Dentsply India Pvt. Ltd, New Delhi v. DCIT, New Delhi

ITA 4195/DEL/2009 | 2004-2005
Pronouncement Date: 04-05-2021 | Result: Allowed

Appeal Details

RSA Number 419520114 RSA 2009
Assessee PAN AAACD3171E
Bench Delhi
Appeal Number ITA 4195/DEL/2009
Duration Of Justice 11 year(s) 6 month(s) 7 day(s)
Appellant Dentsply India Pvt. Ltd, New Delhi
Respondent DCIT, New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 04-05-2021
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted I1
Tribunal Order Date 04-05-2021
Date Of Final Hearing 05-07-2017
Next Hearing Date 05-07-2017
Assessment Year 2004-2005
Appeal Filed On 27-10-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-2 NEW DELHI BEFORE SH. AMIT SHUKLA JUDICIAL MEMBER DR. B. R. R. KUMAR ACCOUNTANT MEMBER ITA NO. 752/DEL/2009 : ASSTT. YEAR: 200 2-03 ITA NO. 1682/DEL/2009 : ASSTT. YEAR: 200 3-04 ITA NO. 4195/DEL/2009 : ASSTT. YEAR: 200 4-05 DENTSPLY INDIA PVT. LTD. PLOT NO. 263 FIES PATPARGANJ INDUSTRIAL AREA DELHI-110092 VS DCIT CIRCLE-10(1) NEW DELHI (APPELLANT T (RESPONDENT) PAN NO. AA ACD3171E ASSESSEE BY : SH. HIMANSHU SINHA ADV. REVENUE BY : MS. MEERA SRIVASTAVA CIT DR DATE OF HEAR ING: 2 5 . 03 .20 21 DATE OF PRONOUNCEMENT: 04 .0 5 .20 2 1 ORDER PER DR. B. R. R. KUMAR ACCOUNTANT MEMBER: THE PRESENT APPEALS HAVE BEEN FILED BY THE ASSESSE E AGAINST THE ORDER OF LD. CIT (A)-XX NEW DELHI DATE D 26.12.2008. 2. AT THE OUTSET IT IS TO BE MENTIONED THAT THE AS SESSEE HAS FILED APPLICATION UNDER RULE 11 OF THE INCOME TAX ( APPELLATE TRIBUNAL) RULES 1963 FOR ADMISSION OF THE ADDITION AL GROUNDS. THE ADDITIONAL GROUND READS AS UNDER: THE INAPPROPRIATE USE OF TRANSACTIONAL NET MARGIN METHOD (TNMM) INSTEAD OF THE RESALE PRICE METHOD (RPM) AS THE MOST APPROPRIATE METHOD (MAM) FOR BENCHMARKING THE APPELLANTS INTERNATIONAL TRANSACTION OF IMPORT OF DENTAL PRODUCTS FROM ITS ITA NOS. 752 1682 & 4195/DEL/2009 DENTSPLY INDIA PVT. LTD. 2 FOREIGN AE I.E. DENTSPLY INTERNATIONAL USA (INTERNATIONAL TRANSACTION). 3. IT WAS ARGUED THAT THE GROUNDS TAKEN UP INVOLVES A LEGAL ISSUE AND DOESNT REQUIRE ANY INVESTIGATION AND CAN BE DECIPHERED FROM THE FACTS ON RECORD. THE LD. DR OBJ ECTED TO ADMISSION OF ADDITIONAL GROUND AT THIS JUNCTURE. KE EPING IN VIEW THE JUDGMENT OF THE HONBLE APEX COURT IN THE CASE OF NATIONAL THERMAL POWER CO. LTD. VS CIT (1998) 229 ITR 383 THE ADDITIONAL GROUND FILED BY THE ASSESSEE IS ACCEPTED. THE RELEVANT PORTION OF THE JUDG MENT IS AS UNDER: 5. UNDER SECTION 254 OF THE INCOME-TAX ACT THE APPELLATE TRIBUNAL MAY AFTER GIVING BOTH THE PARTIES TO THE A PPEAL AN OPPORTUNITY OF BEING HEARD PASS SUCH ORDERS THEREON AS IT THINKS FIT. THE POWER OF THE TRIBUNAL IN DEALING WIT H APPEALS IS THUS EXPRESSED IN THE WIDEST POSSIBLE TERMS. THE PURPOSE O F THE ASSESSMENT PROCEEDINGS BEFORE THE TAXING AUTHORITIES I S TO ASSESS CORRECTLY THE TAX LIABILITY OF AN ASSESSEE IN ACCORDANCE WITH LAW. IF FOR EXAMPLE AS A RESULT OF A J UDICIAL DECISION GIVEN WHILE THE APPEAL IS PENDING BEFORE THE TRIBUNAL IT IS FOUND THAT A NON-TAXABLE ITEM IS TAXE D OR A PERMISSIBLE DEDUCTION IS DENIED WE DO NOT SEE ANY REASO N WHY THE ASSESSEE SHOULD BE PREVENTED FROM RAISING THAT QUESTION BEFORE THE TRIBUNAL FOR THE FIRST TIME SO L ONG AS THE RELEVANT FACTS ARE ON RECORD IN RESPECT OF THAT ITEM. WE DO NOT SEE ANY REASON TO RESTRICT THE POWER OF THE TRIBUNA L UNDER SECTION 254 ONLY TO DECIDE THE GROUNDS WHICH ARISE FROM THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPE ALS). BOTH THE ASSESSEE AS WELL AS THE DEPARTMENT HAVE A RIGHT TO FILE AN APPEAL/CROSS-OBJECTIONS BEFORE THE TRIBUNAL. W E FAIL TO SEE WHY THE TRIBUNAL SHOULD BE PREVENTED FROM CONSIDER ING QUESTIONS OF LAW ARISING IN ASSESSMENT PROCEEDINGS ALTHOUGH NOT RAISED EARLIER. 6. IN THE CASE OF JUTE CORPORATION OF INDIA LTD. V. C .I.T. . THIS COURT WHILE DEALING WITH THE POWERS OF THE APPELLAT E ASSISTANT COMMISSIONER OBSERVED THAT AN APPELLATE AUTHOR ITY HAS ALL THE POWERS WHICH THE ORIGINAL AUTHORITY MAY HA VE IN DECIDING THE QUESTION BEFORE IT SUBJECT TO THE RESTRICTI ONS OR LIMITATIONS IF ANY PRESCRIBED BY THE STATUTORY PROV ISIONS. IN THE ABSENCE OF ANY STATUTORY PROVISION THE APPELLATE ITA NOS. 752 1682 & 4195/DEL/2009 DENTSPLY INDIA PVT. LTD. 3 AUTHORITY IS VESTED WITH ALL THE PLENARY POWERS WHICH T HE SUBORDINATE AUTHORITY MAY HAVE IN THE MATTER. THERE IS NO GOOD REASON TO JUSTIFY CURTAILMENT OF THE POWER OF TH E APPELLATE ASSISTANT COMMISSIONER IN ENTERTAINING AN ADDITIONAL GROUND RAISED BY THE ASSESSEE IN SEEKING MODIFICATION OF THE ORDER OF ASSESSMENT PASSED BY THE INCOME-TAX OFFICER. THIS COURT FURTHER OBSERVED THAT TH ERE MAY BE SEVERAL FACTORS JUSTIFYING THE RAISING OF A NEW P LEA IN AN APPEAL AND EACH CASE HAS TO BE CONSIDERED ON ITS OWN FACTS. THE APPELLATE ASSISTANT COMMISSIONER MUST BE SATISFIED THAT THE GROUND RAISED WAS BONA FIDE AND THAT THE SAME COULD NOT HAVE BEEN RAISED EARLIER FOR GOOD REASON S. THE APPELLATE ASSISTANT COMMISSIONER SHOULD EXERCISE HIS DISCRETION IN PERMITTING OR NOT PERMITTING THE ASSESSEE T O RAISE AN ADDITIONAL GROUND IN ACCORDANCE WITH LAW AND REASON. THE SAME OBSERVATIONS WOULD APPLY TO APPEALS BEFORE THE TRIBUNAL ALSO. 7. THE VIEW THAT THE TRIBUNAL IS CONFINED ONLY TO ISS UES ARISING OUT OF THE APPEAL BEFORE THE COMMISSIONER OF INCOME- TAX (APPEALS) TAKES TOO NARROW A VIEW OF THE POWERS OF THE APPELLATE TRIBUNAL [VIDE E.G. C.I.T V. ANAND PRA SAD (DELHI) C.I.T. V. KARAMCHANDPREMCHAND P. LTD. AND C.I.T. V. CELLULOSE PRODUCTS OF INDIA LTD. . UNDOUBTEDLY THE TR IBUNAL WILL HAVE THE DISCRETION TO ALLOW OR NOT ALLOW A NEW GROUND TO BE RAISED. BUT WHERE THE TRIBUNAL IS ONLY REQUIRED TO CONSIDER A QUESTION OF LAW ARISING FROM THE FACTS WHICH ARE ON R ECORD IN THE ASSESSMENT PROCEEDINGS WE FAIL TO SEE WHY SUCH A QUESTION SHOULD NOT BE ALLOWED TO BE RAISED WHEN IT IS NECESSARY TO CONSIDER THAT QUESTION IN ORDER TO CORRECTLY ASSESS THE TAX LIABILITY OF AN ASSESSEE. 8. THE REFRAMED QUESTION THEREFORE IS ANSWERED IN T HE AFFIRMATIVE I.E. THE TRIBUNAL HAS JURISDICTION TO EX AMINE A QUESTION OF LAW WHICH ARISES FROM THE FACTS AS FOUND BY TH E AUTHORITIES BELOW AND HAVING A BEARING ON THE TAX LI ABILITY OF THE ASSESSEE. WE REMAND THE PROCEEDINGS TO THE TRIBUNAL F OR CONSIDERATION OF THE NEW GROUNDS RAISED BY THE ASSESSEE ON THE MERITS. 4. RESPECTFULLY FOLLOWING THE ABOVE JUDGMENT OF THE HO NBLE APEX COURT THE ADDITIONAL GROUNDS TAKEN UP BY THE ASSESSEE A RE HEREBY ADMITTED. ITA NOS. 752 1682 & 4195/DEL/2009 DENTSPLY INDIA PVT. LTD. 4 5. THE ASSESSEE COMPANY IS A WHOLLY OWNED SUBSIDIAR Y OF DENTSPLY INTERNATIONAL USA. THE ASSESSEE COMPANY I S ENGAGED IN MANUFACTURING AND TRADING OF DENTAL PRODUCTS. TH E TOTAL SALE OF THE ASSESSEE DURING THE YEAR WAS RS.14.05 CRORES . THE RAW MATERIAL FOR THE DENTAL PRODUCTS MANUFACTURED BY T HE ASSESSEE IS PROCURED FROM UNRELATED PARTIES. THE PRODUCTS TR ADED BY THE ASSESSEE ARE ENTIRELY PURCHASED FROM ITS ASSOCIATED ENTERPRISES. THE TRADING ACTIVITY CONSTITUTED ABOUT 95% OF THE B USINESS AND THE REMAINING 5% IS FROM MANUFACTURING ACTIVITY. TH E DENTAL PRODUCTS MANUFACTURED OR TRADED BY THE ASSESSEE ARE SOLD TO THE DEALERS OR DISTRIBUTORS OF THESE DENTAL PRODUCT S AND ALSO TO DENTISTS DIRECTLY. 6. THE TPO USED NET OPERATING MARGIN AS THE PLI AS AGAINST THE GROSS PROFIT MARGIN SELECTED BY THE APPELLANT A ND CONCLUDED THAT SINCE THE MEAN OPERATING PROFIT MARGIN OF THE COMPARABLES WAS 3.40% AS AGAINST THE APPELLANT AT -16.06% THER EFORE RECOMMENDED AN ADJUSTMENT OF RS.2 73 65 789/- TO TH E INTERNATIONAL TRANSACTIONS. 7. THE WRITTEN ARGUMENTS OF THE LD. AR WITH REGARD TO THE ADDITIONAL GROUNDS ARE AS UNDER: A. THE APPELLANT SUBMITS THAT IT IS PRIMARILY INVOLVED IN TRADING OF DENTAL PRODUCTS. THE TRADING ACTIVITIES CONSTITUTE PURCHASE OF DENTAL PRODUCTS B Y THE APPELLANT FROM ITS FOREIGN AE AND RESELLING TO DEALERS OR DISTRIBUTORS OF SUCH DENTAL PRODUCTS AND ALSO TO DENTISTS DIRECTLY WITH NO ADDITION TO THE V ALUE OF SUCH DENTAL PRODUCTS. B. IT IS SUBMITTED THAT THE TRANSFER PRICING REGULATIONS CONTAINED UNDER SECTIONS 92 TO 92F OF CHAPTER X OF THE INCOME TAX ACT 1961 (ITA) WERE MADE EFFECTIVE FROM 1 APRIL 2001 (I.E. FROM AY 2002 - 03 WHICH IS THE FIRST AY UNDER CONSIDERATION). THE ITA NOS. 752 1682 & 4195/DEL/2009 DENTSPLY INDIA PVT. LTD. 5 ASSESSEE AND ITS CONSULTANT WERE NOT FULLY AWARE ABOUT THE PRACTICES REGARDING DETERMINATION OF ARM S LENGTH PRICE THE LAW BEING COMPLETELY NEW. THEY WERE UNABLE TO APPRECIATE THAT FOR DISTRIBUTION/ TRADING WHERE THE TRADER DOES NOT CARRY OUT ANY SIGNIFICANT VALUE ADDITION THE RPM SHOULD BE ADOPT ED AS THE MOST APPROPRIATE METHOD IF ADEQUATE COMPARABLE COMPANIES ARE AVAILABLE. HOWEVER THE APPELLANT HAS ADOPTED TNMM AS THE MAM BY THE APPELLANT ITSELF TO BENCHMARK ITS INTERNATIONAL TRANSACTION IN ITS TRANSFER PRICING STUDY REPORT IN AY 2002-03 WHICH WAS FOLLOWED IN SUBSEQUENT AYS TOO. C. HOWEVER GIVEN THE BUSINESS MODEL OF THE APPELLANT AND INTERNATIONAL TRANSACTION ENTERED INT O BY IT DURING THE AYS IN QUESTION THE APPELLANT IS NOW AWARE THAT THE RPM IS THE MAM FOR BENCHMARKING ITS INTERNATIONAL TRANSACTION. THUS THE APPELLANT PRAY S BEFORE THIS HONBLE TRIBUNAL FOR ADJUDICATING THE APPROPRIATENESS OF USE OF THE RPM AS THE MAM IN THE PRESENT CASE. D. IN THIS REGARD RELIANCE IS PLACED ON THE ORDER OF THE MUMBAI BENCH OF THIS HONBLE TRIBUNAL IN THE CASE OF MATTEL TOYS (I) (P.) LTD. V. DCIT IT APPEAL NOS. 2476 & 2801 (MUM.) OF 2008. IN THE FACTS OF THAT CASE THE ASSESSEE (A DISTRIBUTOR) IMPORTED GOODS FROM ITS FOREIGN AE AND RE-SOLD SUCH GOODS TO INDEPENDENT PARTIES IN INDIA WITHOUT ANY VALUE ADDITIONS. THE ASSESSEE HAD APPLIED TNMM AS THE MAM IN ITS TRANSFER PRICING STUDY REPORT AND PRAYED BEFORE THE HONBLE TRIBUNAL TO CHANGE THE METHOD OF BENCHMARKING TO RPM. AT PARA 38 OF THE ORDER THE HONBLE TRIBUNAL HELD THAT RPM IS THE MAM METHOD FOR DETERMINING THE ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACTION WHEREIN GOODS PURCHASED FROM THE AE ARE RESOLD BY THE ASSESSEE WITHOUT ANY VALUE ADDITIONS. RELEVANT PART OF THE ORDER IS REPRODUCED BELOW FOR READY REFERENCE: .... THIS IS ALSO WHAT HAPPENS IN THE CASE OF A DISTRIBUTOR WHEREIN THE PROPERTY AND SERVICE ARE PURCHASED FROM THE A.E. AND ARE RESOLD TO OTHER INDEPENDENT ENTITIES WITHOUT ANY VALUE ADDITIONS. THE GROSS PROFIT MARGIN EARNED IN SUCH ITA NOS. 752 1682 & 4195/DEL/2009 DENTSPLY INDIA PVT. LTD. 6 TRANSACTIONS BECOMES THE DETERMINATION FACTOR TO SEE THE GROSS COMPENSATION AFTER THE COST OF SALES. IN THE INSTANT CASE THE ASSESSEE IS A DISTRIBUTOR OF MATTEL 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. E. FURTHER AT PARA 41 OF THE ORDER THE HONBLE TRIBUNAL HELD THAT THE ASSESSEE IS NOT PRECLUDED FR OM RAISING A GROUND BEFORE THIS HONBLE TRIBUNAL FOR T HE FIRST TIME IF A METHOD OTHER THAN THE ONE CHOSEN B Y IT IN ITS TRANSFER PRICING STUDY REPORT SHOULD BE RESORTED TO FOR DETERMINATION OF ARMS LENGTH PRICE IN A MORE APPROPRIATE MANNER. F. RELIANCE IN THIS REGARD IS ALSO PLACED ON THE FOLLOWING DECISIONS WHEREIN IT HAS BEEN HELD THAT T HE RPM IS THE MAM FOR BENCHMARKING THE INTERNATIONAL TRANSACTION IN WHICH THE ASSESSEE RESELLS PRODUCTS PURCHASED FROM ITS FOREIGN AE TO INDEPENDENT THIRD PARTIES WITHOUT ANY VALUE ADDITIONS: A) DCIT V. M/S. LUXOTTICA INDIA EYEWEAR PVT. LTD ITA NO.1115 OF 2014 (DELHI - PARA 10 WHICH WAS AFFIRMED BY THE HONBLE DELHI HIGH COURT IN CIT V. M/S LUXOTTICA INDIA EYEWEAR PVT. LTD ITA NO. 852 OF 2015 (DELHI HIGH COURT) - PARA 5A; B) ITO V. L'OREAL INDIA (P.) LTD. IT APPEAL NO. 542 3 (MUM.) OF 2009 PARA 19 WHICH WAS AFFIRMED BY THE HONBLE BOMBAY HIGH COURT IN CIT V. L'OREAL INDIA (P.) LTD. [2015] 276 CTR 484 (BOMBAY) - PARA 7; C) NOKIA INDIA (P.) LTD. V. DCIT IT APPEAL NOS.178 & 242 (DELHI) OF 2010 - PARA 10; D) DCIT V. M/S. TUPPERWARE INDIA PVT. LTD. ITA NO. 2140/DEL/2011 & ITA NO. 1323/DEL/2012 - PARA 16 AND 17. G. THE FACT THAT INSTEAD OF TNMM THE RPM IS THE MAM WAS ALSO IGNORED BY THE LD. TPO/ AO/ CIT (A). IT IS PERTINENT TO NOTE THAT THE CIT (A) IN HIS ORD ER ITA NOS. 752 1682 & 4195/DEL/2009 DENTSPLY INDIA PVT. LTD. 7 DATED 26 DECEMBER 2008 (FOR ASSESSMENT YEAR 2002- 03) (AT PAGE 32 OF THE ORDER PAGE 39 OF THE APPEAL SET) ALSO OBSERVED THAT RPM IS APPROPRIATE WHERE TH E RESELLER DOES NOT ADD SUBSTANTIALLY TO THE VALUE OF THE PRODUCT/ SERVICE. HOWEVER DESPITE THAT THE LD . CIT (A) WRONGFULLY APPLIED TNMM TO BENCHMARK THE INTERNATIONAL TRANSACTION OF THE APPELLANT. 8. THE LD. AR FURTHER ARGUED THAT OWING TO THE NASC ENT STAGE OF TRANSFER PRICING DEVELOPMENT IN INDIA THE ASSES SEE WAS ALSO NOT CONVERSANT WITH THE DIFFERENT METHODS LEGALITY DEMANDS THAT MOST APPROPRIATE METHOD SHOULD BE USED FOR DET ERMINING ALP UNDER INDIAN TRANSFER PRICING REGULATIONS. 9. ON THE OTHER HAND THE LD. DR ARGUED THAT THE AS SESSEE THEMSELVES ARE FOLLOWING TNMM IN THE SUBSEQUENT YEA RS HENCE THE ARGUMENT OF THE ASSESSED CANNOT BE ACCEPTED. 10. HEARD THE ARGUMENTS OF BOTH THE PARTIES AND PER USED THE MATERIAL AVAILABLE ON RECORD. 11. WE HAVE GONE THROUGH THE VARIOUS DECISIONS REND ERED ON THIS ISSUE. FOR THE SAKE CONVENIENCE AND READY REFE RENCE THE RELEVANT PART CONTAINING THE ENTIRE FACTS AND RATIO IN THE CASE OF MATTEL TOYS (I) (P.) LTD. VS DCIT IN ITA NOS. 2476 & 2801/MUM/2008 IS REPRODUCED AS UNDER: 17. FACTS IN BRIEF: THE ASSESSEE IS AN INDIRECT W HOLLY OWNED SUBSIDIARY OF MATTEL INC. U.S.A. WHICH IS T HE WORLDWIDE LEADER IN MANUFACTURING AND MARKETING OF VARIETY OF TOY PRODUCTS AND GAMES. THE ENTIRE SHARE CAPITAL OF THE ASSESSEE COMPANY IS OWNED BY MATTEL INC. U.S.A. AND PARTLY THROUGH ITS OTHER SUBSIDIAR Y. THE ASSESSEE IS ENGAGED IN MARKETING AND SELLING OF TOY BRANDS OF MATTEL GROUP IN INDIA AND RECORDED IT S TURNOVER OF RS.36 CRORES DURING THE RELEVANT PREVIO US YEAR. ITS OPERATIONS CONSISTED OF IMPORT OF FINISHE D ITA NOS. 752 1682 & 4195/DEL/2009 DENTSPLY INDIA PVT. LTD. 8 GOODS FROM THE GROUP COMPANIES AND SELLING THEM IN INDIA AND ALSO MANUFACTURING OF THE TOY AFTER IMPORTING THE RAW MATERIALS FROM THE A.E. THE TOY BRANDS DEALT BY THE ASSESSEE IN INDIA INCLUDED BARB IE DOLLS HOT WHEELS FISHER PRICE PRODUCTS AND OTHER ENTERTAINMENT GAMES. THUS THE ASSESSEE HAD INTERNATIONAL TRANSACTIONS WITH THE A.E. WITH REGAR D TO THE PURCHASE OF FINISHED GOODS AND PURCHASE OF RAW MATERIALS. LOOKING TO THE NATURE OF INTERNATIONAL TRANSACTIONS WITH ITS A.E. THE ASSESSING OFFICER M ADE A REFERENCE U/S 92CA(1) TO THE TRANSFER PRICING OFF ICER (FOR SHORT TPO) FOR DETERMINATION OF ALP AS REPOR TED IN FORM3CEB FILED BY THE ASSESSEE. THE TURNOVER OF THE ASSESSEE COMPANY ALONG WITH THE NET PROFIT BEFO RE INTEREST AND TAX FOR VARIOUS YEARS WERE REPORTED IN THE FOLLOWING MANNER: A.Y. SALES (RS.) RETURNED INCOME / LOSS (RS.) NPBT (RS.) TAXES PAID IN INDIA 2003 04 30 41 12 782 ( )18 92 71 790 ( )14 16 04 449 NIL 2002 03 36 58 52 712 ( )22 31 41 398 ( )33 33 51 613 NIL 2001 02 46 56 93 750 ( )34 28 16 554 ( )40 71 57 703 NIL 2000 01 24 80 65 852 ( )12 46 36 005 ( )12 33 00 581 NIL 18. DURING THE RELEVANT ASSESSMENT YEAR THE ASSESS EE HAS DISCLOSED FOLLOWING INTERNATIONAL TRANSACTIONS IN ITS TRANSFER PRICING REPORT: SL.NO. SALES (RS.) RETURNED INCOME / LOSS (RS.) METHOD APPLIED 1. PURCHASE OF RAW MATERIALS 2 19 94 477 COST PLUS METHOD 2. PURCHASE OF FINISHED GOODS 3 08 16 302 TNMM METHOD 3. SALE OF FINISHED GOODS 3 28 21 040 TNMM METHOD 4. REIMBURSEMENT 38 21 597 CUP METHOD 19. INSOFAR AS MANUFACTURING ACTIVITIES WERE CONCERNED THE TPO ACCEPTED THE ASSESSEES DETERMINATION OF ALP AND THERE IS NO DISPUTE BEFORE US. 20. FOR THE DISTRIBUTION ACTIVITIES WHICH RELATED T O PURCHASE OF FINISHED GOODS AND SALE THEREOF THE ASSESSEE IN THE TRANSFER PRICING REPORT HAS SELECTE D ITA NOS. 752 1682 & 4195/DEL/2009 DENTSPLY INDIA PVT. LTD. 9 TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD TO ARRIVE AT THE ALP. IN THE SAI D REPORT ITSELF THE ASSESSEE HAS REJECTED THE RESALE PRICE METHOD (RPM) FOR THE REASON THAT THE SAID METHOD FOCUSES ON GROSS PROFIT MARGIN WHICH IS HEAVILY INFLUENCED BY THE SCOPE AND FUNCTION PERFORMED AND MAY ALSO VARY WIDELY AMONG UNCONTROLLED PARTIES. FURTHER THE ASSESSEE COULD N OT IDENTIFY THE COMPARABLES WITH THE PRODUCT LINES SIM ILAR TO THAT OF THE ASSESSEE. FOR THE PURPOSE OF DETERMINING THE ALP UNDER THE TNMM THE ASSESSEE SELECTED SIX COMPARABLES WITH THE AVERAGE OPERATING PROFIT MARGIN RATIO AT 0.91% AS COMPARED TO (-) 51.22% SHOWN BY THE ASSESSEE FOR THE DOMESTIC DISTRIBUTION SEGMENT FOR THE YEAR ENDING 31ST MARCH 2002. ON SUCH MARGIN THE ASSESSEE MADE AN ADJUSTMENT ON ACCOUNT MATTEL TOYS (I) PVT. LTD. 9 O F ADVERTISEMENT DISTRIBUTION COST AND WORKED OUT THE AVERAGE OPERATING MARGINS OF THE SIX COMPARABLES AT () 17.41%. THE TPO HAS INCORPORATED THE ORIGINAL PROFIT MARGIN AND THE ADJUSTED OPERATING PROFIT MAR GIN OF THE SIX COMPARABLES IN PARA6.3 IN THE FOLLOWING MANNER: SL. NO. COMPARABLES ORIGINAL OPERATING PROFIT MARGIN ADJUSTED OPERATING PROFIT MARGIN 1. BALSARA HYGIENE PRODUCTS LTD. 4.36% ( ) 3.2% 2. DETERGENTS INDIA LTD. ( ) 0.43% ( ) 22.46% 3. HENKEL SPIC INDIA LTD. 5.40% ( ) 19.74% 4. MUELLER AND PHIPPS INDIA LTD. ( ) 0.10% () 20.15% 5. NIRMA CONSUMER CARE LTD. ( ) 0.83% () 19.15% 6. PARAMOUNT COSMETICS INDIA LTD. 0.00% () 19.68% AVERAGE OPERATING MARGIN OF COMPARABLES 0.91% () 17.41% 21. THE TPO FURTHER NOTED THAT WITHIN THE DISTRIBUT ION ACTIVITY THE ASSESSEE HAS DETERMINED ITS GROSS PRO FIT MARGIN AND OPERATING PROFIT MARGIN UNDER THREE SEGMENTS FIRSTLY IMPORTED GOODS FROM THE A.E. SOL D IN DOMESTIC MARKET; SECONDLY IMPORTED GOODS FROM THE A.E. RESOLD TO A.E. AND LASTLY IMPORTED GOODS FROM THE A.E. AND EXPORTED TO THIRD PARTIES OUTSIDE INDI A. BASED ON THESE THREE SEGMENTS OF THE DISTRIBUTION ITA NOS. 752 1682 & 4195/DEL/2009 DENTSPLY INDIA PVT. LTD. 10 ACTIVITY HE WORKED OUT THE OPERATING PROFIT MARGIN AND GROSS PROFIT IN THE FOLLOWING MANNER: PARTICULARS IMPORT FROM AE & RESALE IN DOMESTIC MARKET (RS.) IMPORT FROM AE AND EXPORT TO AE (RS.) IMPORT FROM AE AND EXPORT TO THIRD PARTIES (RS.) TOTAL DISTRIBUTION ACTIVITY (RS.) SALES 11 74 41 770 4 61 57 312 7 49 07 171 23 85 06 253 LESS: COST OF SALES 8 40 80 455 4 80 71 836 7 88 74 978 21 10 27 269 GROSS PROFIT 3 33 61 315 (19 14 524) (39 67 807) 2 74 78 984 OTHER COSTS 9 35 13 477 1 77 22 486 2 87 61 235 13 99 97 198 OP. PROFIT (6 01 52 162) (1 96 37 010) (3 27 29 042) (11 25 18 21 ) OP. MARGIN (51.22%) (42.54%) (43.69%) (47.17%) GROSS PROFIT 28.40% (4.15%) (5.30%) 11.52% 22. AFTER MAKING THE ANALYSIS IN THE AFORESAID MANN ER HE OBSERVED THAT THE ASSESSEES OPERATING PROFIT MARGIN AT () 51.22% IN THE DOMESTIC SEGMENT IS MUCH LOWER THAN THE AVERAGE MARGIN EARNED BY THE OTHER ENTITIES (COMPARABLES) ENGAGED IN THE DISTRIBUTION ACTIVITY IN INDIA WHICH IS AT 0.91%. A FTER INVITING THE ASSESSEES SUBMISSIONS / OBJECTIONS ON THE PROPOSED ADJUSTMENTS THE TPO GAVE A DETAIL REASONS FOR REJECTING THE ASSESSEES SUBMISSIONS WHICH HAS BEEN DISCUSSED FROM PARAS6.5 TO PARA 11. ONE OF THE VERY IMPORTANT SUBMISSIONS OF THE ASSESSEE BEFO RE THE TPO VIDE LETTER DATED 6TH OCTOBER 2004 WAS TH AT THE GROSS PROFIT MARGIN SHOULD BE COMPARED INSTEAD OF OPERATING PROFIT FOR THE THREE SEGMENTS OF ITS DISTRIBUTION ACTIVITIES AND THE MOST APPROPRIATE METHOD FOR BENCH MARKING THE ALP SHOULD BE DONE THROUGH RESALE PRICE METHOD WITH THE SAME SET OF COMPARABLES. SUCH A CONTENTION OF THE ASSESSEE HAS BEEN REJECTED BY THE TPO IN PARA11.1. THE TPO FINALLY DETERMINED THE ALP IN THE FOLLOWING MANNER AND MADE FOLLOWING ADJUSTMENTS: 12. IN VIEW OF THE ABOVE THE ARMS LENGTH PRICE OF THE ASSESSEE IS DETERMINED IN THE FOLLOWING MANNER: (A) THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS IS CALCULATED AS PER THE SEGMENTAL COS TS AND REVENUES SUBMITTED BY THE ASSESSEE IN ITS SUBMISSIONS DATED 17.11.2004 (SEGMENTED COSTS I ITA NOS. 752 1682 & 4195/DEL/2009 DENTSPLY INDIA PVT. LTD. 11 REVENUE FOR DOMESTIC SEGMENT) AND SUBMISSION DATED 01.12.2004 (FOR SEGMENT COSTS AND REVENUE FOR REMAINING 2 EXPORT SEGMENTS). (B) THE IMPORT OF FINISHED GOODS OF RS. 3 08 16 302 /- IS CONSIDERED UNDER THE DOMESTIC SEGMENT. (C) THE ASSESSEE HAS MADE ADJUSTMENTS TO THE MARGIN OF THE COMPARABLES ON ACCOUNT OF DIFFERENCE IN ADVERTISEMENT COSTS. AS A RESULT OF THIS THE AVERA GE OPERATING PROFIT MARGIN OF THE COMPARABLES HAS BEEN DETERMINED AT (-) 17.4% WHICH APPEARS VERY IMPROBABLE IN A DISTRIBUTION ACTIVITY. THE ASSESSEE HAS FILED NO EVIDENCE TO SUPPORT THE ADJUSTMENT MADE. HENCE THE ADJUSTMENT MADE BY THE ASSESSEE IN THIS REGARD IS REJECTED. (D) THE AVERAGE OPERATING PROFIT ON SALES RATIO OF 0.91% AS CALCULATED BY THE ASSESSEE IS APPLIED FOR THE DOMESTIC SEGMENT. SEPARATE RELIEF ON ACCOUNT OF ADVERTISEMENT COSTS OF THE ASSESSEE HAS BEEN GIVEN WHILE CALCULATING THE ALP. FOR THE SEGMENT CONSISTI NG OF EXPORT TO A.E. RATIO OF OPERATING PROFIT ON COST S OF 0.92% IS APPLIED TO DETERMINE THE ALP. 13. THE ARMS LENGTH PRICE FOR ALL THE THREE SEGMEN TS IS CALCULATED IN THE FOLLOWING MANNER: I. IMPORT FROM A.E AND SALE IN DOMESTIC. PARTICULARS AMOUNT (RS.) OPERATING PROFIT MARGIN ON SALES OF THE COMPARABLES 0.91% ASSESSEES SALES IN DOMESTIC 11 74 41 770 OPERATING PROFIT REQUIRED ON SALES @ 0.91% 10 68 720 (A) ACTUAL LOSS OF ASSESSEE (6 01 52 162) (B) ADJUSTMENT TO INTERNATIONAL TRANSACTION (A) + (B) 6 12 20 882 LESS: ADVERTISEMENT COSTS AS CHARGED TO THIS SEGMENT AS DISCUSSED IN PARA12(D) (AS PER ANNEXURE2 TO ASSESSEES LETTER DT. 17.11.04) 2 53 68 909 ADJUSTMENT TO INTERNATIONAL 3 58 51 973 ITA NOS. 752 1682 & 4195/DEL/2009 DENTSPLY INDIA PVT. LTD. 12 TRANSACTION RATIO OF INTERNATIONAL TRANSACTION TO THE COST OF SALES IN THIS SEGMENT (I.E. RS.3 08 16 302 /RS.8 40 80 455) 37% HENCE 37% OF RS.3 58 51 993 AMOUNTS TO 1 32 65 230 ADJUSTMENT TO THE INTERNATIONAL TRANSACTION 1 32 65 230 II. IMPORT FROM A.E. AND SALE TO A.E. (ADJUSTMENT BEING MADE TO SALES VALUE). PARTICULARS AMOUNT (RS.) ACTUAL SALES (INTERNATIONAL TRANSACTIONS) 3 29 52 6 73 OPERATING PROFIT MARGIN ON COST OF COMPARABLES 0.92 % TOTAL COSTS OF ASSESSEE 6 57 94 322 OPERATING PROFIT REQUIRED 6 05 307 ACTUAL LOSS OF ASSESSEE 19637010 ADJUSTMENT TO THE INTERNATIONAL TRANSACTION 2024231 7 ARMS LENGTH PRICE OF SALES TO AE 5 31 94 990 ACTUAL SALES (INTERNATIONAL TRANSACTIONS) 3 29 52 6 73 23. THUS HE MADE ADJUSTMENT OF RS.1 32 65 230 IN THE ALP OF INTERNATIONAL TRANSACTION ON PURCHASE OF FINISHED GOODS AND ADJUSTMENT OF RS.2 02 42 317 ON SALE OF FINISHED GOODS THEREBY MAKING THE TOTAL ADJUSTMENT OF RS.3 35 07 547. 24. BEFORE THE LEARNED COMMISSIONER (APPEALS) THE ASSESSEE CONTENDED THAT THE ADJUSTMENT MADE BY THE TPO IS WHOLLY INCORRECT ON FACTS BECAUSE THE TPO HA S PRESUMED THAT THE ASSESSEES GROSS PROFIT MARGIN WOULD WORK OUT TO 80.57% WHICH IS MUCH HIGHER SIDE AS COMPARED FOR AVERAGE GROSS PROFIT MARGIN EARNED BY THE COMPARABLE COMPANIES. FURTHER THE TPO HAS FAILED TO APPRECIATE THAT THE ASSESSEE HAD HUGE ADMINISTRATIVE COST TO THE EXTENT OF 79.62% OF ITS TOTAL SALES AND BECAUSE OF SUCH ADMINISTRATIVE COST THE ASSESSEE HAD TO INCUR HUGE NEGATIVE PROFIT. THUS TNMM CANNOT BE AN APPROPRIATE METHOD FOR BENCH MARKING ITS OPERATING NET PROFIT. SINCE THE INTERNATIONAL TRANSACTIONS PERTAIN TO IMPORT OF FIN ISHED GOODS FROM THE A.E. AND RESALE IN THE DOMESTIC MARKET THE BEST WAY FOR BENCH MARKING SUCH ITA NOS. 752 1682 & 4195/DEL/2009 DENTSPLY INDIA PVT. LTD. 13 INTERNATIONAL TRANSACTION WAS TO COMPARE GROSS PROF IT MARGIN BY ADOPTING RPM. FURTHER IT WAS ALSO STATED THAT THE ASSESSMENT YEAR 200203 WAS THE FIRST YEAR OF ASSESSEES BUSINESS IN INDIA AND THEREFORE THE Y HAVE TO INCUR VERY HIGH ADMINISTRATIVE COST INCLUDI NG ADVERTISEMENT AND SUCH EXPENDITURES ACCOUNTED FOR ALMOST 80% OF THE SALES REVENUE. TO ADMINISTER THE GROSS PROFIT MARGIN AND ACTUAL OPERATING PROFIT MAR GIN THE ASSESSEE FURNISHED CHART FOR SIX YEARS STARTING FROM THE YEARS 200102 TO 200607 WHICH HAS BEEN INCORPORATED IN APPELLATE ORDER AT PARA6.8 IN THE FOLLOWING MANNER: PROFITABILITY STATEMENT PARTICULARS 200102 2002 03 2003 04 2004 05 2005 06 2006 07 SALES 111441770 304112782 305011664 321028703 427450318 550000867 LESS: SALES TAX 16740887 13479686 19160394 36392568 NET SALES 117441770 304112782 288270777 307549017 408289924 523608299 LESS: GROSS COST COST OF GOODS SOLD 84080485 202386334 139965922 157037068 217642512 237802154 GROSS PROFIT (A) 33361285 101726448 148304855 150511949 190647412 285806145 GROSS PROFIT (%) 28% 33% 51% 49% 47% 55% OPR. MARGIN (%) 51% 36% 15% 11% 5% 10% ADM. COST AS % OF SALES MATTEL INDIA 80% 69% 66% 60% 52% 45% ADM. COST AS A % OF SALES COMPARABLES 12% 21% 20% 17% 18% DATABASE YET TO UPDATE THE INFO 25. THE LEARNED COMMISSIONER (APPEALS) INSOFAR AS THE TRANSACTIONS RELATING TO IMPORT OF FINISHED GOO DS AND RESALE IN INDIA ARE CONCERNED REJECTED THE ASSESSEES CONTENTIONS ON VARIOUS GROUNDS. THE SUM AND SUBSTANCE OF SUCH REASONING ARE (I) THAT THE ASSESSEES CONTENTION THAT THE CURRENT YEAR WAS THE FIRST YEAR OF OPERATION AND THEREFORE THEY HAD TO INCUR HEAVY HIGH ADMINISTRATIVE COST IS NOT TENABLE BECAUSE THE ASSESSEE HAS BEEN OPERATING IN ITA NOS. 752 1682 & 4195/DEL/2009 DENTSPLY INDIA PVT. LTD. 14 INDIA FOR AROUND 3 TO 4 YEARS IN THE PAST AND IN TH E EARLIER YEARS ALSO THE ASSESSEE HAD SIGNIFICANT TURNOVER. THEREFORE THERE IS NO JUSTIFICATION IN ASSESSEES CONTENTIONS ABOUT ADJUSTMENT OF ADMINISTRATIVE COST; (II) THE ASSESSEES CONTENTION THAT PRICES CHARGED BY MATTEL EUROPA IS AT PAR WITH THE PRICES CHARGED TO OTHER A.ES CANNOT BE ACCEPTED BECAUSE THE TRANSFER PRICING ADJUSTMENTS HAVE TO BE BASED ON FAR ANALYSI S AND IF LOWER PRICES ARE BEING CHARGED IN ASIA REGIO N THE SAME CANNOT JUSTIFY LOWER PROFITS BECAUSE THE ASSESSEE HAS NOT GIVEN PLI INDICES OF ITS A.ES FOR OPERATING IN THIS REGION TO JUSTIFY ITS CLAIM AND WHETHER THEY ARE ALSO SHOWING ABNORMAL LOSSES IN RESPECTIVE MARKETS; (III) THE GROSS PROFIT RATE IN THE PRECEDING YEAR W AS 37.64% WHEREAS IN THE CURRENT YEAR IS ONLY 19.90% WHICH SUPPORTS THE TPOS CONTENTIONS AND REFUTE THE ASSESSEES CLAIM THAT NEGATIVE PROFITS ARE ON ACCOU NT OF THE FACT THAT THIS WAS INITIAL YEAR OF OPERATION IN INDIA; AND (IV) THE ASSESSEES CONTENTION THAT RPM SHOULD BE FOLLOWED INSTEAD OF TNMM CANNOT BE ACCEPTED BECAUSE THE ASSESSEE IN ITS TRANSFER PRICING STUDY REPORT H AS GIVEN A DETAIL ANALYSIS AS TO WHY RPM COULD NOT BE FOLLOWED AND TNMM IS THE MOST APPROPRIATE METHOD FO R DETERMINING THE ALP. 26. FURTHER THE LEARNED COMMISSIONER (APPEALS) OBSERVED THAT THE ASSESSEE ITSELF DID NOT MAKE THE REQUIRED ADJUSTMENT TO ITS PROFIT AND LEFT IT TO TH E TPO TO MAKE THE ADJUSTMENTS. BASED ON THESE REASONS HE UPHELD THE TPOS DETERMINATION OF ALP ON THE GROUND THAT THE TPO WHILE DETERMINING THE ALP HAD ALREADY EXCLUDED THE ADVERTISEMENT EXPENSES AND THEREFORE THERE REMAINS NO VALID GRIEVANCE OF THE ASSESSEE TO BE CONSIDERED. THUS HE UPHELD THE ADJUSTMENT OF RS.1 32 65 320. INSOFAR AS THE ADJUSTMENT ON ACCOUN T OF IMPORT OF A.E. AND EXPORT BACK TO THE A.E. IS CONCERNED THE LEARNED COMMISSIONER (APPEALS) HAS ACCEPTED THE ASSESSEES CONTENTIONS. THIS ASPECT WOULD BE DISCUSSED IN THE REVENUES APPEAL. ITA NOS. 752 1682 & 4195/DEL/2009 DENTSPLY INDIA PVT. LTD. 15 27. BEFORE US THE LEARNED COUNSEL MR. MUKESH BUTANI REPRESENTING THE ASSESSEE NARRATED THE ENT IRE FACTS OF THE CASE WHICH HAS BEEN BY AND LARGE DISCUSSED IN THE FORGOING PARAGRAPHS AND THE ISSUE INVOLVED. HE SUBMITTED THAT DUE TO HIGH ADMINISTRAT IVE COST AND ADVERTISEMENT EXPENSES THE TNMM METHOD CANNOT BE TAKEN AS MOST APPROPRIATE METHOD IN THE ASSESSEES CASE BECAUSE THE NET PROFIT MARGIN EVEN AFTER VARIOUS KINDS OF ADJUSTMENT WILL NOT RESULT I NTO DETERMINATION OF PROPER ARMS LENGTH RESULT. EVEN THOUGH THE ASSESSEE HAS ADOPTED THE MOST APPROPRIAT E METHOD AS TNMM IN THE TRANSFER PRICING REPORT HOWEVER SUCH A METHOD FAILS IN THIS CASE DUE TO PECULIAR CIRCUMSTANCES IN THIS CASE AND FURTHER IN THE CASE OF COMPANIES WHICH ARE ENGAGED IN THE DISTRIBUTION ACTIVITIES RPM IS MORE PREFERABLE MET HOD. THE ASSESSMENT YEAR 200203 BEING THE FIRST YEAR OF APPLICATION OF TRANSFER PRICE MECHANISM IT WAS NOT CLEAR EVEN TO THE PROFESSIONALS WHAT SHOULD HAVE BE EN THE BEST METHODOLOGY AND COMPARABILITY ANALYSIS FOR ARRIVING AT ALP FOR PARTICULAR TYPE OF BUSINESS TRANSACTIONS. BEFORE THE LEARNED COMMISSIONER (APPEALS) A SPECIFIC SUBMISSION WAS RAISED FOR APPLYING THE RESALE PRICE METHOD IN ASSESSEES CASE BECAUSE THERE WAS HUGE OPERATING COST IN THE FORM O F ADMINISTRATIVE AND ADVERTISEMENT COST WHICH HAS RESULTED INTO NEGATIVE OPERATING MARGIN OF () 51.22%. THIS WORKING OF THE ASSESSEE OF THE ACTUAL NET MARGIN AT () 51.22% HAS NOT BEEN DISPUTED BY THE TPO OR THE LEARNED COMMISSIONER (APPEALS) EVEN AFTER ADJUSTMENT OF ADVERTISEMENT EXPENSES. HE SUBMITTED THAT NET SALES UNDER THE DISTRIBUTION SEGMENT WAS AT RS.11 74 41 770 AS AGAINST THE TOTA L COST INCURRED BY THE ASSESSEE WHICH WAS RS.17 75 93 932 AND OPERATING PROFIT WAS RS. () 6 01 52 162 THEREBY GIVING NEGATIVE OPERATING PROF IT RATIO OF () 51.22%. THE REASON FOR SUCH A HUGE ADMINISTRATIVE AND ADVERTISEMENT COST IN THIS YEAR WAS THAT THE ASSESSEE HAS STARTED ITS DISTRIBUTION ACTI VITIES ON ITS OWN AND ALL THE EARLIER ARRANGEMENTS UNDER T HE JOINT VENTURE WITH BLOWPLAST WAS DISCONTINUED. IF T HE ASSESSEES GROSS PROFIT MARGIN HAS TO BE ANALYSED THEN THE ASSESSEES MARGIN AS COMPARED TO THE SIX COMPARABLES ARE MUCH BETTER. BEFORE THE ASSESSING ITA NOS. 752 1682 & 4195/DEL/2009 DENTSPLY INDIA PVT. LTD. 16 OFFICER AND THE LEARNED COMMISSIONER (APPEALS) THE REVISED MARGIN USING RESALE PRICE METHOD WAS FILED WHICH HAS BEEN REJECTED BY THEM SIMPLY ON THE GROUN D THAT THE ASSESSEE ITSELF HAS ADOPTED TNMM IN THE TRANSFER PRICING REPORT. HE SUBMITTED THAT THE ASSESSEE BEING A DISTRIBUTOR AND IN CASE OF DISTRIB UTION ACTIVITIES THE RPM HAS BEEN RECOGNISED TO BE THE M OST APPROPRIATE METHOD FOR BENCH MARKING THE ALP WHILE CARRYING OUT COMPARABILITY ANALYSIS BETWEEN CONTROL LED AND UNCONTROLLED TRANSACTIONS. IN SUPPORT OF HIS CONTENTIONS HE REFERRED TO THE GUIDANCE NOTE ISSUE D BY THE ICAI WHEREIN IT HAS BEEN CLARIFIED THAT RPM MAY BE ADOPTED FOR THE TRANSACTIONS WHERE THERE IS DISTRIBUTION OF GOODS AND THERE IS NO VALUE ADDITIO N. FURTHER HE REFERRED TO THE VARIOUS DECISIONS OF TH E TRIBUNAL WHICH ARE LISTED BELOW WHEREIN IT HAS BEEN HELD THAT IN CASE OF DISTRIBUTION RPM IS THE MOST APPROPRIATE METHOD: I) DCIT VS QUARK SYSTEMS PVT. LTD. [2010] 38 SOT 30 7 (CHD.)(SB); II) DCIT VS MITSUIOSK LINES MERETIME INDIA P. LTD. ITA NO. 6397/MUM./2006; III) TEXTRONIX INDIA P. LTD. VS DCIT ITA NO.1334/BANG./2010 ORDER DATED 31ST OCTOBER 2012; AND IV) ITO VS LOREAL INDIA P. LTD. ITA NO.5423/MUM./2009 ORDER DATED 25TH APRIL 2012. 28. REGARDING THE ASSESSING OFFICERS AND LEARNED COMMISSIONER (APPEALS)S OBJECTION THAT THE ASSESSE E CANNOT CHANGE THE METHOD FOR DETERMINING THE ALP AT A LATER STAGE HE SUBMITTED THAT IF THE ALP IN A PARTICULAR CASE CAN BE DETERMINED BY FOLLOWING ANY ONE OF THE METHODS THEN THE SAME CAN BE RAISED AT ANY STAGE AFTER DULY EXPLAINING AS TO WHY SUCH METH OD SHOULD BE FOLLOWED. IN SUPPORT OF THIS CONTENTION HE RELIED UPON THE FOLLOWING DECISIONS OF THE TRIBUNAL : I) DCIT VS MCI COM INDIA P. LTD. ITA NO.2766 & 4187/DEL./ 2010; AND ITA NOS. 752 1682 & 4195/DEL/2009 DENTSPLY INDIA PVT. LTD. 17 II) ACIT VS MSS INDIA P. LTD. [2009] 32 SOT 132 (PUNE); AND III) GAP INTERNATIONAL SOURCING INDIA P. LTD. 149 TTJ 437. 29. RELYING ON THESE DECISIONS HE SUBMITTED THAT R PM SHOULD BE FOLLOWED IN THE PRESENT CASE FOR DETERMINATION OF ALP WHILE EVALUATING THE CONTROLLE D TRANSACTIONS OF THE ASSESSEE. 30. REGARDING THE COMPARABLES AS SELECTED BY THE ASSESSEE AND ACCEPTED BY THE TPO HE SUBMITTED THAT EVEN THOUGH THERE WAS NO PRODUCT COMPARABILITY WITH THAT OF THE ASSESSEE BUT ALL WERE FUNCTIONALLY COMPARABLE THEREFORE THE SAME COMPARABLES CAN BE TAKEN FOR THE PURPOSE OF RPM. IN SUPPORT OF THIS CONTENTION THAT PRODUCT COMPARABILITY IS NOT REQUIR ED IN RPM HE RELIED UPON THE CONTENTS OF PARA2.26 OF THE OECD GUIDELINES AND THE GUIDELINES OF ICAI. IN CASE OF A DISTRIBUTION IT IS VERY DIFFICULT TO GET THE COMPANIES WITH SIMILAR PRODUCT COMPARABILITY AND THEREFORE ONE HAS TO GO FOR FUNCTIONAL COMPARABILI TY. THUS THE SAME COMPARABLES CAN BE CONSIDERED FOR TH E PURPOSE OF RPM ALSO. HE POINTED OUT THAT IF THE TRANSFER PRICING ADJUSTMENT AS DONE BY THE TPO IS CARRIED OUT THEN THE GROSS PROFIT MARGIN WILL BECO ME SO HIGH WHICH IS IMPROBABLE IN ANY KIND OF DISTRIBU TION BUSINESS AND IN THE CASE OF THE ASSESSEE THE PURCH ASE PRICE WILL ALMOST BECOME NEGLIGIBLE. LASTLY BY WAY OF ALTERNATIVE ARGUMENTS HE POINTED OUT THAT THERE WA S CERTAIN COMPUTATIONAL ERROR IN THE WORKING OF TPO. IN SUPPORT OF THE SAME HE FURNISHED A CHART BEFORE US . 31. PER CONTRA THE LEARNED DEPARTMENTAL REPRESENTATIVE MR. AJIT KUMAR JAIN REPRESENTING T HE REVENUE SUBMITTED THAT THE ASSESSEE HAS FIRST OF ALL CHOSEN TNMM AS MOST APPROPRIATE METHOD IN THE TRANSFER PRICING STUDY. BASED ON THIS METHOD THE ASSESSEE HAS SELECTED SIX COMPARABLE COMPANIES WHIC H WERE FOR THE PURPOSE OF CARRYING OUT FUNCTIONAL COMPARABILITY BASED ON TNMM ONLY. THESE COMPARABLES WERE NOT SELECTED FOR THE PURPOSE OF RESALE PRICE METHOD. HAD THE ASSESSEE CHOSEN RESALE PRICE METHOD IN THE TRANSFER PRICING REPORT THEN THE SELECTION O F ITA NOS. 752 1682 & 4195/DEL/2009 DENTSPLY INDIA PVT. LTD. 18 COMPARABLES WOULD HAVE BEEN DIFFERENT AND ALSO THE DIFFERENT GROSS PROFIT MARGIN. ONCE THE ASSESSEE IT SELF HAS GIVEN A DETAILED REPORT AND COMMENT IN THE TRANSFER PRICING REPORT AS TO WHY TNMM IS THE MOST APPROPRIATE METHOD IN THIS CASE AND WHY RESALE PRIC E METHOD CANNOT BE ADOPTED. THE ASSESSEE CANNOT JUSTIFY LATER ON THAT ITS APPROACH WAS WRONG WHEN I T DOES NOT SUITS ITS DETERMINATION OF ALP BY THE TPO OR AT A LATER STAGE. FURTHER SIX COMPARABLES AS CHOSE N BY THE ASSESSEE WERE DEALING IN DIFFERENT PRODUCT L INES SO THEY CANNOT BE HELD TO BE COMPARABLES FOR THE PURPOSE OF RPM HOWEVER FOR THE PURPOSE OF TNMM SUCH KIND OF COMPARABLES CAN BE TAKEN AS A GOOD COMPARABLES FOR THE PURPOSE OF COMPARABILITY ANALYS IS. HE REFERRED TO THE VARIOUS PRODUCT LINES IN WHICH T HESE COMPARABLES WERE DEALING WITH LIKE SOAP TOILETRIES ETC. HE REFERRED TO THE VARIOUS PARAGRAPHS OF OECD GUIDELINES SPECIFICALLY PARA2.25 2.29 THAT SAME K IND OF PRODUCTS SIMILARITIES ARE DESIRABLE IN RPM AND A LSO THAT IN CASE OF THE ASSESSEE THE TRADE NAME IS OWN ED BY THE A.E. THEREFORE THE RPM IS NOT ADVISABLE IN SUCH CASE. HE ALSO REFERRED TO THE UNITED NATION MANUAL ON TRANSFER PRICING SPECIFICALLY PARA9.2.9 .4 WHEREIN IT HAS BEEN STATED THAT DISTRIBUTORS ENGAGE D IN THE SALE OF MARKEDLY DIFFERENT PRODUCTS CANNOT B E COMPARED IN RESALE PRICE METHOD. 32. MOREOVER HE SUBMITTED THAT THE ASSESSEE HAS NO T GIVEN ANY COGENT REASON AS TO WHY RESALE PRICE METHOD SHOULD BE ADOPTED NOW WHEN TNMM HAS BEEN ACCEPTED BY IT IN THE TRANSFER PRICING REPORT. THE ONLY REASON FOR NOW ADOPTING THE RESALE PRICE METHOD IS TO JUSTIFY THE ALP BASED ON THE AVERAGE GROSS PROFIT R ATE OF SIX COMPARABLES CHOSEN BY IT THOUGH INITIALLY SELECTED FOR THE PURPOSE OF TNMM. EVEN AFTER THE ADJUSTMENT OF ADVERTISEMENT ON THE OPERATING PROFIT S OF SIX COMPARABLES THEN ALSO THE AVERAGE NET PROFI T MARGIN OF COMPARABLES COMES TO () 17.41%. EVEN IF THAT IS ALSO ACCEPTED AS SUGGESTED BY THE ASSESSEE THEN ALSO THE ASSESSEES MARGIN IS NOT AT ALP AND T HAT IS WHY THE ASSESSEE HAS TAKEN A TURN AROUND FOR ADOPTING RPM SO AS TO JUSTIFY THE ALP OF ITS A.E. TRANSACTIONS. THUS HE SUBMITTED THAT THE SUBMISSIO NS OF THE LEARNED COUNSEL FOR ADOPTING THE RPM SHOULD BE REJECTED OUT RIGHTLY. ITA NOS. 752 1682 & 4195/DEL/2009 DENTSPLY INDIA PVT. LTD. 19 33. BY WAY OF ALTERNATIVE ARGUMENTS THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT IN CASE THE RPM IS ACCEPTED TO BE THE MOST APPROPRIATE METHOD FOR BENCH MARKING THE ALP THEN THE MATTER SHOULD BE RESTORED BACK TO THE FILE OF THE TPO AND THE ASSESSEE SHOULD FURNISH A LIST OF FRESH COMPARABLES FOR CARRYING COMPARABILITY ANALYSIS FOR THE PURPOSE OF RPM. 34. THE LEARNED COUNSEL IN THE REJOINDER SUBMITTE D THAT IN CASE OF RPM THERE CANNOT BE ANY SIMILARITY OF PRODUCT COMPARABILITY BUT FUNCTIONAL COMPARABILITY HAS TO BE SEEN. HE REFERRED TO THE SAME OECD GUIDELINES WHICH WERE REFERRED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE DURING THE COURSE OF HIS ARGUMENTS. REGARDING THE LEARNED DEPARTMENTAL REPRESENTATIVES ARGUMENT THAT THE ASSESSEE HAS ADOPTED RPM BEFORE THE TPO AND THE LEARNED COMMISSIONER (APPEALS) SO A S TO JUSTIFY THE ALP AT GROSS PROFIT MARGIN LEVEL IS NOT CORRECT BECAUSE THE ASSESSEE HAS GIVEN A DETAIL REASONS BEFORE THE TPO AND THE LEARNED COMMISSIONER (APPEALS) AS TO WHY THE RPM SHOULD BE ADOPTED AND NONE OF THE AUTHORITIES HAVE GIVEN ANY COGENT REASO N FOR REJECTING THE RPM OR ASSESSEES CONTENTION. 35. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS PERUSED THE RELEVANT FINDINGS OF THE ASSESSING OFFICER AND THE LEARNED COMMISSIONER (APPEALS) AS WELL AS THE MATERIAL PLACED ON RECORD. THE ONLY DISPUTE BEFORE US RELATES TO ADJUSTMENT OF ALP WITH REGARD TO THE DISTRIBUTION SEGMENT I.E. IMPORT OF FINISHED GOODS FROM THE A.E. AND SALE IN DOMESTIC AS WELL AS TO THE A.E. THE ASSESSEE HAD INITIALLY ADOPTED TNMM AS MOST APPROPRIATE METHOD F OR BENCH MARKING ITS ALP AND FOR THIS PURPOSE IT HAS CHOSEN SIX COMPARABLES WHICH HAS BEEN ACCEPTED BY THE TPO. THE ASSESSEES OPERATING MARGIN IN RELATIO N TO THE TRANSACTIONS OF IMPORT OF FINISHED GOODS FRO M THE A.E. AND RESALE IN THE DOMESTIC MARKET WAS AT ( ) 51.22% AND THE MAJORITY OF THE OPERATING COST WAS O N ACCOUNT OF ADMINISTRATIVE AND ADVERTISEMENT COSTS. IN THE TRANSFER PRICING REPORT THE ASSESSEE HAD SUBMITTED THAT IF THE ADJUSTMENT ON ACCOUNT OF ADVERTISEMENT IS MADE ON THE AVERAGE OPERATING PROF IT ITA NOS. 752 1682 & 4195/DEL/2009 DENTSPLY INDIA PVT. LTD. 20 MARGIN OF THE SIX COMPARABLES THE OPERATING MARGIN WILL COME DOWN TO ()17.41%. THE DETAILS OF ACTUAL OPERATING PROFIT MARGIN AND THE ADJUSTED OPERATING PROFIT MARGIN HAD ALREADY BEEN INCORPORATED IN THE FORGOING PARAGRAPHS. IT WAS SUBMITTED BY THE ASSESS EE BEFORE THE TPO AS WELL AS IN THE TRANSFER PRICING R EPORT THAT IF THE ADJUSTMENT IS MADE IN THE ALP BASED ON THE OPERATING PROFIT MARGIN OF THE COMPARABLES THEN ON THE PECULIAR FACTS OF THE CASE SUCH ADJUSTMENTS WOU LD RESULT INTO IMPROBABLE SCENARIO AS THE VALUE OF IMPORTED GOODS WOULD BE DETERMINED AT A VALUE LESS THAN ZERO THEREFORE NO ADJUSTMENT IS REQUIRED AND HENCE ITS MARGIN IS AT ALP. ONE OF THE OTHER MAIN CONTENTION OF THE ASSESSEE BEFORE THE TPO WAS THAT THE GROSS PROFIT MARGIN SHOULD BE COMPARED INSTEAD OF OPERATING PROFIT OF ITS DISTRIBUTION ACTIVITIES SEG MENT FOLLOWING RPM INSTEAD OF TNMM. SUCH A SUBMISSION WAS MADE VIDE LETTER DATED 6TH OCTOBER 2004. THIS H AS BEEN REJECTED BY THE TPO MAINLY ON THE GROUND THAT THE ASSESSEE HAS ITSELF ADOPTED TNMM AS THE MOST APPROPRIATE METHOD AND HAS ITSELF REJECTED THE RPM. THIS OBJECTION / SUBMISSION OF THE ASSESSEE HAS ALS O BEEN REJECTED BY THE LEARNED COMMISSIONER (APPEALS) ON THE SAME GROUND. ONE OF THE MAIN ISSUES BEFORE U S AT THIS STAGE IS AS TO WHAT SHOULD BE THE MOST APPROPRIATE METHOD ON THE FACTS OF THE ASSESSEES CASE WHICH HAS BEEN DISCUSSED AT LENGTH IN THE EARL IER PARAGRAPHS. 36. ACCORDING TO THE PROVISIONS OF SECTIONS 92C R/W 10B THE ALP IN RELATION TO AN INTERNATIONAL TRANSACTIONS HAS TO BE DETERMINED BY FOLLOWING ANY OF THE MOST APPROPRIATE METHOD VIZ. (I) COMPARABLE UNCONTROLLED PRICE METHOD (CUP); (II) RESALE PRICE METHOD (RPM); (III) COST PLUS METHOD (CPM); (IV) PROFITS SPLIT METHOD (PSM) AND (V) TRANSACTIONAL NE T MARGIN METHOD (TNMM). IN CUP METHOD THE FOCUS IS DIRECTLY ON THE PRICE OF THE PRODUCT SOLD OR TRANSF ERRED REQUIRING BOTH FUNCTIONAL AND PRODUCT COMPARABILITY . THE RPM AND CPM OPERATE AT GROSS PROFIT MARGIN LEVE L REQUIRING FUNCTIONAL RATHER THAN PRODUCT COMPARABIL ITY. THE PSM AND TNMM OPERATE ON OPERATING PROFIT MARGIN LEVEL USED FOR A COMPLEX AND INTEGRATED ENTERPRISE. THESE METHODS ARE BASED ON PRICE OR PROFIT. THE CENTRE POINT OF THESE METHODS IS COMPARABILITY ITA NOS. 752 1682 & 4195/DEL/2009 DENTSPLY INDIA PVT. LTD. 21 ANALYSIS WITH THE COMPARABLES AND THE METHOD WHICH PROVIDES MOST RELIABLE WAY OF ARRIVING AT THE ALP IS CONSIDERED AS MOST APPROPRIATE METHOD. A COMPARABILITY ANALYSIS IS DONE FOR THE COMPARISON O F CONTROLLED TRANSACTION(S) WITH AN UNCONTROLLED TRANSACTION(S) AND CONTROLLED AND UNCONTROLLED TRANSACTIONS ARE COMPARABLE IF NONE OF THE DIFFEREN CES BETWEEN THE TRANSACTIONS CAN MATERIALLY AFFECT THE FACTOR BEING EXAMINED BY ADOPTING ANY OF THE METHODOLOGIES AS MENTIONED IN SECTION 92C OR IF ANY REASONABLE ACCURATE ADJUSTMENT CAN BE MADE TO ELIMINATE THE MATERIAL AFFECTS OF ANY SUCH DIFFEREN CE. 37. THE RPM HAS BEEN PRESCRIBED IN RULE 10B(1)(B) I N THE FOLLOWING MANNER: DETERMINATION OF ARM'S LENGTH PRICE UNDER SECTION 92C. 10B. (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SEC TION 92C THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY AN Y OF THE FOLLOWING METHODS BEING THE MOST APPROPRIATE METHOD IN THE FOLLOWING MANNER NAMELY : (B) RESALE PRICE METHOD BY WHICH (I) THE PRICE AT WHICH PROPERTY PURCHASED OR SERVIC ES OBTAINED BY THE ENTERPRISE FROM AN ASSOCIATED ENTERPRISE IS RESOLD OR ARE PROVIDED TO AN UNRELATE D ENTERPRISE IS IDENTIFIED; (II) SUCH RESALE PRICE IS REDUCED BY THE AMOUNT OF A NORMAL GROSS PROFIT MARGIN ACCRUING TO THE ENTERPRI SE 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 SERVICE S IN A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMB ER OF SUCH TRANSACTIONS; (III) THE PRICE SO ARRIVED AT IS FURTHER REDUCED BY THE EXPENSES INCURRED BY THE ENTERPRISE IN CONNECTION W ITH THE PURCHASE OF PROPERTY OR OBTAINING OF SERVICES; ITA NOS. 752 1682 & 4195/DEL/2009 DENTSPLY INDIA PVT. LTD. 22 (IV) THE PRICE SO ARRIVED AT IS ADJUSTED TO TAKE IN TO ACCOUNT THE FUNCTIONAL AND OTHER DIFFERENCES INCLU DING DIFFERENCES IN ACCOUNTING PRACTICES IF ANY BETWEE N THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRIS ES ENTERING INTO SUCH TRANSACTIONS WHICH COULD MATERI ALLY AFFECT THE AMOUNT OF GROSS PROFIT MARGIN IN THE OPE N MARKET; (V) THE ADJUSTED PRICE ARRIVED AT UNDER SUB-CLAUSE (IV) IS TAKEN TO BE AN ARM'S LENGTH PRICE IN RESPECT OF THE PURCHASE OF THE PROPERTY OR OBTAINING OF THE SERVIC ES BY THE ENTERPRISE FROM THE ASSOCIATED ENTERPRISE; 38. THUS THE RPM METHOD IDENTIFIES THE PRICE AT WH ICH THE PRODUCT PURCHASED FROM THE A.E. IS RESOLD TO A UNRELATED PARTY. SUCH PRICE IS REDUCED BY NORMAL GR OSS PROFIT MARGIN I.E. THE GROSS PROFIT MARGIN ACCRUIN G IN A COMPARABLE CONTROLLED TRANSACTION ON RESALE OF SA ME OR SIMILAR PROPERTY OR SERVICES. THE RPM IS MOSTLY APPLIED IN A SITUATION IN WHICH THE RESELLER PURCHA SES TANGIBLE PROPERTY OR OBTAIN SERVICES FROM AN A.E. A ND RESELLER DOES NOT PHYSICALLY ALTER THE TANGIBLE GOO DS 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 BE EN MADE. SINCE IN RPM ONLY MARGINS ARE SEEN WITH REFERENCE TO ITEMS PURCHASED AND SOLD OR EARNED BY AN INDEPENDENT ENTERPRISE IN COMPARABLE UNCONTROLLED TRANSACTIONS VISAVIS THE ONE IN THE CONTROLLED TRANSACTIONS THEREFORE IN SUCH A SITUATION THE N ATURE 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 PROPERTI ES OR SERVICES RATHER THAN SIMILARITY OF PRODUCTS. IN RPM OTHER ATTRIBUTES OF COMPARABILITIES THAN THE PRODUC T ITSELF CAN PRODUCE A RELIABLE MEASURE OF ARMS LENG TH CONDITIONS. THE MAIN REASON IS THAT THE PRODUCT DIFFERENTIATION DOES NOT MATERIALLY EFFECT THE GROS S PROFIT MARGIN AS IT REPRESENTS GROSS COMPENSATION AFTER THE COST OF SALES FOR SPECIFIC FUNCTION PERFO RMED. THE FUNCTIONAL ATTRIBUTE IS MORE IMPORTANT WHILE UNDERTAKING THE COMPARABILITY ANALYSIS UNDER THIS METHOD. THUS IN OUR OPINION UNDER THE RPM PRODUC TS SIMILARITY IS NOT A VITAL ASPECT FOR CARRYING OUT ITA NOS. 752 1682 & 4195/DEL/2009 DENTSPLY INDIA PVT. LTD. 23 COMPARABILITY ANALYSIS BUT OPERATIONAL COMPARABILIT Y IS TO BE SEEN. SINCE THE GROSS PROFIT MARGIN IS THE MA IN CRITERIA WHILE EVALUATING THE TRANSACTIONS IN THE R PM WHEREIN PRICE IS IDENTIFIED AT WHICH PROPERTY OR SERVICES ARE RESOLD AND NORMAL GROSS PROFIT MARGIN IS DERIVED AT BY THE ENTERPRISE WHICH IS DEDUCTED FROM THE RESALE PRICE OF SUCH PROPERTY OR SERVICE IN COMPARABLE UNCONTROLLED TRANSACTIONS. THE GROSS PRO FIT MARGIN EARNED BY THE INDEPENDENT ENTERPRISE IN COMPARABLE UNCONTROLLED TRANSACTIONS IS SERVED AS A GUIDANCE FACTOR. THIS IS ALSO WHAT HAPPENS IN THE C ASE OF A DISTRIBUTOR WHEREIN THE PROPERTY AND SERVICE A RE PURCHASED FROM THE A.E. AND ARE RESOLD TO OTHER INDEPENDENT ENTITIES WITHOUT ANY VALUE ADDITIONS. THE GROSS PROFIT MARGIN EARNED IN SUCH TRANSACTIONS BECOMES THE DETERMINATION FACTOR TO SEE THE GROSS COMPENSATION AFTER THE COST OF SALES. IN THE INSTAN T CASE THE ASSESSEE IS A DISTRIBUTOR OF MATTEL TOYS AND GETS THE FINISHED GOODS FROM ITS A.E. AND RESELLS T HE SAME TO INDEPENDENT PARTIES WITHOUT ANY VALUE ADDITION. IN SUCH A SITUATION RPM CAN BE THE BEST METHOD TO EVALUATE THE TRANSACTIONS WHETHER THEY AR E AT ALP. 39. SOME OF THE CASE LAWS RELIED UPON BY THE LEARNE D COUNSEL ALSO SUPPORT OUR ABOVE CONCLUSION THAT IN C ASE OF DISTRIBUTION ACTIVITIES I.E. IMPORT OF PRODUCTS AND SERVICES FROM THE A.E. AND RESALE TO THE INDEPENDEN T PARTIES WITHOUT ANY VALUE ADDITION THE RPM WOULD B E THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP . THIS VIEW HAS BEEN UPHELD BY THE TRIBUNAL MUMBAI BENCH IN TEXTRONIX INDIA P. LTD. (SUPRA) LOREAL INDIA P. LTD. (SUPRA AND STAR DIAMOND GROUP V/S DDIT 141 TTJ 21. THE OECD GUIDELINES AND ICAI GUIDELINES AS HAVE BEEN REFERRED TO BY THE LEARNED COUNSEL HAVE ALSO EXPRESSED ON THE SIMILAR LINE THAT RPM WOULD B E THE BEST METHOD WHEN RESALE TAKES PLACE WITHOUT ANY VALUE ADDITION TO A PRODUCT FOR BENCH MARKING THE A LP. 40. ON THE OTHER HAND UNDER THE TNMM THE ALP IS DETERMINED BY COMPARING THE OPERATING PROFIT RELATE D TO AN APPROPRIATE BASE I.E. COST OR SALE OR ASSETS OF THE TESTED PARTY WITH THE OPERATING PROFIT OF AN UNCONTROLLED PARTY ENGAGED IN COMPARABLE TRANSACTIONS. UNDER THE TNMM NET MARGIN OR ITA NOS. 752 1682 & 4195/DEL/2009 DENTSPLY INDIA PVT. LTD. 24 OPERATING PROFIT IS COMPARED AGAINST WITH THE INDEPENDENT ENTITIES AGAINST THOSE ACHIEVED IN RELA TED PARTY TRANSACTIONS. UNDER THE TNMM THE MAJOR THRUS T IS TO DERIVE AT THE OPERATING PROFIT AT THE TRANSAC TIONAL LEVEL AND TO IDENTIFY THE OPERATING EXPENSES OF BOT H THE TESTED PARTY AS WELL AS THE INDEPENDENT PARTIES . THIS REQUIRES A LOT OF ADJUSTMENTS TO DERIVE AT THE ACTUAL OPERATING PROFIT. IF THE ALP OF ANY TRANSACT ION CAN BE DETERMINED BY APPLYING ANY OF THE DIRECT METHODS LIKE CUP RPM CPM THEN THEY SHOULD BE GIVEN THE PREFERENCE AND ONCE THESE TRADITIONAL METHODS HAVE BEEN RENDERED INAPPLICABLE THEN ONLY TNMM SHOULD BE RESORTED TO. ON THE FACTS OF THE ASSESSEES CASE IN OUR OPINION THE ASSESSEE BEING A DISTRIBUTOR WHO IS PURCHASING THE GOODS FROM ITS A .E. AND RESELLING THEM TO INDEPENDENT PARTIES / UNRELAT ED PARTIES RESALE PRICE METHOD WOULD BE THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF THE TRANSACTIONS BETWEEN THE ASSESSEE AND THE A.E. 41. NOW COMING TO THE ARGUMENT OF THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT ONCE THE ASSESSEE ITSELF HAS CHOSEN TNMM AS MOST APPROPRIATE METHOD I N TPR THEN IT CANNOT RESORT TO CHANGE ITS METHOD AT AN ASSESSMENT OR APPELLATE STAGE. IN OUR OPINION SUCH A CONTENTION CANNOT BE UPHELD BECAUSE IF IT IS FOUND ON THE FACTS OF THE CASE THAT A PARTICULAR METHOD WILL NOT RESULT INTO PROPER DETERMINATION OF THE ALP THE TP O OR THE APPELLATE AUTHORITIES CAN VERY WELL HOLD THA T WHY A PARTICULAR METHOD CAN BE APPLIED FOR GETTING PROPER DETERMINATION OF ALP OR THE ASSESSEE CAN DEMONSTRATE A PARTICULAR METHOD TO JUSTIFY ITS ALP. THUS EVEN IF THE ASSESSEE HAD ADOPTED TNMM AS THE MOST APPROPRIATE METHOD IN THE TRANSFER PRICING REPORT THEN ALSO IT IS NOT PRECLUDED FROM RAISING THE CONTENTIONS / OBJECTIONS BEFORE THE TPO OR THE APPELLATE COURTS THAT SUCH A METHOD WAS NOT AN APPROPRIATE METHOD AND IS NOT RESULTING INTO PROPER DETERMINATION OF ALP AND SOME OTHER METHOD SHOULD BE RESORTED. THE ULTIMATE AIM OF THE TRANSFER PRICI NG IS TO EXAMINE WHETHER THE PRICE OR THE MARGIN ARISING FROM AN INTERNATIONAL TRANSACTIONS WITH THE RELATED PARTY IS AT ALP OR NOT. THE DETERMINATION OF APPROXIMATE ALP IS THE KEY FACTOR FOR WHICH MOST APPROPRIATE METHOD IS TO BE FOLLOWED. THEREFORE IF AT ITA NOS. 752 1682 & 4195/DEL/2009 DENTSPLY INDIA PVT. LTD. 25 ANY STAGE OF THE PROCEEDINGS IT IS FOUND THAT BY ADOPTING ONE OF THE PRESCRIBED METHODS OTHER THAN CHOSEN EARLIER THE MOST APPROPRIATE ALP CAN BE DETERMINED THE ASSESSMENT AUTHORITIES AS WELL AS T HE APPELLATE COURTS SHOULD TAKE INTO CONSIDERATION SUC H A PLEA BEFORE THEM PROVIDED IT IS DEMONSTRATED AS TO HOW A CHANGE IN THE METHOD WILL PRODUCE BETTER OR MORE APPROPRIATE ALP ON THE FACTS OF THE CASE. ACCORDINGLY WE REJECT THE CONTENTIONS OF THE LEARN ED DEPARTMENTAL REPRESENTATIVE AND ALSO THE OBSERVATIONS OF THE ASSESSING OFFICER AND THE LEARN ED COMMISSIONER (APPEALS) THAT THE ASSESSEE CANNOT RESORT TO ADOPTION OF RPM METHOD INSTEAD OF TNMM. 42. NOW COMING TO THE COMPARABLES SELECTED BY THE ASSESSEE WE AGREE WITH THE CONTENTION OF THE LEARN ED DEPARTMENTAL REPRESENTATIVE THAT THESE COMPARABLES WERE CHOSEN FOR THE PURPOSE OF CARRYING OUT COMPARABILITY ANALYSIS UNDER THE TNMM AND EVEN THE TPO OR THE ASSESSEE HAS NOT CARRIED OUT ANY FUNCTIO NAL ANALYSIS OF THESE COMPARABLES WITH REGARD TO THE GR OSS PROFIT MARGIN LEVEL. IN OUR CONSIDERED OPINION THI S MATTER NEEDS TO BE RESTORED TO THE FILE OF THE TPO FOR DENOVO ADJUDICATION. CONSEQUENTLY WE SET ASIDE THE IMPUGNED ORDER PASSED BY THE LEARNED COMMISSIONER (APPEALS) AND RESTORE THE ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER WHO SHALL DECIDE THE ISSUE AFRESH AFTER REQUIRING THE ASSESSEE TO FURNISH FRESH COMPARABLES AFTER CONSIDERING THE RPM AS THE MOST APPROPRIATE METHOD FOR DETERMINATION OF ALP. THE TP O WILL ALSO PROVIDE DUE AND EFFECTIVE OPPORTUNITY OF HEARING AND DETERMINE THE ALP AFTER CONSIDERING THE FRESH COMPARABLES AND FOLLOWING THE RPM. THUS GROUND NO.3 RAISED BY THE ASSESSEE IS PARTLY ALLOW ED FOR STATISTICAL PURPOSES. 43. THE ASSESSEE HAS ALSO RAISED ADDITIONAL GROUNDS CHALLENGING THE TPOS ORDER PASSED UNDER SECTION 92CA3 ON LEGAL GROUNDS. 12. NEEDLESS TO MENTION ONE OF THE MEMBERS OF THE BENCH WAS THE AUTHOR OF THE JUDGMENT IN THE CASE MENTIONED AB OVE. SINCE THE FACTS AND LEGAL ISSUE INVOLVED IN THE INSTANT C ASE IS AKIN TO ITA NOS. 752 1682 & 4195/DEL/2009 DENTSPLY INDIA PVT. LTD. 26 THE CASE OF M/S MATTEL TOYS INDIA PVT. LTD. (SUPRA) WE HEREBY DIRECT TO REVENUE TO DETERMINE ARMS LENGTH PRICE ( ALP) CONSIDERING RESALE PRICE METHOD (RPM) AS MOST APPRO PRIATE METHOD (MAM). 13. AS A RESULT ALL THE APPEALS OF THE ASSESSEE AR E ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 04/05/2021. SD/- SD/- (AMIT SHUKLA) (DR. B. R. R. KUMAR) JUDICIAL MEMBER ACC OUNTANT MEMBER . DATED: 04/05/2021 *SUBODH* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR DATE INITIAL 1. DRAFT PUNCHED ON COMPUTER 15.04.2021 PS 2. DRAFT PLACED BEFORE AUTHOR 15.04.2021 PS