rs.75,60,413/-. Aggrieved by the order of AO, pursuant to the directions of DRP, assessee is now before us and has raised the following grounds:

That the AO erred on facts and in law in making an adjustment of Rs.1,73,97,217/- on account of difference in arm’s length price of the ‘international transactions’ undertaken with the associated enterprises on the basis of the order passed under section 92CA(3) of the Act by the Transfer Pricing Officer (“TPO”). 2.1 That the DRP/TPO erred on facts and in law in rejecting Resale Price Method (‘RPM’) applied by the appellant and instead applied TNMM as the most appropriate method, allegedly holding that the appellant was not a simple trader and performs additional functions. 2.2 That the DRP/TPO erred on facts and in law in not appreciating that qua international transaction of purchase of finished goods (telecom equipment), the appellant was only acting as a distributor and hence the international transactions were appropriately and correctly benchmarked applying Resale Price Method as the most appropriate method. 2.3 Without prejudice that on facts and circumstances of the case and in law, the DRP/ TPO erred in not allowing comparability adjustment on account of underutilization of capacity allegedly on the ground that the appellant failed to furnished evidences in support of the claim.

That the AO erred on facts and in law in levying interest under section 234A, 234B and section 234C of the Act. The Appellant craves leave to add, amend, alter or vary, any of the aforesaid grounds of appeal before or at the time of hearing of the appeal.”

On pursuing the Transfer Pricing Report furnished by the Assessee, TPO noted that the assessee had benchmarked the transaction for purchase and sale of trading goods by using TNMM method and used GP/Sales as the Profit Level Indicator (PLI) instead of using OP/OR as the PLI. Considering the functions performed by the assessee, TPO was of the view that choice of GP/Sales as the PLI was not a right choice under TNMM method and the OP/OC should be the correct PLI. The assessee was accordingly issued show-cause notice. Assessee inter alia submitted that it is purely a trader engaged in the business of trading of network equipments and therefore, Resale Price Method (RPM) is a most appropriate method for the purpose of benchmarking the international transactions of purchase and sale of goods and provision of support services. It was further stated that in the Transfer Pricing documentation, the assessee had inadvertently stated that TNMM was being applied for the purpose of benchmarking the international transactions but the assessee had considered Gross Profit to Sales ratio as the PLI which establishes the fact that in reality the Resale Price Method (‘RPM’) was applied by the Assessee to benchmark the international transactions. It was further submitted by the assessee that the Gross Profit margin of the assessee was compared with weighted average gross profit margin of the RFS India Telecom Pvt. Ltd. vs. ACIT A.Y. 2012-13 7 comparable and since its Gross Profit margin was higher than the weighted average gross profit margin of the comparable companies, the international transactions were considered to be at arm’s length price and no adjustment was called for. The submissions of the assessee were not found acceptable to the TPO. TPO thereafter, after considering the comparables (stated in Para-9 of Page 21 of his order) noted that average OP/OR of the comparables to be 1.88% and applying it to the purchase (Rs 18,43,93,983) and sale of goods (Rs 7,95,17,520) worked out the difference at Rs.1,73,97,217/- and proposed its addition. When the matter was carried before the DRP, the DRP upheld the order of TPO. Aggrieved by the order of AO passed pursuant to the direction of DRP, the assessee is now before us.

Before us, learned AR submitted that assessee had entered into following international transactions with its associated enterprises : S. Description Amount of No. Transaction (in Rs.) 1. Purchase of finished goods 184,393,983 2. Sale of finished goods 79,517,520 3. Service provided (marketing support 14,32,650 services against receipt of commission)

He submitted that in the Transfer Pricing Document, for the purpose of benchmarking the international transaction of RFS India Telecom Pvt. Ltd. vs. ACIT A.Y. 2012-13 8 purchase and sale of finished goods, the assessee had applied Resale Price Method by considering itself to be the tested party and Gross Profit to Sales was considered as Profit Level Indicator but inadvertently the method selected was referred as TNMM. For application of RPM, the assessee had considered the Compunics Information System Ltd. having weighted average of gross profit/Sales of 6.07% and Mobile Telecommunications Ltd. having weighted average of GP/Sales of 4.77% and the Arithmetic mean comparable was 5.42%. Since the gross profit to sales ratio of the assessee was 5.95%, which were higher than the average gross profit to sales ratio of the comparable companies at 5.42%, therefore, it considered the international transaction of purchase and sale of traded goods to be at arm’s length price. He submitted that TPO rejected the benchmarking analysis undertaken by the assessee and instead applied Transaction Net Margin Method (TNMM) as the most appropriate method with “Operating Profit to Operating Revenue” as the PLI. Further, for benchmarking the TPO computed the margin of the assessee at -5.04% and after applying various filters, TPO arrived at a set of following four comparable companies with an average operating profit to operating revenue ratio of 1.88%: Sr. Company name OP/OR No. 1. Compuage Infocom Ltd. 1.78% 2. Essel Shyam Technologies Ltd. 2.72% 3. Mahaveer Infoway Ltd. 1.90% 4. Mobile Telecommunications Ltd. 1.11% Average 1.88% RFS India Telecom Pvt. Ltd. vs. ACIT A.Y. 2012-13 9

The TPO thus made an adjustment of Rs. 1,73,97,217 on account of difference in arm’s length price of international transactions of purchase and sale of goods.

Before us, Ld AR submitted that in terms of Section 92C(1) of the Act, the arm’s length price of an international transaction shall be determined by any of method being the most appropriate method having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons. He submitted that Rule 10B(1)(b) of the Income- tax Rules provides that for application of Resale Price Method as one of the method and that method is applicable in the situation involving the benchmarking of international transactions relating to purchase and sale of finished goods. He submitted that since there is a specific method specified in Rule 10B for determining the arm’s length price of international transactions of resale of the goods, the same should be applied in preference over the other methods and in support of aforesaid contentions he placed reliance on the decision of Hon’ble Apex Court in the case of Britannia Industries Ltd reported in 278 ITR 546 and in the case of New Okhla Industrial Development Authority vs CCIT reported in [2018] 95 taxmann.com 58 (SC). He further submitted that the Institute of Chartered Accountants of India in its Guidance note on Report under Section 92E of the Income Tax Act, 1961, also RFS India Telecom Pvt. Ltd. vs. ACIT A.Y. 2012-13 10 states that RPM method should be applied in a situation wherein the reseller does not add significant value to the product. He further placing reliance on the decision of the Hon’ble Delhi High Court in the case of Matrix Cellular International Services (P.) Ltd reported in 90 Taxmann.com 54 submitted that the Hon’ble High court has also upheld the application of RPM as the most appropriate method in the case of a distributor who are not adding any value to the goods. He also relied on the other decisions of the Tribunal which are cited in the written submission for the proposition that RPM to be the most appropriate method of benchmarking the transaction of purchase of finished goods.

With respect to the observation of the DRP that assessee is not a simple trade in view of the fact that assessee has undertaken various functions like pre and post sales services, advertising and business promotion etc, he submitted that the condition precedent for application of RPM is reselling of goods as such without making any value addition to the product itself, and not the intensity of functions performed by trader in reselling the goods/ distributing the goods. He further submitted that functions like business promotion, and maintenance of distribution network are general functions of a trader/ distributor. He further pointing to the transfer pricing report submitted that the pre and post sales services is rendered by the appellant does not, in any way, relate to the international RFS India Telecom Pvt. Ltd. vs. ACIT A.Y. 2012-13 11 transaction of purchase of finished goods undertaken with the associated enterprise and against the provision of aforesaid pre and post sales services, assessee had earned commission computed at the rate of 6% amounting to Rs. 14,32,650/- which constituted 0.24% of the total sales. He further submitted that Revenue had raised similar objections in the case of Celio Future Fashion Pvt. Ltd. vs. ACIT (ITA No. 1928/Mum/2016) and in the case of M/s Videojet Technologies (I) Pvt. Ltd. vs. ACIT (ITA No 6956/Mum/2012), but the objections of the Revenue were discarded by the Co-ordinate bench of the Tribunal. He further submitted that the Delhi Bench of Tribunal recently in the case of Topcon Sokkia India P. Ltd. vs. DCIT [ITA No. 8110/Del/2018] has upheld the application of RPM as the most appropriate method. He further submitted that the comparable companies considered by the TPO are functionally comparable to the assessee and are engaged in the business of trading similar telecom network equipments, except for Essel Shyam Technologies Limited. He submitted that even if all the companies selected by the TPO are to be considered as appropriate comparable companies, the gross profit margin over sales of the above companies works out to 6.93% as against the gross profit margin of 5.9%. He further submitted and even if Essel Shyam Technologies Limited is excluded, the gross profit margin over sales of the comparable companies work out to 3.26% and even in that situation, the gross profit to sales margin of the assessee at 5.9% is higher or within the range of +/-5% of the margin of companies and therefore no addition is called for. He therefore RFS India Telecom Pvt. Ltd. vs. ACIT A.Y. 2012-13 12 submitted that no adjustment on account of international transaction is called for. He further submitted that the assessee has applied RPM method in AY 2011-12 and no adjustment to the international transaction was made by the TPO in the order framed u/s 92CA(3) dated 14.01.2015. He pointed to the copy of the order placed at page 243 to 244 of the paper book.

Learned DR on the other hand supported the order of lower authorities and further submitted that since the assessee does pre and post sales support services in relation to telecom product itself,it results into value addition and therefore the RPM method cannot be considered to be an appropriate method. He further submitted that the issue in A.Y. 2011-12 is not comparable to A.Y. 2012-13 as in the earlier year no services were provided by the assessee but in the current year services have been provided. He further submitted that when the assessee is seeking adjustment of capacity utilization it shows that it is not a mere distributor. He thus supported the order of lower authorities.

Learned AR in the rejoinder with respect to the provision of services pointed out that assessee has exclusive jurisdiction to sale products in India and any direct sale by any group entity to any Indian customer will give rise commission to the assessee. He submitted that the amount of Rs.14,32,650/- was received on account of commission from its AE for the sales made by its AE in RFS India Telecom Pvt. Ltd. vs. ACIT A.Y. 2012-13 13 India directly and it is nothing but part of Income for trading activity undertaking by assessee. He submitted that aforesaid commission income received is added to the income of trade activity.

We have heard the rival submissions and perused all the materials available on record. The issue in the present ground is with respect to the addition of Rs.1,73,97,217/- made to the TPO. It is an undisputed fact that assessee is engaged in the business of trading to telecom network equipments and it is the assessee’s submission that the assessee was purchasing goods from the associated enterprises and was selling it without any value addition. It is also a fact that assessee had applied RPM method (though it is assessee’s contention that inadvertently it is stated to have followed TNMM method in TPO study report) TPO considered the TNMM method to be most appropriate method and proceeded to work out the adjustment accordingly.

We find that RPM method has been held to be a most appropriate method for determining of ALP transaction when the assessee is trading in goods without making any value addition. We further find that recently the Co-ordinate bench of Tribunal in the case of Topcon Sokkia India Pvt. Ltd. (supra) has observed as under:

We further find that the Pune Benches of the Tribunal in the case of ACIT vs MSS India Pvt Ltd ((2009) 123 TTJ 657 (Pune) has observed as under: "While there is no particular order or priority of methods which the assessee must follow, and no method can invariability be considered to be more reliable than others, on a conceptual note, transactional profit methods (i.e. Transactional Net Margin Method and Profit Split Method) are treated as methods of last resort which are pressed into service only when the standered methods, which are also termed as 'traditional methods', (i.e. Comparable Uncontrolled Price Method, Resale Price Method and Cost Plus Method) cannot be reasonably applied."

We further find that it is assessee's contentions that the purchase of trading goods undertaken by the assessee and application of Reselling Price Methods for determining the arm's length price has been accepted by the Revenue in preceding and succeeding assessment years. The aforesaid contention of the Ld AR is found correct in view of the assessment orders of the Assessee for AY 2012-13,2013-14 and AY 2015-16 (which are placed at page 460 to 465 of the paper book). Further before us, the aforesaid contentions of the Ld AR have not been controverted RFS India Telecom Pvt. Ltd. vs. ACIT A.Y. 2012-13 15 by Revenue. We are aware of the fact that Res Judicta principles are not applicable to the income tax proceedings but at the same time we find that the Honorable Supreme Court in the case of Radhasoami Satsang vs. CIT (supra) has held that where a fundamental aspect permeating through the different assessment years is accepted one way or the other, a different value in the matter is not warranted unless there are any material change of facts.

Further, before us assessee has also pointed that if the comparables selected by the TPO are considered then also the margins of the assessee are higher or fall within +/-5% of the final comparable companies selected by TPO. Considering the totality of the aforesaid facts, we are of the view that DRP was not justified in rejecting the RPM method followed by assessee. We therefore, set aside the order of TPO (pursuant to the directions of DRP) to compute the ALP by following the TNMM method. Thus the ground of appeal of the assessee is allowed.

We have heard the rival submissions and perused the materials available on record. The issue in the present ground is with respect to the addition of Rs.9,91,02,710/-. It is the contention of the Revenue that the details of the valuation of closing stock was not submitted by the assessee and on the other hand it is assessee’s contention that it the method of valuation has been regular followed by the assessee and required details were also submitted before the authorities. We however do not find any findings to the lower authorities on the method of valuation adopted by the assessee and the basis for its write down in the value of stock. Considering the totality of the aforesaid facts, we are of the view that the matter needs reexamination at the end of AO. We therefore restore restore the RFS India Telecom Pvt. Ltd. vs. ACIT A.Y. 2012-13 19 issue to the file of AO. The AO is directed to verify the submissions of the assessee and thereafter, decide the issue in accordance with law. The assessee is also directed to co-operate for furnishing all the details which is called by the AO. In case the assessee fails to furnish the required details, the AO shall be free to proceed on the basis of material available on record. Thus, ground of appeal is allowed for statistical purposes.

In the result, appeal of the assessee is allowed.