Where assessee has resold goods imported from AE without any value addition RPM is most appropriate method

Bangalore ITAT: In the case where the assessee has resold the goods imported from the Associated Enterprise (AE) without any value addition, the most appropriate method which can be applied for determining the arm’s length price [ALP] is the Resale Price Method [RPM] and not Transactional Net Margin Method [TNMM].

M/s Randox Laboratories India Private Limited vs The Asst. Commissioner of Income Tax, Bengaluru; IT(TP)A No. 2576/Bang/2019; ITAT A Bench, Bangalore; 04.01.2022

Present Appeal has been filed by the Assessee regarding the adoption of the Most Appropriate Method (MAM) for determination of Arm’s Length Price (ALP) in respect of an international transaction of sale of reagents by the Assessee to its Associated Enterprise (AE).

Facts:

• The Assessee is a wholly-owned Indian subsidiary of Randox Laboratories Ltd., a company based in the United Kingdom (hereinafter referred to as AE). The parent company is primarily engaged in the business of manufacturing medical diagnostic reagents and analyzers.
• Diagnostic reagents are used to diagnose a range of health issues by screening for pathogens, antigens, co-infections, genetic diseases, and a host of other physical diseases. Analyzer is a medical laboratory instrument designed to measure different chemicals and other characteristics in a number of biological samples quickly, with minimal human assistance. These measured properties of blood and other fluids may be useful in the diagnosis of disease. The Assessee imports reagents and diagnostic equipments (analyzers) from the parent Randox Laboratories (India) P. Ltd. and sells them to independent third parties in India.
• The question before the AO was, whether the price paid by the Assessee to its AE for purchase of reagents was at Arm’s length because as per the provisions of Sec.92 of the Act, income arising from an international transaction (transaction with a related party) has to be determined having regard to Arm’s Length Price (ALP).
• Section 92F define Arm’s Length Price is the price applied (or proposed to be applied) when two unrelated persons enter into a transaction in uncontrolled conditions. Unrelated Persons; Section 92A, the persons said to be unrelated if they are not associated or deemed to be associated enterprise. Uncontrolled Conditions; are that conditions which are not controlled or suppressed or moulded for achievement of a predetermined results.
• The AO referred to the Transfer Pricing Officer (TPO) the question of determination of ALP of the aforesaid transaction of purchase of reagents, as per provisions of Sec.92CA of the Act.
• The main dispute between the Assessee and the Revenue is with regard to which is the most appropriate method (MAM) for determination of ALP, whether it is Transaction Net Margin Method (TNMM) as contended by the revenue or the Resale Price Method (RPM) as contended by the Assessee.

Assessee’s Contention:

• The Assessee is merely a distributor and the activity conducted by the Assessee is that of buying and reselling reagents and analysers without any change in the product. t was reiterated that in order to better the sale of the reagents, it has adopted a model for Indian market, which the Assessee calls it as ‘Reagent Rental Contract (RRC)’, where the analyser machine in which such reagents are used are placed in the premises of the customer and a certain commitment for sales is taken from them.
• With regard to the accounting treatment, the Assessee pointed out that when Assessee places an analyzer in the place of its customer, the cost of such analyzer is capitalized in the books of the Assessee and depreciation is claimed on such analysers which is a business expenditure and charged to the Profit & Loss account.
• contended that merely because a certain mode of selling/distribution has been adopted by the Assessee does not in any way mean that they don’t remain a reseller of the product. The product remains the same with no value addition. It is only that the selling mode adopted has been made conducive to ensure that the sales in India increases for the Randox reagents.
• It was the plea of the Assessee that the TPO presumed that distributors do not do any activities other than distribution. It was the plea of the Assessee that it is very clearly mentioned in the risk analysis of the Assessee in the Transfer Pricing Documentation that the Assessee bears the risk of marketing and creating demand for the product.

Revenue’s Contention:

• Since there is a huge cost of depreciation in the Profit & Loss account and hence the Assessee is not a simple distributor, the Assessee pointed out that during the previous year the Assessee earned a gross margin of 31.16% which is generally higher as compared to the other distributors.
• The DRP however confirmed the order of the TPO and held that, the Assessee has unique business model and during the year, the functions performed are not of a simple distributor.
• Aggrieved by the order of the DRP on the MAM for determining ALP, the Assessee is in appeal before the Tribunal. It is the plea of the Assessee before the Tribunal that there is neither any reasoning that has been provided for such a presumption nor any factual modification that has been done by the DRP in arriving at such conclusion.

Observations and Findings:

• Identical issue had come up for consideration before the ITAT Mumbai Bench in Assessee’s own case in AY 2010-11 and the Tribunal by its order held that RPM was the MAM and directed the TPO to determine ALP applying RPM as the MAM. The said decision has been followed by the ITAT Bangalore “A” Bench in Assessee’s own case .
• The Observations of the Tribunal in aforesaid cases are as follows:
  • The core issue arising for consideration is, whether the international transaction relating to purchase of reagents, spares, consumables from the AE is a simple trading activity, hence, can be benchmarked under RPM.
  • as could be seen from the facts on record, the analyzers were never sold to the third party customers who buy the reagents from the assessee, but, were only installed in their premises for chemical analysis and research work for a period of five years.
  • Thus, it is clear, the assessee is merely purchasing reagents from its AE and reselling them to third party customers in India without making any value addition. In fact, the analyzer / spares of the machines are never sold to the third party customers but always remain the property of the assessee.
  • In the transfer pricing analysis, the assessee has selected RPM as the most appropriate method. However, the Transfer Pricing Officer has rejected the RPM and has concluded that the assessee is not merely a trader but is also engaged in manufacturing and research activity. Learned DRP has simply endorsed the aforesaid view of the Transfer Pricing Officer without discussing much on the issue.
  • From the facts on record, it is very much clear that in the year under consideration, assessee has not undertaken any manufacturing activity as the manufacturing unit was still in the process of being set-up. On the contrary, the facts on record clearly reveal that the assessee had purchased reagents and chemicals from its AE and sold to the third party customers without any value addition. Further, the analyzers, spares and consumables, though, were imported, however, they were not sold but were provided in the laboratories / diagnostics units of the third party customers for testing and research activity.
  • Keeping in perspective the aforesaid factual position, it has to be examined which is the appropriate method to benchmark the arm’s length price of the transaction. On going through the provisions of rule 10B and more particularly sub-rule-1(b) of the aforesaid rule, it is evident that RPM is applicable to a case where the price at which property purchased or service obtained by a enterprise from the AE is resold or provided to an unrelated enterprise.
  • The gross profit margin of such a transaction is thereafter compared to the gross profit margin of similar comparable uncontrolled transactions after making necessary adjustment with regard to the expenditure incurred, functional and other differences, the arm’s length price is determined.
  • Thus, in the facts of the present case, since the assessee has resold the goods imported from the AE without any value addition, the most appropriate method which can be applied for determining the arm’s length price is RPM and TNMM cannot be the most appropriate method in such type of transaction.
  • Coming to the argument that the assessee himself has adopted TNMM as the MAM for its transfer pricing study and hence it cannot turn around and argue for adoption of RSPM as the MAM, it was held that even if the assessee had adopted TNMM as the MAM in the TP 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.
  • From the material available on record, it can be concluded that once assessee has given a methodology for working of ALP on selection of a particular method supported by appropriate comparables, the working can be dislodged by TPO on the basis of cogent reasons and objective findings.
• Relying on the aforesaid observations, it was held by the Tribunal that The reasons assigned by the TPO for regarding RPM as the MAM and other facts and circumstances remain the same in the present AY also and therefore the decision of the Tribunal would be equally applicable to the present AY also.

Held:

Following the aforesaid decision of the tribunal it was held that RPM is the MAM for determining ALP and the AO/TPO is directed to compute the ALP as directed by the Tribunal in its order for AY 2010-11, after affording Assessee opportunity of being heard.