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TMI Blog2016 (8) TMI 204X X X X Extracts X X X X X X X X Extracts X X X X ..... adopting the TNMM as MAM instead of RPM. Appropriate adjustment towards the extra-ordinary expenses - Held that:- There is no dispute on the fact that the assessment under consideration is the initial years of the distribution activity of the assessee and therefore it cannot be ruled out that the expenditure incurred by the assessee towards the marketing, advertisement and sales promotion activity is substantially higher because of the initial year. We do agree with the view taken in the case of Skoda Auto India Pvt. Ltd. [2009 (3) TMI 249 - ITAT PUNE-A] that if the abnormal expenditure towards the advertisement, marketing and sales promotion is only on account of the beginning of the activity of distribution-ship then an appropriate adjustment has to be allowed while determining the ALP under TNMM. We may clarify that the Assessing Officer has to verify by comparing this expenditure during the year with the subsequent years to find out that the significant expenditure towards the marketing, advertisement and sales promotion is only during the initial year and not in the later year. Accordingly, we set aside this issue to the record of the A.O./TPO for re-examination and adjudic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be used. 4. Without prejudice to application of TNMM as the most appropriate method, the learned AO and the learned Panel erred in not providing appropriate adjustment towards the significant expenses incurred by the Appellant towards marketing, advertisement and sales promotion activities due to initial year of its distribution operation. 5. The learned AO and the learned Panel erred in not providing the benefit of lower range of +/-5% in determination of arm's length price. 6. That the learned Assessing Officer erred in consequently levying and computing interest under Section 234B and Section 234D of the Act. That the Appellant craves leave to add to and/or alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this Appeal. 3. The assessee is a 100% subsidiary of Advanced Medical Optics (India) Pvt. Ltd., Netherlands BV Group Entity of AMOINC, US. The assessee is engaged in distribution of ophthalmic lenses and related products. The assessee company undertakes to buy and sell the group s finished products in the Indian markets. The financial results and international transactions reported by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is purely trading in nature. In support of his contention, he has relied upon the following decisions : i. OSI Systems Pvt. Ltd. Vs. DCIT dt.12.8.2015 in ITA No.683/Hyd/2014. ii. Loreal India PVt. Ltd. Vs. ITO dt.25.4.2012 in IT(TP)A No.5423/Mum/2009. iii. Danisco India Pvt. Ltd. Vs. ACIT dt.29.4.2014 in IT(TP)A No.5291/Del/2010. Thus the learned Authorised Representative has submitted that when there is no value addition in the goods imported from the AE and sold to the third party then, the RPM adopted by the assessee for bench marking its international transactions has been accepted by the Tribunal in a series of decisions. He has further submitted that for the Assessment Year 2006-07, the A.O./TPO accepted the resale method and no addition was made. 6. On the other hand, the learned Departmental Representative has submitted that as per the notes on accounts at page No.300 of the paper book it has been reported that during the year under consideration the assessee has discontinued the lens manufacturing operation from 1st Jan., 2006 and the net block asset relating to the said facility comprising of land, plant and machinery, electrical installation, furn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing and connected activity carried out by the assessee as well as comparables must be similar. In the case on hand there is no dispute that the assessee has incurred huge expenditure on account of selling and distribution as well as promotion amounting to more than ₹ 75 lakhs. It is also not in dispute that this expenditure of selling and distribution and sales promotion has been incurred in respect of the trading of the goods imported from the AE as the asses has already closed its manufacturing operations prior to the F.Y. relevant to the A.Y. under consideration. The TPO has rejected the resale price method on the ground that the business model of the assessee is not comparable with that of the comparable companies who are not incurring such expenditure on selling and distribution and sales promotion. We find that there is a substance in the reasons assigned by the TPO while rejecting the resale price method and particularly in view of the fact that the assessee has incurred huge expenditure on account of sale and distribution as well as sales promotion. The assessee has carried out the trading activity only in the goods imported from the AE and such expenditure incurred b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Revenue authorities. The import content of raw material in these cases ranged from 26 per cent to 56.83 per cent (Hindustan Motors-31 per cent; Honda Siel-48.2 per cent; Hyundai Motors-25.29 per cent; General Motors-56.83 per cent and Maruti Udyog-26 per cent). This variation is particularly important since the business model of a car maker having 98.5 per cent import content in raw material normally cannot be the same as of a car maker having import content of 26 per cent to 56.84 per cent. While the latter shows substantial indigenous inputs in the raw material, the former is virtually an assembly job of the imported knocked down kits. These business models are so fundamentally different that, in our understanding, no comparisons are possible unless the impact of the import contents are eliminated, or unless it is the case, as was the case before the Tribunal in Sony India (P) Ltd. (supra), that the decision to have such a huge import content was a conscious decision taking into consideration all commercial considerations including the obvious benefits of a better quality which is bound to reflect or translate into higher seller product. No doubt, a higher import content of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad to sell the cars with such high import contents, and essentially high costs, while the normal selling price of the car was computed in the light of the costs as would apply when the complete facilities of regular production are in place. None of these arguments were before any of the authorities below. What was argued before the AO was mere fact of higher costs on account of higher import duty but then this argument proceeded on the fallacy that an operating profit margin for higher import duty is permissible merely because the higher costs are incurred for the inputs. That argument has been rejected by a Co-ordinate Bench and we are in respectful agreement with the views of our esteemed colleagues. This additional argument was not available before the authorities below and it will indeed be unfair for us to adjudicate on this factual aspect without allowing the TPO to examine all the related relevant facts. We, therefore, deem it fit and proper to remit this matter to the file of the TPO for fresh adjudication in the light of our above observations and particularly dealing with the contention that the present year being first full year of operations, the assessee was forced to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pricing regime and it was a new area of taxation laws in which law had not developed, we think that it will meet the ends of justice that the assessee has liberty to raise all these arguments before the TPO so that the TPO can examine all the relevant contentions and decide the same by way of a speaking order in accordance with the law. As we are remitting these issues to the file of the TPO, and as these issues are somewhat academic at this stage which will be relevant only when the assessee s plea regarding adjustment on account of higher import duties being warranted by peculiarities of operations in this year, we refrain from making any observations on the merits of the case. With the above observations, we hereby remit the matter to the file of the TPO so far as question of determination of ALP under the TNMM method is concerned. We do agree with the view taken by the Pune Bench of ITAT that if the abnormal expenditure towards the advertisement, marketing and sales promotion is only on account of the beginning of the activity of distribution-ship then an appropriate adjustment has to be allowed while determining the ALP under TNMM. We may clarify that the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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