Facts of the Case

The Revenue filed an appeal under Section 260A of the Income-tax Act, 1961 against the order dated 10.06.2024 passed by the Income Tax Appellate Tribunal in ITA No. 516/Del/2022 for Assessment Year 2017–18.

The respondent assessee, D Light Energy Pvt. Ltd., is part of the D Light Group and is engaged in importing and distributing solar lights and power products manufactured by its Associated Enterprise (AE). The assessee filed its return of income declaring a loss of ₹9,45,78,855. During scrutiny, it was noticed that the assessee had entered into international transactions with its AE involving purchase of solar products, reimbursement of expenses and warranty cost claims aggregating to ₹138.54 crores.

The matter was referred to the Transfer Pricing Officer, who aggregated the purchase of goods, warranty cost claim and reimbursement of expenses and applied the Transactional Net Margin Method (TNMM), proposing a transfer pricing adjustment. The Dispute Resolution Panel concurred with the TPO, and the final assessment order was passed making an adjustment of ₹6,94,53,297. The ITAT partly allowed the assessee’s appeal and held that Resale Price Method (RPM) was the most appropriate method, leading to the present appeal by the Revenue.

Issues Involved

Whether the ITAT erred in holding RPM as the most appropriate method for benchmarking the assessee’s international transactions, and whether the warranty cost claims and reimbursement of expenses could be aggregated with the purchase of goods for application of TNMM.

Appellant’s Arguments

The Revenue contended that the assessee undertook significant functions including marketing, advertising and after-sales support, and that warranty obligations and reimbursement expenses were intrinsically linked with the purchase of solar products. It was argued that such activities amounted to value addition, justifying aggregation of transactions and application of TNMM. Reliance was placed on the decision in Avery Dennison (India) Pvt. Ltd. to support aggregation.

Respondent’s Arguments

The assessee submitted that it functioned purely as a distributor and resold imported solar products without any value addition. It was argued that warranty costs were incurred only for manufacturing defects and were fully reimbursed by the AE under an inter-company agreement, with no service element involved. The assessee relied on settled precedents including Matrix Cellular International Services Pvt. Ltd., Fujitsu India Pvt. Ltd. and Burberry India Pvt. Ltd. to submit that RPM is the most appropriate method for distributors without value addition.

Court Order / Findings

The Delhi High Court held that the assessee was undisputedly a distributor and not a manufacturer, and that no value addition was made to the imported products before resale. The Court examined the inter-company agreement and noted that warranty costs were reimbursed by the AE and did not involve any service element or independent function performed by the assessee.

The Court found that the assumption of the TPO and DRP that warranty and reimbursement transactions were inextricably linked with purchase transactions was erroneous. It held that such transactions could not be aggregated merely on that basis. The Court further observed that marketing and advertising activities by a distributor do not amount to value addition so as to disqualify application of RPM.

Relying on authoritative precedents including Matrix Cellular, Fujitsu India and Burberry India, the Court upheld the ITAT’s finding that RPM was the most appropriate method in the facts of the case and that TNMM was wrongly applied.

Important Clarification

The Court clarified that aggregation of international transactions for transfer pricing purposes is a fact-dependent exercise. Where an assessee acts as a pure distributor without value addition and warranty costs are reimbursed by the AE, such transactions cannot be clubbed to justify application of TNMM in place of RPM.

Final Outcome

The appeal filed by the Revenue was dismissed. The Delhi High Court upheld the order of the Income Tax Appellate Tribunal, held that RPM was the most appropriate method for benchmarking the assessee’s international transactions, and concluded that no substantial question of law arose for consideration, thereby deciding the matter in favour of D Light Energy Pvt. Ltd. and against the Revenue.

Link to download order - https://www.mytaxexpert.co.in/uploads/1769686715_PR.COMMISSIONEROFINCOMETAX1DELHIVsDLIGHTENERGYP.LTD..pdf

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