M/s Oriflame India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 184/DEL/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6454 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 2 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-03-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 03-01-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 13-01-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Assessee Lawyers: HIMANSHU S SINHA; YESHU ARORA
• Keywords: Related party transaction; Transfer pricing; International transaction; Rule of consistency; Cost of acquisition
• Section: 143(3); 92D; 234B; 10B

Judgement Text

I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I NEW DELHI BEFORE SMT DIVA SINGH, JUDICIAL MEMBER AND SH.ANADEE NATH MISSHRA, ACCOUNTA NT MEMBER I.T.A .NO.-960/DEL/2014, 184/DEL/2016 & 271/DEL/2 016 (ASSESSMENT YEAR-2009-10, 2010-11 & 2011-12) ORIFLAME INDIA PVT.LTD., GROUND FLOOR, CORPORATE ONE, PLOT NO.5, NHCC, JASOLA, NEW DELHI-110076. PAN-AAACO0256B ( APPELLANT) VS ACIT, CIRCLE-13(1), NEW DELHI. (RESPONDENT) ASSESSEE BY SH.HIMANSHU S.SINHA, ADV. & SH. YESHU ARORA, CA REVENUE BY SH. AMRENDRA KUMAR, CIT DR & SH. NEERAJ KUMAR, SR.DR DATE OF HEARING 03.01.2017 DATE OF PRONOUNCEMENT 24 . 03 .201 7 ORDER PER DIVA SINGH, JM THE PRESENT APPEALS HAVE BEEN FILED BY THE ASSESSEE IN 2009-10, 2010-11 AND 2011- 12 ASSESSMENT YEARS. ALL THESE APPEALS ARE BEING D ECIDED BY A COMMON ORDER FOR THE SAKE OF CONVENIENCE. WHEREAS IN THE APPEALS PERTAINING T O 2009-10 AND 11-12 AYS, THE CORRECTNESS OF THE ORDER DATED 03/12/2013 AND 18/12 /2015 PASSED BY THE ASSESSING OFFICER UNDER SECTION 143(3) R.W.S 144C(13) AND 143(3) R.W. S 144C(1) AND 144C(5) RESPECTIVELY, IS ASSAILED. IN 2010-11 ASSESSMENT YEAR, THE ASSESSEE INSTEAD OF APPROACHING THE DISPUTE RESOLUTION PANEL (HEREINAFTER REFERRED TO AS DRP) FORUM HAS AVAILED OF THE APPELLATE FORUM PROVIDED UNDER THE STATUTE BY FILING AN APPEAL BEFO RE THE CIT(A). ACCORDINGLY IT IS THE CORRECTNESS OF THE ORDER DATED 01.09.2015 OF CIT(A) -44, NEW DELHI WHICH IS ASSAILED IN THE SAID YEAR. IT WAS A COMMON STAND OF THE PARTIES BE FORE THE BENCH THAT THE FACTS, CIRCUMSTANCES AND THE ISSUES IN ALL THE YEARS ARE I DENTICAL. ACCORDINGLY, GROUNDS FROM ITA NO.960/DEL/2014 ARE REPRODUCED HEREUNDER:- 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, THE ORDER PASSED BY THE LD. ASSESSING OFFICER ('AO') IS BAD I N LAW AND VOID AB-INITIO. 2. THE LD. AO/LD. TRANSFER PRICING OFFICER ('TPO') ERRED ON FACTS AND CIRCUMSTANCES OF THE CASE IN DETERMINING THE ARM'S LENGTH ADJUSTMENT TO THE PAGE 2 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT APPELLANT'S INTERNATIONAL TRANSACTION FROM ASSOCIAT ED ENTERPRISES ('AES'), THEREBY RESULTING IN THE ENHANCEMENT OF RETURNED IN COME OF THE APPELLANT BY RS. 14,29,24,000. 3. THAT THE REFERENCE MADE BY THE LD. AO SUFFERS FR OM JURISDICTIONAL ERROR AS THE LD. AO HAS NOT RECORDED ANY REASONS IN THE DRAFT AS SESSMENT ORDER BASED ON WHICH HE REACHED THE CONCLUSION THAT IT WAS 'EXPEDI ENT AND NECESSARY' TO REFER THE MATTER TO THE LD. TPO FOR COMPUTATION OF THE AR M'S LENGTH PRICE, AS IS REQUIRED UNDER SECTION 92CA(1) OF THE INCOME TAX AC T, 1961 ('ACT'). 4. THE LD. AO/ TPO ERRED ON FACTS AND IN LAW IN THE DETERMINATION OF THE ARM'S LENGTH PRICE OF THE APPELLANT'S INTERNATIONAL TRANS ACTIONS WITH ITS ASSOCIATED ENTERPRISES BY- 4.1. USING ONLY ONE COMPARABLE COMPANY FOR THE PUR POSE OF BENCHMARKING UNDER RESALE PRICE METHOD ('RPM') AND NOT CONSIDERI NG PRODUCT SIMILARITY OF COMPARABLES ADOPTED BY THE APPELLANT IN ITS TP DOCU MENTATION/ FRESH SEARCH. 4.2. REJECTING THE ARM'S LENGTH PRICE DETERMINED BY THE APPELLANT IN THE TP DOCUMENTATION MAINTAINED BY THE APPELLANT UNDER SEC TION 92D OF THE ACT READ WITH RULE 10D OF THE INCOME TAX RULES, 1962 AN D ITS SUBMISSIONS AND SUBSTITUTING THE SAME WITH HIS OWN METHODOLOGY WITH OUT PROVIDING ANY COGENT EVIDENCE OR BACK UP DOCUMENTATION IN SUPPORT OF HIS STATEMENTS USED TO REJECT THE TP METHODOLOGY ADOPTED BY THE AP PELLANT BY 4.2.1 REJECTING COMPANIES WHOSE REVENUES ARE LES S THAN RS. 5 CRORES WITHOUT TAKING COGNIZANCE OF THE APPELLANT'S SUBMISSIONS. 4.2.2 REJECTING COMPANIES WHOSE DATA IS NOT AVAI LABLE FOR FY 2008- 09. 4.2.3 HOLDING THAT THE QUANTITATIVE FILTER OF RA TIO OF R&D EXPENSES TO SALES MORE THAN 3% IS AN INAPPROPRIATE FILTER. 4.2.4 APPLYING THE THRESHOLD LIMIT OF 25% FOR TH E RELATED PARTY TRANSACTIONS BASED ON SUBJECTIVE GROUNDS AND WITHOU T ANY RATIONAL JUSTIFICATION AND BY DISREGARDING VARIOUS JUDICIAL PRONOUNCEMENTS. 4.3. NOT FOLLOWING A DETAILED SEARCH METHODOLOGY FOR THE ARM'S LENGTH ANALYSIS, DEMONSTRATING CHERRY PICKING OF COMPANIES , THUS ALSO REFLECTING A SINGLE MINDED INTENTION OF MAKING AN ADDITION TO TH E RETURNED INCOME OF THE APPELLANT. 5. THE LD. AO/ TPO/ DRP ERRED IN FACTS AND IN LAW BY CONSIDERING DIRECT SELLING COMPANIES TO BE THE ONLY APPROPRIATE COMPARABLES BY IGNORING THE FACT THAT THE MODE OF SELLING IMPACTS THE EXPENSES BELOW THE GROS S MARGIN AND WOULD NOT AFFECT THE APPLICATION OF RPM. 6. THE LD. AO/ TPO/ DRP ERRED IN FACTS AND IN LA W IN SELECTING MODICARE LTD AS A SINGLE COMPARABLE COMPANY FOR AN ARM'S LENGTH ANALY SIS EVEN THOUGH THIS COMPANY WAS NOT COMPARABLE ON A STANDALONE BASIS TO THE APP ELLANT IN TERMS OF FUNCTIONS, ASSETS AND RISKS ASSUMED. 7. THE LD. AO/ TPO/ DRP ERRED IN ARBITRARILY REJ ECTING THE COMPARABLES' SEARCH PROCESS AND THE COMPARABLES CHOSEN BY THE APPELLANT . 8. THAT ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. AO / TPO / DRP ERRED ON FACTS AND IN LAW IN DISREGARDING MULTI PLE YEAR/ PRIOR YEARS' DATA AS USED BY THE APPELLANT IN THE TP DOCUMENTATION AND H OLDING THAT CURRENT YEAR (I.E. FY 2008-09) DATA FOR THE COMPARABLE COMPANIES SHOUL D HAVE BEEN USED DESPITE THE FACT THAT THE SAME WAS NOT AVAILABLE TO THE APP ELLANT AT THE TIME OF PREPARATION OF ITS TP DOCUMENTATION. 9. THAT THE LD. AO/ TPO /DRP ERRED IN FACTS AND I N LAW IN BEING INCONSISTENT BY REJECTING THE TRANSFER PRICING METHODOLOGY FOR THIS FINANCIAL YEAR WHEN THE SAME WAS ACCEPTED IN THE PRIOR YEARS DESPITE THERE BEING NO CHANGE IN FACTS AND CIRCUMSTANCES OVER THE TWO YEARS (I.E. FINANCIAL YE AR 2007-08 AND 2006-07). 10. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN INITIATING PENALTY PROCEEDINGS U/S 274 REA D WITH SECTION 271 OF THE ACT MECHANICALLY FOR FURNISHING INACCURATE PARTICULARS WITHOUT RECORDING ANY ADEQUATE SATISFACTION FOR SUCH INITIATION PAGE 3 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT 11. THAT THE LD. AO ERRED IN FACTS AND IN LA W IN CHARGING AND COMPUTING INTEREST UNDER SECTION 234B OF THE ACT. THE ABOVE GROUNDS OF APPEAL ARE MUTUALLY EXCLUSIVE AND WITHOUT PREJUDICE TO EACH OTHER. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR VARY ANY OF THE ABOVE GROUNDS EITHER BEFORE OR AT THE TIME OF HEARING AS WE MAY B E ADVISED. THE ARGUMENTS TAKEN HEREINABOVE ARE WITHOUT PREJUDICE TO EACH OTHER. 2. LD.AR INVITING ATTENTION TO THE GROUNDS SUBMITTE D THAT GROUND NOS.1 AND 2 MAY BE TREATED AS GENERAL GROUNDS WHEREIN THE ENTIRE ISSUE AGITATED BEFORE THE ITAT IS HIGHLIGHTED AND THUS NO SPECIFIC FINDING QUA THE SAME MAY BE RE QUIRED TO BE GIVEN. GROUND NOS. 3 AND 8 IT WAS SUBMITTED ARE NOT BEING PRESSED IN THE PRESE NT PROCEEDINGS. ADDRESSING GROUND NOS. 4 AND 5, IT WAS SUBMITTED THE ISSUES AGITATED THERE IN MAY BE CONSIDERED TO BE AGITATED BEFORE THE ITAT. HOWEVER, THE SPECIFIC GRIEVANCE WHICH THE ASSESSEE WANTS TO HIGHLIGHT IS ADDRESSED BY GROUND NO. 6 WHICH IS ALSO ADDRESSED I N GROUND NO. 4.1. GROUND NO. 7, IT WAS SUBMITTED IS ALSO AN ARGUMENT IN SUPPORT OF THE PR AYER AND VIDE GROUND NO. 9, RELIANCE IS BEING PLACED ON THE RULE OF CONSISTENCY GROUND NOS. 10 AND 11 IT WAS SUBMITTED MAY NOT REQUIRE ANY SPECIFIC ADJUDICATION. 2.1. IN THE LIGHT OF THE ABOVE SUBMISSIONS, IT WAS SUBMITTED THAT THE SPECIFIC GRIEVANCE OF THE ASSESSEE IS PRIMARILY RETENTION OF MODI CARE LT D. AS A STANDALONE COMPARABLE REJECTING THE COMPARABLES SELECTED BY THE ASSESSEE. THE RETEN TION IS ALSO ASSAILED AS IT HAS BEEN DONE WITHOUT MAKING APPROPRIATE ADJUSTMENTS KEEPING IN MIND THE PECULIAR BUSINESS MODEL OF THE ASSESSEE. THE ASSESSEE, IT WAS STATED, IS ENGAG ED IN A DIRECT SALES BUSINESS MODEL THE TPO WRONGLY REJECTED THE COMPARABLES SELECTED BY TH E ASSESSEE IGNORING THE OBJECTION TO RETAINING MODI CARE LTD. AS A SINGLE COMPARABLE COM PANY, WHICH HAS WRONGLY BEEN SELECTED AND RETAINED. THE DRP IN THE TWO YEARS AND THE CIT( A) IN 2010-11 A.Y., IT WAS SUBMITTED, HAVE UPHELD THE TPOS ACTION IN THE RESPECTIVE YEAR S. THE SPECIFIC GRIEVANCES OF THE ASSESSEE DEMONSTRATED ON THE BASIS OF FACTS AND EVI DENCES ON RECORD. IT WAS SUBMITTED HAVE BEEN IGNORED WITHOUT ADDRESSING THE FACTS. 2.2. INVITING ATTENTION TO THE MATERIAL AVAILABLE O N RECORD, IT WAS SUBMITTED THAT IT WAS AN ACCEPTED POSITION THAT THE ASSESSEE IS A ROUTINE DI STRIBUTOR AND DOES NOT OWN ANY VALUABLE PAGE 4 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT NON-ROUTINE INTANGIBLES AS IT IS ENGAGED PRIMARILY IN DISTRIBUTION AND SALE OF COSMETIC PRODUCTS AND DOES NOT UNDERTAKE ANY VALUE ADDITION ACTIVITIES. ACCORDINGLY, THE ASSETS DEPLOYED ARE ROUTINE TANGIBLE ASSETS LIKE COMPUTERS , OFFICE EQUIPMENT, FURNITURE AND FITTINGS ETC. FOR ITS OPERATIONS AND IT ASSUMES ALL NORMAL B USINESS RISKS OF A ROUTINE DISTRIBUTOR LIKE MARKET RISK, PRICE RISK, CUSTOMER CREDIT RISK, PROD UCT LIABILITY RISK, FOREIGN EXCHANGE RISKS ETC. THE MAJOR INTERNATIONAL TRANSACTION UNDERTAKEN BY T HE ASSESSEE WHICH IS A SUBJECT MATTER FOR CONSIDERATION IN THE PRESENT PROCEEDINGS, IT WAS SU BMITTED, IS PURCHASE OF FINISHED GOODS. THE ASSESSEE IT WAS SUBMITTED HAS SELECTED RESALE P RICE METHOD (HEREINAFTER REFERRED TO AS RPM) AS THE MOST APPROPRIATE METHOD. IT WAS SUBMI TTED THAT THE GROSS MARGINS OF THE ASSESSEE HAVE REMAINED HEALTHY CONSISTENTLY OVER TH E YEARS WHEN COMPARED WITH THE PRIOR YEARS. IT WAS ALSO SUBMITTED THAT IT IS A MATTER OF RECORD THAT FOR THE TWO PREVIOUS YEARS I.E. 2007- 08 AND 2008- 09 ASSESSMENT YEARS IDENTICAL IN TERNATIONAL TRANSACTIONS OF THE ASSESSEE AFTER DETAILED TP SCRUTINY ANALYSIS THE TRANSACTION ON AN IDENTICAL SET OF FACTS HAS BEEN ACCEPTED TO BE AT ARMS LENGTH. IT WAS SUBMITTED TH AT THERE WAS NO CHANGE IN EITHER THE FAR PROFILE OF THE ASSESSEE OR OF THE COMPARABLES IT HA D SELECTED. THE METHOD ADOPTED FOR BENCHMARKING METHODOLOGY FOLLOWED IN THE YEAR UNDER CONSIDERATION, IT WAS SUBMITTED, ALSO REMAINS THE SAME. 2.3. REFERRING TO THE FACTS ON RECORD, IT WAS SUBMI TTED THAT THE PLI OF THE ASSESSEE FOR 2009-10 ASSESSMENT YEAR TO 2011-12 ASSESSMENT YEARS WAS 45.58%; 46.79% AND 48.72% RESPECTIVELY AND SINCE THE ASSESSEE IN ITS DOCUMENT ATION HAD TAKEN INTO CONSIDERATION MULTIPLE YEARS DATA AND CLAIMED THAT COMPARED TO TH E PLI OF THE COMPARABLES THE TRANSACTION WAS AT ARMS LENGTH. THE ASSESSEE WAS REQUIRED TO C ARRY OUT A FRESH SEARCH AND EVEN THEN THE PLI OF THE COMPARABLE COMPANIES SELECTED BY THE ASSESSEE WAS 32.62%; 29.70% AND 32.62% RESPECTIVELY IN THE 3 YEARS. THE TRANSACTION ACCORDINGLY WAS STILL VERY MUCH AT ARMS- LENGTH. HOWEVER, THE TPO REJECTED ALL THE COMPARAB LE COMPANIES SELECTED BY THE ASSESSEE ON THE GROUNDS THAT NONE OF THESE COMPANIES WERE EN GAGED IN DIRECT SELLING AND THUS SELECTING A SINGLE COMPARABLE I.E. MODI CARE LTD. O N THE BASIS OF ITS TP/SALES OF 76.47% AND PAGE 5 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT WITHOUT MAKING ANY ADJUSTMENTS IN ORDER TO MAKE IT COMPARABLE AS PROVIDED UNDER RULE 10 B(2) PROCEEDED TO MAKE ADJUSTMENTS. THE ISSUE, IT W AS SUBMITTED HAD BEEN AGITATED BEFORE THE DRP ON THIS GROUND HOWEVER IT DID NOT MEET WITH SUCCESS RESULTING IN FILING OF THE PRESENT APPEAL BEFORE THE ITAT. REITERATING THE SUBMISSION S MADE BEFORE THE DRP AND RELYING UPON THE SYNOPSIS FILED IT WAS THE PRAYER OF THE ASSESSE E THAT MODI CARE LTD. AS THE SOLE COMPARABLE SELECTED BY THE TPO AND RETAINED BY TH E DRP WAS AN INCORRECT COMPARABLE. IN SUPPORT OF THE SAID SUBMISSION, IT WAS STATED THAT MODI CARE LTD. HAD A DIVERSE PRODUCT PORTFOLIO WHICH INCLUDED DIVERSE PRODUCTS LIKE AUTO CARE, AGRICULTURAL PRODUCTS, TEA, JEWELLERY, HEALTHCARE ETC. AND EVEN IF THE PERSONAL CARE PRODU CTS OF MODI CARE LTD. ARE AGGREGATED WITH COSMETICS EVEN THEN THE TOTAL SHARE OF THESE TWO CA TEGORIES WOULD BE 42.56%. IN SUPPORT OF THE SAID SUBMISSION, ATTENTION WAS INVITED TO PAGE 26 OF THE ANNUAL REPORT FOR F.Y. 2008 09 ASSESSMENT YEAR PLACED AT PAPER BOOK PAGE 80 OF VOL UME I. IT WAS HIS SUBMISSION THAT ORIFLAME INDIA LTD. DOES NOT DEAL IN ANY OF THESE P RODUCTS OR CATEGORIES AND THE DIFFERENT PRODUCT ITEMS AS ARE DEALT WITH BY MODI CARE LTD. M AKES THE SAID COMPARABLES AN INCOMPARABLE. EACH OF THESE PRODUCTS DEALT WITH BY MODI CARE LTD., IT WAS SUBMITTED NECESSARILY WOULD INVOLVE DIFFERENT LEVELS OF ASSET S, RISKS AND MARKETS AND ACCORDINGLY THE SELECTION OF THE SAID COMPANY AS A STAND-ALONE COMP ARABLE ON GROSS BASIS UNDER RP METHOD WAS HEAVILY ASSAILED. 2.4. RELIANCE WAS PLACED UPON THE DECISION OF THE I TAT IN ITA NO.7367/MUM/2012 IN THE CASE OF M/S CARLYLE INDIA ADVISORS PVT. LTD. VS DCIT. SPECIFIC ATTENTION WAS INVITED TO PAGE 9 PARA 12 OF THE SAME WHEREIN MOTILAL OSWAL INVESTMENTS ADVISORS PVT. LTD. HAD BEEN REJECTED AS A COMPARABLE WITH AN EXTREME OP MARGIN OF 72.33% FROM THE FINAL SET OF COMPARABLE SELECTED BY THE TPO ON THE GROUNDS THAT IT WAS ENGA GED IN DIVERSIFIED ACTIVITIES AND THE SEGMENTALS WERE NOT AVAILABLE. 2.5. APART FROM THE SAID FACT, IT WAS ALSO HIS SUBM ISSION THAT MODI CARE LTD. SHOULD NOT BE CONSIDERED AS A COMPARABLE ESPECIALLY ON A STANDALO NE BASIS SINCE ON A PERUSAL OF ITS FINANCIALS, IT WOULD BE EVIDENT THAT APART FROM THE DIRECT SELLING MODEL MODI CARE LTD. ALSO PAGE 6 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT INCLUDES SERVICE INCOME IN THE NATURE OF AMC AND ON CE ITS SERVICE INCOME IS EXCLUDED ITS TP/SALES WOULD BE 69.66%. THE FACT THAT MODI CARE L TD. RECOGNISES SERVICE INCOME, IT WAS SUBMITTED IS EVIDENT FROM THE FACT THAT THE TPO IN 201011; 201112; AND 201213 ASSESSMENT YEARS HAS ADMITTED THAT MODI CARE LTD. R ECOGNISES SERVICE INCOME IN ITS PROFIT & LOSS A/C AND HAS ACCORDINGLY REMOVED SERVICE INCOME FROM THE COMPETITION OF MARGINS. IT WAS HIS SUBMISSION THAT THE ASSESSEE IS NOT PRAYING THAT THE SERVICE INCOME BE REMOVED FROM THE COMPUTATION OF THE MARGINS AS THE PRIMARY OBJECTION OF THE ASSESSEE REMAINS THAT THE SEGMENTAL INFORMATION FOR EACH PRODUCT CATEGORY OR THE CARE IS NOT AVAILABLE. EVEN OTHERWISE, IT WAS HIS SUBMISSION THAT THE DETAILS O F THE SERVICE INCOME ARE NOT AVAILABLE IN THE ANNUAL REPORT. REFERRING TO THE RECORD, IT WAS SUBM ITTED THAT THE NOTES TO THE ACCOUNTS ON REVENUE RECOGNITION STATED THEIR REVENUES FROM ANNU AL MAINTENANCE CONTRACTS AND OTHER SERVICE CONTRACTS. IT WAS HIS SUBMISSION THAT IT IS QUITE POSSIBLE THAT MODI CARE LTD. MAY BE DERIVING FRANCHISE SERVICE FEE FROM ITS FRANCHISEES . THESE FACTORS, IT WAS SUBMITTED ADMITTEDLY DEMONSTRATE THAT THE SAID COMPANY WAS FUNCTIONALLY DIFFERENT FROM THAT OF THE ASSESSEE. 2.6. APART FROM THE ABOVE, IT WAS ALSO HIS SUBMISSI ON THAT MODI CARE LTD. HAS FLUCTUATING MARGINS, THE INTENSIVE FLUCTUATION IN THE SALES FOR MODI CARE LTD. IT WAS SUBMITTED SHOWS THAT IT IS ASSUMING SIGNIFICANT BUSINESS AND MARKET RISK S WHEREAS IN THE CASE OF THE ASSESSEE THERE IS A CONSISTENT INCREASING TREND AND THERE IS NO SUCH RISK EXPOSURE OF THE ASSESSEE. TABLE 3: SALES TREND OF ORIFLAME INDIA VIS--VIS MODICARE LIMITED (INR) SALES ORIFLAME INDIA YEAR ON YEAR CHANGE MODICARE LIMITED YEAR ON YEAR CHANGE FY 2006-07 656,303,028 - 344,886,627 - FY 2007 - 08 968,658,047 47.59% 363,303,749 5.34% FY 2008-09 1,355,759,156 39.96% 298,286,306 -17.90% FY 2009-10 1,930,328,718 42.38% 439,442,705 47.32% 2.7. INVITING ATTENTION TO PAPER BOOK PAGE NO. 151 VOLUME-1, IT WAS HIS SUBMISSION THAT MODI CARE LTD HAS PERSISTENT OPERATING LOSSES. 2.8. APART FROM THESE DIFFERENCES, IT WAS SUBMITTED THAT THERE IS DIFFERENTIAL TREATMENT OF EXPENSES INCURRED ON INCENTIVES/DISCOUNTS BETWEEN T HE ASSESSEE AND MODI CARE LTD. IN SUPPORT OF THE SAID SUBMISSION, ATTENTION WAS INVIT ED TO PAGE 19 OF THE ANNUAL REPORT FOR PAGE 7 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT F.Y.200809 PAGE 73 OF VOLUME1 FILED BEFORE THE ITA T. IT WAS SUBMITTED THAT IN ANY DIRECT SELLING BUSINESS THE AGENTS/CONSULTANTS WHO ACT AS RETAILERS ARE PAID INCENTIVES DISCOUNTS TO REMUNERATE THEM FOR THE CONTRIBUTION. THE ARRANGEM ENT IT WAS SUBMITTED VARIES FROM ONE COMPANY TO ANOTHER AND THE CORRESPONDING ACCOUNTING ENTRIES ALSO DIFFER, ACCORDINGLY THUS BEFORE MAKING ANY COMPARISON OF GROSS PROFIT MARGIN THESE DIFFERENCES HAVE TO BE ACCOUNTED FOR OTHERWISE THE RESULTS WOULD BECOME UNRELIABLE. ORIFLAME INDIA LTD., IT WAS SUBMITTED RECORDED SALES NET OF DISCOUNTS/INCENTIVE PAID TO I TS AGENTS/CONSULTANTS AND HENCE SHOWS A LOWER GROSS MARGIN AS PER ITS ACCOUNTING TREATMENT. 2.9. THE REVENUE RECOGNITION POLICY OF THE TWO COMP ANIES IT WAS SUBMITTED, WAS ALSO DIVERGENTLY DIFFERENT. REFERRING TO PAPER BOOK PAG E 433 OF VOLUME 2, THE ASSESSEE IT WAS SUBMITTED HAS A POLICY OF ALLOWING 20% OF DISCOUNT ON MRP TO ITS CONSULTANTS WHICH IS EQUAL TO MARGIN OF 25% OF SALES FOR THE CONSULTANTS. WHEN THIS POSITION IS COMPARED WITH THE DISCOUNT GIVEN TO THE CONSULTANTS/AGENTS WHICH IS C ATEGORISED AS INCENTIVES BY MODI CARE LTD, IT WAS SUBMITTED THAT IT IS A BELOW THE LINE IN PROFIT & LOSS A/C AS A PART OF OPERATING EXPENSES. ACCORDINGLY, IT DOES NOT FORM PART OF THE COMPUTATION OF GROSS PROFIT MARGIN OF MODI CARE LTD. THE INCENTIVE PAY TO THE AGENTS AND CONS ULTANTS WORKS OUT TO BE AROUND 30% OF THE SALES OVER AND ABOVE THE SAID DISCOUNT THE ASSE SSEE ALSO PAYS INCENTIVES TO THE TUNE OF RS.3,032,04/- AS WOULD BE EVIDENT FROM PAPER BOOK P AGE 44 31 OF VOLUME11 OF THE PAPER BOOK FILED BEFORE THE ITAT. ACCORDINGLY, IT WAS HI S SUBMISSION THAT IT IS IMPROPER TO COMPARE THE GROSS MARGINS OF MODI CARE LTD.WITH THE ASSESSE E. 2.10. ADDRESSING THE COMPARABLES SELECTED BY THE AS SESSEE, IT WAS SUBMITTED THAT FOR J.K. HELENE CURTIS LTD., WIPRO AND YARDLEY THE SALES IS NET OF INCENTIVES. THUS FOR AN APPLE TO APPLE COMPARISON IT WAS SUBMITTED ECONOMIC COMPARAB LE ADJUSTMENTS HAD TO BE UNDERTAKEN TO COMPUTE THE PLI FOR THIS COMPANY TO ACCOUNT FOR THE SIGNIFICANT DISSIMILARITIES IN THE FUNCTIONS AND REVENUE STREAMS OF MODI CARE LTD. AND THE ASSESSEE. ACCORDINGLY IT WAS SUBMITTED THE SALES OF MODI CARE LTD. SHOULD BE RED UCED BY THE AMOUNT OF INCENTIVES PAID AS APPEARING IN OPERATING EXPENSES IN ITS FINANCIALS S INCE FOR AN APPLE TO APPLE COMPARISON WITH PAGE 8 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT THE ASSESSEE, THE FACTORS IMPARTING COMPARABILITY H AVE TO BE GIVEN SIMILAR TREATMENT. THE ACCOUNTING TREATMENT SIMILAR BETWEEN THE COMPARABLE S IT WAS SUBMITTED NEEDS TO BE KEPT ACCEPTABLE ON FACTS. THUS THE REVISED GP/SALES OF MODI CARE LTD AFTER ACCOUNTING FOR THIS ADJUSTMENT AND AFTER EXCLUDING THE SERVICE INCOME I T WAS SUBMITTED WOULD BE 40% AND THE GP SALES OF THE ASSESSEE, IT WAS SUBMITTED IS 45.6% THEREFORE EVEN ON WITHOUT PREJUDICE BASIS IF MODI CARE LTD. IS TO BE TAKEN AS A COMPARA BLE UNDER RPM THEN NO TRANSFER PRICING ADJUSTMENT IS WARRANTED ON FACTS. THE IMPACT OF ADJ USTMENT FOR INCENTIVES IS 30% OF THE GP AND THE EXCLUSION OF SERVICE INCOME IS 6% OF THE GP . 2.11. IF THESE ARGUMENTS ADVANCED, IT WAS SUBMITTE D ARE CONSIDERED TO BE NOT SUFFICIENT TO DIRECT NECESSARY RELIEF BY HOLDING THAT NO ADJUSTME NTS ARE WARRANTED THEN IT MAY BE NOTED THAT THE MODI CARE LTD. HAS SUBSTANTIAL VARIATION BETWEEN GROSS MARGIN AND NET MARGIN. REFERRING TO THE RECORD, IT WAS SUBMITTED THAT FOR THE YEAR UNDER CONSIDERATION, THE GROSS MARGIN OF MODI CARE LTD. WAS 76.47% AND ITS NET MAR GIN WAS 33.78%. THE SUBSTANTIAL VARIANCE IN THE GROSS IN THE MID-LEVEL MARGINS IT W AS SUBMITTED ESTABLISHES THE FACT THAT THE COMPANY INCURS HEAVY OPERATING EXPENSES. THIS FAC TOR SUBSTANTIATES THAT SINCE HEAVY FUNCTIONS AT THE OPERATING LEVEL ARE PERFORMED BY M ODI CARE LTD. ACCORDINGLY THE SAID COMPANY CAN NOT BE CONSIDERED TO BE A COMPARABLE TO ORIFLAME INDIA LTD. I.E. THE ASSESSEE. THE SAID FACT IT WAS SUBMITTED FURTHER S UPPORTS THE ARGUMENT THAT MODI CARE LTD. IS NOT JUST A DIRECT MARKETER AND SELLER WHEREAS OR IFLAME INDIA LTD. DOES NOT UNDERTAKE ANY VALUE ADDITION FUNCTIONS. 2.12. REFERRING TO THE INFORMATION AVAILABLE ON THE SAID COMPANYS WEBSITE ITSELF, IT WAS SUBMITTED IT HAS BEEN STATED THAT MODI CARE LTD MAN UFACTURES ITS OWN PRODUCTS THUS THE VALUE ADDED EXPENSES ARE HIGH BECAUSE OF THESE MANI FESTLY HIGH EXPENSES AND IT CANNOT BE CONSIDERED AS COMPARABLE TO THE ASSESSEE. IT WAS SU BMITTED THAT EVEN IF THE EVIDENCE OF THE WEBSITE DESCRIPTION FOR A MOMENT IS NOT CONSIDERED, THE INCIDENCE OF SUCH HIGH OPERATING EXPENSES DEMONSTRATED THAT THE SAID COMPANY HAVING SUBSTANTIAL VALUE ADDING EXPENSES UNLIKE THE ASSESSEE CANNOT BE DEEMED TO BE COMPARAB LE TO THE ASSESSEE. PAGE 9 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT 2.13. IT WAS ALSO SUBMITTED THAT SIGNIFICANT ADVERT ISING, MARKETING AND PROMOTION EXPENSES SPEND WHEN COMPARED TO ITS SALES OF 7.32% WHEN COMP ARED TO 0.49% OF THE ASSESSEE, WOULD ALSO SHOW THAT FUNCTIONALLY THE COMPANIES CAN NOT BE SAID TO BE COMPARABLE AND THUS FOR AN APPLE TO APPLE COMPARISON AND ECONOMIC ADJUS TMENTS FOR THE SAID FACTS, SHOULD ALSO BE FACTORED INTO AND ONCE A REVISED GP/SALES POST T HE SAID INVESTMENTS ARE CARRIED OUT IT WOULD BE SEEN THAT THE GP IS 65.95%. 2.14. INVITING ATTENTION TO PAPER BOOK PAGE 19 OF T HE ANNUAL REPORT FOR FINANCIAL YEAR 2008 09 PAPER BOOK PAGE 73 VOLUME1, IT WAS SUBMITTED WOU LD SHOW THAT MODI CARE LTD IN ITS ANNUAL REPORT FOR THE AFOREMENTIONED FINANCIAL YEAR HAS RECORDED FRANCHISEE EXPENSES OF RS.20,308,572/- WHICH IS 5.09% OF TOTAL OPERATING E XPENSES. THUS, MODI CARE LTD. ADMITTEDLY IS NOT WHOLLY A DIRECT SELLER AS IT HAS FRANCHISE BUSINESS ALSO. 2.15. ATTENTION WAS AGAIN INVITED TO PAPER BOOK PAG E 131 VOLUME1 OF THE PAPER BOOK FILED. IT WAS ALSO SUBMITTED THAT THE COST OF GOODS SOLD I.E. COGS AS PER THE FINANCIAL STATEMENTS FOR MODI CARE LTD. IS ONLY 22.56% OF ITS TOTAL OPERATIN G COSTS, ITS VALUE, ADDED EXPENSES I.E.( VAE) ARE 77.44% OF TOTAL COSTS. IT WAS SUBMITTED I TS POSITION ADMITTEDLY IS UNLIKE THE TRADING CO WHERE COGS SHOULD BE THE DOMINANT COMPONENT OF T OTAL COSTS AS CAN BE SEEN FROM THE FINANCIALS OF ORIFLAME INDIA LTD. AS A PERCENTAGE O F ITS TOTAL OPERATING COST IS 50.71% AND THE SAID POSITION IS IN ALIGNMENT WITH THE DESCRIPTION OF A DISTRIBUTOR HENCE THE COST PROFILE OF MODI CARE LTD., IT WAS SUBMITTED IS ALSO NOT SIMILAR TO THE ASSESSEE. 2.16. WITHOUT PREJUDICE TO THESE ARGUMENTS, IT WAS SUBMITTED THAT IN CASE SELECTION OF MODI CARE LTD. AS A COMPARABLE IS RETAINED AS A STAND-A LONE COMPARABLE THEN FOR AN ARMS-LENGTH ANALYSIS IN SUCH A SITUATION IT SHOULD BE CONSIDERE D AT NET LEVEL UNDER THE TNMM AS DIRECT SELLING WOULD EFFECT NET MARGINS OF THE COMPANY AND NOT THE GROSS MARGINS. ACCORDINGLY AN ANALYSIS AT THE NET LEVEL USING TNMM WHICH MORE TOL ERANT OF FUNCTIONAL DIFFERENCES THEN THE GROSS MARGIN ANALYSIS IT WAS SUBMITTED WOULD SHOW O PERATING MARGINS OF MODI CARE LTD. TAKING OP/OI AS PLI WOULD BE (-) 33.78% AS COMPAR ED TO (-) 0.63% OF THE ASSESSEE. PAGE 10 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT 2.17. RELYING UPON THE SYNOPSIS FILED, IT WAS SUBMI TTED THAT THE COMPANIES DEALING IN THE BUSINESS OF COSMETICS OPERATE IN AN INDEPENDENT ECO NOMIC ENVIRONMENT WHETHER THEY ENGAGE IN DIRECT SELLING OR RETAIL SELLING. IT WAS ALSO SUBMITTED ADMITTEDLY THEY ARE ALL COMPETING AGAINST EACH OTHER FOR CAPTURING THE ATTE NTION OF THE SAME CUSTOMERS IN THE SAME MARKET. THUS THE MODE OF SELLING, IT WAS SUBMITTED, DOES NOT TAKE AWAY THE FUNCTIONAL COMPARABILITY OF BUYING AND RESELLING THE COSMETICS . ACCORDINGLY, IT WAS ARGUED THAT THE COMPARABLES CHOSEN BY THE ASSESSEE IN ITS SEARCH PR OCESS HAVE BEEN ARBITRARILY REJECTED. THIS ARGUMENT, IT WAS SUBMITTED IN SUPPORT OF GROUN D NO.4.1, 4.3.5 AND 7. ATTENTION WAS INVITED TO PAPER BOOK PAGE NUMBER 123 TO 127 FILED. THUS, IT WAS SUBMITTED THAT IT IS TRUE THAT THE ASSESSEE IS A DIRECT SELLER AND HENCE MAY BE CO NSIDERED TO PERFORM EXTRA FUNCTIONS OF CARRYING INVENTORY FOR A LONGER DURATION AT HIGH-RI SK VIS-A-VIS AN ORDINARY TRADER WHO MAY SELL ITS INVENTORY TO ANOTHER WHOLESALER, RETAILER BUT T HE SAID DIFFERENCE IT WAS SUBMITTED CAN EASILY BE ACCOUNTED FOR BY MAKING AN ADJUSTMENT FOR HIGHER WORKING CAPITAL LEVELS. A DIRECT RESELLER WOULD HAVE A HIGHER WORKING CAPITAL REQUIREMENT ON ACCOUNT OF HIGHER INVENTORY LEVELS SUCH AN APPROACH IT WAS SUBMITTED IS WIDELY ACCEPTED BY THE OECD AND THE UN AND HAS BEEN ENDORSED BY THE ITAT ALSO IN A CATENA OF CASES. 2.18. THE TPO AND THE DRP/CIT(A) IN THE RESPECTIVE YEARS, IN THE CIRCUMSTANCES, IT WAS SUBMITTED HAS FAILED TO APPRECIATE THAT FOR APPLYIN G RPM PRODUCT COMPARABILITY IS NECESSARY AND SINCE THE COMPARABLES CHOSEN BY THE ASSESSEE DE ALS IN COSMETICS THUS DURING THE BENCHMARKING ANALYSIS, THE ASSESSEE HAS NECESSARILY FOCUSED ON THE COMPANIES WHICH ARE:- A) PRIMARILY TRADERS I.E. ENGAGED IN BUYING AND SEL LING ACTIVITIES; AND/OR B) DEAL IN THE CATEGORY OF COSMETICS 2.19. THE BUSINESS DESCRIPTION OF THE COMPARABLE CO MPANIES, IT WAS SUBMITTED HAS BEEN PROVIDED IN THE TP DOCUMENTATION. ATTENTION WAS IN VITED TO PAPER BOOK PAGE 550 OF VOLUME II. RELIANCE WAS PLACED UPON M/S TUPPERWARE INDIA PVT.LTD. VS DCIT (C.O.NO.191/D EL/2011 & 168/DEL/2012): TUPPERWARE INDIA PVT.LTD., IT WAS SUBMITTED, IS A PART OF IDSAS LIST OF DIRECT SELLING COMPANIES. HOWEVER AS CAN BE READ FROM THE SAID DECISION, THE ITAT, IT WAS PAGE 11 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT SUBMITTED, HAS NOT REJECTED NON-DIRECT RESELLERS FR OM THE COMPARABLE SET OF COMPANIES TO DETERMINE THE ARMS LENGTH GROSS MARGIN FOR M/S TUP PERWARE INDIA PVT.LTD. ATTENTION WAS ALSO INVITED TO MATTEL TOYS (I) PVT. LTD. VS DCIT (ITA NO.2476/MUM/ 2008), ITA NO.2801/MUM/2008) (PARA 39, PAGE 22): IT WAS SUBMITTED THAT RPM IS T HE MOST APPROPRIATE METHOD IN CASE OF DISTRIBUTION ACTIVITIES WITHOUT A NY VALUE ADDITION. HENCE FUNCTIONAL AND OPERATIONAL COMPARABILITY HAS BEEN DEFINED AS A NEC ESSARY COMPONENT AND ADMITTEDLY. ACCORDING ALL COMPARABLES SELECTED BY THE APPELLANT SHOULD ALSO BE CONSIDERED FOR AN ARMS LENGTH ANALYSIS. 3. THE LD. CIT DR HEAVILY RELYING ON THE ORDERS OF THE DRP AND THE CIT(A) SUBMITTED THAT ALL THE ARGUMENTS OF THE ASSESSEE HAVE ALREADY BEEN CONSIDERED IN DETAIL AND HAVE BEEN REJECTED BY A SPEAKING ORDER IN THE RESPECTIVE YEAR S. SINCE IN 2010-11 ASSESSMENT YEAR, THE CIT(A) HAD THE BENEFIT OF THE DRPS ORDER, ACCORDIN GLY HEAVY RELIANCE WAS PLACED ON THE REASONING ADDRESSED THEREIN. ATTENTION WAS INVITED TO PAGE NOS. 22 TO 26 OF THE SAID ORDER, IT WAS SUBMITTED THAT MODI CARE LTD. HAS CORRECTLY BEE N RETAINED AS A COMPARABLE. SIMILARLY, IT WAS SUBMITTED THAT THE CIT(A) HAS ALSO CONSIDERED A ND REJECTED THE SUPPLEMENTARY TNMM ANALYSIS PROVIDED BY THE ASSESSEE AT PAGE 27 AND 28 OF THE SAID ORDER RELYING ON THE SAME IT WAS SUBMITTED THAT RPM AS A METHOD IS THE MAM. ACCO RDINGLY, IT WAS HIS SUBMISSION THAT ON FACTS, THE IMPUGNED ORDERS MAY BE UPHELD. FOR READY REFERENCE, THE RELEVANT EXTRACTS FROM THE AFORESAID ORDER OF THE CIT(A) ARE EXTRACTED HER EUNDER:- 7.2 DECISION : I HAVE CONSIDERED THE TRANSFER PRICING ORDER U/S 9 2CA(3), ASSESSMENT ORDER, WRITING SUBMISSION AND ORAL ARGUMENTS OF THE LD. AR. FIRST ISSUE WHICH IS TO DECIDED AS TO WHETHER THE TPO ACTION FOR COMPUTING ALP ON THE BASIS OF SINGULAR COMPARABLE THAT IS MODI CARE LTD. ON THE CRITERIA OF DIRECT SELLING MODEL IS CORRECT OR NOT. LD. TPO IN HIS ORDER HAS R EPRODUCED GREAT EMPHASIS IN THE FUNCTIONALITY OF THE APPELLANT ON DIRECT SELLING OP ERATION. THE BASIC OF TP REPORT OF THE APPELLANT LAYING EMPHASIS ON THE PROFILE OF ORIFLAM E GROUP IS REPRODUCED AS UNDER:- 2.1 PROFILE OF ORIFLAME GROUP THE ORIFLAMME GROUP WAS FOUNDED IN SWEDEN IN 1967. ORIFLAME IS A GLOBAL COSMETIC GROUP WITH DIRECT SELLING OPERATIONS. THIS MEANS TH AT INDEPENDENT SALES PERSONNEL SELL PRODUCTS DIRECTLY TO THE END CONSUMERS, WITHOUT ANY INVOLVEMENT OF VARIOUS RETAIL CHAINS. PAGE 12 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT 4.2.1. FUNCTIONS PERFORMED BY ORIFLAME GROUP. THE ORIFLAME GROUP PROVIDES SOME 900 PRODUCTS IN T HE FIELD OF SKIN CARE, MAKE UP, FRAGRANCES AND TOILETRIES THROUGH DIRECT SALES. 5. AS PER PAGE-24 OF TP REPORT:- 5.2.1 FUNCTIONS PERFORMED BY ORIFLAME INDIA ORIFLAME INDIA IS A ROUTINE DISTRIBUTOR WHICH CARR IES OUT ROUTINE FUNCTIONS AND ASSUMES NORMAL RISKS ASSOCIATED WITH CARRYING OUT SUCH BUSI NESS. THE MAIN BUSINESS ACTIVITY FOR ORIFLAME INDIA IS T HE DISTRIBUTION AND SALES OF THE COSMETIC PRODUCTS THROUGH DIRECT SALES CHANNEL. AS PER PAGE -34 OF TP REPORT:[ THE COMPANY: ORIFLAME INDIA FACES THE RISK OF ADVE RSE SALES CONDITIONS DUE TO INCREASE COMPETITION IN THE MARKET PLACE. THE COMPANY FACES DUAL COMPETITION FROM BOTH THE COSMETICS COMPANIES AND DIRECT SALES COMPANIES. THE COMPANYS BUSINESS IS ALSO SUBJECT TO ADVERSE DEMAND CONDITIONS. IN VIEW OF THE APPELLANT PROFILE IT WOULD NOT BE A PPROPRIATE TO TREAT THE APPELLANT AS A ROUTINE DISTRIBUTOR THOUGH MARKETING CHANNELS I.E. WHOLE SELLER, RETAILER, SHOW ROOM ETC. THE APPELLANT IS THE UNDISPUTEDLY MEMBER OF INDIAN DIRECT SELLING ASSOCIATION (IDSA). THIS ASSOCIATION IS AN AUTONOMOUS BODY WHICH ACTS A S AN INTERFACE BETWEEN THE INDUSTRIES AND POLICY MAKING BODY OF THE GOVERNMENT . ORIFLAME AND MODI CARE ARE THE MEMBERS OF INDIAN DIRECT SELLING ASSOCIATION. THE T PO HAS TAKEN THE MEMBERS PROFILE FROM IDSA SITE AND REPRODUCED IN THE ORDER. IN VIEW OF THE FUNCTIONALITY BEING DIRECT SALES IN MY VIEW IF THE COMPARABLE EXISTS IN THE SA ME SEGMENT I.E. DIRECT SELLING MODEL, THEN OTHER DISTRIBUTORS THERE THE CHAINS OF WHOLE S ELLING, DISTRIBUTING AND SHOW ROOMS SHOULD NOT BE CONSIDERED. THE REASONS BEHIND THIS C ONCLUSION IS THAT THE FAR OF DIRECT SELLERS OR THROUGH THE CHAIN OF DISTRIBUTING NETWOR K OR THROUGH SHOW ROOMS ARE BOUND TO BE DIFFERENT. RISK IN THE CASE OF DIRECT SELLING IS DIFFERENT AS SALES ARE AFFECTED THROUGH ITS OWN EMPLOYEE AND THE PRODUCT REACHES DI RECTLY TO THE CUSTOMERS WHEREAS, IN THE CASE OF OTHER DISTRIBUTOR CHANNELS GOODS DO NOT REACH TO THE CUSTOMERS DIRECTLY BUT SOLD THROUGH THE WHOLE SELLER & DISTRIBUTOR ETC . SIMILARLY AS THE FUNCTION IS DIFFERENT THE ASSET EMPLOYED ARE ALSO BOUND TO BE DIFFERENT I N THESE TWO MODELS OF SELLING. CONSIDERING THESE FACTS, 1 AM OF THE CONSIDERED OPI NION THAT THE DIRECT SELLING MODEL A STRONG FACTOR IN DECIDING COMPARABLE IN THE CASE OF APPELLANT. THOUGH THE PRODUCT REMAINS THE SAME THE PROFITABILITY IS BOUND TO BE D IFFERENT IN THESE TWO BUSINESS MODELS I.E. DIRECT SALE MODEL OR SALES THROUGH WHOL E SELLER AND DISTRIBUTOR. CONSIDERING THESE ENTIRE FACTS AND CIRCUMSTANCES IN MY VIEW THE TPO IS CORRECT IN HIS APPROACH IS NOT CONSIDERING M/S. JK HELENE CURTIS LTD AND M/S. RAMA VISION LTD AND OTHER DISTRIBUTORS AS COMPARABLES WHILE COMPUTING ALP OF THE INTERNATIONAL TRANSACTIONS OF THE APPELLANT. UNDER DIRECT SELLING MODEL UNDISPUTE DLY FINANCIAL DATA OF OTHERS COMPANIES WERE NOT AVAILABLE IN PUBLIC DOMAIN THERE FORE, TPO WAS JUSTIFIED IN CONSIDERING M/S. MODI CARE LTD AS SINGLE COMPARABLE TO COMPUTE PROFIT LEVEL INDICATOR AS IT GROSS MARGIN FOR BENCHMARKING THE TRANSACTION THROUGH RPM. NOW I WOULD EXAMINE THE VARIOUS ADJUSTMENT SOUGHT BY THE LD. AR. (I) ADJUSTMENT ON ACCOUNT OF COST OF GOODS SOLD (C OGS): LD. AR HAS SOUGHT ADJUSTMENT IN COGS ON THE BASIS OF AVERAGE COST OF GOODS SOLD AND OTHER EXPENSE BY THE APPELLANT AS WELL AS OTHER COMPARABLE SUCH AS J K H ELENE CURTIS LTD AND M/S. RAMA PAGE 13 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT VISION LTD. ETC. IF THE ADJUSTMENT ON ACCOUNT OF CO GS IS ALLOWED WHICH IS THE MAIN COST TO COMPUTE GROSS MARGIN OF M/S. MODICARE.THE E NTIRE PURPOSE OF COMPUTING GROSS PROFIT MARGIN FOR THE PURPOSE OF RPM ANALYSIS IS LO ST. TINKERING OF GROSS PROFIT MARGIN OF THE COMPARABLE ON THE BASIS OF OTHER COMPARABLES WHICH ARE NOT CONSIDERED AS COMPARABLE IS NOT PROPER. FURTHER, AT GROSS MARGIN LEVEL MAJOR COST IS COGS IS ADJUSTED ON THE BASIS OF APPELLANTS RESULT THEN GR OSS MARGIN IS ITSELF ADJUSTED THEN THERE IS NO MEANING OF TAKING GROSS MARGIN AS PROFI T LEVEL INDICATOR. ACCORDINGLY, THIS ADJUSTMENT IS REJECTED. (II) ADJUSTMENT ON THE BASIS OF SERVICE INCOME : LD. AR HAS SOUGHT EXCLUSION OF SERVICE INCOME FOR THE COMPUTATION OF GROSS MARGIN FOR ITS TRADING SEGMENT. AS THE SERVICE INCOME IS NOT RELATED TO ATTAIN THE DIRECT SELLING ACTIVITIES. I HAVE PERUSED THE FINANCIALS OF M/S. MODICARE LTD. IT HAS DECLARED SERVICE INCOM E OF RS. 5,47,26,523/- IN ITS PROFIT & LOSS A/S FOR THE FINANCIAL YEAR ENDING 31.03.2010 . I HAVE ALSO PERUSED THE WORKING OF GROSS PROFIT MARGIN COMPUTED BY THE TPO IN ITS S HOW CAUSE. THE TPO HAS COMPUTED GROSS PROFIT MARGIN AT THE RATE OF 73.68% AND WHILE COMPUTING THIS GROSS PROFIT MARGIN THE TPO HAS INCLUDED SERVICE INCOME. FURTHER, AFTER CONSIDERING THE REPLY OF THE APPELLANT GROSS PROFIT MARGIN HAS BEEN REDUCED TO 7 0.33%. I AGREE WITH THE ARGUMENT OF THE LD. AR THAT THE S ERVICE INCOME IS NOT A PART OF DIRECT SALES AND PURCHASE OF THE GOODS, THEREFORE, IT SHOU LD NOT BE INCLUDED WHILE COMPUTING GROSS PROFIT MARGIN. ACCORDINGLY, AO/TPO IS DIRECTE D TO EXCLUDE THE SERVICE INCOME WHILE COMPUTING PLI ON THE BASIS OF GROSS PROFIT 8S AND REDUCE FURTHER IF SUCH ADJUSTMENT EXCEEDS THE LOWERING OF GROSS PROFIT MAR GIN FROM 73.68% TO 70.33%. (III) ADJUSTMENT SOUGHT ON ACCOUNT OF AMP :- THE LD. AR IN HER ARGUMENT HAS ARGUED THAT AMP EXPENDITURE IN THE CASE OF MODI CARE LTD COMPAR ED TO SALES IS 10.06% AND AVERAGE OF SUCH EXPENSE FOR APPELLANT IS VERY LOW. LD. AR HAS NOT GIVEN BREAK UP OF SUCH AMP EXPENSES. I HAVE PERUSED THE FINANCIALS OF M/S. MODI CARE LTD FOR FINANCIAL YEAR ENDING ON 31.03.2010 THE DETAILS OF EXPENSES O THER THAN COST OF GOOD SOLD ARE CONTAIN IN SCHEDULE 15, 16 OF THE AUDIT REPORT WHIC H COMPRISES OF PERSONAL EXPENSE AND OPERATING AND OTHER EXPENSES. SCHEDULE 17 IS TH E FINANCIAL EXPENSES WHICH CANNOT BE SAID TO RELATE TO AMP EXPENSES. IT WOULD BE PROP ER TO REPRODUCED SCHEDULE 15 AND 16 TO UNDERSTAND THE CLAIM OF THE LD. AR FOR AMP EX PENSE. SCHEDULE 15 AND SCHEDULE 16 ARE REPRODUCED AS UNDER:- SCHEDULE 15 PERSONNEL EXPENSES FOR THE YEAR ENDED MARCH 31, 2010 (AMOUNT IN RS.) FOR THE YEAR ENDED MARCH 31, 2009 (AMOUNT IN RS.) SALARIES, WAGES, BONUS ETC. 63,508,585 64,371,816 CONTRIBUTION TO PROVIDENT AND OTHER FUNDS 7,762,369 7,595,193 STAFF WELFARE EXPENSES 7,043,139 4,749,473 TOTAL 78,314,093 76,716,482 SCHEDULE 16 PERSONNEL EXPENSES FOR THE YEAR ENDED MARCH 31, 2010 (AMOUNT IN RS.) FOR THE YEAR ENDED MARCH 31, 2009 (AMOUNT IN RS.) PACKING & OTHER MATERIAL CONSUMED 6,632,667 4,616,088 RENT 13,447,476 13,274,323 POSTAGE & COMMUNICATION EXPENSES 8,677,857 8,246,290 PAGE 14 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT INSURANCE 2,377,921 2,522,786 INSURANCE EMPLOYEES 407,063 389,605 TRAVELLING & CONVEYANCE EXPENSES 16,536,549 21,820,807 LEGAL, PROFESSIONAL & CONSULTANCY CHARGES 8,287,372 7,755,203 REPAIR & MAINTENANCE OTHERS 4,428,456 5,016,559 AUDITORS REMUNERATION - AUDIT FEE 425,000 425,000 TAX AUDIT FEE 75,000 75,000 RATES & TAXES 790,292 800,462 ELECTRICITY & WATER CHARGES 2,326,068 2,208,565 PROVISION FOR DOUBTFUL ADVANCES - 952,220 ADVANCES WRITTEN OFF 3000 855,533 FIXED ASSETS WRITTEN OFF 1,198,152 - LOSS ON DISPOSAL OF FIXED ASSETS 293,194 - - NET OF GAIN RS. 75,430(PREVIOUS YEAR NIL) FRANCHISE EXPENSES 22,499,788 20,308,572 MARKETING & SALES PROMOTION EXPENSES 44,213,293 29,552,604 FREIGHT & CARTAGE 16,711,545 11,637,296 INCENTIVE TO CONSULTANTS 99,338,781 91,171,340 FREIGHT EXCHANGE DIFFERENCE (NET) - 123,971 MISC EXPENSES 6,744,486 5,618,955 TOTAL 255,913,960 227,071,179 A PERUSAL OF THIS SCHEDULE REVEALS THAT THERE ARE NO ITEM APPARENTLY OF ADVERTISEMENT EXPENSES AS SUCH. IN ANY CASE, EXPENSES RELATED TO MARKETING AND SALES PROMOTION EXPENSES EFFECTS NET PROFITABILITY OF THE BUSINESS AND IN MY VIEW THEY DID NOT AFFECT GROSS MARGIN. ACCORDINGLY, NO ADJUSTMENT OF THESE A LLEGED AMP EXPENSES IS ALLOWED WHILE ARRIVING AT GROSS PROFIT MARGIN. (IV) CLAIM OF ADJUSTMENT ON ACCOUNT OF INCENTIVES/D ISCOUNT BETWEEN THE APPELLANT AND M/S MODI CARE LTD.: A PERUSAL TO SCHEDULE. 15 & 16 REPRODUCED AS ABOVE DOES NOT SHOW ANY DISCOUNT ON THE PRODUCT SOLD. M/S. MODI CARE LT D HAS DEBITED RS. 9.93 CRORES UNDER THE HEAD INCENTIVES TO CONSULTANTS. THIS EXPE NSE ITEM IS IN THE NATURE OF AFFECTING THE NET PROFITABILITY AND BELOW THE LINE ITEM FOR COMPUTING GROSS PROFIT MARGIN. ACCORDINGLY, NO ADJUSTMENT IS ALLOWED FOR C OMPUTING GROSS PROFIT MARGIN. OTHER ARGUMENTS OF THE LD.AR ARE THAT M/S. MODI CA RE LTD IS DEBITED FRANCHISEE EXPENSES OF RS. 2.22 CRORES. THEREFORE, M/S. MODI C ARE LTD IS NOT ACTING ON DIRECT SELLING MODEL. I DO NOT AGREE THAT THE ARGUMENT OF THE LD. AR. M/S. MODI CARE LTD IS A MEMBER OF DIRECT SELLING ASSOCIATION OF INDIA (IDSA ). FURTHER, FROM THE WEBSITE NOWHERE IT HAS EMPHASIZED THAT THEY ARE WORKING ON FRANCHISE MODEL. THEREFORE, APPARENTLY THESE FRANCHISE EXPENSE MAY BE IN THE NA TURE OF SOME COMPENSATION TO ITS EMPLOYEE AND AGENT ENGAGED IN DIRECT SELLING. THERE FORE, JUST BECAUSE IN THE ACCOUNT PAGE 15 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT SAME EXPENSE IS TERMED AS FRANCHISES EXPENSE THE BU SINESS MODEL OF M/S. MODI CARE LTD. CANNOT BE SAID TO BE NON-DIRECT SELLING MODEL. ANOTHER ARGUMENT OF THE LD. AR IS THAT THE COSMETI CS SALE OF M/S. MODI CARE LTD. IS ONLY 12.6% AND PERSONAL CARE IS INCLUDED WHICH PERC ENTAGE OF SALES COMES TO 35.87% ONLY. THEREFORE M/S. MODI CARE LTD. IS TRADING IN D IVERSIFIED PRODUCT PORT FOLIOS INCLUDING AGRICULTURAL DATA, JEWELLERY ETC. THE TPO HAS DEALT THIS ISSUE AND HE HAS INCLUDED HOME CARE PRODUCT OF M/S. MODI CARE AND CA ME TO THE CONCLUSION THAT THESE THREE SEGMENTS CONSTRUTE MORE THAN 60% OF TOTAL SAL ES. THE HOME CARE PRODUCT CAN ALSO BE CLASSIFIED SIMILAR TO PERSONAL CARE PRODUCT S. IN VIEW OF THE ABOVE FACTS, I AGREE WITH THE FINDI NG OF THE TPO THAT CONTRIBUTION OF SIMILAR PRODUCT WHICH IS SOLD BY ORIFLAME EXCESS 65 % OF TURNOVER, THEREFORE THE MODI CARE LTD IS GOOD COMPARABLE AS ITS WORKING ON DIREC T SELLING MODEL AND IS HAVING MOSTLY SIMILAR PROFILE OF PRODUCTS. AS A RESULT ALL THESE GROUNDS OF APPEAL ARE DISMISSED EXCEPT ADJUSTMENT ALLOWED ON ACCOUNT OF SERVICES CH ARGES. ----------------------------------------------- ----------------------------------------------- 9.2 DECISION ; I HAVE CONSIDERED THE TRANSFER PRICING ORDER, ASSE SSMENT ORDER, WRITTEN SUBMISSION AND ARGUMENT OF THE LD. AR. LD. AR HAS OPTED FOR TN MM AS ALTERNATIVE METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTION AND HAS CONSIDER AVERAGE NET PLI (OP/OI) 12.7% BEING AVERAGE OF PLI OF JK HELENE CURTIS LTD AND M/S. RAMA VISION LTD AND MODI CARE LTD. I DO NOT AGREE WITH THE ARGUMENTS OF LD. AR. THE APPELLANT IS A TRADER, THEREFORE, THE MOST APPROPRIATE METHOD IS RPM FOR B ENCHMARKING INTERNATIONAL TRANSACTION AND THEREFORE THE PROFIT LEVEL INDICATO R HAS TO BE CONSIDERED AT GROSS PROFIT LEVEL ONLY. ACCORDINGLY, I CONFIRM THE APPRO ACH OF THE TPO FOR BENCHMARKING THE INTERNATIONAL TRANSACTION OF THE APPELLANT ON THE B ASIS OF RPM. HENCE, THIS GROUND OF APPEAL IS DISMISSED. 3.1 THE ARGUMENTS, IT WAS SUBMITTED, WOULD REMAIN T HE SAME FOR EACH OF THE YEARS DESPITE THE DIFFERENCES IN AMOUNTS AND THE MINOR VARIATIONS OF THE NAMES OF THE COMPANIES PROPOSED BY THE TAX PAYER AS PRINCIPALLY THE MOST APPROPRIAT E METHOD; METHODOLOGY; SELECTION OF COMPARABLES AND THE REASONS FOR REJECTING THE OBJEC TIONS OF THE ASSESSEE CONTINUE TO REMAIN THE SAME. 4. COUNTERING THE SUBMISSION OF THE LD. CIT DR, THE LD AR RELYING UPON THE SYNOPSIS FILED, SUBMITTED THAT THE OBJECTIONS HAVE NOT BEEN CONSIDE RED ON FACTS. INVITING ATTENTION TO THE SYNOPSIS FILED FOR 2010-11 ASSESSMENT YEAR, FOLLOWI NG PARAGRAPHS WERE SPECIFICALLY HIGHLIGHTED IN ORDER TO SHOW THAT THE GRIEVANCE OF THE ASSESSEE STILL PERSISTS. GROUNDS OF APPEAL AND REASONING THEREON 8. ARM 'S LENGTH PRICE OF ASSESSEE'S INTERNAT IONAL TRANSACTIONS OF PURCHASE OF FINISHED GOODS HA D BEEN ACCEPTED BY THE CUSTOMS DEPARTMENT AS PER THE SPECI AL VALUATION BOARD ORDER. (PAGE NO.133 OF ITAT PAPERBOOK) - GROUND NO. 5.4 PAGE 16 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT THE SPECIAL VALUATION BOARD ORDER OF THE CUSTOMS AU THORITIES (DATED 8.2.2013 AND VALID TILL 8.2.2016) HAS ACCEPTED THE ARM'S LENGTH PRICE OF THE INTERNATIONA L TRANSACTIONS OF IMPORT OF GOODS BY ORIFLAME INDIA . 9. SELECTING MODICARE LTD AS A SINGLE COMPAR ABLE COMPANY FOR THE ARM'S LENGTH ANALYSIS EVEN THO UGH THIS COMPANY WAS NOT COMPARABLE ON A STANDALONE BAS IS TO THE APPELLANT IN TERMS OF FUNCTIONS, ASSETS AND RISKS ASSUMED AND ITS PRODUCT PROFILE AND BY DI SREGARDING THAT THIS COMPANY WAS A PERSISTENT LOSS MAKING COMPANY (PAGE NO. 114-125 OF ITAT PAPERBOOK} - GROUND NO. 5.2 AS PER RULE 10B(3) OF THE INCOME TAX RULES 1962, RE ASONABLY ACCURATE ADJUSTMENTS NEED TO BE MADE TO ENHANCE THE COMPARABILITY. ALSO, AS PER 3.51 OF OEC D GUIDELINES 2010, IF REASONABLY ACCURATE ADJUSTMEN TS CANNOT BE MADE THEN THE COMPARABLE NEEDS TO BE REJE CTED. HENCE, IN VIEW OF THE SIGNIFICANT DIFFERENCES IN THE PRODUCT PROFILE, FUNCTIONAL PROFILE AND ACCO UNTING DIFFERENCES BETWEEN MODICARE LTD. AND ORIFLA ME INDIA IT IS NOT POSSIBLE TO MAKE REASONABLE ACCURAT E ADJUSTMENTS SPECIALLY AS MODICARE LTD. HAS A DIVERSIFIED PRODUCT PROFILE AND PRODUCT SEGMENTAL A RE NOT AVAILABLE, MODICARE LTD. SHOULD BE REJECTED. 9.1 DIVERSIFIED PRODUCT PORTFOLIO (PLEASE REFER TO PAGE 54 - 55 OF THE ANNUAL REPORT FOR FY 2010-11 ) COSMETICS COMPRISED ONLY 15.68% OF THE TOTAL PRODUC T PORTFOLIO OF MODICARE LTD. EVEN IF PERSONAL CARE IS AGGREGATED WITH COSMETICS, THEN ALSO THE TOTAL SHAR E OF THESE TWO CATEGORIES IS ONLY 37.57%. THEREFORE 62.43% SHARE COMPRISES AS DIVERSE PRODUCTS LIKE AUT O CARE, AGRICULTURAL PRODUCTS, TEA, JEWELLERY, HEALTHCARE, ETC. (PLEASE REFER TO PAGE 54-55 OF THE ANNUAL REPORT FOR FY 2010-1 1) (PAGE NO. 114- 115 OF ITAT PAPERBOOK) IT MAY BE NOTED THAT ORIFLAME INDIA DOES NOT DEAL I N ANY OF THESE PRODUCT CATEGORIES. (PAGE NO. 115 OF ITAT PAPERBOOK) DIFFERENT PRODUCT ITEMS WOULD INVOLVE DIFFERENT LEV EL OF ASSETS, RISKS AND MARKETS AND ACCORDINGLY THI S COMPANY CANNOT BE SELECTED AS A STANDALONE COMPARAB LE ON A GROSS BASIS UNDER RPM. TABLE NO. 2: DIVERSIFIED PRODUCT PORTFOLIO AS PER A NNUAL REPORT OF MODICARE LTD. S.NO. PRODUCTS SALES (INR) % OF THE TOTAL PRODUCT TURNOVER 1. LAUNDRY & HOME CARE 78,765,810 14.34% 2. PERSONAL CARE 120,292,729 21.89% 3. AGRICULTURE 79,718,481 14.51% 4. TEA 8,045,875 1.46% 5. JEWELLERY 53,766,590 9.79% 6. COSMETICS 86,129,350 15.68% 7. HEALTHCARE 88,886,747 16.18% 8. OTHERS 33,819,599 6.16% TOTAL 549,425,182 CASE LAWS RELIED UPON: M/S CARLYLE INDIA ADVISORS P VT. LTD. VS. DCIT (ITA NO. 7367/ MUM/2012) (PAGE 9. PARA 12): HONBLE MUMBAI CIT REJECTED A CO MPARABLE MOTILAL OSWAL INVESTMENT ADVISORS PVT LTD WITH AN EXTREME OP MARGIN OF 72.33% FROM THE FINAL SET OF COMPARABLES SELECTED BY THE LD. TPO SINCE I T WAS ENGAGED IN DIVERSIFIED ACTIVITIES AND SEGMENTAL WAS NOT AVAILABLE. 9.2. DIVERSE FUNCTIONAL PROFILE (PLEASE REFER TO PAGE 35 OF THE ANNUAL REPORT FOR F Y 2010-11) MODICARE LTD. RECOGNIZES SERVICE INCOME IN ITS PROF IT AND LOSS ACCOUNT TO THE EXTENT OF 9.66% OF ITS T OTAL REVENUE (INCLUDING SERVICE INCOME). THIS AS PER ITS ANNUAL REPORT IS IN THE NATURE OF AMC INCOME AND OTHER SERVICE INCOME ON THE BASIS OF THE AGREEMENT. THIS SERVICE INCOME CLEARLY SHOWS THAT THE REVENUE S ARE NOT ONLY FROM RESELLING ACTIVITY. HENCE, AS IT HAS BUSINESSES APART FROM DIRECT SELLING MODICARE L TD. SHOULD NOT BE CONSIDERED AS A COMPARABLE, ESPECIALL Y ON A STANDALONE BASIS. FURTHER, THE LD. TPO IN THE FY 2009-10, FY 2010-11 AND FY 2011-12 HAS ADMITTED THAT MODICARE LTD RECOGNIZES SERVICE INCOME IN ITS PROFIT & LOSS ACCO UNT AND HAS ACCORDINGLY REMOVED SERVICE INCOME FROM THE COMPUTATION OF MARGINS. HENCE, THE LD. TPO HAS ACCEPTED THAT MODICARE LTD IS NOT COMPARABLE TO THE APPELLANT. HOWEVER THIS ADJUSTMENT IS NOT APPROPRIA TE AS SEGMENTAL INFORMATION FOR MODICARE LTD IS NOT AVAILABLE. PAGE 17 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT 9.3 FLUCTUATING SALES MODICARE LTD. HAS HIGHLY FLUCTUATING SALES WHILE TH E APPELLANT HAS A CONSISTENT INCREASING TREND. THE INTENSIVE FLUCTUATION IN SALES FOR MODICARE LTD SHO WS THAT IT IS ASSUMING SIGNIFICANT BUSINESS AND MAR KER RISKS WHILE THE SAME IS NOT THE CASE FOR THE APPELL ANT. (PAGE NO. 115-116 OF ITAT PAPERBOOK) TABLE 3: SALES TREND OF ORIFLAME INDIA VIS-A-VIS M ODICARE LIMITED (INR) SALES ORIFLAME INDIA YEAR ON YEAR CHANGE MODICARE LIMITED YEAR ON YEAR CHANGE FY 2006 - 07 656,303,028 - 344,886,627 - FY 2007 - 08 968,658,047 47.59% 363,303,749 5.34% FY 2008 - 09 1,355,759,156 39.96% 298,286,306 - 17.90% FY 2009 - 10 1,930,328,718 42.38% 439,442,705 47.32% 9.5 DIFFERENTIAL TREATMENT OF EXPENSES INCURRED ON INCENTIVES/ DISCOUNTS BETWEEN THE APPELLANT AND MODICARE LIMITED (PLEASE REFER TO PAGE 86 OF THE ANNUAL REPORT FOR F Y 2010-11, PAGE 122-124 OF ITAT PAPERBOOK) ORIFLAME INDIA SHOWS THE SALES NET OF INCENTIVES AN D HENCE SHOWS A LOWER GROSS MARGIN AS PER ITS ACCOUNTING TREATMENT. THE REVENUE RECOGNITION POLIC Y OF THE APPELLANT IS SHOWN AT PAGE NO 339 OF THE ITAT PAPERBOOK). THE AMOUNT SHOWN AS DISCOUNT IS CA TEGORIZED AS INCENTIVES BY MODICARE LIMITED. ACCORDINGLY, IT IS SHOWN AS BELOW THE LINE IN PROFI T & LOSS ACCOUNT AS A PART OF OPERATING EXPENSES. T HE APPELLANT OVER AND ABOVE THE DISCOUNT PAYS INCENTIV E TO THE TUNE OF INR 3,974,543 (PAGE 337 OF ITAT PAPERBOOK). THEREFORE IT IS IMPROPER TO COMPARE THE GROSS MARGINS OF MEDICARE LIMITED WITH THE APPELLANT. TABLE 5: DISCOUNTS/ INCENTIVES SHOWN IN OPERATING EXPENSE PARTICULARS ORIFLAME INDIA (INR) MODICARE LIMITED (INR) RAMA VISION LTD. (INR) J K HELENE CURTIS LTD. (INR LAKHS) INCENTIVES/DISCOUNT 3,974,543 110,428,823 2,126,923 91.40 INCENTIVES/DISCOUNT/TOTAL OPERATING COST % 0.18% 18.21% 1.26% 0.58% WITHOUT PREJUDICE, FOR AN APPLE TO APPLE COMPARISON ECONOMIC COMPARABILITY ADJUSTMENTS HAVE TO BE UNDERTAKEN TO COMPUTE THE PLI FOR THIS COMPANY TO A CCOUNT FOR THE SIGNIFICANT DISSIMILARITIES IN THE FUNCTION AND REVENUE STREAMS, BETWEEN MODICARE LTD. AND THE APPELLANT. HENCE SALES OF MODICARE LTD SHOULD BE REDUCED BY THE AMOUNT OF INCENTIVES PAID AS APPEARING IN OPERATING EXPENSES IN ITS FINANCIAL S SINCE FOR AN 'APPLE TO APPLE' COMPARISON WITH THE A PPELLANT AND OTHER COMPARABLES ACCEPTABLE TO THE APPELLANT, SO AS TO KEEP THE ACCOUNTING TREATMENT S IMILAR (PAGE NO. 123 OF ITAT PAPERBOOK). THE REVISE D GP/ SALES OF MODICARE LIMITED WOULD BE 48%. 9.6 MEDICARE LTD, HAS SUBSTANTIAL VARIATION BETWEEN GROSS MARGIN AND NET MARGIN THE APPELLANT WOULD LIKE TO STATE THAT MODICARE LTD HAS A GROSS MARGIN OF 66.77% (AS PER LD. TPO) WHEREAS, ITS NET MARGINS ARE -9.94%. THE SUBSTANTI AL VARIANCE IN THE GROSS AND NET LEVEL MARGINS ESTABLISHES THE FACT THAT THE COMPANY IS INCURRING HEAVY OPERATING EXPENSES, WHICH SUBSTANTIATES HEAV Y, FUNCTIONS AT THE OPERATING LEVEL THAT ARE NOT COMPA RABLE TO ORIFLAME INDIA. THIS GIVES SUPPORT TO THE ARGUMENT THAT MODICARE LTD, IS NOT JUST A DIRECT MA RKETER AND RESELLER. ORIFLAME INDIA ON THE OTHER H AND DOES NOT UNDERTAKE VALUE ADDITION FUNCTIONS. (PAGE NO. 117 OF ITAT PAPERBOOK) 9.8 SIGNIFICANT ADVERTISING MARKETING AND PR OMOTION (AMP) SPEND (PLEASE REFER TO PAGE 86 OF THE ANNUAL REPORT FOR F Y 2010-1 1) MODICARE LTD. HAS SIGNIFICANT AMP/SALES OF 10.41% A S COMPARED TO ORIFLAME INDIA WHICH IS ONLY 0.85%. THIS CLEARLY SHOWS THAT THIS COMPANY HAS SIGNIFICAN TLY DIFFERENT FUNCTIONS AS COMPARED TO THE APPELLAN T AND IS BEING REMUNERATED ON A PREMIUM PRICING. (PAG E NO. 121 -122 OF 1TAT PAPERBOOK). AN ECONOMIC ADJUSTMENT FOR THE SAME SHOULD BE CARRIED OUT FOR A N APPLE COMPARISON. THE REVISED GP/ SALES POST THE SAID ADJUSTMENT WOULD BE 62.02%. 9.9 FRANCHISE BUSINESS MODEL MODICARE LTD. IN ITS ANNUAL REPORT FOR FY 2010-11, HAS RECORDED FRANCHISEE EXPENSES OF INR 26,914,881 WHICH IS 4.44% OF TOTAL OPERATING EXPENSES. IN THIS REGARD, MODICARE LID. IS OPERATING AS A FRANCHISE BUSINESS AND IS NOT WHOLLY A DIRECT SELLER (PAGE NO . 120 OF ITAT PAPERBOOK) 9.10 DIFFERENCE IN COGS RATIO AND VAE RATIO PAGE 18 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT THE TOTAL COGS, AS PER THE FINANCIAL STATEMENTS, FO R MODICARE LTD IS ONLY 28.61% OF ITS TOTAL OPERATIN G COSTS. ITS VALUE ADDED EXPENSES ('VAE')/ OPERATING EXPENSES (OTHER THAN COGS) ARE 71.39% OF TOTAL COST S. THIS IS UNLIKE A TRADING COMPANY WHERE COGS SHOULD BE THE DOMINANT COMPONENT OF TOTAL COSTS. AS CAN ALSO BE SEEN FROM THE FINANCIALS OF ORIFLAME INDIA, ITS COGS AS A PERCENTAGE OF ITS TOTAL OPERATING CO ST IS 50.06% AS IS THE CASE THAT SHOULD BE WITH A DISTRIB UTOR. HENCE, THE COST PROFILE OF MODICARE LIMITED I S NOT SIMILAR TO THE APPELLANT. (PAGE NO. 118 OF ITAT PAP ERBOOK) TABLE 6: COMPARISON OF COST PROFILE OF MODICARE LIM ITED WITH OTHER DISTRIBUTORS FY 2010-11 PARTICULARS COGS/TOTAL COST% OTHER EXPENSES (EXCLUDING COGS/TOTAL COST%) ORIFLAME INDI A 50.06% 49.94% MODICARE LIMITED 28.61% 71.39% J K.HELENE CURTIS LIMITED 54.01% 45.99% RAMA VISION LTD. 71.3% 28.65% FROM THE ABOVE TABLE, IT CAN BE INFERRED THAT EITHE R: I. MODICARE LTD IS NOT ACTING AS A RESELLER A S IT UNDERTAKES SUBSTANTIAL VALUE ADDED EXPENSES OR II. IT HAS RECORDED SOME OF THE COGS RELATED EXPENSE ITEMS AS PART OF OPERATING EXPENSES AN ECONOMIC ADJUSTMENT FOR DIFFERENCES IN THE COST PROFILE OF MODICARE LTD, AND THE APPELLANT SHOULD B E CARRIED OUT. THIS ADJUSTMENT HAS BEEN COMPUTED BY B RINGING THE VAE OF MODICARE LIMITED TO THE LEVEL OF VAE OF THE INDEPENDENT DISTRIBUTORS OF COSMETICS. A S CAN BE SEEN FROM THE ANALYSIS BELOW THE RATIO OF COGS TO VAE IN CASE OF A TRADER IS 60:40 APPROXIMAT ELY. MODICARE LIMITED IS INCURRING HEAVY EXPENDITUR E AT THE OPERATING LEVEL FOR INSTANCE ITS FREIGHT OUT WARD EXPENSES, INCENTIVES AND FRANCHISEE EXPENSES A RE VERY HIGH IN PROPORTION TO THE PURCHASE COST THAT I T IS INCURRING. IF THE VAE ADJUSTMENT IS CARRIED OUT THEN THE GROSS MARGIN OF MODICARE LTD. IS25.02% (PAGE NO. 119 OF ITAT PAPERBOOK) 16 THE COMPANIES CHOSEN BY THE APPELLANT IN THE TP DOCUMENTATION/ FRESH SEARCH ARE COMPARABLE TO THE APPELLANT IN TERMS OF THEIR PRODUCTS, FUNCTIONS , ASSETS AND RISKS AND SHOULD BE CONSIDERED WHILE COMPUTING THE ARM'S LENGTH MARGIN. 17 IF THESE COMPANIES ARE CONSIDERED, THEN THE RESULTS OF THE BENCHMARKING ANALYSIS WOULD BE: (PAGE NO. 113 OF ITAT PAPERBOOK) TABLE NO. 9: GP/SALES MARGINS OF COMPARABLES ENGAGE D IN TRADING OF COSMETIC PRODUCTS S.NO. NAME OF THE COMPANY GP/SALES FY 2010 - 11 1. J K HELENE CURTIS LTD. 52.05% 2. RAMA VISION LTD. 30.61% AVERAGE 41.33% ORIFLAME INDIAS MARGIN 48.72% 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. BEFORE WE PROCEED TO ADJUDICATE UPON THE ISSUES ARI SING IN THE PRESENT APPEAL, IT IS APPROPRIATE TO FIRST REFER TO CERTAIN RELEVANT FACT S. ORIFLAME INDIA PRIVATE LIMITED IS A SUBSIDIARY OF ORIFLAME INVESTMENTS LTD., MAURITIUS AND THE ULTIMATE HOLDING COMPANY IS ORIFLAME COSMETICS S.A. LUXEMBURG. THE ASSESSEE IS STATED TO BE PRIMARILY ENGAGED IN DISTRIBUTION AND SALE OF COSMETIC PRODUCTS AND DOES NOT UNDERTAKE ANY VALUE ADDITION ACTIVITIES. IT ALSO DOES NOT OWN ANY VALUABLE NON-R OUTINE INTANGIBLES AND DEPLOYS ONLY ROUTINE TANGIBLE ASSETS LIKE COMPUTERS, OFFICE EQUIPMENT, F URNITURE AND FITTINGS ETC. FOR ITS OPERATIONS. PAGE 19 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT ACCORDINGLY, THE ASSESSEE DESCRIBED ITSELF AS A ROU TINE DISTRIBUTOR, WHO IS ASSUMING ALL NORMAL BUSINESS RISKS LIKE MARKET RISK, PRICE RISK, CUSTOMER CREDIT RISK, PRODUCT LIABILITY RISK, FOREIGN EXCHANGE RISK ETC. IT UNDERTOOK 6 INTERNATI ONAL TRANSACTIONS IN THE YEAR UNDER CONSIDERATION WITH ITS ASSOCIATED ENTERPRISE, THE D ISPUTE IN THE PRESENT PROCEEDINGS AND IN THE OTHER TWO YEARS, REVOLVES AROUND ONLY THE INTER NATIONAL TRANSACTION PERTAINING TO PURCHASE OF FINISHED COSMETIC GOODS . THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE TAXPAYER IN 2009-10 ASSESSMENT YEAR ARE SUMMARISED HEREUNDER:- NO. NATURE OF TRANSACTION METHOD VALUE OF TRANSACTI ON 1. PURCHASE OF FINISHED COSMETICS GOODS RPM 41,84,39,934 2. SALE OF FINISHED COSMETIC PRODUCTS 3,76,715 3. USE OF CATALOGUE SERVICES IN THE NATURE OF DRAWING AND DESIGN FOR PRODUCTS 1,34,58,598 4. RECEIPT OF SERVICES 3,00,35,592 5. COST REIMBURSEMENTS PAID 1,57,57,891 6. COST REIMBURSEMENTS RECEIVED 1,24,744 5.1. IT IS A MATTER OF RECORD THAT THE TAXPAYER IN THE YEAR UNDER CONSIDERATION SELECTED RESALE PRICE METHOD (HEREINAFTER REFERRED TO AS RP M) AS THE MOST APPROPRIATE METHOD SELECTING GROSS PROFIT / SALES AS THE PROFIT LEVEL INDICATOR (HEREINAFTER REFERRED TO AS PLI). CONSIDERING THE ADJUSTED AVERAGE 3 YEARS MARGIN OF AVON BEAUTY PRODUCTS INDIA PRIVATE LIMITED; BODYLINE INTERNATIONAL PRIVATE LIMITED; JK HELENE CURTIS LTD; PARAMOUNT COSMETICS (INDIA) PRIVATE LIMITED AND SURYA VINAYAK INDUSTRIE S LTD IN 2009-10 ASSESSMENT YEARS, IT WAS CONCLUDED THAT COMPARED TO THE UNADJUSTED AVERAGE M ARGIN OF 3 YEARS AS 29.95%, THE TAX PAYERS MARGIN OF 45.58% DID NOT WARRANT ANY ADJUST MENT AS THE TRANSACTION WAS ADMITTEDLY AT ARMS LENGTH. IT HAS ALSO BEEN ARGUED THAT THE P LI OF 2010-11 ASSESSMENT YEAR WAS 46.79% AND IN 2011-12 ASSESSMENT YEAR IT WAS 48.72% , WHICH WAS MUCH HIGHER THAN THAT OF THE COMPARABLES. ON THE BASIS OF THESE FACTS, IT WA S CLAIMED THAT THE TRANSACTIONS WITH ITS AE OVER THE YEARS WERE AT ARMS LENGTH. SINCE THE UNAD JUSTED AVERAGE MARGIN OF 3 YEARS WAS NOT ACCEPTED BY THE TPO, THE TAXPAYER WAS REQUIRED TO C ARRY OUT A FRESH SEARCH OF THE COMPARABLE COMPANIES FOR THE RESPECTIVE YEARS, EVEN THEN THE GP MARGINS WERE 36.62%; 29.70% AND 37.47% RESPECTIVELY AND IT WAS AGAIN CLA IMED THAT NO ADJUSTMENT WAS PAGE 20 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT WARRANTED. IT HAS ALSO BEEN ARGUED BEFORE THE TAX A UTHORITIES AND REPEATED BEFORE US THAT THE GROSS MARGINS OF THE ASSESSEE HAVE REMAINED HEALTHY AND CONSISTENT OVER THE YEARS. 5.2 IT HAS ALSO BEEN ARGUED BY THE LD AR THAT IDENT ICAL INTERNATIONAL TRANSACTIONS OF THE ASSESSEE IN THE IMMEDIATELY PRECEDING TWO ASSESSMEN T YEARS NAMELY 2007 08 AND 2008 09 ASSESSMENT YEARS SIMILARLY CLAIMED AND SUPPORTED BY IDENTICAL DOCUMENTATION AND METHODOLOGY AFTER DETAILED TP SCRUTINY AND ANALYSIS AND MANY ROUNDS OF DISCUSSION HAVE BEEN ACCEPTED TO BE AT ARMS LENGTH BY THE TAX AUTH ORITIES. THUS IN THE ABSENCE OF ANY CHANGE EITHER IN THE FAR PROFILE OF THE ASSESSEE OR OF THE COMPARABLES SELECTED OR THE METHOD OF TP REPORT DOCUMENTATION ADOPTED OR THE BE NCHMARKING METHODOLOGY, THE REJECTION OF THE TAX PAYERS COMPARABLES HAS BEEN ASSAILED ON THE GROUNDS OF BEING ARBITRARY AND IGNORING RULE OF CONSISTENCY AS THE SAME IS COMPARA BLE TO THE IMMEDIATELY PRECEDING ASSESSMENT YEARS. 5.3 WE FIND THAT IN THE FACE OF THE GIVEN FACTS WHE RE ADMITTEDLY THERE IS NO DISPUTE ON THE SELECTION OF MOST APPROPRIATE METHOD, THE WITHOUT P REJUDICE PRAYER OF THE LD. AR FOR A DIRECTION THAT TNMM MAY BE DIRECTED TO BE SELECTED AS THE MAM, HAS TO BE REJECTED. WHILE SO HOLDING WE MAKE IT CLEAR THAT THIS CONCLUSION IS SPECIFIC TO THE FACTS OF THE PRESENT THREE YEARS AND IS NOT A CONCLUSION THAT NEED NECESSARILY BIND THE PARTIES IN THE SUBSEQUENT YEARS AS FIRSTLY THE ISSUE DOES NOT ARISE IN THE PRESENT APPEALS AND THUS IS ACADEMIC IN NATURE. SECONDLY SINCE THE PARTIES WERE NOT REQUIRED TO ADD RESS THE SAME AND THUS THE ISSUE IS LEFT OPEN AS WITHOUT A PROPER REPRESENTATION ON THE SAME BY BOTH THE PARTIES IT CANNOT BE DECIDED. HAVING SO HELD, WE RECORD THAT ALTHOUGH WE HAVE DELIBERATED ON THE MERITS AND DEMERITS OF THE MOST APPROPRIATE METHOD IN PASSING AND ARE CONSCIOUS OF THE FACT THAT TNMM AS A METHOD IS MORE TOLERANT TO MINOR FUNCTIONAL AN D PRODUCT VARIATION AND THUS TOLERATES A HIGHER LEVEL OF DEVIATION IN THE COMPARABLES SELECT ED AND IS ALSO A MORE RELIABLE METHOD WHERE DATA MAY NOT BE VERY ROBUST. HOWEVER, SINCE I N THE FACTS OF THE PRESENT CASE THE TAX PAYER HAS CONSISTENTLY PROPOSED RPM AS THE MOST APP ROPRIATE METHOD AND THIS METHOD HAS BEEN ACCEPTED BY THE TPO, THE OCCASION TO COMMENT U PON AND PROCEED TO DECIDE THE PAGE 21 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT METHOD IN THE ABSENCE OF A DISPUTE EVEN ON AN ORAL REQUEST OF THE LD. AR HAS TO BE REJECTED. WE ALSO NOTE THAT RPM IS ONE OF THE TRADITIONAL MET HODS AND IS IDEALLY THE BEST SUITED METHOD TO A CASE LIKE THE PRESENT CASE WHERE ADMITTEDLY NO VALUE ADDED SERVICES ARE PERFORMED BY THE TAXPAYER. THE FUNCTION PERFORMED IS THAT OF A R OUTINE LOW-RISK DISTRIBUTOR. THE PRODUCT IS DIRECTLY PURCHASED FROM THE FOREIGN AE AND RESOLD A T A SPECIFIC PRICE AS PER THE SALE POLICY OF THE FOREIGN AE. WE, THUS, DO NOT DEEM IT APPROPRIAT E TO ADDRESS THE ISSUE AS WE FIND THAT THE SELECTION OF THE MOST APPROPRIATE METHOD IS AN ACCE PTED FACT AS THE METHOD ADOPTED BY THE ASSESSEE HAS BEEN ACCEPTED BY THE TPO. IT GOES WITH OUT SAYING THAT THE PRODUCT WHICH IS PURCHASED BY THE ASSESSEE ADMITTEDLY FALLS IN THE C ATEGORY OF COSMETIC AND PERSONAL CARE . THE PRODUCT IS STATED TO BE COMPETING IN A HIGHLY C OMPETITIVE SOCIO ECONOMIC MARKET SEGMENT IN THE COUNTRY WITH MANY DOMESTIC AND INTER NATIONAL PLAYERS COMPETING FOR ATTENTION IN THE LIMITED SEGMENT. THE ASSETS STATED TO BE EMP LOYED BY THE TAXPAYER ARE ROUTINE ASSETS LIKE COMPUTERS, OFFICE PARAPHERNALIA ETC. QUA THE R ISKS ALSO THE TAXPAYER IS STATED TO BE REASONABLY CUSHIONED AS THE MARKET RISK; CAPITAL RI SK ETC. ARE RISKS BORNE BY THE FOREIGN AE. THE TAXPAYER IS STATED TO BE EXPOSED TO NORMAL INVE NTORY RISK AND LIMITED CREDIT RISK. WE FIND THAT THE TAX AUTHORITIES HAVE NOTED IN PASSING THAT THE RISK OF UNSOLD INVENTORY IS ENTIRELY BORNE BY THE TAXPAYER. WE FIND THAT SUCH AN OBSERVA TION WITHOUT ADDRESSING THE SALE POLICIES OF UNSOLD INVENTORY OF THE FOREIGN AE CANNOT BE OF ANY RELEVANCE. ACCORDINGLY IF INVENTORY RISK IS TO BE INFERRED AS A NEGATIVE IN FAVOUR OF THE AS SESSEE THEN THE SPECIFIC CONTRACTUAL AGREEMENTS AND THE COST/PRICING POLICIES OF UNSOLD INVENTORY, ALSO WILL NEED TO BE NECESSARILY ADDRESSED. WE FIND THAT THE TAXPAYER HAS CONSISTENT LY IN ALL THE THREE YEARS NAMELY TWO YEARS BEFORE THE DRP I.E. IN 2009-10 AND 2011-12 ASSESSME NT YEAR HAS TAKEN OBJECTIONS TO THE SELECTION OF MODI CARE LTD. AS A STAND-ALONE COMPAR ABLE ON MULTIPLE GROUNDS. THESE ARGUMENTS AND OBJECTIONS HAVE ALREADY BEEN BROUGHT OUT IN DETAIL IN THE EARLIER PART OF THIS ORDER. WE ALSO NOTE THAT THE TAXPAYER IN 201011 AS SESSMENT YEAR HAS AVAILED OF THE APPELLATE FORUM BY FILING AN APPEAL BEFORE THE CIT( A) WHEREIN AGAIN SIMILAR OBJECTIONS AS POSED BEFORE THE DRP HAVE BEEN RAISED BY THE TAXPAY ER. PAGE 22 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT 5.4 BEFORE WE ADDRESS THE AFORESAID SUBMISSIONS, WE DEEM IT APPROPRIATE TO FIRST EXTRACT THE SPECIFIC RULE WHICH IS REQUIRED TO BE CONSIDERE D AS THE TAX PAYER HAS TAKEN SHELTER UNDER THE RULE TO SUPPORT ITS PRAYERS. FOR THE PURPOSES O F SUB-SECTION (2) OF SECTION 92C, RULE 10 B (1) OF THE INCOME TAX RULES, 1962 SETS OUT THAT THE ARMS LENGTH PRICE SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS BEING THE MOST APPROPR IATE METHOD. AS NOTED IN THE FACTS OF THE PRESENT CASE THERE IS NO DISPUTE ON THE SELECTION O F MOST APPROPRIATE METHOD. WHEREAS CLAUSE (A) OF SUB CLAUSE (1) OF RULE 10B TALKS OF C UP METHOD CLAUSE (B) OF THE SAID SUB CLAUSE WITH WHICH WE ARE CONCERNED IN THE PRESENT P ROCEEDINGS SETS OUT THE REQUIREMENTS OF RPM. 5.5 FOR READY REFERENCE THE RELEVANT RULE IS REPROD UCED HEREUNDER:- DETERMINATION OF ARM'S LENGTH PRICE UNDER SECTION 9 2C . 10B . (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SECTION 92C, THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION 55A [ OR A SPECIFIED DOMESTIC TRANSACTION ] SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHOD S, BEING THE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER, NAMELY : (A ) COMPARABLE UNCONTROLLED PRICE METHOD, BY WHICH, (I) XXXXXXXXXXXXXXXXXX (II) XXXXXXXXXXXXXXXXXX (III) XXXXXXXXXXXXXXXXXXX (B) RESALE PRICE METHOD, BY WHICH, (I) THE PRICE AT WHICH PROPERTY PURCHASED OR SERVICES O BTAINED BY THE ENTERPRISE FROM AN ASSOCIATED ENTERPRISE IS RESOLD OR ARE PROVIDED TO AN UNRELATED ENTERPRISE, IS IDENTIFIED; (II) SUCH RESALE PRICE IS REDUCED BY THE AMOUNT OF A NOR MAL GROSS PROFIT MARGIN ACCRUING TO THE ENTERPRISE OR TO AN UNRELATED ENTER PRISE FROM THE PURCHASE AND RESALE OF THE SAME OR SIMILAR PROPERTY OR FROM OBTAINING AND PROVIDING THE SAME OR SIMILAR SERVICES, IN A COMPARABLE UNCON TROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS; (III) THE PRICE SO ARRIVED AT IS FURTHER REDUCED BY THE E XPENSES INCURRED BY THE ENTERPRISE IN CONNECTION WITH THE PURCHASE OF PROPE RTY OR OBTAINING OF SERVICES; (IV) THE PRICE SO ARRIVED AT IS ADJUSTED TO TAKE INTO AC COUNT THE FUNCTIONAL AND OTHER DIFFERENCES, INCLUDING DIFFERENCES IN ACCOUNT ING PRACTICES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION 55A [ OR THE SPECIFIED DOMESTIC TRANSACTION ] AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR B ETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF GROSS PROFIT MARGIN IN THE OPEN MARKE T; (V) THE ADJUSTED PRICE ARRIVED AT UNDER SUB-CLAUSE (IV) IS TAKEN TO BE AN ARM'S LENGTH PRICE IN RESPECT OF THE PURCHASE OF THE PROP ERTY OR OBTAINING OF THE SERVICES BY THE ENTERPRISE FROM THE ASSOCIATED ENTE RPRISE. PAGE 23 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT 5.6. ON A PERUSAL OF THE ABOVE, WE NOTE THAT THE LEGISLA TURE ENVISAGES IN ITS WISDOM IN SUB-CLAUSE (II) OF CLAUSE (B) OF SUB-RULE (1) OF RU LE 10B THAT THE COMPARISON WOULD BE WITH THE RESALE OF THE SAME OR SIMILAR PROPERTY AND ALSO ENVISAGES A COMPARISON WITH A COMPANY PROVIDING THE SAME OR SIMILAR SERVICES . SUB CLAUSE (IV) OF CLAUSE (B) OF SUB- RULE(1) OF RULE 10B FURTHER NECESSITATES THAT THE P RICE SO ARRIVED AT IS TO BE ADJUSTED TO TAKE IT INTO ACCOUNT THE FUNCTIONAL AND OTHER DIFFERENCE S INCLUDING DIFFERENCES IN ACCOUNTING PRACTICES WHICH COULD MATERIALLY AFFECT THE AMOUN T OF GROSS PROFIT MARGIN IN THE OPEN MARKET. ACCORDINGLY LOOKING AT THE REQUIREMENTS OF THE ACT AS SET OUT IN THE RULES, WE FIND THAT THE GRIEVANCE OF THE TAXPAYER HAS ADMITTE DLY NEITHER BEEN ADDRESSED BY THE DRP IN THE TWO YEARS NOR BY THE CIT(A) IN THE RESPECTIVE Y EARS. A FURTHER PERUSAL OF SUB-RULE (2) OF RULE 10B OF THE I.T. RULES, 1962 THROWS LIGHT ON TH E ASPECT THAT COMPARABILITY OF INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION FOR TH E PURPOSES OF SUB-RULE (1) SHALL BE JUDGED WITH REFERENCE TO THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED; THE FUNCTIONS PERFORMED , TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED , BY THE RESPECTIVE PARTIES; CONTRACTUAL TERMS (WHE THER OR NOT SUCH TERMS ARE FORMAL OR IN WRITING), WHICH LAY DOWN EXPLICITLY OR IMPLICITLY HOW THE RESPONSIBILITIES , RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES; CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE R ESPECTED PARTIES TO THE TRANSACTIONS OPERATE ETC. THUS IT IS UNAMBIGUOUSLY MADE CLEAR BY SUB-RUL E (2) OF RULE 10B THAT THERE SHOULD BE A FAR COMPARABILITY AND THE DEGREE OF COMPARABILITY I S INSISTED UPON TO THE EXTENT THAT IT IS LIKELY TO A MATERIALLY EFFECT THE PRICE OR COST CHARGED OR PAID IN OR THE PROFIT ARISING FROM SUCH TRANSACTIONS OR REASONABLE ACCURATE ADJUSTMENTS CAN BE MADE TO ELIM INATE THE MATERIAL FACTS OF SUCH DIFFERENCES. 5.7 FOR READY REFERENCES WE ALSO REPRODUCE SUB-RULE (2) AND (3) OF RULE 10B OF THE IT RULES, 1962:- 10B(2) FOR THE PURPOSES OF SUB-RULE (1), THE COMPAR ABILITY OF AN INTERNATIONAL TRANSACTION [OR A SPECIFIED DOMESTIC TRANSACTION] WITH AN UNCONTROL LED TRANSACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING; NAMELY:- PAGE 24 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT (A) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY T RANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; (B) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT A SSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RESPECTIVE P ARTIES TO THE TRANSACTIONS; (C) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TER MS ARE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLICITL Y HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE P ARTIES TO THE TRANSACTIONS; (D) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LO CATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOU R AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITI ON AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIN. 10B(3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARA BLE TO AN INTERNATIONAL TRANSACTION [OR A SPECIFIED DOMESTIC TRANSACTION] IF- (I) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE T RANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACT IONS ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN THE OPEN MARKET; OR (II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE T O ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. 5.8 THUS WHEN CONSIDERED IN THE LIGHT OF THE AFORES AID STATUTORY RULES, WE FIND THAT THE TAX AUTHORITIES WHILE CONSIDERING THE GRIEVANCE OF THE TAX PAYER ADMITTEDLY HAVE TAKEN A POSITION CONTRARY TO WHAT HAS BEEN ENVISAGED UNDER THE RULES . 5.9. HAVING SO ADDRESSED, WE FIND THAT OVER THE YEA RS PRIMARILY THE TAXPAYER HAS RAISED THE ISSUE THAT MODI CARE LTD. AS A STAND-ALONE COMPARAB LE WAS IDEALLY NOT AN APPROPRIATE COMPARABLE AND HAS ALSO CANVASSED THAT THE COMPARAB LES SELECTED BY THE TAXPAYER HAVE WRONGLY BEEN REJECTED BY THE TAX AUTHORITIES. ONE O F THE MANY LINES OF ARGUMENTS TAKEN BY THE TAXPAYER IS THAT FIRSTLY MODI CARE LTD. HAS A V ERY LIMITED COSMETIC AND PERSONAL CARE PRODUCT CATEGORY THUS IT LACKS PRODUCT SIMILARITY; SECONDLY IT ALSO HAS INCOME FROM FRANCHISEES, HENCE IT IS NOT A SIMILAR SERVICE; THI RDLY ITS DISCOUNTS ARE BELOW THE LINE EXPENSE AND REVENUE RECOGNITION POLICIES ARE ALSO SIGNIFICA NTLY INCOMPARABLE; FOURTHLY IT HAS HIGH AMP SPEND; FIFTHLY IT HAS FLUCTUATING SALES; ITS IN CENTIVES SCHEMES ARE DIFFERENT IT HAS WIDE VARIATION BETWEEN ITS GROSS MARGINS AND NET MARGINS THEREBY GIVING WEIGHT TO THE ALLEGATION THAT HEAVY FUNCTIONS ARE BEING PERFORMED AT THE OPE RATING LEVEL. 5.10 WE NOTE THAT AS PER TEXT BOOK DEFINITIONS RPM , PRE-SUPPOSES THAT THERE IS NO VALUE ADDED SERVICES BEING PROVIDED BY THE DISTRIBUTOR AN D SINCE MARKETING AND PROMOTION ARE PAGE 25 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT CONSIDERED TO BE VALUE ADDING SERVICES THUS IN ORDE R TO MAKE THE SELECTED COMPANIES COMPARABLE THIS ACTIVITY ALSO HAS TO BE FACTORED IN . THE TAXPAYER HAS CLAIMED THAT WHEN THE EXPENSE OF ADVERTISING AND MARKETING OF MODI CARE L TD IS COMPARED TO THE TAXPAYER THERE ARE SIGNIFICANT DIFFERENCES IN THE 3 YEARS UNDER CONSID ERATION. THIS FACT BECOMES MORE SIGNIFICANT WHEN CONSIDERED IN THE PECULIAR FACTS THAT A DISTRI BUTOR IS REMUNERATED FOR THE FUNCTIONS PERFORMED BY IT. THE HIGHER THE FUNCTIONS PERFORMED HIGHER IS THE EXPECTATION OF HIGHER PROFITS. 5.11 RPM IS A TRADITIONAL METHOD AND IS TYPICALLY R ESORTED TO IN ORDER TO DETERMINE ALP OF PURCHASES MADE BY THE DISTRIBUTOR FROM RELATED PART Y. THE METHOD IS APPLIED WHERE NECESSARILY THE DISTRIBUTOR DOES NOT CARRY OUT ANY MATERIAL VALUE ADDITION SERVICES AND CONFINES ITSELF ONLY TO DISTRIBUTION ACTIVITIES. OW NERSHIP OF INTANGIBLES BY THE DISTRIBUTOR WOULD ORDINARILY DISCARD RPM AS THE APPROPRIATE METHOD FO R DETERMINING ALP. SIMILARLY MARKETING AND PROMOTION ACTIVITIES BEING VALUE ADDITIONAL ACT IVITIES ARE NOT PRESUMED TO BE CARRIED OUT BY A LOW-RISK ROUTINE DISTRIBUTOR. NO DOUBT, PRODUC T COMPARABILITY IS LESS DECISIVE WHEN USING RPM AS OPPOSED TO WHEN USING CUP METHOD BUT THE FAC T REMAINS THAT AT THE MICRO-LEVEL DIFFERENCES IN PRODUCT WOULD IMPACT THE FAR OF THE TWO COMPANIES BEING COMPARED. THUS, MANY FACTORS DETERMINE THE COMPARABILITY OF COMPANI ES UNDER THE RPM METHOD ALSO WHICH ALSO INCLUDES THE SIMILARITY OF FUNCTIONS ASSETS AN D RISKS AND A BROAD LEVEL SIMILARITY OF PRODUCT IS EXPECTED. IT IS EMPHASISED THAT NEAR IDE NTICAL COMPARABILITY IN PRODUCT IS NOT NECESSARY BUT TO THE EXTENT, IT IS POSSIBLE IT SHOU LD BE IDEALLY ASPIRED FOR. AT THE SAME TIME WHEREVER IT IS DEMONSTRATED THAT IT IMPACTS THE GRO SS PROFIT OF THE COMPARABLE TRANSACTIONS APPROPRIATE ADJUSTMENTS ARE REQUIRED TO BE MADE. IN VIEW OF THE FACT THAT THERE ARE DIFFICULTIES IN IDENTIFYING IDENTICAL OR NEAR IDENTICAL FAR PROF ILES WHERE INDIAN COMPANIES ARE NOT REQUIRED TO DISCLOSE GROSS MARGINS EARNED IN THE FINANCIALS, IDENTIFICATION OF GROSS MARGINS BASED ON LIMITED DISCLOSURES IN FINANCIALS AT TIMES MAY MAKE THE METHOD UNSUITABLE IN CERTAIN CONDITIONS. THE INSISTENCE ON ACCOUNTING CONSISTENC Y CANNOT ALSO BE OVER EMPHASISED AS GROSS PROFIT MARGINS WILL NOT BE COMPARABLE IF ACCO UNTING PRINCIPLES AND/OR PRACTICES DIFFER PAGE 26 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT BETWEEN THE CONTROLLED TRANSACTION AND THE UNCONTRO LLED TRANSACTION. AS HAS BEEN ARGUED BY THE TAXPAYER, THE COMPARABLE COMPANY DIFFERS FROM T HE ASSESSEE COMPANY IN REPORTING CERTAIN COSTS. THUS WHERE A COMPARABLE COMPANY REPO RTS CERTAIN COSTS, FOR EXAMPLE DISCOUNTS, TRANSPORTATION COSTS, INSURANCE AND PERF ORMING THE WARRANTY FUNCTION AS OPERATING EXPENSES OR ITS COSTS OF GOODS SOLD OR THE DIFFEREN CES IN INVENTORY VALUATION METHODS THESE VARIATIONS WILL ALSO AFFECT THE GROSS MARGINS. IT I S THUS IMPORTANT THAT THE ANALYSIS DOES NOT COMPARE APPLES WITH ORANGES BUT RATHER APPLES WITH APPLES. THEREFORE THERE CAN BE NO ESCAPING THE UNDENIABLE CONCLUSION THAT APPROPRIATE ADJUSTMENTS SHOULD BE PERFORMED TO THE DATA USED IN COMPUTING THE GROSS MARGIN TO MAKE SUR E THAT SIMILAR GROSS MARGINS ARE COMPARED. THUS IN ORDER TO ENSURE THAT THE SELECTED COMPANY AND THE COMPARABLE COMPANY PERFORM A SIMILAR AND A NEAR IDENTICAL FUNCTION AND IS ALSO A LOW-RISK DISTRIBUTOR OF THE PRODUCT PURCHASED FROM THE FOREIGN AES, THERE IS AGAIN NO E SCAPING THE STATUTORY REQUIREMENTS AND THUS THERE CAN BE NO TWO OPINIONS TO HOLD THAT IT I S IMPERATIVE TO CONSIDER THE CONTRACTUAL TERMS AND THE RISKS UNDERTAKEN THE ECONOMIC CONDITI ONS AND THE CLASS OF ASSET OR SERVICES IN WHICH THE TWO COMPANIES OPERATE. THE SAID EXERCISE IS NECESSARY UNDENIABLY AS IT IS IMPORTANT TO KEEP IN MIND THE FACT THAT THE DISTRIB UTOR IS REMUNERATED FOR ITS FUNCTIONS AS IT DOES NOT CARRY OUT ANY VALUE ADDING ACTIVITIES. THU S THE GROSS MARGINS EARNED BY THE DISTRIBUTOR BEING A REFLECTION OF FUNCTIONS PERFORM ED; RISKS ASSUMED; AND ASSETS EMPLOYED NECESSARILY MANDATES THAT THE COMPARABLE SELECTED W HICH PERFORMS MORE FUNCTIONS AND ASSUMES A HIGHER RISK OR OWNS MORE VALUABLE ASSETS THEN THE SELECTED PARTY THEN IT SHOULD NECESSARILY ALSO EARN A HIGHER GROSS MARGIN TO COVE R ADDITIONAL COSTS AND EARN ADDITIONAL PROFIT. IT IS FOR THIS PURPOSE THAT COMPARABILITY O F SIMILAR FUNCTIONS NEEDS TO BE IDENTIFIED. NO DOUBT AS OPPOSED TO CUP WHERE A HIGHER ORDER OF PRO DUCT COMPARABILITY IS NECESSARY, IN THE CASE OF RPM PRODUCT COMPARABILITY IS NOT AS STRICTL Y REQUIRED TO BE ADHERED TO AS DISTRIBUTION ACTIVITIES MAY BROADLY REMAIN THE SAME. HOWEVER, AG AIN THERE IS NO ESCAPING THE UNDENIABLE TRUTH I.E. CERTAIN DEGREE OF SIMILARITY OF CLASS OF GOODS IS NECESSARY AS IT CANNOT BE PRESUMED THAT THE FAR OF AN AGRICULTURAL-BASED AUTOMATED COM PONENT, COMPANY WOULD BE SIMILAR TO PAGE 27 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT THE FAR OF A PHARMACEUTICAL COMPANY OR A COMPANY DI STRIBUTING CHEMICALS FOR INDUSTRIAL OR AGRICULTURAL ACTIVITY. THUS WE FIND THAT THE OBJECT IONS OF THE TAXPAYER TO THE EXTENT THAT THE STAND-ALONE COMPARABLE HAS HIGHER ADVERTISE SPEND; HAS FRANCHISEE INCOME HAS A DIFFERENT PRODUCT MIX HAS DIFFERENT ACCOUNTING POLICIES AND R EVENUE RECOGNITION POLICIES HAS HIGHER DISCOUNTS AND REBATES ARE NOT GIVEN AS BELOW THE PR OFIT LINE, EXPENSES WHICH ARE NOT REFLECTED IN THE PROFIT & LOSS ACCOUNT OF THE SAID COMPARABLE ETC. ARE ARGUMENTS, WHICH PRINCIPALLY SHOULD HAVE BEEN ACCEPTED AND THE CALCULATIONS OF T HE TAX PAYER BE EXAMINED AND REQUIRED TO SATISFACTORILY DEMONSTRATE ITS CLAIM. 5.12. ACCORDINGLY, IN VIEW OF THE ABOVE, WE ARE OF THE CONSIDERED VIEW THAT IDEALLY THE TAX AUTHORITIES SHOULD NOT HAVE SELECTED MODI CARE PVT. LTD. AS A STANDALONE COMPARABLE. THE TAX AUTHORITIES SHOULD HAVE CARRIED OUT A SEARCH OR DIRECTED THE ASSESSEE TO CARRY OUT A FRESH SEARCH ENSURING THAT THE COMPARABLES SELECTED WERE PRIMARILY ENGAGED IN DIRECT SALES WITH NO MEANINGFUL VALUE ADDITION ACTIVITIES. TO THE EXTENT POSSIBLE PRODUCT SIMILARITIES SHOULD HAVE BEEN ASPIRED FOR AND IF IT WAS FOUND IN A PARTICULA R YEAR THAT IT WAS NOT AVAILABLE THEN CARRYING OUT THE NECESSARY ADJUSTMENTS ON THE COMPARABLES SE LECTED ATTEMPTED TO APPROACH NEAR COMPARABLE FAR. THUS COMPLYING WITH THE REQUIREMENT S OF SUB-RULE (2) AND (3) OF RULE 10B AND SUB-CLAUSE (IV) OF CLAUSE (B) OF SUB-RULE (1) O F RULE 10B IDEALLY MORE COMPARABLES SHOULD HAVE BEEN SELECTED. WE NOTE THAT THERE IS SU FFICIENT GUIDANCE AND CLARITY IN THE AFORESAID STATUTORY PROVISIONS TO ENSURE THAT THE G RIEVANCE OF THE ASSESSEE CAN BE ADDRESSED AS IT HAS AMPLY BEEN PROVIDED THAT WHEREVER THE GRO SS MARGINS ARE DEMONSTRATED TO BE IMPACTED EITHER WITH INCOMPARABLE ACTIVITIES; FUNCT IONS; ACCOUNTING PRACTICES; PRODUCT DISSIMILARITIES; ETC. THEN NECESSARY ADJUSTMENTS SH OULD BE MADE. HEREIN NOTING THAT THE TAX PAYERS FIRST GRIEVANCE IS THAT WITH NECESSARY ADJU STMENTS, EVEN IF MODI CARE LIMITED IS TAKEN AS A STANDALONE COMPARABLE AS HAS BEEN DONE BY THE TAX AUTHORITIES EVEN THEN ADJUSTMENTS PROPOSED BY THE TAX PAYER ON VALID GROUNDS NAMELY I NCOMPARABLE ACTIVITIES, FUNCTIONS ACCOUNTING AND REVENUE RECOGNITION POLICIES ETC. IS NECESSITATED. WE ARE GIVEN TO UNDERSTAND THAT SERVICE INCOME HAS BEEN EXCLUDED BY THE TPO HIMSELF IN THE SUBSEQUENT PAGE 28 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT YEARS AND IN FACT IN ONE OF THE YEARS IN THE PRESEN T PROCEEDINGS. IT HAS BEEN ARGUED THAT IF THE ADJUSTMENTS ARE THUS MADE THEN NO ADJUSTMENTS TO TH E ARMS LENGTH PRICE OF THE ASSESSEE WOULD BE NECESSITATED. WE NOTE THAT THE TAX AUTHORI TIES HAVE NOT CONSIDERED THE CALCULATIONS AS PRINCIPALLY THEY HAVE BEEN OF THE OPINION THAT N O RELIEF WAS WARRANTED. HOLDING THE SAID APPROACH OF THE TAX AUTHORITIES CONTRARY TO THE STA TUTORY POSITION WE DIRECT THE TPO TO LOOK INTO THE CLAIM OF ADJUSTMENTS REQUIRED TO BE MADE T O MODI CARE LIMITED. WHILE SO DIRECTING IT IS MADE CLEAR THAT THE RESPONSIBILITY FOR PROVIDING THE SUPPORTING DATA TO THE SATISFACTION OF THE TPO RESTS WITH THE ASSESSEE. THE TPO CANNOT BE BURD ENED TO LOOK FOR POSSIBLE ADJUSTMENTS. IN CASE THE TAX PAYER DOES NOT SUCCEED ON THIS GROU ND THEN THE TPO MAY CONSIDER DIRECTING THE ASSESSEE TO CARRY OUT A SEARCH OF COMPARABLE CO MPANIES FROM THE LIST OF DIRECT SELLERS IN THE MARKET, AS HAS BEEN REFERRED TO IN THE TPO IN T HE RESPECTIVE YEARS AND THE CIT(A) HAS ALSO SPECIFICALLY MENTIONED THE DIRECT SELLERS AT P AGES 8 AND 9 OF HIS ORDER. THE COMPARABLE COMPANIES WITH SUITABLE ADJUSTMENTS ADHERING TO THE REQUIREMENTS AS SET OUT IN SUB-RULE (1), (2) AND (3) OF RULE 10B OF THE IT RULES MAY BE SELE CTED. 5.13 WE ALSO DEEM IT APPROPRIATE TO NOTE THAT THE A RGUMENTS OF THE TAX PAYER THAT SIMILAR COMPARABLES HAVE BEEN SELECTED IN THE EARLIER YEARS AND THUS THE COMPARABLES WHO ADMITTEDLY ARE RETAIL SELLERS AND NOT IN DIRECT SAL ES SHOULD STILL BE RETAINED ON THE GROUNDS OF CONSISTENCY WE FIND ON CONSIDERATION IS AN ARGUMENT WHICH HAS TO BE REJECTED AS THE SAID COMPARABLES FAIL ON THE THRESHOLD LEVEL OF FUNCTION AL ASPECT ITSELF AT THE OUTSET. THE MISTAKES MADE IF ANY IN THE EARLIER YEAR WITH REGARD TO THE SELECTION OF COMPARABLES CANNOT BE AN ACCEPTABLE BASIS EITHER FOR RETAINING OR REJECTING A COMPARABLE. THE SELECTION AND RETENTION OF A COMPARABLE SHOULD BE JUSTIFIED ON THE BASIS OF FA CTS EX FACIE ON RECORD AND NOT ON THE BASIS OF OMISSIONS OR MISTAKES OF THE PARTIES. IT WOULD NOT BE OUT OF PLACE TO QUOTE FROM THE WELL CELEBRATED JUDGMENT OF THE HONBLE APEX COURT THE O FT REPEATED DICTUM THAT THERE IS NO HEROISM IN PERPETUATING AN ERROR . THUS, SHELTER BEHIND THE RULE OF CONSISTENTLY FOR RETAINING THE COMPARABLES SELECTED BY THE ASSESSEE ON THIS GR OUND HAS TO BE REJECTED OUT RIGHTLY AS IT REEKS OF LAZY REPETITION AS CONSIDERED AND REFERRED TO BY THEIR LORDSHIPS AND EXTRACTED IN PAGE 29 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT CHRYSCSPITAL INVESTMENT ADVISORS (INDIA) PVT. LTD. VS DCIT 2015-TII-13-HC-DEL-TP DATED 27/4/2015 WHEREIN THEIR LORDSHIPS QUOTE JUSTICE FELIX FRANKFURTER S FOLLOWING EXTRACT FROM TILLER V. ATLANTIC COAST LINE RAILROAD CO. 318 U.S. 54 (1943); A PHRASE BEGINS LIFE AS A LITERARY EXPRESSION; ITS FELICITY LEADS TO ITS LAZY REPETITION ; AND REPETITION SOON ESTABLISHES IT AS A LEGAL FORMULA, INDISCRIMINATING LY USED TO EXPRESS DIFFERENT AND SOMETIMES CONTRADICTORY IDEAS. (EMPHASIS PROVIDED) 5.14 THOUGH, IN THE FACTS OF THE PRESENT CASE AS NO TED EARLIER ALSO FOR THE THREE YEARS UNDER CONSIDERATION SELECTION OF MOST APPROPRIATE M ETHOD IS NOT IN DISPUTE, WE DEEM IT APPROPRIATE TO REFER TO SUB-RULE (2) OF RULE 10C OF THE IT RULES, 1962 FOR THE SAKE OF CLARITY NOTING THAT SINCE IT IS A RECURRING ISSUE AND THAT IN THE PECULIAR NICHE AREA OF COSMETICS THERE ARE MULTIPLE PLAYERS IN THE LIMITED MARKET THE PERS UASIVENESS OF THE ARGUMENTS THAT THE BUSINESS MODEL OF DIRECT SALES OR RETAIL SALES AS F AR AS THE SPECIFIC TARGET CUSTOMER BASE IS CONCERNED THE BUSINESS MODEL OF DIRECT SALES MAY NO T BE A RELEVANT CRITERIA THUS WE MAKE IT CLEAR THAT THE ISSUE HAS BEEN LEFT OPEN TO BE DECID ED AS AND WHEN AND IF EVER A CHALLENGED IS POSED TO THE APPLICATION OF RPM AS THE MOST APPROPR IATE METHOD. IN ORDER TO TAKE GUIDANCE FROM THE RULES WE DEEM IT APPROPRIATE TO REFER TO R ULE 10C OF THE IT RULES WHEREIN SUB-RULE (1) OF RULE 10C THROWS LIGHT ON THE CRITERIA TO BE ADHERED TO AND MAKES IT CLEAR THAT FOR THE PURPOSES OF SUB-SECTION (1) OF SECTION 92C, THE MOS T APPROPRIATE METHOD SHALL BE THE METHOD WHICH IS BEST SUITED TO THE FACTS AND CIRCUMSTANCES OF EACH PARTICULAR INTERNATIONAL TRANSACTION OR SPECIFIED DOMESTIC TRANSACTION, AND WHICH PROVIDES THE MOST RELIABLE MEASURE OF AN ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION OR THE SPECIFIED DOMESTIC TRANSACTION, AS THE CASE MAY BE. SUB-RULE (2) OF RULES 10C FURTHER SUCCINCTLY AND UNAMBIGUOUSLY ELABORATES THAT IN SEL ECTING THE MOST APPROPRIATE METHOD VARIOUS OTHER FACTORS SET OUT IN CLAUSE (A) TO (F) NEED ALSO TO BE TAKEN INTO ACCOUNT. THUS WE NOTE THAT THERE IS AMPLE GUIDANCE AND CLARITY WHICH SHINES AS A BEACON LIGHT ON THE SELECTION OF MOST APPROPRIATE METHOD AND TACIT MISTAKES OR OM ISSIONS IF ANY COMMITTED IN THE PAST BY THE PARTIES NEED NOT BE REPEATED AD INFINITUM AS HA S BEEN WELL SETTLED BY THE HONBLE APEX PAGE 30 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT COURT WHEN IT OBSERVED IN THE CELEBRATED JUDGMENT T HAT THERE IS NO HEROISM IN PERPETUATING AN ERROR . 5.15 FOR READY REFERENCE AND FOR THE SAKE OF CONVEN IENCE, SUB-RULE (2) OF RULE 10C REFERRED TO IN THE ABOVE DELIBERATION IS REPRODUCED HEREIN:- 10C(2) IN SELECTING THE MOST APPROPRIATE METHOD AS SPECIFIED IN SUB-RULE (1), THE FOLLOWING FACTORS SHALL BE TAKEN INTO ACCOUNT, NAMELY:- (A) THE NATURE AND CLASS OF THE INTERNATIONAL TRANS ACTION [OR THE SPECIFIED DOMESTIC TRANSACTION]; (B) THE CLASS OR CLASSES OF ASSOCIATED ENTERPRISES ENTERING INTO THE TRANSACTION AND THE FUNCTIONS PERFORMED BY THEM TAKING INTO ACC OUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND RISKS ASSUMED BY SUCH ENTERPRISE S; (C) THE AVAILABILITY, COVERAGE AND RELIABILITY OF D ATA NECESSARY FOR APPLICATION OF THE METHOD; (D) THE DEGREE OF COMPARABILITY EXISTING BETWEEN TH E INTERNATIONAL TRANSACTIONS [OR THE SPECIFIED DOMESTIC TRANSACTION] AND THE UNCONTR OLLED TRANSACTION AND BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACT IONS; (E) THE EXTENT OF WHICH RELIABLE AND ACCURATE ADJUS TMENTS CAN BE MADE TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE INTERN ATIONAL TRANSACTION [OR THE SPECIFIED DOMESTIC TRANSACTION] AND THE COMPARABLE UNCONTROLLED TRANSACTION OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANS ACTIONS; (F) THE NATURE, EXTENT AND RELIABILITY OF ASSUMPTIO NS REQUIRED TO BE MADE IN APPLICATION OF A METHOD. 5.16. THUS THOUGH THE ISSUE MAY BE OF ACADEMIC INTE REST IN THE PRESENT PROCEEDINGS WE DEEM IT APPROPRIATE TO CLEARLY AND AMBIGUOUSLY SET OUT THAT ON THE SELECTION OF THE MOST APPROPRIATE METHOD THERE IS NO FINDING GIVEN AS THE ISSUE IS NOT UNDER CHALLENGE IN THE PRESENT PROCEEDINGS. 6. ACCORDINGLY, IN VIEW OF THE ABOVE DETAILED REASO NING AND THE CONCLUSION THE ISSUES ARE REMITTED BACK TO THE TPO IN THE RESPECTIVE YEARS TO COMPLY WITH THE AFORESAID DIRECTIONS SET OUT HEREINABOVE. 7. ACCORDINGLY, THE APPEALS OF THE ASSESSEE ARE PAR TLY ALLOWED FOR STATISTICAL PURPOSES. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 24 TH OF MARCH 2017. SD/- SD/- (ANADEE NATH MISSHRA) (DIVA SINGH) ACCOUNTANT MEMBER JUDICIAL MEMB ER *AMIT KUMAR/AMIT RANJAN* PAGE 31 OF 31 I.T.A .NO.-960/DEL/2014, 184 & 271/DEL/2016 ORIFLAME INDIA PVT.LTD. VS ACIT COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI