FUJITSU INDIA PVT. LTD.,GURGAON vs. ACIT, CIRCLE-9(2), NEW DELHI

The Ld. DRP erred on facts and in law in not following the directions of Hon‟ble Income Tax Appellate Tribunal („Hon‟ble ITAT) in Appellant‟s own case for AY 2011-12, AY 2012-13 and AY 2013-14 wherein the Hon‟ble ITAT, for each of the aforesaid years, by characterising the Appellant as a normal risk distributor, has upheld the application of RPM as the most appropriate method in order to benchmark the international transaction of purchase of traded goods; 7. The Ld. AO has erred in initiating penalty proceedings u/s 27i(i)(c) read with section 274 of the Act mechanically and without recording any adequate satisfaction for such initiation; and 8. That on the facts and circumstances of the case and in Page | 2 law, the Ld. AO erred in charging interest u/s 234A, 234B, 234C of the Act without assigning cogent reasons for the same.”

The brief facts of the case shows that the assessee is leading provider of ICT based business solution for global marketplace. It combines worldwide Corps of systems and services exports with highly reliable computing and communication products and advanced microelectronics to deliver added value to customers. It is also engaged in business of sale of goods and services. The assessee filed its return of income on 30/11/2014 declaring a loss of Rs. 10,36,15,530/-. During the assessment it entered into 9 different international transactions. Out of that 7 international transactions are not in dispute between the parties. The assessee has entered into an international transaction of purchase of finished goods of Rs. 38,06,77,874/- and purchased of spare parts of Rs. 9,50,19,020/-. The assessee benchmarked the above transaction by adopting the recent price method as the most appropriate method. It adopted profit level indicators of gross profit/ sales and selected 8 comparable companies whose average gross profit margin is 5.64 % and assessee’s gross profit margin was determined at 5.43 %. Thus, the assessee stated that its international transaction is within 3% band and hence it is at arm's length. The ld TPO rejected the compatibility analysis. It rejected the resale price method as the most appropriate method stating that the appellant was also performing certain additional functions including purchase order, warehousing and inventory control, quality control to purchasing and forecasting, pricing and sales and marketing services. Therefore, the assessee assumes considerable risk in the form of market risk. credit risk, inventory risk foreign exchange risk, contract risk, service Page | 3 liability risk and manpower risk. He further held that since all the relevant cost incurred to discharge these functions cannot be captured in the recent price method, it cannot be taken as most appropriate method. Therefore, the ld TPO adopted the Transactional Net Margin Method as the most appropriate method and substituted the profit level indicator with OP/ sales. The ld TPO did not disturb the comparable selected by the assessee however denied the working capital adjustment. He computed the margin of the comparable at 1.64 % and proposed a adjustment of Rs. 17.64 Crores. He further held that the assessee has outstanding receivable on the 30 days therefore same are considered as loans by assessee to the associated enterprises and imputed interest based on the average State Bank of India base rate @ 14.5% is. The adjustment of Rs. 31,84,574/- was made. Accordingly, the order u/s 92CA(3) was passed on 06.10.2017. Consequently, the draft Assessment Order was passed by the ld AO determined the income of the assessee at Rs. 728,77,534/- against the return loss of Rs. 10,36,15,530/- thereby making an adjustment on account of the arm's length price on the international transaction of Rs. 17,64,93,064/-. The assessee preferred objection before the ld DRP to consider the objection of the assessee passed an direction dated 13/08/2018. It upheld the action of the ld TPO in rejecting RPM as the most appropriate method. It upheld the TNMM method as the most appropriate method. This was because of the risk with similar directions were given by the ld DRP for Assessment Year 2012-13 and 2013-14. It also dealt with certain comparables and directed their exclusion. Working capital adjustment was also granted. The ld AO directed to consider 60 days credit period using LIBOR rates for interest on outstanding receivables. Based on this the ld TPO passed an order dated 24/09/2018 wherein the transfer pricing adjustment on account of purchase of goods was reduced to Rs. 1,48,65,293/- and adjustment on account of interest on receivable was determined at Rs. Nil. Based on this the assessment order was passed on 28/09/2018 where the assessed income was determined at Rs, 4,12,49,763/- against the return loss of Rs. 10,36,15,304/-. Thus, the assessee is aggrieved with that order and has preferred this appeal.

The ld AR submitted that the assessee is contesting first ground Nos. 5 and 6 of the appeal with respect to the adoption of the most appropriate method. It was submitted that in case of the assessee the ld TPO has accepted the resale price method for benchmarking the trading segment for Assessment Year 2009-10 and 2010-11 and the ld TPO has accepted this approach. It was further stated that co-ordinate bench in assessee’s own case for assessment year 2011-12, 2012-13, 2013-14 in 1982/Del/2017 and 7088/Del/2017 by order dated 30/07/2018 on identical facts and circumstances of the case held that the appellant is routine risk bearing distributor and upheld the resale price method as the most appropriate method for benchmarking the international transaction of purchase of traded goods. He also referred to para No. 22 onwards of that decision. He also admitted that the revenue has filed an appeal against order of the coordinate bench before the Hon'ble Delhi High Court which is pending. It was further stated that for this year the ld DRP has merely relied on its finding for earlier years which have been reversed by the co-ordinate bench.

The ld DR vehemently opposed the argument of the ld AR and submitted that admittedly in earlier years the most appropriate method has been accepted by the co-ordinate bench as resale price method. He submitted that the co-ordinate bench has not considered the several risk that assessee undertakes the functional profile of the assessee and therefore that order should not be followed. He submitted that finding of the coordinate bench is also challenged before honourable Delhi high court where risk assumed by the assessee are ignored. He referred to following paragraph of the order “17. However, when we examine the arguments addressed by both the ld. Representative for the parties to the appeal in the light of the undisputed facts, it goes to prove that the taxpayer has purchased finished goods ready for sale in the market from its AE without making any value addition to the same. The function performed by the taxpayer for issuance of the purchase order, budget control, quality checks, etc. would not change the role of the taxpayer other than a normal distributor.‖ 6. He submitted that coordinate bench has not all given any hheed to the arguments of the ld TPO and DRP that assessee assumes considerable risk in the form of market risk. credit risk, inventory risk foreign exchange risk, contract risk, service liability risk and manpower risk. He further held that since all the relevant cost incurred to discharge these functions cannot be captured in the recent price method, it cannot be taken as most appropriate method. He otherwise submitted that the matter is pending before the Hon'ble Delhi High Court and therefore the issue needs to be decided afresh.

We have carefully considered the rival contentions and perused the orders of the lower authorities. We have also perused the order of the coordinate bench in assessee’s own case in earier years. We appreciate the arguments of the parties with respect to the risk assumed by the normal distributor as well as the risk assumed by the assessee. However , we find that the issue is squarely covered by the decision of the coordinate bench in assessee’s own case. The coordinate bench in Fujitsu India (P.) Lt.d Vs Assistant Commissioner of Income-tax, Circle-9(2), New Delhi [2019] 101 taxmann.com 322 (Delhi - Trib.)[03-07- 2018] decided this issue vide para Nos. 15 to 23 as under:- ‘15. TPO has based his entire findings on the sole ground that the taxpayer is not a normal distributor as he has been performing host of functions including purchase order, warehousing and inventory control, quality control, budgeting and forecasting, pricing and marketing and sales which the taxpayer needs to carry out within its distribution function to ensure that its goods reached the market and ready for actual resale. It is also the case of the TPO that unless the taxpayer has made proper warehousing arrangement or has proper inventory control, its goods will not move to the point of sale which can be said of the marketing efforts of the taxpayer.

TPO also proceeded to change the method on the premises that the taxpayer has incurred AMP expenses of Rs.15,425,168/-against the trading revenue of Rs.81,738,810 which is 18.87% which is definitely much higher than the expenses of a routine distributor. TPO also not entertained the arguments of the taxpayer that the net level loss the taxpayer has suffered is due to failure of the business/ project plans for the financial years on the ground that AE ought to have been supported the taxpayer either by reimbursement of cost or some price support in the international transaction of purchase of finished goods by the taxpayer. So, the TPO proceeded to believe that the net loss of the taxpayer is linked to the transfer price that the taxpayer has agreed with its AE and in these circumstances, TNMM is the most appropriate method.

However, when we examine the arguments addressed by both the ld. Representative for the parties to the appeal in the light of the undisputed facts, it goes to prove that the taxpayer has purchased finished goods ready for sale in the market from its AE without making any value addition to the same. The function performed by the taxpayer for issuance of the purchase order, budget control, quality checks, etc. would not change the role of the taxpayer other than a normal distributor. 18. Now, the question arises for determination in this case is as to whether functions performed by the taxpayer with regard to quality control, warehousing, sales and marketing etc. are required to be captured in the resale price margin.

Undisputedly, these costs are qua unrelated parties and to our mind, these activities are not linked to the international transactions entered into between the taxpayer and the AEs as the AEs do not have any control on such activities and the answer to the question is to be found in case law relied upon by the taxpayer as under.

Coordinate Bench of the Tribunal in Horiba India (P.) Ltd. v. Dy. CIT [2017] 81 taxmann.com 209 (Delhi- Trib.) while deciding the identical issue as to whether RPM or TNMM is the most appropriate method to determine ALP of international transactions in case of distribution of marketing activities by relied upon the decision rendered by Hon'ble Mumbai High Court in CIT v. L'oreal India (P.) Ltd. [2015] 53 taxmann.com 432 decisions of the Tribunal in Nokia India (P.) Ltd. v. Dy. CIT [2015] 153 ITD 508/[2014] 53 taxmann.com 492 (Delhi) and Mattel Toys (I.)(P.) Ltd. v. Dy. CIT [2013] 34 taxmann.com 203/[2013] 144 ITD 76 (Mum. - Trib.) and decided the issue in favour of the assessee by returning following findings :— "14. From the aforesaid decision it is quite ostensible that in case of a distributor, wherein the goods are purchased from AE and resold to other independent entities without any value addition, then resale price method should be reckoned as MAM. One of the main reason given by the TPO as well as the DRP is that the assessee is a full- fledged/full risk distributor and performing host of Page | 9 functions, therefore, RPM should not be taken us the MAM, because all these functions required huge cost which may not represent correct gross profit margin. We are unable to appreciate such proposition, because in a comparable uncontrolled transactions scenario, a normal distributor will undertake all kind of functions which are related to sales of the product. The functions like market research, sales and marketing, ware-housing, inventory control, quality control etc. and also risk like market risk, inventory risk, credit risk etc all are undertaken by any distributor for sale of products. No comparable instances have been brought either by the TPO or by the Ld. DRP that the other distributors are not performing such functions. What is important is to see is, whether there is any value addition or not on the goods purchased for resale? If there is no value addition and if the finished goods which are purchased from AE are resold in the market as it is, then gross profit margin earned on such transaction becomes the determinative factor to analyse the gross compensation after the cost of sales. Thus, we hold that under the facts of the present case, RPM should be held as MAM."

Co-ordinate Bench of the Tribunal in Asstt. CIT v. Kobelco Construction Equipment India Ltd. [2017] 81 taxmann.com 31 (Delhi - Trib.) also decided the identical issue by relying upon Mattel Toys (I.)(P.) Ltd. (supra) and ITO v. L'oreal India (P.) Ltd. [2012] 24 taxmann.com 192/53 SOT 263 (Mum.) (URo) in favour of the assessee by returning following findings :— Page | 10 "13. The aforesaid decision clearly clinches the issue that under the RPM, the focus is more on same or similar nature of properties or services rather than similarity of products and functional attribute is a primary factor while undertaking the comparability analysis under RPM. Further, RPM is mostly applied in the case of a distributor where reseller purchases tangible property and obtains services from the AE and without making any value addition, resells the same to third parties. Under these circumstances and looking to the fact that functions performed by the assessee is of distributor only, therefore, RPM should be reckoned as the most appropriate method and accordingly, we agree with the learned CIT(A) that on the facts of the present case, RPM should be the adopted as the most appropriate method for benchmarking assessee's international transactions. So far as the two comparables chosen by the TPO apart from assessee's comparables are concerned, we find that, T & I Global Limited has rightly been rejected by learned CIT(A), because this company was manufacturing machinery, therefore, same cannot be compared 15 ITA- 6401/Del/2012 with the assessee which is purely performing the distribution function. Thus, the final list of comparables, i.e., three chosen by the assessee and accepted by the TPO and one as selected by the TPO and upheld by the learned CIT(A), is sustained for comparing the margins under RPM. As a consequence, we hold that the TP adjustment made by the learned TPO has rightly been deleted by Ld CIT(A). Accordingly, the grounds raised

On careful reading of the order of the lower authorities , it is claimed that assessee performs services much more than required. We have also perused the OECD guidelines on TP which provides that :- 2.37 It should be expected that the amount of the resale price margin will be influenced by the level of activities performed by the reseller. This level of activities can range widely from the case where the reseller performs only minimal services as a forwarding agent to the case where the reseller takes on the full risk of ownership together with the full responsibility for and the risks involved in advertising, marketing, distributing and guaranteeing the goods, financing stocks, and other connected services. If the reseller in the controlled transaction does not carry on a substantial commercial activity but only transfers the goods to a third party, the resale price Page | 13 margin could, in light of the functions performed, be a small one. The resale price margin could be higher where it can be demonstrated that the reseller has some special expertise in the marketing of such goods, in effect bears special risks, or contributes substantially to the creation or maintenance of intangible property associated with the product. However, the level of activity performed by the reseller, whether minimal or substantial, would need to be well supported by relevant evidence. This would include justification for marketing expenditures that might be considered unreasonably high; for example, when part or most of the promotional expenditure was clearly incurred as a service performed in favour of the legal owner of the trademark. In such a case the cost plus method may well supplement the resale price method. 2.38 Where the reseller is clearly carrying on a substantial commercial activity in addition to the resale activity itself, then a reasonably substantial resale price margin might be expected. If the reseller in its activities employs certain assets (e.g. intangibles used by the reseller, such as its marketing organisation), it may be inappropriate to evaluate the arm's length conditions in the controlled transaction using an unadjusted resale price margin derived from uncontrolled transactions in which the uncontrolled reseller does not employ similar assets. If the reseller possesses valuable marketing intangibles, the resale price margin in the uncontrolled transaction may underestimate the profit to which the reseller in the controlled transaction is entitled, unless the comparable uncontrolled transaction involves the same reseller or a reseller with similarly valuable marketing intangibles.

However, judicial discipline demands that a coordinate bench should normally follow the decision of coordinate bench. Thus, decision of the coordinate bench binds us and therefore respectfully following the same we allow ground Nos. 5 and 6 of the appeal of the assessee and direct the ld TPO to adopt the resale price as the most appropriate method and compute the difference in ALP thereafter. The ld TPO is directed to examine the transfer pricing analysis and decide the issue afresh.

In view of our decision in Ground Nos. 5 and 6 all other grounds of appeal are not required to be adjudicated. Accordingly, the appeal of the assessee is partly allowed. Order pronounced in the open court on 23/11/2021.