Elcome Technologies Private Limited Vs DCIT (ITAT Mumbai)
Resale Price Method (RPM) is a GP margin based method. It is a traditional transaction method. It primarily compares controlled and uncontrolled transactions. Under RPM we can tolerate slight differences in the products distributed by the two types of distributors as long as the broad category of products distributed is the same.
As mentioned earlier while product differences may be more acceptable in applying the RPM as compared to CUP method, the property transferred should still be broadly similar in the controlled and uncontrolled transactions. Broad differences are likely to reflect differences in functions performed, and therefore, gross margins earned, at arm’s length. It should be noted that distributors engaged in the sale of markedly different products cannot be compared.
In the instant case, there is no similarity in the products between the appellant and PAE Ltd as gleaned from the activities delineated below. Because of lack of similarity, it has impact on functions performed and on gross margins earned.
In the instant case, the product differences between the appellant and PAE Ltd. are not at all acceptable in applying the Resale Price Method (RPM).
In RPM, the compensation for a distribution company should be the same. The similar level of compensation is expected for performing similar functions across different activities. In the instant case similar level of compensation is not expected for performing similar functions across different activities.
RPM can be applied more broadly, for example based on the gross margin a sales company should earn over its full range of broadly similar products. In the instant case RPM cannot be applied more broadly, for example based on the gross margin because there is no similarity in the products of the appellant vis-a-vis PAE Ltd.
United Nations Practical Manual on Transfer Pricing for Developing Countries (2017), in para B.3.2.7.2 succinctly describes in the context of RPM “It is thus important that the analysis does not compare ‘apples with oranges’ but rather, ‘apples with apples’.
In view of the above factual scenario and principles governing RPM, the AO has rightly excluded PAE Ltd in the final set of comparables. To hold otherwise would be to exalt artifice above reality and to deprive the settled principles in question of all relevant purpose.
FULL TEXT OF THE ITAT JUDGEMENT
This is an appeal filed by the assessee. The relevant assessment year is 2011-12. The appeal is directed against the order dated 29.01.2016 passed by the Dy. Commissioner of Income Tax- 15(1)(1), Mumbai (hereinafter ‘AO’) u/s 143(3) r.w.s. 144C(13) of the Income Tax Act 1961, (the ‘Act’).
2. The grounds of appeal filed by the assessee read as under:
1. On the facts and in the circumstances of the case and in law, the DRP and AO erred in partly upholding the action of the TPO by making transfer pricing adjustment in relation to the international transaction of purchase of finished goods at Rs. 6,62,46,133.
2. On the facts and in the circumstances of the case and in law, the DRP and AO erred in rejecting comparables namely, P L Enterprise Ltd. and PAE Ltd. from the economic analysis of the Appellant, which were comparable to the Appellant’s distribution activity in relation to the international transaction of purchase of finished goods in terms of functions, asset base and risk profile.
3. On the facts and in the circumstances of the case and in law, in relation to the international transaction of purchase of finished goods, the benefit of (+/-) 5% range available under proviso to section 92C(2) of the Act, be granted to the Appellant, if eligible.
4. On the facts and in the circumstances of the case and in law, the AO erred in charging interest under Section 234B and 234C of the Act.
5. On the facts and in the circumstances of the case and in law, the AO erred in initiating penalty proceedings under section 271(1)(c) of the Act.
3. Briefly stated, the facts of the case are that the appellant filed its return of income for the assessment year (AY) 2011-12 on 30.09.2011 declaring total income at Rs.9,92,01,580/-. Subsequently, it revised the return of income on 21.02.2012 declaring total income at Rs.9,04,85,647/-. As per the documents filed before the Assessing Officer (AO), the appellant is a subsidiary of Leica Geosystems AG, Switzerland. The appellant represents Leica Geosystems AG, Switzerland (subsidiary company of Hexagon Group, Sweden) for positioning technologies, which include geodesy, high-end GPS and the highly specialized Industrial Measurement Systems (IMS) and high definition surveying systems. The appellant is engaged in trading of above related surveying and measurement equipments.
During the course of assessment proceedings, the AO made a reference u/s 92CA(1) to the Transfer Pricing Officer (TPO). We find that vide order dated 27.01.2015, the TPO framed an order u/s 92CA(3) proposing an adjustment of Rs.9,33,15,374/- towards transfer pricing.
Thereafter, the AO passed a draft assessment order dated 10.03.2015 u/s 143(3) r.w.s.144C and forwarded a copy of it to the appellant. Before the Dispute Resolution Panel (DRP), the appellant filed objections in respect of variations made by the AO in the said draft assessment order. In respect of the comparables, the appellant submitted the following details before the DRP:
