ITAT Mumbai Upholds TNMM As Most Appropriate Method For Konica Minolta Healthcare India

1. Background of the Dispute

Konica Minolta Healthcare India Private Limited filed an appeal before the Income Tax Appellate Tribunal, Mumbai, challenging the final assessment order dated 27/06/2024 passed under Section 143(3) read with Section 144C(13) and Section 144B of the Income Tax Act, 1961.

The controversy primarily related to a transfer pricing adjustment of ₹20,39,22,414 in respect of the assessee’s international transaction involving import of medical equipment, films and consumables from its Associated Enterprise (AE). The Transfer Pricing Officer (TPO) rejected the Transactional Net Margin Method (TNMM) adopted by the assessee and instead applied the Resale Price Method (RPM) to benchmark these purchases.

The assessee contended that it was not a simple trading entity, but was engaged in a wide range of value‑added and technical activities in relation to the imported medical equipment, and therefore TNMM was the correct Most Appropriate Method (MAM).

2. Assessee’s Business Profile and Return Processing

2.1 Nature of Operations

The assessee is a joint venture between KMI and EM PAX Technology Pvt. Ltd. (EM PAX). Since June 2010, it has been engaged in:

  • Distribution of healthcare products, including medical equipment, films and consumables manufactured by Konica Minolta Inc.; and
  • Provision of Annual Maintenance, Comprehensive Maintenance, Extended Warranty and Repair services to customers in India in respect of the healthcare products sold.

Thus, its business model comprises both product distribution and associated technical service and maintenance activities.

2.2 Return of Income and Scrutiny

  • The assessee filed its original return of income on 11/02/2021 declaring total income of ₹13,28,52,330.
  • The return was processed under Section 143(1).
  • The case was then selected for scrutiny under CASS for:
    • Credit of brought forward TDS; and
    • High-risk international transactions.

Notices under Section 143(2) and Section 142(1) were issued and duly complied with.

3. Reference to TPO and International Transactions

3.1 Scope of International Dealings

The Assessing Officer (AO) made a reference to the TPO under Section 92CA(1) for determination of arm’s length price (ALP). The TPO noted that the assessee had entered into international transactions aggregating to about ₹108.35 crore with its AE, comprising mainly:

  • Purchase of finished medical equipment, films and consumables: approx. ₹107.55 crore;
  • Other transactions: repair charges and reimbursement of exhibition and stall expenses.

3.2 Assessee’s TP Documentation and TNMM

In its Transfer Pricing Study Report, the assessee:

  • Identified itself as the tested party;
  • Selected TNMM as the MAM for benchmarking the purchase of finished goods from AE;
  • Compared its operating profit margin with that of functionally comparable independent companies; and
  • Concluded that its international transactions were at arm’s length.

The TPO initiated proceedings under Section 92CA(2) and Section 92D(3), calling for detailed information and supporting documentation, which the assessee furnished.

4. TPO’s Approach: Rejection of TNMM and Application of RPM

4.1 TPO’s Characterisation of the Assessee

After examining the TP Study, the TPO formed a prima facie view that the assessee was essentially a distributor of imported medical equipment. On that basis, the TPO concluded that:

  • RPM, and not TNMM, was the MAM for the purchase of finished goods;
  • Revenue from maintenance contracts and related services constituted a small fraction of total turnover and did not alter the character of the assessee as a distributor.

A detailed show cause notice was issued proposing to:

  1. Reject TNMM; and
  2. Benchmark the international transaction under RPM using gross profit to sales as the Profit Level Indicator (PLI).

4.2 Assessee’s Response Before TPO

The assessee submitted comprehensive written submissions describing its operations and emphasising that its role exceeded that of a routine distributor. Key points made by the assessee included:

  1. Imported equipment not ready-to-use

    • The medical equipment imported from AE could not be sold in “as imported” condition.
    • Customer-specific package configuration was required.

  2. Local integration and configuration

    • Various accessories were sourced locally and integrated with the imported equipment.
    • Only after such integration could the products be supplied to hospitals and diagnostic centres.

  3. Regulatory and statutory compliance

    • For each sale, the assessee had to ensure compliance with regulatory requirements, including PNDT and AERB approvals wherever applicable.

  4. Installation and commissioning

    • Delivery, installation and commissioning of sophisticated medical equipment was carried out by trained engineers of the assessee.
    • Activities included:
      • Installation of specialised software;
      • Activation of licences;
      • Integration of locally procured parts;
      • Installation of recovery software;
      • System configuration and testing to make the device fully operational.