When RPM had been accepted as most appropriate method in subsequent years i .e. assessment year 2007-08 onwards to determine arm’s length price of assessee’s international transaction of purchase of finished goods, then same could not be denied for assessment in previous year.

The present three appeals are directed at the instance of assessee against separate orders of even date i.e. 31st October, 2014 passed by ld. CIT(A)-XX, New Delhi for A.Y. 2003-04 to 2005-06 respectively.

2. There are common issues involved in these appeals. Therefore, we heard them together and deem it appropriate to dispose of them by this common order. The facts on all vital points are common, therefore, for the facility of reference we are taking up the facts mainly from A.Y. 2003-04. The grounds of appeal taken by the assessee in all three years are not inconsonance with Rule 8 (of Income Tax Rules, 1962) of ITAT rules, they are descriptive and argumentative in nature.

3. In brief, the first common grievance of the assessee in all three years relates to adjustment made by the assessing officer in the arm’s length price of international transaction entered into by the assessee with its Associated Enterprises (AEs). It is pertinent to observe that an addition of Rs. 2,99,86,098/-, 1,86,68,270/- and 1,18,77,521/- has been recommended by the Ld. TPO u/s 92CA(3) (of Income Tax Act, 1961) in the value of international transaction in AYs 2003-04, 2004-05, 2005-06 respectively. These additions have been impugned by the assessee in the first fold of grievance in all these years.

4. The brief facts of the case are that assessee has filed its returned of income on 17th January, 2003, 31st October, 2004 and 31st October, 2005 declaring a loss of Rs. 14,601,920, 53,12,179/- and 37,44,350/- in AY 2003- 04 to 2005-06 respectively. On scrutiny of the accounts it revealed to the assessing officer that assessee had entered into international transaction with its Associated Enterprises, therefore, a reference u/s 92CA(3) (of Income Tax Act, 1961) has to be made to the Ld. TPO for determining the arm’s length price of the international transaction entered by the assessee with its Associated Enterprises. A reference to this effect was made by the assessing officer in all these three years. The ld.

TPO took note of international transaction which read as under :-

ASSESSMENT YEAR 2003-04 :-

Sl. No. International Transactions Method Value (in Rs.)

1. Import of Surgical Implants and Hospital Equipments (finished goods)

RPM Rs. 5,90,07,427/-

2. Sale of finished goods - 2,72,047/-

3. Purchase of advertising material - 2,64,918/-

4. Reimbursements CUP 1,59,738/-

ASSESSMENT YEAR 2004-05 :-

Sl. No. Description of transaction Method Value (in Rs.)

1. Business of Orthopedic Implants and surgical instruments RPM 6,08,16,966/-

2. Purchase Return RPM 1,02,789/-

ASSESSMENT YEAR 2005-06 :-

Sl. No. Nature of transaction Method Used by Assessee Value of tansaction (in Rs.)

1. Import of finished goods RPM 101,345,337/-

2. Purchase Returns of finished goods RPM 352,943/-

3. Import of Surgical Instrumentation Sets CUP 6,522,146

4. Cost allocation from group companies (other than allocation towards purchase of finished goods/surgical instrumentation sets) CUP 804,580/-

5. Cost allocation of freight towards purchase of finished goods/surgical instrumentation sets RPM 219,609

6. Import of advertising/promotional materials RPM 605,962/-

7. Reimbursement of expenses to group companies CUP 982,700/-

5. The adjustment has been recommended by the Ld. TPO qua item no. 1 i.e. import of surgical implants, import of surgical instrumentation in AY 2003-04, import to finished goods in AY 2005-06 and business of orthopaedic implants and surgical instrument in AY 2004-05. In order to demonstrate that value of international transaction shown by the assessee in the accounts are at arm’s length price, assessee adopted Resale Price Method (RPM) as the most appropriate method. The assessee has contended that it has no internal comparable, therefore, it has selected set of comparables from public data base PROWESS. The mean gross profit margin (GP/sales) of these comparables has been computed at 20.39% in AY 2003-04. The gross profit margin of the assessee is stated to be 20.63% and therefore it was contended that value of international transaction is at arm’s length price. Identical modus operandi has been adopted in other two years. The ld. TPO did not concur with the view point of the assessee. He observed that assessee company is basically engaged in distribution of two types of product, the first consist of capital equipments like endoscopy, MRI and other examination machines. The second segment consist of surgical implants of various kinds, whereas the product profile of the comparables are totally different. Thus, ld. TPO has rejected the RPM method selected by the assessee and used Transactional Net Margin Method (TNMM). Out of seven comparables selected by the assessed, he used five and excluded Advance Micronics Services Limited, Glenmark Exports Ltd. In this way Ld. TPO recommended adjustment of Rs. 2,99,86,098/- in AY 2003-04 on similar analogy adjustments have been recommended in other years.

6. The appeals to the CIT(A) did not bring any relief for the assessee.

7. The ld. Counsel for the assessee while impugning the orders of ld. Revenue Authorities contended that Ld. TPO has changed the method from RPM to TNMM but he has not assigned any specific reasons except mention in paragraph 5.4. On the strength of following decisions :-

“1. Assistant Commissioner of Income-tax, Circle 1(1), New Delhi v. Akzo Nobel Car Refinishes India (P.) Ltd. (189 TTJ 535)

2. Bose Corporation India (P.) Ltd. v. Assistant Commissioner of Income- tax, Circle 3(1), New Delhi (163 ITD 186)

3. Horiba India (P.) Ltd. v. Deputy Commissioner of Income tax, Circle- 11(1), New Delhi ([2017] 81 taxmann.com 209

4. Assistant Commissioner of Income-tax, Circle-5(1), New Delhi v. Kobelco Construction Equipment India Ltd. (186 TTJ 790),

5. Kohler India Corp. Ltd. vs. DCIT (67 Taxmann.com 200)

6. CIT vs. Loreal India Pvt. Ltd. (276 CTR 484)

7. Mattel Toys (I) (P.) Ltd. v. Deputy Commissioner of Income-tax, Circle- 6(3) (158 TTJ 461).” (Copy placed on record),

Ld. Counsel for the assessee contended that where the assessee is directly engaged in resaling of finished goods purchased from its AE, without making any value additions then RPM is the most appropriate method required to be applied for benchmarking of international transaction of purchase of finished goods. He further contended that in A.Y. 2007-08. Ld. TPO, vide order dated 9th September, 2010 has accepted that RPM method is the most appropriate method for determining the arm’s length price of assessee’s international transactions with its AE. He placed on record copy of the TPO’s order. Ld. Counsel for the assessee thereafter made reference to the order of ITAT passed in A.Y. 2002-03 in ITA no. 3009/Del/2011. He contended that in this assessment year Tribunal has remitted the issue to the file of AO/ TPO for determining this issue afresh. On the strength of all these materials, he contended that keeping in mind the stand of the TPO in A.Y. 2007-08 on similar transactions, the RPM method ought to be upheld and the issue to be relegated to the assessing officer/ TPO should be confined to identification of comparables for benchmarking.

8. Ld. DR on the other hand, contended that all these facts were available before the Tribunal in A.Y.s 2002-03. The Tribunal took into consideration order of the TPO passed in A.Y.s 2007-08 to 2011-12 wherein RPM has been accepted but in spite of all these materials Tribunal has not granted any advance authority in favour of the assessee i.e. Tribunal has not accepted RPM method as most appropriate method but left this issue open before the TPO.

9. On due consideration of the facts and circumstances, we are of the view that the issue whether RPM method or TNMM method is to be applied to the given facts of assessee’s international transaction has not been decided by the ITAT. The Tribunal has observed that from assessment year 2007-08 to 2011-12, department has accepted the method of RPM, adopted by the assessee but fail to give reasons as to why this method was not acceptable in A.Y. 2002-03.

The finding recorded by the Tribunal in paragraph no. 16 read as under :-

“16. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, the only controversy to be resolved relates to the method to be considered as most appropriate while determining the arms length price. In the present case, the assessee applied RPM which was rejected by the TPO although the same comparables were considered by the TPO while applying the TNMM as most appropriate method to determine the Arms Length Price. In the instant case RPM has been accepted as the most appropriate method in the subsequent years i.e. assessment year 2007-08 onwards to determine the arms length price of the assessed international transaction of purchase of finished goods which the assessee considered as the most appropriate method, which is evident from page nos. 22 to 95 of the assessees paper book which are the copies of the assessment orders for the assessment years 2007-08 to 2011-12. It is also noticed that the TPO for the assessment year under consideration while rejecting the RPM and selecting the TNMM considered the same comparables.

Therefore, it is not clear when the department itself has considered the RPM as most appropriate method while determining the arms length price on the import of finished goods in the succeeding years and there is no dispute as regards to the comparables selected by the assessee then why the TNMM was considered as most appropriate method by the TPO/CIT(A). We, therefore, in the absence of the clear facts on record, deem it appropriate to set aside this issue back to the file of the AP/TPO to be decided afresh in accordance with law after providing due and reasonable opportunity of being heard to the assessee.”

10. There is no disparity on facts, therefore, respectfully following order of the ITAT in A.Y. 2002-03. We set aside the issue regarding determination of arms length price of International Transaction with the AE in all these three years to the file of AO/ TPO. The Ld. Revenue Authorities would follow directions given by the Tribunal in A.Y. 2002-03 (extracted supra). With the above observation, the first fold of grievance is allowed for statistical purposes.

In other words, ground no. 2 and other sub-grounds are being allowed for statistical purposes in all these three years.

11. In A.Y. 2003-04, there is one more ground of appeal vide which assessee has contended that Ld. CIT(A) has earned in upholding the disallowance of the claim of Rs. 32,17,535/- on account to write back in the provisions of old and absolete items and disallowance of Rs. 69,26,605/- claimed on account of obsolete inventory.

12. With the assistance of Ld. Representatives, we have gone through the record carefully. In the return of income the assessee did not make such claim, however, during the course of assessment proceeding, it has made a claim vide letter dated 31st January, 2006. The ld. Assessing officer has reproduced the letter on page 5 of the assessment order, thereafter following the decision of Hon’ble Supreme Court in the case of Goetz (India) Ltd. [2006] 284 ITR 323. He observe that assessee ought to have filed a revised return u/s 139(5) (of Income Tax Act, 1961), since it failed to revise its return, its claim cannot be entertained. On appeal, ld. First appellate authority has not adjudicated the issue on merit rather concur with the assessing officer by observing as under :-

“5.1 In the case of Goetze (India) Ltd.[2006] 284 ITR 323 (SC), the Hon'ble Supreme Court has held under:

“1. The question raised in this appeal relates to whether the appellant- assessee could make a claim for deduction other than by filing a revised return. The assessment year in question was 1995-96. The return was filed on 30-11-1995 by the appellant for the assessment year in question. On 12-1-1998, the appellant sought to claim a deduction by way of a letter before the Assessing Officer. The deduction was disallowed by the Assessing Officer on the ground that there was no provision under the Income-tax Act to make amendment in the return of income by modifying an application at the assessment stage without revising the return.

2. This appellant's appeal before the Commissioner of Income-tax (Appeals) was allowed. However, the order of the further appeal of the Department before the Income-tax Appellate Tribunal was allowed. The appellant has approached this Court and has submitted that the Tribunal was wrong in upholding the Assessing Officer’s order. He has relied upon the decision of this Court in National Thermal Power Co. Ltd. v. CTT [1998] 229 ITR 383, to contend that it was open to the assessee to raise the points of law even before the Appellate Tribunal.

3. The decision in question is that the power of the Tribunal under section 254 (of Income Tax Act, 1961), is to entertain for the first time a point of law provided the fact on the basis of which the issue of law can be raised before the Tribunal. The decision does not in any way relate to the power of the Assessing Officer to entertain a claim for deduction otherwise than by filing a revised return.

In the circumstances of the case, we dismiss the civil appeal. However, we make it clear that the issue in this case is limited to the power of the assessing authority and does not impinge on the power of the Income-tax Appellate Tribunal under section 254 (of Income Tax Act, 1961). There shall be no order as to costs.”

The above decision of the HonTole Supreme Court is squarely applicable to the facts of the present case. In view of it, the action of the AO is upheld. These grounds of appeal are dismissed.”

13. It is pertinent to observe that Hon’ble Supreme Court has explained the power of assessing officer for entertaining such claim during the assessment proceeding. According to the judgment, such type of claim could only be entertained if an assessee filed a revised return but the judgment does not denude the appellate authorities from entertained any such claim which is going to effect the taxability of an assessee. If facts are available on the record then, the appellate authority could adjudicate the issue itself otherwise can call for a remand report from the assessing officer and adjudicate the controversy on merit. A perusal of the order of CIT(A), it reveals that Ld. First appellate authority has not entertained any of the contention raised by the assessee, rather rejected the claim of assessee in a cursory manner. It is also pertinent to observe that whenever a higher appellate authority found irregularity or illegality crept in the proceeding of a subordinate authority then, after removing that, irregularity, proceeding ought to be instituted at that level, but since we are setting aside issue regarding determination of Arms Length Price of International Transaction to the file of assessing officer. Therefore, we deem it appropriate that in order to avoid multiplicity of litigation, this issue also be set aside to the file of assessing officer. In case, it is being set aside to the file of CIT(A) then Ld. First appellate authority will have to call for are mand report and the proceeding would commence at two different levels.

Therefore, considering this aspect, we set aside this issue also to the file of assessing officer, ld. Assessing officer shall decide the issue on merit and assessee will be, at liberty, to submit any details in support of its claim before the assessing officer.

14. In the result, all the three appeals are allowed for statistical purposes.

(Order Pronounced in the Open Court on 04/05/2018).

Sd/- Sd/-

(O.P.KANT) (RAJPAL YADAV)

ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 04/ 05/2018