VIDEOJET TECHNOLOGIES (I) P. LTD,NAVI MUMBAI vs. ASST CIT CIR 10(3), MUMBAI

08. October 2012 passed under section 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 ('the Act') passed by the Assistant Commissioner of Income Tax,

The TPO in the course of proceedings before him observed that as per the details discernible from the Transfer Pricing Study Report (in short „TPSR‟) the assessee had during the year carried out the following international transactions :-

In the backdrop of the aforesaid facts it was submitted by the assessee that as its gross profit margin of 42.08% was higher than the average mean margin of 26.06% of the aforementioned comparables, hence, its international transactions were found to be at Arms Length. The TPO not being impressed by the fact that the assessee had taken three years margin in so far the aforementioned comparables were concerned, thus, directed him to submit the gross profit margin of the comparable companies by using the single year data for financial year 2007-2008. As the gross profit margin of two comparable companies was not available with the assessee, therefore, it used the single year gross profit margin data as regards the remaining six comparables, as under :-

As such, it was claimed by the assessee that as its gross profit margin of 42.08% was more than the average mean margin of 29.53% (as per “Prowess”) and 29.68% (as per annual reports), therefore, its international transactions were within the ALP.

The TPO in the course of proceedings was not persuaded to accept the „Resale Price method‟ (for short „RPM‟) that was adopted by the assessee for bench-marking its international transactions for multiple reasons viz. (i) that, the assessee had failed to demonstrate that uniform accounting norms were followed in the accounting of “cost of goods sold” by the assessee as in comparison to the aforementioned comparables selected by it; (ii) that, in absence of the accounting norms which were followed by the comparables selected by the assessee the gross profit margin could not be adopted as a reliable PLI; (iii) that, in the absence of the complete details of comparables, difference in accounting of certain items such as freight, transportation cost, insurance, discounts, rebates, packaging, duties etc under the 'cost of goods sold' or as 'operating expenses' would affect the reliability of gross profit margin as profit level indicator for the purpose of comparison; (iv) that, in view of the elaborate functions performed and risk undertaken, it would be necessary to examine whether the assessee had obtained appropriate returns as regards the various functions performed while determining of ALP its M/s Videojet Technologies (I) Pvt. Ltd. international transactions; (v) that, there was no thumb rule that RPM was the most appropriate method insofar resale transactions were concerned; (vi) a perusal of the FAR analysis of the assessee revealed that unlike the case of other comparables where the goods were imported on CIF basis, in case of the assessee the insurance in transit was borne by the AEs; (vii) that, a perusal of the FAR analysis revealed that the assessee did not make any separate payments for use of trade names and trade marks, which was not so in the case of the other comparables; (viii). that, the goods were procured by the assessee from the AEs for a credit period of one month which was normally extendable upto 180 days, however, the details as regards the credit period in case of the comparables was not discernible from the records; and (vii) that in the case of the assessee the warranty was provided by the AEs, which however was not so in the case of the comparables.

The TPO was further of the view that as the assessee carried on elaborate functions of distribution, marketing, sales promotion, inventory management, personnel management, training, development of training materials etc in the course of its business of trading in coding and marketing equipment and rendering of allied services, and also did bear substantial risks in the form of inventory risk, market risk and credit risk, thus, it could not be considered as a limited risk distributor as claimed in FAR analysis. As such, the contention of the assessee that as it was involved in the business of purchase and re-sale without any value addition, therefore, the RPM was most appropriate method for benchmarking its international transactions with its AEs, was rejected by the TPO. Apart therefrom, it was also observed by the TPO that a perusal of “Schedule 16” to the balance sheet of the assessee for the year under consideration revealed that the average cost price of the goods imported during the year was substantially more as in comparison to the last year, as under :-

In the backdrop of the aforesaid observations, it was concluded by the TPO that the assessee‟s business model clearly revealed that it was not merely purchasing goods and immediately reselling the same to its customers, but in fact, it was also carrying on the functions as that of distributing the goods, stocking the goods in various warehouses, adopting certain market strategies for sale for which it had engaged 140 sales/service/back office employees. Accordingly, the TPO was of the view that it would be appropriate to examine the returns for its various functions while determining the ALP of the transactions under consideration. As such, on the basis of the aforesaid observations, the TPO rejected the RPM method and adopted the Transaction Net Margin Method (TNMM) at entity level as the most appropriate method for benchmarking the international transactions of the assessee.

The assessee being aggrieved with the order passed by the AO u/s.143(3) rw.s.144C(13), dated 08.10.2012, has carried the matter in appeal before us. The Ld. Authorized Representative (for short „A.R‟) fo the assesse at the very outset of the hearing of the appeal, took us through the observations of the lower authorities in context of the issue under consideration. It was submitted by the ld. AR that as the assessee was engaged in the business of importing of coding and marking printers, consumable and accessories from its AEs and selling the same without making any value addition, hence, it had adopted RPM as the most appropriate method for benchmarking its international transactions. It was submitted by ld. AR that the AO/TPO had most arbitrarily proceeded on the basis of misconceived facts and substituted the RPM by TNMM for benchmarking the international transactions of the assessee. It was vehemently submitted by ld. AR that as per the rule 10B(1)(b) of the Income-tax Rules,1962, RPM is the best suited method for determining the ALP of the international transactions in a case where the assessee purchases goods from AE which are resold as such to the unerelated parties. In support of his contention, ld. AR relied on the certain judicial pronouncements, as under:-

It was submitted by the ld. AR that in all the aforementioned orders it had consistently been concluded that in a case where goods are purchased and sold without any value addition, the RPM would be the M/s Videojet Technologies (I) Pvt. Ltd. most appropriate method for benchmarking the international transactions. The ld. AR submitted that the view taken by the TPO that as 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 it, therefore, the RPM could not be accepted for benchmarking the international transactions of the assessee was not only backed by misconceived facts, but all the more was devoid and bereft of any force of law. It was submitted by ld. AR that in case the TPO was of the view that the comparables were not found appropriate, then the appropriate remedy available with him was to search for fresh comparables and the method adopted by the assessee for benchmarking the international transactions could not have been rejected merely for the said reason. In support of his aforesaid contentions, the ld. AR relied on the order of the ITAT Delhi Bench of the Tribunal in the case of Burberry India Pvt. Ltd. Vs. ACIT, Circle 5(1), New Delhi (ITA No. 758/Del/2017; dated 22.06.2018). Apart therefrom, it was submitted by the ld. AR that the aforesaid observation of the TPO that the assessee and the comparables were not demonstrated to be following uniform accounting norms was in itself an incorrect observation. It was submitted by the ld. AR that both the assessee and the comparables used Indian GAAP and accordingly followed the uniform accounting norms. In fact, it was submitted by him that no specific discrepancy was pointed out by the TPO/DRP while dislodging the said claim of the assessee. Further, on facts it was the claim of the ld. AR that the TPO while drawing adverse inference as regards the method of benchmarking adopted by the assessee had relied upon wrong facts and figures. The ld. AR taking us to Para 6.15 of the order of the TPO, submitted, that the latter while observing that the average cost price of goods imported during the year was more as in comparison to that of last year, had based such view on wrong facts and figures. It was averred by the ld. AR that while for the assessee in the immediately preceding year had imported 420 machines for a consideration of Rs.12,56,25,031/-, however, the value of the same

Per Contra, the ld. Departmental Representative (in short the “DR”) submitted that the claim of the assesses counsel that the TPO had wrongly taken the purchase price of the machines at Rs.2,56,25,031/- as M/s Videojet Technologies (I) Pvt. Ltd. against the actual value of Rs.12,56,25,031/- was not borne from the records and, thus could not be summarily accepted. It was further submitted by ld. DR that a FAR analysis of the assessee clearly revealed that the goods purchased by him from the AEs were not immediately sold by it. It was the contention of ld. DR that the lower authorities keeping in view the nature of the business of the assessee had rightly concluded that RPM was not the most appropriate method for bench marking the international transactions of the assessee, and had thus rightly applied TNMM. The Ld. DR relied on the orders of the lower authorities and submitted that as the appeal of the assessee was devoid of any force, thus, the same was liable to be dismissed.

We have heard the authorized representatives of 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 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 :-

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 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 M/s Videojet Technologies (I) Pvt. Ltd. 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: "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:

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.”

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).

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 rejectingg 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 M/s Videojet Technologies (I) Pvt. Ltd. accordingly followed the uniform accounting norms, however, the said claim of the assessee was rejected by the TPO/DRP 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

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,

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.

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 M/s Videojet Technologies (I) Pvt. Ltd. aforementioned two comparables in the final list of comparables. Accordingly, we allow the appeal of the assessee in terms of our aforementioned observations.

In the result, appeal of the assessee is allowed. Order pronounced in the open court on 28/05/2019. Sd/- Sd/- (G.S.PANNU) (RAVISH SOOD) VICE PRESIDENT JUDICIAL MEMBER Mumbai; Dated 28/05/2019 Prakash Kumar Mishra, Sr.PS Copy of the Order forwarded to :