Delhi ITAT Allows Foreign AE As Tested Party Under RPM In ₹13.42 Crore Transfer Pricing Case

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) on 19 August held that a foreign Associated Enterprise (AE) can be selected as the tested party under the Resale Price Method (RPM) for back-to-back merchant trading transactions where it is the least complex entity and reliable comparable data is available.

A Bench comprising Judicial Member Satbeer Singh Godara and Accountant Member Manish Agarwal dismissed the Revenue's appeal against the deletion of a Rs. 13.42 crore transfer pricing adjustment concerning POSCO International India's purchase of steel slabs and HRCF coils from its Korean AE, POSCO Korea, for resale through merchant trading. It observed:

“It is observed that the transactions carried by the assessee with its AE of trading of steel HRCF coil are similar to the transactions carried by its AE with the unrelated parties. It is further observed that TPO has doubted the adoption of flat rate of US$ by holding that it keeps on fluctuating however, it does not have any impact since, the purchase and sales transactions are back-to-back transactions which both are carried in US$, therefore, it has no impact on the conversion rate.”

POSCO International India had benchmarked the transactions under RPM, selecting POSCO Korea as the tested party on the ground that it was the less complex entity. It relied on POSCO Korea's margins from comparable sales of similar products to unrelated parties, which stood at 0.30% for steel slabs and 0.34% for HRCF coils. It had made a suo motu adjustment of Rs. 10.54 lakh for steel slabs and Rs. 13,529 for HRCF coils.

The Transfer Pricing Officer (TPO) accepted RPM as the most appropriate method but rejected POSCO Korea as the tested party. The TPO instead selected 14 external comparables and arrived at a median gross margin of 11.30%, as against POSCO International India's margin of 4.40%, resulting in a proposed adjustment of Rs. 13,42,61,738.

The Tribunal noted that the transactions involved high-sea sales on a back-to-back basis. POSCO International India therefore did not maintain inventory and did not bear significant inventory or market risk. The sales were also backed by letters of credit, while both purchases and sales were denominated in US dollars, substantially eliminating concerns relating to collection, working capital and foreign exchange.

The Bench found that POSCO Korea was the least complex entity for which reliable comparable data was available, satisfying the recognised criteria for selecting a tested party. It also noted that the TPO had not disputed the use of RPM itself. It rejected the Revenue's objection concerning working capital and credit exposure, noting that the transactions were backed by letters of credit and that POSCO International India did not have to maintain inventory. It recorded:

“It is further observed that all the goods were sold on LC basis thus working capital requirement is very insignificant. Looking to this facts, the selection of the AE as the tested party is found to be correct.”

Further, the Tribunal held that the AE's margins of 0.30% and 0.34% were not merely internal margins but were derived from its trading of similar products with unrelated parties. It therefore treated those transactions as valid uncontrolled comparable transactions for applying RPM under Rule 10B(1)(b) of the Income Tax Rules, which provides the framework for applying the method.

In contrast, the comparables selected by the TPO were functionally different. Most of them were engaged in manufacturing steel products, whereas neither POSCO International India nor POSCO Korea undertook manufacturing in the transactions under consideration. The Bench noted that the transactions were purely merchant trading transactions involving back-to-back purchases and sales.

The Tribunal also rejected the TPO's objection that only one invoice had been used for benchmarking. It noted that Rule 10B(1)(b) permits reliance on a comparable uncontrolled transaction or a number of such transactions. It further found that the comparable transactions were sufficiently material in relation to the tested transactions.

Ultimately, the Bench found no error in the Commissioner of Income Tax (Appeals)'s conclusion that the TPO's manufacturing comparables were functionally and risk-wise inappropriate and that POSCO Korea was rightly selected as the tested party.

Accordingly, the ITAT upheld the deletion of the Rs. 13.42 crore transfer pricing adjustment and dismissed the Revenue's appeal.

Counsel for the Revenue: Shri Mahesh Kumar, CIT-DR

Counsel for the Assessee: Shri Amol Sinha, Advocate and Shri Ankit Kumar, Advocate