Pr. Commissioner Of Income Tax-1 v. Dentsply India Pvt. Ltd

$~20 *IN THE HIGH COURT OF DELHI AT NEW DELHI +ITA 199/2022 PR. COMMISSIONER OF INCOME TAX-1 ..... Appellant Through:Mr. Sanjay Kumar and Ms. EashaKadian, Advocates. versus DENTSPLY INDIA PVT. LTD. Through:None. ..... Respondent %Date of Decision: 18[th]July, 2022 CORAM:HON'BLE MR. JUSTICE MANMOHANHON'BLE MS. JUSTICE MANMEET PRITAM SINGH ARORA J U D G M E N T MANMOHAN, J (Oral): 1.Present Income Tax Appeal has been filed challenging the Orderdated 4[th]May, 2021 passed by the Income Tax Appellate Tribunal (‘ITAT’)in ITA No. 752/Del./2009 for Assessment Year 2002-03. 2.Learned Counsel for the Appellant states that the ITAT has erred insolely relying on the decision of ITAT, Mumbai Bench in the case of MattelToys (I) Pvt. Ltd. vs. DCIT in ITA No. 2476 & 2801/Mum/2008 withoutappreciating that the facts in the case of the assessee are entirely differentfrom the one relied upon. He further states that the ITAT has erred indirecting application of the Resale Price Method (RPM) as the MostAppropriate Method (‘MAM’) when the selection of the Most AppropriateMethod was not under challenge before lower authorities, also when the ITA 199/2022 assessee itself had applied the Trans Net Margin Method (TNMM) as theMAM in the TP Study. 3.Having perused the paper book, this Court finds that the authoritiesbelow have found that 95% of the business of the assessee involves tradingactivity. In fact, the function of the assessee during the year underconsideration, as stated in the Orders of the lower authorities, is reproducedherein under:- “The assesses company is a wholly owned subsidiary of DentsplyInternational,USATheassesseecompanyisengagedinmanufacturing and trading of dental products. The total sale of theassessee during the year was Rs. 14.05 crores. The raw material, forthe dental products manufactured by the assessee, is procured fromunrelated parties. The products traded by the assessee are entirelypurchased from its Associated Enterprises. The trading activityconstituted about 95% of the business and the remaining 5% is frommanufacturing activity. The dental products manufactured or tradedby the Assessee are sold to the dealers or distributors of these dentalproducts and also to dentists directly.” 4.Consequently, the facts in the present case are akin to the case of M/sMattel Toys India Pvt. Ltd. (supra). 5.Further, the mere fact that the assessee had relied on TNMM in itstransfer pricing report would not in any way preclude the ITAT fromadopting the RPM as the MAM under Section 92C of the Act, if it so findsin the circumstances of the case. The decision of Supreme Court inKedarnath Jute Manufacturing Co. Ltd. V. Commercial Tax Officer, AIR1996 SC 12 is an authority for the proposition that tax authorities andadjudications as well as assessee are not precluded by the positions taken inreturns, documents or accounts and have the duty (and a correspondingright) to apply the correct legal principle. Thus, the use of one method in a ITA 199/2022 Page 2 of 5 transfer pricing report does not estop the assessee from later claiming thatanother method is the most appropriate one, provided that is indeed thecorrect position. [See: PCIT vs Matrix Cellular International Services Pvt.Ltd. . 6.In fact, this Court in Matrix Cellular International Services Pvt. Ltd.(supra) has upheld the finding of the Bombay Tribunal in Mattel Toys (I)Pvt. Ltd. vs. DCIT in ITA No. 2476 & 2801/Mum/2008, and observed asunder:- “10. A similar view has been adopted by the Mumbai bench ofthe ITAT in Mattel Toys v. Deputy Commissioner of IncomeTax, (2013) 158 TTJ (Mum)461: ITA 199/2022 Page 2 of 5 transfer pricing report does not estop the assessee from later claiming thatanother method is the most appropriate one, provided that is indeed thecorrect position. [See: PCIT vs Matrix Cellular International Services Pvt.Ltd. . 6.In fact, this Court in Matrix Cellular International Services Pvt. Ltd.(supra) has upheld the finding of the Bombay Tribunal in Mattel Toys (I)Pvt. Ltd. vs. DCIT in ITA No. 2476 & 2801/Mum/2008, and observed asunder:- “10. A similar view has been adopted by the Mumbai bench ofthe ITAT in Mattel Toys v. Deputy Commissioner of IncomeTax, (2013) 158 TTJ (Mum)461: “Thus, the RPM method identifies theprice at which the product purchasedfrom the A.E. is resold to a unrelatedparty. Such price is reduced by normalgross profit margin i.e., the grossprofitmarginaccruinginacomparable controlled transaction onresale of same or similar property orservices. The RPM is mostly applied inasituationinwhichtheresellerpurchases tangible property or obtainservices from an A.E. and resellerdoes not physically alter the tangiblegoodsandservicesoruseanyintangible assets to add substantialvalue to the property or services i.e.,resale is made without any valueaddition having been made.” 11. This view has also been affirmed by the Bombay HighCourt in its judgment dated 07.11.2014 in Commissioner ofIncome Tax v. L’Oreal India Pvt. Ltd. (ITA No. 1046 of 2012),where the Court found that there was no error in law ITA 199/2022 ITA 199/2022 committed by the ITAT when it held that RPM was the MostAppropriate Method in case of distribution or marketingactivities especially when goods are purchased from associatedentities and there are sales effected to unrelated parties withoutany further processing. In fact, a Division Bench of this Courtin its decision in Bausch & Lomb Eyecare (India) Pvt. Ltd. v.Additional Commissioner of Income Tax, (2016) 381 ITR 227(Del), while considering the decision of this Court in SonyEricssonMobileCommunicationsIndiaPvt.Ltd.v.Commissioner of Income Tax, (2015) 374 ITR 118 (Del), notedthat: “The RP Method loses its accuracy andreliabilitywherethereselleraddssubstantially to the value of the product orthegoodsarefurtherprocessedorincorporated into a more sophisticatedproduct or when the product/service istransformed.” 12. Therefore, a contrario, when the reseller does not add anyvalue to the product of the goods, the RP method would beappropriate for determining the arms’ length price. 13. Accordingly, we find that the ITAT committed no error inlaw in applying RPM as the Most Appropriate Method forcomputing the arms’ length price. The Revenue’s grievance isthat the ITAT could not have applied RPM as the MostAppropriate Method, given that the assessee had itself, in itstransfer pricing study report, and before the DRP, adopted theTNMM as the Most Appropriate Method to benchmark theinternational transactions it had undertaken, and only adoptedthe RPM as a secondary method to justify its losses at the netlevel. xxxxxxxxx15. This Court finds that the ITAT’s reasoning on this issue iswithout flaw. The ITAT’s reasoning, relying on the decision inLuxottica (supra), that since the ultimate aim of the transferpricing exercise is to determine an accurate value of the arms’length price for the purpose of taxation/and therefore theappellate authorities would not be barred from adopting a xxxxxxxxx15. This Court finds that the ITAT’s reasoning on this issue iswithout flaw. The ITAT’s reasoning, relying on the decision inLuxottica (supra), that since the ultimate aim of the transferpricing exercise is to determine an accurate value of the arms’length price for the purpose of taxation/and therefore theappellate authorities would not be barred from adopting a different method, from that adopted by the assessee in thetransfer pricing report, if the latter is not found to be the MostAppropriate Method. Accordingly, this Court does not discernany illegality in the ITAT’s approach in determining that RPMwas, in the given circumstances, and having regard to thebusiness of the assessee, the Most Appropriate Method fordetermining the arms’ length price. The mere fact that theassessee had relied on TNMM and had only used RPM as asecondary method in its transfer pricing report, would not inany way preclude the ITAT from adopting the RPM as the MostAppropriate Method under Section 92C of the Act, if it so findsinthecircumstancesofthecase.KedarnathJuteManufacturing Co. Ltd. v. Commercial Tax Officer, AIR 1966SC 12 is an authority for the proposition that tax authoritiesand adjudicators as well as assessees are not precluded by thepositions taken in returns, documents or accounts and have theduty (and a corresponding right) to apply the correct legalprinciple. Thus, the use of one method in a transfer pricingreport does not estop the assessee from later claiming thatanother method is the most appropriate one, provided that isindeed the correct position. 16. For the above reasons, we are of the opinion that nosubstantial question of law arises. The appeal is accordinglydismissed.”substantial question of law arises. The appeal is accordinglydismissed.” 7.Keeping in view the aforesaid, this Court is of the view that nosubstantial question of law arises for consideration in the present appeal.Accordingly, the present appeal is dismissed. MANMOHAN, J JULY 18, 2022/msh MANMEET PRITAM SINGH ARORA, J ITA 199/2022