Facts of the Case

The assessee, Fujitsu India Pvt. Ltd., was engaged in distribution activities, purchasing goods from its associated enterprises (AEs) and reselling them in India without any value addition.

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

However, the assessee contended that since it acted as a pure distributor without value addition, the Resale Price Method (RPM) should be applied.

The Assessing Officer (AO), relying on TNMM, made upward adjustments to income for the relevant assessment years.

Issues Involved

  1. Whether the Tribunal erred in rejecting TNMM adopted by the TPO for determining ALP.
  2. Whether RPM should be considered the Most Appropriate Method for a distributor with no value addition.

Petitioner’s Arguments (Revenue)

  • The Revenue argued that the assessee was a full-fledged risk-bearing distributor performing multiple functions.
  • Therefore, TNMM was appropriate for benchmarking international transactions.
  • The Tribunal erred in disregarding the functional profile and rejecting TNMM.

Respondent’s Arguments (Assessee)

  • The assessee contended that it was merely a trader/distributor reselling goods without any value addition.
  • Hence, RPM is the most suitable method for determining ALP in such cases.
  • The gross margin earned from resale transactions should be the basis of comparison.

Court’s Findings / Order

  • The Tribunal found that:
    • No proper comparables were provided by TPO/DRP.
    • The assessee did not add value to the goods and merely resold them.
  • The High Court upheld the Tribunal’s findings and held:
    • RPM is the Most Appropriate Method where goods are resold without value addition.
    • TNMM was incorrectly applied in such circumstances.
  • The Court relied on precedent:
    • Principal Commissioner of Income-tax-6 v. Matrix Cellular International Services (P.) Ltd.
  • Final Decision:
    Appeals of the Revenue were dismissed; decision in favor of the assessee.

Important Clarifications

  • RPM is preferred when:
    • The assessee is a pure distributor/trader
    • No or insignificant value addition is made
  • TNMM may not be appropriate where:
    • Gross margins (not net margins) are the key indicator
  • RPM loses reliability if:
    • Significant value addition or processing is involved

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

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.