TaxTMI 
TaxTMI 
2019 (4) TMI 1866
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....n all the appeals is with regard to the inclusion or exclusion of one comparable company, namely, Modicare Ltd. For the sake of ready reference, we are taking up the appeal for the Assessment Year 2009-10 and our finding given therein will apply mutatis mutandis in all the years. 3. The brief background and facts of the case are that Oriflame India Pvt. Ltd. is a company incorporated in India, and is a part of Oriflame group founded in 1967. This group provides about 1000 products in skincare, make up, fragrances and toiletries through its various subsidiaries across 60 countries all over the world with 3.6 million independent consultants all over the world. The assessee company is inter alia engaged in trading of cosmetic products and the main business activity of the assessee was purchase of finished goods from its associated enterprises and resale in India without any value addition activities. As a sales strategy, the assessee sells its products through its sales consultants, that is, it is into direct selling model. Beginning from F.Y. 2011-2 the assessee was also engaged in manufacturing activities and hence followed a segmental approach for the transfer pricing analysis i....
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....ssment Year 2012-13, though held that Modicare Ltd. is not an appropriate comparable to the assessee due to several reasons, however, remanded the matter back to the file of ld. TPO to retain the sole comparable and examine the comparability adjustment on Modi Care Ltd. to enhance its comparability with the assessee. Aggrieved by the order of the Tribunal, assessee has preferred an appeal before the Hon'ble High Court, with the sole issue, as to whether under the facts and circumstances of the case the direction of the Tribunal to include Modicare Ltd. and the exclusion of other comparables chosen by the assessee were correct. The Hon'ble High Court vide its judgment and order dated 10the April, 2018, in very detail judgment observed that the findings of the Tribunal were inconsistent in so far as selection of Modicare Ltd. is concern, because, despite noting various significant differences between the assessee and Modicare Ltd., still the Tribunal chose not to address how such difference can be adjusted while carrying out the comparability analysis. After considering the entire gamut of facts and contentions raised, the Hon'ble Hight Court remanded the issue back to th....
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....dicare Ltd. as a standalone comparable (since all other comparables were eliminated by the revenue authorities at the early stage of the proceedings) 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. In paras 5.8 and 5.9 it is stated as follows: "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 of the many lines of arguments taken by the taxpayer is that firstly Modi Care Ltd. has a very limited cosmetic and personal care product category thus it lacks product similarity; secondly it also has income from franchisees, hence it is not a similar service, thirdly....
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.... incomparable activities, functions accounting and Revenue recognition policies etc. is necessitated. We are given to understand that service income has been excluded by the TPO himself in the subsequent years and in fact in one of the years in the present proceedings. It has been argued that if the adjustments are thus made then no adjustments to be arm's length price of the assessee would be necessitated. We note that the tax authorities have not considered the calculations as principally they have been of the opinion that no relief was warranted. Holding the said approach of the tax authorities contrary to the statutory position we direct the TPO to look into the claim of adjustments required to be made to Modi Care Limited. While so directing it is made clear that the responsibility for providing the supporting data to the satisfaction of the TPO rests with the assessee. The TPO cannot be burdened to look for possible adjustments. In case the tax payer does not succeed on this ground then the TPO may consider directing the assessee to carry out a search of comparable companies from the list of direct sellers in the market, as has been referred to in the TPO in the respectiv....
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....s in the arguments, especially since what the Revenue Authorities would be left with if the ITAT's order was not to be disturbed, would be what a comparable in the form of Modicare Ltd (supra). 9 In view of the above reasons, this Court is of the opinion that the appeal should be re-examined by the ITAT; it should be addressed on these two aspects i.e. firstly, the appropriateness of including Modicare Ltd. having regard to the availability of data with respect to the different product segments, and secondly, involving the comparable, the functional difference with respect to its marketing strategy (i.e. discount, transportation costs, insurance and performing the warranty function). Having regard to the factors mentioned in clause 5.10 of the impugned order, the ITAT is also directed to re-examine whether and to what extent adjustment can be reasonably made, having regard to the available data in respect to the trading comparables offered for ALP determination, for all the relevant years by the assessee. It is also directed to consider the feasibility again having regard to the available data for all the concerned assessment years- marking appropriate adjustments (inc....
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....t for incentives/ discounts Shows the sales net of incentives Incentives/ discounts are shown as a part of operating expenses No Marketing and Business Promotion expenses / Sales ratio Less than 1% of sales More than 10% of sales- evidencing that it is engaged in value addition activity Yes. However, under transfer pricing norms a trader performing value addition cannot be compared with a low risk distributor not performing any value addition. Cost of Goods sold / Total operating Cost ratio In the range of 50% to 60% In the range of 20% to 30% - evidencing that's its functional profile is different from a normal trader Yes. Though an adjustment can be made for COGS, under transfer pricing norms such a comparable is not appropriate. 7. It was also submitted by the learned counsel that;  Firstly, if RPM method is to be applied, then it should be applied on all the comparables chosen by the assessee and after working capital adjustment, most of the differential factors would be removed and;  Secondly, in case adjustment cannot be made under RPM, then TNMM should be adopted as most appropriate method as observed ....
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....ilable then as per observations made by the Hon'ble High Court Modicare Ltd. needs to be excluded in case RPM is to be applied. Regarding other comparables chosen by the assessee in RPM, it would be very difficult to carry out various adjustments due to limitation under the RPM method. Therefore, we are of the opinion that these comparables can be examined under the TNMM and all the relevant data would be provided by the assessee which shall be verified by the TPO. Let the remand report from the TPO be placed before this bench on or before 18th July, 2018. The assessee is directed to provide all the relevant data within two days, i.e., by 11th July, 2018; and thereafter TPO should give this comment by 18th July, 2018. List this matter on 18th of July, 2018. A copy of this order sheet shall be served to the TPO by today or tomorrow." 10. In pursuance of the aforesaid direction, the TPO has submitted her remand report, wherein she has stated that segmental data for varied products of Modicare Ltd. is not available; and further observed that the segmental cannot be constructed due to non availability of data for apportionment of cost in various segments. The TPO has also rejected t....
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....ucts similar to assessee. Further. In case of direct marketers, business model comparability is more important than products comparability....... 2.4. Hence, in view of the significant differences in the functional profile and product profile between assessee's comparables and Oriflame India, it is not possible to make reasonable accurate adjustments under RPM as can be seen from the table and explanations above, and accordingly none of them can be considered comparable to the assessee. 2.5. With respect to Modicare Ltd., functional and product similarity has already been established in the above. S. No. Factors Whether adjustment can be made - Yes/No 1 Advertising, Marketing, Promotion (AMP) No. Modicare Ltd. has incurred expenses under the} head 'Marketing and Sales Promotion Expenses' I of Rs. 29,552,604. Out of these, as confirmed by Modicare Ltd. in a response to a notice issued to it u/s 133(6), [Refer Annexure A] there is no Advertisement expense. Hence, Modicare Ltd.; has not incurred any actual AMP expenses, thereby eliminating the need for comparability adjustment. 2. VAE No. As discussed in the precedin....
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.... relevant extract from the response from Modicare Ltd. u/s 131 is given below: 1. Recasting of certain segments of M/S Modicare Ltd. In order to recast the segments of laundry and home care, personal care, cosmetics and health care, the company was issued notice u/s 131 wherein he was required to furnish "segmental information {clearly indicating all income & expense} under the following heads: i. Laundry, ii. home care, iii. personal care, iv. cosmetics and v. health care In the submission dated 18.09.2018 ref. nil, the comparable assessee has clearly denied the possibility of such bifurcation stating that "bifurcation of other major expenses in separate product categories is not feasible due to nature of these expenses, which are incurred for total business of the company." The major heads of expenses have also been discussed in the submission which is enclosed for ready reference." 11. Before us, the learned counsel submitted that there are huge product and functional differences between the assessee and Modicare Ltd., which for the sake of ready reference can be summarized in the following manner:- ....
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....compared to Oriflame India which is only 0.49% and similar percentages for subsequent years under consideration. This clearly shows that this company has significantly different functions as compared to the Appellant and is engaged in value addition activities and is being remunerated on a premium pricing. 5. Difference in Cost of Goods Sold (COGS) ratio and Value Added Expense (VAE) ratio The total COGS, as per the financial statements, for Modicare Ltd ranges from 22% to 28% of its total operating costs for years under consideration. Value added expenses/operating expenses are more than 70%. This is unlike a trading company where COGS should be the dominant component of total costs, Hence, the cost profile of Modicare Limited is not similar to the Appellant. 6. Franchise business model Modicare Ltd. has recorded franchisee expenses in its financial statements. Thus, Modicare Ltd. is operating as a franchise business and is not wholly a direct seller. The segmental accounts given in the Annual report is only in respect of products and there is no segmental account available for franchise business. The revenues from franchise business are presumably being included....
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....e are dissimilarities which materially affect the price charged, etc, then first attempt has to be eliminate the components which so materially affect the price or cost and if such factors are not available in the data then same has to be rejected. He also gave point-wise rebuttal to the remand report of the TPO in the following manner: "The Ld. TPO in her remand report has stated that segmental data for different products is riot available in the annual report of Modicare Ltd. However, she has stated that the data for the company at an entity level can be taken into account because personal care, cosmetics and healthcare products comprises 59.88% of the total sales for FY 2011-12 and similar percentages for other years under consideration. It is pertinent to note that Ld. TPO has not been able to rebut the claim of the Appellant regarding incomparable product profile of Appellant and Modicare Ltd. and has also not been able to show that comparability adjustments are possible on account of different product profiles. Modicare Ltd. has a different business model as compared to the appellant as it is also incurring substantial franchise expenses and earning service ....
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....stments. The Ld, TPO has failed to provide any justification in this regard, thereby confirming the appellant contention that if material difference cannot be adjusted, comparable has to be excluded. It was further submitted that comparability cannot be established merely on the grounds of membership of IDSA. It should be noted that IDSA has a very diverse group of members and includes companies which are engaged in Financial Services (for eg Max Life Insurance) and very large FMCG companies (for eg Hindustan Lever Ltd). It also has companies like Tupperware (dealing in plastic products) and Herbal Life (Nutrition of weight management). It is quite evident that all these companies have not been taken as a comparable despite being members of IDSA. Further, in the case of Tupperware India Pvt Ltd vs DCIT fITA no, 2140/Del/20Hand ITA no. 1323/Def/2012), the Delhi ITAT has considered non- direct sellers/ normal trading companies as comparables even though Tupperware is a direct seller. In para 1.8 of the remand report, the Ld. TPO has stated that no adverse conclusion can be drawn regarding Modicare on account of the fact that there is a very big divergence b....
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....nd accounting difference between Modicare Ltd and Oriflame India it is not possible to make reasonable accurate adjustments as can be seen from the table above, Modicare Ltd. should be rejected." 13. He further submitted that the companies dealing in the business of cosmetics operate in an independent economic environment, whether they are engaged in direct selling or retail selling, they are all competing against each other for capturing the attention of the same customers in the market and the mode of selling does not take away functional comparability of buying and reselling in the cosmetics arena. For applying RPM, though closer product comparability produces a better result, but the comparables chosen by the assessee deal in cosmetics only. Comparable companies selected by the assessee have been provided before us separately. Further, a table showing similarities between a direct marketer and non-direct marketer and comparison between Oriflame India, Modicare Ltd. and other companies selected by the assessee was given in the following manner to demonstrate that there is no significant difference between them:- Particulars Oriflame India Modicare Ltd. Other compa....
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....th the difference between direct selling company and normal distributor is in respect of working capital. A direct selling company undertakes much higher inventory risk as compared to normal traders, who would be selling to another intermediary. Since this difference can be adjusted by way of a working capital adjustments using the method recommended by OECD and UN (and accepted by the Ld. TPO in here remand report), these comparable should be accepted after making working capital adjustments. The assessee humbly submits that it is an irony that on one hand, the selection of an non- comparable company for which adequate adjustments cannot be made has been upheld and on the other hand, companies on which comparability adjustments permissible in Rule 10B(3) can be made to bring them at par with the Appellant have been outrightly rejected. 14. Lastly, he submitted that DRP in the subsequent assessment order for the A.Y.2014-15 has itself rejected Modicare Ltd. on functional ground based on the observation of Hon'ble High Court and, therefore, on this count also Modi Care Ltd. should be excluded. 15. On the other hand, ld. CIT-DR, submitted that the mandate of the Hon'ble Hig....
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....differences with respect to its marketing strategy, i.e., discount, transportation cost, insurance and performing the warranty functions; Their Lordships further directed that the Tribunal should reexamine, to what extent adjustment can be reasonably made having regard to the available data in relation to trading comparable offered for ALP determination for all the relevant years by the assessee. Further, the Tribunal was directed to consider the feasibility having regard to available data for all the concerned years for making appropriate adjustment. Another very important observation made by the Hon'ble Court was that it was open to the assessee to urge that TNMM can be taken as most appropriate method instead of RPM and there would be no enlarging of comparable already selected by the assessee. 17. It was in this background, we had required the Ld. TPO to submit a remand report, whether relevant data with regard to various segment of Modicare Ltd. is available or not; and to what extent adjustment can be made. The differences highlighted by the assessee was directed to be examined by the TPO. Further, it was also directed that the comparables given by the assessee sh....
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....ns. Though it is not always necessary under resale price analysis that each product line distributed should be examined, but there should be broadly similar products so that gross compensation of the functions performed, that is, marketing and selling functions can be analysed. If reliable data for the various product and marketing strategy is not available, then accurate comparability adjustments would be very difficult to carry out. Another distinctive feature, which we have noted is that, Oriflamme India records the sale, net of discounts/ incentives paid to its agent/consultant and that is the reason why the gross profit margin is lower. On the other hand, in the case of Modicare Ltd. discount given to the consultants/agents has been categorized as 'incentives' which has been taken below the line in the Profit & Loss account treating to be a part of operating expenses. Because of the difference in accounting treatment, there is a gap between gross profit margin and net profit margin disclosed by the Modicare Ltd., which can be seen from the annual account that the gross profit margin of Modicare Ltd has been shown at 76.47%, whereas the net profit margin is at only 2.25%. Th....