CITIZEN WATCHES (INDIA) PVT. LTD.,,BANGALORE vs. ASST.C.I.T., BANGALORE

These are cross appeals raised by the assessee and the Revenue and a cross objection by the assessee against the appeal of the Revenue, for the assessment year 2010-11.

With respect to ground no.2, it was submitted by the Ld. AR that the case of the assessee is covered by the decision of the IT(TP)A.497, 406/B/2015 Page - 3 CO.124/Bang/2016 Tribunal in assessee’s own case, for the assessment year 2009-10, vide order dt.06.07.2018. Since there is no change in facts for the present year, therefore ground no.2 of the assessee is required to be allowed. He has drawn our attention to para 6.4.1 to 6.4.3 of the order, to the following effect : 6.4.1 We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the including the judicial details, documents and material on record; pronouncements. The fact not disputed is that the assessee is performing only trading functions. As pointed out by the learned Authorised Representative of the assessee, the only reason that the TPO has cited in his order under Section 92CA of the Act is that the losses incurred by the assessee as being indicative of carrying out of value added functions. In our view, this presumption by the TPO is not borne out by the facts on record. The details of expenses in the assesses profit and loss account do not indicate OR establish that any value added functions have been carried out by the assessee. Expenses incurred on packing material cannot be said to create any value addition to the product. 6.4.2 The issue of the MAM to be applied to traders / distributors has been considered and decided in the judicial pronouncements cited by the assessee (supra). It has been quite consistently held that RPM is the MAM for a trader / distributor, if there is no value addition to the products. The decision of the ITAT, Mumbai Bench in the case of ITO Vs. L'Oreal India Pvt Ltd (supra) has been affirmed by the Honbe Bombay High Court. In the said decision in the case of L'Oreal India Pvt. Ltd. (supra) at paras 18 & 19 thereof it has been held as under :- 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 he considered by RPM or TNMM. We observe that TPO has applied TNMM and has suggested adjustment of Rs. 4.90,07.000 by showing desired profits margin of comparable companies at 0.36% on s*s as the operating margin of the assessee shown is (-) 19.84%. Accordingly. TPO computed the ALP in the purchase of finished goods at Rs. 2,70,9 1,000 as against actual value of Rs. 760.88,729 shown by the assessee. We observe that 'FPO stated that the assessee has adopted RPM for determining the ALP for the import of finished goods. He has stated IT(TP)A.497, 406/B/2015 Page - 4 CO.124/Bang/2016 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-à-vis comparable companies identified by the assessee, earned margin of 14.85%. However. TPO suggested that as per Rule 10B(2) of Income tax Rules, for the purpose of determining ALP, the comparable transaction considered by the assessee must be similar to the international transaction in terms of similarity in the characteristics of the product and the functions performed, assets employed and risks assumed in the controlled transaction and the uncontrolled transaction must also be similar. Accordingly, TPO did not agree with the comparable companies considered by the assessee. He also stated that RPM could be an appropriate method only when there is no value addition undertaken by the distributor. The TPO considered the selling and distribution expenses in marketing and stated that there is a value addition by the assessee and thus TMMM is the most appropriate method. The TPO did not accept the adjustment given by the assessee end, accordingly, made this addition. 19.During the course of hearing, Id D.R. also supported the method considered by TPO and referred to para 2.29 of OECD Price Guidelines 2010 as stated hereinabove. On the other hand, Id A.R.justified the RPM method adopted by it and also referred to order of TPO in the preceding assessment, years as well as succeeding assessment years to the assessment year under consideration to substantiate that RPM is the most appropriate method to determine ALP. He submitted that the assessee made adjustment for marketing and selling expenses to the profits to make it comparable to the comparable companies' profits. We agree with Id 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. In the case before us, there is no dispute to the fact that the assessec buys products from its AEs and sells to unrelated parties without any further processing. Further, the 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. 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 Id CIT(A) that the margin of profit earned by AEs themselves is also reasonable and, IT(TP)A.497, 406/B/2015 Page - 5 CO.124/Bang/2016 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 of the assessee, we do not find any infirmity with the order of Id CIT(A) in deleting the addition of Rs. 4,90,07.000 made by the AG. Ground No. 2 is accordingly rejected by upholding the order of Id CIT(A).

Per contra the Ld. DR fairly conceded that there is no change in facts of the case. However, she submitted that the Department has not accepted the order of the Tribunal.

We have heard the rival contentions and perused the material on record. As the facts and circumstances for the present assessment year are similar to the facts and circumstances of the assessment year 2009- 10, therefore respectfully following the decision of the coordinate bench in the assessee’s own case for the earlier assessment year 2009- IT(TP)A.497, 406/B/2015 Page - 6 CO.124/Bang/2016 10, we allow ground no.2 of the assessee’s appeal. As a result, thereof the TPO is directed to apply RPM as the MAM for the purposes of bench marking / determining the ALP of the international transactions.

Ground no.3 of the assessee’s appeal pertains to subvention charges in respect of mark-up expenses incurred by the assessee and reimbursed by the AE. In this regard the Ld. AR has submitted that the Tribunal in the assessee’s own case for the earlier assessment year 2009-10 (supra), in para 7.1 to 7.4.2 has decided the issue in favour of the assessee, and therefore this issue is also be decided in favour of the assessee.

Per contra, the Ld. DR vehemently opposed the submission of the Ld. AR and has drawn our attention to the decision of the Delhi Tribunal in the matter of Seagram Manufacturing P. Ltd v. ACIT [69 taxmann.com 385, wherein at para 39 & 40, it was held as follows : 39. We are further in agreement with the following findings of ld. CIT(A): "In view of the foregoing analysis, I am inclined to agree with the findings of the TPO that the reimbursed expenses should be part of the cost base of the appellant for computing return on the total cost, for the following additional reasons, in addition to what has been cited by the TPO: (i) The resources of the entire enterprise of the appellant had been put to use for discharging the comprehensive functions assigned to the appellant as per the agreement. (ii) Sales promotion activities of similar nature were also organized for the domestic segment of the appellant and claim of such expenses have been allowed as business expenses. There is no reason as to why a separate treatment is to be given to the reimbursed amounts in the segmented accounts as IT(TP)A.497, 406/B/2015 Page - 7 CO.124/Bang/2016 both these expenses aim at achieving similar results. In any case, the reimbursed expenses did impact the sales of the AE positively. (iii) The appellant has been using the same agencies for the sales promotion purposes both for the domestic segment as well as for the AE segment. Credits are extended to SMPL on its own credibility or standing and not on the basis of the credibility of the AE. This makes these expenses an integral part of the market support function. (iv) Perusal of some of the advertising bills reveals that the appellant while making payments collected TDS. All obligations relating to collection of TDS, obtaining TAN, filing TDS returns and all other consequential legal Obligations are met by the appellant in its own right as an independent entity. Resources of the entire enterprise are used to meet such legal Obligations and support the market service function. Under these circumstances, the appellant is entitled to get a mark-up on the actual cost incurred inclusive of reimbursed expenses. (v) Under TNMM, the appropriate cost base is to be taken into account while determining the arm's length nature, of compensation received for discharging a particular function. Exclusion of a relevant cost item would distort the bench marking analysis vis-a-vis the results of the comparables. No such exceptions have been brought out by the appellant for the comparables."

In view of above discussion this ground is dismissed.

On the basis of the above, the Ld. DR submitted that the Tribunal in the case of the assessee in the earlier year (supra) held that the subvention charges are taken care of, if the TNMM is applied, however as the Tribunal is changing the method i.e., instead of TNMM, RPM method is applied by the Tribunal in the earlier assessment year and also in the present assessment year, therefore, the IT(TP)A.497, 406/B/2015 Page - 8 CO.124/Bang/2016 decision of the Tribunal will not be a binding precedent for the purposes of subvention charges and the subvention charges are required to be decided in the light of the decision in Seagram Manufacturing P. Ltd (supra).

We have heard the rival submissions and perused the material on record. The DRP in the order on this aspect at page 9 has mentioned as under :

The Ld. AR has drawn our attention to the Revenue’s appeal, as well as assessee’s appeal, in the assessee’s own case for A. Y. 2009- 10, wherein ground no.2 was decided by the Tribunal with the following observation : 11.3 We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. From an appraisal of the record before us, we find that the DRP has not said that the mark up has been determined under TNMM. It has only mentioned that such an addition is taken case of if TNMM is adopted as the MAM. Be that as it may, since we have already held that mark up on subvention charges is not tenable and is liable to be deleted (supra), this issue becomes academic in nature. Consequently ground no.2 of Revenue’s appeal is dismissed.

As we have already held that RPM is the MAM, therefore the application of TNMM, therefore, the grounds pertaining to the rejection or inclusion of various comparables by applying the TNMM method by the DRP / TPO would not be available to the parties before us. Therefore, in our view, the ground 2 of the Revenue’s appeal is required to be rejected being academic in nature.

Ground nos.3 to 5 pertain to exclusion of three comparables, namely M/s. Bose Corporation India P. Ltd, M/s. Gemini Communication Ltd and M/s. Softcell Technologies Ltd. These grounds do not survive after change in method as we had held that RPM is the MAM and these grounds arise only if TNMM is found to be the MAM. These grounds are only academic in nature and hence dismissed.