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TMI Blog2022 (3) TMI 297X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 susta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecting Antik Denim as it also has GMR clause. 4. Erred in rejecting Provogue and Gingiss formal wear as comparable agreements without appreciating the comparability criterion adopted by the Appellant. 5. Without prejudice to the above, shall be deemed to consider Antik Denim as a comparable if Rampage and Bill Blass are considered as comparables. 5. The relevant material facts are as follows. The assessee before us is a joint venture between Diesel SPA (Italy) and Reliance Brands Ltd (RBL). The present year is the first year of it s full operations. The assessee is engaged in the business of distribution of Diesel products in India through wholesale channel and through retail network of Diesel products. Under the franchise agreement dated 6th May 2009, the assessee s AE (i.e. Diesel SPA) had granted the following:- Exclusive right to use Diesel as part of company name of Diesel India; Exclusive right and license to use the technical know-how (proprietary methods, processes, trade secrets, techniques, distribution procedures, models, standards and specification and information as to distribution of the products in India) licensed by Diesel S.P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 10. Ground no. 2 to 5 are thus allowed. 11. In ground nos. 6 to 10, the assessee has raised the following grievances which will be taken up together:- 6. Erred in confirming the adjustment of INR 14,00,761 made by the Learned TPO in relation to the international transaction of payment of design fees undertaken by the Appellant with its AE. 7. Erred in rejecting the Comparable Uncontrolled Price ( CUP ) Method as the most appropriate method considered by the Appellant to benchmark the international transaction of payment of design fees to its AE. 8. Erred in determining the ALP of design fees as Nil by alleging that the design services are a part of royalty paid by the Appellant under the franchise agreement. 9. Erred in not applying any of the methods prescribed under section 92C of the Act to benchmark the international transaction of payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA No.1046 of 2012) dated 07.11.2014 and upholding Resale Price Method (RPM) as the Most Appropriate Method (MAM), thus ignoring that the assessee is a full-fledged high risk distributor performing marketing and warranty functions as well and also spending high amount under the head other expenses? 19. Once again a reference to some undisputed facts will be in order. The assessee company is a joint venture between Diesel SPA and Reliance Brands Ltd. The assessee company is engaged in the business of distribution of Diesel products through wholesale channel and through the retail network during the relevant period, the assessee purchase merchandise and samples amounting to ₹ 18,40,27,155 from Diesel SPA for resale in India, and benchmarked the same on the basis of Retail Price Method (RPM) as the most appropriate method. On the basis of this benchmarking the gross profit on sale of the assessee worked out to 52.54% as against arithmetic mean of 32.16% of the 12 comparables selected by the assessee. However, the TPO rejected this benchmarking. He was, inter alia, of the view that that computation based on annual reports, rather than audited financials, are ten reliable, c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t brought out any factual differences between the controlled transactions and comparables. Similarly the TPO has relied upon para 2.32, 2.34, 2.36, 2.37 and 2.38 of the OECD guidelines and a number of illustrations thereunder, to depict various situations where appropriate adjustments need to be carried out to the resale price margin in order to effect proper comparability and to arrive at an arm's length resale price margin. However the TPO has not brought out any factual aspect to demonstrate that the circumstances enumerated in these paragraphs do exist in the comparability analysis performed by the assessee. The approach of the TPO of merely going on conjectures and surmises and rejecting RPM as the MAM cannot be upheld. 6.3.5 The Jurisdictional Bombay High Court in its judgment dated 07.11.2014 in Commissioner of Income Tax v. L'Oreal India Pvt. Ltd. (ITA No. 1046 of 2012) held that there was no error in law committed by the ITAT when it held that RPM was the Most Appropriate Method especially when goods are purchased from associated entities and there are sales effected to unrelated parties without any further processing. The Hon ble HC in Para 7 state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;Oreal The Appellant is in first full year of operations and has incurred a loss at net level as has been pointed out by the TPO in the case of the Appellant as well in the case of L'Oreal The Appellant is also a distributor of imported apparels through its stores in India and there is no value addition made to the imported products purchased from the AE. Same is the case with L'Oreal In the current case, it is the stand of the TPO that, functionally dissimilar comparables from Indian domain have been selected by the Appellant. Similar assertions were made by the TPO in the case of L'Oreal as well In Loreal's case, the TO was of the opinion that selling and distribution expenses resulted in value addition to the product of the assessee and hence rejected RPM as the MAM and adopted TNMM. Similar assertions have been made by the TPO in the case of Appellant. Here, the PO has stated that the assessee is engaged in a single business of distribution of Diesel's apparels and accessories and has incurred substantial expenditure on AMP and also paid royalty. Therefore, TNMM is the MAM. 6.3.7 Considering the above facts and circumstances of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of purchase of from an AE which are resold as such to unrelated parties. Ordinarily, this method pre-supposes no or insignificant value addition to the goods purchased from foreign AE. 17. While noting the above decision also, Hon'ble jurisdictional High Court, in Principal Commissioner of Income-tax-6 v. Matrix Cellular International Services (P.) Ltd. [2018) 90 taxmann.com 54 (Delhi) found that, - 8. This Court finds that once the ITAT, on considering the relevant facts as well as the order of the PO, had concluded that the business of the assessee was merely that of a pure trader, and there was no value addition made before reselling the particular products (i.e. the SIM cards), its consequent finding that RPM is the Most Appropriate Method, is irreproachable..........11. This view has also been affirmed by the Bombay High Court in its judgment dated 07.11.2014 in Commissioner of Income Tax v. L'Oreal India Pvt. Ltd. (ITA No. 1046 of 2012)... ...... 12. Therefore, a contrario, when the reseller does not add any value to the product of the goods, the RP method would be appropriate for determining the arms' length price. 18. In respect of the observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an Indian entity, which is 51:49 ownership of Burberry International Holding Ltd. UK and Genesis Colours Pvt. Ltd. India and which was dealing with a luxary range of products, a coordinate bench of this Tribunal, in the case of Burberry India Pvt. Ltd. vs ACIT (ITA Nos. 758 7684/Del/2017; order dated 22.06.2018), has observed as follows:- 15. We have gone through the record in the light of the submissions on either side. It is an admitted fact that in this case the assessee is merely purchasing and selling the products without adding any value to the core product. Further, Ld. TPO did not dispute the characterisation of the assessee as in the TP document and also accepted the functional profile of the assessee as a routine distributor. Ld. DRP, however, recorded that the assessee has incurred substantial AMP, and other expenses, in relation to its turnover, and is therefore, not a simple distributor in terms of the requirement of using RPM. Now we shall proceed to examine the law applicable these facts. 16. In Nokia India (P) Ltd. v. Dy. CIT[2014] 52 taxmann.com 492/153 ITD 508 (Delhi), the Delhi bench of the ITAT held that,- 9. Sub-clause (i) of clause (b) of Ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uses of r. 10B(1)(b) makes it clear beyond doubt that RPM is best suited for determining ALP of an international transaction in the nature of purchase of goods from an AE which are resold as such to unrelated parties. Ordinarily, this method presupposes no or insignificant value addition to the goods purchased from foreign AE. In a case the goods so purchased are used either as raw material for manufacturing finished products or are further subjected to processing before resale, then RPM cannot be characterized as a proper method for benchmarking the international transaction of purchase of goods by the Indian enterprise from the foreign AE. 9. Similarly, in Swarovski India Pvt. Ltd. v. ACIT, ITA No. 5621/Del/2014, the ITAT held: Adverting to the facts of the instant case, we find that the assessee purchased Crystal goods and Crystal components from its AE. No value addition was made to such imports. The goods were sold as such. In the given circumstances, the RPM is the most appropriate method for determining the ALP of the international transaction of' Import of Crystal goods and Crystal components. 10. A similar view has been adopted by the Mumbai bench o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that the incurring of high advertisement and marketing expenses by the assessee vis-avis the other comparable companies does not in any manner affect the determination of ALP under the RPM. In the above decision it was held that, - The ld. DR vehemently argued against the application of RPM in the given circumstances as the most appropriate method by contending that the assessee incurred huge advertisement and marketing expenses. In view of such incurring of expenses, the ld. DR stated that the better course would be to apply TNMM which would consider operating profit. We are unable to accept the contention advanced on behalf of the Revenue. The obvious reason for this is that the incurring of high advertisement and marketing expenses by the assessee vis-a-vis the other comparable companies does not in any manner affect the determination of ALP under the RPM. When we consider gross profit in numerator and net sales in denominator, all the expenses debited to the Profit loss account automatically stand excluded. It is but natural that only those expenses can have bearing on the gross profit that are debited to the Trading account. As the amount of advertisement and mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ety 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., as alleged in the ground of appeal before us. On this count, grievances of the Assessing Office ill conceived. 24. As we part with this issue, we may add that in the case of DCIT vs India Medtronic Pvt. Ltd. [(2019) 112 taxmann.com 318 (Mum)] the TPO discarded TNMM method adopted by the assessee, and imposed RPM method with Malaysian Company s gross profit margins on sale. In this case, a co-ordinate bench did approve adoption of TNMM but then the reason of doing so was the basis of transaction being controlled transactions which were intra AE transaction. That decision cannot be the basis to suggest that TNMM is to be preferred over RPM. 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. 25. In view of the above discussions and bearing i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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