The Income Tax Appellate Tribunal (ITAT) of Bangalore, India issued its decision on 04 January 2022, in the case of Randox Laboratories India Private Limited V. The Assistant Commissioner of income tax (IT(TP)A No 2576/Bang/2019) that the Resale Price Method (RPM) is the most appropriate method (MAM) for benchmarking inter-company transaction pertaining to import and resale (without any value addition) of finished goods.
Facts of the Case
Randox Laboratories India Private Limited (the Taxpayer) is a wholly owned subsidiary of Randox Laboratories Ltd, a company based in the United Kingdom. The parent company is engaged in the business of manufacturing medical diagnostic reagents and analyzers.
Diagnostic reagents are used to diagnose a range of health issues by screening for pathogens, antigens, co-infections, genetic diseases, and a host of other physical diseases. Analyzer is a medical laboratory instrument designed to measure different chemicals and other characteristics in several biological samples quickly, with minimal human assistance.
The Taxpayer imported reagents and analyzers from its parent company and sold them to independent parties in India. The Taxpayer also purchased reagents in bulk quantities and later packaged them in smaller quantities for non-standard sales in India based on customer requests. The Taxpayer did not carry out any manufacturing activity in India but for the purpose of excise duty, the activity of packaging reagents was considered deemed manufacturing.
In order to facilitate the sale of its reagents, the Taxpayer, under an agreement, would place an analyzer on the premises of the customer free of cost for a period of up to 5 years. This placement of the analyzer was to facilitate the sale of reagents and to ensure that in case the customer gets accustomed to using the analyzer, it might eventually buy purchase them from the Taxpayer. The condition for placing the analyzer was a commitment from the customer that it would purchase a minimum quantity of reagents from the Taxpayer.
The Taxpayer capitalized the cost of these analyzers and claimed depreciation on them as a business expenditure. The analyzers were categorized under plant & machinery (fixed assets) in the balance sheet.
In the transfer pricing study, the Taxpayer used the RPM to benchmark the international transaction pertaining to the import and resale of reagents and analyzers.
The tax authorities rejected the transfer pricing documentation of the Taxpayer and argued that the Taxpayer is not a mere distributor, but is also engaged in manufacturing and research activity, and thus the Transaction Net Margin Method (TNMM) is the MAM under the circumstances. The tax authorities also concluded that the significant amount of depreciation in the income statement of the Taxpayer proved that the Taxpayer was not a simple distributor. Furthermore, the tax authorities commented on the unique business model of the Taxpayer arguing that such model is not followed by simple distributors.
The Taxpayer’s bifurcated income statement for the year under dispute is provided below in Indian Rupees (INR):
|
|
Deemed Manufacture
|
Trading
|
Total
|
|
Sale of Products
|
12,48,261
|
42,15,20,034
|
42,27,68,295
|
|
Excise Duty
|
(1,14,276)
|
0
|
(1,14,276)
|
|
Purchase of Stock in Trade
|
0
|
28,05,80,849
|
28,05,80,849
|
|
Cost of Materials Consumed
|
7,72,410
|
0
|
7,72,410
|
|
Change in Inventory of Stock in Trade
|
2,495
|
(95,81,460)
|
(95,78,965)
|
|
Gross profit
|
3,64,070
|
13,13,57,725
|
13,17,21,795
|
|
Gross Profit/Sales
|
29.16%
|
31.16%
|
31.16%
|
ITAT Ruling
On the question of whether the Taxpayer was engaged in manufacturing activity, the ITAT ruled that the Taxpayer was not engaged in manufacturing activity for the disputed year, which was confirmed by the audited financials. Furthermore, the Taxpayer incurred product development cost towards spares for the analyzers which was capitalized by the Taxpayer in its books of accounts.
The ITAT also noted that the analyzers, spares and consumables imported by the Taxpayer were not sold, but rather were provided to the laboratories/diagnostic units of the third-party customers for testing and research.
On whether the the RPM or TNMM is the MAM based on the facts and circumstances of the intercompany transaction, the ITAT determined that the Taxpayer imported finished goods from its parent company and resold them in India without any value addition and thus, the MAM to benchmark the international transactions is the RPM. The ITAT relied on the rule 10B (1)(b) of the Income tax Rules 1962 (the Rules).
Takeaways
This case highlights that the RPM is the MAM for import and resale of finished goods transactions. However, its applicability requires that the reseller sells the finished goods to unrelated customers without any value addition or material change to such products. For example, limited enhancements, such as packaging, repacking, labelling or minor assembly, generally do not add significant value to the goods, so the RPM would still be considered the MAM. Physical modifications or use of intangible property for goods before resale makes the RPM difficult to apply.
References
Randox Laboratories India Private Limited V. The Assistant Commissioner of income tax (IT(TP)A No 2576/Bang/2019).
