STRYKER INDIA PVT. LTD.,NEW DELHI vs. DCIT, NEW DELHI

Following grounds have been raised in this appeal:

From the above grounds, it is gathered that the only grievance of the assessee relates to the enhancement on account of transfer pricing adjustment amounting to Rs.2,00,75,857/- u/s 92C(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act).

Facts of the case in brief are that the assessee filed the return of income on 31.10.2002 declaring a loss of Rs.96,16,480/-. The said return was processed u/s 143(1) of the Act on 03.02.2003. Subsequently, the case was selected for scrutiny. The assessee was engaged in importing medical/surgical products from its Associated Enterprises Stryker India Pvt. Ltd. (AEs) and selling them in India. During the year under consideration the assessee entered into the following international transactions with its AEs:

The TPO made the aforesaid adjustment in the following manner:

Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted that the AO/TPO rejected the methodology adopted by the assessee i.e. Resale Price Method and substituted the same with his own methodology i.e. Transactional Net Margin Method (TNMM), based upon several subjective presumptions, without taking due cognizance of the submissions/arguments/data provided by the assessee. It was further submitted that the AO/TPO had not appreciated the facts relating to international transaction of purchase of finished goods from AEs in right perspective and if the adjustment made by the TPO were to be given effect, then the post adjustment would worked out to approximately 50%, which itself was exorbitant and absolutely absurd percentage of gross profit earned by any distributor in the trade. It was also stated that the AO/TPO had not allowed the +/- 5% range mentioned in proviso to Section 92C(2) of the Act while computing the arm’s length price.

The ld. CIT(A) after considering the submissions of the assessee observed that RPM evaluates the arm’s length nature of transaction with reference to the gross profit margin in a comparable uncontrolled transaction and measures the value of functions performed and this method is appropriate in the cases involving the purchase and resale of tangible goods/services in which the buyer/reseller does not add value to the goods by physically altering them. He further observed that RPM begins with the price at which a product that has been purchased from an AE is resold to an independent enterprise and this price (the resale price) is reduced by an appropriate gross margin representing the amount out of which the reseller/distributor would seek to cover its selling and other operating expenses and in the light of the distribution of resale functions performed (taking into account assets used and risks assumed), make an appropriate profit. The ld. CIT(A) discussed the provisions contained in Rule 10C(1) and 10B(1)(b)(i) of the Act and transfer pricing guidelines issued by OECD. The ld. CIT(A) reproduced the abstracts from TPO’s order in para 10.7 of the impugned order for the cost of repetition the same are not reproduced herein. The ld. CIT(A) was of Stryker India Pvt. Ltd. the view that none of the comparable company provided a kind of warranty or after sales service which the assessee offered under warranty period. According to him the following factors militate against the use of RPM: “a) It is not known that the comparables are placed at what level in the distribution channel, i.e., whether there are any more intermediaries above or below them; presence of such intermediaries impacts gross margins; b) Stryker brand is an internationally known brand; the brand equity carries its own premium; the comparables don’t seem to be well known companies; c) Stryker is the exclusive distributor of its products in India; whereas it is not known whether the comparables have any such exclusive rights; manual; and d) As there is no uniformity in regard to accounting methods of computing gross margins insofar as some expense items may be accounted for above the line while others may account for the same items below the line.”

The ld. CIT(A) was of the view that the TNMM was the most suitable method as it was more tolerant to functional and product differences and takes care of the problems in accounting at gross level comparison. He also Stryker India Pvt. Ltd. observed that as there was no uncontrolled transactions pertaining to purchase of Stryker products by other independent enterprises in India or the assessee purchasing identical items from third parties, Comparable Uncontrolled Price (CUP) cannot be used. He also observed that the Cost Plus Method was not applicable to resale and trading transactions and that the Profit Split Method could not be applied as no information was available about the profit earned by the AEs, in such conditions, TNMM was the most suitable method as it was more tolerant to functional and product differences and takes care of the problem in accounting that cannot be checked at gross level comparison. The ld. CIT(A) held that operating profit/sales was the appropriate Profit Level Indicator (PLI) and that the contention of the assessee that the risk profile of the assessee were same as that of other independent risk bearing distributor was not entirely correct because the inventory holding and obsolescence risk for the assessee was much higher than that of other companies. The ld. CIT(A) also observed that in capital goods which were high value, the product liability risk was much higher that in capsules & ointments and that the assessee offered 1-2 years of repair and replacement warranty to its customers. The ld. CIT(A)

The ld. CIT(A) held that the RPM was not applicable in the assessee’s case by observing in paras 11.8 & 11.9 of the impugned order as under:

The ld. CIT(A) also held that the persistent losses of the assessee were on account of improper transfer prices rather than high operating level expenses. The ld. CIT(A)

Now the assessee is in appeal. The ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the assessee selected comparable on the basis of functional analysis and that RPM was the most appropriate method in the case of the assessee who was engaged in distribution of healthcare devices or cardiac care equipments. It was contended that the TPO rejected RPM selected by the assessee alleging that there was high degree of product dissimilarity between the comparables and the assessee. However, he had selected the same set of comparables while using TNMM as the most appropriate method even inspite of noting that there was high degree of product dissimilarity. Therefore, the approach of the TPO was contradictory and he could not have blown hot and cold in the same time. The reliance was placed on the judgment of Hon’ble Supreme Court in the case of Enron Oil & Gas India Ltd. reported at (2008) 173 Taxman 346.

It was further stated that the RPM selected by the assessee for benchmarking as the most appropriate method Stryker India Pvt. Ltd. evaluates the arm’s length nature of controlled transaction by reference to the gross profit margin realized in a comparable uncontrolled transaction and measures the value of functions performed and it was appropriate in the cases involving the purchase and resale of tangible goods/services in which the buyer/reseller did not add value to the goods by physically altering them. It was also stated that this method begins with the price at which the product that had been purchased from an AE and was resold to an independent enterprise, this resale price was then reduced by an appropriate gross margin (the resale price margin) representing the amount out of which the reseller would seek to cover its selling and other operating expenses and in the light of the functions performed (taking into account assets used risk assumed) made an appropriate profit. The ld. Counsel for the assessee contended that the RPM was the most useful when applied to marketing operations wherein the reseller/distributor did not add substantial value of the product through use of tangible or intangible property and that this method requires similarity in the functions and contractual terms between the assessee company and its AE, although the similarity in the product under consideration was less important. It was also stated that even the Rule Stryker India Pvt. Ltd. 10C(1) read with Rule 10B(1)(b)(i), the OECD guidelines and paragraphs 19.2 and 19.3 of the Guidance Note Report on international transactions u/s 92E of the Act issued by the Institute of Chartered Accountants of India, highlight & emphasize the appropriateness of using RPM. The reliance was placed on the decision of the ITAT Bombay Bench in the case of L’Oreal India Pvt. Ltd. reported at TS-293- ITAT-2012 which has been confirmed by the Hon’ble Bombay High Court. The reliance was also placed on the decision of the ITAT Delhi Bench in the case of Tupperware India Pvt. Ltd. in and 1323/Del/2012 wherein the RPM was held to be the most appropriate method for testing the transaction from its AEs for resale to third parties. The reliance was also placed on the following case laws: � Luxottica India Eyewear P. Ltd. (TS-375-ITAT- 2014 (Del(-TP) � Sanyo India Pvt. Ltd. (TS-368-ITAT-2014 (Bang)-TP) � Nokia India (P) Ltd. (TS-349-ITAT-2014(Del)- TP) � Danisco (India) Pvt. Ltd. (TS-169-ITAT- 2014(Del)-TP) The ld. Counsel for the assessee further stated that the TPO objected to the use of RPM due to product Stryker India Pvt. Ltd. dissimilarity between the assessee and the comparables which was a non-issue so far as application of RPM method was concerned. The reliance was placed on the decision of the ITAT Bombay Bench in the case of Mattel Toys (I) Pvt. Ltd. Vs DCIT in ITA No. 2476/Bom/2008.

In his rival submissions the ld. DR reiterated the observation made by the TPO and the ld. CIT(A) and strongly supported the impugned order.

We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, the only controversy to be resolved relates to the method to be considered as most appropriate while determining the arm’s length price. In the present case, the assessee applied RPM which was rejected by the TPO although the same comparables were considered by the TPO while applying the TNMM as most appropriate Stryker India Pvt. Ltd. method to determine the Arm’s Length Price. In the instant case RPM has been accepted as the most appropriate method in the subsequent years i.e. assessment year 2007-08 onwards to determine the arm’s length price of the assessed international transaction of purchase of finished goods which the assessee considered as the most appropriate method, which is evident from page nos. 22 to 95 of the assessee’s paper book which are the copies of the assessment orders for the assessment years 2007-08 to 2011-12. It is also noticed that the TPO for the assessment year under consideration while rejecting the RPM and selecting the TNMM considered the same comparables. Therefore, it is not clear when the department itself has considered the RPM as most appropriate method while determining the arm’s length price on the import of finished goods in the succeeding years and there is no dispute as regards to the comparables selected by the assessee then why the TNMM was considered as most appropriate method by the TPO/CIT(A). We, therefore, in the absence of the clear facts on record, deem it appropriate to set aside this issue back to the file of the AP/TPO to be decided afresh in accordance with law after providing due and reasonable opportunity of being heard to the assessee.