Transfer Pricing

Resale Price Method (RPM)

Transfer Pricing

Resale Price Method (RPM)

1. Introduction:

The Resale Price Method (RPM) is one of the five primary transfer pricing methods prescribed under the OECD Guidelines and Indian Income-tax Rules for determining the Arm’s Length Price (ALP) in international transactions between associated enterprises. It is particularly suitable for businesses engaged in distribution and trading activities, where goods are purchased from a related party and subsequently resold to independent parties without significant value addition. RPM focuses on the gross profit margin earned by the reseller, rather than net profit, making it ideal for evaluating whether the pricing of goods or services in a controlled transaction aligns with that of comparable uncontrolled transactions.

he method begins with the resale price charged to independent customers and deducts an appropriate gross margin, which should cover selling, marketing, and operational costs, leaving a reasonable profit for the reseller. The balance represents the ALP for the initial inter-company transaction. RPM is widely used in industries such as pharmaceuticals, automobiles, electronics, and consumer goods where entities operate primarily as distributors. Judicial precedents, including landmark cases like CIT v. L’Oreal India (P.) Ltd. and Star Diamond Group v. DDIT, have consistently upheld RPM as the Most Appropriate Method (MAM) in distribution scenarios. This article comprehensively explains the principles, application, adjustments, and key case laws that shape the use of RPM in transfer pricing.

2. Definition: The Resale Price Method (RPM) evaluates whether the transfer price of a controlled transaction is at arm's length by considering the gross margins realized. It is primarily used in cases where a reseller or distributor performs significant value-adding functions such as marketing, sales, and distribution of goods or services.

3. Key Concepts: The RPM begins with the price at which a product purchased from an associated enterprise is resold to an independent third party. From this resale price, an appropriate gross margin is deducted to cover selling and operational expenses, and to provide a reasonable profit to the reseller.

The balance amount after deduction of the gross margin is treated as the arm's length price (ALP) for the initial transfer price between related entitie.

4. Comparison with Uncontrolled Transactions: Internal RPM uses data from similar transactions of the same enterprise with unrelated parties to evaluate comparability.

External RPM uses data from independent enterprises performing similar functions to determine the appropriate gross profit margin.

5. OECD Guidelines: According to OECD Guidelines, a transaction is comparable if there are no material differences affecting the resale margin.

Where differences exist, they must be reasonably adjusted to ensure accuracy in determining the arm's length price.

6. Factors Influencing Comparability:

(i) Level of Activities: The extent of functions performed by the reseller impacts the resale margin. A simple forwarding agent will have lower margins compared to a full-service distributor.

(ii) Rights and Exclusivity: Exclusive rights to resell products affect the gross margin, depending on geographic scope and market competition.

(iii) Time Gap: The closer the time between purchase and resale, the more accurate the analysis. Larger gaps require adjustments for market fluctuations, currency changes, or cost variations.

7. Differences in Accounting Practices: Consistency in accounting practices is essential to ensure comparability. Inconsistent reporting of costs such as goods sold, direct and indirect costs, or discounts can distort RPM results.

Adjustments must be made for items like rebates, returns, insurance, packaging, and transportation to align accounting methods between compared entities.

8. Factors for Applying RPM: Availability of reliable resale prices and transactions occurring within a reasonable timeframe are critical for applying RPM.

The reseller should not significantly alter the value of the goods before resale, apart from minimal activities like packaging or labeling.

Where intangible assets are involved, their impact must not substantially affect the tangible goods' value.

Exclusive resale rights and market size must also be considered when determining gross margins.

9. Adjustments for Differences: Adjustments are necessary for inventory turnover rates, contractual terms, sales and marketing costs, and market levels (retail or wholesale).

Foreign currency risks must also be factored in, especially when dealing with cross-border transactions to avoid exchange rate distortions.

10. Examples

(i) Example I: A U.S. company sells a product to its group entity for $100. With a general gross margin of 10%, the ALP is $90 after deducting $10 gross margin.

(ii) Example II: Company 'X' sells goods to its AE 'Y'. Total cost to 'Y' is $600. 'Y' resells to unrelated parties for $1000. After deducting a 25% gross margin ($250) and $200 in other costs, ALP is $550.

(iii) Example III: A German parent company manufactures drugs and sells to its Indian subsidiary at ₹60 per strip. The subsidiary only performs distribution functions and resells without adding substantial value, making RPM the most appropriate method.

11. Arm's Length Price Determination

I. Identify the resale price of goods or services.

II. Deduct the normal gross margin derived from comparable uncontrolled transactions.

III. Deduct related operating expenses incurred by the enterprise.

IV. Adjust for differences in functional and accounting practices.

V. The final figure represents the arm's length price.

12. Case Law

Paccar Inc and Subs v. Commissioner of Internal Revenue: A U.S. parent sold trucks and parts to its wholly-owned subsidiary. The IRS disallowed a discount allocation due to differences in handling complete units versus parts.

The court emphasized evaluating domestic versus foreign market conditions and ruled that separate evaluations were needed due to cost structure differences.

13. Case Study

XYZ Pvt. Ltd. purchased fax machines and accessories from AEs in Singapore and Malaysia and resold them in India. Initially, TNMM was applied but later switched to RPM due to simpler functions performed by the Indian entity.

Five comparable companies were identified, and the average gross margin was calculated at 30%. Based on this, the ALP was determined to be ₹14.4 million compared to the cost of goods sold of ₹12.6 million, requiring an upward adjustment of ₹1.8 million.

14. Summary: The RPM is most effective for resale and distribution transactions where goods are sold without significant alteration.

It is supported by international guidelines and case laws and requires careful adjustments for functional, market, and accounting differences to ensure reliable results.

15. Case Laws on Resale Price Method:

(i) CIT v. L'Oreal India (P.) Ltd. [2015] 53 taxmann.com 432 (Bombay HC): In case of distribution or marketing activities when goods are purchased from associated entities and sales are affected to unrelated parties without any further processing RPM is MAM.

L'Oreal India operated in two segments – manufacturing and distribution. For its distribution segment, it imported finished goods from its Associated Enterprises (AEs) and sold them directly to unrelated parties without any further processing. The assessee applied the Resale Price Method (RPM) as the Most Appropriate Method (MAM) for determining Arm’s Length Price (ALP). The Transfer Pricing Officer (TPO) rejected RPM, citing continuous losses and applied the Transactional Net Margin Method (TNMM), leading to an adjustment of ₹4.90 crore. The Commissioner (Appeals) and ITAT upheld RPM, noting that the TPO himself had accepted this method in earlier and later years.The Bombay High Court affirmed ITAT’s order, holding that under OECD guidelines, RPM is the most suitable method for distribution or marketing activities where goods are purchased from AEs and resold to unrelated parties without further value addition or processing. Since there were no distinguishing facts, rejection of RPM was unjustified. The Court dismissed the Revenue’s appeal, confirming that RPM was correctly adopted as MAM for such transactions.

(ii) Star Diamond Group v. DDIT (International Taxation) [2011] 44 SOT 532 (Mumbai ITAT):

In the case of a trader, without value addition to goods, RPM is MAM.

The assessee was engaged in importing rough diamonds from its Associated Enterprise (AE) and selling them without any value addition in the Indian market. To benchmark its international transactions, it adopted the Resale Price Method (RPM), which had been accepted by the department in earlier years. The TPO, however, found the imports of ₹5.62 crore not at arm’s length and made an adjustment of ₹96 lakhs, determining ALP at ₹4.66 crore. The CIT(A) rejected the assessee’s comparables since they dealt with cut and polished diamonds, not rough diamonds, and instead used a mix of comparables to compute margins, confirming an adjustment of ₹73 lakhs. The ITAT held that for a pure trader, where goods are resold without processing, RPM is the Most Appropriate Method (MAM). If comparables are unsuitable, fresh comparables should be identified rather than rejecting RPM. The matter was remanded to AO/TPO to recompute ALP only on the net purchase of ₹94 lakhs (after deducting purchase returns), with directions to ensure logical and evidence-based adjustments.

(iii) Putzmeister Concrete Machines (P.) Ltd. v. DCIT [2014] 49 taxmann.com 436 (Panaji - Trib.):

In importing of pumps from parent company, the Associated Enterprises, in CKD or semi CKD state reselling after assembling, RPM is MAM.

The assessee, engaged in manufacturing and trading of concrete pumps, imported pumps in CKD/semi-CKD form from its parent company (AE) during its first year of operations. These pumps were assembled in India and resold without substantial value addition. The assessee benchmarked its international transactions using the Resale Price Method (RPM). However, the TPO rejected RPM and used comparables showing a 12.04% gross profit margin, making an upward ALP adjustment since the assessee had reported a -4% margin. The Dispute Resolution Panel (DRP) upheld the TPO’s order. The ITAT held that in cases where goods are imported in CKD/semi-CKD form and resold after basic assembly without significant value addition, RPM is the Most Appropriate Method (MAM). The Tribunal relied on Skoda Auto India (P.) Ltd. ruling, emphasizing that higher import duties and first-year operational inefficiencies can cause price variations. The matter was remanded to the TPO to re-examine using RPM while factoring in import duty differences and to reassess comparables logically.

(iv) Yamaha Motor India (P.) Ltd. v. ACIT [2014] 50 taxmann.com 444 (Delhi - Trib.):

When sales are made to AE which in turn sells the same goods to an uncontrolled party RPM is MAM.

Yamaha Motor India, a wholly owned subsidiary of Yamaha Japan, exported motorcycles and spare parts to its Associated Enterprise (AE). The assessee applied the Resale Price Method (RPM) for motorcycles and Cost Plus Method (CPM) for spare parts in its transfer pricing study. In earlier years, this approach had been accepted by the TPO. However, for the relevant years, the TPO rejected RPM, applied TNMM, and proposed an adjustment of ₹51.58 crore, which was upheld by the DRP. Yamaha demonstrated that the margin earned from AE transactions (15.83%) was higher than that from non-AE sales (10.75%) and provided detailed documentation, including resale details by the AE. The ITAT held that there is no legal restriction under Section 92C or Rule 10B against applying RPM when goods are sold to an AE which subsequently resells them to unrelated parties. As per OECD guidelines, RPM is most suitable when resale occurs shortly after purchase and no significant value is added. Since facts were unchanged from earlier years where RPM was accepted, and Yamaha's AE transactions were at higher margins than non-AE sales, RPM was upheld as the Most Appropriate Method (MAM), and the TNMM-based adjustment was deleted.

(v) Tacke Wind Energy India (P.) Ltd. v. ACIT [2010] 39 SOT 30 (Mum.):

Where there is import of Plant & Machinery as well as its installation and commissioning, then while determining ALP in case of assessee, cost of operation carried out by assessee for installation and commissioning of equipments of wind turbines in India was to be excluded and only cost pertaining to import of plant and machinery, tools and consumables was to be considered in RPM

The ITAT held that, for applying the Resale Price Method (RPM) to imports from AEs, the comparability base must be confined to the trading limb of the transaction. The TPO had benchmarked on the entire wind-turbine contract value, including costs of civil foundation, erection, installation, commissioning, land and regulatory work performed locally by the assessee. The Tribunal found this improper: these post-import, value-adding/ service costs must be excluded when computing gross margins under RPM. Only costs directly pertaining to the imported plant, machinery, tools and consumables should be considered. The ITAT therefore remanded the matter, directing the AO/TPO to (i) segregate trading (import/resale) from downstream installation/commissioning activities, (ii) benchmark on gross profit relatable to the imported goods alone, and (iii) reassess after considering proper RPM requirements. In short, RPM focuses on the reseller’s gross margin on the imported goods, not on bundled EPC-type costs; including local installation/ commissioning distorts the arm’s-length analysis and must be avoided.

(vi) Kodak Polychrome Graphics (I) (P.) Ltd. v. ACIT [2013] 36 taxmann.com 42 (Mum.-Trib.):

Even in RPM comparability analysis has to be carried out while adopting resale price.

The assessee, a distributor of graphic plates and allied products imported from its AE, benchmarked purchases under the Resale Price Method (RPM) but did not furnish any comparables or gross-margin analysis. It merely argued that the AE supplied at a global price list and later sought to switch to CUP using customs import data, again without showing product and functional similarity or procurement circumstances of third-party buyers. The TPO made an upward adjustment; CIT(A) upheld it. The Tribunal held that RPM is often the MAM for pure distribution, but it still demands a robust comparability analysis at the gross-profit level—global price lists or AE certificates are insufficient. Likewise, a switch to CUP cannot be allowed unless the assessee demonstrates close product and functional comparability in similar market conditions. Finding both sides’ analyses inadequate, the ITAT remanded the matter for de novo benchmarking, directing the assessee to substantiate the chosen method (RPM or CUP) with proper comparable data and reasoning.

(vii) Cisco Systems (India) (P.) Ltd. v. DCIT [2011] 16 taxmann.com 128 (Bang. - Trib.) –

RPM not applicable when assessee is not a trader/distributor.

The assessee provided product replacement services for its US parent company. Under the agreement, it imported spare parts, stored them, and delivered them directly to the parent company’s customers in India as per the parent’s directions. Although ownership of goods technically passed to the assessee at import, it had no right to set resale prices or choose customers, earning only a 1% mark-up for its facilitation role. The assessee benchmarked this activity under TNMM, using comparables performing similar logistics and C&F agent functions. The TPO, however, treated the assessee as a trader, rejected TNMM, and applied the Resale Price Method (RPM) using comparables engaged in trading of electrical goods. The Tribunal held that since the assessee was merely a custodian of goods, not a trader or distributor, RPM was inapplicable. The matter was remanded to recompute the ALP using TNMM with proper FAR-based comparables, excluding trading companies.

(viii) ITO v. L’oreal India (P.) Ltd. [2012] 24 taxmann.com 192 (Mum.): RPM is the most appropriate method in cases of distribution and marketing activities particularly when goods are purchased from Associated Enterprises, and they re-sold to unrelated parties

(ix) Textronix India (P.) Ltd. vs. DCIT [2013] 29 taxmann.com 288 (Bangalore - Trib.): In the business of distribution of Telecom equipments, logic analyzers and other test and measurement equipments on behalf of Associated Enterprise, resale price method is considered as most appropriate method for determination of ALP of International transaction.

(x) Greaves Cotton Ltd. vs. ITO, [2013] 32 taxmann.com 86 (Mumbai Trib.) In RPM it is the gross profitable margin and not net profitable margin of assessee and comparables is to be considered while determining ALP.

(xi) Onward Technologies Ltd. vs. DCIT [2013] 35 taxmann.com 584 (Mumbai - Trib.): RPM is the most suitable method where assessee buys its products from its Associated Enterprise and sales them to unrelated parties without further processing.

(xii) Shasun Pharmaceuticals Ltd. vs. Dy/ACIT[2013] 38 taxmann.com 27 (Chennai - Trib.) RPM is applicable with reference to property purchased or services obtained by enterprises from its AEs.

(xiii) Yamaha Motor India (P.) Ltd. vs. ACIT, Circle -18 (1), New Delhi [2014] 50 taxmann.com 444 (Delhi - Trib.)Where in the preceding years, RPM was applied and accepted to determine ALP of export of Motorcycle and spare parts to Yamaha, Japan and there is no change in fact and circumstances of case, RPM method could not be rejected in the current year

(xiv) ACIT vs. Rahman Industries Ltd [2015] 59 taxmann.com 185 (Lucknow - Trib.) Resale method cannot be applied to determine arm’s length price in case of an exporter.

16. Conclusion:

The Resale Price Method plays a critical role in transfer pricing by ensuring that related-party transactions in distribution and resale activities adhere to the arm’s length principle, fostering fairness and compliance in cross-border trade. Its emphasis on gross margins rather than net profit makes it uniquely suited to cases where goods are resold without significant processing or transformation. The method’s reliability, however, depends on the availability of accurate comparable data, consistent accounting practices, and necessary adjustments for differences in functions, risks, and contractual terms.

Indian courts and tribunals have provided clear guidance on the scope and applicability of RPM through several rulings, reaffirming its suitability for pure trading and distribution entities. At the same time, decisions like Cisco Systems (India) Pvt. Ltd. caution against its misuse where the entity does not function as a true trader. As global tax regulations evolve, RPM continues to be a preferred method due to its simplicity and alignment with OECD standards. Proper application of RPM, backed by robust documentation and logical analysis, not only mitigates litigation risk but also promotes transparency and trust between tax authorities and multinational enterprises in an increasingly interconnected economy.