Transfer Pricing | 'Resale Price Method' Most Appropriate To Determine ALP Where Distributor Makes No Value Addition To Imported Products: Delhi HC

A division bench of Chief Justice Devendra Kumar Upadhyaya and Justice Tushar Rao Gedela thus dismissed the appeal preferred by Revenue against a Solar products distributor, which imported goods from an Associated Enterprise (AE) for resale.

It was the Revenue's case that the assessee-distributor offering no-cost warranty to the purchasers tantamount to value addition. It argued that this transaction was closely linked to purchase of goods and hence the two transactions needed to be aggregated for the purpose of benchmarking under Transactional Net Margin Method (TNMM).

Rejecting this contention the Court said, “there is no value addition done by the assessee on the products purchased and subsequently sold by it…The warranty cost claim stands reimbursed by the AE to the assessee as per the term of the inter-company agreement which would not tantamount to value addition made by the assessee at its end.”

The Revenue had preferred the appeal after ITAT set aside its demand of Rs.10,61,91,407/-.

Assessee argued that it is only a distributor of the products manufactured by the AE and does not involve in any activity which would amount to “value addition” on such products. It also emphasized that the warranty cost claim incurred was subsequently reimbursed by the AE.

It was also contended that the RPM would be the most appropriate method in cases where the distributor/reseller does not add any value to the products purchased and sold.

According to Revenue, the warranty cost claim and the reimbursement of expenses is inextricably linked and intertwined with the purchase of solar goods, i.e., solar lights and lanterns. In other words, learned counsel for the Revenue submits that the “rendering of services” after sales is “value addition” made by the assessee.

The Department also contended that TNMM was a more appropriate method over the Resale Price Method (RPM) since the transactions in question are closely linked.

Reliance was placed on Pr. Commissioner of Income Tax-1 vs. Avery Dennison (India) Pvt. Ltd. (2016) wherein the determination by aggregating/ clubbing transactions under TNMM was upheld after observing that the assessee therein was predominantly a manufacturer and the services received by it from its AE were intrinsically linked to the core business operation.

At the outset, the High Court observed that in terms of the agreement entered into between the assessee and its AE, warranty cost claim shall be reimbursed by the AE apart from reimbursement of expenses.

“Pertinently, the amounts so recovered/reimbursed do not comprise any service element as the AE would have borne these expenses directly, had the assessee not incurred the same. Thus, there is no service element involved. Ergo, the purchase of solar products/lights on the one hand and warranty cost claim on the other, are unrelated transactions and can neither be aggregated/clubbed nor are they so inextricably linked as to not survive without the other, so far as the present facts are concerned,” it said.

The Revenue had also argued that the entire responsibility for developing market strategy including marketing and advertising etc. for the AE was of the assessee, which would tantamount to rendering “service after sales” which would be in the nature of “value addition”.

Rejecting this stance too, the Court cited Pr. CIT-2, Delhi vs. M/s Burberry India Pvt. Ltd (2024) which held that RPM is the most appropriate method in the case of a distributor without value addition to the imported products “before sale”.

As such, Revenue's appeal was dismissed.

Appearance: For the Appellant : Mr. Sanjay Kumar, Ms. Monica Benjamin and Ms. Esha Kadian, Advocates. For the Respondent : Mr. Ved Jain, Mr. Nischay Kantoor and Ms. Soniya Dodeja, Advocates.

Case no.: Pr. Commissioner Of Income Tax-1, Delhi v. D Light Energy P. Ltd.

Citation: 2025 LiveLaw (Del) 341

Case title: ITA 53/2025

Click here to read judgment