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Tax Publishers Toyoda Micromatic Machinery India (P) Ltd. v. DCIT [ITA No. 3834/DEL/2017, dt. 10-12-2020] : 2020 TaxPub(DT) 5177 (Del-Trib) Resale price method -- Profitability level index -- Huge Expat salaries non-commensurate to turnover *Facts:* Assessee a jointly Japan/Indian owned company sold directly or thru third parties certain machine tools. They had purchased certain traded goods from their AE which was benchmarked using the Resale Price Method (RSM) by applying a certain profitability mark up on the purchased goods. It was noticed by the TPO that they had spent large expat personnel expenses and thus alleged that RSM method was inappropriate and the Transactional Net Margin Method (TNMM) was the more appropriate method in the case of the assessee and sustained certain additions by applying the TNMM method. On appeal the Commissioner (Appeals) concurred with the views of the assessee that RSM method is the most appropriate method but the profitability has to be benchmarked by including the large expat personnel cost at gross profit level benchmarking to that extent he ordered re-computation of the RSM profitability index benchmarking but accepted the assessees RSM method. Based on this the TPO passed a rectification by reducing the additions. Aggrieved by this order the assessee went in appeal to the ITAT -- Held against the assessee that the RSM benchmarking was correct and has to include the expat employee costs. *Editorial Note:* The case clearly indicates entities where huge expat employee costs are deployed but correct benchmarking methods are employed then they will need justification of such large personnel costs to the extent of the value addition done by the assessee. It was this value addition which was missing in this case which is why the addition also could have got sustained. A large loss being sustained by the large expat cost cannot be artificially benchmarked to entities having profits without these expat costs so will emerge explicitly in profit benchmarking irrespective of whether TNMM is used or RSM is used.

Tax Publishers

Toyoda Micromatic Machinery India (P) Ltd. v. DCIT [ITA No. 3834/DEL/2017, dt. 10-12-2020] : 2020 TaxPub(DT) 5177 (Del-Trib)

Resale price method -- Profitability level index -- Huge Expat salaries non-commensurate to turnover

Facts:

Assessee a jointly Japan/Indian owned company sold directly or thru third parties certain machine tools. They had purchased certain traded goods from their AE which was benchmarked using the Resale Price Method (RSM) by applying a certain profitability mark up on the purchased goods. It was noticed by the TPO that they had spent large expat personnel expenses and thus alleged that RSM method was inappropriate and the Transactional Net Margin Method (TNMM) was the more appropriate method in the case of the assessee and sustained certain additions by applying the TNMM method. On appeal the Commissioner (Appeals) concurred with the views of the assessee that RSM method is the most appropriate method but the profitability has to be benchmarked by including the large expat personnel cost at gross profit level benchmarking to that extent he ordered re-computation of the RSM profitability index benchmarking but accepted the assessees RSM method. Based on this the TPO passed a rectification by reducing the additions. Aggrieved by this order the assessee went in appeal to the ITAT --

Held against the assessee that the RSM benchmarking was correct and has to include the expat employee costs.

Editorial Note: The case clearly indicates entities where huge expat employee costs are deployed but correct benchmarking methods are employed then they will need justification of such large personnel costs to the extent of the value addition done by the assessee. It was this value addition which was missing in this case which is why the addition also could have got sustained. A large loss being sustained by the large expat cost cannot be artificially benchmarked to entities having profits without these expat costs so will emerge explicitly in profit benchmarking irrespective of whether TNMM is used or RSM is used.