Delhi High Court: Warranty Costs and Purchases “Unrelated” in Transfer Pricing Dispute, Rejects Aggregation by Revenue, Upholds RPM Method
Kiran Raj
The Delhi High Court has dismissed an appeal filed by the Revenue challenging the order of the Income Tax Appellate Tribunal (ITAT) that upheld the assessee's adoption of the Resale Price Method (RPM) to benchmark international transactions related to the import and sale of solar products. The Division Bench comprising Chief Justice Devendra Kumar Upadhyaya and Justice Tushar Rao Gedela held that the Tribunal’s findings were based on settled legal principles applicable to distributors and found no substantial question of law arising in the appeal. The Court concluded that the purchase of solar products and warranty cost claims could not be aggregated under the Transfer Pricing framework in the present case.
The assessee, part of the D Light Group, is engaged in the business of manufacturing, marketing, and trading solar lights and power products for various international markets. For the Assessment Year 2017-18, the assessee filed its income tax return on 30.11.2017 declaring a total income of NIL with a claimed loss of Rs. 9,45,78,855. The assessee’s international transactions with its Associated Enterprises (AE) amounted to Rs. 1,38,54,42,925, comprising purchases of lights and accessories, reimbursement of expenses, and warranty cost claims.
The case was selected for scrutiny, and based on Form No. 3CEB disclosures, the Transfer Pricing Officer (TPO) aggregated the purchase of goods and warranty cost claim transactions and applied the Transactional Net Margin Method (TNMM) instead of RPM. The TPO proposed an adjustment of Rs. 10,61,91,407 to the books of accounts. The Dispute Resolution Panel (DRP), by order dated 29.12.2021, concurred with the TPO’s findings and reduced the adjustment to Rs. 6,94,53,297. The Assessing Officer subsequently passed the final assessment order determining the total income of Rs. 2,51,25,559.
The assessee challenged this order before the ITAT, which allowed the appeal partly, holding that the RPM method applied by the assessee for benchmarking its distribution activities was correct. The Tribunal found that the warranty cost claim and reimbursement of expenses formed a minor portion (around 1.5%) of the total purchase value from the AE and were not closely linked to the purchase transactions. The Tribunal also relied on decisions of the Delhi High Court in Matrix Cellular International Services (P) Ltd., Fujitsu India Pvt. Ltd., and Burberry India Pvt. Ltd.
Before the High Court, the Revenue submitted that the Tribunal erred in applying RPM as the most appropriate method. The Revenue contended that warranty costs and reimbursement of expenses were intrinsically linked to the purchase of goods and that the distributor bore post-sale risks, constituting value addition. The Revenue argued that TNMM was the appropriate method under Section 92CA(3) of the Income Tax Act read with Rule 10B of the Income Tax Rules.
Counsel for the Revenue referred to Rule 10AB and the definitions under Rule 10A, contending that all transactions were sufficiently linked to justify aggregation. The Revenue emphasized that the assessee was responsible for developing marketing strategies and bearing warranty risks and that such post-sale obligations amounted to value addition. It was further argued that the Tribunal had misapplied precedents including Matrix Cellular and Fujitsu India.
The assessee opposed these submissions, arguing that it operated purely as a distributor without any value addition to the imported products. The assessee emphasized that the warranty costs were directly reimbursed by the AE in accordance with the inter-company agreement dated 01.04.2016, and thus did not constitute additional services. The assessee maintained that the RPM was appropriate for its distribution model, and relied on the Delhi High Court’s decisions in Matrix Cellular, Fujitsu India, and Burberry India.
The Court recorded, “undoubtedly, the edifice of the entire issue would have to be premised on the fact that the assessee is a distributor and not a manufacturer.” The Court noted that the assessee imported products without making any value addition and that the warranty cost claim was reimbursed by the AE, in line with the agreement between the parties.
The Bench observed, “the purchase of solar products/lights on the one hand and warranty cost claim on the other, are unrelated transactions and can neither be aggregated/clubbed nor are they so inextricably linked as to not survive without the other.”
The Court stated that the TPO and DRP erred in aggregating these transactions, observing, “the assumption is erroneous. It was equally erroneous to conclude that these three transactions were required to be aggregated or clubbed together for benchmarking or determination of the ALP.”
The Court found no merit in the Revenue’s argument regarding post-sale obligations being value addition. It stated, “the warranty cost claim stands reimbursed by the AE to the assessee as per the term of the inter-company agreement which would not tantamount to value addition made by the assessee at its end.”
The Court also noted that arguments regarding marketing and advertising expenses were addressed in earlier precedents. Referring to the decision in Burberry India, the Court stated that distributors without value addition to goods could appropriately apply the RPM method.
The Bench cited from Burberry India, observing, “RPM would be the most appropriate method in cases where the reseller does not add any value to the products purchased and sold.”
The Court also relied on the principle that aggregation or clubbing of transactions under Transfer Pricing rules is a fact-dependent determination and does not automatically raise a substantial question of law. The Court recorded, “the ratio laid down was to the effect that aggregation/clubbing of the transactions is entirely a fact dependent exercise, which cannot, ipso facto, be treated as a question of law.”
Accordingly, the Court dismissed the Revenue’s appeal and held that no substantial question of law arose in the case. The Court concluded, “in view of the above, we find the Revenue’s appeal unmerited and do not find any question of law, much less a substantial question of law in the present appeal.”
Advocates Representing the Parties
For the Appellant: Mr. Sanjay Kumar, Ms. Monica Benjamin, Ms. Esha Kadian
For the Respondent: Mr. Ved Jain, Mr. Nischay Kantoor, Ms. Soniya Dodeja
Case Title: Pr. Commissioner of Income Tax-1, Delhi v. D Light Energy P. Ltd.
Neutral Citation: 2025:DHC:1740-DB
Case Number: ITA 53/2025 & CM APPL. 12854/2025
Bench: Chief Justice Devendra Kumar Upadhyaya, Justice Tushar Rao Gedela
[Read/Download order]
