TMI Blog2012 (11) TMI 175X X X X Extracts X X X X X X X X Extracts X X X X ..... ate that RPM is the most appropriate method to determine ALP - RPM is one of the standard method and OECD guidelines also states that in case of distribution and marketing activities when the goods are purchased from AEs which are sold to unrelated parties, RPM is the most appropriate method - the assessee buys products from its AEs and sells to unrelated parties without any further processing. - assessee has also produced certificates from its AEs that margin earned by AEs on supplies to the assessee is 2% to 4% or even less. - TPO's contention that AEs have earned higher profit is not based on facts - margin of profit earned by AEs themselves is also reasonable and, therefore, it could not be said that there is shift of profits by the assessee to its AEs at overseas – addition deleted Addition – assessee is in receipt of services and benefit from its Associative Enterprises in lieu of the marketing fee payments – Revenue submitted that ld CIT(A) has considered additional documents which were produced before him without seeking Remand Report from the Assessing Officer. He submitted that TPO has categorically stated that the assessee could not furnish evidence to justify that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufacturing and trading in cosmetic products i.e. Fast Moving Consumer Goods (FMCG), there is a cut-throat competition and it was imperative for the assessee to come out with a new and better advertisement films on a continuous basis to attract, retain-customers. It was contended that advertisement does not result in creation of any new asset and/or benefit of enduring nature as these advertisements only increases the basic awareness of the products. It was further contended that the advertisements relate to brands which are only licensed to the assessee. On behalf of the assessee, reliance was place on the decision of Hon'ble Jurisdictional High court in the case of CIT v. Geoffrey Manners Co. Ltd. [2009] 315 ITR 134/180 Taxman 87 (Bom.) and also the decision of Mumbai Tribunal in the case of Dy. CIT v. Metro Shoes (P.) Ltd. [2004] 2 SOT 127. Ld CIT(A) after considering the submissions of the assessee held that the advertisement expenditure of ₹ 2,70,58,119 is revenue in nature and incurred wholly and exclusively for the purpose of business of the assessee. Hence, department is in appeal before us. 5. During the course of hearing, learned Departmental R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e us also, the expenditure has been incurred by the assessee for production of 'ad-films', advertisement in electronic and print media, in respect of promotion of its 'on-going products'. Hence, we hold that the said expenditure has rightly been treated as revenue in nature by CIT(A), which was incurred by the assessee wholly and exclusively for the purpose of its business. We, therefore, uphold the order of ld CIT(A) and reject the ground No. 1 taken by the revenue. 7. Ground No.2 is as under: Whether on the facts and in the circumstances of the case and in law, the ld CIT(A) erred in holding that the resale price method (RPM) was the most appropriate method for determining the arms length prices of the assessee's international transaction in respect of imports of finished goods. 8. Facts are that assessee is a 100% subsidiary company of L'Oreal SA France and is engaged in the business of manufacturing and distribution of cosmetics and beauty products. The assessee company has exclusive rights to import, manufacture, market, distribute and sell of branded products of consumer products and the professional products relating to L'Or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat as per OECD Guidelines and the guidance note issued by the ICIA, RPM is the most appropriate method in case of distribution and marketing activities, especially when the goods are purchased from Associated Enterprise (AE) and resold to unrelated parties. The OECD Guidelines in para 2.22 was referred to, which has been reproduced by ld CIT(A) in para 7.11 of the impugned order, which reads as under: 2.22 An appropriate resale price margin is easiest to determine where the reseller does not add substantially to the value of the product. In contrast, it may be more difficult to use the resale price method to arrive at an arm's length price where, before resale, the goods are further processed or incorporated into a more complicated product so that their identity is lost or transformed. 11. It was contended that assessee merely buys the products from its AE and sells to unrelated parties without any further processing and, therefore, RPM has correctly been applied. It was also contended that the products of comparables selected by the assessee fall under the category of FMCG products and are for the personal consumption of an individual. The assessee also referr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l for variation of operating expenses across enterprises. The appellant has submitted that the TPO made a huge adjustment of approx. 67% to the value of imports results in an anomalous situation. The appellant has further assumed a hypothetical situation where if the net margins of the comparable companies were to be 10.36%, the adjustment made would be of entire purchase value (i.e. more that 100% addition) thereby implying that the appellant should have procured the goods at nil cost/price. This is because net margins is affected by several factors and not only purchase price. 12. Ld CIT(A) after considering above submissions of the assessee has held that RPM is the appropriate method and, accordingly, deleted the entire addition of ₹ 4,90,07,000 made by TPO, inter alia, observing at paras 7.24 and 7.25 as under: 7.24 I have perused the assessment order, TPO order and submission of the appellant. There is no order of priority of methods which the tax payers must follow. Transactional profit Method (TNMM/PSM) are treated as methods of last resort only when the standard method for CUP, RPM, CPM cannot be reasonably applied. The appellant has adopted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds sold. Therefore, RPM is not the right method to determine ALP. Ld D.R. referred to the decision of ITAT in the case of Star Diamond Group v. Dy. DIT (International Taxation) [2011] 44 SOT 532/9 taxmann.com 311 (Mum.) and submitted that it was held that RPM is the most appropriate method for determining the ALP with respect to AEs if there is no value addition to the goods. When there is a value addition to the product, RPM cannot be adopted. Ld D.R. also referred to para 2.29 of OECD Transfer Pricing Guidelines 2010 and submitted that with reference to RPM it is provided as under: An appropriate resale price margin is easiest to determine where the reseller does not add substantially to the value of the product. In contrast, it may be more difficult to use the resale price method to arrive at an arm's length where, before resale, the goods are further processed or incorporated into a more complicated product so that their identity is lost or transformed (e.g. where components are joined together in finished or semi-finished goods). Another example where the resale price margin requires particular care is where the reseller contributes substantially to the creation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of orders of TPO. He submitted that order of ld CIT(A) may be confirmed. 17. We have carefully considered the submissions of the representatives of the parties, orders of the authorities below as well as TPO's order in assessee's own case for the preceding assessment year, viz; A.Y. 2002-03 as well as succeeding assessment years to the assessment year under consideration, referred hereinabove and also the ITAT order dated 28.1.2011 ( supra ). 18. The only question for our consideration is as to whether to determine ALP in respect of business activity relating to distribution segment of the assessee with the AE is to be considered by RPM or TNMM. We observe that TPO has applied TNMM and has suggested adjustment of ₹ 4,90,07,000 by showing desired profits margin of comparable companies at 0.36% on sales as the operating margin of the assessee shown is (-) 19.84%. Accordingly, TPO computed the ALP in the purchase of finished goods at ₹ 2,70,81,000 as against actual value of ₹ 7,60,88,729 shown by the assessee. We observe that TPO stated that the assessee has adopted RPM for determining the ALP for the import of finished goods. He has s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n supplies to the assessee is 2% to 4% or even less. The department has not disputed the above certificates. Therefore, the TPO's contention that AEs have earned higher profit is not based on facts. On the other hand, we agree with ld CIT(A) that the margin of profit earned by AEs themselves is also reasonable and, therefore, it could not be said that there is shift of profits by the assessee to its AEs at overseas. Considering the facts of the case and also the order of TPO that RPM method has been accepted in the preceding as well as succeeding assessment years to the assessment year under consideration in respect of distribution segment activity of the assessee, we do not find any infirmity with the order of ld CIT(A) in deleting the addition of ₹ 4,90,07,000 made by the AO. Ground No. 2 is accordingly rejected by upholding the order of ld CIT(A). 20. Ground No.3 is as under: Whether on the facts and in the circumstances of the case and in law, the ld CIT(A) erred in holding that the assessee is in receipt of services and benefit from its Associative Enterprises in lieu of the marketing fee payments amounting to ₹ 1,14,28,409. 21. The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cost sharing arrangement and, therefore, in ALP study determined the same at Nil. 24. Ld A.R. admitted that fresh documents were submitted by the assessee before ld CIT(A) which were considered while allowing the claim of the assessee and deleting the disallowance made by the AO. He submitted that he has no objection if the matter is restored to the file of TPO to examine the same in the light of benefits if any derived by the assessee against the said payments to DMI. 25. In view of above submissions of representatives of the parties, we consider it prudent to set aside the orders of authorities below and restore the matter to the file of the AO with a direction that he will get it examined from TPO as to whether the assessee has received any benefit under cost sharing arrangement for which assessee made the said payment of Rs. ₹ 1,14,28,409. In case assessee is able to produce requisite documents to the satisfaction of the TPO that the assessee received benefit under cost sharing arrangement, he will decide the claim of the assessee accordingly. Hence, ground No. 3 is allowed for statistical purposes. 26. In the result, appeal filed by the department ..... X X X X Extracts X X X X X X X X Extracts X X X X
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