ORIFLAME INDIA PVT. LTD.,NEW DELHI vs. ADDL.CIT, SPECIAL RANGE- 7, NEW DELHI

O R D E R PER PRASHANT MAHARISHI, AM: 01 This appeal is filed by the assessee against the order of THE ADDITIONAL COMMISSIONER OF INCOME TAX, SPECIAL RANGE – SEVEN, NEW DELHI [ The Ld AO ] passed on 23/9/2017 under section 143 (3) read with section 92CA (3) read with section 144C (13) of The Income Tax Act [ The Act] for Assessment Year [ AY] 2013 – 14 determining the total income of the assessee at ₹ 981607220/- incorporating the adjustment on account of the arm‟s length price [ ALP] of the international transaction of Rs 66,55,27,960/- against the returned income filed by the assessee at Rs 31,60,79,260/–. 02 Assessee is part of Oriflame group of companies comprising of Oriflame cosmetics SA [as the parent company] based in Luxembourg holding 100 % equity in Oriflame investments Ltd,[ Mauritian company] which holds almost all the shares of the appellant company. 03 Assessee is engaged in trading of beauty products . It caters to the middle as well as the premium end market and currently has a presence in, cosmetics, skincare products, toiletries and Fragrances. It imports finished products as a part of its marketing strategy and to complete its product range. It imports products through Oriflame trading Ltd [the global trading Co of the group] upto October 2002 and subsequently through Oriflame cosmetics SA . 04 The assessee filed its return of income on 30 November 2013 declaring an income of ₹ 31,60,79,260/-. As the assessee has entered into an international transaction the reference was made to the learned Transfer Pricing Officer [ ld TPO] to determine the arm‟s length price under section 92CA (3) of the act. The order of the ld TPO was received on 28/10/2016 wherein the transfer pricing adjustment of Rs 66,55,27,960/- was proposed. Consequently the draft assessment order was passed on 30/11/2016 wherein the income of the assessee was computed at ₹ 98,16,07,220/–. Assessee filed objection before the Dispute Resolution Panel – 2, New Delhi[ The Ld DRP] . The learned DRP passed directions on 22/8/2017 granting no relief in the transfer pricing adjustment proposed by the learned TPO. Thus the assessment order under section 143 (three)/92CA (three)/144C (13) of the income tax act, 1961 was passed determining the total income of the assessee at ₹ 9 81607 to 20/–. This order is under challenge before us. 05 The assessee has raised following grounds of appeal:-

1. That on the facts and in the circumstances of the case and in law, the order passed by the Ld. Assessing Officer ("AO") is bad in law and void ab-initio.

2. That on facts and circumstances of the case and in law, the Ld. Dispute Resolution Panel ("DRP") erred in upholding the addition of INR 665,527,960 made by the Ld. AO/Transfer Pricing Officer ("TPO") to the returned income of the Appellant by recomputing, the arm's length price of the international transactions under section 92 of the Income Tax Act, 1961 ("Act").

3. That on the facts and circumstances of the case and in law, the Ld. DRP erred in upholding the validity of the reference made by the Ld. AO to the Ld. TPO and without recording any reasons to show that it was necessary and expedient to do so and without affording any opportunity to the Appellant in this regard.

4. That the Ld. DRP erred on facts and in law in upholding the adjustment made by the Ld. AO/TPO to the arm's length price of the Appellant's international transactions with its associated enterprises by - 4.1 Considering direct selling companies to be the only appropriate comparables and in doing so arbitrary rejecting the comparables selected by the Appellant, which were selected by the Appellant on the basis of a valid scientific search process and based on the criteria of functional and product comparability.

4.2 Selecting Modicare Ltd as a single comparable company for the arm's length analysis even though this company was not comparable on a standalone basis to the appellant in terms of functions, assets and risks assumed and its product profile and by disregarding that this company was a persistent loss making company. 4.3 Disregarding the Hon'ble bench's decision in Appellant's own case for AY 2009-10 to AY 2011-12 by not considering the categorical finding of the Hon'ble Tribunal that Modicare Ltd. should not have been taken as a standalone comparable. 4.4 Disregarding the Hon'ble bench's decision in Appellant's own case for AY 2009-10 to AY 2011-12 by not considering the economic adjustments to account for differences in the accounting of certain significant expense items like incentive, high AMP to sales ratio, etc between Modicare Ltd and the Appellant. 4.5 Failing to appreciate that the Arm's Length Price of Appellant's international transactions of purchase of finished goods had been accepted by the customs department as per the Special Valuation Board Order.

06 The only adjustment that as made by the learned TPO with respect to the local trading segment of the cosmetic products. The learned TPO noted that assessee has bifurcated its transactions in three segments namely (i) manufacturing segment, (ii) local trading segment and (iii) export trading segment. For benchmarking transactions related to renting segment of the cosmetic products assessee has used the Transactional Net Margin Method [ TNMM] as the most appropriate method [MAM] choosing the profit level indicator [PLI] of OP /OI, conducting a search on the PROWESS and capitaline database and arrived at the set of three comparables. The average margin of this comparables is 4.71% by using multiple year data, compared its own margin of 4.13% and stated that its international transaction of that segment are at arm‟s length. 07 The learned transfer pricing rejected TNMM method adopted by assessee and proceeded to adopt Resale price Method. He rejected all the comparables of the assessee applying the filter of different business model, turnover less than ₹ 1 crore trading sales/total sales ratio less than 50%, duplication of the companies, negative company 25% related party transaction filter and different financial year. Thereafter, he selected the single comparable namely Modicare Limited. He computed the margin of that company by adopting PLI of gross profit/sales at 71.34 percentage, computed the margin of the assessee at 42.54 percentage and thereafter putrid the shortfall of rupees 665527960/–. This adjustment is also upheld by the learned dispute resolution panel and therefore incorporated by the AO in its final order. 08 The learned authorised representative submitted that the above approach of the learned TPO is based on prior year order of the learned TPO and dispute resolution panel wherein similar adjustment have been proposed on the basis of single comparable company and other facts and circumstances are similar. He submitted that the coordinate bench in its own case for assessment year 2008 – 9 to Ay 2012-13 has decided this issue as per order dated 15 April 2019. Therefore, the issue is squarely covered in favour of the assessee. He referred to the order of the coordinate bench wherein it has been held that due to non-comparable product profile and other differences and lack of data of various factors, reasonably accurate adjustment cannot be made. As was directed by the honourable High Court, it held that Modicare Ltd cannot be taken as a comparable company under resale price method. Therefore, he submitted that the above comparable have been rejected by the coordinate bench in assessee‟s own case in earlier years. He further referred to the order of the coordinate bench and submitted that the TNMM is accepted as the most appropriate method and in that year coordinate bench directed the learned TPO to apply TNMM on the comparable selected by the assessee with suitable working capital adjustment. He therefore submitted that issue is squarely covered in favour of the assessee. He further submitted that the dispute resolution panel in subsequent year in assessment year 14- 15 has also rejected the above comparable and has accepted the transfer pricing approach and methodology provided by the appellant in the transfer pricing documentation. For this year also he submitted that above comparable has a negative net worth of Rs 4 6621741/–. He referred to the annual report of the comparable. Therefore he submitted that as per the filter of the learned TPO also the above company has a negative net worth and therefore it should have been rejected. In view of this, he submitted that issue squarely covered in favour of the assessee. 09 The learned and departmental representative relied upon the orders of the AO/TPO/DRP. 10 We have carefully considered rival contention and perused the orders of the lower authority as well as the order of the coordinate bench in assessee‟s own case for assessment year 2009 – 10 to assessment year 2012 – 13. This issue stands decided in assessee‟s own case in 2019-TII-209-ITAT-DEL-TP for assessment year 2009 – 10, 2010 – 11, 2011 – 12 and 2012 – 13, on identical facts and circumstances where the coordinate bench as per order dated 15 April 2019 has held as under:-

“16. We have heard the rival submissions and also perused the relevant findings given in the impugned orders as well as material referred to before us at the time of hearing. As stated above, in the first round of proceedings, Tribunal though had enlisted various factors and distinguishing features to hold various differences between the Modicare Ltd. and assessee, however remanded the matter back to the TPO to examine the comparability adjustments between the Assessee Company and Modi Care Ltd. The said order of the Tribunal has been set aside by the Hon'ble High Court, wherein Hon'ble High Court, first of all agreed with the contention of the assessee that looking to such a difference, Modicare Ltd. cannot be that straightaway taken as a comparable company, what is required to be seen is: - - Firstly, whether it would be appropriate to include Modicare Ltd. having regard to the availability of data with respect to the different product segments; and - Secondly, the functional differences with respect to its marketing strategy, i.e., discount, transportation cost, insurance and performing the warranty functions; Their Lordships further directed that the Tribunal should reexamine, to what extent adjustment can be reasonably made having regard to the available data in relation to trading comparable offered for ALP determination for all the relevant years by the assessee. Further, the Tribunal was directed to consider the feasibility having regard to available data for all the concerned years for making appropriate adjustment. Another very important observation made by the Hon‟ble Court was that it was open to the assessee to urge that TNMM can be taken as most appropriate method instead of RPM and there would be no enlarging of comparable already selected by the assessee.