INCOME TAX ACT, 1961

Section 92C

Transfer pricing - Determination of ALP - MAM - TNMM v. RPM--Resale of goods imported from AE without any value addition

Assessee imported dental products from its foreign AE for resale to the dealers or distributors of these dental products without any value addition. TPO benchmarked the transaction of import using TNMM method. Held: RPM method identifies the price at which product purchased from AE is resold to a unrelated party. Such price is reduced by normal gross profit margin, i.e., 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 reseller purchases tangible property or obtain services from an AE 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. Since in RPM only margins are seen with reference to items 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. Since in RPM only margins are seen with reference to items purchased and sold or earned by an independent enterprise in comparable uncontrolled transactions vis-a-vis the one in controlled transactions, 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. In RPM other attributes of comparabilities than product itself can produce a reliable measure of arm's length conditions. The main reason is that the product differentiation does not materially effect gross profit margin as it represents gross compensation after cost of sales for specific function performed. The functional attribute is more important while undertaking comparability analysis under this method. In the instant case, assessee was a distributor of dental products and got the finished goods from its AE and resold the same to independent parties without any value addition. In such a situation, RPM could be the best method to evaluate transactions whether they were at ALP and, therefore, application of TNMM was not justified.

Applied:Mattel Toys (I) (P) Ltd. v. Dy. CIT ITA Nos. 2476 & 2801/Mum/2008.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. :

INCOME TAX ACT, 1961

Section 254(1)

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