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2019 (4) TMI 1866 - AT - Income TaxTP Adjustment - Selection of MAM - Selection of comparable Modi Care Ltd. - TNMM method v/s Resale price Method - HELD THAT:- Simply because Modicare Ltd. is also involved in direct selling, cannot be taken as a good comparable, especially in the light of the observation and finding of the Hon'ble High Court in Chryscapital Investor Advisors (India) Pvt. Ltd.[2015 (4) TMI 949 - DELHI HIGH COURT] - Apart from that, we agree with the contention of the learned counsel that, Modi Care Ltd. had a huge diversified product portfolio ranging from personal care, agriculture, Tea, Jewellery, Healthcare, cosmetics, etc. which had different profitability depending upon market factors. Different product items would involve different level of assets, risks and market which may affect gross margins. 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. 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%. Thus, there is substantial variance in the gross and net profit margin levels, which indicates that Modicare Ltd. is incurring heavy operating expenses and also substantiates heavy functions at the operating level. Further, Modicare Ltd. has significant AMP expenses of 7.32% which in the case of the assessee is only 0.94%. If a distributor is incurring substantial AMP expenses then it cannot be compared with routine distributor under RPM as it tantamount to value addition. This also goes to show Modicare Ltd. has different functions as compared to the assessee. There is also difference in the case of goods sold ratio and value-added expenses which is apparent from the fact that in case of Modi Care Ltd. the cost of goods sold ranges from 22% to 28% of its total operating cost and value-added expenses/operating expenses are more than 70%. Modicare Ltd. has also recorded franchisee expenses and hence it cannot be inferred wholly as a direct seller. Service fee earned by the assessee is on account of renewal fees and handling fees received from the individual consultants, engaged in distribution of assessee’s product and directly related to assessee’s business. Whereas, the service fee earned by Modi Care Ltd. is on account of annual maintenance contract (AMC). This factor also vitiates the comparability analysis. We are thus in tandem with the contention raised by the learned counsel that due to non-comparable product profile and other differences and lack of data for various factors, reasonably accurate adjustment cannot be made. as was directed by the Hon'ble High Court. Hence Modi Care Ltd. cannot be taken as a comparable company under RPM. Service fee earned by the assessee is on account of renewal fees and handling fees received from the individual consultants, engaged in distribution of assessee’s product and directly related to assessee’s business. Whereas, the service fee earned by Modi Care Ltd. is on account of annual maintenance contract (AMC). This factor also vitiates the comparability analysis. We are thus in tandem with the contention raised by the learned counsel that due to non-comparable product profile and other differences and lack of data for various factors, reasonably accurate adjustment cannot be made. as was directed by the Hon'ble High Court. Hence Modi Care Ltd. cannot be taken as a comparable company under RPM. The differences in the functions performed between the enterprises are often reflected in variations in operating expenses. Though this may lead to wide range of gross profit margin but still broadly similar levels of net operating profit indicators. Under the TNMM standard of comparability is relaxed relative to other methods with only broadly similarity of functions required. Thus, in our opinion as observed by the Hon’ble High Court, TNMM can be adopted as most appropriate method. Accordingly, we direct the TPO to apply TNMM on the comparable selected by the assessee with suitable working capital adjustment. Appeals of the assessee are allowed.
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