TMI Blog2011 (1) TMI 1410X X X X Extracts X X X X X X X X Extracts X X X X ..... adopted by the assessee to arrive at arm s length price and rejecting thereby the calculation of arm s length price determined by the TPO by applying transaction net margin method which considering the business of the assessee was the most appropriate method to determine the arm s length price. 2. The appellant prays that the order of CIT(A) on the above grounds be set aside and that of the AO be restored. 2. The facts in brief are that the assessee is a subsidiary of L Oreal SA France engaged in the business of manufacturing and distribution of cosmetics and beauty products. During the previous year relevant to the assessment year, the assessee had entered into the following international transactions with its Associated Enterp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or manufacturing. However, the TPO had not made any adjustment to the ALP of purchase of finished goods in distribution segment because the operating margins of the assessee in the said segment being commensurate with the operating margins of the comparable companies. No adjustments where also made on other transactions where CUP method was applied. The AO had accepted the additions made by the TPO while completing the assessment u/s 143(3) of the Act, 1961. 4. Being aggrieved the assessee carried the matter in appeal before the CIT(A). The main contention of the assessee before the CIT(A) was that the TPO/AO wrongly rejected the Cost Plus Method adopted by the assessee for computing ALP in manufacturing segment imposing a Transaction Ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tary non-routine intangible of its own during the production process. The assessee was only responsible for day to day commercial functions like production scheduling and inventory management. Hence, the assessee was characterized as a licensed manufacturer exposed to less than normal risk while carrying out such activities. Consequently, Cost Plus Method (CPM) was used to test the arm s length nature of the international transaction involving purchase of raw materials. It was further submitted before the CIT(A) that CPM is a traditional and transactional method which is typically applied to test the price of goods that are manufactured and then sold and is generally appropriate when the party being examined is not engaged in significant va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee by holding that the method adopted by the assessee i.e. Cost Plus Method is appropriate method. The relevant findings of the CIT(A) are extracted below for the sake of clarity:- The cost plus method (CPM) adopted by the appellant appears to be appropriate method as it is based on the functions performed and not on the various product manufactured. Normally, the pricing methods get precedence over prof it methods. CPM is applied to test the price of goods that are manufactured and then sold or to measure the value of services performed by a service provider and is generally appropriate when the party being examined is not engaged in signif icant value adding activities. Even OECD Guidelines prefer methods which requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... controlled and uncontrolled enterprises and is less dependent on similarity of products The contention of the appellant that the cost of raw materials as a percentage of sales is only 7.46% and accordingly it can be said that the appellant s prof it cannot be inf luenced merely by cost of raw materials which constitute nominal percentage of sales carries weight. Further, the Prof it Level Indicator (PLI) of Gross Margin used by appellant is a more appropriate measure. This PLI measures the prof its made by appellant on gross basis vis-a-vis the comparable companies and if the said margin is commensurate with that of comparable companies it could be said that the cost of raw material is at arm s length. Net prof it margin which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other hand, the learned counsel for the assessee has relied upon the order of the CIT(A). 9. We have heard the learned representatives of the parties and perused the record. The facts of the case are that the assessee is a subsidiary of L Oreal SA France engaged in the business of manufacturing and distribution of cosmetics and beauty products. TPO completed the assessment u/s 92CA(3) by applying Transaction Net Margin Method (TNMM) in respect of international transaction relating to purchase of raw materials by rejecting the Cost Plus Method used adopted by the assesee and made an addition of ₹ 1,99,00,000/-. The learned CIT(A) gave a categorical finding that the Cost Plus Method adopted by the assessee is based on the functions ..... X X X X Extracts X X X X X X X X Extracts X X X X
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