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Income Tax Appellate Tribunal, “K”, BENCH
Before: SHRI M.BALAGANESH, AM & SHRI RAVISH SOOD, JM
आदेश / O R D E R PER M. BALAGANESH (A.M): This appeal in A.Y.2012-13 preferred by the order against the final assessment order passed by the Assessing Officer dated 30/12/2016 u/s.143(3) r.w.s.144C(13) of the Income Tax Act, hereinafter referred to as Act, pursuant to the directions of the ld. Dispute Resolution Panel (DRP in short) u/s.144C(5) of the Act dated 01/11/2016 for the A.Y.2012-13.
Though the assessee had raised several grounds of appeal, we find that the principal issue involved in this appeal is with regard to adoption
M/s. Ecolab Food Safety & Hygiene Solutions Pvt. Ltd. of most appropriate method. We find that assessee had adopted Resale Price Method (RPM) whereas the ld. TPO had adopted Transactional Net Margin Method (TNMM) in the distribution segment of the assessee.
The brief facts of this issue are that the assessee is engaged in the manufacturing and trading of cleaning, sanitizing, food safety and infection control products and services. The traded goods are procured from other group companies and manufacturing operations mainly involves mixture of chemicals at third party manufacturer. The assessee is a 99.99% subsidiary of Ecoiabone BV Netherlands.
3.1. The international transactions reported by the assessee in Form 3CEB are as under:
Sr.No. Nature of Transactions Value of Transaction 1 Import of materials 28,81,748 2 Import of finished chemical products for 8,78,77,963 resale 3 Export of finished chemical products 8,41,051 4 Purchase of assets 217,951 5 Reimbursement of expenses 2,90,82,906 3.2. Import of finished chemical products for resale and export of finished chemicals
The assessee submitted that during the financial year ending 31.3.2012, the assessee has imported finished chemical products from AEs and exported finished chemical products to its overseas Group
M/s. Ecolab Food Safety & Hygiene Solutions Pvt. Ltd. entities. Further, the assessee also imported raw materials from the A.E. to the tune of Rs. 28,81,748 /-. Accordingly, the assessee contended that functions performed by it is that of a trader and hence aggregation of the same has been done by the assessee for the purpose of benchmarking. For determining the Arm’s Length Price (ALP), the assessee has adopted the following methodology:- • The assessee has adopted RPM. • PLI is the operating profit to operating cost (GP/Sales). • The assessee is the tested party. • 7 companies were identified as comparables.
The net sales of assessee was Rs. 12.19 crores and Gross profit is Rs.4.06 crores. The PLI is 33.33%, whereas the arithmetic mean of the comparables is 10.95% as per Transfer Pricing Study Report (TPSR). The assessee was asked to submit the updated PLI of the 7 comparable companies for FY 2011-12, which was 7.62%. The comparable used by the assessee are tabulated as under :- Sr. No. Name of comparable company 1 Black Rose Industries Ltd (segmental) 2 Guljag Industries Ltd (segmental) 3 PH trading Limited 4 Standard Surfactant Ltd (segmental) 5 Priya International Ltd (segmental) 6 Nikhil Adhesives Ltd (segmental) 7 Nilchem Industries Ltd Mean PLI is 7.62%
M/s. Ecolab Food Safety & Hygiene Solutions Pvt. Ltd.
3.3. The ld. TPO rejected the RPM and selected TNMM as the Most Appropriate Method of the assessee for its distribution segment on the following grounds:- The annual report of the assessee was perused along with the financials for the year under consideration. On perusal of the financials of the assessee, it was observed that the assessee was having an item of manufactured goods to the tune of Rs. 6,38,99,426 /-. Further, the assessee was reporting Work-in- progress of Rs. 16,48,774 /-, The same was verified from Note 21 to the balance sheet. Further, on perusal of Note 13 "Inventories" to the Balance Sheet, it was observed that the assessee has an inventory of Manufactured goods of Rs, 1,37,35,465 /-. Further, the assessee has a revenue of Rs. 10,08,11,753 /- from sale of manufactured goods. On perusal of Note 19 to the Balance Sheet, it was observed that the assessee has consumed packing materials to the tune of Rs. 39,33,488 /-. As submitted by the assessee, Ecolab India works under 3 divisions ;-
Institutional Division F & B division Key Division Only the F & B division was engaged in distributing the products locally in India without any value addition. Both the other divisions were either selling manufactured goods or were selling the goods imported from A.E. after subsequent value addition. The Resale Price Method can be used where a product which has been purchased from A.E. has been sold to independent party without any significant value addition. Further, use of Resale Price Margin is justified in a situation where the assessee does not make significant value addition to the goods bought from the A.E. before
M/s. Ecolab Food Safety & Hygiene Solutions Pvt. Ltd. selling them to independent enterprise. The OECD guidelines in para 2.22 are reproduced for ease of reference as under :-
"2.22 An appropriate resale price margin is easiest to determine where the reseller does not add substantially to the value of the product. In contrast, it may be more difficult to use the resale price method to arrive at an arm's length price where, before resale, me goods are further processed or incorporated into a more complicated product so that their identity is lost or transformed."
As can be seen from the financials of assessee, that the assessee is doing substantial value addition in terms of manufacturing some of the products, packing them further and then subsequently selling them to independent enterprise. The FAR analysis of the assessee was perused in this regard. However, the functions as listed in the FAR analysis does not mention at all about the manufacturing functions. Further, it also does not also mention the risks that are involved in the manufacturing items. Therefore the FAR analysis of the assessee is rejected along with the use of Resale Price Method for the purpose of benchmarking.
3.4. The ld. TPO observed in his order that assessee is not a pure trader but does subsequent value addition to the goods brought by the AE before selling the same to the end customers and it is also engaged in manufacturing activity. Accordingly, he resorted to adopt TNMM as the MAM. The PLI was taken by the ld. TPO at OP/OR (operating profit / operating revenue). The PLI margins of the assessee were worked out by the ld. TPO as under:-
M/s. Ecolab Food Safety & Hygiene Solutions Pvt. Ltd.
Particulars Amount (in Rupees) Income Net sales 13.33,06,493 Total operating income 13.33,06,493 Expenditure Purchase of stock-in-trade 11,14.69,696 Changes in inventory (3,01.73,226) Employee Benefit Expenses 7,01,14,715 Depreciation and Amortization 78,98,636 Other expenses 6,97,24,145 Total operating cost 22,90,33,965 Operating profit (9,57,27,472) Adjusted Operating Profit/Operating Revenue -71.81% 3.5. The ld. TPO adopted the very same seven comparables of the assessee as listed supra and applied PLI at OP/OR on the said comparables and arrived at the mean margin thereon at 1.38% and compared the same with that of assessee at negative 71.81% and proceeded to make an adjustment to ALP as under:-
Margin of the assessee -71.81% Margin of comparable companies 1.38% Operating Revenue 13,33,06,493 Difference in margins 73.19%
M/s. Ecolab Food Safety & Hygiene Solutions Pvt. Ltd.
Amount 9,75,60,535 3.6. The assessee has on without prejudice basis submitted that the total value of international transaction is Rs. 8,49,96,214 /- as against the total purchases of Rs. 11,14,69,696 /-. Since the international transactions account for 76.25 % of the total purchases, the TP adjustment should be restricted to 76.25%. The assessee has relied on the decision of Delhi ITAT in the case of Global Vantedge Pvt. Ltd. Vs. DCIT (ITA No.s 2763 and 2764/De!/2009). However, relying on the decision of Hon'ble Bombay High Court in the case of of Fire Stone international P. Ltd. in of 2013, the claim of assessee is allowed as such and the adjustment is restricted to Rs. 7,43,89,908 (being 76.25 % of 9,75,60,535 /-. The ld TPO noted the fact that the department had filed an appeal before Hon'ble Supreme Court against the above mentioned order of Bombay High Court. However, he proceeded to follow the decision of Hon’ble Jurisdictional High Court and restricted the ALP adjustment to the extent of international transactions as stated supra.
3.7 Therefore an adjustment of Rs. 7,43,89,908 /- was proposed to the ALP of international transaction.
3.8. The ld. DRP upheld the action of the ld. TPO by observing as under:- “4.2.2 On the perusal of above, it is apparent that the assessee was engaged in manufacturing activity and it has not refuted the TPO's observation regarding manufacturing activities with any cogent evidences. Further, from the company's financial for March 2014 & 2015, Excise Duty paid of Rs. 2.19"crores & Rs. 3.29 crores are seen suggesting major manufacturing activity. The assessee has also not given the basis for GP/Sale ratio of 33% purportedly reflected by it We, therefore, filed substantial merit in the TPO's findings that the assessee was involved in M/s. Ecolab Food Safety & Hygiene Solutions Pvt. Ltd. major value addition in terms of manufacturing some of the products. Accordingly, rejection of TP study of the assessee and application of TNMM by the TPO is upheld.”
3.9. The ld. DRP also enhanced the addition made by the ld. TPO by not resorting the ALP adjustment only to international transactions by observing as under:- “4.2.3 So far as ground of objection relating to entity level vis-a-vis transaction level is concerned, the issue of entity level adjustment versus transaction level adjustment is pending before Hon'ble Supreme Court which has admitted SLP filed by the Department in the case of CIT v Firestone International Pvt. Ltd [ITA No 1354 of 2013] - TS-401-HC- 2015(BOM)-TP against the decision of Hon'ble High Court holding that transfer pricing adjustment should be made with reference to the international transaction and not with reference to the entity level turnover. Since, there is a change in the provisions of the Act and the decisions of DRP are no longer appealable by the Department, if the issue is decided in favour of the assessee, it will amount to pre- judging the issue and bringing finality to an issue which is pending before a higher judicial authority. Therefore, in order to keep the issue alive and protect the interest of the Department, the action of the TPO in making a transfer pricing adjustment by considering the entire turnover of the trading segment is upheld.”
Aggrieved, the assessee is in appeal before us.
We have heard rival submissions and perused the materials available on record including the paper book filed by the assessee. We had also gone through the transfer pricing study report enclosed in the paper book. We have gone through the various replies filed by the assessee before the ld. TPO which are enclosed in the paper book. We have gone through the financial statements of the assessee which are enclosed in the paper book. At the outset, we find that assessee has imported finished chemical compound products such as dispensing liquid to be sold to customers in India. The chemical compounds are the disinfectant chemicals that are used as a cleansing agent. In addition, it also imports dispensing equipment from its AEs. The dispensing equipment functions as a means to store the chemical compounds and M/s. Ecolab Food Safety & Hygiene Solutions Pvt. Ltd.
release them in an effective manner. The dispensing equipment is more permanent and has a reasonably long shelf life. We find that assessee had engaged in importing products from its AE for mere resale without any value addition thereon. The assessee has earned the gross margin of 33.33% and had applied RPM as MAM and compared the gross margin of 7.62% earned by the comparable companies. Accordingly, assessee concluded that the international transaction of import of finished goods from its AE for resale was at arm’s length. There is no dispute with regard to the comparables chosen by the assessee and by the ld. TPO. The only dispute is with regard to the Most Appropriate Method. We find from the audited financial statements that assessee is having both manufacturing segment as well as distribution segment. The revenue from operations of the assessee in the year 31/03/2012 are as under:-
Sale of Products Manufactured Goods - Rs.10,81,15,753/- Traded Goods - Rs.13,26,97,839/- Sale of Services Services Income - Rs. 10,57,191/- ----------------------------- - Rs.24,18,70,783/- Less Excise Duty - Rs. 1,03,26,374/- ------------------------------ Net Sales of Manufacturing Segment and Distribution Segment & Service Segment- Rs.23,15,44,409/- ------------------------------ 5.1. We find from the said audited financial statements, revenue earned has been further detailed as under:-
(i) Details of Sales (Manufactured goods) Chemical and allied - Rs.10,81,15,753/-
M/s. Ecolab Food Safety & Hygiene Solutions Pvt. Ltd.
(ii) Details of Sales (Traded goods) Chemical and allied - Rs.12,83,77,154/- Merchandising equipments - Rs 43,20,685/- ------------------------------ Rs.13,26,97,839/- ================== 5.2. We further find from page 98 of the paper book containing the audited financial statements that assessee had disclosed in its financials as under:-
Note 20 April1, 2011 to Purchases of stock-in-trade March 31,2012 Rupees Chemical and allied 6,18,84,739 Merchandising equipments 4,95,84,957 ================= 11,14,69,696 ================= Note 21 Changes in inventories of finished goods, work-in-progress and stock-in-trade Year ended March 31,2012 Rupees (lncrease)/decrease in stocks Stock at the end of the year: Manufactured goods 1,37,35,465/- Traded goods 6,38,99,426/- Work-in-progress 16,48,774/- Total A 7,92,83,665/- Less: Stock at the beginning of the year; Manufactured goods 50,62,054/- Traded goods 3,37,26,200/- Work-in-progress 10,20,089/- ------------------ Total B 3,98,08,343/- ------------------ Less: Provision for obsolete and non moving inventories (1,95,447)
M/s. Ecolab Food Safety & Hygiene Solutions Pvt. Ltd.
=========== (Increase) /Decrease in Stocks (A-B) (3,96,70,769)/- ========== 5.3. We also find from page 97 of the paper book containing audited financial statements as under:-
Note 19' Cost of materials consumed April1, 2011 to March 31,2012 Rupees_______ Raw material consumed Opening inventory 88,37,002 Add: Purchases (net) 4,34,21,387 Less: Inventory at the end of the year 1,37,35,614 Add: Provision for obsolete and non moving inventories 8,74,924_____ Cost of raw materials consumed during the year 3,93,97,698 Packing material consumed Opening inventory 3,73,834 Add: Purchases (net) 40,88,943 Less: Inventory at the end of the year 5,29,289______ Cost of packing materials consumed during the year 39,33,488_____ 4,33,31,186 =========== Details of Consumption (a) Details of raw materials/ Packing materials consumed: April 1, 2011 to March 31,2012 Rupees____________________ Organic Chemicals 3,93,97,698 Packing materials 39,33,488 ------------------- 4,33,31,186 ===========
M/s. Ecolab Food Safety & Hygiene Solutions Pvt. Ltd.
(b) Value of imported and indegenious raw materials and packing materials consumed: Imported 28,46,628/- 6.57% Indigenous 4,04,84,558_______ 93.43% 4,33,31,186________100%_ 5.4. The aforesaid break-up of revenue system and the purchase of goods for re-sale and cost of materials consumed would go to prove that assessee is having separately manufacturing segment as well as distribution segment. We also find from the TP study report that assessee had separately benchmarked its international transactions with AE under manufacturing segment as well as under distribution segment. We find from pages 110 & 111 of the paper book that assessee had duly submitted the segmental profitability statement from manufacturing segment and trading segment before the ld. TPO vide letter dated 16/12/2015. All the aforesaid evidences would squarely go to prove that assessee had separately benchmarked its manufacturing segment and its distribution segment. Only for its distribution segment, the assessee had applied resale price method as most appropriate method. The fact of the assessee holding inventories , paying excise duty are all relevant for its manufacturing segment and has got absolutely nothing to do with the transactions carried out in its distribution segment. Hence, we hold that the lower authorities have proceeded the entire issue on total misconception of facts ignoring the relevant materials on record. We find that the ld. AR placed reliance on the Co-ordinate Bench decision of this Tribunal in the case of M/s. Videojet Technologies (I) Pvt. Ltd., vs. ACIT in for A.Y.2008-09 dated 28/05/2019 in support of his contentions:-
“16. We have heard the authorized representatives of both the parties, perused the orders of the lower authorities and the material available on M/s. Ecolab Food Safety & Hygiene Solutions Pvt. Ltd. record as well as the judicial pronouncements relied upon by them. Admittedly, the assessee in the course of the its business purchases finished goods i.e. coding and marking equipments viz. continuous Inkjet Printers, Labelling Equipments, Laser markers and related consumables & spares from its foreign affiliates for the purpose of sale in the domestic market. As such, the assessee does not carry out any value addition to the goods purchased from its AEs and, sells it in the same form in the domestic market. Before adverting to the fact as to whether the international transactions of the assessee with its AEs were rightly benchmarked by it in its TPSR by taking RPM as the most appropriate method, or not, we feel that it would be relevant to cull out Rule 10B(1)(b) of the Income-tax rules, 1962, which envisages the determination of ALP u/s.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) xxxxxxxx (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,"
We are of the considered view that from a perusal of Rule 10B(1)(b) of the Income-tax rules, 1962, it can safely be concluded that RPM is the M/s. Ecolab Food Safety & Hygiene Solutions Pvt. Ltd.
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 fortified by the orders of the ITAT, Delhi Bench in the case of (i) Burberry India Pvt. Ltd. Vs. ACIT, Circle-5(1), New Delhi, dated 22.06.2018 and Nokia India Pvt. Ltd. Vs. DCIT, Circle-13(1), New Delhi [2014] taxmann.com 492 (Delhi-Trib). In the latter case, it was observed by the Tribunal that a close scrutiny of sub- clauses (i) and (v) along with the remaining sub-clauses of rule 10B(1)(b) of the Income-tax rules, 1962, makes it clear beyond doubt that RPM is best suited for determining the ALP of an international transaction in the nature of purchases made from an AE which are resold as such to unrelated parties. It was further observed by the Tribunal that ordinarily the said method presupposes no or insignificant value addition to the goods purchased by an assessee from its foreign AE. Further, we find that the aforesaid issue had 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 taxmann.com 54(Delhi). The Hon'ble High Court observing that in case of a pure trader where there was no value addition before reselling the products, RPM was the most appropriate method for benchmarking the transactions, had held as under :- "8. This Court finds that once the ITAT, on considering the relevant facts as well as the order of the TPO, had concluded that the business of the assessee was merely that of a pure trader, and there was no value addition made before re-selling the particular products (i.e. the SIM cards), its consequent finding that RPM is the Most Appropriate Method, is irreproachable. In Nokia India (P) Ltd. v. Dy. CIT[2014] 52 taxmann.com 492/153 ITD 508 (Delhi), the Delhi bench of the ITAT held: "A close scrutiny of the above two sub-clauses along with the remaining sub-clauses of r. 10B(1)(b) makes it clear beyond doubt that RPM is best suited for determining ALP of an international transaction in the nature of purchase of goods from an AE which are resold as such to unrelated parties. Ordinarily, this method presupposes no or insignificant value addition to the goods purchased from foreign AE. In a case the goods so purchased are used either as raw material for manufacturing finished products or are further subjected to processing before resale, then RPM cannot be characterized as a proper method for benchmarking the international transaction of purchase of goods by the Indian enterprise from the foreign AE."
Similarly, in Swarovski India (P.) Ltd. v. Asstt. CIT[2017] 78 taxmann.com 325 (Delhi - Trib.) the ITAT held:
M/s. Ecolab Food Safety & Hygiene Solutions Pvt. Ltd.
Adverting to the facts of the instant case, we find that the assessee purchased Crystal goods and Crystal components from its AE. No value addition was made to such imports. The goods were sold as such. In the given circumstances, the RPM is the most appropriate method for determining the ALP of the international transaction of' Import of Crystal goods and Crystal components.
A similar view has been adopted by the Mumbai bench of the ITAT in Mattel Toys India (P.) Ltd. v. Dy. CIT[2013] 34 taxmann.com 203/144 ITD 76:
Thus, the RPM method identifies the price at which the product purchased from the A.E. is resold to a unrelated party. Such price is reduced by normal gross profit margin i.e., the gross profit margin accruing in a comparable controlled transaction on resale of same or similar property or services. The RPM is mostly applied in a situation in which the reseller purchases tangible property or obtain services from an A.E. and reseller does not physically alter the tangible goods and services or use any intangible assets to add substantial value to the property or services i.e., resale is made without any value addition having been made.
This view has also been affirmed by the Bombay High Court in its judgment dated 07.11.2014 in CIT v. L'Oreal India (P.) Ltd.[2015] 53 taxmann.com 432/228 Taxman 360 , where the Court found that there was no error in law committed by the ITAT when it held that RPM was the Most Appropriate Method in case of distribution or marketing activities especially when goods are purchased from associated entities and there are sales effected to unrelated parties without any further processing. In fact, a Division Bench of this Court in its decision in Bausch & Lomb Eyecare (India) (P.) Ltd. v. Addl. CIT[2016] 381 ITR 227/237 Taxman 24/65 taxmann.com 141 (Delhi), while considering the decision of this Court in Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT[2015] 374 ITR 118/231 Taxman 113/55 taxmann.com 240 (Delhi), noted that: "The RP Method loses its accuracy and reliability where the reseller adds substantially to the value of the product or the goods are further processed or incorporated into a more sophisticated product or when the product/service is transformed."
Therefore, a contrario, when the reseller does not add any value to the product of the goods, the RP method would be appropriate for determining the arms' length price."
M/s. Ecolab Food Safety & Hygiene Solutions Pvt. Ltd.
We also find that the Hon'ble High Court of Bombay in the case of CIT Vs. L'oreal India Pvt. Ltd., 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 are purchased from AEs are thereafter sold 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 taxamnn.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/De1/2012 (Delhi). Accordingly, in terms of our aforesaid observations, we are of the considered view that in the case of a pure trader RPM is the most appropriate method for bench marking the 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, under the TNMM, the net margin or operating profit achieved in related party transactions is compared against 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 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. We, thus, in the backdrop of the facts of the case before us, are of the considered view that RPM can safely be taken as the most appropriate method for benchmarking its international transactions, as against TNMM.
We shall now deliberate on the observations of the lower authorities on the basis of which application of RPM for benchmarking the international transactions of the assessee had been rejected by them. We find that a primary reason given by the TPO for rejecting RPM as the most appropriate method, and the gross profit margin as the PLI, was that as per him the assessee had not demonstrated that uniform accounting norms were followed in the accounting of "cost of goods sold" by the assessee and the comparables selected by the assessee. As observed hereinabove, we find that though it has been the claim of the assessee that both the assessee and the comparables have used Indian GAAP and accordingly followed the uniform accounting norms, however, the said claim of the assessee was rejected by the TPO/DRP
M/s. Ecolab Food Safety & Hygiene Solutions Pvt. Ltd. without placing on record any material which could disprove the same. Be that as it may, we are of the considered view that as per the rule 10B(1)(b)(iv) of the Income- tax Rules, 1962, while determining the ALP in relation to an international transaction as per RPM, the price so arrived at is to be adjusted to take into account the functional and other differences including difference in accounting practices, if any, between the international 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. As such, we are of the considered view that in case the AO held a conviction that the comparables selected by the assessee were not found to be appropriate, then the remedy available with him was either to make necessary adjustments as envisaged in Rule 10B(1)(b)(iv) of the Income-tax rules, 1962 or to search for fresh comparables. However, merely for the reason that the comparables selected by the assessee were not found to be appropriate could have by no means justified the 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 of the Tribunal in the case of CIT Vs. Sanyo India Pvt. Ltd. [2015] 45 CCH 98 (Bang) and the order of ITAT, Delhi Bench in the case of Burberry India Pvt. Ltd. (supra). Further, we find that another reason given by the TPO/DRP for rejecting the RPM is that the assessee as per them was a full-fledged/full risk distributor and was performing a host of functions which would involve huge costs and, hence, the said method may not represent correct gross profit margin. We are unable to persuade us to accept the said observations of the lower authorities, because, in our considered view, in a comparable uncontrolled transaction scenario also a normal distributor will undertake all such functions which are related to sales of a product viz. market research, sales and marketing, warehousing, inventory control, quality control etc., and would also bear risks viz. market risk, inventory risk, credit risk etc. As a matter of fact, the TPO/DRP had not placed on record instances of any such comparable which is engaged in the business of a distributor and is not performing the aforementioned functions. 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 for resale or not. In case, there is no value addition and the finished goods which are purchased from the AE are resold in the market in the same form, then the gross profit margin earned on such transactions becomes the determinative factor for benchmarking the international transaction of the assessee with its AE by taking RPM as the most appropriate method. Our aforesaid view is supported by the order of ITAT Pune Bench in the case of Fresenius Kabi India (P) Ltd. Vs. DCIT (ITA No. 235/Pun/2013), wherein it was held that in case of a distribution activity, the selling and marketing expenses which are borne by the assessee
M/s. Ecolab Food Safety & Hygiene Solutions Pvt. Ltd. would not lead to any value addition to the product in question. We, thus, in terms of our aforesaid observations vacate the view taken by the TPO/DRP, who had concluded that the freight, transaction cost, insurance discounts, rebates, packaging, duties, etc. would affect the reliability of gross profit margin as PLI for the purpose of comparison. In terms of our aforesaid observations, we are of the considered view that the TPO/DRP while dislodging the RPM followed 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 were to be benchmarked and all the other functions carried out by the assessee having no nexus with the said import transactions were, thus, not relevant for the said benchmarking analysis.
We shall now deliberate on the aspect as to whether the TPO/DRP were justified in excluding two of the comparables viz. (i) M/s K. Dhandapani & Co. and (ii) M/s Kusam Electricals Industries Pvt. Ltd. from the final list of comparables. As is discernible from the order of the TPO, the aforesaid parties were rejected as comparables primarily for the reason that while for the assessee's line of business was "trading in high- ended technology related products", on the other hand, the said comparables were dealing in routine electrical equipments. We may herein observe that under the RPM method, the focus is more on the functions rather than the similarity of products because product differentiation does not materially affect the gross profit margin, as it represents gross composition after the cost of sales for specific functions performed. Our aforesaid view is supported by the orders of the ITAT, Mumbai in the case of Mattel Toys (I)(P.) Ltd. Vs. DCIT, Cirlce-6(3), Mumbai, [2013] 34 taxamnn.com 203 (Mumbai-Trib) and ITAT, Delhi Bench in the case of Horiba India (P) Ltd. Vs.DCIT, 81 taxamnn.com 209(Delhi). As we have upheld the RPM as the most appropriate method in the case of the assessee as against TNMM applied by the TPO, therefore, we find no justifiable reason for exclusion of the aforementioned comparables from the final list of comparables. Accordingly, we direct the AO/TPO to include the aforementioned two comparables viz. (i) M/s K. Dhandapani & Co. and (ii) M/s Kusam Electricals Industries Pvt. Ltd. in the final list of comparables for the purpose of benchmarking the ALP of the international transactions of the assessee as per the RPM adopted by it in its TPSR.
As we have set aside the order of the AO/TPO insofar the assessee's claim for benchmarking its international transaction as per RPM was rejected by the TPO/DRP and was substituted by TNMM, therefore, we refrain from adverting to the other issues raised by the assessee before us on merits viz. declining on the part of the TPO for exclusion of the revenue of Rs.2.82 crores and purchase expenses of Rs.1.74 crores while working out its ALP which, thus, are left open.
M/s. Ecolab Food Safety & Hygiene Solutions Pvt. Ltd.
We, thus, in terms of our aforesaid observations, direct the AO/TPO to benchmark the ALP of the assessee as per RPM after including the aforementioned two comparables in the final list of comparables. Accordingly, we allow the appeal of the assessee in terms of our aforementioned observations.
5.5. In view of the aforesaid observations and respectfully following the judicial precedents relied upon hereinabove, we direct the ld. TPO to apply RPM as the most appropriate method and recompute the margins of the assessee accordingly and make any adjustment to ALP thereon, if warranted. Accordingly, grounds raised by the assessee are allowed for statistical purposes.
6. In the result, appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open court on this 26/07/2019