Exploring the Resale Method in Transactions with Limited Value Addition by Distributors

In case of a pure trading company involved in the distribution activity without adding any value to the purchased product, RPM is the most appropriate method in Transfer Pricing as was held by The ITAT Delhi in the case of KARCHER CLEANING SYSTEMS PRIVATE LIMITED Vs ADDL. CIT, NEW DELHI [2023-VIL-1550-ITAT-DEL].

For the purpose of application of Resale Price Method (RPM) in Transfer Pricing cases, what is relevant is to see as to whether there is any value addition or not to the goods purchased for resale. In case, there is no value addition and the finished goods which are purchased from the AE are resold in the market in the same form, then the gross profit margin earned on such transactions becomes the determinative factor for benchmarking the international transaction of the assessee with its AE by taking RPM as the most appropriate method.

The following points are essential for a pure distributor relationship

1. The assessee is engaged in trading of goods only.

2. Assessee does not add value to the goods purchased (even from related parties).

3. 'Relationship', is defined in the distributor agreement as being that between a manufacturer and distributor and not between that of an agent and principle.

4. Reseller may perform the functions of advertising, marketing, distribution and guaranteeing the goods, financing the stocks and warranty risk.

The characterization of a reseller, who does not add value to the purchased product would not change owing to the mere fact that the tested party and comparable have incurred varying levels of employee costs, or selling and distribution, or marketing and promotion expenses for boosting company's own sales volume. In a comparable uncontrolled transaction scenario also a normal distributor will undertake all such functions which are related to sales of a product viz. market research, sales and marketing, warehousing, inventory control, quality control etc., and would also bear risks viz. market risk, inventory risk, credit risk etc.

It is a fact that principle's employees do help the distributors in setting up of business. Hence even if the AEs expats came to help the assessee to set up its business and employee costs included an exceptional expenditure for its expatriate employees towards payment for salaries and other expenses for the purpose of stabilizing the business in India being the first year of the company's operations, it cannot change the relationship.