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TMI Blog2015 (12) TMI 961X X X X Extracts X X X X X X X X Extracts X X X X ..... dopted Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) and further it has also adopted Resale Price Method (RPM) to corroborate the Arms Length Price (ALP). 2.3. The TPO initially gave a show cause notice to the assessee proposing to apply RPM as the MAM for the reason that Luxottica India is a full fledged distributor engaged in resale of goods purchased from AE's to unrelated parties in India, without any value addition and under such circumstances RPM is the MAM to establish the arms length nature of the transactions of import of sun glasses/ sun glass frames from AEs for resale in India. Later the TPO rejected the TP study for the reason provided in the show cause notice dt. 24.12.2013 except points 6 and 7. The TPO alleged serious flaws in the T.P. documentation. 2.4. At page 14 of the TPO's order, he gave reasons for applying TNMM as the MAM which are as follows: (a) It is not possible to prescribe procedures/practices for every operation. (b) Even in the same industry it depends on the nature of transactions and circumstances surrounding the transactions. The approach would be different from industry to industry. (c) The ultimate selection of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price method is the most appropriate method. (b) The AO initially stated that resale price method is the MAM in its show cause notice, but later due to revenue considerations adopted TNMM. (c) That the assessee in its T.P.study had in fact used TNMM as the primary method but it also has used resale price method as the secondary MAM for arriving at the ALP. That the assessee is not stopped from claiming before the TPO, to adopt resale price method as the MAM, though in its TP study, the assessee adopted TNMM as one of the MAM, when the assessee claim that the RSPM is the MAM in case of a trader. For this proposition that the assessee is not estopped from claiming that a particular method is the MAM he relied on the judgement of the Mumbai "K" Bench of the Tribunal in ITA no. 2476/Mum/2008 in the case of Metal Toys India (I) Pvt.Ltd. 7.1. Further he relied on the following case laws for the proposition that various Benches of the Tribunal have held that RSPM is the MAM when the functional profile of the assessee is that of a trader. i. Star Diamond Group NV Mumbai in ITA no.3923/Mum/2008 ii. L'Oreal India Pvt.Ltd. vs. ITO, ITA no.5423/Mum/2009 iii. Danisco (India) Pvt. Ltd. Vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sun glasses and frames. Keeping the functional profile of the assessee in mind, it is held that RPM is the MAM for this case. The RPM is applicable in a resale situation, wherein the property or services purchased from an associated enterprise are resold to unrelated enterprises. Further more, RPM is generally adopted where the tested party i.e. trader purchases from an associated enterprise and resells to an independent enterprise without adding substantial value to the product, or does not contribute substantially to the creation of maintenance of intangible property associated with the product (trade mark or trade names) which are owned by the AEs. Luxottica India is a full fledged distributor engaged in reselling goods purchased from AEs to unrelated parties in India. Luxottica India does not add value to the goods purchased from related party, which are resold to unrelated parties. Accordingly, the RPM is the MAM to establish the arm's length nature for Luxottica India's inter company transaction of the import of sun glasses / sun glass frames from AEs for resale in India." 10.1. The reasons given by the TPO for adopting TNMM at page 14 of his order are general in nature. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his argument of the Revenue is rejected. 10.4. As the undisputed fact is that the functional profile of the assessee is that of a trader and as the characterisation of the transaction is purchase and sale of goods, we hold that RSPM is the MAM by applying the following decisions of the Co-Ordinate Bench of the Tribunal. (i) In the case of Star Diamond Group NV Mumbai (ITA No.3923/Mum/2008), it is held as follows: "13. This finding in our humble opinion is wrong for the reason that the CIT(A) has adopted these very comparables, along with three others while arriving at the operating margins at para 7.16 of his order. As the assessee is a trader, without value addition to the goods, we find force in the submissions of the assessee that resale price method is the most appropriate method for determining the ALV with respect to AE transaction. In fact, the Revenue has accepted this method in earlier two years. The TPO in his order dt. 7.3.2005 for the AY 2002-03 and order dt. 20.3.2006 for the AY 2003-04, has agreed with the computation of arm's length price made by the assessee under the resale price method." (ii) In the case of L'Oreal India P.Ltd. vs. ITO (ITA no.5423/Mum/2009) i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus we are of the view that it is a fit case to set aside the matter to the file of the Ld.TPO for his fresh consideration and decide the issue afresh after affording opportunity of being heard to the assessee and discussing their submissions in the order and reasons, if any, for not agreeing or agreeing with them. It is ordered accordingly with direction to the Ld.TPO to: a) first examine as to whether, was there any value addition on imported goods, and if answer is in negative then apply RPM as a most appropriate method for trading transactions of imported goods and in consequence examine the application of appropriate method as commission payment; (iv) Frigoglass India P.Ltd. (ITA no.463/Del/2013), it is held as follows: "We have heard the rival contentions and perused the material available on record. In our considered view, once assessee has given a methodology for working of ALP on selection of a particular method supported by appropriate comparables, the working can be dislodged by TPO on the basis of cogent reasons and objective findings. In this case except theoretical assertions and generalized observations, no objective findings have been given to come to a reasoned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rriving at the ALP. Thus, ground Nos. 2 to 7 are allowed." 10.5. In view of the above discussion, we direct the TPO to adopt RSPM as the MAM in this case. 10.6. In the result this ground of the assessee is allowed. 10.7. In view of our above decision, we do not adjudicate on the alternative pleas made by the assessee regarding, adjustments on account of (a) employee cost; (b) marketing and c) foreign exchange as it is infructuous to do so. 11. The second issue is regarding transfer pricing adjustment of AMP expenses. As agreed by both the parties this issue is set aside to the file of the AO/TPO for fresh adjudication in line with the propositions laid down by the Special Bench of the Tribunal in the case of L.G.Electronics India (supra). 11.1. In the result this ground is allowed for statistical purposes. 11.2. The ground of levy of interest u/s 234B is consequential in nature. 11.3. The ground against initiation of penalty u/s 271(1)(c ) of the Act, is premature and dismissed as such. 12. In the result the appeal of the assessee is allowed in part. 13. The Revenue's appeal is on the following grounds. "1. Whether on the facts and circumstances of the case and in law, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th. It appears that the AO has not gone into the issue in appropriate depth to arrive at his conclusion. The AO has also not looked into the manner in which the assessee has been creating the provisions and thereafter, on receipt of the relevant bills, has been squaring up the provisions so made by it. The Panel therefore, would like to reproduce the assessee's submissions on this account. F.Y. 2007-08 (AY 2008-09) During the AY 2008-09, the assessee ahs created provision for following expenses by debiting the account head audit fees'as on 31st March,2008. - Legal and professional charges - Rs. 365,170 - Tax audit fees - Rs. 129,992 - Tax compliance fees - Rs. 171,776 Particulars Debit Amount (Rs.) Credit Amount (Rs.) Audit fees (A.R. 2007-08 booked in Dec.2008 and paid in Jan.2009) 84,270 Audit fees (Tax audit fees for 2007-08 booked and paid in Nov.08) 5,05,620 Audit Fees (For tax compliance of Expat and TP study and TP report FY 2007-08) 3,65,170/-(includes 171776) To Provision for expense (Being provision created for expenses) 955,060 F.Y. 2008-09 (AT 2009-10) Issue 1: Tax audit fees - Rs. 129,992 and Tax complianc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... includes Rs. 1,71,776). None of the expenditure identified by the AO has been claimed in AY 2009-10, as the relevant provisions were made in AY 2008-09 and the said provision expenditure ahs been allowed by the AO in AY 2008-09. Thus, the addition proposed by the AO does not survive. However, the AO is directed to reverify the factual claim of the assessee while finalising the assessment order and in case any discrepancy is still noticed, to take action accordingly."" We find no infirmity in these findings. In the result this ground of the Revenue is dismissed. 15.6. Ground no.4 is on the issue of relief granted by the DRP on account of provision for warranty. The DRP at para 15.4, applied the decision of Hon'ble Supreme Court in the case of Rotork Controls India Pvt.Ltd. vs. CIT, 314 ITR 62 and the Delhi High Court in CIT vs. Vinitec Corporation Pvt.Ltd. 278 ITR 337 and judgement of Hon'ble Delhi High Court in the case of CIT vs. Ericsson Communications Pvt.Ltd. (2009) TIOL- 583-HC-Del-IT. On the ground that the assessee has made provisions of warranty on a consistent and rational basis, the dRP directed the AO to grant deduction. We find no infirmity in this finding. Hence thi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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