Facts of the Case

The present matter pertains to appeals filed by the Revenue against Fujitsu India Private Limited for Assessment Years 2011–12, 2012–13, and 2013–14.

The Assessing Officer (AO) passed assessment orders under Sections 144C read with 143(3) of the Income Tax Act, 1961, making upward transfer pricing adjustments based on the Transactional Net Margin Method (TNMM).

The Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) also considered TNMM as the Most Appropriate Method (MAM) for determining the Arm’s Length Price (ALP).

However, the assessee contended that it functioned merely as a distributor without any value addition to goods purchased from its Associated Enterprises (AEs), and therefore, the Resale Price Method (RPM) should be applied.

The Income Tax Appellate Tribunal (ITAT) accepted the assessee’s contention and held RPM to be the appropriate method.

Issues Involved

  1. Whether the ITAT erred in rejecting TNMM adopted by the TPO for determining ALP?
  2. Whether RPM is the Most Appropriate Method where the assessee acts as a pure distributor without value addition?
  3. Whether absence of comparable data invalidates the application of TNMM?

Petitioner’s (Revenue) Arguments

  • The Revenue contended that the assessee was a full-fledged distributor bearing risks and performing multiple functions.
  • Therefore, TNMM was rightly selected as the Most Appropriate Method.
  • The ITAT erred in disregarding TNMM and adopting RPM.
  • It was argued that RPM was not suitable due to the functional profile of the assessee.

Respondent’s (Assessee) Arguments

  • The assessee argued that it was merely engaged in resale of goods without any value addition.
  • Hence, RPM was the correct method for benchmarking international transactions.
  • The gross margin, rather than net margin, was the appropriate indicator for ALP determination.
  • The assessee emphasized that no reliable comparables were provided by the TPO to justify TNMM.

Court’s Findings / Order

The Delhi High Court upheld the findings of the ITAT and ruled in favor of the assessee:

  • The Tribunal correctly observed that the assessee was engaged in resale without value addition.
  • No comparable instances were provided by the TPO/DRP to justify TNMM.
  • RPM is the appropriate method where goods are resold without processing or value addition.
  • The Court relied on its earlier judgment in:
    • Principal Commissioner of Income Tax-6 v. Matrix Cellular International Services (P.) Ltd.
  • The Court held that once the assessee is a pure distributor, RPM becomes the most suitable method.

Important Clarification

  • RPM is most appropriate where:
    • The assessee is a distributor
    • No value addition is made to goods
  • TNMM becomes inappropriate in absence of proper comparables.
  • Functional analysis is critical in selecting the MAM for transfer pricing.
  • The judgment reinforces consistency with prior rulings including:
    • Bausch & Lomb Eyecare (India) Pvt. Ltd. v. ACIT
    • Sony Ericsson Mobile Communications India Pvt. Ltd. v. CIT

Sections Involved

  • Section 92C – Computation of Arm’s Length Price
  • Section 144C – Reference to Dispute Resolution Panel
  • Section 143(3) – Assessment
  • Rule 10B of Income Tax Rules (Methods for ALP determination)

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

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