TaxTMI 
TaxTMI 
TaxTMI 
2017 (10) TMI 688
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....nal transaction with its associated enterprises. He, therefore, made the reference to the TPO to determine the arm's length price u/s 92CA(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act) in respect of international transaction entered into by the assessee. The TPO noticed that the assessee had undertaken the following international transactions: S. No. Description of Transaction Method Value 1. Purchase of Food Supplements and Health Equipments RPM 31,10,33,139/- 2. Sale of Food Supplements and Health Equipments RPM 9,25,485/- 5. The TPO observed that the assessee had purchased food supplements and healthcare instruments from Tianjin Tianshi Biological Development Company Ltd. [India Branch Office-Permanent Establishment (PE)], whose head office is in China. The assessee had stated in the TP study report that the transactions between the assessee and the PE falls within the ambit of definition of international transaction in Section 92B of the Act. The TPO observed that the assessee relied upon Resale Price Method (RPM) taking Gross Profit/Sales as Profit Level Indicator (PLI) and that its margin in food supplement and health equipment....
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....it has explained its multilevel marketing model. "The marketing model followed by Tianshi group is a Multi Level Marketing ("MLM") model, whereby numerous networks of franchises and distributors get together and they are involved directly in retail selling. The Group does not undertake retail setting on its own. Also, there are no retail outlets, shops or showrooms for the sale of TIENS products by the company. 3.5 The marketing of the products in this company is done by a "Network Marketing" Plan. In Network Marketing, all the intermediaries in the Retail Sales Distribution Line up to the end user or consumer are replaced by Distributor Networks. Network marketing is based on "word of mouth" and independent canvassing by the Distributors in the Network and also ability to enroll more Distributors in the Network. This marketing strategy is typically that of a relationship marketing, wherein the marketing person approaches the customers, educates them about the utility, quality and functionally of the products. 3.6 Under the MLM model franchises and distributors purchases the products from the company and resells to the direct consumers. This model saves on heavy advertisement....
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....in this case." 6. The TPO accepted only 4 comparables out of the 15 selected by the assessee and worked out the TP adjustment of Rs. 18,58,14,299/- in the following manner: "6. TP Adjustment: 6.1 In view of the observations above, the OP/Sales margin of comparables considered as functionally similar to the assessee are as below: S. No Name of the company OP/Sales 1. Emami Ltd. 15.31% 2. Dabur India Ltd. 15.50% 3. Fern Care Pharma Ltd. 15.10% 4. ZanduPharma Ltd. 23.60% Arithmetic Mean 17.38% 6.2 The Operating Profit of the assessee as per the P&L account is (5.96 crores) and the turnover during the year is 72.64 crores. The OP/Sales margin of the assessee is (8.20%). As the average OP/Sales of the comparables taken above after detailed analysis is 17.38%, the OP/Sales margin of the assessee falls outside the +/-5% range and therefore, TP adjustment is made in the case as below: Total Sales 72,64,04,610/- OP/Sales @ (8.20%) (5,95,65,178) Arm's Length Price, of Operating Profit @17.38 12,62,49,121/- Adjustment 18,58,14,299/- 6.3 In order to benchmarked the above international transaction, I propose to use the OP/Sales margi....
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....,35,606/- from the purchase price paid by the assessee to its related party." Thereafter, the AO passed the draft assessment order dated 22.03.2013 u/s 144C of the Act and made the addition of Rs. 16,73,35,606/-. 9. Against the said draft assessment order, the assessee raised objection before the ld. DRP on the issue relating to rejection of the Resale Price Method by the TPO for benchmarking the international transaction. 10. The ld. DRP directed the TPO to use RPM as the MAM by observing in para 6.1 of the order dated 26.12.2013 which read as under: "6.1. The TPO has rejected RPM based on the reason given in the order. However, DRP is not convinced because of the following factors: 1) There is no dispute on the fact that assessee is a retailer of health food supplements. RPM is the MAM when the function performed by the assessee is reselling. 2) There is no evidence brought on the record by the TPO to show that the assessee has done any value addition to the goods being sold in India. 3) In the case of the assessee itself for AY 2007-08, the Hon'ble ITAT in its order dated 21.05.2013 has set the case back to the AO/TPO to decide the application of the RPM. 4) ....