Appeal Details
Counselvise Citation
[2019] 118 COUNSELVISE.COM (IT) 1497 (ITAT-MUMBAI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
2 year(s) 11 month(s) 17 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
15-03-2019
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
K
Assessment Year
2011-2012
Appeal Filed On
28-03-2016
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES K , MUMBAI BEFORE SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND SHRI AMARJIT SINGH, JUDICIAL MEMBER ITA NO. 1928/MUM/2016 ASSESSMENT YEAR : 2011-12 M/S. CELIO FUTURE FASHION PRIVATE LIMITED, (FORMERLY KNOWN AS CELIO FUTURE FASHION), A WING, UNIT NO. 301 & 302, NEAR GRAHAM FIRTH COMPOUND, OPPOSITE WESTERN EXPRESS HIGHWAY, GOREGAON (EAST), MUMBAI [PAN : AADCC3844J] VS. THE ASSISTANT COMMISSIONER OF INCOME TAX-9(2)(1), MUMBAI (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI NIRAJ SHETH & SHRI KETAN VED, RESPONDENT BY : SHRI PURUSHOTTAM TRIPURI, CIT-DR DATE OF HEARING : 11-03-2019 DATE OF PRONOUNCEMENT : 15-03-2019 O R D E R PER B.R. BASKARAN, ACCOUNTANT MEMBER: T HIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE ASSESSING OFFICER (AO) U/S 143(3 ) R.W.S 144C(13) OF THE INCOME TAX ACT (ACT) FOR ASSESSMENT YEA R ITA NO. 1928/MUM/2016 : 2 : 2011-12, IN PURSUANCE TO THE DIRECTIONS GIVEN BY THE LD . DISPUTE RESOLUTION PANEL (DRP). THE ASSESSEE IS AGGR IEVED BY THE TRANSFER PRICING (TP) ADJUSTMENT OF RS. 3,47,91,04 1/- MADE BY THE AO. 2. THE FACTS RELATING TO THE CASE ARE STATED IN BRIEF. TH E ASSESSEE IS THE DISTRIBUTOR OF CELIO BRAND MENS WEAR . DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS ENTERED THE FOLLOWING INTERNATIONAL TRANSACTIONS: A) PURCHASE OF MENS WEAR AND B) REIMBURSEMENT OF TECHNICAL FEES; 3. IN RESPECT OF REIMBURSEMENT OF TECHNICAL FEES, TH E TRANSFER PRICING OFFICER (TPO) NOTICED THAT ASSESSEE HAS FAILED TO FURNISH THE JUSTIFICATION AND EVIDENCES FOR SERVICE S RECEIVED FROM ITS ASSOCIATED ENTERPRISE (AE). THE TPO TOOK THE VIEW THAT THE SERVICES RENDERED BY ASSESSEE ARE OF ROUTINE N ATURE THAT ARE GIVEN IN THE NORMAL COURSE OF CARRYING ON OF BUSINESS TRANSACTIONS. ACCORDINGLY, THE TPO DETERMINED THE ARMS LENGTH PRICE (ALP) OF THE REIMBURSEMENT OF TECHNICAL F EE AS NIL. THE ASSESSEE HAD PAID TECHNICAL FEE OF RS. 10 4.27 LAKHS AND THE TPO HELD THAT THE ALP OF THE SAME IS NIL. ITA NO. 1928/MUM/2016 : 3 : 4. IN RESPECT OF THE TRANSACTIONS OF IMPORT OF FINISHE D GOODS (MENS WEAR) FROM ITS AE, THE ASSESSEE HAD BENCHMARKE D THE TRANSACTION UNDER TRANSACTIONAL NET MARGIN METHOD (TNMM) . THE ASSESSEE INITIALLY ADOPTED COST + MARK UP AS PLI BASED ON THE SINGLE YEAR DATA. THE PLI OF THE COMPARABLE CO MPANIES WAS ARRIVED AT 10.61%. THE ASSESSEE WAS IMPORTING G OODS AT COST + MARK UP OF 9%. ACCORDINGLY, THE ASSESSEE SUBM ITTED THAT THE DIFFERENCE FALLS WITHIN (+)/(-) 5% RANGE AND H ENCE THE TRANSACTIONS OF IMPORT OF GOODS ARE AT ARMS LENGTH. 4.1. THE TPO NOTICED THAT THE ASSESSEE HAS INCURRED LOS S DURING THE YEAR, I.E., THE NET MARGIN WAS NEGATIVE AT (-) 8.21%. THE TPO SELECTED CERTAIN COMPARABLES AND THE NET PROFIT MARGIN OF THOSE COMPARABLE COMPANIES WAS 1.12% . 4.2. ACCORDINGLY, THE TPO PROPOSED THE TP ADJUSTMENT OF RS.320.52 LAKHS IN RESPECT OF IMPORT OF MENS WEAR FR OM THE AE. 5. BEFORE THE LD. DRP, THE ASSESSEE SUBMITTED THAT IN TH E CASE OF DISTRIBUTION OF GOODS, RE-SALE PRICE METHOD IS THE MOST APPROPRIATE METHOD. HOWEVER, THE LD. DRP NOTICED TH AT THE ASSESSEE HAS INCURRED HEAVY EXPENSES TOWARDS BRAN DING IN THE FORM OF ADVERTISEMENT AND MARKET PROMOTION EXPEN SES ITA NO. 1928/MUM/2016 : 4 : (AMP). ACCORDINGLY, LD. DRP TOOK THE VIEW THAT THE SAID EXPENSES ALSO NEED TO BE TAKEN INTO ACCOUNT WHILE BENCHMARKING THE TRADING FUNCTION. ACCORDINGLY, IT HEL D THAT TNMM IS THE MOST APPROPRIATE METHOD TO BENCHMARK THE TRANSACTIONS. ACCORDINGLY, THE LD. DRP UPHELD THE TP ADJUSTMENT PROPOSED BY THE AO. WHILE HOLDING SO, THE LD. DRP DIRECTED THE AO TO EXCLUDE CERTAIN DISALLOWANCES MADE OUT OF REIMBURSEMENT OF TECHNICAL FEES FROM THE OPERATI NG COST. THE AO PASSED THE ORDER IN TERMS OF DIRECTIONS GIVEN BY THE DRP, WHICH IS BEING AGITATED BY THE ASSESSEE. 6. WE HAVE HEARD THE PARTIES AND PERUSED THE RECORD. THE FIRST ISSUE RELATES TO TP ADJUSTMENT MADE IN RESPEC T OF REIMBURSEMENT OF TECHNICAL FEES. 6.1. LD. AR PLACED HIS RELIANCE ON CERTAIN CASE LAW AND CONTENDED THAT THE TPO IS NOT ENTITLED TO EXAMINE THE GENUINENESS OF THE EXPENSES. ACCORDINGLY, HE CONTEND ED THAT THE TP ADJUSTMENT PROPOSED BY THE TPO AND CONFIRMED BY THE LD. DRP NEEDS TO BE DELETED. 6.2. ON THE CONTRARY, LD. DR SUBMITTED THAT THE TPO HAS N OT QUESTIONED THE GENUINENESS OF EXPENSES AS CONTENDED BY LD A.R. HE POINTED OUT ASSESSEE HAS FAILED TO FURNISH ANY ITA NO. 1928/MUM/2016 : 5 : EVIDENCE TO SHOW THE NATURE OF SERVICES RENDERED BY TH E AE. THE LD. DR SUBMITTED THAT THE ASSESSEE HAS FURNISHED ONL Y COPIES OF INVOICES RAISED BY THE AE AND THE SAME WOUL D NOT DEMONSTRATE THE NATURE OF SERVICES RECEIVED BY THE ASSES SEE. SINCE THE ASSESSEE COULD NOT FURNISH THE DETAILS OF SER VICES RECEIVED BY IT FROM AE, THE TPO HAD NO OTHER OPTION BU T TO DETERMINE THE ALP AT NIL. THE LD D.R FURTHER SUBMITTED THAT THE ASSESSEE DID NOT FURNISH ANY EVIDENCES BEFORE LD DRP ALSO AND HENCE, THE LD. DRP ALSO HAS CONFIRMED THE ORDER P ASSED BY THE TPO. 6.3. IN THE REJOINDER, THE LD A.R SUBMITTED THAT THE ASS ESSEE HAS PREPARED A DETAILED NOTE ON THE NATURE OF SERVICES RENDERED BY ITS AE. HE PRAYED THE SAME MAY KINDLY BE ADMITTED AS ADDITIONAL EVIDENCE AND PRAYED THE SAME MAY BE ADMITTED AND THE MATTER MAY BE RESTORED TO THE FILE OF AO/TPO. THE LD D.R, HOWEVER, OBJECTED TO THE SAME. 6.4. WE HAVE HEARD THE PARTIES AND PERUSED THE MATERIA L ON RECORD. ADMITTEDLY, THE ASSESSEE DID NOT FURNISH ANY DO CUMENT TO SHOW THAT THE ASSESSEE HAS RECEIVED ANY SERVICES FR OM ITS AE. THERE SHOULD NOT BE ANY DISPUTE THAT THE NATURE, QU ALITY AND QUANTITY OF SERVICES RENDERED BY A PERSON WOULD ITA NO. 1928/MUM/2016 : 6 : DETERMINE THE QUANTUM OF PAYMENT TO BE MADE FOR RENDER ING OF SUCH SERVICES. THE PURPOSE OF DETERMINING ALP OF A TRANSACTION IS TO FIND OUT AS TO WHETHER SIMILAR KIND OF PAYMENTS WOULD HAVE BEEN MADE TO AN UNRELATED PARTY F OR SIMILAR KIND OF SERVICES RENDERED. HENCE THE DETAILS RELATING TO NATURE OF SERVICES THAT WERE RECEIVED BY THE ASSESSEE A RE, IN OUR VIEW, CRUCIAL FOR DETERMINING ALP. HENCE WE AR E OF THE VIEW THAT THE TPO HAS NOT QUESTIONED THE GENUINENESS OF TRANSACTIONS. WE ALSO AGREE WITH THE CONTENTIONS OF THE LD . DR THAT THE COPIES OF INVOICES RECEIVED BY THE ASSESSEE FR OM ITS AE WOULD NOT DEMONSTRATE THE DETAILS OF SERVICES RECEIVED BY THE ASSESSEE. FROM THE ORDER OF TPO, WE NOTICED THAT THE AS SESSEE HAS GIVEN EXAMPLES OF SERVICES RECEIVED BY IT FROM I TS AE. THE TPO HAS DESCRIBED THE SAME AS UNDER: ASSISTANCE/ADVICE IN ANALYSIS FOR VALIDATION OF STOR E LOCATIONS, ORGANIZATION AND MANAGEMENT OF THE STORES; ASSISTANCE/ADVICE IN PROCESSES FOR STOCKS & SALES CONTROL, CONTROL MANAGEMENT, PROCUREMENT SCHEDULING, CO-ORDINATION ETC; ASSISTANCE/ADVICE IN DETERMINING STORE LAYOUTS, CONTROLLING VISUAL MERCHANDISING OF THE STORES; ITA NO. 1928/MUM/2016 : 7 : ASSISTANCE/ADVICE IN PREPARATION AND ELABORATION OF CREATIVES (WINDOWS, INSTORE) FOR POINT OF SALE INITIATIV ES; ASSISTANCE/ADVICE IN PREPARATION OF SUPPORT TOOLS FOR TH E SALES TEAMS; ASSISTANCE/ADVICE IN ORGANIZING RETAIL TRAINING SEMINA RS; ASSISTANCE/ADVICE IN MARKET SURVEY AND PRICE STUDIES SPECIFIC FOR THE INDIAN MARKET; THOUGH THE ASSESSEE HAS CLAIMED TO HAVE RECEIVED THE A BOVE SAID SERVICES, YET IT HAS NOT FURNISHED ANY MATERIAL TO DEMONSTRATE THAT THE ABOVE SAID SERVICES WERE ACTUALLY RECEIVED. HENCE, IN THE ABSENCE OF ANY MATERIAL TO PR OVE THE DETAILS OF SERVICES ACTUALLY RENDERED BY THE AE, IT WOU LD BE DIFFICULT FOR THE TAX AUTHORITIES AS WELL AS FOR THE TR IBUNAL TO APPRECIATE THE CONTENTIONS OF ASSESSEE. BEFORE US, TH E LD. AR SUBMITTED THAT THE ASSESSEE HAS PREPARED A DETAILED NOTE EXPLAINING THE DETAILS OF SERVICES RECEIVED BY IT. 6.5. HAVING REGARD TO THE RIVAL CONTENTIONS ON THIS ISSU E, IN THE INTEREST OF NATURAL JUSTICE, WE ARE OF THE VIEW TH AT THE ASSESSEE MAY BE PROVIDED WITH ONE MORE OPPORTUNITY IN THIS MATTER. ACCORDINGLY WE ADMIT THE ADDITIONAL EVIDENCES ITA NO. 1928/MUM/2016 : 8 : FURNISHED BY THE ASSESSEE EXPLAINING THE DETAILS OF RE CEIVED SERVICES PROVIDED BY ITS AE. IN VIEW OF THE ABOVE, THIS ISSUE REQUIRES FRESH EXAMINATION AT THE END OF AO/TPO. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY AO ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF AO/TPO TO EXAMINE TH E ALP OF THE PAYMENT OF TECHNICAL FEE IN ACCORDANCE WITH THE LAW BY DULY CONSIDERING THE ADDITIONAL EVIDENCES AND ALS O T.P STUDY OF THE ASSESSEE. 7. THE NEXT ISSUE RELATES TO TP ADJUSTMENT MADE IN RE SPECT OF IMPORT OF MENS WEAR FROM ITS AE. 7.1. THE LD. AR SUBMITTED THAT THE ASSESSEE IMPORTS MENS WEAR FROM ITS AE AND DISTRIBUTES THE SAME AS IT IS WITHOU T MAKING ANY VALUE ADDITION. HE SUBMITTED RE-SALE PRICE METHOD IS THE APPROPRIATE METHOD FOR DETERMINING THE AL P OF THE ABOVE SAID TRANSACTIONS. HE SUBMITTED THAT THE LD DRP HAS OBSERVED THAT THE ADVERTISEMENT AND SALES PROMOTION EXPENSES INCURRED BY THE ASSESSEE WAS HUGE AND HENCE THE NET PROFIT MARGIN ALONE SHOULD BE CONSIDERED UNDER T NMM METHOD FOR DETERMINING ALP. HE SUBMITTED THAT THE ADVERTISEMENT AND SALES PROMOTION EXPENSES DO NOT INCRE ASE THE INHERENT VALUE OF THE PRODUCTS. FURTHER, THE PROVISI ONS OF ITA NO. 1928/MUM/2016 : 9 : RULE 10B(1)(B) DEFINES THE RE-SALE PRICE METHOD AND T HE SAID DEFINITION PROVIDES FOR COMPUTING GROSS PROFIT MARGIN IN ORDER TO DETERMINE THE ALP UNDER RE-SALE PRICE METHOD. HE SUBMITTED THAT THE ADVERTISEMENT AND SALES PROMOTION EXPENSES ARE NOT TO BE DEDUCTED FOR COMPUTING GROSS P ROFIT MARGIN. ACCORDINGLY HE SUBMITTED THAT THE LD. DRP WAS NOT JUSTIFIED IN HOLDING THAT THE ADVERTISEMENT AND SALES PROMOTION EXPENSES SHOULD ALSO BE TAKEN INTO ACCOUNT A ND ACCORDINGLY HOLDING THAT TNMM IS THE MOST APPROPRIATE METHOD. LD. AR RELIED ON THE HOST OF THE CASE LAW TO SU PPORT ITS CONTENTIONS. 7.2. ON THE CONTRARY, LD. DR SUBMITTED THAT THE ADVERTISEMENT AND SALES PROMOTION EXPENSES INCURRED BY THE ASSESSEE HUGE. HE SUBMITTED THAT, SINCE THE ASSESSEE HAS INCURRED THESE EXPENSES, IT SHOULD HAVE IMPORTED THE GO ODS AT A LOWER RATE THAN THAT THE RATE THAT SHOULD HAVE BEEN CHA RGED TO AN UN-RELATED PARTY, SINCE THE UNRELATED PARTY WOU LD NOT HAVE INCURRED ADVERTISEMENT EXPENSES AT SUCH LEVEL. I N THIS VIEW OF THE MATTER, THE LD D.R SUBMITTED THAT LD. DRP WAS JUSTIFIED IN HOLDING THAT THE ALP SHOULD BE DETERMINED UNDER ITA NO. 1928/MUM/2016 : 10 : TNMM METHOD BY CONSIDERING THE NET PROFIT MARGIN OF THE ASSESSEE. 7.3. WE HAVE HEARD THE PARTIES ON THIS ISSUE AND PERUS ED THE RECORD. ADMITTEDLY, THE ASSESSEE IS A MERE DISTRIBUTOR OF MENS WEAR, IMPORTED FROM ITS AE. IN THE FOLLOWING CASES, IT HAS BEEN HELD THAT RE-SALE PRICE METHOD IS THE MOST APPROPRIATE ME THOD TO BENCHMARK THE INTERNATIONAL TRANSACTIONS WHEN FINISHE D GOODS ARE PURCHASED BY THE ASSESSEE FROM ITS AE, WHIC H ARE READY TO BE SOLD IN THE MARKET WITHOUT ANY VALUE ADDITI ON: I. FUJITSU INDIA (P) LTD., VS. ACIT [101 TAXMANN.COM 322 ] (DELHI-TRIB); II. BURBERRY INDIA PVT. LTD., VS. ACIT IN ITA NOS. 758 & 7684/DEL/2017, DT. 22-06-2018; III. BOSE CORPORATION INDIA (P) LTD., VS. ACIT [77 TAXMANN.COM 194] (DELHI-TRIB); IV. CIT VS. LOREAL INDIA (P) LTD., [53 TAXMANN.COM 432] (BOMBAY); 7.3.I. FOR THE SAKE OF CONVENIENCE, WE EXTRACT BELOW T HE OPERATIVE PORTION OF THE ORDER PASSED BY THE DELHI BENC H OF ITA NO. 1928/MUM/2016 : 11 : THIS TRIBUNAL IN THE CASE OF BURBERRY INDIA PVT. LTD., VS. ACIT IN ITA NOS. 758 & 7684/DEL/2017, DT. 22-06-2018: 15. WE HAVE GONE THROUGH THE RECORD IN THE LIGHT OF THE S UBMISSIONS ON EITHER SIDE. IT IS AN ADMITTED FACT THAT IN THIS CASE THE ASS ESSEE IS MERELY PURCHASING AND SELLING THE PRODUCTS WITHOUT ADDING ANY VALUE TO THE C ORE PRODUCT. FURTHER, LD. TPO DID NOT DISPUTE THE CHARACTERISATION OF THE ASSE SSEE AS IN THE TP DOCUMENT AND ALSO ACCEPTED THE FUNCTIONAL PROFILE OF THE ASSES SEE AS A ROUTINE DISTRIBUTOR. LD. DRP, HOWEVER, RECORDED THAT THE ASSESSEE HAS INCURR ED SUBSTANTIAL AMP, AND OTHER EXPENSES, IN RELATION TO ITS TURNOVER, AND IS THEREFORE, NOT A SIMPLE DISTRIBUTOR IN TERMS OF THE REQUIREMENT OF USING RPM. NOW WE SHALL PROCEED TO EXAMINE THE LAW APPLICABLE THESE FACTS. 16. IN NOKIA INDIA (P) LTD. V. DY. CIT[2014] 52 TAX MANN.COM 492/153 ITD 508 (DELHI), THE DELHI BENCH OF THE ITAT HELD THAT,- 9. SUB-CLAUSE (I) OF CLAUSE (B) OF RULE 10B(1) DEAL S WITH IDENTIFYING THE PRICE AT WHICH THE GOODS PURCHASED FROM AN AE IS RE SOLD. SUB-CLAUSE (II) OF CLAUSE (B) OF RULE 10B(1) TALKS OF REDUCING THE AMOUNT OF NORMAL GROSS PROFIT MARGIN OF COMPARABLE UNCONTROLLED TRAN SACTIONS FROM SUCH RESALE PRICE OF THE ASSESSEE. SUB-CLAUSE (III) STATES THAT THE RESULT OF SUBCLAUSE (II) IS FURTHER REDUCED BY THE EXPENSES INCURRED IN CONNECTION WITH THE PURCHASE OF GOODS AND SUB-CLAUS E (IV) PROVIDES THAT THE AMOUNT SO DEDUCED UNDER SUB-CLAUSE (III) I S ADJUSTED ON ACCOUNT OF DIFFERENCES IN THE INTERNATIONAL TRANSAC TION AND COMPARABLE UNCONTROLLED TRANSACTIONS WHICH MATERIAL LY AFFECT THE AMOUNT OF GROSS PROFIT MARGIN IN THE OPEN MARKET. F INALLY, SUB-CLAUSE (V) PROVIDES THAT THE ADJUSTED PRICE FOUND UNDER SU B-CLAUSE (IV) IS TAKEN AS ARM'S LENGTH PRICE IN RESPECT OF PURCHASE OF GOODS FROM THE AE. WHEN WE CONSIDER THE METHODOLOGY GIVEN UNDER RP M, MORE SPECIFICALLY SUB-CLAUSES (I) AND (V), IT BECOMES PA TENT THAT SUB-CLAUSE (I) REFERS TO 'PROPERTY PURCHASED BY THE ENTERPRISE ... IS RESOLD ' AND SUB-CLAUSE (V) REFERS TO 'ARM'S LENGTH PRICE IN RES PECT OF THE PURCHASE OF THE PROPERTY ... BY THE ENTERPRISE '. A CLOSE SC RUTINY OF THE ABOVE TWO SUB-CLAUSES ALONG WITH THE REMAINING SUB-CLAUSE S OF RULE 10B(1)(B) MAKES IT CLEAR BEYOND DOUBT THAT RPM IS B EST SUITED FOR DETERMINING ALP OF AN INTERNATIONAL TRANSACTION IN THE NATURE OF PURCHASE OF FROM AN AE WHICH ARE RESOLD AS SUCH TO UNRELATED PARTIES. ORDINARILY, THIS METHOD PRE-SUPPOSES NO OR INSIGNIFICANT VALUE ADDITION TO THE GOODS PURCHASED FROM FOREIGN AE. 17. WHILE NOTING THE ABOVE DECISION ALSO, HONBLE JUR ISDICTIONAL HIGH COURT, IN PRINCIPAL COMMISSIONER OF INCOME-TAX-6 V. MATRIX CE LLULAR INTERNATIONAL SERVICES (P.) LTD. [2018] 90 TAXMANN.COM 54 (DELHI) FOUND THAT, - ITA NO. 1928/MUM/2016 : 12 : 8. THIS COURT FINDS THAT ONCE THE ITAT, ON CONSIDER ING THE RELEVANT FACTS AS WELL AS THE ORDER OF THE TPO, HAD CONCLUDE D THAT THE BUSINESS OF THE ASSESSEE WAS MERELY THAT OF A PURE TRADER, AND THERE WAS NO VALUE ADDITION MADE BEFORE RESELLING THE PAR TICULAR PRODUCTS (I.E. THE SIM CARDS), ITS CONSEQUENT FINDING THAT R PM IS THE MOST APPROPRIATE METHOD, IS IRREPROACHABLE. IN NOKIA IND IA (P) LTD. V. DEPUTY COMMISSIONER OF INCOME TAX, (2015) 167 TTJ ( DEL) 243, THE DELHI BENCH OF THE ITAT HELD: 'A CLOSE SCRUTINY OF THE ABOVE TWO SUB-CLAUSES ALON G WITH THE REMAINING SUB-CLAUSES OF R. 10B(1)(B) MAKES IT CLEAR BEYOND DOUBT THAT RPM IS BEST SUITED FOR DETERMININ G ALP OF AN INTERNATIONAL TRANSACTION IN THE NATURE OF PU RCHASE OF GOODS FROM AN AE WHICH ARE RESOLD AS SUCH TO UNRELA TED PARTIES. ORDINARILY, THIS METHOD PRESUPPOSES NO OR INSIGNIFICANT VALUE ADDITION TO THE GOODS PURCHASED FROM FOREIGN AE. IN A CASE THE GOODS SO PURCHASED ARE US ED EITHER AS RAW MATERIAL FOR MANUFACTURING FINISHED P RODUCTS OR ARE FURTHER SUBJECTED TO PROCESSING BEFORE RESAL E, THEN RPM CANNOT BE CHARACTERIZED AS A PROPER METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTION OF PURCH ASE OF GOODS BY THE INDIAN ENTERPRISE FROM THE FOREIGN AE. ' 9. SIMILARLY, IN SWAROVSKI INDIA PVT. LTD. V. ACIT, ITA NO. 5621/DEL/2014, THE ITAT HELD: 'ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIN D THAT THE ASSESSEE PURCHASED CRYSTAL GOODS AND CRYSTAL COMPON ENTS FROM ITS AE. NO VALUE ADDITION WAS MADE TO SUCH IMP ORTS. THE GOODS WERE SOLD AS SUCH. IN THE GIVEN CIRCUMSTA NCES, THE RPM IS THE MOST APPROPRIATE METHOD FOR DETERMIN ING THE ALP OF THE INTERNATIONAL TRANSACTION OF' IMPORT OF CRYSTAL GOODS AND CRYSTAL COMPONENTS.' 10. A SIMILAR VIEW HAS BEEN ADOPTED BY THE MUMBAI BE NCH OF THE ITAT IN MATTEL TOYS V. DEPUTY COMMISSIONER OF INCOME TAX, (2013) 1 58 TTJ (MUM) 461: 'THUS, THE RPM METHOD IDENTIFIES THE PRICE AT WHICH THE PRODUCT PURCHASED FROM THE A.E. IS RESOLD TO A UNRE LATED PARTY. SUCH PRICE IS REDUCED BY NORMAL GROSS PROFIT MARGIN I.E., THE GROSS PROFIT MARGIN ACCRUING IN A COMPARA BLE CONTROLLED TRANSACTION ON RESALE OF SAME OR SIMILAR PROPERTY OR SERVICES. THE RPM IS MOSTLY APPLIED IN A SITUATI ON IN WHICH THE RESELLER PURCHASES TANGIBLE PROPERTY OR O BTAIN SERVICES FROM AN A.E. AND RESELLER DOES NOT PHYSICA LLY ALTER THE TANGIBLE GOODS AND SERVICES OR USE ANY INTANGIB LE ASSETS TO ADD SUBSTANTIAL VALUE TO THE PROPERTY OR SERVICES ITA NO. 1928/MUM/2016 : 13 : I.E., RESALE IS MADE WITHOUT ANY VALUE ADDITION HAV ING BEEN MADE.' 11. THIS VIEW HAS ALSO BEEN AFFIRMED BY THE BOMBAY HIGH COURT IN ITS JUDGMENT DATED 07.11.2014 IN COMMISSIONER OF IN COME TAX V. L'OREAL INDIA PVT. LTD. (ITA NO. 1046 OF 2012), WHE RE THE COURT FOUND THAT THERE WAS NO ERROR IN LAW COMMITTED BY THE ITA T WHEN IT HELD THAT RPM WAS THE MOST APPROPRIATE METHOD IN CASE OF DISTRIBUTION OR MARKETING ACTIVITIES ESPECIALLY WHEN GOODS ARE PURC HASED FROM ASSOCIATED ENTITIES AND THERE ARE SALES EFFECTED TO UNRELATED PARTIES WITHOUT ANY FURTHER PROCESSING. IN FACT, A DIVISION BENCH OF THIS COURT IN ITS DECISION IN BAUSCH & LOMB EYECARE (INDIA) PV T. LTD. V. ADDITIONAL COMMISSIONER OF INCOME TAX, (2016) 381 I TR 227 (DEL), WHILE CONSIDERING THE DECISION OF THIS COURT IN SON Y ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. V. COMMISSIONER OF I NCOME TAX, (2015) 374 ITR 118 (DEL), NOTED THAT: 'THE RP METHOD LOSES ITS ACCURACY AND RELIABILITY W HERE THE RESELLER ADDS SUBSTANTIALLY TO THE VALUE OF THE PRODUCT OR T HE GOODS ARE FURTHER PROCESSED OR INCORPORATED INTO A MORE SOPHI STICATED PRODUCT OR WHEN THE PRODUCT/SERVICE IS TRANSFORMED.' 12. THEREFORE, A CONTRARIO, WHEN THE RESELLER DOES NOT ADD ANY VALUE TO THE PRODUCT OF THE GOODS, THE RP METHOD WOULD BE APPROPRIATE FOR DETERMINING THE ARMS' LENGTH PRICE. 18. IN RESPECT OF THE OBSERVATIONS OF THE LD. DRP THAT THE ASSESSEE HAS INCURRED SUBSTANTIAL AMP, AND OTHER EXPENSES, IN RELATION TO ITS TURNOVER, AND IS THEREFORE, NOT A SIMPLE DISTRIBUTOR IN TERMS OF THE REQUIREMENT OF USING RPM, LD. AR HAS RIGHTLY PLACED RELIANCE ON THE DECISION REPORTED IN N OKIA INDIA PRIVATE LIMITED VS. DCIT (2015) 153 ITD 508 (DELHITRIB.) WHEREIN IT W AS HELD THAT THE INCURRING OF HIGH ADVERTISEMENT AND MARKETING EXPENSES BY THE AS SESSEE VIS-AVIS THE OTHER COMPARABLE COMPANIES DOES NOT IN ANY MANNER AFFECT THE DETERMINATION OF ALP UNDER THE RPM. IN THE ABOVE DECISION IT WAS HELD THAT, - THE LD. DR VEHEMENTLY ARGUED AGAINST THE APPLICATIO N OF RPM IN THE GIVEN CIRCUMSTANCES AS THE MOST APPROPRI ATE METHOD BY CONTENDING THAT THE ASSESSEE INCURRED HUG E ADVERTISEMENT AND MARKETING EXPENSES. IN VIEW OF SU CH INCURRING OF EXPENSES, THE LD. DR STATED THAT THE B ETTER COURSE WOULD BE TO APPLY TNMM WHICH WOULD CONSIDER OPERATING PROFIT. WE ARE UNABLE TO ACCEPT THE CONTE NTION ADVANCED ON BEHALF OF THE REVENUE. THE OBVIOUS REAS ON FOR THIS IS THAT THE INCURRING OF HIGH ADVERTISEMENT AN D MARKETING EXPENSES BY THE ASSESSEE VIS-A-VIS THE OT HER COMPARABLE COMPANIES DOES NOT IN ANY MANNER AFFECT THE DETERMINATION OF ALP UNDER THE RPM. WHEN WE CONSIDE R GROSS PROFIT IN NUMERATOR AND NET SALES IN DENOMINA TOR, ALL ITA NO. 1928/MUM/2016 : 14 : THE EXPENSES DEBITED TO THE PROFIT & LOSS ACCOUNT AUTOMATICALLY STAND EXCLUDED. IT IS BUT NATURAL THA T ONLY THOSE EXPENSES CAN HAVE BEARING ON THE GROSS PROFIT THAT ARE DEBITED TO THE TRADING ACCOUNT. AS THE AMOUNT O F ADVERTISEMENT AND MARKETING EXPENSES FALLS 'BELOW T HE LINE' AND FINDS ITS PLACE IN THE PROFIT AND LOSS ACCOUNT, THE HIGHER OR LOWER SPEND ON IT CANNOT AFFECT THE AMOUNT OF GR OSS PROFIT AND THE RESULTANT ALP UNDER THE RPM. IF THE ASSESSE E HAS INCURRED MORE EXPENSES ON ADVERTISEMENT AND PROMOTI ON, WHICH, IN THE OPINION OF THE LD. DR WENT ON TO BRAN D BUILDING FOR AN AE, THEN, THE TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF SUCH AMP EXPENSES WAS SEPARATELY CALLED FOR. SIN CE THE TPO HAS NOT MADE ANY SEPARATE ADJUSTMENT ON ACCOUNT OF AMP EXPENSES AND HAS GIVEN EFFECT TO THE SAME UNDER TNMM, WE HOLD THAT THE INCURRING OF SUCH HIGHER ADVERTISEMENT AND MARKETING SPEND WOULD NOT AFFECT THE CALCULATION OF ALP UNDER THE RPM. EX CONSEQUENTI, W E HOLD THAT RPM PRIMA FACIE APPEARS TO BE THE MOST APPROPR IATE METHOD IN THE FACTS AND CIRCUMSTANCES OF THE INSTAN T CASE. 19. THE ABOVE DECISIONS CLINCH THE ISSUE INVOLVED IN T HIS MATTER AND SQUARELY APPLICABLE TO THE FACTS OF THE CASE. WE, THEREFORE, W HILE RESPECTFULLY FOLLOWING THE SAME HOLD THAT THE RPM IS THE MOST APPROPRIATE METHOD IN THE FACTS AND CIRCUMSTANCES OF THIS CASE AND ACCORDINGLY DIRECT TH E LD. TPO TO ADOPT THE RPM AS THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE INT ERNATIONAL TRANSACTION. 7.3.II. THE FACTS PREVAILING IN THE INSTANT CASE ARE A LSO THAT THE ASSESSEE IS THE DISTRIBUTOR OF MENS WEAR IMPORTED FR OM ITS AE. IT DOES NOT CARRY OUT ANY VALUE ADDITION. THOUGH THE ASS ESSEE IS ALLEGED TO HAVE INCURRED HUGE EXPENSES ON ADVERTIS EMENT AND MARKET PROMOTION, THE SAME WOULD NOT INCREASE THE INHERENT VALUE OF THE PRODUCTS. IN THE CASE OF SIMPLE DISTRIBUTION OF PRODUCTS, IT HAS BEEN CONSISTENTLY HELD IN THE ABOVE SAID CASE LAWS THAT THE RESALE PRICE METHOD (RP M) IS THE MOST APPROPRIATE METHOD. UNDER THE RPM, THE PROFITS ARE ITA NO. 1928/MUM/2016 : 15 : COMPARED AT GROSS MARGIN LEVEL, IN WHICH CASE, THE EX PENSES INCURRED ON ADVERTISEMENT AND MARKETING SHOULD NOT BE DEDUCTED WHILE ARRIVING AT THE GROSS PROFIT MARGIN. HENCE THE TNMM METHOD ADOPTED BY THE ASSESSEE AS WELL AS THE TPO IS NOT APPROPRIATE METHOD. SINCE THE T.P STUDY REQUIRES TO BE CARRIED OUT AFRESH BY ADOPTING RPM, WE SET ASIDE THE ORDER PASSED BY THE AO ON THIS ISSUE AND RESTORE THE SAME TO HIS FILE FOR EXAMINING THIS ISSUE AFRESH. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 15 TH DAY OF MARCH, 2019 SD/- SD/- (AMARJIT SINGH) (B.R. BASKARAN) /JUDICIAL MEMBER /ACCOUNTANT MEMBER /MUMBAI; /DATED : 15 TH MARCH, 2019 TNMM ITA NO. 1928/MUM/2016 : 16 : COPY OF THE ORDER FORWARDED TO : 1. APPELLANT 2. RESPONDENT 3. DISPUTE RESOLUTION PANEL (DRP), MUMBAI 4. DIRECTOR OF INCOME TAX (IT & TP) 5. ADDL. COMMISSIONER OF INCOME TAX (TRANSFER PRICI NG) 6. D.R. ITAT, MUMBAI 7. GUARD FILE. / BY ORDER, //TRUE COPY// / (DY./ASST. REGISTRAR) !'!#$%, / ITAT, MUMBAI
