Facts of the Case

The case pertains to Assessment Years 2011-12, 2012-13, and 2013-14, where the Assessing Officer passed orders under Section 144C read with Section 143(3). The Transfer Pricing Officer (TPO) determined the Arm’s Length Price (ALP) using the Transactional Net Margin Method (TNMM).

The assessee, Fujitsu India Private Limited, acted as a distributor of goods received from its associated enterprises (AEs) and resold them in the Indian market without any value addition.

However, the TPO and Dispute Resolution Panel (DRP) treated the assessee as a full-fledged distributor and applied TNMM, resulting in upward adjustments.

Issues Involved

  1. Whether the Tribunal erred in rejecting TNMM adopted by the TPO for determining ALP.
  2. Whether Resale Price Method (RPM) should be considered the Most Appropriate Method (MAM) where goods are resold without value addition.

Petitioner’s Arguments (Revenue)

  • The assessee was a full-fledged risk-bearing distributor performing multiple functions.
  • Therefore, TNMM was the most appropriate method for determining ALP.
  • The Tribunal incorrectly rejected TNMM despite the functional profile of the assessee. 

Respondent’s Arguments (Assessee)

  • The assessee was merely a distributor engaged in resale of goods without any value addition.
  • RPM is the most appropriate method in cases involving pure trading activities.
  • Gross margins, not net margins, should determine ALP in such scenarios. 

Court Findings / Order

  • The Tribunal’s findings were upheld as they were based on factual analysis.
  • No comparable instances were brought on record by the TPO/DRP to justify TNMM.
  • The assessee was engaged in resale without value addition; hence RPM was appropriate.
  • The Court relied on the precedent in Principal Commissioner of Income-tax-6 v. Matrix Cellular International Services (P.) Ltd..
  • The substantial question of law was decided in favour of the assessee and against the Revenue.
  • Appeals were dismissed.

Important Clarification

  • RPM is the Most Appropriate Method where goods are purchased from AEs and resold without any value addition.
  • TNMM cannot be applied mechanically without proper comparables.
  • Functional analysis (FAR) plays a decisive role in selecting the correct transfer pricing method.
  • Pure trading activities justify RPM over TNMM.

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/60812102023ITA342019_133243.pdf

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