LUXOTTICA INDIA EYEWEAR PVT. LTD., GURGAON V. ACIT, CIRCLE- 15(2), NEW DELHI

ITA 126/DEL/2018

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 5773 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 3 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-04-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Assessment Year: 2013-2014
• Appeal Filed On: 04-01-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Set aside
• Section: 271(1)(c); 92B; 234B; 144C; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-1, NEW DELHI BEFORE SH. AMIT SHUKLA, JUDICIAL MEMBER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER ITA NO. 126/DEL/2018: ASSTT. YEAR: 2013-1 4 M/S LUXOTTICA INDIA EYEWEAR PVT. LTD. 7 TH FLOOR, DLF BUILDING NO. 9, TOWER- B, PHASE-III, DLF CYBER CITY, GURGAON VS ACIT, CIRCLE-15(2), NEW DELHI (APPELLANT T (RESPONDENT) PAN NO. AABCL3871C ASSESSEE BY : SH. NAGESHWAR RAO, ADV. REVENUE BY : SH. SURENDRAPAL, CIT DR DATE OF HEAR ING: 2 3 . 03 .20 21 DATE OF PRONOUNCEMENT: 26 .0 4 .20 2 1 ORDER PER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER: THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER DATED 17.10.2017 PASSED BY THE AO U/S 143 (3) R.W.S. 144C OF THE INCOME TAX ACT, 1961. 2. FOLLOWING GROUNDS HAVE BEEN RAISED BY THE ASSESS EE: RE: GENERAL GROUNDS 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO ERRED IN ASSESSING THE INCOM E OF THE APPELLANT AT RS.92,09,362/- AS AGAINST THE RETURNED LOSS OF RS.12,47,639/-. RE: TRANSFER PRICING ADJUSTMENT IN RESPECT OF ADVERTISEMENT, MARKETING AND PROMOTION EXPENSES (AMP EXPENSES) ITA NO. 126/DEL/2018 LUXOTTICA INDIA EYEWEAR PVT. LTD. 2 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO/LD. TRANSFER PRICING OFFICER ('LD. TPO') ERRED IN ENHANCING THE INCOME OF THE APPELLANT BY RS. 13,39,13,000/- BY MAKING A TRANSFE R PRICING ('TP') ADJUSTMENT ON ACCOUNT OF AMP EXPENSE S INCURRED BY THE APPELLANT IN THE REGULAR COURSE OF ITS BUSINESS ON THE GROUND THAT IT WAS EXCESSIVE AND SHOULD BE COMPENSATED BY THE ASSOCIATED ENTERPRISES ('AES'). 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DRP ERRED IN CONFIRMING THE TRANSFER PRICING ADJUSTMENT MADE BY THE LD. TPO WITHOUT GIVING DUE CONSIDERATION TO THE OBJECTIONS RAISED BY THE APPELLANT AGAINST THE SAID ADJUSTMENT . RE: NO TRANSACTION MUCH LESS THAN AN INTERNATIONAL TRANSACTION 3.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DRP/LD. AO/LD. TPO ERRED IN ASSUMING THAT THE AMP EXPENDITURE INCURRED BY THE APPELLANT IS AN 'INTERNATIONAL TRANSACTION' WITHIN THE MEANING OF THE TERM AS CONTAINED IN SECTION 92B OF THE ACT (INCLUDING THE EXPLANATION TO SECTION 92B) WITHOUT APPRECIATING THAT THE AMP EXPENSES INCURRED BY THE APPELLANT IS A FUNCTION PERFORMED BY THE APPELLANT FOR THE PURPOSE OF SALES OF GOODS IN INDI A. 3.2 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DRP/LD. AO/LD. TPO ERRED IN HOLDING THAT THE AMP EXPENDITURE INCURRED BY THE APPELLANT IS AN INTERNATIONAL TRANSACTION BY RELYIN G UPON THE DECISION OF THE SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. VS. CIT ([2015] 374 ITR 118) AND WITHOUT APPRECIATING THAT UNLIKE THE FACTS OF THE CASE IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. (SUPRA), THE APPELLA NT HAD -(A) NEITHER RECEIVED ANY SUBSIDY / GRANT IN CONNECTION WITH AMP EXPENSES FROM ITS AE; AND (B) NOR THE APPELLANT HAD ADMITTED TO THE EXISTENCE OF AN INTERNATIONAL TRANSACTION. 3.3 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DRP/ LD. AO/ LD. TPO HAS ITA NO. 126/DEL/2018 LUXOTTICA INDIA EYEWEAR PVT. LTD. 3 ERRED IN NOT APPRECIATING THAT THE AE OF THE APPELL ANT DID NOT DERIVE ANY BENEFIT FROM THE AMP EXPENDITURE INCURRED BY THE APPELLANT. 3.4 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DRP/ LD. AO/ LD. TPO ERRED IN NOT APPRECIATING THAT THE AMP EXPENSES WER E INCURRED BY THE APPELLANT AS A PART OF ITS ROLE AND RESPONSIBILITY AS A DISTRIBUTER AND NOT FOR THE PUR POSE OF PROVIDING ANY BENEFIT TO ITS AE AND THUS COULD N OT BE CONSIDERED TO BE A TRANSACTION UNDER SECTION 92F(V) OF THE ACT, IN THE ABSENCE OF ANY UNDERSTANDING OR ARRANGEMENT OR ACTION IN CONCERT F OR ANY PROVISION OF SERVICE. 3.5 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DRP/ LD. AO/ LD. TPO ERRED IN NOT APPRECIATING THAT THERE ARE NO MACHINE RY PROVISIONS IN THE ACT TO MAKE ADJUSTMENT IN RELATIO N TO AMP EXPENSES. RE: NO ARRANGEMENT / AGREEMENT / UNDERSTANDING/CONTRACT WITH AES 3.6 THAT THE HON'BLE DRP/LD. AO/LD. TPO GROSSLY ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT AMP EXPENDITURE INCURRED BY THE APPLICANT AT ITS OWN BEHEST COULD NOT BE REGARDED AS A 'TRANSACTION , MU CH LESS THAN AN INTERNATIONAL TRANSACTION UNDER SECTIO N 92B OF THE ACT, IN THE ABSENCE OF ANY UNDERSTANDING / ARRANGEMENT/ AGREEMENT BETWEEN THE APPELLANT AND ITS AES (WHICH OWN THE TRADEMARKS) FOR INCURRENCE O F EXTRAORDINARY AMP EXPENDITURE BY THE APPELLANT FOR DEVELOPING MARKETING INTANGIBLES FOR THE AE. RE: ERRONEOUS APPROACH FOR DETERMINING THE ARM'S LENGTH PRICE ('ALP') O F ALLEGED AMP EXPENSES 3.7 THAT THE HON'BLE DRP/ LD. TPO/LD. AO ERRED IN LAW AND FACTS BY NOT APPRECIATING THAT SINCE GROSS PROFIT MARGIN EARNED BY THE APPELLANT IS HIGHER THA T THE GROSS PROFIT MARGINS OF COMPARABLE COMPANIES, B Y APPLICATION OF RESALE PRICE MARGIN ('RPM') METHOD, ITA NO. 126/DEL/2018 LUXOTTICA INDIA EYEWEAR PVT. LTD. 4 THE AMP EXPENSES INCURRED BY THE APPELLANT ARE NOT REQUIRED TO BE COMPENSATED BY THE AES. 3.8 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DRP/ LD. AO/ LD. TPO HAVE ERRED IN USING MODIFIED TRANSACTIONAL NET MARGIN METHOD ('TNMM') TO DETERMINE THE ARM'S LENGTH NATURE OF THE ALLEGED INTERNATIONAL TRANSACTION BY COMPARING THE NET MARGIN EARNED BY THE APPELLANT WITH ADJUSTED NET MARGINS OF COMPARABLE COMPANIES ('INTENSITY ADJUSTMENT'), WITHOUT GIVING ANY REASON S FOR REJECTING THE RPM METHOD USED BY THE APPELLANT WHICH HAS BEEN UPHELD AS THE MOST APPROPRIATE METHOD FOR DETERMINATION OF ARM'S LENGTH PRICE OF IMPORT OF FINISHED GOODS BY THE ORDER OF HON'BLE HI GH COURT IN APPELLANT'S OWN CASE FOR AY 2009-10. 3.9 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DRP/ LD. AO/LD. TPO HAVE ERRED IN NOT CONSIDERING THAT EVEN IF INTENSITY ADJUSTMENT IS TO BE PERFORMED TO DETERMINE THE ALP OF THE ALLEGED AMP TRANSACTION, THE SAME SHOULD BE PERFORMED ON THE GROSS PROFIT MARGINS OF COMPARABLE COMPANIES WHILE APPLYING THE RPM SELECTED BY THE APPELLANT. 3.10 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE HON'BLE DRP/ LD. AO/ LD. TPO HAVE ERRED IN USING INTENSITY ADJUSTMENT TO ADJUST THE N ET PROFIT MARGIN OF COMPARABLE COMPANIES WITHOUT APPRECIATING THAT INTENSITY ADJUSTMENT IN PRINCIPLE USES THE SAME PARAMETERS WHICH WERE BEING USED FOR APPLICATION OF BRIGHT LINE TEST ('BLT') WHICH IS IN COMPLETE DISREGARD TO THE DECISION OF JURISDICTIONA L DELHI HIGH COURT IN THE CASE OF SONY ERICSSON MOBIL E COMMUNICATIONS (SUPRA). 3.11 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE HON'BLE DRP/ LD. AO/ LD. TPO GROSSL Y ERRED IN NOT FOLLOWING THE WELL ACCEPTED DOCTRINE O F STARE DECISIS AND RES JUDICATA BY DISREGARDING THE BINDING JUDICIAL PRECEDENT IN APPELLANT'S OWN CASE, WHEREIN THE USE OF RPM FOR THE PURPOSE OF INTENSITY ADJUSTMENT HAS BEEN UPHELD BY THE HON'BLE IT AT, ON THE ERRONEOUS AND FALSE ASSUMPTION THAT THE ITA NO. 126/DEL/2018 LUXOTTICA INDIA EYEWEAR PVT. LTD. 5 RESPONDENT WAS IN THE PROCESS OF FILING AN APPEAL AGAINST THE ORDER OF HON'BLE ITAT BEFORE HIGHER FORUM. 3.12 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE HON'BLE DRP/LD. AO/LD. TPO HAVE ERRED IN USING 'TOTAL OPERATING REVENUE' INSTEAD OF 'TOTAL OPERATING COST' AS THE BASE FOR COMPUTING TH E PROPORTIONATE VALUE OF TRANSFER PRICING ADJUSTMENT. 3.13 THAT THE HON'BLE DRP/ LD. AO/ LD. TPO HAVE ERRED IN USING AN UNJUST APPROACH OF CHERRY PICKING A SET OF 11 COMPANIES FOR THE PURPOSE OF DETERMINING THE MARK UP OF 15.43%, THAT SHOULD BE EARNED BY THE APPELLANT ON THE ALLEGED AMP EXPENSES AS A SERVICE PROVIDER WITHOUT PROVIDING ANY SOURCE OR SEARCH STRATEGY AND WITHOUT APPRECIATING THAT THE SAID COMPANIES WERE FUNCTIONALLY NOT COMPARABLE. RE: USE OF BLT APPROACH FOR COMPUTING TRANSFER PRICING ADJUSTMENT ON A PROTECTIVE BASIS 3.14 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, HON'BLE DRP/ LD. AO/LD. TPO HAVE GROSSL Y ERRED IN APPLYING THE 'BLT' TO PROPOSE TRANSFER PRICING ADJUSTMENT OF RS.28,40,13,614 ON A PROTECTI VE BASIS, IN COMPLETE DISREGARD OF THE FINDINGS OF THE HON'BLE JURISDICTIONAL DELHI HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE TELECOMMUNICATIONS INDIA PRIVATE LIMITED. IN THIS REGARD, THE HON'BLE DRP/ L D. AO/ LD. TPO ALSO ERRED IN FACTS AND LAW BY DISREGARDING THE | BINDING NATURE OF A JUDICIAL PRECEDENT AS IT REMAINS UNAFFECTED BY WHETHER OR NO T IT HAS BEEN CHALLENGED BEFORE A HIGHER FORUM, TILL THE TIME IT IS NOT OVERTURNED. 4. THAT ON THE FACT AND CIRCUMSTANCES OF THE CASE AND IN LAW, HON'BLE DRP/ LD. AO/ LD. TPO HAVE GROSSLY ERRED IN USING PROTECTIVE ASSESSMENT FOR APPLICATION OF BLT APPROACH AS THE VERY CONCEPT OF PROTECTIVE ASSESSMENT IS ONLY RELEVANT WHERE THERE IS AN AMBIGUITY REGARDING THE ASSESSE IN V. WHOSE HAND S INCOME IS CHARGEABLE TO TAX. 4.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, LD. AO/ LD. TPO HAVE GROSSLY ERRED IN N OT ITA NO. 126/DEL/2018 LUXOTTICA INDIA EYEWEAR PVT. LTD. 6 FOLLOWING THE DIRECTIONS ISSUED BY HON'BLE DRP TO ELIMINATE ROUTINE SELLING EXPENSES FOR L THE PURPOS E OF COMPUTING THE AMP EXPENSE INCURRED BY THE APPELLANT. 4.2 THAT THE HON'BLE DRP/ LD. AO/LD. TPO GROSSLY ERRED IN FACTS AND IN LAW IN BY NOT APPRECIATING TH AT THE AMP EXPENSE CONSIDERED BY THE LD. TPO FOR COMPUTING THE ADJUSTMENT USING BLT APPROACH ARE PRIMARILY IN THE NATURE OF AT 'POINT OF SALE EXPENDITURE' AND THUS ARE IN THE NATURE OF SELLING EXPENSES. 4.3 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DRP/ LD. AO/ LD. TPO FAILED TO APPRECIATE THAT AMBIT OF 'SELLING EXPENSES' IS NOT ONLY LIMITED TO TRADE DISCOUNT/ VOLUME DISCOUNT, RATHER, ANY EXPENSE(S) WHICH HAVE BEEN INCURRED FOR THE PURPOSES OF ENHANCING SALES WILL FALL UNDER THE PURVIEW OF 'SELLING EXPENSES'. RE: ERRORS IN COMPUTATION OF THE ADJUSTMENT WHILE APPLYING THE APPROACH OF 'INTENSITY ADJUSTMENT' 4.4 THAT ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW THE HON'BLE DRP/ LD. AO/ LD. TPO HAVE ERRED BY FAILING TO CONSIDER CERTAIN EXPENSES AS OPERATING IN NATURE WHILE COMPUTING THE OPERATING PROFIT MARGIN OF COMPARABLE COMPANY AND IN FAILING TO RECTIFY THE ARITHMETICAL INACCURACY POINTED OUT BY THE APPELLANT IN THE COMPARABILITY ADJUSTMENT SHEET. 4.5 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE HON'BLE DRP/LD.AO/ LD. TPO HAVE ERRED IS UNDERTAKING INTENSITY ADJUSTMENT BY CONSIDERING AN INCORRECT VALUE OF INTERNATIONAL TRANSACTION FOR THE PURPOSE OF COMPUTING THE TP ADJUSTMENT. 4.6 THAT THE HON'BLE DRP/ LD. AO/ LD. TPO ERRED IN UNDERTAKING INTENSITY ADJUSTMENT BY FOLLOWING AN INCONSISTENT APPROACH OF USING OPERATING COST (EXCLUDING EMPLOYEE COST) AS A PERCENTAGE OF SALES INSTEAD OF USING AMP EXPENSE (ON NON-LICENSED ITA NO. 126/DEL/2018 LUXOTTICA INDIA EYEWEAR PVT. LTD. 7 BRANDS) AS A PERCENTAGE OF SALES FOR THE PURPOSE OF ADJUSTING THE NET PROFIT MARGIN OF COMPARABLE COMPANIES UNDER INTENSITY ADJUSTMENT. RE: CONSEQUENTIAL GROUNDS 5. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. AO ERRED IN LEVYING INTEREST UNDER SECTION 234B AND 234C OF THE ACT. 6. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, LD. AO ERRED IN INITIATING PENALTY PROCEEDINGS UNDE R SECTION 271(1)(C) OF THE ACT. 3. LUXOTTICA INDIA WAS INCORPORATED IN INDIA IN 15. 11.2007 AND COMMENCED ACTUAL OPERATIONS FROM FEBRUARY 2008. IT HAS BEEN ESTABLISHED PRIMARILY FOR THE PURPOSE OF CARRY ING ON THE BUSINESS OF TRADING OF SUNGLASSES AND SPECTACLES FR AMES IN INDIA. LUXOTTICA INDIA BEING A CLOSELY HELD COMPANY , 99.99 PER CENT OF ITS EQUITY SHARES ARE HELD BY LUXOTTICA HOL LAND. 4. THE PRIMARY ISSUE RELATES TO DETERMINATION OF MO ST APPROPRIATE METHOD (MAM) FOR THE TRANSFER PRICING A DJUSTMENT OF THE TRANSACTIONS. 5. FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS WITH REGARD TO THE AMP EXPENSES, THE ASSESSEE HAS OPTED FOR RESALE PRICE METHOD (RPM) WHEREAS THE REVENUE HAS RESORTED TO TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD (MAM). 6. HAVING HEARD THE ARGUMENTS , WE FIND THAT THIS ISSUE HAS ALREADY BEEN COVERED BY THE ORDER OF THE ITAT IN AS SESSEES OWN CASE FOR THE EARLIER ASSESSMENT YEAR 2013-14 WHEREI N IT WAS HELD THAT RPM WAS MAM FOR BENCHMARKING. HOWEVER, TH E LD. DRP ITA NO. 126/DEL/2018 LUXOTTICA INDIA EYEWEAR PVT. LTD. 8 CHOOSE TO CONFIRM THE ORDER OF THE TPO/AO AS THE DE PARTMENT HAS NOT ACCEPTED TRIBUNAL DECISION AND IT IS LIKELY TO BE CHALLENGED IN THE HIGHER FORUM. FOR THE SAKE OF REA DY REFERENCE, THE RELEVANT PART OF THE ORDER OF THE LD. DRP IS RE PRODUCED AS UNDER: H. TPO HAS CONCLUDED THAT THE INTENSITY OF AMP SPEN D EXPRESSED AS AN AMP/SALES RATIO IS MUCH HIGHER THAN THAT OF THE COMPARABLES. BUT, THE ASSESSEE IS NOT SUITABLY COMPENSATED FOR THIS ADDITIONAL FUNCTION. THIS SITUATION IS ALSO COVERED BY EXAMPLE 10/BEPS REPORT [G-20 (ACTION PLAN 8-10)]. THE EXAMPLE CONCLUDES TH AT AN ENTITY, PERFORMING FUNCTIONS AND INCURRING MARKETING EXPENDITURE SUBSTANTIALLY IN EXCESS OF TH E LEVEL OF FUNCTION AND EXPENDITURE OF INDEPENDENT MARKETER /DISTRIBUTOR/MANUFACTURER IN COMPARABLE TRANSACTIONS, IS REQUIRED TO BE COMPENSATED AND THE APPROPRIATE TAX ADMINISTRATION MUST PROPOSE A TRANSFER PRICING ADJUSTMENT BASED ON SUCH COMPENSATION FOR SUCH AMP ACTIVITY PERFORMED. SUCH ADJUSTMENT MAY BE CONSISTENT WITH WHAT INDEPENDENT ENTERPRISES WOULD HAVE EARNED IN SIMILAR TRANSACTIO NS. I. IN VIEW OF THE DISCUSSIONS SUPRA, IT IS HELD THA T THE INTERNATIONAL TRANSACTION ON ACCOUNT OF AMP DOES EXIST. THE SAME CALLS FOR EXAMINATION TO DETERMINE ALP. RESALE PRICE METHOD CANNOT BE INVOKED IN THIS CASE DUE TO WIDE SCOPE OF THE ACTIVITIES (INCLUDING PROMOTIONAL ACTIVITIES DIRECTLY BENEFITTING THE BRA ND AND CREATION OF INTANGIBLES) UNDERTAKEN BY THE ASSESSEE, WHICH ARE BEYOND A SIMPLE DISTRIBUTOR. TP O HAS RIGHTLY INVOKED TNMM IN VIEW OF THE FACTS OF TH IS CASE. THE CHOICE OF COMPARABLES HAS BEEN ACCEPTED B Y THE ASSESSEE. THE MARK UP FOR SERVICES IS REQUIRED AND IT HAS BEEN UPHELD PER BEPS GUIDANCE ALSO. ITA NO. 126/DEL/2018 LUXOTTICA INDIA EYEWEAR PVT. LTD. 9 THE ASSESSEE HAS ALSO MENTIONED THAT ITAT IN ASSESSEES OWN CASE FOR A.Y 2012-13 HAS HELD THAT RPM WAS MAM FOR BENCHMARKING. FACTUAL MATRIX OF THE CURRENT YEAR IS SAME AS THAT OF A.Y 2012-13. FROM TPOS REPORT IT IS CLEAR THAT THE DEPARTMENT HAS NO T ACCEPTED TRIBUNALS DECISION AND IS LIKELY TO CHALL ENGE IT IN HIGHER FORUM. BASIS ABOVE CONCLUSIONS EMANATING FROM THE DISCUSSION SUPRA, THE ACTION OF THE TPO IS UPHELD. 7. THE RELEVANT PORTION OF THE ORDER OF THE ITAT IN THE ASSESSEES OWN CASE IN ITA NO. 344/DEL/2017 FOR THE ASSESSMENT YEAR 2012-13 DATED 26.05.2017 19. THE ID. AR NEXT CONTENDED THAT THE ASSESSEE APPLIED RESALE PRICE METHOD (RPM) AS THE MOST APPROPRIATE METHOD IN ITS TRANSFER PRICING STUDY RE PORT AND THE TPO USED THE TRANSACTIONAL NET MARGIN METHO D (TNMM) AS THE MOST APPROPRIATE METHOD FOR MAKING THE TRANSFER PRICING ADJUSTMENT. THE ID. AR ARGUED THAT THE TRIBUNAL IN ITS ORDER FOR THE ASSESSMENT YEAR 2 009- 10 HAS APPROVED THE RPM AS THE MOST APPROPRIATE METHOD AND THE HON'BLE HIGH COURT HAS NOT INTERFERE D WITH THE TRIBUNAL ORDER ON THIS ISSUE. THIS WAS OPP OSED BY THE ID. DR WHO SUBMITTED THAT THE HON'BLE HIGH COURT HAS SIMPLY CHOSEN NOT TO INTERFERE IN THE TRIBUNAL ORDER WITHOUT GIVING ANY SEPARATE REASONS AND, HENCE, IT CANNOT BE SAID THAT THE TRIBUNAL ORD ER ON THIS ISSUE HAS BEEN AFFIRMED BY THE HONBLE HIGH COURT. 20. WE FIND THAT THE TPO IN THE INSTANT CASE, THOUG H NOTED IN PARA 2 OF ITS ORDER, THAT THE ASSESSEE APP LIED RPM AS THE MOST APPROPRIATE METHOD, BUT GAVE NO REASONS FOR REJECTING THE SAME AND WENT ON TO COMPU TE TRANSFER PRICING ADJUSTMENT UNDER THE TNMM. IT IS A MATTER OF FACT THAT THE ASSESSEE FOR THE ASSESSMENT YEAR 2009-10 ADOPTED TNMM AS THE MOST APPROPRIATE METHOD TO DEMONSTRATE THAT ITS INTERNATIONAL TRANSACTION OF PURCHASE OF MATERIAL WAS AT ALP. SUC H DETERMINATION WAS SOUGHT TO BE CORROBORATED BY ALSO ITA NO. 126/DEL/2018 LUXOTTICA INDIA EYEWEAR PVT. LTD. 10 APPLYING RPM. THE TPO FOR THAT YEAR INITIALLY CALLE D UPON THE ASSESSEE TO SHOW CAUSE AS TO WHY THE RPM B E NOT APPLIED AS THE MOST APPROPRIATE METHOD. LATER O N, THE TPO WENT WITH THE TNMM AS THE MOST APPROPRIATE METHOD. THE TRIBUNAL NOTICED THAT THE MAIN BUSINESS OF THE ASSESSEE WAS TO CARRY ON TRADING OF SUNGLASSES AND FRAMES. THE GOODS PURCHASED WERE SOLD WITHOUT MAKIN G ANY VALUE ADDITION. IT WAS, THEREFORE, HELD THAT RP M WAS THE MOST APPROPRIATE METHOD IN PREFERENCE OVER THE TNMM. THE HON'BLE HIGH COURT DID NOT INTERFERE WITH THE VIEW TAKEN BY THE TRIBUNAL. IT IS, THEREFO RE, MANIFEST THAT THE APPLICATION OF THE RPM AS THE MOS T APPROPRIATE METHOD HAS BEEN FINALLY APPROVED FOR TH E A.Y. 2009-10. HOWEVER, A SIGNIFICANT FACTOR WHICH CANNOT BE LOST SIGHT OF FOR THE A.Y. 2009-10 IS THA T INSTEAD OF MAKING ANY AMP INTENSITY ADJUSTMENT IN T HE PROFIT RATE OF COMPARABLES, THE TPO CONSIDERED AMP EXPENDITURE AS A SEPARATE INTERNATIONAL TRANSACTION AND DETERMINED ITS ALP INDEPENDENT OF THE ALP OF THE INTERNATIONAL TRANSACTION OF PURCHASE OF MATERIAL F ROM ITS AE. AS SUCH THERE WAS NO NEED TO SUBSUME THE AM P FUNCTION IN THE DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANSACTION OF PURCHASE OF MATERIAL. BUT IN SO FAR AS THE FACTS FOR THE EXTANT YEAR ARE CONCERNED, IT IS PATENT THAT THE AMP FUNCTION HAS B EEN EMBEDDED BY THE TPO IN THE INTERNATIONAL TRANSACTIO N OF PURCHASE OF MATERIAL FROM THE AE AND THE TRANSFE R PRICING ADJUSTMENT HAS BEEN MADE FOR SUCH AN INTERNATIONAL TRANSACTION ALONE, THOUGH BY FACTORIN G IN THE EFFECT OF HIGHER INTENSITY AMP FUNCTIONS CARRIE D OUT BY THE ASSESSEE. RESPECTFULLY FOLLOWING THE DECISIO N TAKEN FOR THE A.Y. 2009-10, WE HOLD THAT, FIRSTLY, THE RPM SHOULD BE APPLIED AS THE MOST APPROPRIATE METHO D FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSA CTION OF PURCHASE OF MATERIAL FROM THE AE, BUT, BY CARRYI NG OUT THE AMP INTENSITY ADJUSTMENT IN THE PROFIT RATE OF COMPARABLES. IF, HOWEVER, IT TURNS OUT THAT SUCH AN ADJUSTMENT CANNOT BE DONE DUE TO ONE REASON OR THE OTHER, THEN THE RPM SHOULD BE DISCARDED AND ANOTHER SUITABLE METHOD BE ADOPTED, WHICH ENCOMPASSES THE EFFECT OF AMP INTENSITY ADJUSTMENT. OUR VIEW IS FORTIFIED BY THE JUDGMENT IN THE CASE OF SONY ERICS SON (SUPRA), IN WHICH IT HAS BEEN HELD IN PARA 165 THAT : 'COMPARABLE ANALYSIS OF THE TESTED PARTY AND THE COMPARABLE WOULD INCLUDE REFERENCE TO AMP EXPENSES. ITA NO. 126/DEL/2018 LUXOTTICA INDIA EYEWEAR PVT. LTD. 11 IN CASE OF A MISMATCH, ADJUSTMENT COULD BE MADE WHEN THE RESULT WOULD HE RELIABLE AND ACCURATE. OTHERWISE, RP METHOD SHOULD NOT BE ADOPTED. 21. WE, THEREFORE, SET ASIDE THE IMPUGNED ORDER AN D REMIT THE MATTER TO THE FILE OF ASSESSING OFFICER/T PO FOR RE-DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION OF IMPORT OF FINISHED GOODS IN THE MA NNER DELINEATED ABOVE. THE ASSESSEE SHOULD BE GIVEN AN ADEQUATE OPPORTUNITY OF HEARING IN SUCH FRESH PROCEEDINGS. 8. SINCE, THE MATTER STANDS COVERED IN FAVOUR OF TH E ASSESSED FOR THE EARLIER YEARS AND IN THE ABSENCE OF ANY MAT ERIAL CHANGE IN THE FACTS OF THE CASE BROUGHT TO OUR NOTICE, WE HEREBY DIRECT THAT THE ADJUSTMENT BE DETERMINED CONSIDERING AS RP M AS MAM. 9. THE OTHER ISSUE RAISED DURING THE ARGUMENTS PERT AINS TO ADJUSTMENT ON PROTECTIVE BASIS FOLLOWING THE BLT ME THOD. THIS ISSUE HAS BEEN SQUARELY COVERED BY THE ORDER OF THE CO-ORDINATE BENCH OF ITAT DELHI IN ITA NO. 6531/DEL/2017 FOR TH E ASSESSMENT YEAR 2013-14 VIDE ORDER DATED 30.11.2017 IN THE CASE OF M/S TOSHIBA INDIA PVT. LTD., WHEREIN ONE OF THE MEMBERS OF THIS BENCH WAS THE SIGNATORY. THE RELEVANT PART OF THE SAID ORDER IS AS UNDER: 3.1 THE HONBLE DELHI HIGH COURT IN THE CASE OF SONY ERICSSON (SUPRA) REJECTED THE BRIGHT LINE TEST (BLT) METHOD FOR COMPUTING THE ARMS LENGTH PRICE O F THE AMP TRANSACTION AND DIRECTED THAT FOR THE PURPO SE OF COMPARABILITY, THE COMPARABLE SHOULD BE IDENTIFI ED IN SUCH A WAY THAT THEY ARE CARRYING OUT MARKETING AND DISTRIBUTION FUNCTION AND THE COMPARABLES SHOUL D HAVE COMPARABLE INTENSITIES OF EXPENSES INCURRED FO R SALES AND MARKETING AND IN THE CASE OF THE ASSESSEE . THE LD. TPO COMPUTED THE ADJUSTMENT UNDER AMP ACCORDING TO THE MANNER PROPOSED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF SONY ERICSSON (SUPR A) ON SUBSTANTIVE BASIS AT RS.19,80,30,988/- AND ALSO PROPOSED ADDITION ON PROTECTIVE BASIS FOLLOWING THE BLT METHOD AMOUNTING TO RS.131,21,90,000/-. ITA NO. 126/DEL/2018 LUXOTTICA INDIA EYEWEAR PVT. LTD. 12 3.2 AGAINST THE ADJUSTED PROPOSED BY THE ID. TPO, THE ASSESSEE BEFORE THE LD. DR, THE ASSESSEE FILED OBJECTIONS BEFORE THE LD. DRP. THE LD. DRP DIRECTED TO VERIFY THE SEGMENTAL ACCOUNT AND OTHER ARITHMETICAL ERRORS/FACTUAL MISTAKES TO ALLOW CERTA IN EXPENSES OUT OF AMP. IN VIEW OF THE DIRECTIONS OF T HE LD. DRP, ADJUSTMENT WAS REVISED. A TABLE REVISING T HE ADJUSTMENT BOTH ON SUBSTANTIVE AS WELL AS PROTECTIV E BASIS BY THE ASSESSING OFFICER IN THE IMPUGNED FINA L ASSESSMENT ORDER IS REPRODUCED AS UNDER: ON SUBSTANTIVE BASIS S. NO. NATURE OF INTERNATIONAL TRANSACTION ADJUSTMENT AS PER THE ORDER OF THE TRANSFER PRICING OFFICER ADJUSTMENT AFTER THE DIRECTIONS ISSUED BY THE HONBLE DRP 1. AMP -DISTRIBUTION 19,80,30,988 NIL ON PROTECTIVE BASIS S. NO. NATURE OF INTERNATIONAL TRANSACTION ADJUSTMENT AS PER THE ORDER OF THE TRANSFER PRICING OFFICER ADJUSTMENT AFTER THE DIRECTIONS ISSUED BY THE HON'BLE DRP 1 AMP -DISTRIBUTION (PROTECTIVE ADDITION) 1,31,21,90,000 51,09,87,000 3.3 THUS, WE FIND THAT SUBSTANTIVE ADDITION ON AMP ADJUSTMENT ON AMP STANDS ALREADY DELETED BY THE LD. DRP, AND ONLY THE ADDITION MADE ON PROTECTIVE BASIS FOLLOWING THE BLT METHOD WAS SUSTAINED BY THE ID. DRP, AGAINST WHICH, THE ASSESSEE IS IN APPEAL BEFOR E US. 4. THE LD. COUNSEL SUBMITTED THAT GROUND NO. 1 AND 1.1 OF THE APPEAL ARE GENERAL IN NATURE. SINCE THE GROUND BEING GENERAL IN NATURE WE ARE NOT REQUIRED TO ADJUDICATE UPON SPECIFICALLY AND ACCORDINGLY DISMIS SED AS INFRUCTUOUS. 5. FURTHER, DURING THE HEARING OF THE CASE, THE LD . COUNSEL DID NOT PRESS THE GROUND NOS.1.2 TO 1.5 AND 2.1 TO 2.4 AND GROUND NO. 3, ACCORDINGLY ALL THESE GROUNDS ARE DISMISSED AS INFRUCTUOUS. ITA NO. 126/DEL/2018 LUXOTTICA INDIA EYEWEAR PVT. LTD. 13 6. THE GROUND NOS. 2, 2.5 TO 2.6 RELATES TO PROTECTIVE ADDITION MADE APPLYING THE BLT. 6.1 BEFORE US, THE LEARNED COUNSEL SUBMITTED THAT TRIBUNAL IN THE CASE OF NICKON INDIA PRIVATE LIMITE D (ITA NO. 4574/DEL/2017, DATED 20.09.2017) HAS DELETED THE IDENTICAL ADDITION OF PROTECTIVE NATURE , AND THEREFORE, IN THE CASE OF THE ASSESSEE ALSO, NO ADDITION COULD BE SUSTAINED. 6.2 THE LD. CIT(DR), ON THE OTHER HAND, RELIED ON THE FINDING OF THE LOWER AUTHORITIES. 6.3 WE HAVE HEARD THE RIVAL SUBMISSION AND PERUSED THE RELEVANT MATERIAL ON RECORD. WE FIND THAT TRIBU NAL IN THE CASE OF NICKON INDIA PRIVATE LIMITED (SUPRA) HAS DELETED THE ADJUSTMENT MADE ON PROTECTIVE BASIS APPLYING THE BLT. THE RELEVANT FINDING OF THE TRIBU NAL IS REPRODUCED AS UNDER: 18. SO, FOLLOWING THE DECISION RENDERED BY HONBLE DELHI HIGH COURT IN CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD. (SUPRA) AND COORDINATE BENCH OF THE TRIBUNAL IN PERFETTI VAN MELLE INDIA PVT. LTD. (SUPRA), TP ADJUSTMENT AMOUNTING TO RS.22,30,18,964/- BY APPLYING BLT IS NOT SUSTAINABLE ON PROTECTIVE BASIS HAVING NO STATUTORY MANDATE. SO, GROUND NO. 5 IS DETERMINED IN FAVOUR OF THE ASSESSEE. 6.4 WE FIND THAT THE BLT FOR COMPUTING ARMS LENGTH PRICE OF AMP TRANSACTION HAS ALREADY BEEN REJECTED BY THE HONBLE DELHI HIGH COURT IN THE CAS E OF SONY ERICSSON (SUPRA), AND THUS ADJUSTMENT EVEN PROTECTIVE BASIS CANNOT BE SUSTAINED. THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IS A BINDING PRECEDENT AND THE LOWER AUTHORITIES CANNOT DISREGAR D IT MERELY BECAUSE THE REVENUE HAS CHALLENGED IT BEFORE THE HONBLE SUPREME COURT. THUS, RESPECTFULL Y FOLLOWING THE ABOVE DECISION OF THE TRIBUNAL, WE DI RECT THE LD. AO/TPO TO DELETE THE PROTECTIVE ADDITION OF RS.51,09,87,000/-. ACCORDINGLY, WE ALLOW THE RELEVA NT GROUNDS OF THE APPEAL OF THE ASSESSEE. ITA NO. 126/DEL/2018 LUXOTTICA INDIA EYEWEAR PVT. LTD. 14 10. SINCE, THE MATTER STANDS COVERED IN FAVOUR OF T HE ASSESSEE AND IN THE ABSENCE OF ANY MATERIAL CHANGE IN THE FA CTS OF THE CASE BROUGHT TO OUR NOTICE, WE HEREBY HOLD THAT THE ADJUSTMENT MADE ON PROTECTIVE BASIS CANNOT BE SUSTAINED. 11. AS A RESULT, THE APPEAL OF THE ASSESSEE IS ALLO WED. ORDER PRONOUNCED IN THE OPEN COURT ON 26/04/2021. SD/- SD/- (AMIT SHUKLA) (DR. B. R. R. KUMAR) JUDICIAL MEMBER ACC OUNTANT MEMBER . DATED: 26/04/2021 *SUBODH* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR