TaxTMI 
TaxTMI 
2017 (7) TMI 996
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..... Accordingly it is the correctness of the order dated 01.09.2015 of CIT(A)-44, New Delhi which is assailed in the said year. It was a common stand of the parties before the Bench that the facts, circumstances and the issues in all the years are identical. Accordingly, Grounds from ITA No.960/Del/2014 are reproduced hereunder:- 1. "That on the facts and in the circumstances of the case and in law, the order passed by the Ld. Assessing Officer ("AO") is bad in law and void ab-initio. 2. The Ld. AO/Ld. Transfer Pricing Officer ("TPO") erred on facts and circumstances of the case in determining the arm's length adjustment to the Appellant's international transaction from Associated Enterprises ("AEs"), thereby resulting in the enhancement of returned income of the Appellant by Rs. 14,29,24,000. 3. That the reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO has not recorded any reasons in the draft assessment order based on which he reached the conclusion that it was "expedient and necessary" to refer the matter to the Ld. TPO for computation of the arm's length price, as is required under section 92CA(1) of the Income Ta....
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....acts and circumstances of the case and in law, the Ld. AO / TPO / DRP erred on facts and in law in disregarding multiple year/ prior years' data as used by the Appellant in the TP documentation and holding that current year (i.e. FY 2008-09) data for the comparable companies should have been used despite the fact that the same was not available to the Appellant at the time of preparation of its TP documentation. 9. That the Ld. AO/ TPO /DRP erred in facts and in law in being inconsistent by rejecting the transfer pricing methodology for this financial year when the same was accepted in the prior years despite there being no change in facts and circumstances over the two years (i.e. financial year 2007-08 and 2006-07). 10. That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings u/s 274 read with section 271 of the Act mechanically for furnishing inaccurate particulars without recording any adequate satisfaction for such initiation 11. That the Ld. AO erred in facts and in law in charging and computing interest under section 234B of the Act. The above grounds of appeal are mutually excl....
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....assets deployed are routine tangible assets like computers, office equipment, furniture and fittings etc. for its operations and it assumes all normal business risks of a routine distributor like market risk, price risk, customer credit risk, product liability risk, foreign exchange risks etc. The major international transaction undertaken by the assessee which is a subject matter for consideration in the present proceedings, it was submitted, is purchase of finished goods. The assessee it was submitted has selected Resale Price Method (hereinafter referred to as "RPM") as the most appropriate method. It was submitted that the gross margins of the assessee have remained healthy consistently over the years when compared with the prior years. It was also submitted that it is a matter of record that for the two previous years i.e. 2007- 08 and 2008- 09 assessment years identical international transactions of the assessee after detailed TP scrutiny analysis the transaction on an identical set of facts has been accepted to be at arm's length. It was submitted that there was no change in either the FAR profile of the assessee or of the comparables it had selected. The method adopted for ....
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.... accordingly the selection of the said company as a stand-alone comparable on gross basis under RP method was heavily assailed. 2.4. Reliance was placed upon the decision of the ITAT in ITA No.7367/MUM/2012 in the case of M/s Carlyle India Advisors Pvt. Ltd. vs DCIT. Specific attention was invited to page 9 para 12 of the same wherein Motilal Oswal Investments Advisors Pvt. Ltd. had been rejected as a comparable with an extreme OP margin of 72.33% from the final set of comparable selected by the TPO on the grounds that it was engaged in diversified activities and the segmentals were not available. 2.5. Apart from the said fact, it was also his submission that Modi Care Ltd. should not be considered as a comparable especially on a standalone basis since on a perusal of its financials, it would be evident that apart from the direct selling Model Modi Care Ltd. also includes service income in the nature of AMC and once its service income is excluded its TP/sales would be 69.66%. The fact that Modi Care Ltd. recognises service income, it was submitted is evident from the fact that the TPO in 2010-11; 2011-12; and 2012-13 assessment years has admitted that Modi Care Ltd. recognise....
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....it was submitted varies from one company to another and the corresponding accounting entries also differ, accordingly thus before making any comparison of gross profit margin these differences have to be accounted for otherwise the results would become unreliable. Oriflame India Ltd., it was submitted recorded sales net of discounts/incentive paid to its agents/consultants and hence shows a lower gross margin as per its accounting treatment. 2.9. The Revenue recognition policy of the two companies it was submitted, was also divergently different. Referring to paper book page 433 of volume 2, the assessee it was submitted has a policy of allowing 20% of discount on MRP to its consultants which is equal to margin of 25% of sales for the consultants. When this position is compared with the discount given to the consultants/agents which is categorised as incentives by Modi Care Ltd, it was submitted that it is a below the line in Profit & Loss A/c as a part of operating expenses. Accordingly, it does not form part of the computation of gross profit margin of Modi Care Ltd. The incentive pay to the agents and consultants works out to be around 30% of the sales over and above the said....
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....e. The said fact it was submitted further supports the argument that Modi Care Ltd. is not just a direct marketer and seller whereas Oriflame India Ltd. does not undertake any value addition functions. 2.12. Referring to the information available on the said company's website itself, it was submitted it has been stated that Modi Care Ltd manufactures its own products thus the value added expenses are high because of these manifestly high expenses and it cannot be considered as comparable to the assessee. It was submitted that even if the evidence of the website description for a moment is not considered, the incidence of such high operating expenses demonstrated that the said company having substantial value adding expenses unlike the assessee cannot be deemed to be comparable to the assessee. 2.13. It was also submitted that significant advertising, marketing and promotion expenses spend when compared to its sales of 7.32% when compared to 0.49% of the assessee, would also show that functionally the companies cannot be said to be comparable and thus for an apple to apple comparison and economic adjustments for the said facts, should also be factored into and once a revised G....
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....mparables chosen by the assessee in its search process have been arbitrarily rejected. This argument, it was submitted in support of Ground No.4.1, 4.3.5 and 7. Attention was invited to paper book page number 123 to 127 filed. Thus, it was submitted that it is true that the assessee is a direct seller and hence may be considered to perform extra functions of carrying inventory for a longer duration at high-risk vis-a-vis an ordinary trader who may sell its inventory to another wholesaler, retailer but the said difference it was submitted can easily be accounted for by making an adjustment for higher working capital levels. A direct reseller would have a higher working capital requirement on account of higher inventory levels such an approach it was submitted is widely accepted by the OECD and the UN and has been endorsed by the ITAT also in a catena of cases. 2.18. The TPO and the DRP/CIT(A) in the respective years, in the circumstances, it was submitted has failed to appreciate that for applying RPM product comparability is necessary and since the comparables chosen by the assessee deals in cosmetics thus during the benchmarking analysis, the assessee has necessarily focused on....
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.... to whether the TPO action for computing ALP on the basis of singular comparable that is Modi Care Ltd. on the criteria of direct selling model is correct or not. Ld. TPO in his order has reproduced great emphasis in the functionality of the appellant on direct selling operation. The basic of TP report of the appellant laying emphasis on the profile of Oriflame Group is reproduced as under:- 2.1 Profile of Oriflame Group The Oriflamme Group was founded in Sweden in 1967. Oriflame is a global cosmetic group with direct selling operations. This means that independent sales personnel sell products directly to the end consumers, without any involvement of various retail chains. 4.2.1. Functions performed by Oriflame Group. The Oriflame group provides some 900 products in the field of skin care, make up, fragrances and toiletries through direct sales. 5. As per page-24 of TP report:- 5.2.1 Functions performed by Oriflame India Oriflame India is a routine distributor which carries out routine functions and assumes normal risks associated with carrying out such business. The main business activity for Oriflame India i....
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....of the appellant. Under direct selling model undisputedly financial data of others companies were not available in public domain therefore, TPO was justified in considering M/s. Modi Care Ltd as single comparable to compute Profit Level Indicator as it gross margin for benchmarking the transaction through RPM. Now I would examine the various adjustment sought by the Ld. AR. (i) Adjustment on account of cost of goods sold (COGS): Ld. AR has sought adjustment in COGS on the basis of average cost of goods sold and other expense by the appellant as well as other comparable such as J K Helene Curtis Ltd and M/s. Rama Vision Ltd. etc. If the adjustment on account of COGS is allowed which is the main cost to compute gross margin of M/s. ModiCare.the entire purpose of computing Gross Profit Margin for the purpose of RPM analysis is lost. Tinkering of Gross Profit Margin of the comparable on the basis of other comparables which are not considered as comparable is not proper. Further, at gross margin level major cost is COGS is adjusted on the basis of appellant's result then gross margin is itself adjusted then there is no meaning of taking gross margin as profit level ind....
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.... Expenses For the year ended March 31, 2010 (Amount in Rs.) For the year ended March 31, 2009 (Amount in Rs.) Packing & other material consumed 6,632,667 4,616,088 Rent 13,447,476 13,274,323 Postage & Communication Expenses 8,677,857 8,246,290 Insurance 2,377,921 2,522,786 Insurance employees 407,063 389,605 Travelling & Conveyance expenses 16,536,549 21,820,807 Legal, Professional & Consultancy Charges 8,287,372 7,755,203 Repair & Maintenance Others 4,428,456 5,016,559 Auditor's remuneration -audit fee 425,000 425,000 Tax audit fee 75,000 75,000 Electricity & water charges 2,326,068 2,208,565 Provision for doubtful advances - 952,220 Advances written off 3000 855,533 Fixed assets written off 1,198,152 - Loss on disposal of fixed assets 293,194 - -net of gain Rs. 75,430(previous year NIL) Franchise expenses 22,499,788 20,308,572 Marketing & sales promotion expenses 44,213,293 29,552,604 Freight & cartage 16,711,545 11,637,296 Freight ex....
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....hich is sold by Oriflame excess 65% of turnover, therefore the Modi Care Ltd is good comparable as its working on direct selling model and is having mostly similar profile of products. As a result all these grounds of appeal are dismissed except adjustment allowed on account of services charges. ----------------------------------------------- ----------------------------------------------- 9.2 Decision; I have considered the Transfer Pricing Order, Assessment Order, Written submission and argument of the Ld. AR. Ld. AR has opted for TNMM as alternative method for benchmarking the International Transaction and has consider average net PLI (OP/OI) 12.7% being average of PLI of JK Helene Curtis Ltd and M/s. Rama Vision Ltd and Modi Care Ltd. I do not agree with the arguments of Ld. AR. The appellant is a trader, therefore, the most appropriate method is RPM for benchmarking International Transaction and therefore the Profit Level Indicator has to be considered at Gross Profit Level only. Accordingly, I confirm the approach of the TPO for benchmarking the international transaction of the appellant on the basis of RPM. Hence, this ground of appeal is ....
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....tal product portfolio of Modicare Ltd. Even if personal care is aggregated with cosmetics, then also the total share of these two categories is only 37.57%. Therefore 62.43% share comprises as diverse products like auto care, agricultural products, tea, jewellery, healthcare, etc. (Please refer to Page 54-55 of the Annual Report for FY 2010-1 1) (Page no. 114- 115 of ITAT paperbook) It may be noted that Oriflame India does not deal in any of these product categories. (Page no. 115 of ITAT paperbook) Different product items would involve different level of assets, risks and markets and accordingly this company cannot be selected as a standalone comparable on a gross basis under RPM. Table no. 2: Diversified product portfolio as per annual report of Modicare Ltd. S.No. Products Sales (INR) % of the total product turnover 1. Laundry & Home Care 78,765,810 14.34% 2. Personal Care 120,292,729 21.89% 3. Agriculture 79,718,481 14.51% 4. Tea 8,045,875 1.46% 5. Jewellery 53,766,590 9.79% 6. Cosmetics 86,129,350 15.68% 7. Healthcare 88,886,747 16.18% 8. Others 33,819,599 6.16% &n....
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....f the Annual Report for FY 2010-11, Page 122-124 of ITAT paperbook) Oriflame India shows the sales net of incentives and hence shows a lower gross margin as per its accounting treatment. The revenue recognition policy of the Appellant is shown at Page No 339 of the ITAT paperbook). The amount shown as discount is categorized as Incentives by Modicare Limited. Accordingly, it is shown as below the line in profit & loss account as a part of operating expenses. The Appellant over and above the discount pays incentive to the tune of INR 3,974,543 (Page 337 of ITAT paperbook). Therefore it is improper to compare the gross margins of Medicare Limited with the Appellant. Table 5: Discounts/ Incentives shown in operating expense Particulars Oriflame India (INR) Modicare Limited (INR) Rama Vision Ltd.(INR) J K Helene Curtis Ltd. (INR Lakhs) Incentives/Discount 3,974,543 110,428,823 2,126,923 91.40 Incentives/Discount/Total operating Cost % 0.18% 18.21% 1.26% 0.58% Without prejudice, for an apple to apple comparison economic comparability adjustments have to be undertaken to compute the PLI for this company to account for the sig....
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....otal costs. As can also be seen from the financials of Oriflame India, its COGS as a percentage of its total operating cost is 50.06% as is the case that should be with a distributor. Hence, the cost profile of Modicare Limited is not similar to the Appellant. (Page no. 118 of ITAT paperbook) Table 6: Comparison of cost profile of Modicare Limited with other distributors FY 2010-11 Particulars COGS/Total cost% Other expenses (Excluding COGS/Total Cost%) Oriflame India 50.06% 49.94% Modicare limited 28.61% 71.39% J K.Helene Curtis Limited 54.01% 45.99% Rama Vision Ltd. 71.3% 28.65% From the above table, it can be inferred that either: i. Modicare Ltd is not acting as a reseller as it undertakes substantial value added expenses or ii. It has recorded some of the COGS related expense items as part of operating expenses An economic adjustment for differences in the cost profile of Modicare Ltd, and the Appellant should be carried out. This adjustment has been computed by bringing the VAE of Modicare Limited to the level of VAE of the independent distributors of Cosmetics. As can be seen from the analysis below the ....
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....r:- No. Nature of transaction Method Value of transaction 1. Purchase of finished cosmetics goods 41,84,39,934 RPM 2. Sale of finished cosmetic products 3,76,715 3. Use of catalogue services in the nature of drawing and design for products 1,34,58,598 4. Receipt of services 3,00,35,592 5. Cost reimbursements paid 1,57,57,891 6. Cost reimbursements received 1,24,744 5.1. It is a matter of record that the taxpayer in the year under consideration selected Resale Price Method (hereinafter referred to as "RPM") as the most appropriate method selecting Gross Profit / sales as the Profit Level Indicator (hereinafter referred to as "PLI"). Considering the adjusted average 3 years margin of Avon Beauty Products India Private Limited; Bodyline International Private Limited; JK Helene Curtis Ltd; Paramount cosmetics (India) Private Limited and Surya Vinayak Industries Ltd in 2009-10 assessment years, it was concluded that compared to the unadjusted average margin of 3 years as 29.95%, the tax payer's margin of 45.58% did not warrant any adjustment as the transaction was admittedly a....
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....ts of the most appropriate method in passing and are conscious of the fact that TNMM as a method is more tolerant to minor functional and product variation and thus tolerates a higher level of deviation in the comparables selected and is also a more reliable method where data may not be very robust. However, since in the facts of the present case the tax payer has consistently proposed RPM as the most appropriate method and this method has been accepted by the TPO, the occasion to comment upon and proceed to decide the method in the absence of a dispute even on an oral request of the ld. AR has to be rejected. We also note that RPM is one of the traditional methods and is ideally the best suited method to a case like the present case where admittedly no value added services are performed by the taxpayer. The function performed is that of a routine low-risk distributor. The product is directly purchased from the foreign AE and resold at a specific price as per the sale policy of the foreign AE. We, thus, do not deem it appropriate to address the issue as we find that the selection of the most appropriate method is an accepted fact as the method adopted by the assessee has been accep....
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....e with which we are concerned in the present proceedings sets out the requirements of RPM. 5.5 For ready reference the relevant Rule is reproduced hereunder:- Determination of arm's length price under section 92C. 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction 55a[or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) comparable uncontrolled price method, by which,- (i) xxxxxxxxxxxxxxxxxx (ii) xxxxxxxxxxxxxxxxxx (iii) xxxxxxxxxxxxxxxxxxx (b) resale price method, by which,- (i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified; (ii) such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, ....
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....ed between the respective parties; conditions prevailing in the markets in which the respected parties to the transactions operate etc. Thus it is unambiguously made clear by sub-Rule (2) of Rule 10B that there should be a FAR comparability and the degree of comparability is insisted upon to the extent that it is likely to a materially effect the price or cost charged or paid in or the profit arising from such transactions or reasonable accurate adjustments can be made to eliminate the material facts of such differences. 5.7 For ready references we also reproduce sub-Rule (2) and (3) of Rule 5.14 Though, in the facts of the present 5.8 Thus when considered in the light of the aforesaid statutory Rules, we find that the tax authorities while considering the grievance of the tax payer admittedly have taken a position contrary to what has been envisaged under the Rules. 5.9. Having so addressed, we find that over the years primarily the taxpayer has raised the issue that Modi Care Ltd. as a stand-alone comparable was ideally not an appropriate comparable and has also canvassed that the comparables selected by the taxpayer have wrongly been rejected by the tax authorities. One....
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....emphasised that near identical comparability in product is not necessary but to the extent, it is possible it should be ideally aspired for. At the same time wherever it is demonstrated that it impacts the gross profit of the comparable transactions appropriate adjustments are required to be made. In view of the fact that there are difficulties in identifying identical or near identical FAR profiles where Indian companies are not required to disclose gross margins earned in the financials, identification of gross margins based on limited disclosures in financials at times may make the method unsuitable in certain conditions. The insistence on accounting consistency cannot also be over emphasised as gross profit margins will not be comparable if accounting principles and/or practices differ between the controlled transaction and the uncontrolled transaction. As has been argued by the taxpayer, the comparable company differs from the assessee company in reporting certain costs. Thus where a comparable company reports certain costs, for example discounts, transportation costs, insurance and performing the warranty function as operating expenses or its costs of goods sold or the differ....
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....scounts and rebates are not given as below the profit line, expenses which are not reflected in the Profit & Loss account of the said comparable etc. are arguments, which principally should have been accepted and the calculations of the tax payer be examined and required to satisfactorily demonstrate its claim. 5.12. Accordingly, in view of the above, we are of the considered view that ideally the tax authorities should not have selected Modi Care Pvt. Ltd. as a standalone comparable. The tax authorities should have carried out a search or directed the assessee to carry out a fresh search ensuring that the comparables selected were primarily engaged in direct sales with no meaningful value addition activities. To the extent possible product similarities should have been aspired for and if it was found in a particular year that it was not available then carrying out the necessary adjustments on the comparables selected attempted to approach near comparable FAR. Thus complying with the requirements of sub-Rule (2) and (3) of Rule 10B and sub-clause (iv) of clause (b) of sub-Rule (1) of Rule 10B ideally more comparables should have been selected. We note that there is sufficient gu....
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....ument which has to be rejected as the said comparables fail on the threshold level of functional aspect itself at the outset. The mistakes made if any in the earlier year with regard to the selection of comparables cannot be an acceptable basis either for retaining or rejecting a comparable. The selection and retention of a comparable should be justified on the basis of facts ex facie on record and not on the basis of omissions or mistakes of the parties. It would not be out of place to quote from the well celebrated judgment of the Hon'ble Apex Court the oft repeated dictum that there is no heroism in perpetuating an error. Thus, shelter behind the rule of consistently for retaining the comparables selected by the assessee on this ground has to be rejected out rightly as it reeks of "lazy repetition" as considered and referred to by their Lordships and extracted in 29 31 Chryscspital Investment Advisors (India) Pvt. Ltd. Vs DCIT 2015-TII-13-HC-DEL-TP dated 27/4/2015 wherein their Lordships quote Justice Felix Frankfurter's following extract from Tiller v. Atlantic Coast Line Railroad Co. 318 U.S. 54 (1943); "A phrase begins life as a literary expression; its felicity lead....