PANASONIC INDIA PRIVATE LTD.,GURGAON vs. NEAC, NEW DELHI

O R D E R PER M. BALAGANESH, A. M.: The Assessee Panasonic India Pvt. Ltd (hereinafter referred to as 1. „assessee) by filing the present appeal sought to set aside the impugned order dated 30.03.2021 passed by the Assessing Officer (AO) under section 143(3) r.w.s. 143(3A) & 143(3B) of the Income Tax Act, 1961 (for short „the Act‟) inconsonance with the order passed by the Dispute Resolution Panel (DRP) dated 08.02.2021 u/s 144C(5) and order passed by Transfer Pricing Officer (TPO) under section 92CA(3) for AY 2016-17.

At the outset, it is relevant to note that the assessee company 2. (Panasonic India Private Limited) had been merged with another Panasonic group entity operating in India i.e. Panasonic Life Solutions India Private Limited with appointed date of merger as 01-01-2020. This was duly intimated by the assessee to this Tribunal vide letter dated 04- 10-2022. Hence, this appellate order is passed in the name of the merged entity i.e. Panasonic Life Solutions India Private Limited.

The Ground Nos. 1 to 2.3. raised by the assessee are general in 3. nature and does not require any specific adjudication.

With regard to the transfer pricing adjustment made in the 4. Distribution Segment, the assessee has raised the following grounds:-

“3. On the facts and circumstances of the case, and in law, the Ld. TPO as well as the Ld. DRP, erred in enhancing the income under the distribution segment with regard to purchase of traded goods from Associated Enterprises ('AEs'), excluding purchases made from Panasonic Holdings Corporation and SANYO Electric Co., Ltd., by INR 1,343,635,463 and in doing so have grossly erred in: 3.1. rejecting Resale Price Method (RPM') as adopted by the Appellant and applying Transactional Net Margin Method (TNMM') as the most appropriate method for benchmarking the international transaction; 3.2. disregarding the internal gross level comparison despite the Ld. TPO accepting that internal RPM is the more acceptable method in the present case; 3.3. in not following the directions given by the I,d. DRP for verifying and adopting the correct operating profit margin of the Appellant; 3.4. including the purchases made from domestic related parties for the purposes of computing the adjustment without invoking Section 92BA of the Act; 3.5. and risks assumed by the Appellant; including United Telelinks (Bangalore) Limited as a comparable company on arbitrary/frivolous grounds without giving due consideration to functions performed, assets employed, 3.6. including Motorola Mobility India Private Limited as a comparable company on arbitrary/frivolous grounds without giving due consideration to functions performed, assets employed, and risks assumed by the Appellant; 3.7. including Panache Digilife Limited as a comparable company on arbitrary/ frivolous grounds without giving due consideration to functions performed, assets employed and risk assumed by the Appellant: 3.8. disregarding the principle of consistency and not following the similar benchmarking approach i.e. RPM as the most appropriate method which had been accepted by the Ld. TPO in previous assessment years viz. for AY 2007-08 to AY 2015-16;”

4.1. We have heard the rival submissions and perused the materials available on record. The assessee is engaged in the business of trading consumer electronic goods such as Washing Machines, Air-conditioners, Refrigerators, Televisions, Mobile-phones etc. through various distribution channels. The assessee also started manufacturing operations in Financial Year 2012-13 in respect of Washing Machines, Air-conditioners and other electronic items. The assessee is also engaged in rendering support services to its Associated Enterprises („AEs‟). During the year under consideration, the assessee was operating under the following segments:- (i) Trading/ Distribution Segment (ii) Support Services Segment (iii) Manufacturing Segment 4.2. For the year under consideration, the assessee reported the international transactions and specified domestic transactions undertaken by it in Form No 3CEB. Under the Trading / Distribution Segment, the assessee performs trading functions i.e. the assessee purchases consumer electronic goods from its AEs (i.e., both International AEs and domestic AEs) and also from third parties [i.e., from Original Design Manufacturer(„ODM‟) / Original Equipment Manufacturer („OEM‟)]and sells the same majorly to third-party customers in India, without performing any value addition to these products. The assessee purchased the traded goods from its AEs such as Camcorders, Airconditioners, LEDs, Telephones, Toughbooks, Projectors, Refrigerators and Washing Machines during the year under consideration Under this segment, the assessee merely performed functions akin to a pure trader / reseller of consumer electronic goods. These traded goods were purchased from its AEs on a principal to principal basis and resold to customers without undertaking any value addition or any sort of processing whatsoever to these traded Page | 3 goods. No intangible assets were employed to add value to these traded goods by the assessee. The assessee benchmarked the international transaction in its distribution segment by using Resale Price Method (RPM) as the Most Appropriate Method (MAM) by adopting the Profit Level Indicator (PLI) as GP /Sales. The assessee in its Transfer Pricing Study Report (TPSR) had stated that it assumes standard risks , employs normal assets and performs the function of trading in consumer electronic goods. While doing the benchmarking, the assessee was taken as the tested party. It was pleaded that since assessee is a pure distribution cum trading segment simplicitor, wherein it imports goods from its AEs and sells in the local market to unrelated parties without any value addition being made thereon. Hence it was submitted that adoption of Resale Price Method for benchmarking the said international transaction would be apt and accordingly the same was considered as the MAM by the assessee. The assessee while benchmarking the international and specified domestic transactions in its distribution segment, after applying the regular filters on qualitative basis finally selected three comparable companies engaged in similar line of activities as under :- Redington India Private Limited - GP margin of 9.46 % Optiemus Infracom Limited - GP margin of 7.99 % Salora International Limited - GP margin of 5.53 % The average margin of the aforesaid three comparables was 7.66 %. Since the assessee's margin was 13.34 % which is much higher than the comparables gross profit margin, the margin shown by the assessee was considered to be at arm's length in the TPSR. 4.3. The Learned TPO rejected the RPM adopted by the assessee as the MAM and substituted it with TNMM and proposed an adjustment of Rs 220,64,30,148/- in the distribution segment. The assessee preferred the objections before the Learned DRP and provided additional evidence vide letter dated 10-12-2020 to substantiate that the international transaction pertaining to purchase of traded goods was at arm's length. The Learned DRP vide its directions dated 8-2-2021 directed the Learned TPO to recompute the TP adjustment under distribution segment after considering the following:- a) Verify the correct operating margin of the assessee company and recompute the adjustment ; b) Include Redington India Limited as a valid comparable; c) To allow working capital adjustment. The Learned DRP however upheld the adoption of TNMM as the MAM by the Learned TPO. The Learned TPO in the giving effect proceedings included Redington India Limited as a valid comparable and allowed working capital adjustment. However, the Learned TPO failed to correct the operating margin of the assessee for computation of TP adjustment under the distribution segment. Consequently, the Learned TPO passed an order dated 24-3-2021 to give effect to the directions of the Learned DRP by proposing an adjustment of Rs. 197,70,97,503/- in the distribution segment. The assessee filed a rectification application on 8-4-2021 before the Learned TPO seeking correction of the operating margin used for computation of the TP adjustment in the distribution segment. Subsequent reminders were also sent vide letters dated 21-4-2021, 8-6- 2023 and 25-6-2024 . The Learned TPO however had not passed any order for rectification and the same is pending disposal. The Learned AO passed the final assessment order on 30-3-2021 by making a transfer pricing adjustment in the distribution segment of Rs. 197,70,97,503/- . Aggrieved, the assessee is in appeal before us.

4.4. For the TP adjustment pertaining to trading/ distribution segment, the assessee opted to file Mutual Agreement Procedure (MAP) application with respect to traded goods purchased by the assessee from its AEs present in Japan (i.e., Panasonic Holdings Corporation, Japan and SANYO Electric Co., Ltd.). Subsequently, Competent Authority of India and Japan agreed to resolve the dispute under MAP and allowed 50 % relief on the TP adjustment made in the final assessment order relating to the purchases made by the assessee from the said two AEs only. The MAP relief was communicated by the Competent Authority of India to the assessee vide letter dated 21-3-2021 and is summarized below:-

Referenc Particulars Amount (INR) e TP adjustment w.r.t distribution segment A 1,97,70,97,503 Relief given for TP adjustment B 31,67,31,019 Corresponding adjustments by Japan C 31,67,31,021 Balance TP adjustment w.r.t distribution segment not D= A-B-C 1,34,36,35,463 subject to MAP resolution between India and Japan 4.5. The assessee accepted the MAP resolution vide letter dated 09-04- 2024 filed before the Competent Authority of India. Parallelly, the assessee also filed an application before this Tribunal on 09-04-2024 to revise the grounds of appeal pertaining to TP adjustment with respect to distribution segment.

4.6. Before us, the Learned AR made the following justification for adoption of RPM as the MAM :-

“As per Indian TP regulations, RPM is a method which evaluates the arm‟s length nature of a controlled transaction by reference to the gross profit margin realized in a comparable uncontrolled transaction. It measures the value of functions performed and is ordinarily appropriate in cases involving the purchase and resale of tangible goods/ services in which the buyer/ reseller does not add substantial value to the goods by physically altering them.

The RPM begins with the price at which a product that has been purchased from the AEs is resold to an independent enterprise. This price (the resale price) is 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 and risks assumed), and accordingly, the product similarity is not relevant in application of RPM. The selection of RPM for international transactions pertaining to distribution operations is in accordance with the selection of RPM as provided in Rule 10B(1)(b) of the Rules as follows: (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 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 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” On combined reading of the above extract of the Rules and the judicial precedent in the case of Nokia India (P.) Ltd. v. Deputy Commissioner of Income-Tax, Circle- 13(1), New Delhi [IT Appeal nos. 178 & 242 (Delhi) of 2010] wherein the Hon‟ble Tribunal explained in detail the applicability of RPM by stating that when we consider the methodology given under RPM, more specifically sub-clauses (i) and (v), it becomes important to note that sub-clause (i) refers to 'property purchased by the enterprise is resold and sub-clause (v) refers to 'arm's length price in respect of the purchase of the property by the enterprise'. A close scrutiny of the above two sub-clauses along with the remaining sub-clauses of Rule 10B(1)(b) of the Rules makes it clear beyond doubt that RPM is best suited for determining Arm’s length price 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 pre-supposes no or insignificant value addition to the goods purchased from foreign AE. In 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. Relying on the above, Your Honours would appreciate that in the present case, the Appellant has purchased traded goods from its AEs on a principal-to-principal basis for resale to its customers, without undertaking any value addition or any sort of processing whatsoever to these traded goods. Accordingly, the Appellant has correctly selected RPM as the most appropriate method to benchmark thesaid international transaction and such selection of RPM as the as the most appropriate method is backed by Indian TP regulations and judicial precedents and hence, no TP adjustment should be made. The Ld. TPO and the Hon‟ble Panel erred in not appreciating the robust and sound economic analysis relied upon by the Appellant in its TP documentation and proceeded to reject RPM as the most appropriate method. The Ld. TPO and the Hon‟ble Panel erred in applying Transactional Net Margin Method („TNMM‟) as the most appropriate method to benchmark the said international transaction by completely altering the economic analysis relied upon by the Appellant in its TP documentation.

The Ld. TPO and the Hon‟ble Panel, while rejecting the RPM as the most appropriate method, erred in making flawed observations and not appreciating the established judicial precedents that support the applicability of RPM in the Company‟s case. In this regard, the Page | 8 observations made by the Ld. TPO in its order and the Appellant‟s rebuttals have been provided below: a. Ld. TPO’s contention: The Appellant does not perform the functions of a pure reseller/ low risk distributor but is also performing additional activities like maintaining inventory, claiming depreciation on the tangible assets utilized while performing distribution activities, sales promotion activities, etc. Appellant’s counter argument: In this regard, the Appellant would like to state that such functions are performed by the Appellant on its own account and it bears normal risk for the same. Further, such functions performed does not entail any value addition to the traded goods purchased by the Appellant from the AEs for resale to third parties in India. Therefore, since the Appellant being a routine distributor bearing routine risks and undertakes no value added functions, it is only prudent to use RPM as the most appropriate method for determining the arm‟s length price for its international transaction of purchase of traded goods from AEs. In this regard, reliance can be placed on the following judicial precedents:  Nokia India (P.) Ltd. v. Deputy Commissioner of Income- Tax, Circle- 13(1), New Delhi [IT Appeal nos. 178 & 242 (Delhi) of 2010]: The Hon‟ble Tribunal held that “incurring of high advertisement and marketing expenses by the assessee vis-a-vis the other comparable companies does not in any manner affect the determination of ALP under the RPM. When we consider gross profit in numerator and net sales in denominator, all the expenses debited to the Profit & loss account automatically stand excluded. It is but natural that only those expenses can have bearing on the gross profit that are debited to the Trading account. As the amount of advertisement and marketing expenses falls 'below the line' and finds its place in the Profit and loss account, the higher or lower spend on it cannot affect the amount of gross profit and the resultant ALP under the RPM. If the assessee has incurred more expenses on advertisement and promotion, which, in the opinion of the ld. DR went on to brand building for an AE, then, the transfer pricing adjustment on account of brand building for an AE, then, the transfer pricing adjustment on account of such AMP expenses was separately called for. Since the TPO has not made any separate adjustment on account of AMP expenses and has given effect to the same under TNMM, we hold that the incurring of such higher advertisement and marketing spend would not affect the calculation of ALP under the RPM. Ex consequenti, we hold that RPM prima facie appears to be the most appropriate method in the facts and circumstances of the instant case.” (Emphasis supplied)  L’Oreal India P. Ltd. [ITA No. 5423/Mum/2009]: The Hon‟ble Tribunal held that “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”. Further, the decision of Hon‟ble Tribunal was upheld by the Hon‟ble High Court vide of 2012. (Emphasis supplied)  Burberry India Pvt. Ltd. v. ACIT Circle 5(1) New Delhi [ITA No. 758/DEL/2017 & 7684/DEL/2017]: The Hon‟ble Tribunal held that “incurring of high advertisement and marketing expenses by the assessee vis-à-vis the other comparable companies does not in any manner affect the determination of ALP under the RPM”. Further, the decision of Hon‟ble Tribunal was upheld by the Hon‟ble High Court vide IT Appeal No. 471 of 2019. (Emphasis supplied) Drawing inference from the above, it can be concluded that RPM is the most appropriate method in the case of the Appellant who is engaged in performing functions in its capacity as routine/ normal distributor which does not add any value to the traded goods purchased by the Appellant from the AEs for resale to third parties in India and accordingly the contention of the Ld. TPO is not justified. b. Ld. TPO’s contention: RPM cannot be applied as the Company is maintaining very high inventory. Appellant’s counter argument: At the outset, it is submitted that the Ld. TPO has not provided any facts or justification to conclude that the Appellant was maintaining “very high inventory.” Without prejudice to Page | 10 the same, the Company‟s inventory at the end of the FY 2015-16 accounts for 11% of its purchase of traded goods during the year which undisputedly cannot be regarded as „very high inventory‟. c. Ld. TPO’s contention: The Ld. TPO in its order has stated that the Company has submitted in its TP documentation that “in the trading business, the functions it performs include business of distribution and providing delivery, installation services of the machine tools, selling tools and accessories directly or through third parties, and certain warehousing and inventory control functions pertaining to management and control of inventory including transportation of machine tools spare parts from port of customs to warehouse of Panasonic India, maintenance and storage of spare parts, transportation of machine tools spare parts to customer‟s location in addition to after sales services and support services. Assessee also provides certain support services related to installation. The Assessee has also stated in its TP report that the risks that it faces, include market risk, credit risk, inventory risk, foreign exchange risk, inventory risk and technology risk. It may be mentioned that the technology risk is a serious one as it is actually related to the products in which Appellant deals. It is stated in the TP report that this risk comes into play when technology becomes obsolete and hence products and services become outdated. Appellant’s counter argument: The Appellant submits that the Ld. TPO in its order has incorrectly stated the functional analysis submitted by the Appellant in its TP documentation. In this regard, your attention is drawn to pages 43-46 of the paperbook for the functional analysis of the trading/ distribution segment as captured in the TP documentation. It is evident that the functional analysis stated by the Ld. TPO is different from the functional analysis captured in the TP documentation of the Appellant which was submitted before the Ld. TPO. It is respectfully submitted that in order to verify the contentions of the Ld. TPO, the Appellant also performed a search in the TP documentation using the words “delivery”, “machine tools” “transportation of machine tools spare parts” and “technology risk”. It was observed that these words are not appearing in the TP documentation and the Ld. TPO has incorrectly stated the functional analysis of the Appellant in the TP order. Accordingly, the Appellant submits that the above contentions presented by the Ld. TPO are not based on facts of the case and should not be considered.

Without prejudice to the contention of the Appellant that the functional analysis stated by the Ld. TPO is different from the functional analysis captured in the TP documentation, it is respectfully submitted that even for a Company whose functional analysis is similar to the one stated by the Ld. TPO, RPM is the most appropriate method to benchmark the international transaction of purchase of traded goods. Reliance in this regard is placed on the judgment pronounced by the Hon‟ble Tribunal in the case of Horiba India Pvt. Ltd. v. Dy.Commissioner of Income Tax Circle 11(1), New Delhi. [ITA No.-6638/Del/2015] wherein it was held that in a comparable uncontrolled transactions scenario, a normal distributor undertakes all kind of functions which are related to sales of the product and observed that 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. The relevant extract of the ruling has been provided below: “Para 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 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. Page | 12

Thus, we hold that under the facts of the present case, RPM should be held as MAM” (Emphasis supplied) d. Ld. TPO’s contention: The Appellant has not carried out any adjustment to the comparable for difference on functions affecting the gross margin. Appellant’s counter argument: At the outset, the Ld. TPO has not highlighted what are the differences in the functions performed by the Appellant vis-à-vis the comparable companies for which adjustment is sought and hence the argument of the Ld. TPO is not justified. 4.7. The Learned AR also placed reliance on the following decisions in support of his contentions that RPM is the MAM in case of routine distributor who is involved in reselling the goods without making any value addition thereon :- a) Decision of Delhi Tribunal in the case of Burberry India Pvt Ltd vs ACIT in dated 22-06-2018 b) Decision of Hon‟ble Delhi High Court in the case of PCIT vs Burberry India Pvt Ltd in ITA 471 of 2019 dated 24-10-2024 reported in 169 taxmann.com 6 c) Decision of Hon‟ble Delhi High Court in the case of PCIT vs Fujitsu India P Ltd in ITA 34, 224 & 243 of 2019 dated 12-10-2023 dated 24-10-2024 reported in 156 taxmann.com 310 d) Decision of Hon‟ble Delhi High Court in the case of PCIT vs Matrix Cellular International Services Pvt Ltd in ITA 484 of 2017 dated 22-11- 2017 e) Decision of Delhi Tribunal in the case of Nokia India (P) Ltd vs DCIT in & 242/Del/2010 dated 31-10-2014 reported in 153 ITD 508 f) Decision of Delhi Tribunal in the case of Horiba India Pvt Ltd vs DCIT in dated 18-04-2017 g) Decision of Delhi Tribunal in the case of Swarovski India P Ltd vs ACIT in ITA 5496 and 5621 (Delhi) of 2014 dated 10-02-2017 h) Decision of Delhi Tribunal in the case of DCIT vs Tianjin Tianshi India P Ltd in ITA 2847 (Delhi) of 2014 dated 13-10-2017 i)Decision of Hon‟ble Bombay High Court in the case of CIT vs L‟Oreal India P Ltd reported in 53 taxmann.com 432 j) Decision of Mumbai Tribunal in the case of Mattel Toys (I) (P) Ltd vs DCIT reported in 144 ITD 76 4.8. The Learned AR alternatively on without prejudice basis stated that if the gross profit margins are applied on the comparables finally chosen by the Learned TPO using RPM as the MAM, the results of gross profit margin of the comparables is as follows:-

S. No. Company Name GP/Sales (%) 1 Salora International Ltd 6.93% 2 Optiemus Infracom Ltd 5.05% 3 Ample Technologies 15.09% 4 O T S E- Solutions Pvt. Ltd. 1.82% 5 Abaj Electronics Pvt. Ltd. 19.15% 6 Sargam India Electronics Pvt. Ltd. 12.14% 7 Girias Investment Pvt. Ltd. 14.38% 8 Intex Technologies 17.78%

S. No. Company Name GP/Sales (%) 9 Zicom Electronic Security Systems Ltd. 10.38% 10 Micromax Informatics Ltd. 16.39% 11 Novel Appliances Pvt. Ltd. 11.09% 12 Lava International 26.19% 13 Panache Digilife Ltd. 19.31% 14 Motorola Mobility India Pvt. Ltd. 7.14% 15 United Telelinks (Bangalore) Pvt. Ltd. 19.59% 16 Redington India Pvt Ltd 1.99% 35th percentile 10.38% 65th percentile 16.39% Median 13.26% The above analysis clearly shows that the range of comparable gross margin is 10.38% to 16.39% with a median of 13.26%. The Appellant during the year has earned a gross margin of 13.34% which is within the range of comparable gross margin. Hence, prices of international transactions of the Appellant would meet the arm's length standard required under the Indian Regulations.

4.9. The Learned DR vehemently relied on the orders of the lower authorities and justified the rejection of RPM as the MAM on the ground that assessee in the instant case is not a routine distributor and it performs other functions too. He drew our attention to the specific observations made by the Learned TPO which had already been dealt hereinabove. We find that each of the observations of the Learned TPO had been duly met by the Learned AR as detailed supra. We find that the reliance placed by the Learned AR on the decision of Mumbai Tribunal in the case of Mattel Toys (I) (P) Ltd vs DCIT reported in 144 ITD 76 is very well founded and the ratio laid down thereon is directly applicable to the facts of the instant case. The relevant operative portion of the said Tribunal order is as under:-

"38. 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. Therefore, in such a situation, the nature of products has not much relevance, though their closer comparable may produce a better result. The focus is more on same or similar nature of properties or services rather than similarity of products. The main reason is that the product differentiation does not materially affect the gross profit margin as it represents gross compensation after the cost of sales for specific function performed. The functional attribute is more important while undertaking the comparability analysis under this method. In the instant case, the assessee is a distributor of toys and gets the finished goods from its A.E. and resells the same to independent parties without any value addition. In such a situation, RPM can be the best method to evaluate the transactions whether they are at ALP.

distributor who is purchasing the goods from it's A.E. and reselling them to independent parties/unrelated parties, resale price method would be the most appropriate method for determining the ALP of the transactions between the assessee and the A.E.”(Emphasis supplied)

We find that the assessee purchases traded goods from AEs on principal to principal basis for resale to unrelated third parties without making any value addition. Hence we hold that in such a scenario, the RPM would be the MAM and not TNMM. Further we find that the assessments for the Assessment Years 2008-09 to 2015-16 had been framed under section 143(3) of the Act except Assessment Year 2014-15, wherein the RPM has been accepted by the Learned TPO (pursuant to reference made by the Learned AO) in respect of the very same activity of the assessee. Eventhough the functions performed by the assessee is to be tested every year, but when there is no change in the functions performed by an assessee when compared to earlier years, and in the earlier years, the MAM adopted by the assessee has been accepted consistently by the Learned TPO in scrutiny assessments, then there is no reason to take a divergent stand for the year under consideration alone. Hence even on the principle of consistency, the assessee is entitled for relief in the instant case.

4.10. In view of the aforesaid observations, we hold that considering the FAR analysis of the assessee, RPM has been rightly adopted by the assessee as the MAM. We find that even by using the comparables of the Learned TPO and RPM applied thereon, the assessee‟s margin is well within the range as worked out in the aforesaid table. Hence the assessee‟s margin is to be accepted to be at ALP in the instant case. Accordingly, the other arguments advanced by the Learned AR on the inclusion and exclusion of certain comparables, incorrect computation of assessee‟s operating margin under TNMM and incorrect inclusion of purchases from domestic AEs under TNMM need not be gone into as adjudication of the same would be academic in the facts and circumstances of the instant case and hence left open. Hence the Ground Nos. 3 to 3.8. raised by the assessee are partly allowed.

The revised Ground Nos. 4 to 4.2 raised by the assessee are 5. challenging the transfer basing adjustment made by the Learned TPO with respect to recovery of expenses.

5.1. We have heard the rival submissions and perused the materials available on record. During the year under consideration, the assessee recovered certain expenses from its AEs. The nature of recoveries is provided below:

Service nature on which markup appropriately charged by the assessee

Amount Name of AE Nature of recovery Remarks (INR) Towards Service fees (for Marketing, Strategic Panasonic Planning and advisory Services, Accounting and No Marketing 5,18,26,583 management support, HR services, IT services, adjustment Middle East & CS support, SCM support)[mark-up of 15% was proposed Africa FZE charged by the Appellant] Panasonic Support for certain advertisement and promotion System Adjustment 30,48,746 expenses [mark-up of 15% was charged by the Networks Co. proposed Appellant] Ltd. Total 5,48,75,329 5.1.1. At the time of TP Assessment proceedings, the assessee had provided written submissions along with documentary evidences to substantiate that markup @15% was already charged on Rs 5,48,75,329/- as this amount was in the nature of services. These expenses on which a mark-up of 15% was charged by the assessee were related to service fees charged by the assessee from Panasonic Marketing Middle East & Africa FZE for provision of support services and to certain advertisement and promotion expenses incurred by the assessee and recovered from Panasonic System Networks Co. Ltd. (amounting to Rs 30,48,746/-). Without appreciating this fact, the Learned TPO incorrectly proposed an adjustment on Rs 30,48,746 by charging a markup of 15% by completely disregarding the fact that a markup of 15% was already charged by the assessee on this amount. Hence we are inclined to grant relief to the assessee in this regard.

5.2. Support/ recovery nature on which no markup was charged by the assessee

Amount Name of AE Nature of recovery Remarks (INR) Support for price protection, project Panasonic Adjustment 7,11,25,808 support and recovery for replacement Corporation, Japan proposed cost for product failure Panasonic Adjustment Procurement Malaysia 31,52,321 Price support for air conditioner parts proposed Sdn Bhd Panasonic Adjustment Procurement Malaysia 31,52,321 Price support for air conditioner parts proposed Sdn Bhd Support for price protectionand Panasonic System Adjustment 1,22,61,052 recovery for replacement cost for Networks Co. Ltd. proposed product failure Total 8,65,39,181 5.2.1. A brief description of these expenses has been provided below:

Price support for goods sold by the assessee in the Indian market and Project support for goods sold by the assessee in the Indian market Due to prevailing market conditions in India the assessee had to offer price support to its distributors so that the assessee‟s traded goods and manufactured goods are able to compete with the products offered by its competitors. In such cases, the AEs supported the assessee by funding these price support in line with the terms of agreement entered into between the assessee and AEs so that the assessee is able to create a market for its products in India. Such part of expenses was recovered by the assessee on a cost-to-cost basis without charging any markup as the assessee has received support income from the AEs which does not involve any service element whatsoever, hence charging a mark-up on such support provided by the AE was not warranted.

Replacement cost of faulty products The assessee had recovered the cost incurred by the assessee for replacement of faulty traded goods from its AEs on a cost-to-cost basis.

5.3. It was submitted that the nature of these recoveries does not warrant any markup as it is merely a support that the assessee is being provided by its AE owing to intense competition in India and there is no service element involved in these recoveries.

5.4. The assessee had furnished before the Learned TPO detailed back-up ledgers along with sample invoices , inter company agreements etc which collectively establish the nature of the support received and demonstrate that no mark up is warranted for recovery of expenses from each of the AEs vide submission dated 22-10-2019. For the recovery of expenses on which a mark-up of 15% was not charged by the assessee, the Learned TPO re-characterised the transaction as „business support services‟ and charged a mark-up of 15% and accordingly computed the TP adjustment as follows:

Particulars Amount (in INR) Recovery of expenses on which a mark-up of 15% 8,95,81,926 is not charged by the assessee TP Adjustment equivalent to 15% mark-up 1,34,37,289 on such recovery of expenses 5.5. We find lot of force in the argument advanced by the Learned AR before us that the AEs in the instant case had helped the assessee by supporting it with price support payments and AMP expenses, which ideally should have been borne by the assessee as a normal risk bearing entity. Based on the nature of expenses for which AEs supported, no mark-up was charged by the assessee on these recoveries. We hold that no mark up is warranted on these recoveries as no service element is involved in the support received thereon from its AEs. We direct the Learned TPO / AO to delete the transfer pricing adjustment made in the sum of Rs 1,34,37,289/- in this regard. Accordingly, the Ground Nos. 4 to 4.2. raised by the assessee are allowed.

The revised Ground Nos. 5 to 5.2 raised by the assessee are 6. challenging the transfer basing adjustment made by the Learned TPO with respect to alleged under reporting of support income received from AEs.

6.1. We have heard the rival submissions and perused the materials available on record. During the year under consideration, the assessee had reported an amount of Rs 3,08,85,89,347/- as support income in the audited financial statements. The break up of the same is as under:-

Particulars Amount (in Rs) Support income received by the assessee from its 2,96,66,72,526 international AEs-reported in the Form 3CEB Domestic support income - not liable to be reported in 12,19,16,821 Form 3CEB Total 3,08,85,89,347 6.2. The break up of support income received by the assessee from its International AEs are as under:-

Name of AE Amount (in INR) Panasonic Corporation, Japan 2,69,42,31,211 Panasonic Eco Solutions (Hong Kong) Co. Ltd. 92,97,235 Panasonic Systems Solutions Asia Pacific 2,36,56,530 Panasonic Industrial Devices Sales Asia 8,62,44,009 Panasonic Marketing Middle East & Africa Fze 41,410 Panasonic System Networks Co. Ltd. 1,44,91,293 Panasonic Welding Systems Co.Ltd. 1,66,62,062 Sanyo Electric Co. Ltd. 3,29,58,156 Panasonic Appliance Air-Conditioning 1,32,78,606 Panasonic Industrial Devices Automation Controls 7,58,12,014 Sales Asia Pacific Total 2,96,66,72,526 6.3.The Learned AR submitted that the balance amount of Rs 12,19,16,821/- was not required to be reported in Form 3CEB due to the below mentioned reasons:

 Support income from AEs in India: Out of the balance amount of Rs 12,19,16,821/-, a sum of Rs 4,28,36,535/- was pertaining to support income from AEs in India namely Anchor Electricals Pvt. Ltd. [now known as PLSIPL] and Panasonic AVC Networks Indi Co. Ltd. and therefore was not required to be reported in Form 3CEB. The relevant extract of the related party schedule as appearing in the annual report has been provided below:

 Inter division transfer: Out of the balance amount of Rs 12,19,16,821/-, a sum of Rs 7,90,80,286/- relates to an inter- division transfer which is not required to be reported in Form 3CEB as this amount does not accrue from any AE and hence is not an international transaction. The Learned DRP without appreciating the debit notes submitted to substantiate the inter division transaction, proposed an adjustment by treating such amount as an international transaction. 6.4. In this regard, the assessee had submitted the reconciliation of support income between the amount of support income reported in audited financial statements vis-à-vis the amount reported in Form 3CEB, along with the debit notes before the Learned DRP vide additional evidence letter dated 26-6-2020 which is as under:-

Particulars Legend Amount in Remarks crores Amount of international transaction A 296.67 reported in Form 3CEB Income received from domestic AEs Domestic i.e. Anchor Electricals Pvt. Ltd. and support income - B Add Panasonic AVC Networks India Co. 4.2 not liable to be Ltd. (not liable to be reported in Form reported in Form 3CEB) 3CEB Add Inter division transfer 0.9 Add Inter division transfer 7.1 Total C=A+B 308.86 Amount reported in financial D 308.86 statements Difference E=D-C 0 6.5. No error was pointed out by the revenue before us on the aforesaid reconciliation. We find that the assessee had duly reconciled the support income with its audited financial statements and hence we hold that there is absolutely no under reporting of income in the Form 3CEB or the TPSR. Hence the TP adjustment made in the sum of Rs 12,19,16,821/- is hereby directed to be deleted. The Revised Ground Nos. 5 to 5.2. raised by the assessee are hereby allowed.

In the result, the appeal of the assessee is partly allowed. 7.

Order pronounced in the open court on 08/10/2025.