Burberry India Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 758/DEL/2017

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 5739 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 4 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-06-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2012-2013
• Appeal Filed On: 10-02-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJAY I BARA
• Keywords: Transfer pricing; International transaction
• Section: 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I-1 NEW DELHI BEFORE SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER & SHRI K.N. CHARY, JUDICIAL MEMBER ITA NO.-758/DEL/2017 ( ASSESSMENT YEAR: 2012-13) BURBERRY INDIA PVT. LTD. 3-A-1, TAJ APARTMENT, RAO TULA RAM MARG NEW DELHI. PAN NO. AADCB9530G VS ACIT CIRCLE 5(1) NEW DELHI. & ITA NO.-7684/DEL/2017 ( ASSESSMENT YEAR: 2013-14) BURBERRY INDIA PVT. LTD. 3-A-1, TAJ APARTMENT, RAO TULA RAM MARG NEW DELHI. PAN NO. AADCB9530G VS ACIT CIRCLE 5(1) NEW DELHI. ASSESSEE BY SH. AJAY WADHWA, ADV. REVENUE BY SH. SANJAY I. BARA, CIT DR ORDER PER K.NARASIMHA CHARY, J.M. THESE APPEALS ARE FILED BY THE ASSESSEE CHALLENGING THE ORDER DATED 30/11/2016 AND 19/12/2016 PASSED BY THE LEARNED ASSESSING OFFICER PURSUANT TO THE DIRECTION S DATED 18/10/2016 AND 15/09/2017 RESPECTIVELY BY THE LEARN ED DISPUTE RESOLUTION PANEL-1, NEW DELHI FOR THE ASSES SMENT YEARS 2012-13 AND 2013-14 RESPECTIVELY. SINCE THE A SSESSEE DATE OF HEARING 21.06.2018 DATE OF PRONOUNCEMENT 22.06.2018 ITA NOS. 758 & 7684/DEL/2017 2 AND THE FACTS INVOLVED IN THESE MATTERS ARE IDENTIC ALLY THE SAME, BOTH THE APPEALS ARE DISPOSED OF BY THIS COMM ON ORDER WITH REFERENCE TO THE FACTS RELEVANT FOR THE ASSESS MENT YEAR 2012-13. 2. BRIEF FACTS OF THE CASE ARE THAT THE BURBERRY IN DIA PRIVATE LIMITED, THE ASSESSEE, WAS INCORPORATED IN JANUARY 2010 AND IS ENGAGED IN TRADING OF IMPORTED LUXURY GOODS BEAR ING THE BURBERRY TRADEMARK. THE ASSESSEE DISTRIBUTES THESE PRODUCTS THROUGH RETAIL BY WAY OF DIRECTLY OWNED AND MANAGED OUTLETS. IT IS A 51:49 JOINT VENTURE BETWEEN BURBERRY INTERN ATIONAL HOLDINGS LTD UK AND GENESIS COLOURS PRIVATE LIMITED , INDIA. 3. FOR THE ASSESSMENT YEAR 2012-13 THE ASSESSEE FIL ED THEIR RETURN OF INCOME ON 30/11/2012 DECLARING LOSS OF R S. 1,80,33,018/-. DURING THE COURSE OF ASSESSMENT PROC EEDINGS, LD. AO NOTICED THAT THE ASSESSEE HAD UNDERTAKEN INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTE RPRISES AS SUCH IN ACCORDANCE WITH THE PROVISIONS OF SECTION 9 2 CA OF THE INCOME TAX ACT, 1961 HE REFERRED THE DETERMINAT ION OF THE ARMS LENGTH PRICE TO THE TRANSFER PRICING OFFICER (LD. TPO). THE ASSESSEE HAS BENCHMARKED INTERNATIONAL TRANSACT ION RELATING TO IMPORT OF FINISHED GOODS USING CUP CORR OBORATED BY RPM AS THE MOST APPROPRIATE METHOD BY USING THE MULTIPLE YEAR DATA AND CLAIMED THE TRANSACTION TO B E AT ARMS LENGTH. THE GROSS PROFIT RATE OF THE ASSESSEE WAS 54.96% AND THE NET PROFIT RATE WAS (-)14.73%. 4. LD. TPO, HOWEVER, BENCHMARKED THE INTERNATIONAL TRANSACTION USING TNMM IS THE MOST APPROPRIATE METH OD AND OP/OC AS THE PLI, AND COMPUTED THE ADJUSTMENT UNDER ITA NOS. 758 & 7684/DEL/2017 3 SECTION 92 CA AT RS. 6,94,58,591/-WHICH ARE SUBSEQU ENTLY RECTIFIED TO RS. 6,80,36,113/-. WHEN THE ASSESSEE F ILED OBJECTIONS BEFORE THE LD. DRP, LD. DRP AFTER CONSID ERING THE DECISIONS REPORTED IN WHILE FOLLOWING EDITIONS REP ORTED IN ABOTT MEDICAL OPTICS PVT. LTD. 2016-TII-366-ITAT-BA NG-TP, MATTEL TOYS INDIA PVT. LTD. 2015-TII-477-ITAT-MUM-T P, AND KOHLER INDIA CORP. PVT. LTD. 2016-TII-91-ITAT-BANG- TP HELD THAT THE TNMM IS MORE TOLERANT OF FUNCTIONAL DIFFER ENCES AND SINCE THE ASSESSEE FAILED TO DEMONSTRATE THAT THE REQUIREMENTS OF USING RPM AS MOST APPROPRIATE METHO D FOUND THAT THE REASONING OF THE LD. TPO IS JUSTIFI ED AND ACCORDINGLY UPHELD THE SAME. 5. LD. DRP, WHILE UPHOLDING THE REJECTION OF RPM BY STATED THAT, THE ASSESSEE HAS INCURRED ABOUT RS. 2.94 CR. TOWAR DS ADVERTISEMENT AND MARKETING EXPENSES ON A TURNOVE R OF ABOUT RS.69.70 CR. IT IS CLAIMED THAT ABOUT RS. 74. 53 LAKHS HAS BEEN REIMBURSED TOWARDS ADVERTISEMENT AND MARKE TING EXPENSES HOWEVER, IT IS CLEAR THAT THE ASSESSEE HAS INCURRED SUBSTANTIAL AMP, AND OTHER EXPENSES, IN RELATION TO ITS TURNOVER, AND IS THEREFORE, NOT A SIMPLE DISTRIBUTO R IN TERMS OF THE REQUIREMENT OF USING RPM. THE ASSESSEE HAS FAI LED TO DEMONSTRATE THAT THE COMPARABLES HAVE ALSO INCURRED SIMILAR EXPENDITURE AND HAVE A SIMILAR FUNCTIONAL PROFILE R EQUIRED FOR RPM ANALYSIS. 6. HENCE THE ASSESSEE PREFERRED THIS APPEAL. THOUGH THE ASSESSEE CHALLENGED THE REFERENCE MADE BY THE LD. A SSESSING OFFICER TO THE LD. TPO, AND THE COMPARABILITY OF TH E COMPANIES, LD. AR CONFINED THE CHALLENGE TO THE FIN DINGS OF THE AUTHORITIES BELOW IN REJECTING THE CUP CORROBOR ATED BY RPM AND SUBSTITUTING THE SAME WITH TNMM. ITA NOS. 758 & 7684/DEL/2017 4 7. IT IS ARGUED BY THE LD. AR THAT THE ROLE OF THE ASSESSEE DOES NOT INVOLVE ANY VALUE ADDITION TO THE PRODUCT BEING SOLD IN THE INDIAN MARKET. ASSESSEE MERELY PURCHASES FRO M ITS PRINCIPAL, BURBERRY LIMITED AND RESELLS THE PRODUCT , WITHOUT ADDING ANY VALUE TO THE CORE PRODUCT AS SUCH RPM IS USED FOR CASES. EVEN AS PER RULE 10B OF THE INCOME-TAX RULES , 1962, RPM IS USED IN CASE OF A RESELLER. HE FURTHER SUBM ITTED THAT INASMUCH AS THE LD. TPO HAS ACCEPTED THE CHARACTERI ZATION OF BURBERRY INDIA AS PROVIDED IN THE TP DOCUMENTATION FOR FY 2012-13, BESIDES THE FUNCTIONAL PROFILE OF THE ASSE SSEE OR THE FACT THAT THE ASSESSEE IS A ROUTINE DISTRIBUTOR, IT IS NOT OPEN FOR THE LD. TPO PROCEEDED TO APPLY AN INDIRECT METH OD I.E. TNMM AS THE MAM OVER THE DIRECT METHOD RPM. 8. LD. AR PLACED RELIANCE ON BOSE CORPORATION INDIA (P.) LTD. V. ACIT [2017] 77 TAXMANN.COM 194 (DELHI - TRI B.), HORIBA INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF I NCOME TAX [2017] 81 TAXMANN.COM 209 (DELHI - TRIB.), ASSI STANT COMMISSIONER OF INCOME TAX VS. KOBELCO CONSTRUCTION EQUIPMENT INDIA LIMITED [2017] 81 TAXMANN.COM 31 (D ELHI - TRIB.), ORIFLAME INDIA (P.) LTD. V. ACIT [2017] 85 TAXMANN.COM 162 (DELHI - TRIB.), DCIT V. DELTA POWER SOLUTION I NDIA (P.) LTD. [2016] 68 TAXMANN.COM 247 (DELHI - TRIB.), LUX OTTICA INDIA EYEWEAR P.LTD. VS DEPARTMENT OF INCOME TAX (I TA NO. 1115/DEL/2014 AND 617/DEL/2014), ACIT VS AKZO NOBEL CAR REFINISHES INDIA (P.) LTD [2017] 84 TAXMANN.COM 19 9 (DELHI - TRIB.), NOKIA INDIA PVT. LTD. V. DEPUTY COMMISSIONE R OF INCOME-TAX, CIRCLE -13(1), NEW DELHI [2014] 52 TAXM ANN.COM 492 (DELHI - TRIB.), AND DANISCO (INDIA) PVT. LTD. VS. ACIT ITA NOS. 758 & 7684/DEL/2017 5 [2014] 48 TAXMANN.COM 60 (DELHI - TRIB.)/[2014] 151 ITD 460 (DELHI - TRIB.) FOR THE PRINCIPLE THAT WHEN THE RES ELLER DOES NOT ADD ANY VALUE TO THE PRODUCT OF THE GOODS, THE RP M ETHOD WOULD BE APPROPRIATE FOR DETERMINING THE ARMS' LENG TH PRICE. 9. FURTHER BY PLACING RELIANCE ON THE DECISIONS IN ASSISTANT COMMISSIONER OF INCOME TAX VS. KOBELCO CONSTRUCTION EQUIPMENT INDIA LIMITED [2017] 81 TAXMANN.COM 31 (D ELHI - TRIB.), ACIT VS AKZO NOBEL CAR REFINISHES INDIA (P. ) LTD [2017] 84 TAXMANN.COM 199 (DELHI - TRIB.) AND MATTE L TOYS (I) PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOM E TAX (2014) 30 ITR (TRIB) 0283 (MUMBAI), IT IS ARGUED BY THE LD. AR THAT IF THE ALP OF ANY TRANSACTION CAN BE DETERM INED BY APPLYING ANY OF THE DIRECT METHODS LIKE CUP, RPM, C PM THEN THEY SHOULD BE GIVEN THE PREFERENCE AND ONCE THESE TRADITIONAL METHODS HAVE BEEN RENDERED INAPPLICABLE THEN ONLY TNMM SHOULD BE RESORTED TO. 10. LD. AR SUBMITTED THAT THE CASE LAW RELIED UPON BY THE LD. DRP HAS NO APPLICATION TO THE FACTS OF THIS CAS E BECAUSE THE FACTS OF THE CASE LAWS QUOTED BY THE DRP ARE DI FFERENT FROM THE FACTS OF THE ASSESSEE. HE SUBMITS THAT IN THE CASE LAWS QUOTED BY THE DRP, THE COMPANIES HAVE INCURRED HUGE EXPENDITURE ON AMP, AND THE BUSINESS MODEL OF THE C OMPANY IS NOT COMPARABLE WITH THE COMPARABLES WHO ARE NOT INCURRING SUCH EXPENDITURE. ACCORDING TO HIM IN ONE CASE LAW QUOTED BY THE LD. DRP, THE COMPANY UNDERTOOK BUILDI NG OF INTANGIBLES AND 65% OF OPERATING COST WAS INCURRED ON AMP EXPENSE AND THE COMPANY WAS ENGAGED IN MANUFACTURIN G ACTIVITY TOO. HE SUBMITTED THAT IN ASSESSEES CASE , THE ITA NOS. 758 & 7684/DEL/2017 6 ASSESSEE HAS NOT INCURRED SUCH HEAVY EXPENDITURE AN D THE COMPARABLES HAVE ALSO INCURRED SIMILAR EXPENSE AND HAVE SIMILAR BUSINESS MODEL. THE ASSESSEE IS NOT ENGAGED IN ANY MANUFACTURING. THE WIDE GAP IN THE GP AND NP IS D UE TO THE HEAVY RENTAL COST AND NOT DUE TO AMP EXPENSES AS GI VEN IN THE CASE LAWS CITED BY THE LD. DRP. 11. LD. AR PLACED RELIANCE ON THE DECISION IN CASE OF NOKIA INDIA PVT. LTD. V. DEPUTY COMMISSIONER OF INCOME-TA X, CIRCLE -13(1), NEW DELHI [2014] 52 TAXMANN.COM 492 (DELHI TRIB) WHEREIN IT WAS HELD THAT THE INCURRING OF HIGH ADVE RTISEMENT AND MARKETING EXPENSES BY THE ASSESSEE VIS--VIS TH E OTHER COMPARABLE COMPANIES DOES NOT IN ANY MANNER AFFECT THE DETERMINATION OF ALP UNDER THE RPM AND IF THE ASSES SEE HAS INCURRED MORE EXPENSES ON ADVERTISEMENT AND PROMOTI ON, WHICH, IN THE OPINION OF THE DEPARTMENT WENT ON TO BRAND BUILDING FOR AN AE, THEN THE TRANSFER PRICING ADJUS TMENT ON ACCOUNT OF SUCH AMP EXPENSES IS SEPARATELY CALLED F OR AND RPM IS THE MOST APPROPRIATE METHOD IN SUCH A SITUAT ION. 12. LASTLY HE RELIED ON THE DECISION IN THE CASE OF DEPUTY COMMISSIONER OF INCOME TAX VS. SANYO INDIA P. LTD. IT(TP).A NO.436/BANG/2015 (2015) 45 CCH 0098 BANG TRIB AT PA GE 13 WHERE WAS HELD THAT IF THE COMPARABLES ARE NOT F OUND APPROPRIATE, FRESH COMPARABLES CAN BE SEARCHED, BUT THE METHOD ADOPTED NEED NOT BE REJECTED. 13. DR PLACED RELIANCE ON THE OBSERVATIONS OF THE L D. TPO, VIDE COMMENT OF THE TPO. HE BROUGHT TO OUR NOTICE T HAT THE LD. TPO FOUND THAT CERTAIN EXPENSES LIKE SALARIES A ND WAGES, ITA NOS. 758 & 7684/DEL/2017 7 TRAVELLING AND CONVEYANCE, ETC., WHICH ARE DIRECTLY CONNECTED WITH SELLING AND DISTRIBUTION FUNCTIONS AS COULD BE FOUND FROM THE PROFIT AND LOSS ACCOUNT OF THE ASSESSEE OR IN THE CASE OF THE COMPARABLES HAVE NOT BEEN CONSIDERED A COMPA TIBILITY, AS SUCH THE MANNER IN WHICH THE RPM HAS BEEN APPLIE D WAS NOT GIVING A PICTURE OF THE COMPATIBILITY ANALYSIS IS FOR APPLICATION OF THE RPM METHOD THESE FACTORS CANNOT BE IGNORED AT ALL. 14. LD. DR FURTHER SUBMITTED THAT AS RIGHTLY OBSERV ED BY THE LD. TPO, FOR ACHIEVING PROPER COMPATIBILITY IN THE LIGHT OF ABOVE MENTIONED ASPECTS OF BUSINESS OF A DISTRIBUTO R, IT IS SIMPLY CLEAR THAT COMPLETE INFORMATION ABOUT BUSINE SS PROFILE AND FINANCIAL DATA IS AVAILABLE IN RESPECT OF ALL T HE PARTIES WHICH ARE EXAMINED AS COMPARABLES, WHICH IS NOT FOU ND IN PUBLIC DOMAIN, AS SUCH, RPM IS REJECTED AS THE MOST APPROPRIATE METHOD AND TNMM WAS RIGHTLY CONSIDERED AS THE MOST APPROPRIATE METHOD. OTHER METHODS LIKE CUP, C PM ARE NOT APPLICABLE TO THE FACTS OF THE CASE. ON THIS B ASIS HE JUSTIFIED THE ORDERS OF THE AUTHORITIES BELOW. 15. WE HAVE GONE THROUGH THE RECORD IN THE LIGHT OF THE SUBMISSIONS ON EITHER SIDE. IT IS AN ADMITTED FACT THAT IN THIS CASE THE ASSESSEE IS MERELY PURCHASING AND SELLING THE PRODUCTS WITHOUT ADDING ANY VALUE TO THE CORE PRODU CT. FURTHER, LD. TPO DID NOT DISPUTE THE CHARACTERISATI ON OF THE ASSESSEE AS IN THE TP DOCUMENT AND ALSO ACCEPTED TH E FUNCTIONAL PROFILE OF THE ASSESSEE AS A ROUTINE DIS TRIBUTOR. LD. DRP, HOWEVER, RECORDED THAT THE ASSESSEE HAS INCURR ED SUBSTANTIAL AMP, AND OTHER EXPENSES, IN RELATION TO ITS ITA NOS. 758 & 7684/DEL/2017 8 TURNOVER, AND IS THEREFORE, NOT A SIMPLE DISTRIBUTO R IN TERMS OF THE REQUIREMENT OF USING RPM. NOW WE SHALL PROCEED TO EXAMINE THE LAW APPLICABLE THESE FACTS. 16. IN NOKIA INDIA (P) LTD. V. DY. CIT[2014] 52 TAX MANN.COM 492/153 ITD 508 (DELHI), THE DELHI BENCH OF THE ITA T HELD THAT,- 9. SUB-CLAUSE (I) OF CLAUSE (B) OF RULE 10B(1) DEAL S WITH IDENTIFYING THE PRICE AT WHICH THE GOODS PURCHASED FROM AN AE IS RESOLD. SUB-CLAUSE (II) OF CLAUSE (B) OF RULE 10 B(1) TALKS OF REDUCING THE AMOUNT OF NORMAL GROSS PROFIT MARGIN O F COMPARABLE UNCONTROLLED TRANSACTIONS FROM SUCH RESA LE PRICE OF THE ASSESSEE. SUB-CLAUSE (III) STATES THAT THE R ESULT OF SUB- CLAUSE (II) IS FURTHER REDUCED BY THE EXPENSES INCU RRED IN CONNECTION WITH THE PURCHASE OF GOODS AND SUB-CLAUS E (IV) PROVIDES THAT THE AMOUNT SO DEDUCED UNDER SUB-CLAUS E (III) IS ADJUSTED ON ACCOUNT OF DIFFERENCES IN THE INTERNATI ONAL TRANSACTION AND COMPARABLE UNCONTROLLED TRANSACTION S WHICH MATERIALLY AFFECT THE AMOUNT OF GROSS PROFIT MARGIN IN THE OPEN MARKET. FINALLY, SUB-CLAUSE (V) PROVIDES THAT THE A DJUSTED PRICE FOUND UNDER SUB-CLAUSE (IV) IS TAKEN AS ARM'S LENGTH PRICE IN RESPECT OF PURCHASE OF GOODS FROM THE AE. WHEN WE CONSIDER THE METHODOLOGY GIVEN UNDER RPM, MORE SPEC IFICALLY SUB-CLAUSES (I) AND (V), IT BECOMES PATENT THAT SUB -CLAUSE (I) REFERS TO 'PROPERTY PURCHASED BY THE ENTERPRISE ... IS RESOLD ' AND SUB-CLAUSE (V) REFERS TO 'ARM'S LENGTH PRICE IN RESPECT OF THE PURCHASE OF THE PROPERTY ... BY THE ENTERPRISE '. A CLOSE SCRUTINY OF THE ABOVE TWO SUB-CLAUSES ALONG WITH TH E REMAINING SUB-CLAUSES OF RULE 10B(1)(B) MAKES IT CL EAR BEYOND DOUBT THAT RPM IS BEST SUITED FOR DETERMINING ALP O F AN INTERNATIONAL TRANSACTION IN THE NATURE OF PURCHASE OF FROM AN AE WHICH ARE RESOLD AS SUCH TO UNRELATED PARTIES. O RDINARILY, THIS METHOD PRE-SUPPOSES NO OR INSIGNIFICANT VALUE ADDITION TO THE GOODS PURCHASED FROM FOREIGN AE. 17. WHILE NOTING THE ABOVE DECISION ALSO, HONBLE JURISDICTIONAL HIGH COURT, IN PRINCIPAL COMMISSIONE R OF INCOME-TAX-6 V. MATRIX CELLULAR INTERNATIONAL SERVI CES (P.) LTD. [2018] 90 TAXMANN.COM 54 (DELHI) FOUND THAT, - ITA NOS. 758 & 7684/DEL/2017 9 8. THIS COURT FINDS THAT ONCE THE ITAT, ON CONSIDER ING THE RELEVANT FACTS AS WELL AS THE ORDER OF THE TPO, HAD CONCLUDED THAT THE BUSINESS OF THE ASSESSEE WAS MERELY THAT O F A PURE TRADER, AND THERE WAS NO VALUE ADDITION MADE BEFORE RE- SELLING THE PARTICULAR PRODUCTS (I.E. THE SIM CARDS ), ITS CONSEQUENT FINDING THAT RPM IS THE MOST APPROPRIATE METHOD, IS IRREPROACHABLE. IN NOKIA INDIA (P) LTD. V. DEPUT Y COMMISSIONER OF INCOME TAX, (2015) 167 TTJ (DEL) 24 3, THE DELHI BENCH OF THE ITAT HELD: 'A CLOSE SCRUTINY OF THE ABOVE TWO SUB-CLAUSES ALON G WITH THE REMAINING SUB-CLAUSES OF R. 10B(1)(B) MAKE S IT CLEAR BEYOND DOUBT THAT RPM IS BEST SUITED FOR DETERMINING ALP OF AN INTERNATIONAL TRANSACTION IN THE NATURE OF PURCHASE OF GOODS FROM AN AE WHICH ARE RESOLD AS SUCH TO UNRELATED PARTIES. ORDINARILY, TH IS METHOD PRESUPPOSES NO OR INSIGNIFICANT VALUE ADDITI ON TO THE GOODS PURCHASED FROM FOREIGN AE. IN A CASE THE GOODS SO PURCHASED ARE USED EITHER AS RAW MATERIAL FOR MANUFACTURING FINISHED PRODUCTS OR ARE FURTHER SUBJ ECTED TO PROCESSING BEFORE RESALE, THEN RPM CANNOT BE CHARACTERIZED AS A PROPER METHOD FOR BENCHMARKING T HE INTERNATIONAL TRANSACTION OF PURCHASE OF GOODS BY T HE INDIAN ENTERPRISE FROM THE FOREIGN AE.' 9. SIMILARLY, IN SWAROVSKI INDIA PVT. LTD. V. ACIT, ITA NO. 5621/DEL/2014, THE ITAT HELD: 'ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIN D THAT THE ASSESSEE PURCHASED CRYSTAL GOODS AND CRYSTAL COMPONENTS FROM ITS AE. NO VALUE ADDITION WAS MADE TO SUCH IMPORTS. THE GOODS WERE SOLD AS SUCH. IN THE G IVEN CIRCUMSTANCES, THE RPM IS THE MOST APPROPRIATE METH OD FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSA CTION OF' IMPORT OF CRYSTAL GOODS AND CRYSTAL COMPONENTS. ' 10. A SIMILAR VIEW HAS BEEN ADOPTED BY THE MUMBAI B ENCH OF THE ITAT IN MATTEL TOYS V. DEPUTY COMMISSIONER OF I NCOME TAX, (2013) 158 TTJ (MUM) 461: 'THUS, THE RPM METHOD IDENTIFIES THE PRICE AT WHICH THE PRODUCT PURCHASED FROM THE A.E. IS RESOLD TO A UNRE LATED PARTY. SUCH PRICE IS REDUCED BY NORMAL GROSS PROFIT MARGIN I.E., THE GROSS PROFIT MARGIN ACCRUING IN A COMPARABLE CONTROLLED TRANSACTION ON RESALE OF SAME OR SIMILAR PROPERTY OR SERVICES. THE RPM IS MOSTLY APP LIED IN A SITUATION IN WHICH THE RESELLER PURCHASES TANG IBLE PROPERTY OR OBTAIN SERVICES FROM AN A.E. AND RESELL ER DOES NOT PHYSICALLY ALTER THE TANGIBLE GOODS AND SE RVICES ITA NOS. 758 & 7684/DEL/2017 10 OR USE ANY INTANGIBLE ASSETS TO ADD SUBSTANTIAL VAL UE TO THE PROPERTY OR SERVICES I.E., RESALE IS MADE WITHO UT ANY VALUE ADDITION HAVING BEEN MADE.' 11. THIS VIEW HAS ALSO BEEN AFFIRMED BY THE BOMBAY HIGH COURT IN ITS JUDGMENT DATED 07.11.2014 IN COMMISSIO NER OF INCOME TAX V. L'OREAL INDIA PVT. LTD. (ITA NO. 1046 OF 2012), WHERE THE COURT FOUND THAT THERE WAS NO ERROR IN LA W COMMITTED BY THE ITAT WHEN IT HELD THAT RPM WAS THE MOST APPROPRIATE METHOD IN CASE OF DISTRIBUTION OR MARKE TING ACTIVITIES ESPECIALLY WHEN GOODS ARE PURCHASED FROM ASSOCIATED ENTITIES AND THERE ARE SALES EFFECTED TO UNRELATED PARTIES WITHOUT ANY FURTHER PROCESSING. IN FACT, A DIVISION BENCH OF THIS COURT IN ITS DECISION IN BAUSCH & LOM B EYECARE (INDIA) PVT. LTD. V. ADDITIONAL COMMISSIONER OF INC OME TAX, (2016) 381 ITR 227 (DEL), WHILE CONSIDERING THE DEC ISION OF THIS COURT IN SONY ERICSSON MOBILE COMMUNICATIONS I NDIA PVT. LTD. V. COMMISSIONER OF INCOME TAX, (2015) 374 ITR 118 (DEL), NOTED THAT: 'THE RP METHOD LOSES ITS ACCURACY AND RELIABILITY W HERE THE RESELLER ADDS SUBSTANTIALLY TO THE VALUE OF THE PRODUCT OR THE GOODS ARE FURTHER PROCESSED OR INCORPORATED INTO A MORE SOPHISTICATED PRODUCT OR W HEN THE PRODUCT/SERVICE IS TRANSFORMED.' 12. THEREFORE, A CONTRARIO, WHEN THE RESELLER DOES NOT ADD ANY VALUE TO THE PRODUCT OF THE GOODS, THE RP METHOD WO ULD BE APPROPRIATE FOR DETERMINING THE ARMS' LENGTH PRICE. 18 . IN RESPECT OF THE OBSERVATIONS OF THE LD. DRP THAT THE ASSESSEE HAS INCURRED SUBSTANTIAL AMP, AND OTHER EX PENSES, IN RELATION TO ITS TURNOVER, AND IS THEREFORE, NOT A SIMPLE DISTRIBUTOR IN TERMS OF THE REQUIREMENT OF USING RP M, LD. AR HAS RIGHTLY PLACED RELIANCE ON THE DECISION REPORTE D IN NOKIA INDIA PRIVATE LIMITED VS. DCIT (2015) 153 ITD 508 ( DELHI- TRIB.) WHEREIN IT WAS HELD THAT THE INCURRING OF HI GH ADVERTISEMENT AND MARKETING EXPENSES BY THE ASSESSE E VIS-A- VIS THE OTHER COMPARABLE COMPANIES DOES NOT IN ANY MANNER AFFECT THE DETERMINATION OF ALP UNDER THE RPM. IN T HE ABOVE DECISION IT WAS HELD THAT, - ITA NOS. 758 & 7684/DEL/2017 11 THE LD. DR VEHEMENTLY ARGUED AGAINST THE APPLICATIO N OF RPM IN THE GIVEN CIRCUMSTANCES AS THE MOST APPROPRIATE METHOD BY CONTENDING THAT THE ASSESSEE INCURRED HUGE ADVERTIS EMENT AND MARKETING EXPENSES. IN VIEW OF SUCH INCURRING OF EXPENSES, THE LD. DR STATED THAT THE BETTER COURSE WOULD BE TO APPLY TNMM WHICH WOULD CONSIDER OPERATING PROFIT. W E ARE UNABLE TO ACCEPT THE CONTENTION ADVANCED ON BEHALF OF THE REVENUE. THE OBVIOUS REASON FOR THIS IS THAT THE IN CURRING OF HIGH ADVERTISEMENT AND MARKETING EXPENSES BY THE AS SESSEE VIS-A-VIS THE OTHER COMPARABLE COMPANIES DOES NOT I N ANY MANNER AFFECT THE DETERMINATION OF ALP UNDER THE RP M. WHEN WE CONSIDER GROSS PROFIT IN NUMERATOR AND NET SALES IN DENOMINATOR, ALL THE EXPENSES DEBITED TO THE PROFIT & LOSS ACCOUNT AUTOMATICALLY STAND EXCLUDED. IT IS BUT NAT URAL THAT ONLY THOSE EXPENSES CAN HAVE BEARING ON THE GROSS P ROFIT THAT ARE DEBITED TO THE TRADING ACCOUNT. AS THE AMOUNT O F ADVERTISEMENT AND MARKETING EXPENSES FALLS 'BELOW T HE LINE' AND FINDS ITS PLACE IN THE PROFIT AND LOSS ACCOUNT, THE HIGHER OR LOWER SPEND ON IT CANNOT AFFECT THE AMOUNT OF GROSS PROFIT AND THE RESULTANT ALP UNDER THE RPM. IF THE ASSESSEE HA S INCURRED MORE EXPENSES ON ADVERTISEMENT AND PROMOTION, WHICH , IN THE OPINION OF THE LD. DR WENT ON TO BRAND BUILDING FOR AN AE, THEN, THE TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF SUCH AMP EXPENSES WAS SEPARATELY CALLED FOR. SINCE THE TPO H AS NOT MADE ANY SEPARATE ADJUSTMENT ON ACCOUNT OF AMP EXPE NSES AND HAS GIVEN EFFECT TO THE SAME UNDER TNMM, WE HOL D THAT THE INCURRING OF SUCH HIGHER ADVERTISEMENT AND MARK ETING SPEND WOULD NOT AFFECT THE CALCULATION OF ALP UNDER THE RPM. EX CONSEQUENTI, WE HOLD THAT RPM PRIMA FACIE APPEAR S TO BE THE MOST APPROPRIATE METHOD IN THE FACTS AND CIRCUM STANCES OF THE INSTANT CASE. 19. THE ABOVE DECISIONS CLINCH THE ISSUE INVOLVED I N THIS MATTER AND SQUARELY APPLICABLE TO THE FACTS OF THE CASE. WE, THEREFORE, WHILE RESPECTFULLY FOLLOWING THE SAME HO LD THAT THE RPM IS THE MOST APPROPRIATE METHOD IN THE FACTS AND CIRCUMSTANCES OF THIS CASE AND ACCORDINGLY DIRECT T HE LD. TPO TO ADOPT THE RPM AS THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTION. 20. IN VIEW OF THE FACT THAT WE HAVE APPROVED THE R PM AS THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE INTERN ATIONAL ITA NOS. 758 & 7684/DEL/2017 12 TRANSACTION RELATING TO THE IMPORT OF FINISHED GOOD S, ALL OTHER GROUNDS BECOME ACADEMIC AND DO NOT REQUIRE ANY ADJUDICATION. 21. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 22.06.2018 SD/- SD/- (PRASHANT MAHARISHI) (K.N.CHARY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 22.06.2018 *KAVITA ARORA COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT TRUE COPY ASSISTANT REGISTRAR ITAT NEW DELHI DATE OF DICTATION 22.06.2018 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER .06.2018 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. PS/PS 22.6.18 DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT 22.6.18 DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. PS/PS 22.6.18 DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT 22.6.18 DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 2 2 . 6 . 1 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER