RPM Is Most Appropriate Method To Benchmark Transaction Of Purchase Of Solar Goods: ITAT

The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has held that the Resale Price Method (RPM) is the most appropriate method to benchmark the transaction of the purchase of solar goods.

The bench of Vikas Awasthy (Judicial Member) and Pradip Kumar Kedia (Accountant Member) has observed that where there is no value addition made before reselling the product, RPM is the most appropriate method. Except for suspicion, the revenue has not been placed on record, and there is no documentary evidence to substantiate that the assessee has undertaken any other activity resulting in value addition to the solar goods purchased by the assessee from the AEs.

The resale price method is generally most appropriate where the final transaction is with an independent distributor. The starting point in the resale price method is the price at which a product that has been purchased from an associated enterprise is then resold to an independent enterprise. This price (the resale price) is then reduced by an appropriate gross margin (the resale price margin), representing an amount from which the reseller would seek to cover its selling and other operating expenses and, in the light of functions performed (taking into account assets used and risks assumed), make an appropriate profit.

The assessee/appellant is a reseller of solar goods. The assessee purchases solar products and goods, i.e., solar lanterns, solar power lights, etc., from its associated enterprises (AEs) for resale in India. The assessee re-sells solar products purchased from AEs without any value addition. The assessee adopted the Resale Price Method (RPM) as the most appropriate method to benchmark the transaction. During the period relevant to the assessment year under appeal, the assessee entered into international transactions in relation to the purchase of solar goods.

The Transfer Pricing Officer rejected RPM and applied the Transactional Net Margin Method (TNMM) as the most appropriate method. The TPO held that the transaction of warranty claims is clearly linked to the transaction of the purchase of solar goods. Thus, the TPO to benchmark the transaction of the purchase of solar goods and warranty claims aggregated the transaction and applied TNMM as the most appropriate method. The TPO made an adjustment of Rs. 10,61,47,428 on account of the purchase of solar goods and other accessories and the warranty cost claim.

The assessee contended that the sole reason for the TPO to reject the RPM selected by the assessee was that the warranty claims were to be clubbed with the transaction of the purchase of solar goods. The warranty claims where the goods are replaced on account of a manufacturing defect are taken care of by the AEs. The warranty against manufacturing defects is given by the AE, and the assessee is only a pass-through entity. Where a product is resold without any value addition, RPM is the most appropriate method.

The assessee argued that the business activities of the assessee are only confined to the reselling of solar goods purchased from AEs. The majority of solar goods, including solar lights and lanterns, are sold in rural and far-flung areas where there is a scarcity of electricity; therefore, the assessee has to bear substantial costs for the marketing and transportation of solar products.

The department contended that the assessee has applied RPM as the most appropriate method to purchase solar goods only. Warranty claims and reimbursement of expenses are inextricably linked to the purchase of solar goods, i.e., solar lights and lanterns. For reimbursement of expenses and warranty claims, the assessee has applied the other method.

“We find that the international transaction of the purchase of solar products is to the tune of Rs. 136.63 crores, whereas the total cost of reimbursement of expenses and warranty claims put together is only Rs. 1.9 crores. The reimbursement expenses and warranty claims are a minuscule part of the total transaction. The cost of reimbursement and warranty claims is merely a little over 1.5% of the purchase cost of solar products from AE. If the contention of the Department is accepted, then it would be like putting a cart before the horse,” the tribunal noted.

The tribunal held that, except for suspicion, the revenue has not been placed on record, and there is no documentary evidence to substantiate that the assessee has undertaken any other activity resulting in value addition to the solar goods purchased by the assessee from the AEs.

Counsel For Appellant: Hari Om Jindal

Counsel For Respondent: Rajesh Kumar

Case Title: D Light Energy P. Ltd. Versus Assessing Officer

Case No.: ITA No.516/DEL/2022 (A.Y.2017-18)

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