Benetton India Pvt. Ltd., Haryana V. ITO, New Delhi

ITA 3829/DEL/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 53342 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 3 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 01-08-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 11-08-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N K CHAND
• Assessee Lawyers: G C SRIVASTAVA; MONON UT DALAL
• Keywords: Related party transaction; Business income; Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary; Fair market value; Avoidance of tax
• Section: 92C; 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH A NEW DELHI BEFORE SHRI R.P. TOLANI AND SHRI SHAMIM YAHYA ITA NO. 3829/DEL/2010 ASSTT. YR: 2006-07 BENETTON INDIA PVT. LTD. VS. INCOME TAX OFFICER, B-25, INFOCITY, GURGAON, WARD 2(4), NEW DELHI. (HARYANA) PAN/GIR NO. AAACD1013F (APPELLANT ) ( RESPONDENT ) APPELLANT BY : SHRI G.C. SRIVASTAVA & SH. MONON UT DALAL ADV. RESPONDENT BY : SHRI N.K. CHAND O R D E R PER R.P. TOLANI, J.M : THIS IS ASSESSEES APPEAL AGAINST THE ADDL. CITS ORDER DATED 14-10- 2009, PASSED U/S 92 CA(3) OF THE INCOME-TAX ACT, 19 61, RELATING TO A.Y. 2006-07. 2. FOLLOWING GROUNDS ARE RAISED: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE HONBLE DISPUTE RESOLUTION PANEL (DRP) ERR ED IN CONFIRMING ORDER UNDER SECTION 92CA(3) THE INCOME T AX ACT, 1961 (THE ACT) PASSED BY THE LEARNED TRANSFER PRI CING OFFICER (TPO) AND THEREBY CONFIRMING THE DRAFT ORDER PASS ED BY LEARNED ASSESSING OFFICER (AO); 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE HONBLE DRP/TPO ERRED IN CONFIRMING REJECT ION OF THE TRANSACTION BY TRANSACTION ANALYSIS CARRIED OUT BY THE APPELLANT AND BY APPLYING TRANSACTIONAL NET MARGIN METHOD (T NMM) ON A COMPANY WIDE BASIS. 3. WITHOUT PREJUDICE TO THE ABOVE GROUND, ON THE FA CTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HO NBLE DISPUTE ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 2 RESOLUTION PANEL (DRP) ERRED IN NOT DIRECTING TO MA KE SUITABLE ADJUSTMENT TO THE MARGINS OF THE APPELLANT TO ADJUS T FOR MATERIAL DIFFERENCES BETWEEN THE APPELLANT AND COMPARABLE CO MPANIES, WHILE APPLYING TNMM ON A COMPANY WIDE BASIS. 4. WITHOUT PREJUDICE TO THE ABOVE GROUND, ON THE FA CTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HO NBLE DRP/TPO ERRED IN NOT SELECTING APPROPRIATE COMPARAB LES FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS OF THE APPELLANT. 4.1. THE HONBLE DRP/TPO ERRED IN ACCEPTING PAGE INDUSTRIES LIMITED AND MICROTEX INDIA LIMITED WHICH EARNED SIGNIFICANT REVENUES FROM NON-COMPARABLE PRODUCTS A S COMPARABLE COMPANIES. 4.2. THE HONBLE DRP/TPO ERRED IN ACCEPTING RAYMOND APPAREL LIMITED WHICH HAS SIGNIFICANT RELATED PARTY TRANSACTIONS, AS COMPARABLE COMPANY. 4.3. THE HONBLE DRP/TPO ERRED IN ACCEPTING KEWAL K IRAN CLOTHING COMPANY AND KOUTONS RETAIL INDIA LIMITED W HICH UNDERWENT MAJOR RESTRUCTURING CHANGES DURING THE RE LEVANT YEAR AS COMPARABLE COMPANIES. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE HONBLE DRP/TPO ERRED IN CONFIRMING ADJUST MENT TO THE ARMS LENGTH VALUE OF THE INTERNATIONAL TRANSAC TIONS INVOLVING IMPORT OF GARMENTS AND ACCESSORIES, IMPOR T OF LAW MATERIAL AND PAYMENT OF ROYALTY WHICH WERE AT ALREA DY ESTABLISHED ARMS LENGTH ON THE BASIS OF COMPARABLE UNCONTROLLED PRICE (CUP) ANALYSIS SUBMITTED BY TH E APPELLANT IN THE ABSENCE OF ANY ADVERSE OBSERVATIONS REGARDIN G THE ANALYSIS OF THESE TRANSACTIONS BY DRP/TPO. 6. WITHOUT PREJUDICE TO THE ABOVE, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE D RP ERRED IN NOT DIRECTING TPO TO ALLOW DOWNWARD VARIATION OF 5 PERCENT IN DETERMINING THE ARMS LENGTH PRICE AS AMENDED PROVI SO TO SECTION 92C OF THE ACT IS NOT APPLICABLE TO A.Y. 20 06-07. 7. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED AO ERRED IN NOT MEETING THE PRECON DITIONS FOR MAKING REFERENCE TO THE TPO UNDER SECTION 92CA(1) O F THE ACT AND IN NOT PROVIDING AN OPPORTUNITY OF BEING HEARD BEFORE REFERRING THE TRANSFER PRICING ISSUES TO THE LEARNE D TPO. ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 3 2. BRIEF FACTS ARE: THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF BENETTON INTERNATIONAL NV, NETHERLANDS, WHICH IN TURN IS A S UBSIDIARY OF BENETTON GROUP SPA, ITALY, THE ULTIMATE HOLDING COMPANY AND IS ENGAGED IN THE MANUFACTURE AND SALE OF WIDE RANGE OF READYMADE GAR MENTS AND ACCESSORIES UNDER THE BRAND NAME OF BENETTON. THE ASSESSEE IS ALSO ENGAGED IN THE BUSINESS OF PROVIDING BUYING SERVICES TO THE ASSOCI ATED ENTERPRISE FOR SOURCING OF GARMENTS, HANDICRAFTS, LEATHER PRODUCTS , ETC. IN INDIA. THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR ENTERED INTO THE INTERNATIONAL TRANSACTIONS AND THEIR METHOD OF EVALUATIONS WITH T HE ASSOCIATED ENTERPRISES, AS UNDER: SL. NO. NAME OF THE ASSOCIATED ENTERPRISE INTERNATIONAL TRANSACTIONS AMOUNT (RS.) METHOD USED (I) BENCOM S.R.L., BENIND S.P.A, BENETTON AUSTRALIA PTY. LTD, BENETTON ASIA PACIFIC LTD. PURCHASE (IMPORT) OF GARMENTS & ACCESSORIES AS SAMPLES 12,490,7 98 CUP (II) BENIND S.P.A, BENETTON ASIA PACIFIC LTD. PURCHASE (IMPORT) OF RAW-MATERIAL 14,993,9 23 CUP (III) BENIND S.P.A PURCHASE OF FIXED ASSETS 3,559,48 5 CUP (IV) BENCOM S.R.L. PAYMENT OF ROYALTY 29,517,7 06 CUP (V) BENCOM S.R.L., BENIND S.P.A. ITALY, BENETTON ASIA PACIFIC LTD, BENETTON GROUP, S.P.A. REIMBURSEMENT OF EXPENSES (PAID) 5,851,44 0 CUP (VI) BENCOM S.R.L., BENETTON ASIA PACIFIC LTD. REIMBURSEMENT OF EXPENSES (RECEIVED) 270,145 CUP (VII) BENIND S.P.A, BENETTON ASIA PACIFIC EXPORT OF GARMENTS 124,923, 684 TNMM ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 4 LTD, BENETTON RETAIL HONGKONG LTD. (VIII) BENIND S.P.A RECEIPT OF COMMISSION 7,611,36 7 TNMM (IX) BENIND S.P.A, BENCOM S.R.L. PAYMENT OF EXPATRIATES COST 33,822,1 75 COST PLUS METHOD 2.1. ACCORDING TO ASSESSEE, THE ALP WAS DETERMINED ON A TRANSACTION BY- TRANSACTION BASIS FOR APPLYING ARMS LENGTH PRICE ON ABOVE METHOD, USING THE MOST APPROPRIATE METHOD HAVING REGARD TO FUNCTI ONAL ANALYSIS AND AVAILABILITY OF THE COMPARABLE UNCONTROLLED BENCHMA RK. 2.2. AO REFERRED THE REPORT TO LD. TPO FOR DETERMIN ATION OF ALP. ASSESSEE SUBMITTED FOLLOWING JUSTIFICATION FOR TRANSACTION TO TRANSACTION BASIS AND METHODS ADOPTED FOR ITS TP REPORT. (A) IMPORT OF GARMENTS/ ACCESSORIES/ RAW MATERIAL - CUP METHOD: FOR BENCHMARKING THE ABOVEMENTIONED INTERNATIONAL T RANSACTIONS, THE ASSESSEE FILED THE INVOICES RAISED BY THE AE ON THE UNRELATED THIRD PARTIES AS CUPS ALONG WITH THE STANDARD PRICE LIST AT WHICH SUCH GARMENTS WERE SOLD TO UNRELATED PARTIES. ON THE BAS IS OF SUCH COMPARISON, IT WAS CONCLUDED THAT THE PAYMENT MADE TO THE AES WAS AT ARMS LENGTH APPLYING THE CUP METHOD. (B) PURCHASE OF FIXED ASSETS: FOR THE PURPOSE OF BENCHMARKING, CUP METHOD WAS APP LIED AND THE THIRD PARTY INVOICES WERE FURNISHED TO THE TPO AS A N EVIDENCE FOR PURCHASE OF FIXED ASSETS. THERE BEING NO ELEMENT OF INCOME, SUCH TRANSACTIONS WERE TO BE REGARDED AS BEING AT ARMS LENGTH. (C) PAYMENT OF ROYALTY: ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 5 THE ASSESSEE PAYS ROYALTY @ 4.8% ON DOMESTIC SALES EXCLUDING SALES TO THE ASSOCIATED ENTERPRISE. THE TRANSACTION WAS B ENCHMARKED APPLYING CUP METHOD AND THE FOLLOWING DOCUMENTS WER E PLACED ON RECORD- (I) THE ROYALTY RATES OF THE FOLLOWING COMPARABLE COMPA NIES WERE FILED DURING THE COURSE OF THE ASSESSMENT- LICENSOR LICENSEE ROYALTY RATES YES CLOTHING LIMITED CS SPORTSWEAR INC 5% CRYSTAL BRANDS INC LACOSTE ALLIGATOR S.A. 5% BLUE HOLDINGS, INC. TAVERNITI HOLDINGS, LLC 5-8% JONES APPAREL GROUP POLO RALPH LAUREN CORP 7% REEBOK NATIONAL FOOTBALL LEAGUE 13% (II) THE COPY OF APPROVAL GRANTED BY THE CENTRAL GOVERNM ENT APPROVING THE RATE OF ROYALTY. HENCE, SINCE THE AVERAGE OF ROYALTY PAID BY THE ABO VEMENTIONED COMPANIES WAS HIGHER THAN THE ROYALTY PAID BY THE A SSESSEE COMPANY, THE INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY IS TO BE REGARDED AS BEING AT ARMS LENGTH APPLYING CUP METHOD. (D) REIMBURSEMENT OF EXPENSES (PAID AND RECEIVED): CUP METHOD WAS ALSO FOUND SUITABLE FOR BENCHMARKING INTERNATIONAL TRANSACTIONS OF REIMBURSEMENT MADE TO AND RECEIVED FROM THE ASSOCIATED ENTERPRISES IN RESPECT OF EXPENSES INCUR RED AS THE SAME WERE MERELY REIMBURSEMENT OF EXPENSES INCURRED BY A ES FOR/ON BEHALF OF ASSESSEE. FOR BENCHMARKING, SUCH TRANSACT IONS WERE ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 6 ADEQUATELY SUPPORTED BY THIRD PARTY EVIDENCES. SINC E, SUCH TRANSACTIONS DO NOT HAVE ANY ELEMENT OF INCOME, HEN CE IT WAS CONSIDERED TO BE AT ARMS LENGTH APPLYING CUP METHO D. (E) EXPORT OF FINISHED GOODS: FOR BENCHMARKING THE TRANSACTION OF EXPORTS, THERE WAS NO INTERNAL COMPARABLE AVAILABLE TO APPLY CUP METHOD AS THE ASS ESSEE AND THE AES DID NOT ENTER INTO SIMILAR TRANSACTIONS WITH UN RELATED PARTIES. HENCE, FOR DETERMINING THE ARMS LENGTH PRICE OF IN TERNATIONAL TRANSACTION OF EXPORT OF FINISHED GOODS, TRANSACTIO NAL NET MARGIN METHOD (TNMM) WAS SELECTED AS THE MOST APPROPRIATE METHOD. FOR THE PURPOSE OF APPLYING TNMM, OPERATING PROFIT TO TOTAL SALES WAS CONSIDERED AS THE BASE OR THE PROFIT LEVE L INDICATOR. 46 COMPANIES IN READYMADE GARMENT BUSINESS WERE IDENTI FIED BASED ON SELECTION CRITERIA, WHICH WERE CONSIDERED FUNCTIONA LLY COMPARABLE TO THE BUSINESS ACTIVITY OF THE ASSESSEE. THE RESULT O F TNMM ANALYSIS FOR TRANSACTIONS OTHER THAN BUYING SERVICES IS SUMMARIZ ED AS UNDER: AVERAGE OP/ OC % OF COMPARABLE COMPANIES 8.73% OP/ OC % OF THE ASSESSEE 17.41% SINCE THE OPERATING PROFIT RATIO OF THE ASSESSEE FO R EXPORTS MADE TO RELATED PARTIES @17.41% IS HIGHER THAN THE AVERAGE OF OPERATING PROFIT RATIO OF 8.73% OF COMPARABLE COMPANIES, THE INTERNA TIONAL TRANSACTION OF EXPORT OF FINISHED GOODS WAS THEREFORE, CONSIDER ED BEING AT ARMS LENGTH USING TNMM. OPERATING PROFIT MARGIN OF THE A SSESSEE COMPANY IN RESPECT OF INTERNATIONAL TRANSACTIONS OF EXPORT OF MANUFACTURED GOODS AT 17.41% WAS HIGHER THAN THE OP ERATING PROFIT ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 7 MARGIN OF COMPARABLE COMPANIES IDENTIFIED IN THE NO TICE AT 8.59% (DETERMINED BY THE ASSESSEE AT 3.38%). (F) RECEIPT OF COMMISSION: FOR DETERMINING THE ARMS LENGTH PRICE OF INTERNATI ONAL TRANSACTION OF RECEIPT OF COMMISSION, TRANSACTIONAL NET MARGIN MET HOD (TNMM) WAS SELECTED AS THE MOST APPROPRIATE METHOD. FOR THE PURPOSE OF APPLYING TNMM, OPERATING PROFIT TO OPERATING COST WAS CONSIDERED AS THE BASE. AFTER CONSIDERING VARIO US CRITERIA, COMPARABLE COMPANIES WERE IDENTIFIED. THE RESULTS OF TNMM ANALYSIS FOR BUYING SERVICES AR E SUMMARIZED AS UNDER: AVERAGE OP/ SALES % OF COMPARABLE COMPANIES 9.68% OP/ SALES % OF ASSESSEE FROM BUYING SERVICES 23.96% SINCE THE OPERATING PROFIT RATIO OF THE ASSESSEE @ 23.96% WAS HIGHER THAN THE AVERAGE OF OPERATING PROFIT RATIO OF 9.68% OF COMPARABLE COMPANIES, THE AFORESAID INTERNATIONAL TRANSACTIONS WAS CONSIDERED HAVING BEEN ENTERED AT ARMS LENGTH PRICE, USING TN MM. (G) PAYMENT OF EXPATRIATES COST: FOR DETERMINING THE ARMS LENGTH PRICE OF INTERNATI ONAL TRANSACTION OF REIMBURSEMENT OF EXPATRIATES COSTS, THERE WAS NO M ARK UP AND THE EXPATS COST WAS REIMBURSED ON COST TO COST BASIS. ACCORDINGLY, SUCH PAYMENT WAS CONSIDERED TO BE AT ARMS LENGTH. ALL THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH THE ASSOCIATED ENTERPRISES HAVE BEEN SATISFACTORILY EVA LUATED SEPARATELY BY ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 8 APPLYING THE MOST APPROPRIATE METHOD FOR DETERMININ G THE ARMS LENGTH PRICE OF THE VARIOUS INTERNATIONAL TRANSACTI ONS. 2.3. IN ORDER TO ARRIVE AT THE MOST PRECISE APPROXI MATION OF FAIR MARKET VALUE, THE ALP SHOULD BE DETERMINED ON A TRANSACTIO N BY-TRANSACTION BASIS AND ONLY IN CASE WHEN THE SEPARATE TRANSACTIONS ARE SO CLOSELY LINKED OR CONTINUOUS THAT THEY CANNOT BE EVALUATED ADEQUATELY ON A SEPARATE BASIS, THAT SUCH TRANSACTIONS MAY BE EVALUATED TOGETHER. 2.4. COMBINING ALL TRANSACTIONS TOGETHER, WAS NOT IN CONFORMITY WITH THE INCOME TAX RULES, OECD COMMENTARY AND ANY INTERNATI ONALLY ACCEPTED BENCHMARKING PRINCIPLES. ALL SEGMENTS CANNOT BE EVA LUATED TOGETHER AS EACH ACTIVITY WILL RESULT IN COMPLETELY DIFFERENT FUNCTI ONS AND THERE IS NO BASIS FOR UNDERTAKING THE BENCHMARKING ANALYSIS COMBINING ALL INTERNATIONAL TRANSACTIONS WHEREBY A RATE OF OPERATING PROFIT MAR GIN IS APPLIED ON THE ENTIRE SALES OF THE ASSESSEE COMPANY WHICH IS LARGE LY DOMESTIC SALE NOT INVOLVING ANY INTERNATIONAL TRANSACTION. 2.5. THE COMPANY IN THE RELEVANT PREVIOUS YEAR HAD INCURRED SUBSTANTIAL EXPENSES TO PROMOTE AND ESTABLISH ITS BUSINESS IN T HE DOMESTIC MARKET. 2.6. THE LOW PROFITABILITY IS ENTIRELY ON ACCOUNT O F THE EXPENSES INCURRED BY THE ASSESSEE COMPANY ON ESTABLISHING NEW SHOW RO OM, CREATING PRESENCE IN THE VARIOUS PARTS OF THE COUNTRY, LARGE DEMONSTR ATION, MARKETING AND SELLING EXPENSES, ETC. IN OTHER WORDS, THE LOW PRO FITABILITY OF THE ASSESSEE COMPANY IS NOT ON ACCOUNT OF THE INTERNATIONAL TRAN SACTIONS AS WOULD BE EVIDENT FROM THE FOLLOWING: ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 9 (I) THE GROSS PROFIT MARGIN OF THE ASSESSEE COMPANY IS WORKED OUT AT 44.53% AS AGAINST 31.76% IN THE CASE OF THE COMP ARABLE COMPANIES IDENTIFIED BY THE TPO. THE PROFITABILITY OF THE ASS ESSEE IS NOT IMPACTED ON ACCOUNT OF THE INTERNATIONAL TRANSACTION OF IMPO RTS, WHICH IS, IN ANY CASE, ONLY 2.54% OF THE TOTAL TURNOVER. (II) THE OPERATING PROFIT MARGIN OF THE ASSESSEE COMPANY AFTER EXCLUDING SOME OF THE EXPENSES, SUCH AS, RENT, ADVE RTISEMENT, SHOP RUNNING AND GUARANTEE CHARGES, ETC., IS WORKED OUT AT 20.41% (OP/SALES %) AS AGAINST 15.29% IN CASE OF THE COMPA RABLE COMPANIES IDENTIFIED THE TPO. 2.7. IN OTHER WORDS, LOW PROFITABILITY OF THE ASSES SEE COMPANY COULD BE LARGELY ATTRIBUTED TO THE EXPENSES INCURRED BY THE ASSESSEE TO ESTABLISH AND PROMOTE ITSELF IN THE DOMESTIC MARKET AND HAS NOTHI NG TO DO WITH THE VARIOUS INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSOCI ATED ENTERPRISE. 3. THE TPO IN HIS ORDER, HOWEVER, HELD THAT ARMS LENGTH S HOULD NOT BE DETERMINED ON A TRANSACTION BY-TRANSACTION BASIS. THE TPO ARGU ED THAT: - SEGMENTAL ANALYSIS DONE BY THE AUDITORS IN THE NOTE S TO THE FINANCIAL STATEMENTS IS NOT APPROPRIATE - THE FINANCIALS HAVE BEEN SPLIT ARTIFICIALLY FOR THE PURPOSE OF TRANSFER PRICING. - THE BASIS OF ALLOCATION TO COMPUTE NET OPERATING MA RGIN WHILE SEPARATELY BENCHMARKING INTERNATIONAL TRANSACTION O F EXPORT OF FINISHED GOODS AND RECEIPT OF COMMISSION IS NOT DIS CLOSED 3.1. THE TPO IN HIS ORDER, FOR UNDERTAKING BENCHMAR KING ANALYSIS OF THE INTERNATIONAL TRANSACTIONS OF IMPORT OF GARMENTS & ACCESSORIES, IMPORT OF RAW ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 10 MATERIAL, EXPORT OF GARMENTS, PAYMENT OF ROYALTY AN D RECEIPT OF COMMISSION APPLYING TNMM ON ENTITY LEVEL, REJECTED THE BENCHMA RKING CARRIED OUT BY THE ASSESSEE AS AFORESAID ON TRANSACTION WISE BASIS . 3.2. THE TPO IDENTIFIED THE FOLLOWING COMPANIES AS COMPARABLE COMPANIES AS PER THE SELECTION CRITERIA AS STATED I N THE 6.6 OF THE TRANSFER PRICING ORDER AND COMPUTED THE OPERATING PROFIT MAR GIN AS FOLLOWS: S. NO. NAME OF THE COMPANY OP/SALES OP/OC 1. RAYMOND APPAREL LIMITED 12.14% 12.99% 2. ARVIND BRANDS LIMITED -16.64% -13.91% 3. LUX HOSIERY INDUSTRIES LIMITED 2.44% 2.49% 4. KOUTONS RETAIL INDIA LTD. 15.44% 18.26% 5. PAGE INDUSTRIES LTD. 18.51% 22.51% 6. KEWAL KIRAN CLOTHING LTD. 22.32% 28.28% 7. NASH FASHION (INDIA) LTD. 7.16% 7.04% 8. OSWAL KNIT INDIA 5.42% 5.73% 9. MICROTEX INDIA LIMITED 10.51% 11.71% ARITHMETIC MEAN 8.59% 10.57% 3.3. THE AVERAGE MEAN OF THE COMPARABLE AT 10.57% B EING MORE THAN THE OPERATING PROFIT MARGIN OF THE ENTITY @2.57%, THE T PO PROPOSED AN ADJUSTMENT IN THE ARMS LENGTH PRICE AS PER COMPUTA TION AS FOLLOWS: VALUE OF INTERNATIONAL TRANSACTIONS 189,537,478.00 OP/OC OF COMPARABLES 10.57% ARM'S LENGTH MARGIN A 20,034,111.42 ARM'S LENGTH PRICE 209,571,589.42 MARGIN SHOWN BY THE ASSESSEE @2.57% B 4,871,113.18 DIFFERENCE A-B 15,162,998.24 % DIFFERENCE 8.00% ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 11 3.4. TPO DID NOT AGREE WITH ASSESSEES T.P. REPORT AND PROPOSED AN ADJUSTMENT OF RS.1,51,62,998 ON ACCOUNT THAT AVERAG E MARGIN OF THE COMPARABLE AT 10.57% IS MORE THAN THE OPERATING PRO FIT MARGIN OF THE ASSESSEE COMPANY, COMPUTED BY THE TPO, AT 2.57%. 4. THE TPOS PROPOSAL WAS CONFIRMED BY AO WHO PROPO SED THIS ADDITION TO ASSESSEES INCOME. AGGRIEVED, ASSESSEE APPROACHED DRP WHERE FOLLOWING CONTENTIONS WERE RAISED: (1) THE TPO HAS UNDERTAKEN ENTITY LEVEL BENCHMARKING AN ALYSIS APPLYING TNMM COMBINING ALL THE INTERNATIONAL TRANSACTIONS A S AGAINST TRANSACTION BY TRANSACTION ANALYSIS AS PROVIDED IN THE TRANSFER PRICING REGULATIONS RECOMMENDED BY OECD GUIDELINES (IN PARA GRAPH 1.42). RELIANCE IS ALSO PLACED ON THE FOLLOWING DECISIONS, WHEREIN, DETERMINATION OF ARMS LENGTH PRICE OF INTERNATIONA L TRANSACTIONS ON TRANSACTION BY TRANSACTION BASIS IS UPHELD: - DEVELOPMENT CONSULTANTS (P) LTD. VS. DCIT: 115 TTJ 577 (CAL) - ACIT V. STAR INDIA LIMITED (ITA NO.3846 / 3585/M/20 06) - AZTEC SOFTWARE AND TECHNICAL SERVICES LTD. VS. ACIT 107 ITD 141 (SB) - UCB INDIA (P) LTD. V ACIT 30 SOT 95 (MUM.) IN THE CASE OF UCB INDIA (P) LTD. VS. ACIT : 30 SOT 95, RELIED UPON BY THE TPO, TOO, THE HONBLE MUMBAI BENCH OF THE TR IBUNAL UPHELD THE DETERMINATION OF THE ARMS LENGTH PRICE BY CONS IDERING SEGMENTAL MARGIN ON A STAND ALONE BASIS. IN VIEW OF THE AFORESAID, THE VARIOUS INTERNATIONAL TRANSACTIONS, OTHER THAN INTERNATIONAL TRANSACTION OF EXPORT OF F INISHED GOODS AND RECEIPT OF BUYING SERVICE COMMISSION, WHICH ARE SEP ARATELY ESTABLISHED TO BE AT ARMS LENGTH AND ARE NOT DISPU TED BY THE TPO, SHOULD BE ACCEPTED AS BEING AT ARMS LENGTH. ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 12 FURTHER, THE TPO CLEARLY ERRED IN AGGREGATING INTER NATIONAL TRANSACTIONS OF EXPORT OF FINISHED GOODS AND RENDER ING OF BUYING SERVICES WHICH ARE FUNCTIONALLY DIFFERENT INTERNATI ONAL TRANSACTIONS UNDERTAKEN WITH DIFFERENT ASSOCIATED ENTERPRISES. IN VIEW OF THE AFORESAID, THE BENCHMARKING ANALYSIS CARRIED OUT BY THE ASSESSEE ON TRANSACTION BY TRANSACTION BASIS FOR MANUFACTURING EXPORT ACTIVITIES AND BUYING SERVICES ACTIVITIES CA NNOT BE DISREGARDED. (2) THE FOLLOWING COMPANIES HAVE BEEN UNJUSTIFIABLY INC LUDED IN THE LIST OF COMPARABLE COMPANIES BY THE TPO: A. RAYMOND APPAREL LIMITED: THE COMPANY HAD SUBSTANTIAL HIGH RELATED PARTY TRANSACTIONS OF 26.22%, WHICH IS BEYOND THE LIMIT OF 10% TO 15% AS LAID DOWN BY THE HONBLE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF DCIT V. SONY INDIA PVT. LTD: 114 ITD 448. B. KEWAL KIRAN CLOTHING LIMITED THE COMPANY HAS UNDERGONE MAJOR RESTRUCTURING DURIN G THE RELEVANT PREVIOUS YEAR BY WAY OF BRINGING FORTH AN INITIAL PUBLIC OFFER; ACQUISITION OF SUBSTANTIAL ASSETS OF KEWAL K IRAN ENTERPRISES, A PARTNERSHIP FIRM AND THE CESSATION KEWAL KIRAN RETA IL INDIA PRIVATE LIMITED AND KORNORSTONE RETAIL LIMITED TO BE ITS SU BSIDIARIES. SINCE, THE RELEVANT PREVIOUS YEAR WAS ABNORMAL; THE OPERATING RESULT OF THE SAID COMPANY CANNOT BE TAKEN INTO ACC OUNT FOR THE PURPOSE OF BENCHMARKING ANALYSIS. THE TPO, HOWEVER, REJECTED THE CONTENTION OF THE AS SESSEE HOLDING THAT THE IMPACT OF BUSINESS RESTRUCTURING O N PROFIT MARGIN OF A COMPANY, ALWAYS REDUCES PROFIT MARGIN OF THE RESTRU CTURED COMPANY IN INITIAL YEARS. ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 13 THE CONTENTION OF THE TPO IS INCORRECT AND NOT SUST AINABLE SINCE YEAR-WISE COMPARATIVE STATEMENT OF PROFITABILITY OF M/S. KEWAL KIRAN CLOTHING LIMITED CLEARLY DEMONSTRATES THE SUBSTANTI AL INCREASE IN THE SALES AND INCOME OF THE COMPANY ON ACCOUNT OF THE B USINESS RESTRUCTURING AS AFORESAID. C. MICROTEX INDIA LTD MICROTEX INDIA LTD. HAD TURNOVER OF 48.34 CRORES IN THE RELEVANT YEAR WHICH WAS NOT WITHIN THE FILTER OF 50-210 CROR ES AS APPLIED BY THE TPO. ACCORDINGLY, THE COMPANY DOES NOT SATISFY THE SELECTION CRITERIA AS CONSIDERED BY THE TPO HIMSELF. D. KOUTONS RETAIL INDIA LIMITED: THE FINANCIAL STATEMENTS OF KOUTONS RETAIL INDIA LI MITED ARE NOT AVAILABLE ON ANY PUBLIC DOMAIN FOR FINANCIAL YE AR 2005-06. SECONDLY, THE COMPANY HAS UNDERGONE MAJOR RESTRUCTU RING DURING THE PREVIOUS YEAR 2005-06 AS KOUTONS RETAIL INDIA LIMIT ED WAS INCORPORATED BY ACQUIRING, CHARLIE CREATIONS, WHICH WAS A PARTNERSHIP FIRM. EVIDENTLY, THE PROFIT OF THE COMPANY HAS CONSIDERAB LY INCREASED DUE TO SUCH RESTRUCTURING AND HENCE SHOULD NOT BE C ONSIDERED AS A COMPARABLE FOR THE RELEVANT ASSESSMENT YEAR. 4.1. ASSESSEE CONTENDED THAT THE FOLLOWING COMPANIE S SHOULD BE EXCLUDED FROM THE SET OF COMPARABLE COMPANIES CONSIDERED BY TPO, APPLYING TNMM: S.NO. COMPANIES REASON FOR REJECTION (I) RAYMOND APPAREL LIMITED SUBSTANTIAL RELATED PARTY TRANSACTIONS TO THE EXTENT OF 26%. (II) MICROTEX INDIA LIMITED DOES NOT SATISFY TURNOVER CRITERIA CONSIDERED BY THE TPO. (III) KEWAL KIRAN MAJOR RESTRUCTURING DURING THE RE LEVANT ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 14 CLOTHING LTD. PREVIOUS YEAR RESULTING IN ABNORMALLY HIGH SALES AND OPERATING PROFIT MARGIN. (IV) KOUTONS RETAIL INDIA LTD MAJOR RESTRUCTURING DURING THE RELEVANT PREVIOUS YEAR AND FINANCIAL STATEMENTS NOT AVAILABLE ON ANY PUBLIC DOMAIN. THE ASSESSEE COMPANY DEALS IN HIGH-END READY-MADE GARMENT PRODUCTS IN COMPARISON TO KOUTONS AND THE ECONOMIC/ MARKET SCENARIO OF THE ASSESSEE COMPANY SO FAR AS WELL ASSESSEES PRODUCT IS CONCERNED IS COMPLETELY DIFFERENT AND IS NOT COMPARABLE TO THAT OF KOUTONS. 4.2. THE AVERAGE OPERATING PROFIT MARGIN (OP/OC%) O F THE REMAINING ESTABLISHED COMPANIES, TO BE COMPARABLE, WORKS OUT AS UNDER: S.NO. NAME OF THE COMPANIES OP/OC % 1. OSWAL KNIT INDIA 5.73% 2. NASH FASHION (INDIA) LTD. 7.04% 3. PAGE INDUSTRIES LTD. 22.51% 4. LUX HOSIERY INDUSTRIES LIMITED 2.49% 5. ARVIND BRANDS LIMITED -13.91% AVERAGE 4.77% 4.3. SINCE THE OPERATING PROFIT MARGIN OF THE ASSES SEE FROM THE INTERNATIONAL TRANSACTIONS OF EXPORTS @17.41% WAS H IGHER THAN THE AVERAGE OF OPERATING PROFIT RATIO OF 3.38% OF COMPARABLE CO MPANIES, THE INTERNATIONAL TRANSACTION OF EXPORT OF GOODS, THERE FORE, CONSIDERED BEING AT ARMS LENGTH APPLYING TNMM. (3) THE LOW PROFITABILITY OF THE ASSESSEE WAS ENTIRELY ON ACCOUNT OF THE EXPENSES INCURRED ON ESTABLISHING NEW SHOW ROOMS, CREATING PRESENCE IN THE VARIOUS PARTS OF THE COUNTRY, LARGE DEMONSTR ATION, MARKETING AND SELLING EXPENSES, ETC. THEY WERE NOT ON ACCOUNT OF THE INTERNATIONAL TRANSACTIONS UNDER TAKEN BY THE ASSESSEE DUE TO FOL LOWING FACTORS: ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 15 (I) THE GROSS PROFIT MARGIN OF THE ASSESSEE COMPANY IS WORKED OUT AT 44.53% AS AGAINST 31.76% IN THE CASE OF THE COMPARA BLE COMPANIES IDENTIFIED BY THE TPO. (II) THE OPERATING PROFIT MARGIN OF THE ASSESSEE COMPANY AFTER EXCLUDING SOME OF THE EXPENSES, SUCH AS, RENT, ADVE RTISEMENT, SHOP RUNNING AND GUARANTEE CHARGES, ETC., IS WORKED OUT AT 20.41% (OP/SALES %) AS AGAINST OPERATING PROFIT MARGIN OF THE COMPARABLE COMPANIES SIMILARLY COMPUTED AT 15.29%. (4) EVEN OTHERWISE, CONSIDERING THAT THE OPERATING PROF IT MARGIN OF THE ASSESSEE AT ENTITY LEVEL AT 2.57% IS WITHIN THE RANGE OF 5% OF THE OPERATING PROFIT MARGIN OF THE COMPARABLE COMPANIES AT 4.77%., THE ADJUSTMENT IS LIABLE TO DROPPED. 4.4. LEARNED DRP, HOWEVER, UPHELD THE ORDER PROPOSE D BY AO ON THE BASIS OF TPOS ORDER BY FOLLOWING OBSERVATIONS: TPO HAS DONE THE COMPARISON OF OPERATING PROFIT MA RGIN OP/OC WITH OPERATING MARGIN OF ASSESSEES COMPANIES . ASSESSEE HAS OBJECTION TO ENTITY LEVEL ANALYSIS AGA INST TRANSACTION BY TRANSACTION. WE DONT FIND ANY INVAL IDITY IN AGGREGATING INTERNATIONAL TRANSACTIONS OF EXPORTS O F FINISHED GOODS AND RENDERING OF BUYING SERVICES WHICH ARE FU NCTIONALLY DIFFERENT INTERNATIONAL TRANSACTIONS UNDERTAKEN WIT H DIFFERENT ASSOCIATED ENTERPRISES. ASSESSEE HAS SUMMED UP HIS ARGUMENTS IN THE TABLE B ELOW IN WHICH THE REASONS FOR REJECTIONS ARE ALSO GIVEN S.NO. COMPANIES REASON FOR REJECTION (I) RAYMOND APPAREL LIMITED SUBSTANTIAL RELATED PARTY TRANSACTIONS TO THE EXTENT OF 26%. (II) MICROTEX INDIA LIMITED DOES NOT SATISFY TURNOVER CRITERIA CONSIDERED BY THE TPO. ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 16 (III) KEWAL KIRAN CLOTHING LTD. MAJOR RESTRUCTURING DURING THE RELEVANT PREVIOUS YEAR RESULTING IN ABNORMALLY HIGH SALES AND OPERATING PROFIT MARGIN. (IV) KOUTONS RETAIL INDIA LTD MAJOR RESTRUCTURING DURING THE RELEVANT PREVIOUS YEAR AND FINANCIAL STATEMENTS NOT AVAILABLE ON ANY PUBLIC DOMAIN. THE ASSESSEE COMPANY DEALS IN HIGH-END READY-MADE GARMENT PRODUCTS IN COMPARISON TO KOUTONS AND THE ECONOMIC/ MARKET SCENARIO OF THE ASSESSEE COMPANY SO FAR AS WELL ASSESSEES PRODUCT IS CONCERNED IS COMPLETELY DIFFERENT AND IS NOT COMPARABLE TO THAT OF KOUTONS. ASSESSEE HAS ALSO TRIED TO SUBMIT THAT LOW PROFITAB ILITY IN THIS YEARS IS ENTIRELY ON ACCOUNT OF THE EXPENSES INCURRED ON EST ABLISHING NEW SHOW ROOM, CREATING PRESENCE IN THE VARIOUS PARTS OF THE COUNTRY, LARGE DEMONSTRATION, MARKETING AND SELLING EXPENSES. THE EXCLUSION OF FOUR COMPANIES ON ACCOUNT OF REINS TRUCTING RELATED PARTY TRANSACTION HAS BEEN CONSIDERED BY US. SOME O BJECTIONS RAISED BY ASSESSEE HAS BEEN ANSWERED BY TPO IN PARA 6.7, 6 .8 AND 6.9. TAKING IN VIEW BRAND VALUE OF ASSESSEE COMPANY DISC USSED, NO DIRECTIONS ARE BEING ISSUED REGARDING THE ARMS LEN GTH PRICE OF INTERNATIONAL TRANSACTIONS DETERMINED BY APO. AGGRIEVED, ASSESSEE IS BEFORE US. 5. LEARNED COUNSEL FOR THE ASSESSEE VEHEMENTLY CONT ENDS THAT: (1) THE BENCHMARKING UNDERTAKEN BY THE ASSESSEE ON THE FOLLOWING INTERNATIONAL TRANSACTIONS HAS NOT BEEN DISPUTED BY THE TPO - PURCHASE OF FIXED ASSETS - REIMBURSEMENT OF EXPENSES (PAID) - REIMBURSEMENT OF EXPENSES (RECEIVED) - PAYMENT OF EXPATRIATES COST THE ASSESSEE HAD UNDERTAKEN THE BENCHMARKING OF THE FOLLOWING INTERNATIONAL TRANSACTIONS AS FOLLOWS: ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 17 (A). IMPORT OF GARMENTS/ ACCESSORIES/ RAW MATERIAL - CUP METHOD: FOR BENCHMARKING THE ABOVEMENTIONED INTERNATIONAL T RANSACTIONS, THE ASSESSEE FILED THE INVOICES RAISED BY THE AE ON THE UNRELATED THIRD PARTIES AS CUPS ALONG WITH THE STANDARD PRICE LIST AT WHICH SUCH GARMENTS WERE SOLD TO UNRELATED PARTIES. ON THE BASIS OF SUCH COM PARISON, IT WAS CONCLUDED THAT THE PAYMENT MADE TO THE AES WAS AT A RMS LENGTH APPLYING THE CUP METHOD. (B) PAYMENT OF ROYALTY: THE ASSESSEE PAYS ROYALTY @ 4.8% ON DOMESTIC SALES EXCLUDING SALES TO THE ASSOCIATED ENTERPRISE. THE TRANSACTION WAS B ENCHMARKED APPLYING CUP METHOD AND THE FOLLOWING DOCUMENTS WER E PLACED ON RECORD- (I) THE ROYALTY RATES OF THE FOLLOWING COMPARABLE COMPA NIES WERE FILED DURING THE COURSE OF THE ASSESSMENT- LICENSOR LICENSEE ROYALTY RATES YES CLOTHING LIMITED CS SPORTSWEAR INC 5% CRYSTAL BRANDS INC LACOSTE ALLIGATOR S.A. 5% BLUE HOLDINGS, INC. TAVERNITI HOLDINGS, LLC 5-8% JONES APPAREL GROUP POLO RALPH LAUREN CORP 7% REEBOK NATIONAL FOOTBALL LEAGUE 13% (II) THE COPY OF APPROVAL GRANTED BY THE CENTRAL GOVERNM ENT APPROVING THE RATE OF ROYALTY. HENCE, SINCE THE AVERAGE OF ROYALTY PAID BY THE ABO VEMENTIONED COMPANIES WAS HIGHER THAN THE ROYALTY PAID BY THE A SSESSEE COMPANY, ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 18 THE INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY IS TO BE REGARDED AS BEING AT ARMS LENGTH APPLYING CUP METHOD. (C) EXPORT OF FINISHED GOODS: FOR BENCHMARKING THE TRANSACTION OF EXPORTS, THERE WAS NO INTERNAL COMPARABLE AVAILABLE TO APPLY CUP METHOD AS THE ASS ESSEE AND THE AES DID NOT ENTER INTO SIMILAR TRANSACTIONS WITH UN RELATED PARTIES. HENCE, FOR DETERMINING THE ARMS LENGTH PRICE OF IN TERNATIONAL TRANSACTION OF EXPORT OF FINISHED GOODS, TRANSACTIO NAL NET MARGIN METHOD (TNMM) WAS SELECTED AS THE MOST APPROPRIATE METHOD. FOR THE PURPOSE OF APPLYING TNMM, OPERATING PROFIT TO TOTAL SALES WAS CONSIDERED AS THE BASE OR THE PROFIT LEVEL INDICATO R. 46 COMPANIES IN READYMADE GARMENT BUSINESS WERE IDENTIFIED BASED ON SELECTION CRITERIA, WHICH WERE CONSIDERED FUNCTIONALLY COMPAR ABLE TO THE BUSINESS ACTIVITY OF THE ASSESSEE. THE RESULT OF TN MM ANALYSIS FOR TRANSACTIONS OTHER THAN BUYING SERVICES IS SUMMARIZ ED AS UNDER: AVERAGE OP/ OC % OF COMPARABLE COMPANIES 8.73% OP/ OC % OF THE ASSESSEE 17.41% SINCE THE OPERATING PROFIT RATIO OF THE ASSESSEE FO R EXPORTS MADE TO RELATED PARTIES @17.41% IS HIGHER THAN THE AVERAGE OF OPERATING PROFIT RATIO OF 8.73% OF COMPARABLE COMPANIES, THE INTERNA TIONAL TRANSACTION OF EXPORT OF FINISHED GOODS WAS THEREFORE, CONSIDER ED BEING AT ARMS LENGTH USING TNMM. OPERATING PROFIT MARGIN OF THE A SSESSEE COMPANY IN RESPECT OF INTERNATIONAL TRANSACTIONS OF EXPORT OF MANUFACTURED GOODS AT 17.41% WAS HIGHER THAN THE OP ERATING PROFIT ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 19 MARGIN OF COMPARABLE COMPANIES IDENTIFIED IN THE NO TICE AT 8.59% (DETERMINED BY THE ASSESSEE AT 3.38%). (D) RECEIPT OF COMMISSION: FOR DETERMINING THE ARMS LENGTH PRICE OF INTERNATI ONAL TRANSACTION OF RECEIPT OF COMMISSION, TRANSACTIONAL NET MARGIN MET HOD (TNMM) WAS SELECTED AS THE MOST APPROPRIATE METHOD. FOR THE PURPOSE OF APPLYING TNMM, OPERATING PROFIT TO OPERATING COST WAS CONSIDERED AS THE BASE. AFTER CONSIDERING VARIO US CRITERIA, COMPARABLE COMPANIES WERE IDENTIFIED. THE RESULTS OF TNMM ANALYSIS FOR BUYING SERVICES AR E SUMMARIZED AS UNDER: AVERAGE OP/ SALES % OF COMPARABLE COMPANIES 9.68% OP/ SALES % OF ASSESSEE FROM BUYING SERVICES 23.96% SINCE THE OPERATING PROFIT RATIO OF THE ASSESSEE @ 23.96% WAS HIGHER THAN THE AVERAGE OF OPERATING PROFIT RATIO OF 9.68% OF COMPARABLE COMPANIES, THE AFORESAID INTERNATIONAL TRANSACTIONS WAS CONSIDERED HAVING BEEN ENTERED AT ARMS LENGTH PRICE, USING TN MM. 5.1. LD. COUNSEL CONTENDS THAT THE TPO PROCEEDED TO APPLY TNMM ON ENTITY WIDE BASIS DISREGARDING THE AFORESAID BENCHM ARKING UNDERTAKEN BY THE ASSESSEE. THE ADJUSTMENT PROPOSED BY THE TPO IS ARB ITRARY AND UNJUSTIFIED DUE TO FOLLOWING: (I) THE TPO PROPOSED TO BENCHMARK THE INTERNATIONAL TRA NSACTIONS OF EXPORT OF GARMENTS AND RECEIPT OF BUYING SERVICE S APPLYING ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 20 TRANSACTIONAL NET MARGIN METHOD (TNMM) AFTER COMBIN ING THE TWO TRANSACTIONS ON AN ENTITY BASIS AS AGAINST SEPARATE BENCHMARKING THE NET PROFIT MARGIN FROM THESE TRANS ACTIONS UNDERTAKEN BY THE ASSESSEE. (II) THE TPO HAS APPLIED TNMM, IN THE CASE OF THE ASSESS EE, ON ENTITY BASIS, COMBINING THE INTERNATIONAL TRANSACTI ONS OF EXPORT OF GARMENTS AND RECEIPT OF BUYING SERVICE COMMISSIO N ALLEGEDLY ON THE FOLLOWING BASIS- (A) THE VARIOUS COSTS HAVE BEEN ALLOCATED ARTIFICIALLY FOR COMPUTING MARGIN IN DIFFERENT BUSINESS SEGMENTS FOR TRANSFER PRICING PURPOSES. (B) SEPARATE TRANSACTIONS CLOSELY INTERLINKED AND CANNO T BE EVALUATED ADEQUATELY ON A SEPARATE BASIS (C) SEPARATE SEGMENTAL ACCOUNTS NOT MAINTAINED (III) FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH PRI CE IN RELATION TO INTERNATIONAL TRANSACTIONS, IN TERMS OF SUB-SECTION (2) OF SECTION 92C OF THE ACT, RULE 10B OF THE RULE S PROVIDES THE MANNER OF APPLICATION OF THE VARIOUS PRESCRIBED METHODS. CLAUSE (E) OF SUB-RULE (1) OF RULE 10B OF THE RULES PROVIDES FOR APPLICATION OF TRANSACTIONAL NET MARGIN METHOD AS UNDER: (E) TRANSACTIONAL NET MARGIN METHOD, BY WHIC H,-- (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRIS E FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSO CIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRE D OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY TH E ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE; ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 21 (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAU SE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERN ATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSAC TIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACT IONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MA RGIN IN THE OPEN MARKET; (IV) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE AND REFERRED TO IN SUB-CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (III); (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARM'S LENGTH PRICE IN RELAT ION TO THE INTERNATIONAL TRANSACTION. (IV) FOR APPLICATION OF TNMM THE NET PROFIT MARGIN (OVER AN APPROPRIATE BASE) REALISED BY THE ENTERPRISE FROM AN INTERNATIO NAL TRANSACTION ENTERED INTO WITH THE ASSOCIATED ENTERPRISE IS TO BE COMPAR ED WITH THAT FROM COMPARABLE UNCONTROLLED TRANSACTION BY AN UNRELATED ENTERPRISE. THE NET PROFIT MARGIN ARISING IN COMPARABLE UNCONTROLLED TR ANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCE, IF ANY, BETWEE N THE INTERNATIONAL TRANSACTION(S) AND THE COMPARABLE UNCONTROLLED TRAN SACTION(S) OR BETWEEN THE ENTERPRISE ENTERING INTO SUCH TRANSACTION WHICH WOULD MATERIALLY AFFECT THE AMOUNT OF NET MARGIN PROFIT. THE OECD GUIDELINES PROVIDE THAT IN ORDER TO ARRIVE AT THE MOST PRECISE APPROXIMATION OF FAIR MARKET VALUE, THE ARM 'S LENGTH PRINCIPLE SHOULD, IDEALLY BE APPLIED ON A TRANSACTION-BY-TRAN SACTION BASIS. YOUR ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 22 HONOURS ATTENTION IS INVITED TO PARAGRAPH 1.42 OF THE OECD GUIDELINES WHICH PROVIDE THAT IDEALLY, IN ORDER TO ARRIVE AT THE MOST PRECISE APPROXIMATION OF FAIR MARKET VALUE, THE ARM S LENGTH PRINCIPLE SHOULD BE APPLIED ON A TRANSACTION-BY-TRANSACTION B ASIS (V) THE CALCUTTA BENCH OF THE TRIBUNAL IN THE CAS E OF DEVELOPMENT CONSULTANTS (P) LTD. VS. DCIT: 115 TTJ 577 REITERAT ED THE PRINCIPLE IN THIS REGARD AND PROVIDED TO THE FOLLOWING EFFECT: THE ASSESSEE HAD ENTERED INTO THE FOLLOWING TYPES OF TRANSACTIONS (A) ENGINEERING DRAWING AND DESIGN SERVICES, (B) DEPUTATION OF EMPLOYEES, (C) REIMBURSEMENT OF TRAVELING COSTS AND (D) RENDERING DATA ENTRY SERVICES THROUGH ITS GROUP ENTITY DATACO RE INDIA. THEREFORE, THE ALP OF EACH OF THE INTERNATIONAL TRANSACTIONS SHOULD BE DETERMINED SEPARATELY AS THE NATURE OF TRANSACTIONS ENTERED BY THE ASSESSEE WITH ITS AES WAS DIFFERENT. HENCE, THE ALP WOULD BE DETERMINED BASED ON THE NATURE OF SERVICES PROVIDED BY THE ASSESSEE FOR EACH CLASS OF TRANSACTION TAKIN G INTO CONSIDERATION THE FUNCTIONS PERFORMED, ASSETS EMPLOYED AND THE RISKS ASSUMED, BY THE RESPECTIVE PARTIES TO THE TRANSACTIONS. (VI) SIMILAR CONVTROVERSY CAME UP BEFORE MUMBAI BEN CH OF THE ITAT IN THE CASE OF STAR INDIA LIMITED (ITA NO.3846 / 3585/ M/2006. IN THIS CASE TPO HAS IGNORED THE DETAILED ANALYSIS OF THE V ARIOUS INTERNATIONAL TRANSACTIONS INDIVIDUALLY ENTERED INTO BY THE ASSES SEE IN RESPECT OF ITS TWO PRINCIPAL BUSINESS ACTIVITIES NAMELY THE EXPORT BUSINESS AND BUYING SERVICES BUSINESS. THE TPO TREATED ALL THE A CTIVITIES AS ONE AND DETERMINED THE ARMS LENGTH PRICE AT AN ENTITY LEVEL IGNORING THAT ONE CANNOT COMPARE A DISTRIBUTOR WITH A PRINCIPAL AND A N AGENT AT THE SAME ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 23 TIME, AS EACH ACTIVITY WILL RESULT IN COMPLETELY DI FFERENT FUNCTIONS AND REASONS ANALYSIS. THE ITAT UPHOLDING THE CONTENTION OF THE ASSESSEE, HELD AS UNDER IN THIS BEHALF: 63. WE HAVE CAREFULLY EXAMINED ALL THE ACTIVITIES OF THE ASSESSEE AND WE FIND THAT THE ASSESSEE IS IN FACT I NVOLVED IN THREE INDEPENDENT ACTIVITIES, I.E. (A) DISTRIBUTION ACTIVITY FOR WHICH ASSESSEE HAS TO PAY THE LICENSE FEE FOR THE R IGHT TO DISTRIBUTE THE STAR CHANNELS TO ASIAN BROADCASTING CORPORATION LTD ALSO BASED IN DUBAI AND INDIAN REGION BROAD CAS TING LTD., A COMPANY BASED IN HONG KONG. THIS DISTRIBUTION RIG HT CANNOT BE LINKED UP WITH OTHER ACTIVITIES OF THE ASSESSEE, I.E. WITH COMMISSION FOR COLLECTING THE ADVERTISEMENT SALES O R WITH THE EXPORT OF TV PROGRAMMES. THE OTHER ACTIVITY THAT RE SULTS IN RECEIPT OF COMMISSION IS ALSO INDEPENDENT ACTIVITY AND THE ASSESSEE ACTS AS A MARKETING AND COLLECTING AGENT F OR STAR LTD. AND NGC ASIA IN RELATION TO ADVERTISEMENT SALES TO THE SATELLITE TELEVISION CHANNELS BROADCAST BY THEM IN INDIA. THE CONTRACT FOR ADVERTISEMENT IS DIRECTLY ENTERED INTO BETWEEN THE ADVERTISERS, ADVERTISING AGENCIES AND STAR LTD AND NGC ASIA, AS THE CASE MAY BE. THESE ENTITIES DIRECTLY RAISE THE INVOICE O N THE ADVERTISERS AND THE ADVERTISEMENT AGENCIES AND FOR THE SERVICES RENDERED BY THE ASSESSEE, IT RECEIVES COMMISSION AT 10% OF THE ADVERTISEMENT REVENUE COLLECTED BY IT FROM STAR LTD IN RESPECT STAR CHANNELS. IN THE CASE OF NGC ASIA, THE ASSESSE E RECOVERS 15% COMMISSION IN RESPECT OF ADVERTISEMENT SALES RE VENUE OF NGC. THE ASSESSEE COLLECTS THE DUES FROM THE ADVERT ISEMENT AGENCIES ON BEHALF OF STAR LTD. OR NGC ASIA AS THE CASE MAY BE, BUT OUT OF THE ADVERTISEMENT COMMISSION AT A MA XIMUM OF 15% OF THE GROSS BILLING AND APPLICABLE INCOME-TAX WITHHOLDING. THE ASSESSEE IS ENTITLED TO THE AGREED COMMISSION ON THE NET BILLED AMOUNT, AND DEDUCT ITS OWN COMMIS SION AT THE TIME OF REALISATION AND THE REST OF THE AMOUNT IS P AID TO THE PRINCIPAL. IN THE LIGHT OF THESE FACTS, COMMISSION ON ADVERTISEMENT SALES ARISES OUT OF AN INDEPENDENT AC TIVITY, WHICH CANNOT HE LINKED UP WITH THE OTHER ACTIVITIES OF TH E ASSESSEE, I.E. DISTRIBUTION ACTIVITY OR ACTIVITY OF EXPORTING TELE VISION PROGRAMMES. LIKEWISE, THE THIRD ACTIVITY OF EXPORT OF TELEVISION ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 24 PROGRAMMES OR SUPPLY OF CONTENT OF TELEVISION CHANN ELS TO ITS GROUP ENTITIES IS ALSO AN INDEPENDENT ACTIVITY, IN WHICH ASSESSEE PROVIDES CONTENT PROCUREMENT SERVICE AND ALSO ACTS AS A CREATOR/PROCURER OF VARIOUS TYPES OF CONTENT FOR SA LE TO ITS GROUP ENTITIES VIZ. STAR LTD. AND SGL. THE VARIOUS TYPES OF CONTENT PROCURED BY THE ASSESSEE FALL UNDER THE CAT EGORY OF PROGRAMS, FILMS, FORMAT SHOWS, IN HOUSE PRODUCTIONS AND PROMOTIONS. THE ASSESSEE PROCURES CONTENT IN ANY ON E OF THE WAYS, SUCH AS ACQUIRING CONTENT FROM EXTERNAL PRODU CERS, IN HOUSE PRODUCTION, JOINT PRODUCTION WITH EXTERNAL PR ODUCERS. ASSESSEE ALSO PRODUCES THE CONTENT ON THE BASIS OF FORMAL SPECIFIED BY THE OVERSEAS ENTITIES AND FILM PROCURE MENT. IN THESE ACTIVITIES, ASSESSEE'S ASSETS WERE UTILIZED AND THE RISKS WERE ASSUMED. THIS ACTIVITY IS ALSO AN INDEPENDENT ACTIV ITY AND COULD NOT BE LINKED UP WITH THE OTHER TWO REMAINING ACTIV ITIES. SINCE ALL THE THREE ACTIVITIES OF THE ASSESSEE ARE NOT IN TER RELATED OR INTERLINKED, THE ARMS LENGTH PRICE FOR ALL THE ACTI VITIES SHOULD HAVE BEEN DETERMINED INDEPENDENTLY, IN THE LIGHT OF COMPARABLE CASE. BUT. THE TPO HAS CONSOLIDATED AND TREATED ALL THE THREE ACTIVITIES AS ONE ACTIVITY AND HAS DETERMINED A COM MON ARMS LENGTH PRICE, HAVING ADOPTED ARITHMETIC MEAN OF OPE RATING COST MARGINS OF SIX COMPARABLE CASES., WHICH ARE NO T INVOLVED IN ALL THE ACTIVITIES AS INVOLVED BY THE ASSESSEE. 64. WE HAVE THOROUGHLY EXAMINED THE ORDER OF THE SP ECIAL BENCH IN THE CASE OF AZTEC SOFTWARE AND TECHNOLOGIE S LTD. (SUPRA) AND WE FIND THAT THE TRIBUNAL HAS EXAMINED THE CHAPTER-X OF THE INCOME-TAX ACT, RELATING SPECIAL P ROVISIONS RELATING TO AVOIDANCE OF TAX IN DETAIL AND THE TRIB UNAL HAS HELD THAT IDEALLY IN ORDER TO ARRIVE AT THE MOST PRECISE APPROXIMATION OF FAIR MARKET VALUE ARMS LENGTH PRINCIPLE SHOULD B E APPLIED ON TRANSACTION TO TRANSACTION BASIS. HOWEVER, THERE AR E OFTEN SITUATIONS WHERE SEPARATE TRANSACTIONS ARE SO CLOSE LY LINKED OR CONTINUOUS THAT THEY CANNOT BE ADEQUATELY DEALT WIT H ON A SEPARATE BASIS. THE TRIBUNAL HAS ALSO HELD THAT THE BURDEN OF PROVING AND ESTABLISHING ARMS LENGTH PRICE AND TO F URNISH THE RELEVANT INFORMATION LIES INITIALLY ON THE ASSESSEE. ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 25 (VII) LD. COUNSEL CONTENDS THAT THE MANUFACTURING E XPORT SEGMENT IS FUNCTIONALLY DIFFERENT AND DISTINCT FROM THE BUYING SERVICE SEGMENT AS: (I) IN MANUFACTURING EXPORT SEGMENT, THE INTERNATIONAL TRANSACTIONS RELATED TO EXPORT OF FINISHED GOODS, V IZ., GARMENTS MANUFACTURED BY THE ASSESSEE, BUYING SERVICE SEGMEN T INVOLVES UNDERTAKING SOURCE RELATED SERVICES, SUCH AS, IDENT IFYING OF THE VENDORS, MERCHANDIZE, UNDERTAKINGS, DESIGN, QUALITY CONTROL, HANDLING, CO-ORDINATION AND LOGISTICS, ETC. THESE T WO ACTIVITIES ARE ENTIRELY DIFFERENT. (II) MANUFACTURING EXPORT ACTIVITIES AND BUYING SERVICE ACTIVITIES ARE INDEPENDENT OF EACH OTHER AND ARE NO T INTER- CONNECTED OR INTER-RELATED. (III) MANUFACTURING EXPORT SEGMENT AND BUYING SERVICES SEGMENT INVOLVE THE FOLLOWING DIFFERENT FUNCTIONS, ASSETS AND RISK: S. NO. DESCRIPTION MANUFACTURI NG EXPORT BUYING SERVICES I FUNCTIONS PERFORMED (I) STRATEGIC PLANNING SIGNIFICANT SIGNIFICANT (II) SOURCING AND SUPPLY CHAIN MANAGEMENT SIGNIFICANT NA (III) MANUFACTURING/TRADING SIGNIFICANT NA (IV) MARKETING & BRAND BUILDING - DOMESTIC SIGNIFICANT NA (V) SALES & DISTRIBUTION - DOMESTIC - EXPORT SIGNIFICANT INSIGNIFICANT NA (VI) DESIGN & DEVELOPMENT INSIGNIFICANT NA ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 26 (VII) QUALITY CONTROL SIGNIFICANT NA (VIII ) GENERAL MANAGEMENT FUNCTIONS SIGNIFICANT SIGNIFICANT (IX) RESEARCH, IDENTIFICATION OF SUPPLIER, SOURCING AND SUPPLY CHAIN MANAGEMENT NA SIGNIFICANT (X) PRODUCTION MANAGEMENT, QUALITY CONTROL AND INSPECTION NA SIGNIFICANT (XI) DEVELOPING CUSTOMER/BUYER RELATIONS NA SIGNIFICANT (XII) MERCHANDISING SAMPLE DISPLAY NA SIGNIFICANT (XIII ) MAINTENANCE OF SHIPPING DOCUMENTATION NA SIGNIFICANT (XIV ) BASIC DOCUMENTATION SUPPORT NA SIGNIFICANT II RISK ASSUMED (I) INVENTORY RISK SIGNIFICANT INSIGNIFICANT (II) CREDIT RISK DOMESTIC SIGNIFICANT INSIGNIFICA NT (III) MARKETING RISK - DOMESTIC SIGNIFICANT INSIGNIFICANT (IV) FOREIGN EXCHANGE RISK SIGNIFICANT INSIGNIFICAN T (V) TECHNOLOGY RISK SIGNIFICANT NA (VI) R & D RISK INSIGNIFICANT NA (VII) MANPOWER RISK SIGNIFICANT SIGNIFICANT (VIII ) PRICE RISK SIGNIFICANT NA (IX) CAPACITY UTILIZATION RISK SIGNIFICANT NA III ASSETS EMPLOYED (I) TANGIBLE ASSETS SIGNIFICANT INSIGNIFICANT (II) INTANGIBLE ASSETS ACQUIRED NA (IV) THE TWO BUSINESS ACTIVITIES REQUIRE PERFORMING DIFF ERENT FUNCTIONS, UTILIZATION OF ASSETS AND RISKS ARE ENTI RELY SEPARATE AND DIFFERENT ACTIVITIES. ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 27 (V) THERE IS A SEPARATE TEAM OF PEOPLE FOR THE TWO BUSI NESS SEGMENTS. RELIANCE IS PLACED ON THE JUDGMENT OF ITAT IN THE C ASE OF UCB INDIA (P) LTD. V ACIT 30 SOT 95 (MUMBAI) WHERE ITAT WHILE EXAMINING THE APPLICABILITY OF TNMM OF ENTITY LEVEL OR ON A TRANSACTION BY TRANSACTION BASIS HELD THAT UNDER TN MM, AN INTERNATIONAL TRANSACTION OR CLASS OF TRANSACTION S HOULD BE EVALUATED ON A STANDALONE BASIS BY COMPUTING THE SE GMENTAL MARGINS - (VIII) THE TPO HAS ADOPTED A COMBINED ANALYSIS OF M ANUFACTURING TRANSACTIONS AND BUYING SERVICES, UNDERTAKEN BY THE ASSESSEE, AND CONSIDERED COMPARABLE COMPANIES ENGAGED IN MANUFACT URING OF GARMENTS ON ENTITY LEVEL BASIS. THE COMPARISON OF M ANUFACTURING ENTERPRISES FOR BENCH MARKING OF THE BUYING SERVICE S BY THE ASSESSEE. THEREFORE, IT WOULD BE ERRONEOUS AND INCONSISTENT W ITH FUNDAMENTAL TEST OF COMPARABILITY AS PROVIDED IN THE TRANSFER P RICING REGULATIONS. HAVING REGARD TO THE FUNCTIONAL ANALYSIS OF THE TRA NSACTIONS, IT WOULD BE INAPPROPRIATE AND IN CONSISTENCE WITH THE ACCEPT ED TRANSFER PRICING CONVENTION AND PRACTICES TO EVALUATE MANUFACTURING EXPORTS AND BUYING SERVICE SEGMENT TOGETHER ON AN ENTITY LEVEL FOR DETERMINING THE ARMS LENGTH PRICE. THEREFORE, BENCHMARKING ANALYSIS CARRIED OUT BY THE ASSESSEE SEPARATELY CONSIDERING MANUFACTURING EXPORT ACTIVIT IES AND BUYING SERVICES ACTIVITIES PROVIDE AN IDEAL BENCHMARK FOR THE RESPECTIVE INTERNATIONAL TRANSACTION AND CANNOT BE DISREGARDED . ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 28 (IX) THE TPO FOR THE PURPOSE OF UNDERTAKING THE BEN CHMARKING OF THE INTERNATIONAL TRANSACTIONS OF EXPORT OF FINISHED GO ODS AND RENDERING OF BUYING SERVICES APPLIED TRANSACTIONAL NET MARGIN ME THOD (TNMM). THE TPO FOR THE PURPOSE OF APPLYING TNMM IDENTIFIED THE FOLLOWING 9 COMPARABLE COMPANIES HAVING AVERAGE OPERATING PROFIT MARGIN (OP/OC) AT 10.57%: S.NO. NAME OF THE COMPANY OP/SALES OP/OC 1. RAYMOND APPAREL LIMITED 12.14 12.99 2. ARVIND BRANDS LIMITED -16.64 -13.91 3. LUX INDUSTRIES LIMITED 2.44 2.49 4. KOUTONS RETAIL INDIA LTD. 15.44 18.26 5. PAGE INDUSTRIES LIMITED 18.51 22.51 6. KEWAL KIRAN CLOTHING LTD. 22.32 28.28 7. NASH FASHIONS INDIA LIMITED 7.16 7.04 8. OSWAL KNIT INDIA LIMITED 5.42 5.73 9. MICROTEX INDIA LIMITED 10.51 11.71 MEAN 8.59% 10.57% IN THIS EXERCISE THE FOLLOWING COMPANIES HAVE BEEN UNJUSTIFIABLY INCLUDED IN THE LIST OF COMPARABLE COMPANIES BY THE TPO: (I) RAYMOND APPAREL LIMITED: THE COMPANY HAD SUBSTANTIALLY HIGH RELATED PARTY TR ANSACTIONS OF 26.22% DURING THE PREVIOUS YEAR 2005-06. RELATED PARTY TRANSACTIONS (RPT) (REFER ANNEXURE-I) RS. 525,917,000 TOTAL REVENUE (TR) RS. 2,005,427,000 RPT/TR % 26.22% ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 29 DELHI ITAT IN THE CASE OF SONY INDIA 114 ITD 448 HELD THAT: WE ARE FURTHER OF VIEW THAT AN ENTITY CAN BE TAKEN AS UNCONTROLLED IF ITS RELATED PARTY TRANSACTION DO NO T EXCEED 10 TO 15% OF TOTAL REVENUE. WITHIN THE ABOVE LIMIT, TRANSACTIONS CANNOT BE HELD TO BE SIGNIFICANT TO IN FLUENCE THE PROFITABILITY OF COMPARABLE. FOR THE PURPOSES O F COMPARISON, WHAT IS TO BE JUDGED IS THE IMPACT OF T HE RELATED PARTY TRANSACTION VIS-A-VIS SALES AND NOT P ROFIT SINCE PROFIT OF AN ENTERPRISE IS INFLUENCED BY LARG E NUMBER OF OTHER FACTORS THE TPO, HOWEVER, DISREGARDED THE CONTENTION OF THE ASSESSEE THAT THE ABOVE COMPANY HAVING RELATED PARTY TRANSACTION SHOU LD NOT BE CONSIDERED AS PART OF THE COMPARABLE COMPANIES. TPO ERRONEOUSLY HELD THAT SINCE THE FILTER OF SUBSTANTIAL RELATED P ARTY TRANSACTIONS WAS NOT APPLIED BY THE ASSESSEE IN THE TRANSFER PRICING DOCUMENTATION, THE SAID CONTENTION COULD NOT BE RAISED BY THE ASSESSEE AT THIS STAGE. THE ASSESSEE DID NOT UNDERTAKE BENCHMARKING ANALYSI S IN THE TRANSFER PRICING DOCUMENTATION APPLYING TNMM. THE ASSESSING OFFICER FOR THE FIRST TIME IN THE SHOW CAUSE NOTICE HAS APPLIED TNM M TO DETERMINE THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSAC TION AND IDENTIFIED THE AFORESAID COMPANIES AS COMPARABLE COMPANIES. CO NSEQUENTLY, THERE WAS NO OCCASION FOR THE ASSESSEE TO APPLY THE SUBSTANTIAL RELATED PARTY FILTER IN THE TRANSFER PRICING DOCUMENTATION. THEREFORE, RAYMOND APPAREL LTD. HAVING SUBSTANTIAL RELATED PARTY TRANSACTIONS CALLS FOR BEING EXCLUDED FROM THE LIST OF COMPARABLES. (II) KEWAL KIRAN CLOTHING LIMITED ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 30 THE COMPANY HAS UNDERGONE MAJOR RESTRUCTURING DURIN G THE RELEVANT PREVIOUS YEAR. AS GIVEN IN ITS ANNUAL REPORT, THE C OMPANY BROUGHT AN IPO OF 31,00,037 EQUITY SHARES OF RS. 10/- AND BECA ME A PUBLIC LIMITED COMPANY W.E.F. FROM 02.11.05. THE SALES AND OPERATING INCOME INCREASED FROM RS. 261.19 MN TO RS. 859.64 M N DURING THE YEAR. THE NET PROFIT BEFORE TAX ALSO INCREASED TO R S. 181.99 MN AS AGAINST RS 48.79 MN BECAUSE OF THE MAJOR RESTRUCTUR ING IN THE COMPANY IN THE RELEVANT PREVIOUS YEAR. BESIDES, THE COMPANY DURING THE YEAR ACQUIRED SUBST ANTIAL ASSETS OF KEWAL KIRAN ENTERPRISES, A PARTNERSHIP FIRM AND TWO OF ITS SUBSIDIARIES, VIZ. KEWAL KIRAN RETAIL INDIA PRIVATE LIMITED AND KORNORSTONE RETAIL LIMITED CEASED TO BE SUBSIDIARIE S OF THE COMPANY W.E.F. AUGUST 6, 2005. THESE FACTS ARE EVIDENT FROM ANNUAL REPORT OF THE COMPANY. THE RELEVANT EXTRACT FROM THE ANNUAL REPORT ARE AS FOLLOWS: A. RESULTS OF THE COMPANY INCLUDE EFFECT OF THE ABOVE FOR PART OF THE YEAR AND HENCE PREVIOUS YEAR FIGURES ARE NOT ST RICTLY COMPARABLE. B. YOUR COMPANY HAD DURING THE YEAR ACQUIRED SUBST ANTIAL ASSETS OF KEWAL KIRAN ENTERPRISES, A PARTNERSHIP FIRM AND THEREFORE THE DATA FOR THE CURRENT YEAR WOULD NOT BE STRICTLY COM PARABLE WITH THAT OF THE PREVIOUS YEAR FOR THE CORRESPONDING PER IOD. C. AS A RESULT OF RESTRUCTURING OF THE GROUP ENTI TIES DURING THE YEAR, THE ENTIRE APPAREL MANUFACTURING AND MARKETIN G BUSINESS NOW RESTS WITH THE COMPANY. ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 31 DUE TO ABOVE MAJOR RESTRUCTURING IN THE BUSINESS OF KEWAL KIRAN CLOTHING LIMITED, THE RELEVANT PREVIOUS YEAR WAS ABNORMAL YEAR AND THE OPERATING RESULT OF THE SAID COMPANY CANNOT BE TAKEN INTO ACCOUNT FOR THE PURPOSE OF BEN CHMARKING ANALYSIS. IV. THE TPO IN HIS ORDER SOUGHT TO IDENTIFY COMPAR ABLE COMPANIES CONSIDERING TURNOVER FILTER OF 50-210 CRORES. IN OT HER WORDS, ONLY COMPANIES HAVING TURNOVER IN THE RANGE OF 50-2 10 CRORES WERE IDENTIFIED AS COMPARABLE BY THE TPO. THE TPO, HOWEVER, INADVERTENTLY CONSIDERED MICROTEX INDIA LTD. HAVING TURNOVER OF 48.34 CRORES ALSO AS PART OF THE COMPARABLE COMPANI ES. THE SAID COMPANY, IT WOULD BE APPRECIATED, DOES NOT SATISFY THE SELECTION CRITERIA AS CONSIDERED BY THE TPO HIMSELF. THE SAID COMPANY FOR THAT REASON IS TO BE EXCLUDED FROM THE SET OF C OMPARABLE COMPANIES. V. THE FINANCIAL STATEMENTS OF KOUTONS RETAIL INDI A LIMITED ARE NOT AVAILABLE ON ANY PUBLIC DOMAIN FOR FINANCIAL YE AR 2005-06. BESIDES, AS PER VARIOUS NEWS REPORTS ON THE INTERNE T, IN PUBLIC DOMAIN, THE COMPANY HAS UNDERGONE MAJOR RESTRUCTURI NG DURING THE PREVIOUS YEAR 2005-06. ON 07.02.06, KOUTONS RET AIL INDIA LIMITED WAS INCORPORATED BY ACQUIRING, CHARLIE CREA TIONS, WHICH WAS A PARTNERSHIP FIRM. AS A RESULT OF THE RESTRUCTURING, AS REPORTED,THE T OTAL INCOME OF KOUTONS RETAIL INDIA LIMITED HAS INCREASED TO RS. 2 1,270.78 ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 32 LAKHS IN FINANCIAL YEAR 2005-06 AS AGAINST 986.6 LA KHS IN FINANCIAL YEAR 2004-05 (SOURCE: CAPITALINE). (X) IT HAS BEEN CONSISTENT STAND OF THE REVENUE THA T THE COMPANIES WITH MAJOR RESTRUCTURING SHOULD NOT HAVE BEEN ACCEPTED A S A COMPARABLE, KOUTONS RETAIL INDIA LIMITED SHOULD NOT BE INCLUDED AS A COMPARABLE COMPANY . THE TPO WITHOUT BASIS HAS OBSERVED THAT THE BUSI NESS RESTRUCTURING REDUCES THE PROFIT MARGIN OF THE COMP ANY IN THE INITIAL YEARS. THE COMPARATIVE STATEMENT OF PROFITABILITY O F THE KOUTONS IS AS UNDER: YEAR SALES % INCREASE PBT % INCREASE PAT % INCREASE 31.03.2005 96.33 3.05 1.93 31.03.2006 158.34 64.37% 20.93 586.23% 13.62 605.70% 31.03.2007 402.40 154.14% 52.59 151.27% 33.95 149.27% 31.03.2008 793.46 97.18% 105.15 99.94% 69.49 104.68% 31.03.2009 1046.68 31.91% 120.82 14.90% 79.56 14.49% THUS, THE PROFIT OF THE COMPANY INCREASED DUE TO RE STRUCTURING. HENCE, COMPANY SHOULD NOT BE CONSIDERED AS A COMPARABLE FO R THE RELEVANT ASSESSMENT YEAR. (XI) IF THESE COMPANIES ARE EXCLUDED, THE AVERAGE O PERATING PROFIT MARGIN (OP/OC%) OF THE REMAINING COMPARABLE COMPANIES, WOR KS OUT AS UNDER: S.NO. NAME OF THE COMPANIES OP/OC % 1. OSWAL KNIT INDIA 5.73% 2. NASH FASHION (INDIA) LTD. 7.04% 3. PAGE INDUSTRIES LTD. 22.51% 4. LUX HOSIERY INDUSTRIES LIMITED 2.49% 5. ARVIND BRANDS LIMITED -13.91% AVERAGE 4.77% ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 33 SINCE THE OPERATING PROFIT RATIO OF THE ASSESSEE FO R EXPORTS MADE TO RELATED PARTIES @17.41% IS HIGHER THAN THE AVERAGE OF OPERATING PROFIT RATIO OF COMPARABLE COMPANIES, THE INTERNATIONAL TR ANSACTION OF EXPORT OF GOODS, THEREFORE, CONSIDERED BEING AT ARMS LENG TH USING TNMM. (XII) THE TPO HAS APPLIED THE OPERATING PROFIT MARG IN OF THE AFORESAID COMPARABLE COMPANIES TO THE VALUE OF ALL THE INTERN ATIONAL TRANSACTIONS AS FOLLOWS: VALUE OF INTERNATIONAL TRANSACTIONS A 189,537,478.00 OP/OC OF COMPARABLES 4.77% ARM'S LENGTH MARGIN B=A*10.57% 9,047,836.18 ARM'S LENGTH PRICE 198,585,314.18 MARGIN SHOWN BY THE ASSESSEE @2.57% C=A*2.57% 4,871,113.18 DIFFERENCE B-C 4,176,722.99 % DIFFERENCE 2.20% 5.2. THE ADJUSTMENT ON ACCOUNT OF THE DIFFERENCE IN THE ARMS LENGTH PRICE COMPUTED BY THE TPO IN THE IMPUGNED ORDER PASSED UN DER SECTION 92CA(3) OF THE ACT BEING WITHIN THE RANGE OF 5%, IS THUS LIABLE TO BE EXCLUDED. THE PROVISION READS AS UNDER: 92C. COMPUTATION OF ARMS LENGTH PRICE. XXX XXX (2) THE MOST APPROPRIATE METHOD REFERRED TO IN SUB -SECTION (1) SHALL BE APPLIED, FOR DETERMINATION OF ARMS LENGTH PRICE , IN THE MANNER AS MAY BE PRESCRIBED: PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMIN ED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES, OR, AT THE OPTION OF THE ASSESSEE, A PRICE WHICH MAY VARY FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 34 EXCEEDING FIVE PER CENT OF SUCH ARITHMETICAL MEAN. (EMPHASIS SUPPLIED) 5.3. RELIANCE IS PLACED ON THE DECISION OF CALCUTTA BENCH OF THE ITAT IN THE CASE OF DEVELOPMENT CONSULTANTS (P) LTD. VS. DC IT: 115 TTJ 577, WHEREIN THE AFORESAID CONTENTION OF THE ASSESSEE HA S BEEN UPHELD BY THE HONBLE TRIBUNAL. 5.4. THE BENEFIT OF +/(-) 5% AS PER PROVISO TO SECT ION 92C(2) OF THE ACT HAS BEEN HELD TO BE ADMISSIBLE AS STANDARD DEDUCTION WH ILE COMPUTING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS IN T HE FOLLOWING DECISIONS: - ACIT VS. PHILIPS SOFTWARE CENTRE PVT. LTD. : (2008) (26 SOT 226 - DCIT VS. SONY INDIA LTD. (2008) (114 ITD 448 ( DELHI ) , 118 TTJ (DELHI) 865) - SKODA AUTO INDIA PVT. LTD. V. ACIT: (2009) 122 TTJ (PUNE) 699 - DEVELOPMENT CONSULTANTS (P) LTD. VS. DCIT: 115 TTJ 577, 5.5. ASSUMING EVEN IF ASSESSEES OTHER ARGUMENTS AR E NOT ACCEPTED, IN VIEW OF THE CLEAR PROVISIONS OF PROVISO TO SECTION 92C (2) OF THE ACT___ NO ADJUSTMENT IS CALLED FOR AS ASSESSEE ALP IS NOT LES S THAN 95% OF THE AVERAGE OPERATING PROFIT MARGIN OF THE COMPARABLE UNCONTROL LED ENTERPRISES DETERMINED APPLYING TNMM METHOD. 5.6. IN ANY CASE THE ASSESSEE COMPANY DURING THE R ELEVANT PREVIOUS YEAR HAS INCURRED SUBSTANTIAL EXPENSES TO PROMOTE AND ES TABLISH ITS BUSINESS IN THE DOMESTIC MARKET. LOW PROFITABILITY OF THE ASSESSEE IS MAINLY ON ACCOUNT OF THE EXPENSES INCURRED FOR ESTABLISHING NEW SHOW ROO MS CREATING PRESENCE IN THE VARIOUS PARTS OF THE COUNTRY, LARGE DEMONSTRATI ON, MARKETING AND SELLING EXPENSES, ETC. LOW PROFITABILITY OF THE ASSESSEE C OMPANY IS NOT ON ACCOUNT ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 35 OF THE INTERNATIONAL TRANSACTIONS, WHICH IS CLEAR F ROM THE FACTS THAT: (I) THE GROSS PROFIT MARGIN OF THE ASSESSEE COMPANY IS WORKED OUT AT 44.53% AS AGAINST 31.76% IN THE CASE OF THE COMP ARABLE COMPANIES. IT WOULD BE APPRECIATED THAT THE PROFITABILITY OF T HE ASSESSEE IS NOT IMPACTED ON ACCOUNT OF THE INTERNATIONAL TRANSACTIO N OF IMPORTS, WHICH IS, IN ANY CASE, ONLY 2.54% OF THE TOTAL TURNOVER. (II) THE OPERATING PROFIT MARGIN OF THE ASSESSEE CO MPANY AFTER EXCLUDING SOME OF THE EXPENSES, SUCH AS, RENT, ADVE RTISEMENT, SHOP RUNNING AND GUARANTEE CHARGES, ETC., IS WORKED OUT AT 20.41% (OP/SALES %) AS AGAINST 15.29% IN CASE OF THE COMPA RABLE COMPANIES. 5.7. THE LOW PROFITABILITY OF THE ASSESSEE COMPANY BEING LARGELY ATTRIBUTABLE TO THE EXPENSES INCURRED BY THE ASSESS EE TO ESTABLISH AND PROMOTE ITSELF IN THE DOMESTIC MARKET, HAS NOTHING TO DO W ITH THE VARIOUS INTERNATIONAL TRANSACTIONS UNDERTAKEN WITH ASSOCIAT ED ENTERPRISE. 6. LEARNED DR SUPPORTS THE TPOS REPORTS AND ORDERS PASSED BY AO AND DRP AND CONTENDS THAT T.P. ANALYSIS REQUIRES CONSID ERATION OF VARIOUS BENCH MARKS, COMPARABLE & FAR ANALYSIS. THE TPO HAS GIVEN DETAILED REASONS IN SUPPORT OF ANALYSIS WHICH SHOULD BE UPHELD. 7. WE HAVE HEARD RIVAL CONTENTIONS, PERUSED THE MAT ERIAL AVAILABLE ON RECORD. THE FIRST AND FOREMOST QUESTION IN THIS CAS E IS TO DETERMINE WHETHER THE ACTION OF TPO IN UNDERTAKING ENTITY LEVEL BENCH MARKING BY TNM METHOD COMBINING OF THE INTERNATIONAL TRANSACTIONS IS JUS TIFIABLE OR THE TP ANALYSIS ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 36 PROVIDED BY ASSESSEE, BASED ON TRANSACTION TO TRA NSACTION BASIS IN RESPECT OF DIFFERENT SEGMENTS SHOULD BE ADOPTED. 7.1. FROM THE FACTS MENTIONED ABOVE, IT IS CLEAR TH AT ASSESSEES MANUFACTURING EXPORT ACTIVITIES; BUYING/SOURCING A ND COMMISSION EARNING ACTIVITIES ARE INDEPENDENT OF EACH OTHER. EACH ACT IVITY HAS DIFFERENT FACTORS IN RESPECT OF SOURCE, IDENTIFICATION OF VENDORS, ME RCHANDISE, DESIGNS QUALITY CONTROL, HANDLING ETC. THE FAR ANALYSIS IN EACH OF THE ACTIVITY WILL HAVE DISTINCT AND SEPARATE CONSIDERATIONS. 7.2. WE, FIND MERIT IN THE ARGUMENT OF THE LEARNE D COUNSEL THAT THE TPO SHOULD HAVE ACCEPTED THE METHOD OF ASSESSEES BENCH MARKING ANALYSIS ON THE BASIS OF TRANSACTION TO TRANSACTION BASIS IN RESPEC T OF DIFFERENT SEGMENTS OF ASSESSEES INTERNATIONAL TRANSACTIONS WITH ASSOCIAT ED ENTERPRISES. IN OUR VIEW, ASSESSEES FUNCTIONS, RISK AND ASSETS FAR CONSIDERA TIONS, WHICH ARE GIVEN IN THE ABOVE TABLE, DESERVES TO BE MERITED. TPO DID N OT APPRECIATE THE ASSESSEES TRANSACTIONS CORRECTLY AND APPLIED ENTIT Y LEVEL BENCHMARKING ON TNMM METHOD BY COMBINING ASSESSEES ALL INTERNATION AL TRANSACTIONS WITH ASSOCIATED ENTERPRISE WITHOUT JUSTIFICATION. 7.3. OUR VIEW IS SUPPORTED BY ITAT JUDGMENTS - MUMB AI BENCH IN THE CASES OF UCB INDIA (P) LTD. VS. ACIT (SUPRA); AND ACIT V. STAR INDIA LTD. (SUPRA); AND KOLKATA BENCH IN THE CASE OF DEVELOPME NT CONSULTANTS (P) LTD. (SUPRA). ALL THESE CASES CLEARLY LAY DOWN THAT ALP WOULD BE DETERMINED BASED ON THE NATURE OF SERVICE PROVIDED BY ASSESSEE FOR EACH CLASS OF TRANSACTION BASED ON VARIOUS FACTORS AND ANALYSIS. IN THE CASE OF STAR INDIA LTD. (SUPRA), ALSO THE TPO TREATED ALL THE ACTIVITI ES OF THE ASSESSEE AS ONE AND ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 37 DETERMINED THE ALP AT ENTITY LEVEL WITHOUT APPRECIA TING THAT ONE CANNOT COMPARE THE FAR OF A PRINCIPAL AND AGENT ON SAME FO OTING. 7.4. IN OUR VIEW, IN THE ASSESSEES CASE THERE ARE DIFFERENT SEGMENTAL ACTIVITIES, WHICH ARE INDEPENDENT OF EACH OTHER. TH EY ARE REQUIRED TO BE ANALYZED ON TRANSACTION TO TRANSACTION BASIS AND NO T BY COMBINING ALL ACTIVITIES. CONSEQUENTLY, WE UPHOLD THE ASSESSEES METHOD OF ALP. 7.5. IN RESPECT OF WORKING OF THE ASSESSEES ALP, W E SEE NO INFIRMITY IN THE FAR ANALYSIS GIVEN BY ASSESSEE, WHICH IS DETAIL ED ABOVE. THEREFORE, WE UPHOLD THE ASSESSEES METHOD AND WORKING OF ALP. IN COMBINE BENCHMARKING ALSO, TPO HAS NOT CONSIDERED THE FACT THAT THE CASES OF RAYMOND, KEWAL KIRAN CLOTHING LTD., MICROTEX INDIA LTD., KOUTONS RETAIL INDIA LTD. CANNOT BE TAKEN AS COMPARABLES DUE TO TH EIR SUBSTANTIALLY HIGH RELATED PARTY TRANSACTIONS, RESTRUCTURING ETC. CONS EQUENTLY, THESE COMPARABLES ARE TO BE EXCLUDED. ON EXCLUSION THEREO F, WHAT REMAINS OUT OF THE COMPARABLES I.E. OSWAL KNIT INDIA, LUX HOSIERY INDUSTRIES LTD., PAGE INDUSTRIES LTD. WITH AVERAGE OP/SALES OF 4.77%. IN CONTRAST THE ASSESSEES OPERATING PROFIT RATIO OF EXPORT TO RELATED PARTIES AT 17.41% IS HIGHER THAN THE AVERAGE OPERATING PROFIT. 7.6. COMING TO THE ASSESSEES ALTERNATE CONTENTION BASED ON PLUS MINUS 5% ACCEPTANCE OF VARIATION, AS PRESCRIBED BY SEC. 9 2CA(3), WE FIND MERIT IN THE ARGUMENT OF LEARNED COUNSEL THAT EVEN IF ALL TH E FACTORS ARE ASSUMED AGAINST ASSESSEE; THE OPERATING PROFIT MARGIN OF TH E ASSESSEE ENTITY LEVEL COMES TO 2.47%, WHICH IS WITHIN THE END OF PLUS M INUS 5% MARGIN. IN THIS EVENTUALITY ALSO ASSESSEE DESERVES TO SUCCEED. ITA 3829/DEL/10 BENETTON INDIA PVT. LTD. 38 7.7. IN VIEW OF THE FOREGOINGS, WE HAVE NO HESITATI ON TO UPHOLD THE ASSESSEES WORKING OF ALP FOR INTERNATIONAL TRANSAC TIONS WITH ASSOCIATED ENTERPRISES, THE ADDITIONS MADE ARE DELETED. 8. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 30-11-2011. SD/- SD/- (SHAMIM YAHYA ) ( R.P. TOLANI ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 30-11-2011. MP COPY TO : 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR