TMI Blog2012 (4) TMI 752X X X X Extracts X X X X X X X X Extracts X X X X ..... ties - TNMM or RPM? - Assessee is a 100% subsidiary company of L Oreal SA France and is engaged in the business of manufacturing and distribution of products. In respect of business of distribution, the TPO while rejecting the Resale Price Method (RPM) as adopted by assessee, has suggested some adjustment by applying Transactional Net Margin Method (TNMM) - HELD THAT:- We agree with ld CIT(A) that there is no order of priority of methods 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. Accordingly, the appellant s international transaction in respect of imports of finished goods can be said to be at arm s length. Therefore, RPM method is accepted - Decision in favour of Assessee. Receipt of services and benefit from AEs in lieu of the marketing fee payments - Assessee has paid to its overseas AEs some amount as cost contribution, wherein certain common marketing services were rendered by group entities. TPO stated that in the absence of any direct evidence to indicate the benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee, it was contended that considering the business of the assessee of manufacturing 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 vs. Geoffrey Manners Co. Ltd., 315 ITR 154(Bom) and also the decision of Mumbai Tribunal in the case of DCIT vs Metro Shoes P Ltd., 258 ITR 106(AT). 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before 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 Oreal Group. The assessee company has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 referred FAR analysis. The assessee further submitted before ld CIT(A) that the margin workings after making adjustm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the RPM which is a Standard Method. RPM adopted by the appellant appears to be the most appropriate method as it is based on the similarity of functions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 or maintenance of intangible property associated with the product (e.g. trademarks or trade names) which are owned by an associated enterprise. In such cases, the contribution of the goods originally transferred to the value of the final product cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment 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 stated that the assessee has determined gross profit margin by taking difference between costs of purchase of value of sales. The assessee has stated that the gross profit margin in the distribution activity was 40.80% vis- -vis comparable companies identified by the assessee, earned margin o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee has paid to its overseas AEs a sum of ₹ 1,14,28,409 as cost contribution wherein certain common marketing services were rendered by group entities. In this regard, it is relevant to state that the Consumer Product Division of L Oreal Group created a centralized International Marketing Management Division k ..... X X X X Extracts X X X X X X X X Extracts X X X X
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