RPM is most appropriate method When No Value Addition Before Resale

D Light Energy P. Ltd. Vs Assessing Officer (ITAT Delhi)

The case of D Light Energy P. Ltd. vs. Assessing Officer (ITAT Delhi) revolves around transfer pricing issues concerning the purchase and resale of solar goods by the assessee, D Light Energy P. Ltd., for the assessment year 2017-18. The primary contention in this appeal was the method used to benchmark the international transactions involving the purchase of solar goods and related expenses like reimbursement and warranty claims.

Facts of the Case

• D Light Energy P. Ltd. (the assessee) purchases solar products such as lanterns and lights from its Associated Enterprises (AEs) abroad and resells them in India without any value addition.
• The assessee applied the Resale Price Method (RPM) to benchmark the purchase of solar goods, citing that no value addition was made before resale. For reimbursement of expenses and warranty claims, another method was applied.
• The Transfer Pricing Officer (TPO) rejected RPM and applied the Transactional Net Margin Method (TNMM), arguing that warranty claims and other expenses were inherently linked to the purchase of solar goods. The TPO aggregated these transactions and made adjustments.
• The Dispute Resolution Panel (DRP) upheld TNMM as the most appropriate method, despite objections from the assessee regarding the comparables chosen and the functional dissimilarities of additional companies included by the DRP.
•  The assessee appealed to the Income Tax Appellate Tribunal (ITAT) against the TPO’s decision, arguing that RPM should have been accepted as the most appropriate method due to the lack of value addition before resale.

Arguments Presented

• The assessee contended that RPM is appropriate because it accurately reflects the resale scenario where no significant value addition occurs. They cited precedents like PCIT vs. Fujitsu India (P.) Ltd. to support their stance that RPM is suitable when there is no value addition.
• The revenue argued that TNMM should apply because the expenses like warranty claims and other costs are part of the overall transaction involving the solar goods. They highlighted the responsibilities taken on by the assessee, such as marketing and warranty handling, as evidence of value addition.

Decision of ITAT

The ITAT considered the arguments from both sides and made the following observations:

•  It was noted that the assessee’s business primarily involved the resale of solar goods without substantial value addition, particularly targeting rural areas where electricity was scarce. This operational model supported the applicability of RPM.
• The ITAT observed that while the total expenses for reimbursement and warranty claims were relatively small compared to the purchase cost of solar goods, they did not justify rejecting RPM in favor of TNMM.
• Referring to legal precedents like PCIT vs. Matrix Cellular International Services (P.) Ltd., the ITAT reaffirmed that RPM is appropriate when no significant value addition is undertaken before resale.
• The ITAT concluded that RPM was correctly applied by the assessee for benchmarking the purchase of solar goods. The aggregation of expenses and warranty claims did not warrant a shift to TNMM, especially given the minor financial impact of these elements compared to the primary transaction. Based on these findings, the ITAT partly allowed the appeal of the assessee, primarily on the grounds related to the method of benchmarking the purchase of solar goods. The ITAT’s decision upheld RPM as the most appropriate method in this case, aligning with the business model of the assessee where resale without substantial value addition was the core activity. 

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal by the assessee is directed against the assessment order dated 31.01.2022 passed u/s 143(3) r.w.s 260 r.w.s 144B of the Income Tax Act 1961(hereinafter referred to as ‘the Act’), for assessment year 2017-18.

2. The assessee in appeal has raised eight grounds of appeal. Ground no. 1 to 4 are in respect of a single issue i.e. adjustment of Rs. 6,94,53,296/- on account of international transaction of purchase of solar goods/lights and reimbursement of expenses and warranty cost claim.

2.1. In ground no. 5 of appeal, the assessee has assailed selection of com pa rables to benchmark the transactions of purchase of solar lights and goods.

2.2 In ground no.6 of appeal, the assessee has assailed adjustment in respect of interest rates. The ld. Authorized Representative of the assessee at the outset stated that, he is not pressing this ground of appeal on account of smallness of the amount involved.

2.3. Ground 7 and 8 of appeal are general, hence, require no separate adjudication.

3. Shri Hari Om Jindal, appearing on behalf of the assessee submitted that the assessee is a reseller of solar goods. The assessee purchases solar products/ goods i.e. solar lanterns, solar power lights etc. from its Associated Enterprises (AEs) for resale in India. The assessee re-sales solar products purchased from AEs without any value addition. The assessee adopted Resale Price Method (RPM) as the most appropriate method to benchmark the transaction. During the period relevant to assessment year under appeal, the assessee entered into following international transactions in relation to purchase of solar goods.

He pointed that during the impugned assessment year, the assessee has claimed loss of Rs. 9,45,78,855/-

4. The TPO rejected RPM and applied Transactional Net Margin Method (TNMM) as the most appropriate method. The TPO held that the transaction of warranty claims is clearly linked to the transaction of purchase of solar goods. Thus, the TPO to bench mark the transaction of purchase of solar goods and warranty claims aggregated the transaction and applied TNMM as the most appropriate method. The TPO made an adjustment of Rs. 10,61,47,428/- on account of purchase of solar goods and other accessories and warranty cost claim. The ld. AR submitted that the sole reason of TPO to reject RPM selected by the assessee is that the warranty claims are to be clubbed with transaction of purchase of solar goods. The ld. AR vehemently submitted that warranty claims where the goods are replaced on account of manufacturing defect is taken care of by the AEs. The warranty against manufacturing defects is given by the AE and the assessee is only a pass through entity. In support of his contention that where product is resold without any value addition, RPM is the most appropriate method he placed reliance on the following decisions: PCIT vs. Fujitsu India (P.) Ltd. 156 taxmann.com 310 (DEL) and Karcher Cleaning Systems P Ltd vs. Addl. CIT 156 taxmann.com 623 (Del Trib).

4.1. The ld.AR further contended that the assessee’s gross margin (GP/sales) is 38.97%, whereas the average margin of comparables is 25.42%. Thus, the profit margins of assessee is higher than that of the comparables. The assessee filed objections before the Dispute Resolution Panel (DRP). The DRP upheld, TNMM as the most appropriate method and also included two more companies in the list of comparables i.e. Avery Dennison India P. Ltd. and Cummins India Ltd. Both the aforesaid companies are not good comparables on account of functional disparity. Avery Dennison India P. Ltd. is engaged in manufacturing segment, whereas, Cummins India Ltd. is providing after sales services. The ld. AR submitted that, if RPM is held to be the most appropriate method, the other ground raised in appeal assailing selection of comparables would become academic.

5. On the other hand, Shri Rajesh Kumar, representing the Department strongly defending the assessment order and the order of TPO submitted that the assessee has applied RPM as the most appropriate method to purchase solar goods only. Warranty claims and reimbursement of expenses is inextricably linked to purchase of solar goods i.e. solar lights and lanterns. For reimbursement of expenses and warranty claims, the assessee has applied the other method. The ld. DR referring to the functions of assessee as stated in Transfer Pricing Analysis Report submitted that though the assessee has claimed that it has not made any value addition but the entire responsibility for developing market strategy including advertising marketing etc. is that of the assessee. Further, as per assessee’s own submissions the replacement services are not backed by corresponding warranty by AE. The AE only takes care of manufacturing defects. Product liability and warranty risks are borne by the assessee. This fact has been admitted by the assessee in risk profile at page 113 of the paper book. In other words, rendering of services after sales is value addition made by the assessee. The ld. DR further referred to United Nations Article Manual on Transfer Pricing to contend that though product comparability is less important under resale price method, greater product similarity is likely to provide reliable transfer pricing results. He asserted that the assessee has been paying huge costs towards payments to contractors, professional technical services and commission/brokerage. The quantum of expenditure under the aforesaid heads clearly indicate that the assessee is undertaking some value addition activity after purchase of goods from the AE. No plausible reason has been given by the assessee for incurring huge costs for payments to contractors, fees for professional and technical services and commission or brokerage, if the activity of assessee is simply restricted to reselling solar goods purchased from AEs.

6. Rebutting the submissions made on behalf of the Department, the ld. AR reiterated that the business activities of the assessee are only confined to reselling of solar goods purchased from AEs. He submitted that majority of solar goods including solar lights and lanterns are sold in rural and far flung areas where there is scarcity of electricity, therefore, the assessee has to bear substantial cost towards marketing and transportation of solar products.

7. The ld. AR has drawn our attention to the sample invoice at page no 254 of the paper book to show the quantity of solar chargeable lanterns purchased and unit price of each lantern purchased from AE.

8. We have heard the submissions made by rival sides and having examined the order of authorities below. The issue before us, is in narrow encompass i.e. Whether the RPM applied by the assessee is the most appropriate method in the given facts or TNMM as adopted by the TPO after aggregating the transactions is to be applied?

9. In so far the activity of assessee viz. purchase of solar goods and accessories from AE and its resale in India, it is not under dispute. The assessee is also providing solar warranty claims on solar goods purchased from AEs. The assessee has applied RPM to benchmark the transaction of purchase of solar goods from AE and to benchmark the transaction of warranty claims and reimbursement of expenses, the assessee has applied the ‘other method’. The TPO has aggregated the transaction of purchase of solar goods, reimbursement of expenses and warranty cost claims and has applied TNMM on aggregating transaction to benchmark the transaction.

10. We find that international transaction of purchase of solar products is to the tune of Rs. 136.63 crores, whereas, the total cost of reimbursement of expenses and warranty claims put together is only Rs. 1.9 crores. The reimbursement expenses and warranty claims are minuscule part of total The cost of reimbursement and warranty claims is merely little over 1.5% of purchase cost of solar products from AE. If the contention of Department is accepted then it would be like putting a cart before the horse. Apart from aforesaid objection, no other reason has been given by the revenue to replace RPM with TN MM.

11. The Hon’ble Jurisdictional High Court in the case PCIT vs. Fujitsu India (P.) Ltd placing reliance on the decision in the case of PCIT vs. Matrix Cellular International Services (P.) Ltd. 90 com 54 (Del) has held that where there is no value addition made before reselling the product, RPM is the most appropriate method. Except for suspicion the revenue has not placed on record, any documentary evidence to substantiate that the assessee has undertaking any other activity resulting in value addition to the solar goods purchased by the assessee from the AEs. In such circumstances, we do not find any merit in the contentions of the revenue that TNMM should be applied as the most appropriate method. As emanating from the records, the assessee is merely a reseller of solar goods in India, therefore, we are of considered view that the assessee has rightly adopted RPM is the most appropriate method to bench mark the transaction of purchase of solar goods. We further hold that even if the transaction of reimbursement of expenses & warranty claims is aggregated with the transaction of purchase of solar goods, it would not impact the method of bench marking as the former transactions are far smaller in value as compared to later transaction of purchase of solar goods. In light of our above findings, the assessee succeeds on ground no 1 to 4 of appeal.

12. In ground no. 5 of appeal, the assessee has assailed selection of Since, we have granted relief to the assessee on method of benchmarking, this ground is left open and is not deliberated at this stage.

13. In respect of ground no. 6 of appeal the ld. AR for the assessee has made a statement at Bar that he is not pressing this ground on account of smallness of the amount involved. In view of the statement made by ld. AR, ground no. 6 of appeal is dismissed as not pressed.

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

Order pronounced in the open court on Monday the 10^th day