Sec. 92C of Income-tax Act, 1961 & Rule 10B(1)(b) & 10B(1)(e) of Income-tax Rules, 1962— Transfer pricing—Margin earned in a controlled transaction can be considered for comparability purpose.

Facts: Assessee has challenged the rejection of TNMM as the most appropriate method and further, rejection of comparables selected while benchmarking the transaction relating to import of finished goods from the AE.

Held, that assessee has benchmarked the transaction relating to import of finished goods from AE by applying TNMM as the most appropriate method. Whereas, the TPO after rejecting TNMM has held that RPM is the most appropriate method. While doing so, he has applied the gross profit margin of 42 per cent to make the adjustment. It is evident, the adoption of gross profit margin of 42 per cent is on the basis of projected resale discount percentage for the financial years 2002–03 to 2006-07 furnished by the assessee in the course of TP proceedings. Applying the resale discount percetnage of 42 per cent of financial year 2006-07 the TPO has ultimately determined the gross margin of the assessee. However, the facts on record reveal that for the financial year 2006-07, assessee’s gross margin was 31.65 per cent . No material has been brought on record by the Revenue to demonstrate that gross profit margin of 42 per cent is the actual margin of the assessee and is not a target margin. Moreover, the TPO while applying RPM has referred to the gross margin earned by Medtronic International Ltd., Malaysia, for adopting gross profit margin of 42 per cent. On examination of the provisions of r. 10B(1)(b), it is clear that even under RPM only the gross margin derived on an uncontrolled transaction can be considered for comparability analysis. Therefore, under no circumstances, the margin earned in a controlled transaction can be considered for comparability purpose. That being the case, the margin earned by Medtronic International Ltd., Malaysia, could not have been considered by the TPO not only because it is a case of controlled transaction, but it is situated in a different geographical location. Though we do not discount the proposition that in case of distribution/resale of goods imported from AE, RPM could be a proper method to benchmark the ALP, however, when both the assessee as well as the TPO admit that sufficient information relating to gross margin in uncontrolled transaction is not available, no useful purpose would be served in restoring the issue to the AO for fresh benchmarking under RPM. In such circumstances, when no other method is applicable, as a method of last resort, TNMM has to be applied as most appropriate method. It is further noticed, in subsequent assessment years, not only the assessee has benchmarked the import of finished goods from the AE by applying TNMM, but the TPO has also accepted it as the most appropriate method. Even the very same comparables, as selected in the impugned assessment year, have been accepted as good comparables in the subsequent assessment years. For the aforesaid reasons, we do not feel the necessity to restore the issue to the AO/TPO for fresh adjudication. Accordingly, we uphold the decision of CIT(A) in deleting the addition, though, on our own reasoning. - DEPUTY CIT V/s INDIA MEDTRONIC (P) LTD. - [2020] 205 TTJ 950 (ITAT-MUMBAI)