M/s. MATTEL TOYS (I) P. LTD., MUMBAI V. DCIT CIR. - 6(3), MUMBAI

ITA 2476/MUM/2008

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 3466 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 2 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-06-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 06-05-2013
• Assessment Year: 2002-2003
• Appeal Filed On: 09-04-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Depreciation; Transfer pricing; International transaction; Retrospective amendment
• Section: 92C; 43B; 143(3); 10B; 92

Judgement Text

, , , , IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI , , !' !' !' !' # $% # $% # $% # $% , ,, , & & & & ' ' ' ' BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER . / ITA NO. 2476/MUM./2008 ( &) * '+* / ASSESSMENT YEAR : 200203 ) MATTEL TOYS (I) PVT. LTD. PHOENIX HOUSE, B WING 4 TH FLOOR, 462, SENAPATI BAPAT MARG LOWER PAREL, MUMBAI 400 013 .. ,- / APPELLANT ) V/S DY. COMMISSIONER OF INCOME TAX CIRCLE6(3), AAYAKAR BHAVAN 101, M.K. ROAD, MUMBAI 400 020 .... ./,- / RESPONDENT , . / PERMANENT ACCOUNT NUMBER AACCM2563P . / ITA NO. 2801/MUM./2008 ( &) * '+* / ASSESSMENT YEAR : 200203 ) DY. COMMISSIONER OF INCOME TAX CIRCLE6(3), AAYAKAR BHAVAN 101, M.K. ROAD, MUMBAI 400 020 .. ,- / APPELLANT ) V/S MATTEL TOYS (I) PVT. LTD. PHOENIX HOUSE, B WING 4 TH FLOOR, 462, SENAPATI BAPAT MARG LOWER PAREL, MUMBAI 400 013 .... ./,- / RESPONDENT , . / PERMANENT ACCOUNT NUMBER AACCM2563P &) *1# 2 3 / ASSESSEE BY : MR. MUKESH BUTANI ' 2 3 / REVENUE BY : MR. AJIT KUMAR JAIN A/W MRS. SASMITA MISRA MATTEL TOYS (I) PVT. LTD. 2 )' 2 # / DATE OF HEARING 06.05.2013 $ 45+ 2 # / DATE OF ORDER 12.06.2013 $ $ $ $ / ORDER # $% # $% # $% # $% , ,, , & & & & 6 6 6 6 / PER AMIT SHUKLA, J.M. THESE CROSS APPEALS ARE DIRECTED AGAINST THE IMPUGN ED ORDER DATED 31 ST DECEMBER 2011, PASSED BY THE LEARNED COMMISSIONER (APPEALS)-XXXII, MUMBAI, FOR THE QUANTUM OF ASSESSMENT PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (FOR SHORT THE ACT ) FOR THE ASSESSMENT YEAR 2002 03. WE FIRST TAKE UP ASSESSEES APPEAL IN ITA NO.2476/MUM./2008, FOR THE ASSESSMENT YEAR 200203 . 2. IN GROUND NO.1, THE ASSESSEE HAS CHALLENGED THE DIS ALLOWANCE OF ` 25,12,877, BEING CONTRIBUTION TO SUPERANNUATION FUN D AND ` 5,52,581, BEING EMPLOYERS CONTRIBUTION TO PF AND ESIC UNDER SECTIO N 43B. 3. ON A PERUSAL OF THE DETAILS FILED BY THE ASSESSEE I N RESPECT OF THE PAYMENT OF PF AND ESIC, THE ASSESSING OFFICER NOTED THAT SOME OF THE AMOUNTS WERE PAID AFTER THE DUE DATE AS PER THE PROVISIONS OF SECTION 43B(B). ACCORDINGLY, HE WORKED OUT THE DISALLOWANCE UNDER SECTION 43B AFTER INCORPORATING THE DETAILS OF AMOUNT PAID, DATE OF P AYMENT AND DUE DATE WHICH HAS BEEN GIVEN AT PAGES2 AND 3 OF THE ASSESS MENT ORDER AND THEREBY WORKED OUT THE DISALLOWANCE UNDER SECTION 43B IN TH E FOLLOWING MANNER: MATTEL TOYS (I) PVT. LTD. 3 TOTAL DISALLOWANCE AS COMPUTED BY THE A.O. IN PARA4.1 ` 44,09,107 LESS: DISALLOWANCE U/S 43B AS MADE BY THE ASSESSEE IN THE COMPUTATION OF INCOME ` 5,52,581 TOTAL DISALLOWANCE ` 38,56,526 4. BEFORE THE LEARNED COMMISSIONER (APPEALS), BESIDES CHALLENGING THE DISALLOWANCE OF ` 38,56,526, THE ASSESSEE RAISED AN ADDITIONAL GROUN D IN RESPECT OF DISALLOWANCE OF ` 5,52,581, WHICH WAS ADDED BACK BY THE ASSESSEE IN THE COMPUTATION OF INCOME FILED ALONG W ITH THE RETURN OF INCOME. THIS ADDITIONAL GROUND WAS ADMITTED BY THE LEARNED COMMISSIONER (APPEALS). 5. BEFORE THE LEARNED COMMISSIONER (APPEALS), IT WAS A RGUED THAT MOST OF THE PAYMENTS HAVE BEEN MADE WITHIN THE GRACE PER IOD AND IN ANY CASE ALL OF THEM HAVE BEEN PAID BEFORE THE DUE DATE OF THE R ETURN OF INCOME. IT WAS ALSO POINTED OUT THAT CERTAIN DISALLOWANCE HAVE BEE N MADE ON THE AMOUNT WHICH HAVE BEEN ADDED TWICE. THE LEARNED COMMISSION ER (APPEALS), AFTER VERIFYING THE DETAILS, CAME TO THE CONCLUSION THAT THE AMOUNT WHICH HAS BEEN PAID WITHIN THE GRACE PERIOD, HAS TO BE ALLOWED UND ER SECTION 43B, HOWEVER, THE PAYMENTS WHICH HAVE BEEN MADE BEFORE THE DUE DA TE OF FILING OF THE RETURN OF INCOME WHICH AGGREGATED TO ` 30,65,458, THE SAME CANNOT BE ALLOWED ON THE FOLLOWING REASONS: 2.7 I HAVE CONSIDERED THE LEGAL POSITION LAID DOWN BY HIGHER AUTHORITIES IN THE ABOVE JUDGMENTS. SO FAR AS THE DECISION OF HON BLE MUMBAI AND DELHI TRIBUNAL IN THE ABOVE 3 CASES ARE CONCERNED, THE LE GAL POSITION IN THE MATTER IS STILL NOT FINAL. THE JUDGMENT OF HONBLE SUPREME COURT IN A/LIED MOTORS P LTD., 224 171 667 RELATES TO THE PROVISIONS OF SEC. 43B PRIOR TO A.Y.2004-05 AND, THEREFORE, THE SAID DECISION CANNOT HE INTERPR ETED TO MEAN THAT THE PROVISIONS AS THEY STAND TODAY FOR A.Y.2004-05 ONWA RDS ARE ALSO APPLICABLE WITH RETROSPECTIVE EFFECT. DETAILED FACTS IN THE TW O CASES OF HONBLE MUMBAI TRIBUNAL ARE ALSO NOT KNOWN SO AS TO INTERPRET THAT THEY WOULD NECESSARILY APPLY TO THE CASE OF THE APPELLANT. AS PER THE PROV ISIONS OF THE ACT FOR A.Y.2002-03, IT IS QUITE EVIDENT THAT THESE PAYMENT S ARE NOT ALLOWABLE U/S.43B OR SEC.36(II)(VA) BECAUSE THE PAYMENTS WERE MADE BEYOND DUE DATES INCLUDING THE GRACE PERIOD. IN VIEW OF THIS, THEREFORE, THE ARGUMENT OF THE APPELLANT IN THIS REGARD CANNOT BE ACCEPTED AND THE BALANCE DISALLOWANCE U/S.43B OF RS.25.12,877/- MADE BY THE A.O. IS HEREB Y UPHELD. MATTEL TOYS (I) PVT. LTD. 4 6. THE LEARNED COUNSEL SUBMITTED THAT THIS ISSUE OF AL LOWABILITY UNDER SECTION 43B, IF PAID BEFORE THE DATE OF RETURN OF I NCOME UNDER SECTION 139(1), IS NOW COVERED BY SERIES OF DECISIONS OF TH E COORDINATE BENCH OF THE TRIBUNAL WHEREIN THE JUDGMENT OF THE HON'BLE SUPREM E COURT IN CIT V/S ALOM EXTRUSIONS LTD., [2009] 319 ITR 306 (SC), HAS BEEN FOLLOWED. 7. THE LEARNED DEPARTMENTAL REPRESENTATIVE FAIRLY ADMI TTED THAT THIS ISSUE NOW SQUARELY COVERED BY THE JUDGMENT OF THE H ON'BLE SUPREME COURT. 8. AFTER CONSIDERING THE RELEVANT FINDINGS OF THE ASSE SSING OFFICER AND THE LEARNED COMMISSIONER (APPEALS), WE FIND THAT IT IS NOT IN DISPUTE THAT ALL THE PAYMENTS WHICH HAVE BEEN REFERRED TO BY THE ASSESSI NG OFFICER AT PAGES2 AND 3, RELATE TO EMPLOYERS AND EMPLOYEES CONTRIBU TION TO PF & ECIS, AND EMPLOYEES SUPERANNUATION FUNDS WHICH HAVE BEEN PAI D BEFORE THE DUE DATE OF FILING OF THE RETURN OF INCOME. IN VIEW OF THE LAW SETTLED BY THE HON'BLE SUPREME COURT IN ALOM EXTRUSIONS (SUPRA), A ND FOLLOWED BY VARIOUS COURTS, THE PAYMENTS TOWARD EMPLOYERS AND EMPLOYEE S CONTRIBUTION TO PF & ECIS, MADE AFTER THE GRACE PERIOD BUT PRIOR TO FI LING OF THE RETURN OF INCOME, CONSTITUTE ADMISSIBLE DEDUCTION WITHIN THE AMBIT OF SECTION 43B. CONSEQUENTLY, WE SET ASIDE THE IMPUGNED ORDER PASSE D BY THE LEARNED COMMISSIONER (APPEALS) AND ALLOW THE CLAIM ADMISSIB LE UNDER SECTION 43B. THUS, TREAT GROUND NO.1, RAISED BY THE ASSESSEE IS TREATED AS ALLOWED. 9. IN GROUND NO.2, THE ASSESSEE HAS CHALLENGED THE DIS ALLOWANCE OF DEPRECIATION OF ` 24,58,028. 10. THE ASSESSING OFFICER, ON A PERUSAL OF AUDITED ACCO UNTS, ESPECIALLY SCHEDULE T, CLAUSE 19 TO THE NOTES AND ACCOUNTS, NOTED THAT THE BOARD OF DIRECTORS IN THEIR MEETING HELD ON 31 ST DECEMBER 2000, DECIDED TO DISCONTINUE THE MANUFACTURING OF TOYS W.E.F. 1 ST JANUARY 2001. THE ASSESSEE ITSELF HAD DISALLOWED THE VARIOUS PAYMENTS / PROVIS IONS TOWARDS THE SAID FACTORY IN THE COMPUTATION OF INCOME. HOWEVER, IN T HE STATEMENT OF DEPRECIATION UNDER SECTION 32, THE ASSESSING OFFICE R NOTED THAT THE ASSESSEE MATTEL TOYS (I) PVT. LTD. 5 HAS CLAIMED DEPRECIATION ON PLANT AND MACHINERY, MO ULDS, ETC. OF ` 90,71,622, ON THE ASSETS OF THE CLOSED PLANT ALSO. IN RESPONSE TO THE SHOW CAUSE NOTICE, THE ASSESSEE GAVE DETAILS OF BREAKUP OF THE PLANT AND MACHINERY SHOWN IN THE BLOCK OF ASSETS WHICH HAS BE EN INCORPORATED AT PAGE4 OF THE ASSESSMENT ORDER. IT WAS FURTHER SUBM ITTED THAT EVEN IF THE PLANT AND MACHINERY HAVE NOT BEEN ACTIVELY USED BUT THERE WAS A PASSIVE USER OF SUCH PLANT AND MACHINERY AND THEY WERE IN T HE CONDITION OF READY TO USE, DEPRECIATION IS TO BE ALLOWED ON SUCH ASSETS. FURTHER, ONCE SUCH ASSET FORMS PART OF THE BLOCK OF ASSETS , THE COMPANY IS ENTITLED TO CLAIM DEPRECATION ON THE SAME. THE ASSESSING OFFICER, AFT ER DETAIL DISCUSSION, DISALLOWED THE DEPRECIATION ON SUCH PLANT AND MACHI NERY AGGREGATING TO ` 24,50,028, ON THE GROUND THAT SUCH PLANT AND MACHIN ERY HAVE NOT BEEN USED AT ANY TIME DURING THE RELEVANT ACCOUNTING YEA R. 11. BEFORE THE LEARNED COMMISSIONER (APPEALS), IN SUPPO RT OF THE CONTENTIONS THAT THE DEPRECIATION ON THE PLANT AND MACHINERY FORMING PART OF THE BLOCK OF ASSETS HAS TO BE ALLOWED AND ALSO ON P ASSIVE USER OF SUCH PLANTS AND MACHINERIES, RELIED UPON THE FOLLOWING CASE LAW S: I) CIT V/S GEO TECH CONSTRUCTION CORPORATION, 244 ITR 0452 (KER.); AND II) CIT V/S REFREGERATION AND ALLIED INDUSTRIES LTD. 22 8 ITR 12 (DEL.) 12. THE LEARNED COMMISSIONER (APPEALS), AFTER ANALYSING THE FACTS AND THE RATIO OF THE SAID DECISIONS, REJECTED THE ASSESSEE S CONTENTIONS AND UPHELD THE ACTION OF THE ASSESSING OFFICER IN DISALLOWING THE DEPRECIATION OF PLANT AND MACHINERY TO THE EXTENT OF ` 24,58,028. 13. BEFORE US, THE LEARNED COUNSEL REITERATED THE SUBMI SSION THAT ONCE AN ASSET FORMS PART OF THE BLOCK ASSET, DEPRECIATION C ANNOT BE DISALLOWED ON THE GROUND THAT IT HAS NOT BEEN USED DURING THE ACCOUNT ING YEAR. IN ANY CASE, THESE PLANT AND MACHINERIES WERE READY FOR USE AND IN VIEW OF VARIOUS MATTEL TOYS (I) PVT. LTD. 6 DECISIONS, ALLOWANCE OF DEPRECIATION ON SUCH PLANT AND MACHINERIES WHICH ARE READY FOR USE CANNOT BE DISALLOWED. ALTERNATIVELY, HE SUBMITTED THAT THE DISALLOWANCE OF DEPRECIATION ON THE PLANT AND MACHI NERIES FOR ` 24,58,028 ALSO CONTAINED CERTAIN MACHINERIES WHICH WERE NOT F OR MANUFACTURING ACTIVITIES. IF ANY DISALLOWANCE IS CALLED FOR, THEN THE SAME SHOULD BE RESTRICTED TO PLANT AND MACHINERY WHICH IS USED FOR MANUFACTURING ACTIVITIES AND WERE NOT USED IN THE RELEVANT ACCOUNTING YEAR. 14. LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE ASSESSEES MANUFACTURING ACTIVITY HAD CEASED TO EXIST AFTER 1 ST JANUARY 2010 AND NOTHING HAS BEEN MADE AVAILABLE ON THE RECORD THAT THESE PLANT AND MACHINERY WERE INTENDED TO BE USED IN FUTURE, THERE FORE, DEPRECIATION HAS RIGHTLY BEEN DISALLOWED. REGARDING ALTERNATE PLEA O F THE LEARNED COUNSEL THAT THE SOME OF THE PLANT AND MACHINERIES WERE NOT USED FOR MANUFACTURING ACTIVITIES, HE SUBMITTED THAT THE SAME MAY BE RESTO RED TO THE FILE OF THE ASSESSING OFFICER FOR VERIFICATION. 15. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE RELEVANT FINDINGS OF THE ASSESSING OFFICER AND THE LEARNED COMMISSIONER (APPEALS). IT IS NOT IN DISPUTE THAT THE ASSESSEES MANUFACTURING ACTIVITIES HAVE BEEN CLOSED DOWN W.E.F. 1 ST JANUARY 2001 AND THE PLANT AND MACHINERY WHICH WERE FOR THE PURPOSE OF MANUFACTURING ACTIVIT IES HAVE NOT BEEN PUT TO USE EITHER DURING THE RELEVANT ACCOUNTING YEAR OR I N THE SUBSEQUENT ASSESSMENT YEARS. THEREFORE, THE DEPRECIATION CANNO T BE ALLOWED ON SUCH MACHINERY AND FURTHER PASSIVE USER OF SUCH MACHINER Y HAVE ALSO NOT BEEN ESTABLISHED BY THE ASSESSEE. FURTHER, IT HAS TO BE ESTABLISHED BY THE ASSESSEE THAT THESE PLANTS AND MACHINERY WERE KEPT READY FOR USE IN THE FUTURE, BUT IN THIS CASE, IT HAS NOT BEEN DONE SO. HOWEVER, THIS PLEA OF THE ASSESSEE CANNOT BE ACCEPTED. THE ASSESSEE IS A GOIN G CONCERN AND ANY PLANT AND MACHINERY WHICH ARE USED FOR OTHER THAN MANUFAC TURING ACTIVITIES, THE SAME HAS TO BE ALLOWED. THEREFORE, AGREEING WITH TH E ALTERNATE CONTENTIONS OF THE LEARNED COUNSEL THAT THE DEPRECIATION CANNOT BE DENIED ON PLANT AND MATTEL TOYS (I) PVT. LTD. 7 MACHINERY WHICH WERE USED FOR OTHER THAN MANUFACTUR ING PURPOSE, WE SET ASIDE THE IMPUGNED ORDER PASSED BY THE LEARNED COMM ISSIONER (APPEALS) AND RESTORE THE ISSUE BACK TO THE FILE OF THE ASSES SING OFFICER TO VERIFY AND EXAMINE WHETHER THE DISALLOWANCE WHICH HAS BEEN MAD E BY THE ASSESSING OFFICER INCLUDES PLANT AND MACHINERY WHICH WERE NOT USED FOR MANUFACTURING PURPOSES. THE ASSESSEE WILL PROVIDE ALL THE NECESSA RY DETAILS BEFORE THE ASSESSING OFFICER FOR THE PURPOSE OF VERIFICATION. CONSEQUENTLY, THIS ISSUE IS RESTORED TO THE FILE OF THE A.O. FOR THE PURPOSE OF VERIFICATION AS DIRECTED ABOVE. THIS GROUND IS THUS TREATED AS PARTLY ALLOWE D FOR STATISTICAL PURPOSES. 16. IN GROUND NO.3, THE ASSESSEE HAS CHALLENGED THE UPW ARD ADJUSTMENT OF ARMS LENGTH PRICE (FOR SHORT ALP ) IN RESPECT OF IMPORT OF FINISHED GOODS FROM THE ASSOCIATE ENTERPRISE (FOR SHORT A.E ) AND SALE IN DOMESTIC MARKET. 17. FACTS IN BRIEF : THE ASSESSEE IS AN INDIRECT WHOLLY OWNED SUBSIDI ARY OF MATTEL INC., U.S.A., WHICH IS THE WORLDWIDE LEADER IN MANUFACTURING AND MARKETING OF VARIETY OF TOY PRODUCTS AND GAMES. THE ENTIRE SHARE CAPITAL OF THE ASSESSEE COMPANY IS OWNED BY MATTEL INC., U.S.A . AND PARTLY THROUGH ITS OTHER SUBSIDIARY. THE ASSESSEE IS ENGAGED IN MARKET ING AND SELLING OF TOY BRANDS OF MATTEL GROUP IN INDIA AND RECORDED ITS TU RNOVER OF ` 36 CRORES DURING THE RELEVANT PREVIOUS YEAR. ITS OPERATIONS C ONSISTED OF IMPORT OF FINISHED GOODS FROM THE GROUP COMPANIES AND SELLING THEM IN INDIA AND ALSO MANUFACTURING OF THE TOY AFTER IMPORTING THE RAW MA TERIALS FROM THE A.E. THE TOY BRANDS DEALT BY THE ASSESSEE IN INDIA INCLUDED BARBIE DOLLS, HOT WHEELS, FISHER PRICE PRODUCTS AND OTHER ENTERTAINMENT GAMES . THUS, THE ASSESSEE HAD INTERNATIONAL TRANSACTIONS WITH THE A.E. WITH R EGARD TO THE PURCHASE OF FINISHED GOODS AND PURCHASE OF RAW MATERIALS. LOOKI NG TO THE NATURE OF INTERNATIONAL TRANSACTIONS WITH ITS A.E., THE ASSES SING OFFICER MADE A REFERENCE U/S 92CA(1) TO THE TRANSFER PRICING OFFIC ER (FOR SHORT TPO ) FOR DETERMINATION OF ALP AS REPORTED IN FORM3CEB FILED BY THE ASSESSEE. THE TURNOVER OF THE ASSESSEE COMPANY ALONG WITH THE NET PROFIT BEFORE INTEREST AND TAX FOR VARIOUS YEARS WERE REPORTED IN THE FOLL OWING MANNER: MATTEL TOYS (I) PVT. LTD. 8 A.Y. SALES ( ` ) RETURNED INCOME / LOSS ( ` ) NPBT ( ` ) TAXES PAID IN INDIA 200304 30,41,12,782 () 18,92,71,790 () 14,16,04, 449 NIL 200203 36,58,52,712 () 22,31,41,398 () 33,33,51, 613 NIL 200102 46,56,93,750 () 34,28,16,554 () 40,71,57, 703 NIL 200001 24,80,65,852 () 12,46,36,005 () 12,33,00, 581 NIL 18. DURING THE RELEVANT ASSESSMENT YEAR, THE ASSESSEE H AS DISCLOSED FOLLOWING INTERNATIONAL TRANSACTIONS IN ITS TRANSFE R PRICING REPORT: SL. NO. SALES ( ` ) RETURNED INCOME / LOSS ( ` ) METHOD APPLIED 1. PURCHASE OF RAW MATERIALS 2,19,94,477 COST PLUS METHOD 2. PURCHASE OF FINISHED GOODS 3,08,16,302 TNMM METH OD 3. SALE OF FINISHED GOODS 3,28,21,040 TNMM METHOD 4. REIMBURSEMENT 38,21,597 CUP METHOD 19. INSOFAR AS MANUFACTURING ACTIVITIES WERE CONCERNED, THE TPO ACCEPTED THE ASSESSEES DETERMINATION OF ALP AND THERE IS NO DISPUTE BEFORE US. 20. FOR THE DISTRIBUTION ACTIVITIES WHICH RELATED TO PU RCHASE OF FINISHED GOODS AND SALE THEREOF, THE ASSESSEE IN THE TRANSFE R PRICING REPORT HAS SELECTED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD TO ARRIVE AT THE ALP. IN THE SAID REPORT ITS ELF, THE ASSESSEE HAS REJECTED THE RESALE PRICE METHOD (RPM) FOR THE REAS ON THAT THE SAID METHOD FOCUSES ON GROSS PROFIT MARGIN WHICH IS HEAVILY INF LUENCED BY THE SCOPE AND FUNCTION PERFORMED AND MAY ALSO VARY WIDELY AMONG U NCONTROLLED PARTIES. FURTHER, THE ASSESSEE COULD NOT IDENTIFY THE COMPAR ABLES WITH THE PRODUCT LINES SIMILAR TO THAT OF THE ASSESSEE. FOR THE PURP OSE OF DETERMINING THE ALP UNDER THE TNMM, THE ASSESSEE SELECTED SIX COMPARABL ES WITH THE AVERAGE OPERATING PROFIT MARGIN RATIO AT 0.91% AS COMPARED TO (-) 51.22% SHOWN BY THE ASSESSEE FOR THE DOMESTIC DISTRIBUTION SEGMENT FOR THE YEAR ENDING 31 ST MARCH 2002. ON SUCH MARGIN, THE ASSESSEE MADE AN AD JUSTMENT ON ACCOUNT MATTEL TOYS (I) PVT. LTD. 9 OF ADVERTISEMENT DISTRIBUTION COST AND WORKED OUT T HE AVERAGE OPERATING MARGINS OF THE SIX COMPARABLES AT () 17.41%. THE T PO HAS INCORPORATED THE ORIGINAL PROFIT MARGIN AND THE ADJUSTED OPERATI NG PROFIT MARGIN OF THE SIX COMPARABLES IN PARA6.3 IN THE FOLLOWING MANNER: SL. NO. COMPARABLES ORIGINAL OPERATING PROFIT MARGIN ADJUSTED OPERATING PROFIT MARGIN 1. BALSARA HYGIENE PRODUCTS LTD. 4.36% () 3.2% 2. DETERGENTS INDIA LTD. () 0.43% () 22.46% 3. HENKEL SPIC INDIA LTD. 5.40% () 19.74% 4. MUELLER AND PHIPPS INDIA LTD. () 0.10% () 20.15% 5. NIRMA CONSUMER CARE LTD. () 0.83% () 19.15% 6. PARAMOUNT COSMETICS INDIA LTD. 0.00% () 19.68% AVERAGE OPERATING MARGIN OF COMPARABLES 0.91% () 17.41% 21. THE TPO FURTHER NOTED THAT WITHIN THE DISTRIBUTION ACTIVITY, THE ASSESSEE HAS DETERMINED ITS GROSS PROFIT MARGIN AND OPERATING PROFIT MARGIN UNDER THREE SEGMENTS, FIRSTLY, IMPORTED GOODS FROM THE A.E. SOLD IN DOMESTIC MARKET; SECONDLY, IMPORTED GOODS FROM THE A.E. RESO LD TO A.E. AND LASTLY, IMPORTED GOODS FROM THE A.E. AND EXPORTED TO THIRD PARTIES OUTSIDE INDIA. BASED ON THESE THREE SEGMENTS OF THE DISTRIBUTION A CTIVITY, HE WORKED OUT THE OPERATING PROFIT MARGIN AND GROSS PROFIT IN THE FOLLOWING MANNER: PARTICULARS IMPORT FROM AE & RESALE IN DOMESTIC MARKET ( ` ) IMPORT FROM AE AND EXPORT TO AE ( ` ) IMPORT FROM AE AND EXPORT TO THIRD PARTIES ( ` ) TOTAL DISTRIBUTION ACTIVITY ( ` ) SALES 11,74,41,770 4,61,57,312 7,49,07,171 23,85,06 ,253 LESS: COST OF SALES 8,40,80,455 4,80,71,836 7,88,74,978 21,10,27,269 GROSS PROFIT 3,33,61,315 (19,14,524) (39,67,807) 2, 74,78,984 MATTEL TOYS (I) PVT. LTD. 10 OTHER COSTS 9,35,13,477 1,77,22,486 2,87,61,235 13,99,97,198 OP. PROFIT (6,01,52,162) (1,96,37,010) (3,27,29,042 ) (11,25,18,214) OP. MARGIN (51.22%) (42.54%) (43.69%) (47.17%) GROSS PROFIT 28.40% (4.15%) (5.30%) 11.52% 22. AFTER MAKING THE ANALYSIS IN THE AFORESAID MANNER, HE OBSERVED THAT THE ASSESSEES OPERATING PROFIT MARGIN AT () 51.22 % IN THE DOMESTIC SEGMENT IS MUCH LOWER THAN THE AVERAGE MARGIN EARNE D BY THE OTHER ENTITIES (COMPARABLES) ENGAGED IN THE DISTRIBUTION ACTIVITY IN INDIA WHICH IS AT 0.91%. AFTER INVITING THE ASSESSEES SUBMISSIONS / OBJECTIONS ON THE PROPOSED ADJUSTMENTS, THE TPO GAVE A DETAIL REASONS FOR REJECTING THE ASSESSEES SUBMISSIONS WHICH HAS BEEN DISCUSSED FRO M PARAS6.5 TO PARA 11. ONE OF THE VERY IMPORTANT SUBMISSIONS OF THE AS SESSEE BEFORE THE TPO, VIDE LETTER DATED 6 TH OCTOBER 2004, WAS THAT THE GROSS PROFIT MARGIN SHO ULD BE COMPARED INSTEAD OF OPERATING PROFIT FOR THE THR EE SEGMENTS OF ITS DISTRIBUTION ACTIVITIES AND THE MOST APPROPRIATE ME THOD FOR BENCH MARKING THE ALP SHOULD BE DONE THROUGH RESALE PRICE METHOD WITH THE SAME SET OF COMPARABLES. SUCH A CONTENTION OF THE ASSESSEE HAS BEEN REJECTED BY THE TPO IN PARA11.1. THE TPO FINALLY DETERMINED THE AL P IN THE FOLLOWING MANNER AND MADE FOLLOWING ADJUSTMENTS: 12. IN VIEW OF THE ABOVE, THE ARMS LENGTH PRICE OF THE ASSESSEE IS DETERMINED IN THE FOLLOWING MANNER: (A) THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRA NSACTIONS IS CALCULATED AS PER THE SEGMENTAL COSTS AND REVENUES SUBMITTED BY T HE ASSESSEE IN ITS SUBMISSIONS DATED 17.11.2004 (SEGMENTED COSTS I REV ENUE FOR DOMESTIC SEGMENT) AND SUBMISSION DATED 01.12.2004 (FOR SEGME NT COSTS AND REVENUE FOR REMAINING 2 EXPORT SEGMENTS). (B) THE IMPORT OF FINISHED GOODS OF RE. 3,08,16,302 1- IS CONSIDERED UNDER THE DOMESTIC SEGMENT. (C) THE ASSESSEE HAS MADE ADJUSTMENTS TO THE MARGIN OF THE COMPARABLES ON ACCOUNT OF DIFFERENCE IN ADVERTISEMENT COSTS. AS A RESULT OF THIS, THE AVERAGE OPERATING PROFIT MARGIN OF THE COMPARABLES HAS BEEN DETERMINED AT (-) 17.4% WHICH APPEARS VERY IMPROBABLE IN A DISTRI BUTION ACTIVITY. THE ASSESSEE HAS FLIED NO EVIDENCE TO SUPPORT THE ADJUS TMENT MADE. HENCE, THE ADJUSTMENT MADE BY THE ASSESSEE IN THIS REGARD IS R EJECTED. MATTEL TOYS (I) PVT. LTD. 11 (D) THE AVERAGE OPERATING PROFIT ON SALES RATIO OF 0.91% AS CALCULATED BY THE ASSESSEE IS APPLIED FOR THE DOMESTIC SEGMENT. SEPAR ATE RELIEF ON ACCOUNT OF ADVERTISEMENT COSTS OF THE ASSESSEE HAS BEEN GIVEN WHILE CALCULATING THE ALP. FOR THE SEGMENT CONSISTING OF EXPORT TO A.E. R ATIO OF OPERATING PROFIT ON COSTS OF 0.92% IS APPLIED TO DETERMINE THE ALP . 13. THE ARMS LENGTH PRICE FOR ALL THE THREE SEGMEN TS IS CALCULATED IN THE FOLLOWING MANNER: I. IMPORT FROM A.E AND SALE IN DOMESTIC. PARTICULARS AMOUNT ( ` ) OPERATING PROFIT MARGIN ON SALES OF THE COMPARABLES 0.91% ASSESSEES SALES IN DOMESTIC 11,74,41,770 OPERATING PROFIT REQUIRED ON SALES @ 0.91% 10,68,720 (A) ACTUAL LOSS OF ASSESSEE (6,01,52,162) (B) ADJUSTMENT TO INTERNATIONAL TRANSACTION (A) + (B) 6,12,20,882 LESS: ADVERTISEMENT COSTS AS CHARGED TO THIS SEGMENT AS DISCUSSED IN PARA12(D) (AS PER ANNEXURE2 TO ASSESSEES LETTER DT. 17.11.04) 2,53,68,909 ADJUSTMENT TO INTERNATIONAL TRANSACTION 3,58,51,973 RATIO OF INTERNATIONAL TRANSACTION TO THE COST OF SALES IN THIS SEGMENT (I.E., ` 3,08,16,302 / ` 8,40,80,455) 37% HENCE, 37% OF ` 3,58,51,993 AMOUNTS TO 1,32,65,230 ADJUSTMENT TO THE INTERNATIONAL TRANSACTION 1,32,65 ,230 II. IMPORT FROM A.E. AND SALE TO A.E. (ADJUSTMENT BEING MADE TO SALES VALUE). PARTICULARS AMOUNT ( ` ) ACTUAL SALES (INTERNATIONAL TRANSACTIONS) 3,29,52,6 73 OPERATING PROFIT MARGIN ON COST OF COMPARABLES 0.92 % TOTAL COSTS OF ASSESSEE 6,57,94,322 OPERATING PROFIT REQUIRED 6,05,307 ACTUAL LOSS OF ASSESSEE 19637010 ADJUSTMENT TO THE INTERNATIONAL TRANSACTION 2024231 7 ARMS LENGTH PRICE OF SALES TO AE 5,31,94,990 ACTUAL SALES (INTERNATIONAL TRANSACTIONS) 3,29,52,6 73 MATTEL TOYS (I) PVT. LTD. 12 23. THUS, HE MADE ADJUSTMENT OF ` 1,32,65,230, IN THE ALP OF INTERNATIONAL TRANSACTION ON PURCHASE OF FINISHED G OODS AND ADJUSTMENT OF ` 2,02,42,317 ON SALE OF FINISHED GOODS THEREBY MAKIN G THE TOTAL ADJUSTMENT OF ` 3,35,07,547. 24. BEFORE THE LEARNED COMMISSIONER (APPEALS), THE ASSE SSEE CONTENDED THAT THE ADJUSTMENT MADE BY THE TPO IS WHOLLY INCOR RECT ON FACTS BECAUSE THE TPO HAS PRESUMED THAT THE ASSESSEES GROSS PROF IT MARGIN WOULD WORK OUT TO 80.57% WHICH IS MUCH HIGHER SIDE AS COMPARED FOR AVERAGE GROSS PROFIT MARGIN EARNED BY THE COMPARABLE COMPANIES. F URTHER, THE TPO HAS FAILED TO APPRECIATE THAT THE ASSESSEE HAD HUGE ADM INISTRATIVE COST TO THE EXTENT OF 79.62% OF ITS TOTAL SALES AND BECAUSE OF SUCH ADMIN ISTRATIVE COST, THE ASSESSEE HAD TO INCUR HUGE NEGATIVE PROFIT. THU S, TNMM CANNOT BE AN APPROPRIATE METHOD FOR BENCH MARKING ITS OPERATING NET PROFIT. SINCE THE INTERNATIONAL TRANSACTIONS PERTAIN TO IMPORT OF FIN ISHED GOODS FROM THE A.E. AND RESALE IN THE DOMESTIC MARKET, THE BEST WAY FOR BENCH MARKING SUCH INTERNATIONAL TRANSACTION WAS TO COMPARE GROSS PROF IT MARGIN BY ADOPTING RPM. FURTHER, IT WAS ALSO STATED THAT THE ASSESSMEN T YEAR 200203 WAS THE FIRST YEAR OF ASSESSEES BUSINESS IN INDIA AND, THE REFORE, THEY HAVE TO INCUR VERY HIGH ADMINISTRATIVE COST INCLUDING ADVERTISEME NT AND SUCH EXPENDITURES ACCOUNTED FOR ALMOST 80% OF THE SALES REVENUE. TO A DMINISTER THE GROSS PROFIT MARGIN AND ACTUAL OPERATING PROFIT MARGIN, T HE ASSESSEE FURNISHED CHART FOR SIX YEARS STARTING FROM THE YEARS 200102 TO 200607, WHICH HAS BEEN INCORPORATED IN APPELLATE ORDER AT PARA6.8 IN THE FOLLOWING MANNER: PROFITABILITY STATEMENT PARTICULARS 200102 200203 200304 200405 200506 200607 SALES 111441770 304112782 305011664 321028703 42745 0318 550000867 LESS: SALES TAX 16740887 13479686 19160394 36392568 NET SALES 117441770 304112782 288270777 307549017 4 08289924 523608299 LESS: GROSS COST COST OF GOODS SOLD 84080485 202386334 139965922 157037068 217642512 237802154 GROSS PROFIT (A) 33361285 101726448 148304855 150511949 190647412 285806145 MATTEL TOYS (I) PVT. LTD. 13 GROSS PROFIT (%) 28% 33% 51% 49% 47% 55% OPR. MARGIN (%) 51% 36% 15% 11% 5% 10% ADM. COST AS % OF SALES MATTEL INDIA 80% 69% 66% 60% 52% 45% ADM. COST AS A % OF SALES COMPARABLES 12% 21% 20% 17% 18% DATABASE YET TO UPDATE THE INFO 25. THE LEARNED COMMISSIONER (APPEALS), INSOFAR AS THE TRANSACTIONS RELATING TO IMPORT OF FINISHED GOODS AND RESALE IN INDIA ARE CONCERNED, REJECTED THE ASSESSEES CONTENTIONS ON VARIOUS GROU NDS. THE SUM AND SUBSTANCE OF SUCH REASONING ARE (I) THAT THE ASSESSEES CONTENTION THAT THE CURRENT YEA R WAS THE FIRST YEAR OF OPERATION AND, THEREFORE, THEY HA D TO INCUR HEAVY HIGH ADMINISTRATIVE COST IS NOT TENABLE BECAU SE THE ASSESSEE HAS BEEN OPERATING IN INDIA FOR AROUND 3 T O 4 YEARS IN THE PAST AND IN THE EARLIER YEARS ALSO, THE ASSESSE E HAD SIGNIFICANT TURNOVER. THEREFORE, THERE IS NO JUSTIF ICATION IN ASSESSEES CONTENTIONS ABOUT ADJUSTMENT OF ADMINIST RATIVE COST; (II) THE ASSESSEES CONTENTION THAT PRICES CHARGED BY MA TTEL EUROPA IS AT PAR WITH THE PRICES CHARGED TO OTHER A .ES CANNOT BE ACCEPTED BECAUSE THE TRANSFER PRICING ADJUSTMENTS H AVE TO BE BASED ON FAR ANALYSIS AND IF LOWER PRICES ARE BEING CHARGED IN ASIA REGION, THE SAME CANNOT JUSTIFY LOWER PROFITS, BECAUSE THE ASSESSEE HAS NOT GIVEN PLI INDICES OF ITS A.ES FOR OPERATING IN THIS REGION TO JUSTIFY ITS CLAIM AND WHETHER THEY A RE ALSO SHOWING ABNORMAL LOSSES IN RESPECTIVE MARKETS; (III) THE GROSS PROFIT RATE IN THE PRECEDING YEAR WAS 37. 64% WHEREAS IN THE CURRENT YEAR IS ONLY 19.90% WHICH SUPPORTS THE TPOS CONTENTIONS AND REFUTE THE ASSESSEES CLAIM T HAT NEGATIVE MATTEL TOYS (I) PVT. LTD. 14 PROFITS ARE ON ACCOUNT OF THE FACT THAT THIS WAS IN ITIAL YEAR OF OPERATION IN INDIA; AND (IV) THE ASSESSEES CONTENTION THAT RPM SHOULD BE FOLLOW ED INSTEAD OF TNMM CANNOT BE ACCEPTED BECAUSE THE ASSE SSEE IN ITS TRANSFER PRICING STUDY REPORT HAS GIVEN A DETAIL AN ALYSIS AS TO WHY RPM COULD NOT BE FOLLOWED AND TNMM IS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP. 26. FURTHER, THE LEARNED COMMISSIONER (APPEALS) OBSERVE D THAT THE ASSESSEE ITSELF DID NOT MAKE THE REQUIRED ADJUSTMEN T TO ITS PROFIT AND LEFT IT TO THE TPO TO MAKE THE ADJUSTMENTS. BASED ON THESE REASONS, HE UPHELD THE TPOS DETERMINATION OF ALP ON THE GROUND THAT THE T PO, WHILE DETERMINING THE ALP HAD ALREADY EXCLUDED THE ADVERTISEMENT EXPE NSES AND, THEREFORE, THERE REMAINS NO VALID GRIEVANCE OF THE ASSESSEE TO BE CONSIDERED. THUS, HE UPHELD THE ADJUSTMENT OF ` 1,32,65,320. INSOFAR AS THE ADJUSTMENT ON ACCOUNT OF IMPORT OF A.E. AND EXPORT BACK TO THE A. E. IS CONCERNED, THE LEARNED COMMISSIONER (APPEALS) HAS ACCEPTED THE ASS ESSEES CONTENTIONS. THIS ASPECT WOULD BE DISCUSSED IN THE REVENUES APP EAL. 27. BEFORE US, THE LEARNED COUNSEL, MR. MUKESH BUTANI, REPRESENTING THE ASSESSEE, NARRATED THE ENTIRE FACTS OF THE CASE WHI CH HAS BEEN, BY AND LARGE, DISCUSSED IN THE FORGOING PARAGRAPHS AND THE ISSUE INVOLVED. HE SUBMITTED THAT DUE TO HIGH ADMINISTRATIVE COST AND ADVERTISEM ENT EXPENSES, THE TNMM METHOD CANNOT BE TAKEN AS MOST APPROPRIATE METHOD I N THE ASSESSEES CASE BECAUSE THE NET PROFIT MARGIN EVEN AFTER VARIOUS KI NDS OF ADJUSTMENT WILL NOT RESULT INTO DETERMINATION OF PROPER ARMS LENGTH RE SULT. EVEN THOUGH THE ASSESSEE HAS ADOPTED THE MOST APPROPRIATE METHOD AS TNMM IN THE TRANSFER PRICING REPORT, HOWEVER, SUCH A METHOD FAILS IN THI S CASE DUE TO PECULIAR CIRCUMSTANCES IN THIS CASE AND FURTHER IN THE CASE OF COMPANIES WHICH ARE ENGAGED IN THE DISTRIBUTION ACTIVITIES, RPM IS MORE PREFERABLE METHOD. THE ASSESSMENT YEAR 200203 BEING THE FIRST YEAR OF APP LICATION OF TRANSFER PRICE MATTEL TOYS (I) PVT. LTD. 15 MECHANISM, IT WAS NOT CLEAR EVEN TO THE PROFESSIONA LS WHAT SHOULD HAVE BEEN THE BEST METHODOLOGY AND COMPARABILITY ANALYSI S FOR ARRIVING AT ALP FOR PARTICULAR TYPE OF BUSINESS TRANSACTIONS. BEFORE TH E LEARNED COMMISSIONER (APPEALS), A SPECIFIC SUBMISSION WAS RAISED FOR APP LYING THE RESALE PRICE METHOD IN ASSESSEES CASE BECAUSE THERE WAS HUGE OP ERATING COST IN THE FORM OF ADMINISTRATIVE AND ADVERTISEMENT COST WHICH HAS RESULTED INTO NEGATIVE OPERATING MARGIN OF () 51.22%. THIS WORKI NG OF THE ASSESSEE OF THE ACTUAL NET MARGIN AT () 51.22% HAS NOT BEEN DI SPUTED BY THE TPO OR THE LEARNED COMMISSIONER (APPEALS) EVEN AFTER ADJUS TMENT OF ADVERTISEMENT EXPENSES. HE SUBMITTED THAT NET SALES UNDER THE DIS TRIBUTION SEGMENT WAS AT ` 11,74,41,770, AS AGAINST THE TOTAL COST INCURRED B Y THE ASSESSEE WHICH WAS ` 17,75,93,932 AND OPERATING PROFIT WAS ` () 6,01,52,162, THEREBY GIVING NEGATIVE OPERATING PROFIT RATIO OF () 51.22%. THE REASON FOR SUCH A HUGE ADMINISTRATIVE AND ADVERTISEMENT COST IN THIS YEAR WAS THAT THE ASSESSEE HAS STARTED ITS DISTRIBUTION ACTIVITIES ON ITS OWN AND ALL THE EARLIER ARRANGEMENTS UNDER THE JOINT VENTURE WITH BLOWPLAST WAS DISCONTI NUED. IF THE ASSESSEES GROSS PROFIT MARGIN HAS TO BE ANALYSED, THEN THE AS SESSEES MARGIN AS COMPARED TO THE SIX COMPARABLES ARE MUCH BETTER. BE FORE THE ASSESSING OFFICER AND THE LEARNED COMMISSIONER (APPEALS), THE REVISED MARGIN USING RESALE PRICE METHOD WAS FILED WHICH HAS BEEN REJECT ED BY THEM SIMPLY ON THE GROUND THAT THE ASSESSEE ITSELF HAS ADOPTED TNM M IN THE TRANSFER PRICING REPORT. HE SUBMITTED THAT THE ASSESSEE BEING A DIST RIBUTOR AND IN CASE OF DISTRIBUTION ACTIVITIES, THE RPM HAS BEEN RECOGNISE D TO BE THE MOST APPROPRIATE METHOD FOR BENCH MARKING THE ALP WHILE CARRYING OUT COMPARABILITY ANALYSIS BETWEEN CONTROLLED AND UNCON TROLLED TRANSACTIONS. IN SUPPORT OF HIS CONTENTIONS, HE REFERRED TO THE GUID ANCE NOTE ISSUED BY THE ICAI WHEREIN IT HAS BEEN CLARIFIED THAT RPM MAY BE ADOPTED FOR THE TRANSACTIONS WHERE THERE IS DISTRIBUTION OF GOODS A ND THERE IS NO VALUE ADDITION. FURTHER, HE REFERRED TO THE VARIOUS DECIS IONS OF THE TRIBUNAL WHICH ARE LISTED BELOW WHEREIN IT HAS BEEN HELD THAT IN C ASE OF DISTRIBUTION, RPM IS THE MOST APPROPRIATE METHOD: MATTEL TOYS (I) PVT. LTD. 16 I) DCIT V/S QUARK SYSTEMS PVT. LTD. [2010] 38 SOT 307 (CHD.)(SB); II) DCIT V/S MITSUIOSK LINES MERETIME INDIA P. LTD., IT A NO. 6397/MUM./2006; III) TEXTRONIX INDIA P. LTD. V/S DCIT, ITA NO.1334/BANG. /2010 ORDER DATED 31ST OCTOBER 2012; AND IV) ITO V/S LOREAL INDIA P. LTD., ITA NO.5423/MUM./200 9, ORDER DATED 25 TH APRIL 2012 . 28. REGARDING THE ASSESSING OFFICERS AND LEARNED COMMI SSIONER (APPEALS)S OBJECTION THAT THE ASSESSEE CANNOT CHAN GE THE METHOD FOR DETERMINING THE ALP AT A LATER STAGE, HE SUBMITTED THAT IF THE ALP IN A PARTICULAR CASE CAN BE DETERMINED BY FOLLOWING ANY ONE OF THE METHODS, THEN THE SAME CAN BE RAISED AT ANY STAGE AFTER DULY EXPL AINING AS TO WHY SUCH METHOD SHOULD BE FOLLOWED. IN SUPPORT OF THIS CONTE NTION, HE RELIED UPON THE FOLLOWING DECISIONS OF THE TRIBUNAL: I) DCIT V/S MCI COM INDIA P. LTD., ITA NO.2766 & 4187/ DEL./ 2010; AND II) ACIT V/S MSS INDIA P. LTD., [2009] 32 SOT 132 (PUNE ); AND III) GAP INTERNATIONAL SOURCING INDIA P. LTD., 149 TTJ 4 37. 29. RELYING ON THESE DECISIONS, HE SUBMITTED THAT RPM S HOULD BE FOLLOWED IN THE PRESENT CASE FOR DETERMINATION OF ALP WHILE EVALUATING THE CONTROLLED TRANSACTIONS OF THE ASSESSEE. 30. REGARDING THE COMPARABLES AS SELECTED BY THE ASSESS EE AND ACCEPTED BY THE TPO, HE SUBMITTED THAT EVEN THOUGH THERE WAS NO PRODUCT COMPARABILITY WITH THAT OF THE ASSESSEE BUT ALL WER E FUNCTIONALLY COMPARABLE, THEREFORE, THE SAME COMPARABLES CAN BE TAKEN FOR TH E PURPOSE OF RPM. IN SUPPORT OF THIS CONTENTION THAT PRODUCT COMPARABILI TY IS NOT REQUIRED IN RPM, HE RELIED UPON THE CONTENTS OF PARA2.26 OF THE OEC D GUIDELINES AND THE GUIDELINES OF ICAI. IN CASE OF A DISTRIBUTION, IT I S VERY DIFFICULT TO GET THE MATTEL TOYS (I) PVT. LTD. 17 COMPANIES WITH SIMILAR PRODUCT COMPARABILITY AND, T HEREFORE, ONE HAS TO GO FOR FUNCTIONAL COMPARABILITY. THUS, THE SAME COMPAR ABLES CAN BE CONSIDERED FOR THE PURPOSE OF RPM ALSO. HE POINTED OUT THAT IF THE TRANSFER PRICING ADJUSTMENT AS DONE BY THE TPO IS CARRIED OUT, THEN THE GROSS PROFIT MARGIN WILL BECOME SO HIGH WHICH IS IMPROBABLE IN ANY KIND OF DISTRIBUTION BUSINESS AND IN THE CASE OF THE ASSESSEE, THE PURCHASE PRICE WILL ALMOST BECOME NEGLIGIBLE. LASTLY, BY WAY OF ALTERNATIVE ARGUMENTS , HE POINTED OUT THAT THERE WAS CERTAIN COMPUTATIONAL ERROR IN THE WORKING OF T PO. IN SUPPORT OF THE SAME, HE FURNISHED A CHART BEFORE US. 31. PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE , MR. AJIT KUMAR JAIN, REPRESENTING THE REVENUE, SUBMITTED THAT THE ASSESSEE HAS, FIRST OF ALL, CHOSEN TNMM AS MOST APPROPRIATE METHOD IN THE TRANS FER PRICING STUDY. BASED ON THIS METHOD, THE ASSESSEE HAS SELECTED SIX COMPARABLE COMPANIES WHICH WERE FOR THE PURPOSE OF CARRYING OUT FUNCTION AL COMPARABILITY BASED ON TNMM ONLY. THESE COMPARABLES WERE NOT SELECTED FOR THE PURPOSE OF RESALE PRICE METHOD. HAD THE ASSESSEE CHOSEN RESALE PRICE METHOD IN THE TRANSFER PRICING REPORT THEN THE SELECTION OF COMPARABLES WO ULD HAVE BEEN DIFFERENT AND ALSO THE DIFFERENT GROSS PROFIT MARGIN. ONCE TH E ASSESSEE ITSELF HAS GIVEN A DETAILED REPORT AND COMMENT IN THE TRANSFER PRICI NG REPORT AS TO WHY TNMM IS THE MOST APPROPRIATE METHOD IN THIS CASE AND WHY RESALE PRICE METHOD CANNOT BE ADOPTED. THE ASSESSEE CANNOT JUSTIFY LATE R ON THAT ITS APPROACH WAS WRONG WHEN IT DOES NOT SUITS ITS DETERMINATION OF ALP BY THE TPO OR AT A LATER STAGE. FURTHER, SIX COMPARABLES AS CHOSEN BY THE ASSESSEE WERE DEALING IN DIFFERENT PRODUCT LINES SO THEY CANNOT B E HELD TO BE COMPARABLES FOR THE PURPOSE OF RPM, HOWEVER, FOR THE PURPOSE OF TNMM, SUCH KIND OF COMPARABLES CAN BE TAKEN AS A GOOD COMPARABLES FOR THE PURPOSE OF COMPARABILITY ANALYSIS. HE REFERRED TO THE VARIOUS PRODUCT LINES IN WHICH THESE COMPARABLES WERE DEALING WITH LIKE SOAP, TOIL ETRIES, ETC. HE REFERRED TO THE VARIOUS PARAGRAPHS OF OECD GUIDELINES SPECIFICA LLY PARA2.25, 2.29 THAT SAME KIND OF PRODUCTS SIMILARITIES ARE DESIRABLE IN RPM AND ALSO THAT IN CASE OF THE ASSESSEE, THE TRADE NAME IS OWNED BY THE A.E ., THEREFORE, THE RPM IS MATTEL TOYS (I) PVT. LTD. 18 NOT ADVISABLE IN SUCH CASE. HE ALSO REFERRED TO THE UNITED NATION MANUAL ON TRANSFER PRICING, SPECIFICALLY PARA9.2.9.4, WHEREI N IT HAS BEEN STATED THAT DISTRIBUTORS ENGAGED IN THE SALE OF MARKEDLY DIFFER ENT PRODUCTS CANNOT BE COMPARED IN RESALE PRICE METHOD. 32. MOREOVER, HE SUBMITTED THAT THE ASSESSEE HAS NOT GI VEN ANY COGENT REASON AS TO WHY RESALE PRICE METHOD SHOULD BE ADOP TED NOW WHEN TNMM HAS BEEN ACCEPTED BY IT IN THE TRANSFER PRICING REP ORT. THE ONLY REASON FOR NOW ADOPTING THE RESALE PRICE METHOD IS TO JUSTIFY THE ALP BASED ON THE AVERAGE GROSS PROFIT RATE OF SIX COMPARABLES CHOSEN BY IT THOUGH INITIALLY SELECTED FOR THE PURPOSE OF TNMM. EVEN AFTER THE AD JUSTMENT OF ADVERTISEMENT ON THE OPERATING PROFITS OF SIX COMPA RABLES, THEN ALSO THE AVERAGE NET PROFIT MARGIN OF COMPARABLES COMES TO ( ) 17.41%. EVEN IF THAT IS ALSO ACCEPTED AS SUGGESTED BY THE ASSESSEE, THEN ALSO THE ASSESSEES MARGIN IS NOT AT ALP AND THAT IS WHY THE ASSESSEE H AS TAKEN A TURN AROUND FOR ADOPTING RPM SO AS TO JUSTIFY THE ALP OF ITS A .E. TRANSACTIONS.. THUS, HE SUBMITTED THAT THE SUBMISSIONS OF THE LEARNED COUNS EL FOR ADOPTING THE RPM SHOULD BE REJECTED OUT RIGHTLY. 33. BY WAY OF ALTERNATIVE ARGUMENTS, THE LEARNED DEPART MENTAL REPRESENTATIVE SUBMITTED THAT IN CASE THE RPM IS AC CEPTED TO BE THE MOST APPROPRIATE METHOD FOR BENCH MARKING THE ALP, THEN THE MATTER SHOULD BE RESTORED BACK TO THE FILE OF THE TPO AND THE ASSESS EE SHOULD FURNISH A LIST OF FRESH COMPARABLES FOR CARRYING COMPARABILITY ANALYS IS FOR THE PURPOSE OF RPM. 34. THE LEARNED COUNSEL, IN THE REJOINDER, SUBMITTED TH AT IN CASE OF RPM, THERE CANNOT BE ANY SIMILARITY OF PRODUCT COMPARABI LITY BUT FUNCTIONAL COMPARABILITY HAS TO BE SEEN. HE REFERRED TO THE SA ME OECD GUIDELINES WHICH WERE REFERRED BY THE LEARNED DEPARTMENTAL REP RESENTATIVE DURING THE COURSE OF HIS ARGUMENTS. REGARDING THE LEARNED DEPA RTMENTAL REPRESENTATIVES ARGUMENT THAT THE ASSESSEE HAS ADO PTED RPM BEFORE THE MATTEL TOYS (I) PVT. LTD. 19 TPO AND THE LEARNED COMMISSIONER (APPEALS) SO AS TO JUSTIFY THE ALP AT GROSS PROFIT MARGIN LEVEL IS NOT CORRECT BECAUSE TH E ASSESSEE HAS GIVEN A DETAIL REASONS BEFORE THE TPO AND THE LEARNED COMMI SSIONER (APPEALS) AS TO WHY THE RPM SHOULD BE ADOPTED AND NONE OF THE AUTHO RITIES HAVE GIVEN ANY COGENT REASON FOR REJECTING THE RPM OR ASSESSEES C ONTENTION. 35. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS, PERUSED THE RELEVANT FINDINGS OF THE ASSESSING OFFICER AND THE LEARNED COMMISSIONER (APPEALS) AS WELL AS THE MATERIAL PLACED ON RECORD. THE ONLY DISPUTE BEFORE US RELATES TO ADJUSTMENT OF ALP WITH REGARD TO THE DISTRIBUTION SEGMENT I.E., IMPORT OF FINISHED GOODS FROM THE A.E. AND SALE IN DOMESTIC AS WELL AS TO THE A.E. THE ASSESSEE HAD INITIALLY ADOPTED TNMM AS MOS T APPROPRIATE METHOD FOR BENCH MARKING ITS ALP AND FOR THIS PURPOSE IT H AS CHOSEN SIX COMPARABLES WHICH HAS BEEN ACCEPTED BY THE TPO. THE ASSESSEES OPERATING MARGIN IN RELATION TO THE TRANSACTIONS OF IMPORT OF FINISHED GOODS FROM THE A.E. AND RESALE IN THE DOMESTIC MARKET WAS AT ()51.22% AND THE MAJORITY OF THE OPERATING COST WAS ON ACCOUNT OF ADMINISTRATIVE AND ADVERTISEMENT COSTS. IN THE TRANSFER PRICING REPORT, THE ASSESSEE HAD SUBMI TTED THAT IF THE ADJUSTMENT ON ACCOUNT OF ADVERTISEMENT IS MADE ON T HE AVERAGE OPERATING PROFIT MARGIN OF THE SIX COMPARABLES, THE OPERATING MARGIN WILL COME DOWN TO ()17.41%. THE DETAILS OF ACTUAL OPERATING PROFI T MARGIN AND THE ADJUSTED OPERATING PROFIT MARGIN HAD ALREADY BEEN INCORPORAT ED IN THE FORGOING PARAGRAPHS. IT WAS SUBMITTED BY THE ASSESSEE BEFORE THE TPO AS WELL AS IN THE TRANSFER PRICING REPORT THAT IF THE ADJUSTMENT IS MADE IN THE ALP BASED ON THE OPERATING PROFIT MARGIN OF THE COMPARABLES, THEN ON THE PECULIAR FACTS OF THE CASE SUCH ADJUSTMENTS WOULD RESULT INTO IMPR OBABLE SCENARIO AS THE VALUE OF IMPORTED GOODS WOULD BE DETERMINED AT A VA LUE LESS THAN ZERO, THEREFORE, NO ADJUSTMENT IS REQUIRED AND, HENCE, IT S MARGIN IS AT ALP. ONE OF THE OTHER MAIN CONTENTION OF THE ASSESSEE BEFORE TH E TPO WAS THAT THE GROSS PROFIT MARGIN SHOULD BE COMPARED INSTEAD OF OPERATI NG PROFIT OF ITS DISTRIBUTION ACTIVITIES SEGMENT FOLLOWING RPM INSTE AD OF TNMM. SUCH A SUBMISSION WAS MADE VIDE LETTER DATED 6 TH OCTOBER 2004. THIS HAS BEEN MATTEL TOYS (I) PVT. LTD. 20 REJECTED BY THE TPO MAINLY ON THE GROUND THAT THE A SSESSEE HAS ITSELF ADOPTED TNMM AS THE MOST APPROPRIATE METHOD AND HAS ITSELF REJECTED THE RPM. THIS OBJECTION / SUBMISSION OF THE ASSESSEE HA S ALSO BEEN REJECTED BY THE LEARNED COMMISSIONER (APPEALS) ON THE SAME GROU ND. ONE OF THE MAIN ISSUES BEFORE US AT THIS STAGE IS, AS TO WHAT SHOUL D BE THE MOST APPROPRIATE METHOD ON THE FACTS OF THE ASSESSEES CASE WHICH HA S BEEN DISCUSSED AT LENGTH IN THE EARLIER PARAGRAPHS. 36. ACCORDING TO THE PROVISIONS OF SECTIONS 92C R/W 10B , THE ALP IN RELATION TO AN INTERNATIONAL TRANSACTIONS HAS TO BE DETERMINED BY FOLLOWING ANY OF THE MOST APPROPRIATE METHOD VIZ. (I) COMPARA BLE UNCONTROLLED PRICE METHOD (CUP); (II) RESALE PRICE METHOD (RPM); (III) COST PLUS METHOD (CPM); (IV) PROFITS SPLIT METHOD (PSM) AND (V) TRANSACTION AL NET MARGIN METHOD (TNMM). IN CUP METHOD, THE FOCUS IS DIRECTLY ON THE PRICE OF THE PRODUCT SOLD OR TRANSFERRED REQUIRING BOTH FUNCTIONAL AND P RODUCT COMPARABILITY. THE RPM AND CPM OPERATE AT GROSS PROFIT MARGIN LEVEL RE QUIRING FUNCTIONAL RATHER THAN PRODUCT COMPARABILITY. THE PSM AND TNMM OPERAT E ON OPERATING PROFIT MARGIN LEVEL USED FOR A COMPLEX AND INTEGRATED ENTE RPRISE. THESE METHODS ARE BASED ON PRICE OR PROFIT. THE CENTRE POINT OF T HESE METHODS IS COMPARABILITY ANALYSIS WITH THE COMPARABLES AND THE METHOD WHICH PROVIDES MOST RELIABLE WAY OF ARRIVING AT THE ALP, IS CONSID ERED AS MOST APPROPRIATE METHOD. A COMPARABILITY ANALYSIS IS DONE FOR THE CO MPARISON OF CONTROLLED TRANSACTION(S) WITH AN UNCONTROLLED TRANSACTION(S) AND CONTROLLED AND UNCONTROLLED TRANSACTIONS ARE COMPARABLE IF NONE OF THE DIFFERENCES BETWEEN THE TRANSACTIONS CAN MATERIALLY AFFECT THE FACTOR B EING EXAMINED BY ADOPTING ANY OF THE METHODOLOGIES AS MENTIONED IN SECTION 92 C OR IF ANY REASONABLE ACCURATE ADJUSTMENT CAN BE MADE TO ELIMINATE THE MA TERIAL AFFECTS OF ANY SUCH DIFFERENCE. 37. THE RPM HAS BEEN PRESCRIBED IN RULE 10B(1)(B) IN TH E FOLLOWING MANNER: MATTEL TOYS (I) PVT. LTD. 21 DETERMINATION OF ARM'S LENGTH PRICE UNDER SECTION 9 2C. 10B. (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SEC TION 92C, THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION S HALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE M ETHOD, IN THE FOLLOWING MANNER, NAMELY : (B) RESALE PRICE METHOD, BY WHICH, (I) THE PRICE AT WHICH PROPERTY PURCHASED OR SER VICES OBTAINED 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 NORMAL GROSS PROFIT MARGIN ACCRUING TO THE ENTERPRISE OR TO AN UNRELATE D ENTERPRISE FROM THE PURCHASE AND RESALE OF THE SAME OR SIMILAR PROPERTY OR FROM OBTAINING AND PROVIDING THE SAME OR SIMILAR SERVICES, IN A COMPAR ABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS; (III) THE PRICE SO ARRIVED AT IS FURTHER REDUCED B Y THE EXPENSES 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 I NTO ACCOUNT THE FUNCTIONAL AND OTHER DIFFERENCES, INCLUDING DIFFERENCES IN ACCOUNT ING PRACTICES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPA RABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING I NTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF GROSS P ROFIT MARGIN IN THE OPEN MARKET; (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 TH E PROPERTY OR OBTAINING OF THE SERVICES BY THE ENTERPRISE FROM THE ASSOCIATED ENTERPRISE; 38. THUS, THE RPM METHOD IDENTIFIES THE PRICE AT WHICH THE PRODUCT PURCHASED FROM THE A.E. IS RESOLD TO A UNRELATED PA RTY. SUCH PRICE IS REDUCED BY NORMAL GROSS PROFIT MARGIN I.E., THE GROSS PROFI T MARGIN ACCRUING IN A COMPARABLE CONTROLLED TRANSACTION ON RESALE OF SAME OR SIMILAR PROPERTY OR SERVICES. THE RPM IS MOSTLY APPLIED IN A SITUATION IN WHICH THE RESELLER PURCHASES TANGIBLE PROPERTY OR OBTAIN SERVICES FROM AN A.E. AND RESELLER DOES NOT PHYSICALLY ALTER THE TANGIBLE GOODS AND SE RVICES OR USE ANY INTANGIBLE ASSETS TO ADD SUBSTANTIAL VALUE TO THE P ROPERTY OR SERVICES I.E., RESALE IS MADE WITHOUT ANY VALUE ADDITION HAVING BE EN MADE. SINCE IN RPM ONLY MARGINS ARE SEEN WITH REFERENCE TO ITEMS PURCH ASED AND SOLD OR EARNED BY AN INDEPENDENT ENTERPRISE IN COMPARABLE UNCONTRO LLED TRANSACTIONS VISA MATTEL TOYS (I) PVT. LTD. 22 VIS THE ONE IN THE CONTROLLED TRANSACTIONS, THEREFO RE, IN SUCH A SITUATION, THE NATURE OF PRODUCTS HAS NOT MUCH RELEVANCE THOUGH TH EIR CLOSER COMPARABLE MAY PRODUCE A BETTER RESULT. THE FOCUS IS MORE ON S AME OR SIMILAR NATURE OF PROPERTIES OR SERVICES RATHER THAN SIMILARITY OF PR ODUCTS. IN RPM OTHER ATTRIBUTES OF COMPARABILITIES THAN THE PRODUCT ITSE LF CAN PRODUCE A RELIABLE MEASURE OF ARMS LENGTH CONDITIONS. THE MAIN REASON IS THAT THE PRODUCT DIFFERENTIATION DOES NOT MATERIALLY EFFECT THE GROS S PROFIT MARGIN AS IT REPRESENTS GROSS COMPENSATION AFTER THE COST OF SAL ES FOR SPECIFIC FUNCTION PERFORMED. THE FUNCTIONAL ATTRIBUTE IS MORE IMPORTA NT WHILE UNDERTAKING THE COMPARABILITY ANALYSIS UNDER THIS METHOD. THUS, IN OUR OPINION, UNDER THE RPM, PRODUCTS SIMILARITY IS NOT A VITAL ASPECT FOR CARRYING OUT COMPARABILITY ANALYSIS BUT OPERATIONAL COMPARABILITY IS TO BE SEE N. SINCE THE GROSS PROFIT MARGIN IS THE MAIN CRITERIA WHILE EVALUATING THE TR ANSACTIONS IN THE RPM WHEREIN PRICE IS IDENTIFIED AT WHICH PROPERTY OR SE RVICES ARE RESOLD AND NORMAL GROSS PROFIT MARGIN IS DERIVED AT BY THE ENT ERPRISE WHICH IS DEDUCTED FROM THE RESALE PRICE OF SUCH PROPERTY OR SERVICE I N COMPARABLE UNCONTROLLED TRANSACTIONS. THE GROSS PROFIT MARGIN EARNED BY THE INDEPENDENT ENTERPRISE IN COMPARABLE UNCONTROLLED TRANSACTIONS IS SERVED A S A GUIDANCE FACTOR. THIS IS ALSO WHAT HAPPENS IN THE CASE OF A DISTRIBUTOR W HEREIN THE PROPERTY AND SERVICE ARE PURCHASED FROM THE A.E. AND ARE RESOLD TO OTHER INDEPENDENT ENTITIES, WITHOUT ANY VALUE ADDITIONS. THE GROSS PR OFIT MARGIN EARNED IN SUCH TRANSACTIONS BECOMES THE DETERMINATION FACTOR TO SE E THE GROSS COMPENSATION AFTER THE COST OF SALES. IN THE INSTA NT CASE, THE ASSESSEE IS A DISTRIBUTOR OF MATTEL TOYS AND GETS THE FINISHED GO ODS FROM ITS A.E. AND RESELLS THE SAME TO INDEPENDENT PARTIES WITHOUT ANY VALUE ADDITION. IN SUCH A SITUATION, RPM CAN BE THE BEST METHOD TO EVALUATE THE TRANSACTIONS WHETHER THEY ARE AT ALP. 39. SOME OF THE CASE LAWS RELIED UPON BY THE LEARNED CO UNSEL ALSO SUPPORT OUR ABOVE CONCLUSION THAT IN CASE OF DISTRIBUTION A CTIVITIES I.E., IMPORT OF PRODUCTS AND SERVICES FROM THE A.E. AND RESALE TO T HE INDEPENDENT PARTIES WITHOUT ANY VALUE ADDITION, THE RPM WOULD BE THE MO ST APPROPRIATE METHOD MATTEL TOYS (I) PVT. LTD. 23 FOR DETERMINING THE ALP. THIS VIEW HAS BEEN UPHELD BY THE TRIBUNAL, MUMBAI BENCH, IN TEXTRONIX INDIA P. LTD. (SUPRA), LOREAL INDIA P. LTD. (SUPRA AND STAR DIAMOND GROUP V/S DDIT, 141 TTJ 21. THE OECD G UIDELINES AND ICAI GUIDELINES AS HAVE BEEN REFERRED TO BY THE LEARNED COUNSEL HAVE ALSO EXPRESSED ON THE SIMILAR LINE THAT RPM WOULD BE THE BEST METHOD WHEN RESALE TAKES PLACE WITHOUT ANY VALUE ADDITION TO A PRODUCT FOR BENCH MARKING THE ALP. 40. ON THE OTHER HAND, UNDER THE TNMM, THE ALP IS DETER MINED BY COMPARING THE OPERATING PROFIT RELATED TO AN APPROP RIATE BASE I.E., COST OR SALE OR ASSETS OF THE TESTED PARTY WITH THE OPERATING PROFIT OF AN UNCONTROLLED PARTY ENGAGED IN COMPARABLE TRANSACTIO NS. UNDER THE TNMM, NET MARGIN OR OPERATING PROFIT IS COMPARED AGAINST WITH THE INDEPENDENT ENTITIES AGAINST THOSE ACHIEVED IN RELATED PARTY TR ANSACTIONS. UNDER THE TNMM, THE MAJOR THRUST IS TO DERIVE AT THE OPERATIN G PROFIT AT THE TRANSACTIONAL LEVEL AND TO IDENTIFY THE OPERATING E XPENSES OF BOTH THE TESTED PARTY AS WELL AS THE INDEPENDENT PARTIES. THIS REQU IRES A LOT OF ADJUSTMENTS TO DERIVE AT THE ACTUAL OPERATING PROFIT. IF THE AL P OF ANY TRANSACTION CAN BE DETERMINED BY APPLYING ANY OF THE DIRECT METHODS LI KE CUP, RPM, CPM THEN THEY SHOULD BE GIVEN THE PREFERENCE AND ONCE THESE TRADITIONAL METHODS HAVE BEEN RENDERED INAPPLICABLE THEN ONLY TNMM SHOU LD BE RESORTED TO. ON THE FACTS OF THE ASSESSEES CASE, IN OUR OPINION, T HE ASSESSEE BEING A DISTRIBUTOR WHO IS PURCHASING THE GOODS FROM ITS A .E. AND RESELLING THEM TO INDEPENDENT PARTIES / UNRELATED PARTIES, RESALE PRI CE METHOD WOULD BE THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF THE TRANSACTIONS BETWEEN THE ASSESSEE AND THE A.E. 41. NOW COMING TO THE ARGUMENT OF THE LEARNED DEPARTMEN TAL REPRESENTATIVE THAT ONCE THE ASSESSEE ITSELF HAS CH OSEN TNMM AS MOST APPROPRIATE METHOD IN TPR, THEN IT CANNOT RESORT TO CHANGE ITS METHOD AT AN ASSESSMENT OR APPELLATE STAGE. IN OUR OPINION, SUCH A CONTENTION CANNOT BE UPHELD BECAUSE IF IT IS FOUND ON THE FACTS OF THE C ASE THAT A PARTICULAR METHOD MATTEL TOYS (I) PVT. LTD. 24 WILL NOT RESULT INTO PROPER DETERMINATION OF THE AL P, THE TPO OR THE APPELLATE AUTHORITIES CAN VERY WELL HOLD THAT WHY A PARTICULA R METHOD CAN BE APPLIED FOR GETTING PROPER DETERMINATION OF ALP OR THE ASSE SSEE CAN DEMONSTRATE A PARTICULAR METHOD TO JUSTIFY ITS ALP. THUS, EVEN IF THE ASSESSEE HAD ADOPTED TNMM AS THE MOST APPROPRIATE METHOD IN THE TRANSFER PRICING REPORT, THEN ALSO IT IS NOT PRECLUDED FROM RAISING THE CONTENTIO NS / OBJECTIONS BEFORE THE TPO OR THE APPELLATE COURTS THAT SUCH A METHOD WAS NOT AN APPROPRIATE METHOD AND IS NOT RESULTING INTO PROPER DETERMINATI ON OF ALP AND SOME OTHER METHOD SHOULD BE RESORTED. THE ULTIMATE AIM OF THE TRANSFER PRICING IS TO EXAMINE WHETHER THE PRICE OR THE MARGIN ARISING FRO M AN INTERNATIONAL TRANSACTIONS WITH THE RELATED PARTY IS AT ALP OR NO T. THE DETERMINATION OF APPROXIMATE ALP IS THE KEY FACTOR FOR WHICH MOST AP PROPRIATE METHOD IS TO BE FOLLOWED. THEREFORE, IF AT ANY STAGE OF THE PROC EEDINGS, IT IS FOUND THAT BY ADOPTING ONE OF THE PRESCRIBED METHODS OTHER THAN C HOSEN EARLIER, THE MOST APPROPRIATE ALP CAN BE DETERMINED, THE ASSESSMENT A UTHORITIES AS WELL AS THE APPELLATE COURTS SHOULD TAKE INTO CONSIDERATION SUCH A PLEA BEFORE THEM PROVIDED, IT IS DEMONSTRATED AS TO HOW A CHANGE IN THE METHOD WILL PRODUCE BETTER OR MORE APPROPRIATE ALP ON THE FACTS OF THE CASE. ACCORDINGLY, WE REJECT THE CONTENTIONS OF THE LEARNED DEPARTMENTAL REPRESENTATIVE AND ALSO THE OBSERVATIONS OF THE ASSESSING OFFICER AND THE L EARNED COMMISSIONER (APPEALS) THAT THE ASSESSEE CANNOT RESORT TO ADOPTI ON OF RPM METHOD INSTEAD OF TNMM. 42. NOW, COMING TO THE COMPARABLES SELECTED BY THE ASSE SSEE, WE AGREE WITH THE CONTENTION OF THE LEARNED DEPARTMENTAL REP RESENTATIVE THAT THESE COMPARABLES WERE CHOSEN FOR THE PURPOSE OF CARRYING OUT COMPARABILITY ANALYSIS UNDER THE TNMM AND EVEN THE TPO OR THE ASS ESSEE HAS NOT CARRIED OUT ANY FUNCTIONAL ANALYSIS OF THESE COMPARABLES WI TH REGARD TO THE GROSS PROFIT MARGIN LEVEL. IN OUR CONSIDERED OPINION, THI S MATTER NEEDS TO BE RESTORED TO THE FILE OF THE TPO FOR DENOVO ADJUDICA TION. CONSEQUENTLY, WE SET ASIDE THE IMPUGNED ORDER PASSED BY THE LEARNED COMM ISSIONER (APPEALS) AND RESTORE THE ISSUE BACK TO THE FILE OF THE ASSES SING OFFICER WHO SHALL MATTEL TOYS (I) PVT. LTD. 25 DECIDE THE ISSUE AFRESH AFTER REQUIRING THE ASSESSE E TO FURNISH FRESH COMPARABLES AFTER CONSIDERING THE RPM AS THE MOST A PPROPRIATE METHOD FOR DETERMINATION OF ALP. THE TPO WILL ALSO PROVIDE DUE AND EFFECTIVE OPPORTUNITY OF HEARING AND DETERMINE THE ALP AFTER CONSIDERING THE FRESH COMPARABLES AND FOLLOWING THE RPM. THUS, GROUND NO. 3, RAISED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES . 43. THE ASSESSEE HAS ALSO RAISED ADDITIONAL GROUNDS CHA LLENGING THE TPOS ORDER PASSED UNDER SECTION 92CA3 ON LEGAL GROUNDS. 44. LEARNED COUNSEL CONTENDED BEFORE US THAT HE DID NOT WISH TO PRESS THIS GROUND, TO WHICH, THE LEARNED DEPARTMENTAL REPRESEN TATIVE ALSO DID NOT OBJECT. CONSEQUENTLY, THE ADDITIONAL GROUND IS DISM ISSED AS NOT PRESSED . 45. 1 #7 &) *1# 2 82 9:; ! $ '# < ) # = > 45. IN THE RESULT, ASSESSEES APPEAL IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. WE NOW TAKE UP REVENUES APPEAL IN ITA NO.2801/MUM./2008, FOR ASSESSMENT YEAR 200203 . 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN ALLOWING DEDUCTION OF ` 18,66,369 BEING THE PROFESSIONAL FEES IN THIS YEAR EVEN THOUGH THE PROF ESSIONAL SERVICES WERE RENDERED IN THE PREVIOUS YEAR RELEVANT TO A.Y. 2000 01 . 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN DELETING THE ADDITION OF ` 2,02,42,317 MADE BY THE A.O. ON THE BASIS OF ARMS LENGTH PRICE IN RESPECT OF IMPORT OF FINISHED GOODS FROM ASSOCIATED ENTERPRISES AND EXPORT TO OTHER ASS OCIATED ENTERPRISES . 46. THE ASSESSING OFFICER DISALLOWED ` 18,66,369, AGAINST PROFESSIONAL FEES PAID TO MR. ASHOK PRATAP & CO. A FIRM IN WHICH ONE OF THE DIRECTORS OF THE ASSESSEE WAS PARTNER. THE SERVICES WERE RENDERED FO R THE PERIOD MAY 2000 TO MARCH 2001. THE ASSESSEES CASE BEFORE THE ASSES SING OFFICER WAS THAT MATTEL TOYS (I) PVT. LTD. 26 THE LIABILITY WAS CRYSTALLISED DURING THE CURRENT Y EAR AS THE INVOICES WERE RECEIVED IN THIS YEAR, THEREFORE, THE SAME SHOULD B E ALLOWED IN THIS YEAR. THE ASSESSING OFFICER REJECTED THE SAID CONTENTIONS AND DISALLOWED THE SAME ON THE GROUND THAT ONE OF THE DIRECTORS IS A PARTNER A ND EXPENSES RELATED TO THE EARLIER YEAR, CANNOT BE ALLOWED IN THIS YEAR. 47. BEFORE THE LEARNED COMMISSIONER (APPEALS), IT WAS R EITERATED THAT INVOICES FROM M/S. ASHOK PRASAD & CO. TOWARDS RENDE RING OF PROFESSIONAL SERVICES WERE RECEIVED DURING THE CURRENT FINANCIAL YEAR AND THUS IT CAN VERY WELL BE HELD THAT THE LIABILITY HAS BEEN CRYSTALISE D ONLY IN THE CURRENT YEAR. MOREOVER, THE PROVISIONS FOR SUCH EXPENSES WERE NOT MADE IN THE EARLIER FINANCIAL YEAR AS THE ASSESSEE WAS NOT HAVING PROJE CTION OF FEES THAT WOULD BE CHARGED FOR THE SERVICES RENDERED. THE LEARNED C OMMISSIONER (APPEALS) DELETED THE SAID ADDITION AFTER OBSERVING AND HOLDI NG AS UNDER: 5.3 I HAVE CONSIDERED THE ARGUMENTS AND FACTS NARRA TED BY THE APPELLANT IN THIS REGARD. FIRST OF ALL, IT IS EVIDENT THAT PR OFESSIONAL EXPENSES OF RS.6,24,949/- OUT OF AGGREGATE OF RS.18,66,369/- PE RTAIN TO SERVICES RENDERED DURING THE CURRENT ASSESSMENT YEAR. APPARE NTLY, THIS FACT WAS NOT NOTICED BY THE A.O. FURTHERMORE, FROM THE INVOICES/ BILLS FURNISHED BY M/S.ASHOK PRATAP & CO. TO THE APPELLANT, IT IS ALSO EVIDENT THAT THE BILLS OF RS.18,66,369/- ALTHOUGH PERTAINING TO THE EARLIER Y EAR, WERE FURNISHED TO THE APPELLANT DURING THE CURRENT YEAR ONLY. THE SERVICE S WERE RENDERED IN THE EARLIER YEAR, HOWEVER, THE APPELLANT WOULD KNOW THE LIABILITY ONLY WHEN THE BILLS ARE RECEIVED. IN THIS REGARD, THE APPELLANT H AVE ALSO CITED THE JUDGMENTS IN THE CASE OF SAURASHTRA CEMENT & CHEMICAL INDUSTR IES LTD. 213 ITR 523, 531 (GUJ.) AND NATHMAL TOLARAM 88 ITR 234 (GAUHATI) . IN BOTH THESE CASES IT HAS BEEN HELD THAT LIABILITY IS CRYSTALLIZED ONLY W HEN A DEMAND IN THIS REGARD IS MADE AND THE SAME IS ACCEPTED BY THE ASSESSEE. I, T HEREFORE, AGREE WITH THE ARGUMENT OF THE APPELLANT THAT THE LIABILITY HAS CR YSTALLIZED DURING THE CURRENT YEAR AND HENCE, THE SAME IS ALLOWABLE IN THE CURREN T YEAR. THE ADDITION OF RS.18,66,369/- ON THIS ACCOUNT IS, THEREFORE, DELET ED . 48. AFTER HEARING BOTH THE PARTIES, IT IS SEEN FROM THE FINDINGS OF THE LEARNED COMMISSIONER (APPEALS) WHICH HAS NOT BEEN R EBUTTED BEFORE US THAT THE BILLS PERTAINING TO THE PROFESSIONAL SERVICES R ENDERED WAS RECEIVED IN THIS YEAR AND AFTER THE RECEIPT OF SUCH BILL, THE PAYMEN T HAS BEEN MADE. IN CASE OF PROFESSIONAL FEES, IT IS VERY DIFFICULT TO PROJE CT AS TO WHAT WOULD BE THE FEE THAT WOULD BE CHARGED BY THE PROFESSIONAL FOR THE S ERVICES RENDERED. IT IS MATTEL TOYS (I) PVT. LTD. 27 WHEN THE BILL IS RECEIVED, THE LIABILITY GET CRYSTA LLISED FOR MAKING THE PAYMENT. AS REGARDS THE ASSESSING OFFICERS OBSERVA TION THAT ONE OF THE DIRECTORS OF THE ASSESSEE COMPANY IS A PARTNER IN T HE PROFESSIONAL FIRM, WE FIND THAT THE ASSESSING OFFICER HAS NOT EXAMINE AS TO WHAT COULD HAVE BEEN THE PROPER FEES HAVING REGARD TO THE VALUE OF SERVI CES RENDERED. IN THE ABSENCE OF SUCH A FINDING, THIS OBSERVATION AND FIN DING OF THE ASSESSING OFFICER IS NOT TENABLE. IN FACT, HE HAS PROCEEDED T O DISALLOW THE ENTIRE PAYMENT OF FEES INSTEAD OF ANY EXCESS PAYMENT.. MOR EOVER, THE LEARNED COMMISSIONER (APPEALS) HAS RECORDED A CATEGORICAL F INDINGS THAT OUT OF ` 18,66,369, PROFESSIONAL EXPENSES OF ` 6,24,949, WAS RENDERED IN THE CURRENT ASSESSMENT YEAR ONLY. FOR THE BALANCE SUM ALSO, WE AGREE WITH THE FINDINGS AND THE CONCLUSION DRAWN BY THE LEARNED COMMISSIONE R (APPEALS) AND, ACCORDINGLY, THE SAME ARE BEING AFFIRMED. THUS, GRO UND NO.1, RAISED BY THE REVENUE IS TREATED AS DISMISSED. 49. IN GROUND NO.2, THE REVENUE HAS CHALLENGED THE DELE TION OF ADDITION OF ` 2,02,42,317, MADE BY THE ASSESSING OFFICER IN THE ALP IN RESPECT OF IMPORT OF FINISHED GOODS FROM THE A.E. AND EXPORT TO OTHER A.E. THE TPO IN HIS ORDER HAS BENCH MARKED THE OPERATING PROFIT MARGIN OF THE COMPARABLES WITH THAT OF THE ASSESSEE IN RELATION TO THE OPERATING MARGIN IN THE SEGMENT OF IMPORT OF A.E. AND EXPORT OF A.E. THE ASSESSEES CONTENTIO N HAS BEEN THAT THERE WAS NO SALE AND PURCHASE WITH THE A.E. BUT THE RETURN O F GOODS WHICH WERE PURCHASED FROM THE SAID A.E. 50. BEFORE THE LEARNED COMMISSIONER (APPEALS), THE ASSE SSEES CONTENTION HAS BEEN THAT THE ASSESSEE WHICH IS ENGAGED IN THE BUSINESS OF IMPORT OF TOYS AND SELLING THE SAME IN THE DOMESTIC MARKET. T HE TOY INDUSTRY IS LIKE A FASHION INDUSTRY WHEREIN THERE IS FREQUENT CHANGE I N THE CONSUMER PREFERENCES AND TASTE. DUE TO ANTICIPATED DEMANDS F OR THE PRODUCTS AND BRANDS, THE ASSESSEE IMPORTS FINISHED GOODS, HOWEVE R, AFTER SOME TIME THE REQUIREMENT FOR SUCH PRODUCTS / BRANDS GET REDUCED AND THE ENTIRE PRODUCT IMPORTED FROM THE A.E. DOES NOT MATERIALISE FOR THE PURPOSE OF RESALE. MATTEL TOYS (I) PVT. LTD. 28 BECAUSE OF THIS FACTOR, THE ASSESSEE HAS STOCK OF H UGE INVENTORY WHICH EITHER CANNOT BE SOLD OR WOULD BE LYING AS A SLOW MOVING O R NONMOVING PRODUCT, WHICH WOULD RESULT INTO HUGE LOSS. TO SALVAGE THIS SITUATION, THESE UNSOLD PRODUCTS ARE THEN SOLD AT BEST AVAILABLE PRICE DEPE NDING UPON THE MARKET CONDITION EITHER IN THE DOMESTIC MARKET OR IN THE E XPORT MARKET WHERE THE ASSESSEE TRIES TO SELL BACK THESE PRODUCTS WHEREVER THERE IS DEMAND OF THESE PRODUCTS SO AS TO REDUCE ITS BURDEN OF THE LOSS. TH E DETAIL SUBMISSION OF THE ASSESSEE TO THIS EFFECT HAS BEEN INCORPORATED BY TH E LEARNED COMMISSIONER (APPEALS) AT PAGES16 AND 17 OF THE APPELLATE ORDER . THE LEARNED COMMISSIONER (APPEALS), AFTER APPRECIATING THE ENTI RE FACTS AND MATERIAL ON RECORD, DELETED THE SAID ADJUSTMENT IN THE ALP AFTE R HOLDING AND OBSERVING AS UNDER: 6.14 I HAVE CONSIDERED THE ARGUMENTS OF THE APPELLA NT AND THE FACTS AND FIGURES BROUGHT OUT AS PER STATEMENT OF FACTS AND F URTHER ARGUMENTS / SUBMISSIONS. THE APPELLANT HAS DEMONSTRATED THAT EX PORT TO AE IS ESSENTIALLY A TRANSACTION OF PURCHASE RETURN. SUCH ITEMS HAVE B EEN EXPORTED BACK TO THE SUPPLIER AE WHICH BECAME OBSOLETE IN THE INITIAL YE AR OF THE APPELLANTS OPERATIONS IN INDIA. IT APPEARS THAT THE TPO HAS NO T UNDERSTOOD THAT EXPORT OF FINISHED GOODS SHOWN TO AE IS OF IDLE, SLOW MOVING AND OBSOLETE STOCK WHICH AMOUNTS TO PURCHASE RETURNS. INSTEAD, SHE PRESUMED THAT THESE ARE EXPORTS OF FRESH MANUFACTURED ITEMS TO EARN PROFITS. IT IS IN THIS REGARD THAT THE TPO HAS ERRED IN NOT UNDERSTANDING THIS SECOND LIMB OF TRANSACTIONS AND HENCE, HAS SUGGESTED THE ADJUSTMENT TO THE TOTAL INCOME. T HE APPELLANT HAS ALSO DEMONSTRATED THAT SUCH PURCHASE RETURNS TO AES RESU LTED IN A LOSS OF 4.15% AS COMPARED TO GREATER LOSS OF 5.30% IN RESPECT OF SALE OF OBSOLETE STOCK TO THIRD PARTIES. HENCE, THE APPELLANT HAS RIGHTLY PLE ADED THAT EXPORTS TO AE WHICH WERE OF IDLE AND OBSOLETE STOCK, WERE AT ARM S LENGTH. I AGREE WITH THE ARGUMENT ADVANCED BY THE APPELLANT AND DO NOT CONSI DER THE ADJUSTMENT OF RS.2,02,42,317/- SUGGESTED BY THE TPO TO THE TOTAL INCOME ON THIS ACCOUNT TO BE CORRECT. THE SAID ADDITION IS HEREBY DELETED . 51. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED T HAT THIS IS A CASE OF PURCHASE FROM THE A.E. AND AGAIN RESALE TO THE A .E., THEREFORE, THE TPO WAS JUSTIFIED IN BENCH MARKING THE ALP WITH THAT OF THE INDEPENDENT COMPARABLES. AS AN ALTERNATIVE PLEA, HE SUBMITTED T HAT THE TPO MAY BE DIRECTED TO EXAMINE THE COMPARABILITY ANALYSIS OF T HE PRICE OF THE GOODS SOLD TO THE A.E. AND THE THIRD PARTY IN THIS CASE CONSID ERING TO BE AN INTERNAL CUP. MATTEL TOYS (I) PVT. LTD. 29 52. ON THE OTHER HAND, THE LEARNED COUNSEL SUBMITTED TH AT THE TPO FAILED TO APPRECIATE THE FACTS OF THE CASE BECAUSE THIS WA S NOT A CASE OF SALE OF GOODS BUT RETURN OF OBSOLETE GOODS TO THE A.E. HE F URTHER SUBMITTED THAT THE ASSESSEE HAD SOLD THIS OBSOLETE STOCK TO THIRD PART Y OUTSIDE ALSO WHEREIN IT HAD SUFFERED A GREATER LOSS THAN THAT THE SALE MADE TO THE A.E. AS THE ASSESSEE HAD SUFFERED LOSS OF ()5.30% IN CASE OF T HIRD PARTY AND IN CASE OF SALE MADE TO A.E., THE ASSESSEE HAD SUFFERED A LOSS OF ()4.5%. THEREFORE, THERE WAS AN INTERNAL COMPARABLE TO JUDGE THE ALP W ITH THE A.E. IN THIS TRANSACTION. HE, THUS, STRONGLY RELIED UPON THE FIN DINGS OF THE LEARNED COMMISSIONER (APPEALS). 53. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAVE P ERUSED THE RELEVANT FINDINGS OF THE TPO AS WELL AS THE LEARNED COMMISSIONER (APPEALS). THE ASSESSEES CONTENTIONS HAVE BEEN THAT IN THE TO Y INDUSTRY THE TRENDS IN THE CONSUMER PREFERENCE CHANGES VERY FAST WHICH IS DEPENDENT UPON ADVERTISEMENT PROGRAMME, CARTOON SERIALS AND MOVIES . IN CASE OF TOYS, WHICH HAS BEEN PURCHASED FROM THE A.E. CANNOT BE SO LD IN THE DOMESTIC MARKET DUE TO NEGATIVE MARKET TREND, THEREFORE, IN ORDER TO RECOVER THE COST, THESE UNSOLD PRODUCTS ARE SOLD AT A BEST AVAILABLE PRICE EITHER BY WAY OF EXPORTING BACK TO THE A.E. OR BY EXPORTING TO THE T HIRD PARTY. IT HAS ALSO BEEN STATED THAT THE ASSESSEE HAS SUFFERED A GREATE R LOSS WHILE MAKING SALE IN THE CASE OF A THIRD PARTY IN COMP A RISON TO THE SALE MADE TO THE A.E. HENCE, THERE WAS AN INTERNAL COMPARABLE AVAILABLE T O JUDGE THE ALP. SINCE THIS INTERNAL COMPARABILITY HAS NOT BEEN EXAMINED B Y THE TPO AND THE LEARNED COMMISSIONER (APPEALS) HAS GIVEN A FINDING WITHOUT EXAMINING THE SEGMENTAL DETAILS OF TRANSACTIONS WITH THE A.E. AND THIRD PARTY AND THE INTERNAL COMPARABILITY, THEREFORE, UNDER THESE CIRC UMSTANCES, WE ARE OF THE CONSIDERED OPINION THAT THIS MARGIN OF EXPORT SALE TO THE THIRD PARTY I.E., INTERNAL COMPARABLE SHOULD BE COMPARED TO THE EXPOR T SALE MADE TO THE A.E. THIS ASPECT SHOULD BE VERIFIED BY THE TPO. IN SUCH A SITUATION, THE APPLICABILITY OF INTERNAL CUP CAN ALSO BE APPLIED T O EVALUATE THE ALP IN THIS SEGMENT. WE, THUS, SET ASIDE THE IMPUGNED ORDER PAS SED BY THE LEARNED MATTEL TOYS (I) PVT. LTD. 30 COMMISSIONER (APPEALS) AND RESTORE THE ISSUE TO THE FILE OF THE TPO FOR THE PURPOSE OF CARRYING OUT THE COMPARABILITY ANALYSIS UNDER THE INTERNAL CUP. CONSEQUENTLY, GROUND NO.2, RAISED BY THE REVENUE IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 54. 1 #7 &) *1# 2 !' ' 2 82 9:; ! $ '# < ) # => 54. IN THE RESULT, ASSESSEES APPEAL AND THE REVENU ES APPEAL ARE TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. $ 2 45+ ? @)7 12 TH JUNE 2013 5 2 A > ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH JUNE 2013 SD/- RAJENDRA SINGH ACCOUNTANT MEMBER SD/- # # # # $% $% $% $% & & & & AMIT SHUKLA JUDICIAL MEMBER MUMBAI, @) @) @) @) DATED: 12 TH JUNE 2013 $ 2 .&#B CB+# / COPY OF THE ORDER FORWARDED TO : (1) &) *1# / THE ASSESSEE; (2) ' / THE REVENUE; (3) D () / THE CIT(A); (4) D / THE CIT, MUMBAI CITY CONCERNED; (5) B'GA .&#&) , , / THE DR, ITAT, MUMBAI; (6) AH* I / GUARD FILE. /B# .&# / TRUE COPY $) / BY ORDER . . JK / PRADEEP J. CHOWDHURY '1L &) J' / SR. PRIVATE SECRETARY 9 / / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI