2022 (3) TMI 297 - AT - Income Tax

TP Adjustment - international transaction involving payment of royalty undertaken by Diesel India with its Associated Enterprise ( AE ) - approach by considering Rampage and Bill Blass with a Guaranteed Minimum Royalty ( GMR ) clause for the purpose of benchmarking the payment of royalty transaction, while rejecting Antik Denim as it also has GMR clause - HELD THAT - We have noted that admittedly in the cases of Rampage as also Bill Blass, there is clause for guaranteed minimum royalty and even though this fact is clearly noted by the CIT(A), these cases are accepted as valid comparables. That is, in our considered view, an unacceptable approach. Once it is clear that the guaranteed minimum royalty clauses are present in comparables adopted and these clauses are missing in the assessee s case and admittedly guaranteed minimum return clause makes the situation maternally different there could not be any valid justification in including these comparables. We, therefore, direct exclusion of these cases. On doing so, we find that the arithmetic mean of comparables comes to 5.25 which is more than the royalty paid by the assessee. The royalty paid by the assessee thus within arm s length range. We, therefore, uphold the plea of the assessee, and direct deletion of impugned ALP adjustment. The assessee gets the relief accordingly. International transaction of payment of design fees undertaken by the Appellant with its AE - assessee had paid design fees to Diesel SPA but TPO held that the design fees was part of royalty agreement, and as such the payment so made was in excess of the arm s length price of royalty because inter alia, royalty paid itself has been held to be more than it s arms length price - HELD THAT - We find that even if the payment of ₹ 14,00,761 is to be treated as part of payment for royalty, the total payment for royalty will be less than 5.25% which is held to be arm s length price in our findings in paragraph 9 above. The impugned ALP adjustment is, therefore, devoid of legally sustainable basis. We delete the same. Addition in respect of international transactions involving purchase of merchandise and samples - Selection of MAM - CIT rejecting the Transactional Net Margin Method (TNMM) adopted by the AO/TPO as the Most Appropriate Method and in directing adoption of Resale Price Method (RPM) as done by the Assessee - HELD THAT - On a careful consideration of all these factors, as also entirety of the case, we are of the considered view that the rejection of RPM method adopted by the assessee was incorrect, and learned CIT(A) has rightly reversed the said action. We have also noted that the conclusion arrived at by the learned CIT(A) were not solely on the basis of Hon ble Bombay High Court in the case of L oreal India Pvt. Ltd., 2014 (11) TMI 1216 - BOMBAY HIGH COURT as alleged in the ground of appeal before us. On this count, grievances of the Assessing Office ill conceived TNMM is in away provision. As long as RPM can be reasonably applied, we see no issues with the same. Nothing, therefore, turns on the decision either. - Decided against revenue.

Summary

Issues Involved:
1. Adjustment of royalty payment to AE.
2. Adjustment of design fees payment to AE.
3. Adoption of Resale Price Method (RPM) versus Transactional Net Margin Method (TNMM) for benchmarking international transactions involving purchase of merchandise and samples.

Issue-wise Detailed Analysis:

1. Adjustment of Royalty Payment to AE:
The assessee, a joint venture between Diesel SPA (Italy) and Reliance Brands Ltd, paid a 5% royalty to Diesel SPA for exclusive rights and technical know-how. The TPO adjusted the royalty to 3.31% based on comparables (Donakaran, Victorinox, Rampage, Bill Blass). The CIT(A) included "Guess" (7%) in the comparables, adjusting the royalty to 5.25%. The Tribunal found the inclusion of Rampage and Bill Blass, which had guaranteed minimum royalty clauses, inappropriate as these clauses materially differ from the assessee’s agreement. Excluding these comparables, the Tribunal determined the royalty paid by the assessee was within the arm’s length range, directing deletion of the ALP adjustment.

2. Adjustment of Design Fees Payment to AE:
The assessee paid ?14,00,761 as design fees to Diesel SPA, which the TPO considered part of the royalty agreement, leading to an ALP adjustment. The CIT(A) upheld this adjustment. The Tribunal, however, noted that even if the design fees were included in the royalty payment, the total would still be below the 5.25% arm’s length price established. Hence, the ALP adjustment was deemed legally unsustainable and was deleted.

3. Adoption of RPM versus TNMM for Benchmarking International Transactions:
The assessee used RPM to benchmark transactions involving merchandise purchases from Diesel SPA, showing a gross profit margin of 52.54% against a comparable mean of 32.16%. The TPO rejected RPM, adopting TNMM, arguing that the assessee’s marketing efforts and high-risk distribution rendered RPM inappropriate. The CIT(A) reversed this, citing the Bombay High Court’s decision in L’Oreal India Pvt. Ltd., which upheld RPM for distributors reselling goods without value addition. The Tribunal agreed, noting no substantial value addition by the assessee and that marketing expenses did not affect gross profit margins. The Tribunal found RPM to be the most appropriate method, affirming the CIT(A)’s decision and dismissing the Assessing Officer’s appeal.

Separate Judgments:
The Tribunal’s decision for the assessment year 2012-13 was applied mutatis mutandis to the assessment year 2013-14, resulting in the dismissal of the Assessing Officer’s appeal for that year as well. The cross objections filed by the assessee were dismissed as infructuous.

Conclusion:
The Tribunal allowed the assessee’s appeal, directing deletion of ALP adjustments for royalty and design fees, and upheld the CIT(A)’s adoption of RPM for benchmarking international transactions, dismissing the Assessing Officer’s appeals for both assessment years.