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Judgment
PER M. BALAGANESH, A. M.:
The appeal in ITA No.1164/Del/2023 for AY 2011-12, arises out of the order of the Commissioner of Income Tax (Appeals)-44, New Delhi [hereinafter referred to as ‘ld. CIT(A)’, in short] dated 21.02.2023 against the order of assessment passed u/s 143(3) r.w.s. 144C of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 17.04.2015 by the Assessing Officer, DCIT, Circle-4(2), New Delhi (hereinafter referred to as ‘ld. AO’).
Ground No. 1 is general in nature and does not require any specific adjudication.
Ground Nos. 2.1 to 2.4 raised by the assessee are challenging the transfer pricing adjustment made by the ld TPO in the sum of 4,08,80,300 in respect of international transaction of import of goods from Associated Enterprises (AE).
We have heard the rival submissions and perused the material available on record. The assessee is engaged in the production and sale of alcoholic beverages in India. The return of income for AY 2011-12 was filed by the assessee company on 30.11.2011, declaring total income of Rs. 54,02,95,256. During the year under consideration, the assessee entered into international transaction with Associated Enterprises with respect to import of finished goods from its AE for resale in India. The assessee has got manufacturing segment, distribution segment and provision of services segment. The dispute prevailing in this appeal is only with regard to distribution segment in respect of import of finished goods from its AE. The share of distribution segment is 3.56 % of total turnover of the company.
The assessee has entered into a distributorship agreement with Beam Group entities and undertaken the business activities of distribution of the Bottle-in-origin (BIO) products which are imported from Beam Group Entities in India. The assessee also provides need based marketing support services to Beam Group Entity in order to promote sales of international brands of BIO products to licensed borders and duty free shops in India. The assessee had benchmarked international transaction of import of finished goods by applying Resale Price Method (RPM) as the Most Appropriate Method (MAM) with gross profit by sales as the relevant Profit Level Indicator (PLI). The tested party’s margin was 49.73 %. The comparables margin was 15.91%, accordingly, the assessee’s margin was considered to be at Arm’s Length Price (ALP) in accordance with Indian Transfer Pricing Regulations.
The ld TPO on perusal of benchmarking analysis provided in the Transfer Pricing Study Report (TPSR) proceeded to reject the economic analysis undertaken by the assessee by first rejecting the MAM of the assessee and substituted the same with Transactional Net Margin Method (TNMM) for import of finished goods. The ld TPO observed that assessee is not a mere routine distributor and had incurred cost mandated for promotional activities and had developed local intangible thereby giving value addition to the products by applying TNMM as MAM. The ld TPO adopted the PLI as operating profit/ operating revenue (OP/OR) to ascertain the ALP. The ld TPO accordingly computed the net profit margin of the comparables @ 2.11% and consequently proposed an addition of Rs. 4,08,80,300 on account of import of goods in the trading segment/ distribution segment.
The Ld. CIT(A) observed that the assessee company, by virtue of obtaining requisite licenses for storage, sale, and distribution of the imported goods had engaged itself in various functions including storing, preserving, maintaining the nature & identity of the product, clearing the product from bonded warehouse, trading, selling, arranging for distributor channel, registration of brand with concerned authorities, promotional activities, etc. It was further held that such activities undertaken by the assessee add economic value to the product and result in the development of local intangibles. The Ld. CIT(A) also noted that the assessee company incurred selling and distribution expenses for the relevant segment which allegedly indicates the assessee’s active engagement in brand promotion and its contribution towards the development of the brand in the local market.
We find that the assessee had merely imported BIO alcoholic beverages from its AE and sold the same in India to 3rd party customers. We find there is absolutely no value addition made in this regard to the product. During the year under consideration, the assessee had incurred substantial advertising, sales and marketing expenses in a bid to establish itself in the local market. The traded goods were purchased by the assessee from its AEs on principal to principal basis and resold to customers without undertaking any value addition or any sort of processing whatsoever to the traded goods. There is no evidence brought on record by the revenue to prove that any physical alteration to the traded goods have been done by the assessee or the assessee had employed any intangible assets to add some economic value to the traded goods. In these circumstances, the assessee could be construed only as a mere routine distributor. Hence, in our considered opinion, resale price method adopted by the assessee should be the most appropriate method for benchmarking the international transaction of import of finished goods. The assessee assumed all the routine risks associated with its local business operation. From the FAR (i.e functions performed, assets employed and risks assumed) analysis of the assessee, we find that assessee is engaged in performing the function of distribution of finished goods imported from AEs and the product mixed functions for India are performed by the assessee which are based on various factors which primarily include consumer preferences, broader market trends, etc. The assessee employees routine tangible assets exposed to normal risk associated with carrying out its operation in India. It was submitted that similar method applied by the assessee i.e. RPM was indeed accepted by the ld TPO in assessee’s own case for AYs 2012-13 and 2013-14, and there is absolutely no change in facts and circumstances of the cases in subsequent years when compared to the year under consideration.
The ld DR before us vehemently argued that assessee had shown turnover of Rs. 9.30 crores and had incurred distribution expenses of Rs. 8.02 crores. According to revenue, this goes to prove that substantial value added distribution expenditure has been incurred by the assessee, which need to be adequately compensated by the AE to the assessee either by separate reimbursement or by giving a reduction in import price of finished goods. This, in our considered opinion, is absolutely irrelevant as under RPM, only the gross profit is being compared. The distribution expenses are an item which are debited in the profit and loss account, which is after the determination of gross profit. Hence, the incurrence of distribution expenses per se, be it high or low, has got no relevance at all for comparing the gross profit margin of the assessee vis-a-vis the comparable when RPM is adopted as the MAM. We have already held hereinabove that the assessee being a mere routine distributor of finished goods by importing the same from AE and selling to its Indian customers who are 3rd parties without adding any value to the products, RPM would be the most appropriate method. We find the coordinate bench of Delhi Tribunal in case of Burberry India Pvt Ltd Vs. ACIT in ITA No. 758/Del/2017 and in ITA No. 7684/Del/2017 dated 22.06.2018 has held as under:-
“15.We have gone through the record in the light of the submissions on either side. It is an admitted fact that in this case the assessee is merely purchasing and selling the products without adding any value to the core product. Further, Ld. TPO did not dispute the characterisation of the assessee as in the TP document and also accepted the functional profile of the assessee as a routine distributor. Ld. DRP, however, recorded that the assessee has incurred substantial AMP, and other expenses, in relation to its turnover, and is therefore, not a simple distributor in terms of the requirement of using RPM Now we shall proceed to examine the law applicable these facts.
16.In Nokia India (P) Ltd. v. Dy. CIT[2014] 52 taxmann.com 492/153 ITD 508 (Delhi), the Delhi bench of the ITAT held that,-
9.Sub-clause (i) of clause (b) of Rule 10B(1) deals with identifying the price at which the goods purchased from an AE is resold. Sub-clause (ii) of clause (b) of Rule 10B(1) talks of reducing the amount of normal gross profit margin of comparable uncontrolled transactions from such resale price of the assessee. Sub-clause (iii) states that the result of sub-clause (ii) is further reduced by the expenses incurred in connection with the purchase of goods and sub-clause (iv) provides that the amount so deduced under sub-clause (ii) is adjusted on account of differences in the international transaction and comparable uncontrolled transactions which materially affect the amount of gross profit margin in the open market. Finally, sub-clause (v) provides that the adjusted price found under sub-clause (iv) is taken as arm's length price in respect of purchase of goods from the AE. When we consider the methodology given under RPM, more specifically sub-clauses (i) and (v), it becomes patent that sub-clause (i) refers to property purchased by the enterprise... is resold and sub-clause (u) 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) makes it clear beyond doubt that RPM is best suited for determining ALP of an international transaction in the nature of purchase of 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.
17.While noting the above decision also, Hon'ble jurisdictional High Court, in Principal Commissioner of Income-tax-6 v. Matrix Cellular International Services (P.) Ltd. [2018] 90 taxmann.com 54 (Delhi) found that,
8.This Court finds that once the ITAT, on considering the relevant facts as well as the order of the TPO, had concluded that the business of the assessee uns merely that of a pure trader, and there was no value addition made before re selling the particular products (Be the SIM cards), its d. v. Deputy consequent finding that RPM is the Most Appropriate Method, in irreproachable. In Nakin India (P) Ltd. Commissioner of Income Tax, (2015) 167 TTJ (Del) 243, the Delhi bench of the ITAT held
"A close scrutiny of the above two stub-clauses along with the remaining sub-clauses of r. 108(1)(b) makes it clear beyond doubt that RPM is best suited for determining ALP of an international transaction in the nature of purchase of goods from an AE which are resold as such to unrelated parties. Ordinarily, this method presupposes no or insignificant value addition to the goods purchased from foreign AE. In a case the goods so purchased are used either as raw material for manufacturing finished products or are further subjected to processing before resale, then RPM cannot be characterized as a proper method for benchmarking the international transaction of purchase of goods by the Indian enterprise from the foreign AЕ."
9.Similarly, in Swarovski India Pvt. Ltd. v. ACIT, IT'A No. 5621/Del/2014, the ITAT held:
"Adverting to the facts of the instant case, we find that the assessee purchased Crystal goods and Crystal components from its AE. No value addition was made to such imports. The goods were sold as such. In the given circumstances, the RPM is the most appropriate method for determining the ALP of the international transaction of Import of Crystal goods and Crystal components."
10.A similar view has been adopted by the Mumbai bench of the ITAT in Mattel Toys v. Deputy Commissioner of Income Tax, (2013) 158 TTJ (Mum) 461:
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 Le, resale is made without any value addition having been made
11.This view has also been affirmed by the Bombay High Court in its judgment dated 07.11.2014 in Commissioner of Income Tax v. L'Oreal India Pvt. Ltd. (ITA No. 1046 of 2012). where the Court found that there was no error in tow committed by the ITAT when it held that RPM was the Most Appropriate Method in case of distribution or marketing activities especially when goods are purchased from associated entities and there are sales effected to unrelated parties without any further processing. In fact, a Division Bench of this Court in its decision in Bausch & Lomb Eyecare (India) Pvt. Ltd. u. Additional Commissioner of Income Tax, (2016) 381 ITR 227 (Del), while considering the decision of this Court in Sony Ericsson Mobile Communications India Put. Ltd. v. Commissioner of Income Tax, (2015) 374 ITR 118 (Del), noted that:
"The RP Method loses its accuracy and reliability where the reseller adds substantially to the value of the product or the goods are further processed or incorporated into a more sophisticated product or when the product/service is transformed.
12.Therefore, a contrario, when the reseller does not add any value to the product of the goods, the RP method would be appropriate for determining the arms' length price.
18.In respect of the observations of the Ld. DRP that the assessee has incurred substantial AMP, and other expenses, in relation to its turnover, and is therefore, not a simple distributor in terms of the requirement of using RPM, Ld. AR has rightly placed reliance on the decision reported in Nokia India Private Limited vs. DCIT (2015) 153 ITD 508 (Delhi-trib.) wherein it was held that the 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. In the above decision it was held that, -
The Id. DR vehemently argued against the application of RPM in the given circumstances as the most ost appropriate method by contending that the assessee incurred huge advertisement and marketing expenses. In view of such incurring of expenses, the Id. DR stated that the better course would be to apply TNMM which would consider operating profit. We are unable to accept the contention advanced on behalf of the Revenue. The obvious reason for this is that the incurring of high advertisement and marketing expenses by the assesse 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 Id. DR went on to 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.
19.The above decisions clinch the issue involved in this matter and squarely applicable to the facts of the case. We, therefore, while respectfully following the same hold that the RPM is the most appropriate method in the facts and circumstances of this case and accordingly direct the Ld. TPΟ to adopt the RPM as the most appropriate method for benchmarking the international transaction.
20.In view of the fact that we have approved the RPM as the most appropriate method for benchmarking the international transaction relating to the import of finished goods, all other grounds become academic and do not require any adjudication.”
It is also pertinent to note that the Hon’ble Jurisdictional Delhi High Court had affirmed the findings of the aforesaid decision of this Tribunal in the case of PCIT vs Burberry India Pvt. Ltd. in ITA No. 471 of 2019 dated 24-10-2024 reported in 169 taxmann.com 6 (Del HC).
Similar view was also taken by Hon’ble Jurisdictional Delhi High Court in the case of CIT Vs. Luxottica India Pvt. Ltd in ITA No. 852 of 2015 reported in TS-532-HC-2015(Del)-TP and the decision of Hon'ble Bombay High Court in the case of CIT Vs. L’Oreal India Private Limited reported in 53 taxmann.com 432 (Bom HC). The ld DR placed reliance on the decision of the coordinate bench decision of Bangalore Tribunal in the case of Abott Medical Optics Private Limited Vs. DCIT reported in 71 taxmann.com 338 dated 30.06.2016, wherein it was held that the assessee had incurred huge expenditure on account of selling and distribution as well as promotion for trading of imported goods in India and applied RPM, the ld TPO was justified in rejecting RPM as business model of the assessee was not comparable with that of the comparable companies since they were not incurring such expenditure on selling and distribution and sales promotion. The ld AR before us placed reliance on the decision of the coordinate bench of Delhi Tribunal in the case of Burberry India Pvt. Ltd in ITA No. 758 and 7684/Del/2017 dated 22.06.2018, which has already been reproduced above, wherein, the observations made by Bangalore Tribunal had already been met. At the cost of repetition, we would like to state that the aforesaid decision of the Delhi Tribunal has been approved by the Hon’ble Jurisdictional Delhi High Court in ITA No. 471 of 2019 dated 24.10.2024 reported in 169 taxmann.com 6. Hence, respectfully following the decision of the Hon’ble Jurisdictional High Court, the Ground Nos. 2.1 to 2.4 raised by the assessee are allowed.
Ground No. 3.1 raised by the assessee is challenging the levy of interest u/s 234B and 234D, which are consequential in nature.
Ground No. 3.2 raised by the assessee is challenging initiation of penalty proceedings u/s 271G and 271(1)(c) of the Act, which would be premature for adjudication at this stage and hence dismissed.
In the result, the appeal of the assessee is partly allowed.