Loading judgment…
Facts
The assessee's appeal stemmed from a final assessment order involving a transfer pricing (TP) adjustment for Assessment Year 2010-11. An earlier Tribunal order had remanded the AMP expenses issue but failed to adjudicate the TP adjustment related to the import of finished goods. The Delhi High Court subsequently remanded this specific issue back to the Tribunal to determine the Most Appropriate Method (MAM) for calculating the Arm's Length Price (ALP) for these transactions.
Held
Following the jurisdictional High Court's ruling in the assessee's own case for Assessment Year 2009-10, which held the 'Resale Price Method' (RPM) as the MAM for similar transactions, the Tribunal directed the Assessing Officer (AO)/Transfer Pricing Officer (TPO) to re-compute the Arm's Length Price for the international transactions concerning purchases of finished goods. The AO/TPO is instructed to apply the 'Resale Price Method' for this re-computation and conduct fresh benchmarking.
Key Issues
The primary legal issue was the determination of the Most Appropriate Method (MAM) for computing the Arm's Length Price (ALP) for international transactions involving the import and resale of finished goods, specifically whether the Resale Price Method (RPM) or Transactional Net Margin Method (TNMM) should be applied for the transfer pricing adjustment.
Sections Cited
143(3), 144C(1), 92C
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH ‘I’: NEW DELHI
O R D E R
PER MANISH AGARWAL, AM:
This appeal is filed by the assessee against the final assessment order dated 30.01.2015 passed U/s 143(3) r.w.s.144C(1) of the Income Tax Act, 1961 (hereinafter called ‘the Act’) in compliance to the direction given by Ld. Dispute Resolution Panel (DRP) vide order dated 15.12.2014 for Asst. Year 2010-11.
In the present appeal, the Co-ordinate Bench vide order dated 26.05.2017 in TP Adjustment towards alleged AMP expenses to the file of TPO to decide afresh with certain directions, however, Luxottica India Eyewear Pvt. Ltd. vs. ACIT ground in respect of TP Adjustment made towards International transactions of import of finished goods remained un-adjudicated.
Against the said order, the assessee filed an appeal before the Hon’ble Delhi High Court wherein the Hon’ble Court in vide its order dated 20.11.2024 has remand the matter to back to the Tribunal to consider and decide the grounds of appeal raised in respect of TP adjustment pertaining to import of finished goods. The observations given by the Hon’ble High Court in para 12 to 15 are as under:
“12. Mr. Nageshwar Rao, the learned counsel appearing for the Assessee referred to the grounds of appeal filed before the learned ITAT and had drawn the attention of this Court to grounds raised for challenging the adjustment in respect of transactions pertaining to purchase of finished goods. The said grounds are set out below: "4.1 That the action of Hon'ble DRP/Ld. AO/Ld. TPO of rejecting the Resale Price Method ("RPM") applying Transaction Net Margin Method ("TNMM") as the Most appropriate Method ("MAM") under section 92C of the Act to determine ALP of impugned international transaction is completely arbitrary and calls for being reversed. 4.2 That the Ld. AO/Ld. TPO/Hon'ble DRP while rejecting RPM as the MAM, erred in ignoring the fact that the Appellant had earned sufficient gross margins vis-a-vis the comparable companies and hence, there was no occasion for the Ld. AO/Ld. TPO to reject the same as the MAM. 4.3 That the Ld. AO/Hon'ble DRP/Ld. TPO erred on facts and in law in rejecting the RPM and applying TNMM as the MAM in complete ignorance of the fact that the Hon'ble Tribunal had upheld the applicability of RPM as the MAM in respect of the impugned transaction in the order passed in Appellant's own case for the immediately preceding year, i.e., AY 2009-10. 4.4 That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO/Ld. TPO erred in disregarding the commercial reality and re-computing the ALP of the impugned international transaction without making appropriate adjustments so as to take into account the fact that the Appellant is in its initial years of operation.
4.5 That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO/Ld. TPO erred in using single year updated data to determine the ALP of the impugned international transaction. **** **** **** 4.8 That on facts and in law, the Hon'ble DRP/Ld. AO/Ld. TPO have erred in selection of functionally non comparable companies for application of TNMM without appreciating that (a) such companies are manufactures/ retailers; (b) business profile of the comparable company is significantly different from that of the Appellant which operates as a full fledged distributor; and (c) Comparable companies do not meet the quantitative filters applied by the Ld. TPO,"
We find no discussion in respect of the said grounds. This Court is also unable to accept that adjudication of the issue regarding the determination of ALP on account of AMP expenses would necessarily entail determination of transfer pricing adjustments on the ground of purchase of finished goods.
Concededly, the impugned order does not reflect that learned ITAT had adjudicated any of the aforesaid grounds. It is apparent that the learned ITAT had proceeded on the basis that since the matter is remanded to the TPO, the petitioner's challenge to the adjustment on account of purchase of finished goods would also be considered afresh.
In view of the above, we consider it apposite to remand the matter to the learned ITAT to consider the grounds raised by the Assessee regarding transfer pricing adjustment in respect of transactions pertaining to purchase of the finished goods.”
While addressing these grounds of appeal, at the outset, Ld. AR for the assessee drew our attention to the order of the Co-ordinate Bench of Tribunal in the case of assessee itself in Assessment Year 2009-10 in IT(TP)A No.1115/Del/2014 wherein vide order dated 06.05.2014, Co-ordinate Bench has held that “Resale Price Method” as most appropriate method (MAM). The Co-ordinate Bench further directed the TPO to adopt the ‘Resale Price Method’ as MAM and compute the arm length price of the transaction of purchases of finished goods. The relevant observations as contained in para 9 to 10.5 of the said order are reproduced as under:
“9. After hearing rival contentions we hold as follows.
The undisputed fact is that the functional profile of the assessee is trading in sun glasses and sun glass frames. It purchases and sells goods without any value addition. In fact the TPO in the original show cause notice has, in our view, correctly stated as follows. “5. From the details filed by the assessee, it is observed that the company has been established primarily for the purpose of carrying on the business of trading of sun glasses and frames. Keeping the functional profile of the assessee in mind, it is held that RPM is the MAM for this case. The RPM is applicable in a resale situation, wherein the property or services purchased from an associated enterprise are resold to unrelated enterprises. Further more, RPM is generally adopted where the tested party ie. trader purchases from an associated enterprise and resells to an independent enterprise without adding substantial value to the product, or does not contribute substantially to the creation of maintenance of intangible property associated with the product (trade mark or trade names) which are owned by the AES. Luxottica India is a full fledged distributor engaged in reselling goods purchased from AEs to unrelated parties in India. Luxottica India does not add value to the goods purchased from related party, which are resold to unrelated parties. Accordingly, the RPM is the MAM to establish the arm's length nature for Luxottica India's inter company transaction of the import of sun glasses/sun glass frames from AEs for resale in India." 10.1. The reasons given by the TPO for adopting TNMM et page 14 of his order are general in nature. The TPO or the DRP has not given any specific reason on the resale price method (RSPM) should not be adopted as its MAM. 10.2. Coming to the argument that the assessee himself has adopted TNMM as the MAM for its transfer pricing study and hence it cannot turn around and argue for adoption of RSPM as the MAM, we find that the Mumbai Bench of the Tribunal in the case of Mattel Toys (I) Pvt. Ltd. in held as follows. “41. Now coming to the argument of the Ld. DR that once the assessee itself has chosen TNMM as the MAM in TPR, then it cannot resort to change its method at an assessment or appellate stage. In our opinion, such a contention cannot be upheld because if it is found on the facts of the case that a particular method will not result into proper determination of the ALP, the TPO or the appellate authorities can very well hold that why a particular method can be applied for getting Luxottica India Eyewear Pvt. Ltd. vs. ACIT proper determination of ALP or the assessee can demonstrate a particular method to justify its ALP. Thus, even if the assessee had adopted TNMM as the MAM in the TP report, then also it is not precluded from raising the contentions/objections before the TPO or the appellate Courts that such a method was not an appropriate method and is not resulting into proper determination of ALP and some other method should be resorted. The ultimate aim of the TP is to examine whether the price or the margin raising from an international transaction with the related party is at ALP or not. The determination of approximate ALP is the key factor for which the MAM is to be followed. Therefore, if at any stage of the proceedings, it is found that by adopting one of the prescribed methods other than chosen earlier, the most appropriate ALP can be determined, the assessment authorities as well as the appellate Courts should take into consideration such a plea before them provided, it is demonstrated as to how a change in the method will produce better or more appropriate ALP on the facts of the case. Accordingly, we reject the contentions of the Ld. DR and also the observations of the AO and the Ld. CIT(A) that the assessee cannot resort to adoption of RPM method instead of TNMM." 10.3. The case of the assessee is much better than the case of M/s Mattel Toys (1) Pvt. Ltd. (supra) for the reason that the assessee in its transfer pricing report has also used RSPM as the MAM. Hence this argument of the Revenue is rejected. 10.4. As the undisputed fact is that the functional profile of the assessee is that of a trader and as the characterization of the transaction is purchase and sale of goods, we hold that RSPM is the MAM by applying the following decisions of the Co- Ordinate Bench of the Tribunal. (i) In the case of Star Diamond Group NV Mumbai (ITA No.3923/Mum/2008), it is held as follows: "13. This finding in our humble opinion is wrong for the reason that the CIT(A) has adopted these very comparables, along with three others while arriving at the operating margins at para 7.16 of his order. As the assessee is a trader, without value addition to the goods, we find force in the submissions of the assessee that resale price method is the most appropriate method for determining the ALV with respect to AE transaction. in fact, the Revenue has accepted this method in earlier two years. The TPΟ in his order dt. 7.3.2005 for the AY 2002-03 and order dt. 20.3.2006 for the AY 2003-04, has agreed with the computation of arm's length price made by the assessee under the resale price method.
Luxottica India Eyewear Pvt. Ltd. vs. ACIT (ii) In the case of L'Oreal India P. Ltd. vs. ITO (ITA no.5423/Mum/2009) it is held as follows: “19. During the course of hearing, Id. DR also supported the method considered by TPO and referred to para 2.29 of OECD price guidelines 2010 as stated hereinabove. On the other hand, Id.AR justified the RP< method adopted by it and also referred to order of TPO in the preceding AY as well as succeeding AY to the AY under consideration to substantiate that RPM is the most appropriate method to determine ALP. He submitted that the assessee made adjustment for marketing and selling expenses to the profits to make it comparable to the comparable companies profits. We agree with the Ld. CIT(A) that there is no order of priority of methods to determine ALP. RPM is one of the standard method and OECD guidelines also states that in case of distribution and marketing activities when the goods are purchased from AEs which are sold to unrelated parties, RPM is the most appropriate method. In the case before us, there is no dispute to the fact that the assessee buys products from its AEs and sells to unrelated parties without any further processing.” (iii) In the case of Danisco (India) Pvt. Ltd. vs. ACIT, Circle 10(1), New Delhi (ITA no.5291/Del/2010), it is held as follows: “22. Considering the above submissions we find that the assessee established in 1998 as a 100% subsidiary of Danisco A/S Denmark. Danisco India is engaged in the business of manufacturing and trading of food additives. The manufacturing business in respect of food flavours and the trading business is for products for falling under the category of food ingredients. The main grievances of the assessee against the order of the Ld. TPO upheld by the Ld. DRP are regarding their approach in the manner in which transfer pricing adjustment has been made, the approach adopted by the Ld. TPO in granting 17 comparable companies denying the economic adjustment claim made by the assessee, regarding computation of margins of the assessee, non consideration of supplementary transaction and denial of adequate opportunity of being heard to the assessee by the authorities below as well as their failure to examine the contentions and arguments of the assessee in this regard. Considering these grievances as discussed herein above by us in the arguments advanced by the parties/their submissions and having gone through the decision relied upon, we find substance in the submission of the assesse3e and thus we are of the view that it is a fit case to set aside the matter to the file of the Ld. TPO for his fresh consideration and decide the issue afresh after affording opportunity of being heard to the assessee and discussing their submissions in the order and reasons, if any, for not agreeing or Luxottica India Eyewear Pvt. Ltd. vs. ACIT agreeing with them. It is ordered accordingly with direction to the Ld. TPO to: a) first examine as to whether, was there any value addition on imported goods, and if answer is in negative then apply RPM as a most appropriate method for trading transactions of imported goods and in consequence examine the application of appropriate method as commission payment; (iv) Frigoglass India P.Ltd. (ITA no.463/Del/2013), it is held as follows: "We have heard the rival contentions and perused the material available on record. In our considered view, once assessee has given a methodology for working of ALP on selection of a particular method supported by appropriate comparables, the working can be dislodged by TPO on the basis of cogent reasons and objective findings. In this case except theoretical assertions and generalized observations, no objective findings have been given to come to a reasoned conclusion that assessee's adoption of CPM for manufacturing segment and RPM for trading segment was Factually and objectively not correct. Thus the rejection of methods by TPO as adopted by assessee is bereft of any cogency and objectivity. The same is a work of guessing and conjectured. Similarly, the TNMM method applied by the TPO suffers from the same inherent aberrations as mentioned above. In these circumstances we are of the view that Assessee's methods of CPM and RPM respectively worked by applying appropriate comparables is to be upheld. Thus the ALP working returned by the assessee is upheld. The Assessee's TP grounds are allowed." (v) Textronic India Pvt.Ltd. vs. DCIT (ITA no. 1334/Bang/2010), it is held as follows: "We have considered the rival submissions. The dispute is with regard to the ALP in respect of international transactions whereby the assessee imports equipment from its AE and resells them without any value addition to the Indian customers. In similar circumstances, Mumbia Bench of the Tribunal in the case of L'Oreal India Pvt. Ltd. (supra) has taken the view that the RPM would be the most appropriate method for determining the ALP. The Mumbai Bench of Tribunal in this regard, has referred to the OECD guidelines wherein a view has been expressed that RPM would be the best method when a re-sale takes place without any value addition to a product. In the present case, the assessee buys products from the AE and sells it without any value addition to the Indian customers. In such circumstances, we are of the view that the ratio laid down by the Mumbai Bench of the Tribunal in the case of L 'Oreal India Pvt. Ltd. (supra) would be squarely Luxottica India Eyewear Pvt. Ltd. vs. ACIT applicable to the facts of the assessee's case. In that event, the GP as a percentage of sales arrived at by the TPO in Annexure to the TPO's order insofar as trading activity of comparables identified by the TPO at 12.90%. The GP as a percentage of sales of the assessee is at 35.6% which is much above the percentage of comparables identified by the TPO. In such circumstances, we are of the view that no adjustment could be made by way of ALP. We, therefore, accept the alternative plea of the assessee and delete the addition made by the AO. In view of the above conclusion, we are not going into the other issues on merits raised by the assessee on the approach adopted by the TPO in arriving at the ALP. Thus, ground Nos. 2 to 7 are allowed." 10.5. In view of the above discussion, we direct the TPO to adopt RSPM as the MAM in this case. 10.6. In the result this ground of the assessee is allowed.”
The Ld. AR further drew our attention to the judgement of Hon’ble Jurisdictional High Court in the case of assessee itself wherein the Revenue’s appeal against the order of the Tribunal in Assessment Year 2009-10 in stood confirmed in dated 06.11.2015 wherein the Hon’ble High Court has made the following observations in para 5A of the order: “5A. The other issue is about the Assessee having shifted from Transactional Net Margin Method (TNMM) to the resale price met (RPM) as the most appropriate method (MAM) for the purposes determination of the arm’s length price (ALP). The Court sees no reason interfere since the adoption of the RPM by the Assessee was indeed found be the MAM by the Dispute Resolution Panel (DRP) itself.”
It is thus, requested that in the present case, since the facts are identical, necessary directions be given to TPO to adopt the ‘Resale Price Method’ as MAM as against TNMM applied by TPO for determination of arm’s length price of the international transactions pertaining to purchases of finished goods.
On the other hand, the CIT-DR submits that in terms of the order of the Hon’ble High Court in preceding assessment year matter may be sent back to the Luxottica India Eyewear Pvt. Ltd. vs. ACIT file of the Ld. AO/TPO, however, the necessary directions be given that the AO/TPO made a fresh benchmarking in terms of the Resale Price Method being the most appropriate method in the matter. He prayed accordingly.
Heard both the parties and perused the materials available on record. Admittedly the issue raised in these grounds of appeal have already been settled by the jurisdictional High Court in the case of assessee in Assessment Year 2009-10 where the order of the Co-ordinate Bench holding the ‘Resale Price Method’ as MAM. Thus, by respectfully following the judgments of the Hon’ble Jurisdictional High Court, we direct the AO/TPO to re-compute the arm’s length price of international transactions pertaining to purchases of finished goods by following ‘Resale Price Method’ and further directed to make fresh benchmarking. With these directions, the grounds of appeal No.4 to 4.8 of assessee are allowed for statistical purposes.