Oriflame India Pvt. Ltd., New Delhi V. Addl.CIT, New Delhi

ITA 328/DEL/2017

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 2822 (ITAT-DELHI)
• Duration Of Justice: 4 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-06-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 12-06-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 19-01-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: HIMANSHU S SINHA
• Keywords: Transfer pricing; Opportunity of being heard; International transaction
• Section: 143(3); 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-1: NEW DELHI BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA NO.328/DEL/2017 ASSESSMENT YEAR : 2012-13 ORIFLAME INDIA PVT. LTD., GROUND FLOOR, CORPORATE ONE, PLOT NO.5, NHCC, JASOLA, NEW DELHI. PAN: AAACO0256B VS. ADDL. CIT, SPECIAL RANGE-7, CR BUILDING, NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI HIMANSHU S. SINHA, ADVOCATE DEPARTMENT BY : SHRI NEERAJ KUMAR, SR. DR DATE OF HEARING : 12.06.2017 DATE OF PRONOUNCEMENT : 13.06.2017 ORDER PER R.S. SYAL, VP: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE FINAL ASSESSMENT ORDER DATED 25.12.2016 PASSED BY THE ASS ESSING OFFICER ITA NO.328/DEL/2017 2 (AO) U/S 143(3) READ WITH SECTION 144C(13) OF THE I NCOME-TAX ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT) IN RELATION TO THE ASSESSMENT YEAR 2012-13. 2. THE ONLY ISSUE RAISED IN THIS APPEAL IS AGAINST THE MAKING OF TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.48,90,2 7,914/-. 3. SUCCINCTLY, THE FACTS OF THE CASE ARE THAT THE A SSESSEE IS AN INDIAN COMPANY, WHICH IS A PART OF THE ORIFLAME GROUP FOUN DED IN 1967. THIS GROUP PROVIDES ABOUT 1000 PRODUCTS IN SKIN CARE, MA KE-UP, FRAGRANCES AND TOILETRIES THROUGH ITS VARIOUS SUBSIDIARIES AND INDEPENDENT LICENSEES ACROSS 60 COUNTRIES ALL OVER THE WORLD AND 3.6 MILL ION INDEPENDENT CONSULTANTS IN THESE COUNTRIES. THE ASSESSEE IS, INTER ALIA, ENGAGED IN THE TRADING OF BEAUTY PRODUCTS. THE MAIN BUSINESS ACTI VITY OF THE ASSESSEE UNDER THIS SEGMENT IS DISTRIBUTION AND SALES OF COS METIC PRODUCTS DIRECTLY TO CUSTOMERS THROUGH ITS CONSULTANTS, I.E., WITHOUT THE CHAIN OF WHOLESALERS AND RETAILERS. A RETURN OF INCOME WAS FILED ALONG WITH FORM NO. 3CEB GIVING DETAILS OF INTERNATIONAL TRANSACTIO NS. THE ASSESSING OFFICER MADE REFERENCE TO THE TRANSFER PRICING OFFI CER (TPO) FOR ITA NO.328/DEL/2017 3 DETERMINING THE ARMS LENGTH PRICE (ALP) OF THE INT ERNATIONAL TRANSACTIONS. HERE IT IS RELEVANT TO MENTION THAT THE ASSESSEE EARNED REVENUE FROM SALE OF FINISHED GOODS AND TRADED GOOD S. THERE IS NO DISPUTE AS REGARDS SALE OF FINISHED GOODS. THE ENT IRE CONTROVERSY IN THE INSTANT APPEAL IS IN RESPECT OF TRADED GOODS. THE ASSESSEE EMPLOYED RESALE PRICE METHOD (RPM) FOR DEMONSTRATING THAT IT S INTERNATIONAL TRANSACTION OF PURCHASE OF TRADED GOODS WAS AT ALP. CERTAIN COMPARABLES WERE CHOSEN BY THE ASSESSEE. THE TPO OB SERVED THAT ONLY MODICARE LTD. WAS A DIRECT MARKETER, LIKE THE ASSES SEE. HE, THEREFORE, REJECTED THE OTHER COMPANIES CHOSEN BY THE ASSESSEE AS COMPARABLE AND TREATED MODICARE LTD. AS A SOLE COMPARABLE. GP/SALE S MARGIN OF MODICARE LTD. WAS INITIALLY COMPUTED AT 71.87% AS A GAINST THE ASSESSEES SIMILAR MARGIN AT 48.27%. AFTER ENTERTA INING THE ASSESSEES OBJECTIONS, THE TPO DETERMINED MARGIN OF MODICARE L TD. AT 69.35%. THIS WAS TREATED AS ARMS LENGTH MARGIN (GP/OPERATI NG INCOME). BY APPLYING THIS RATE AS AN ARMS LENGTH MARGIN, THE T PO COMPUTED TRANSFER PRICING ADJUSTMENT U/S 92CA OF THE ACT AMOUNTING TO RS.48,90,27,914/-. THE ASSESSEE REMAINED UNSUCCESSFUL BEFORE THE DISPU TE RESOLUTION PANEL ITA NO.328/DEL/2017 4 (DRP). THE ASSESSING OFFICER MADE THE ABOVE ADDITI ON IN THE FINAL ASSESSMENT ORDER, AGAINST WHICH THE ASSESSEE HAS CO ME UP IN APPEAL BEFORE US. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT THE ASSESS EE IS CONTINUING THE BUSINESS MODEL AS A DIRECT MARKETER SINCE LAST SEVE RAL YEARS. IN THE IMMEDIATELY PRECEDING THREE YEARS ALSO, THE ASSESSE E APPLIED THE RPM AS THE MOST APPROPRIATE METHOD TO PROVE THAT ITS INTER NATIONAL TRANSACTION OF PURCHASE OF TRADED GOODS WAS AT ALP, WHICH WAS NOT DISPUTED BY THE TPO. IN SUCH EARLIER YEARS ALSO, THE TPO SHORTLIST ED MODICARE LTD. AS THE ONLY COMPARABLE FROM A LIST OF COMPANIES CLAIME D AS COMPARABLE BY THE ASSESSEE. THE VIEW OF THE AO/TPO IN SUCH EARLI ER YEARS WAS CHALLENGED BEFORE THE TRIBUNAL. THE ASSESSEE, APART FROM ASSAILING THE COMPARABILITY OF MODICARE LTD., ALSO CONTENDED BEF ORE THE TRIBUNAL THAT CERTAIN OTHER COMPANIES ENGAGED IN SIMILAR PRODUCTS , EVEN THOUGH SELLING THROUGH THE DISTRIBUTION NETWORK, SHOULD ALSO BE IN CLUDED, ALBEIT AFTER SUITABLE ADJUSTMENT ON ACCOUNT OF WORKING CAPITAL. THE TRIBUNAL, VIDE ITA NO.328/DEL/2017 5 ITS ORDER DATED 24.03.2017 (IN ITA NO.960/DEL/2014 AND OTHERS), FOR THE IMMEDIATELY THREE PRECEDING ASSESSMENT YEARS 2009-1 0, 2010-11 AND 2011-12 UPHELD THE APPLICATION OF THE RPM AS THE MO ST APPROPRIATE METHOD IN THE GIVEN CIRCUMSTANCES. IT WAS SO HELD ON THE PREMISE THAT THE ASSESSEE WAS NOT MAKING ANY VALUE ADDITION TO T HE IMPORTS FROM ITS AES BEFORE SALE TO THE EVENTUAL CUSTOMERS. THE TRIB UNAL APPROVED THE SELECTION OF MODICARE LTD. AS A COMPARABLE. IT FUR THER ADDED THAT: IDEALLY, THE TAX AUTHORITIES SHOULD NOT HAVE SELEC TED MODICARE AS A STANDALONE COMPARABLE. THE TAX AUTHORITIES SHOULD H AVE CARRIED OUT A SEARCH OR DIRECTED THE ASSESSEE TO CARRY OUT A FRES H SEARCH ENSURING THAT THE COMPARABLES SELECTED WERE PRIMARILY ENGAGED IN DIRECT SALES WITH NO MEANINGFUL VALUE ADDITION ACTIVITIES. TO THE EXTEN T POSSIBLE, PRODUCTS SIMILARITY SHOULD HAVE BEEN ASPIRED FOR AND IF IT W AS FOUND IN A PARTICULAR YEAR THAT IT WAS NOT AVAILABLE, THEN CARRYING OUT T HE NECESSARY ADJUSTMENTS ON THE COMPARABLE SELECTED ATTEMPTED TO APPROACH NEAR COMPARABLE FAR. THE ASSESSEES CONTENTION THAT TH E OTHER RETAILERS DEALING IN SIMILAR TYPE OF PRODUCTS SHOULD ALSO BE CONSIDERED WITH SUITABLE ADJUSTMENT, CAME TO BE JETTISONED VIDE PA RA 5.13 OF THE ORDER IN ITA NO.328/DEL/2017 6 WHICH THE TRIBUNAL HELD THAT THE RETAIL SELLERS SHO ULD BE REJECTED AT THE VERY OUTSET. EVENTUALLY, THE TRIBUNAL RESTORED THE MATTER TO THE FILE OF TPO/AO FOR CARRYING OUT NECESSARY ADJUSTMENTS TO TH E PROFIT MARGIN OF MODICARE LTD., BY GIVING FURTHER LIBERTY TO THE ASS ESSEE TO PLACE ON RECORD CERTAIN OTHER COMPARABLES IN DIRECT MARKETIN G. THE ASSESSEE HAS NOT FILED ANY RECTIFICATION PETITION AGAINST IT. A DMITTEDLY, THE FACTS AND CIRCUMSTANCES OF THE INSTANT YEAR ARE, MUTATIS MUTANDIS , SIMILAR TO THOSE OF IMMEDIATELY PRECEDING THREE ASSESSMENT YEARS. IN THAT VIEW OF THE MATTER, THE EARLIER ORDER OF THE TRIBUNAL BECOMES A PRECEDENT TO BE RESPECTFULLY FOLLOWED. 5. THE LD. AR ONCE AGAIN RAKED UP THE CONTENTION TH AT OTHER COMPANIES ENGAGED IN SIMILAR PRODUCTS, BUT, SELLING THEIR GOODS THROUGH RETAIL CHAIN SHOULD BE CONSIDERED AS COMPARABLE. TH IS ARGUMENT, IN OUR CONSIDERED OPINION, CANNOT BE COUNTENANCED. WE HAV E NOTICED ABOVE THAT THE ASSESSEE IS MAKING SALES DIRECTLY TO CUSTO MERS WITHOUT THE INVOLVEMENT OF ANY WHOLESALERS OR RETAILERS NETWO RK. THUS, IT IS PALPABLE THAT THE BUSINESS MODEL ADOPTED BY THE ASS ESSEE FOR SELLING ITS ITA NO.328/DEL/2017 7 PRODUCTS CANNOT, UNDER ANY CIRCUMSTANCE, BE COMPARE D WITH THOSE SELLING THEIR GOODS THROUGH THE RETAIL CHAIN. THE H ON'BLE DELHI HIGH COURT IN RAMPGREEN SOLUTIONS PVT. LTD. VS. CIT (2015) 377 IT R 533 (DEL), HAS HELD THAT A COMPANY WHICH IS OTHERWISE SIMILAR , BUT, OUTSOURCING MAJOR PART OF ITS BUSINESS ACTIVITIES, CANNOT BE COMPARED WITH A COMPANY NOT SO OUTSOURCING BECAUSE OF DIFFER ENCE IN BUSINESS MODELS. THE FOLLOWING OBSERVATIONS FROM THE JUDGMEN T MERIT CONSIDERATION : ` EVEN VISHAL COULD NOT BE CONSIDERED AS A COMPARABLE , AS ADMITTEDLY, ITS BUSINESS MODEL WAS COMPLETELY DI FFERENT . ADMITTEDLY, VISHALS EXPENDITURE ON EMPLOYMENT COST DURING THE RELEVANT PERIOD WAS A SMALL FRACTION OF THE PROPORTIONATE COST INCURRED BY THE ASSESSEE, APPARENTLY, FOR THE REASON THAT MOST OF ITS WORK WAS OUTSOURCED TO OTHER VENDORS/SERVICE PROVIDERS. . PLAINLY, A BUSINESS MODEL WHERE SERVICES ARE RENDERED BY EMPLOYING OWN EMPLOYEES AND USING O NES OWN INFRASTRUCTURE WOULD HAVE A DIFFERENT COST STRUCTUR E AS COMPARED TO A BUSINESS MODEL WHERE SERVICES ARE OUTSOURCED. THERE WAS NO MATERIAL FOR THE TRIBUNAL TO CONCLUDE THAT THE OUTSOURCING O F SERVICES BY VISHAL WOULD HAVE NO BEARING ON THE PROFITABILITY OF THE S AID ENTITY. SIMILAR ITA NO.328/DEL/2017 8 PROPOSITION HAS BEEN LAID DOWN BY THE HON'BLE PUNJA B & HARYANA HIGH COURT IN PRINCIPAL CIT VS. IHG IT SERVICES (INDIA) P. LTD. (2017) 392 ITR 77 (P&H). IN VIEW OF THE FOREGOING DISCUSSION, IT IS MANIFE ST THAT TWO COMPANIES THOUGH DEALING IN SIMILAR PRODUCTS, B UT, HAVING DIFFERENT BUSINESS MODELS, CANNOT BE COMPARED WITH EACH OTHER . IT IS, ERGO, HELD THAT THE ASSESSEES CONTENTION FOR INCLUSION OF OTH ER COMPANIES IN THE LIST OF COMPARABLES WHO ARE NOT INTO THE DIRECT MARKETIN G, DESERVES TO BE AND IS HEREBY REPELLED. 6. THE LD. AR TOOK UP ANOTHER ARGUMENT TO THE EFFEC T THAT THE TRANSACTIONAL NET MARGIN METHOD (TNMM) SHOULD BE CO NSIDERED AS THE MOST APPROPRIATE METHOD INSTEAD OF THE RPM. WE ARE DISINCLINED TO ACCEPT THIS CONTENTION FOR MORE THAN ONE REASONS. FIRSTLY, THE ASSESSEE IS ENGAGED IN PURCHASING AND RESELLING THE SAME GOODS WITHOUT ANY VALUE ADDITION, AND AS SUCH, THE RPM IS THE MOST APPROPRI ATE METHOD IN SUCH CIRCUMSTANCES. SECONDLY, THE TRIBUNAL IN EARLIER Y EARS HAS UPHELD THE RPM AS THE MOST APPROPRIATE METHOD. IN THE ABSENCE OF ANY CHANGE IN ITA NO.328/DEL/2017 9 THE FACTS AND CIRCUMSTANCES OF THE INSTANT YEAR VIS--VIS THE EARLIER YEARS, WE CANNOT ORDER THE SWITCH OVER FROM THE RPM TO THE TNMM. 7. ON A SPECIFIC QUERY AS TO WHY THE LD. AR WAS SO INCLINED TO MAKE A SHIFT TO THE TNMM, IT WAS SUBMITTED THAT MODICARE L TD. WAS LEFT AS THE ONLY COMPARABLE AS A DIRECT MARKETER, AND THAT TOO WITH CERTAIN OTHER DIFFERENCES AND THERE WERE NOT MANY COMPANIES TO BE CONSIDERED AS COMPARABLE. IT WAS SUBMITTED THAT THE TNMM IS MORE TOLERANT TO FUNCTIONAL DIFFERENCES AND, AS THE SEQUITUR, A WIDE R RANGE OF COMPANIES CAN ALSO BE ROPED IN UNDER THIS METHOD WHICH ARE NO T STRICTLY COMPARABLE. WE ARE UNABLE TO ACCEPT THIS CONTENTION FOR THE OBVIOUS REASON THAT SIMILARITY OF THE FUNCTIONS PERFORMED U NDER ANY OF THE METHODS FOR DETERMINING THE ALP IS ESSENTIAL AND CA NNOT BE DISPENSED WITH EVEN UNDER THE TNMM. THE HON'BLE JURISDICTION AL HIGH COURT IN RAMPGREEN SOLUTIONS PVT. LTD . (SUPRA) HAS HELD THAT THE SELECTION OF COMPARABLES DOES NOT DIFFER WITH THE METHODS ADOPTE D AND THE COMPARABLES SHOULD BE SELECTED ON THE BASIS OF SIMI LARITY FOUND EVEN UNDER THE TNMM. RELEVANT DISCUSSION MADE IN PARAS 4 2 AND 43 ITA NO.328/DEL/2017 10 ACCENTUATES THE IMPORTANCE OF FUNCTIONAL SIMILARITY EVEN UNDER THE TNMM : ` BEFORE CONCLUDING, THERE IS YET ANOTHER ASPECT OF T HE MATTER THAT NEEDS CONSIDERATION. THE TRIBUNAL PROCEEDED ON THE BASIS THAT WHILE APPLYING TNMM METHOD, BROAD FUNCTIONALITY IS SUFFIC IENT AND IT IS NOT NECESSARY THAT FURTHER EFFORT BE TAKEN TO FIND A CO MPARABLE ENTITY RENDERING SERVICES OF SIMILAR CHARACTERISTICS AS TH E TESTED ENTITY. THE DRP HELD THAT TNMM ALLOWS FLEXIBILITY AND TOLERANCE IN SELECTION OF COMPARABLES, AS FUNCTIONAL DISSIMILARITIES ARE SUBS UMED AT NET MARGIN LEVELS, AS COMPARED TO RESALE PRICE METHOD OR COMPA RABLE UNCONTROLLED PRICE METHOD AND, THEREFORE, THE FUNCTIONAL DISSIMI LARITIES POINTED OUT BY THE ASSESSEE DID NOT WARRANT REJECTION OF ECLERX AN D VISHAL AS COMPARABLES. . IN OUR VIEW, THE AFORESAID APPROAC H WOULD NOT BE APPOSITE. INSOFAR AS IDENTIFYING COMPARABLE TRANSACTIONS/ENTI TIES IS CONCERNED, THE SAME WOULD NOT DIFFER IRRESPECTIVE O F THE TRANSFER PRICING METHOD ADOPTED. IN OTHER WORDS, THE COMPARABLE TRANSACTIONS/ENTITIE S MUST BE SELECTED ON THE BASIS OF SIMILARITY WITH TH E CONTROLLED TRANSACTION/ENTITY. COMPARABILITY OF CONTROLLED AND UNCONTROLLED TRANSACTIONS HAS TO BE JUDGED, INTER ALIA, WITH REF ERENCE TO COMPARABILITY ITA NO.328/DEL/2017 11 FACTORS AS INDICATED UNDER RULE 10B(2) OF THE INCOM E TAX RULES, 1962. COMPARABILITY ANALYSIS BY TNMM METHOD MAY BE LESS S ENSITIVE TO CERTAIN DISSIMILARITIES BETWEEN THE TESTED PARTY AN D THE COMPARABLES. HOWEVER, THAT CANNOT BE THE CONSIDERATION FOR DILUT ING THE STANDARDS OF SELECTING COMPARABLE TRANSACTIONS/ENTITIES. IT IS APPARENT FROM THE ABOVE DISCUSSION THAT THERE IS NO COMPROMISE ON THE FUNCTIONAL SIMILARITY EVEN UNDER THE TNMM. THUS THE CONTENTIO N OF THE LD. AR IN THIS REGARD DOES NOT HOLD WATER. 8. THE LD. AR TOOK AN ADDITIONAL GROUND TO THE EFFE CT THAT THE TRANSFER PRICING ADJUSTMENT SHOULD BE LIMITED TO THE INTERNA TIONAL TRANSACTIONS ALONE. SINCE THIS IS A LEGAL ISSUE AND DOES NOT RE QUIRE ANY CONSIDERATION OF NEW FACTS AT OUR END, RESPECTFULLY FOLLOWING THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF NATIONAL THERMAL POWER COMPANY LTD. VS. CIT (1998) 229 ITR 383 (SC), WE ADMIT THE ADDITIONAL GROUND FOR CONSIDERATION AND DECISION. 9. IT CAN BE SEEN FROM THE TPOS ORDER THAT WHI LE CALCULATING THE AMOUNT OF TRANSFER PRICING ADJUSTMENT, HE HAS TAKEN OPERATING INCOME OF ITA NO.328/DEL/2017 12 THE ASSESSEE AT RS.205,18,55,944/-. IT IS ON THE B ASIS OF THIS OPERATING INCOME THAT THE TRANSFER PRICING ADJUSTMENT OF RS.4 8.90 CRORE HAS BEEN DETERMINED. ON GOING THROUGH THE ANNUAL ACCOUNTS O F THE ASSESSEE- COMPANY, IT IS LUCID THAT THE TRANSFER PRICING ADJU STMENT HAS BEEN MADE WITH REFERENCE TO THE FIGURES WHICH ALSO INCLUDE NO N-AE TRANSACTIONS. THE HON'BLE DELHI HIGH COURT IN CIT VS. KEIHIN PANALFA LTD. (2016) 381 ITR 407 (DEL) , HAS HELD THAT THE TRANSFER PRICING ADJUSTMENT CA N BE MADE ONLY WITH REFERENCE TO THE INTERNATIONAL TRANSACTIO NS AND NOT THE TRANSACTIONS WITH THE NON-ASSOCIATED ENTERPRISES. SIMILAR VIEW HAS BEEN ESPOUSED BY THE HON'BLE BOMBAY HIGH COURT IN CIT VS. THYSSEN KRUPP INDUSTRIES INDIA PRIVATE LTD. (2016) 381 ITR 413 (B OM) . IN VIEW OF THE ABOVE DISCUSSION, IT IS CLEAR THAT THE TRANSFER PRI CING ADJUSTMENT CANNOT BE MADE WITH REFERENCE TO THE NON-AE TRANSACTIONS, BUT, THE SAME HAS TO BE CONFINED ONLY TO THE INTERNATIONAL TRANSACTIONS. SINCE THE TPO/AO HAS MADE THE ADDITION ON THE BASIS OF TRANSACTIONS EVEN WITH NON-AES, WE DIRECT TO RESTRICT THE ADDITION ONLY QUA THE INTERNATIONAL TRANSACTIONS. ITA NO.328/DEL/2017 13 10. IN VIEW OF THE FOREGOING DISCUSSION AND RESP ECTFULLY FOLLOWING THE TRIBUNAL ORDER IN ASSESSEES OWN CASE FOR THE IMMED IATELY PRECEDING THREE YEARS, WE SET ASIDE THE IMPUGNED ORDER AND RE MIT THE MATTER TO THE FILE OF THE ASSESSING OFFICER/TPO FOR ACCORDINGLY R EDETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION AFRESH AFTER A LLOWING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 11. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 13.06.201 7. SD/- SD/- [AMIT SHUKLA] [R.S. SYAL] JUDICIAL MEMBER VICE PRESIDENT DATED, 13 TH JUNE, 2017. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.