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Facts
The Assessing Officer (AO) made a transfer pricing adjustment for the Assessment Year 2012-13. The assessee engaged in wholesale trading of garments and fashion accessories and was a subsidiary of a Dutch company. The assessee imported goods from associated enterprises and incurred brand promotion expenses, which were partly reimbursed.
Held
The Tribunal held that the CIT(A)'s order in deleting the addition was not infirm. The CIT(A) had accepted the assessee's subsequent adoption of the transactional net margin method (TNMM) over the resale price method (RPM) and found the assessee's margin to be higher than the comparables. The Tribunal confirmed the CIT(A)'s order, dismissing the AO's appeal.
Key Issues
Whether the CIT(A) erred in rejecting the transfer pricing officer's adjustment and accepting the assessee's method and comparables for determining the arm's length price.
Sections Cited
143(3), 144C(3), 92CA(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
This appeal is filed by Asst. Commissioner of Income Tax, Circle 1(2)(1), Mumbai-400020, in case of BEST Seller Fashion India Pvt. Ltd. for A.Y. 2012-13, against the appellate order passed by the Commissioner of Income- tax (Appeals)-55, Mumbai [the learned CIT (A)], wherein the appeal filed by the assessee against the assessment order dated 16th March, 2016, by the Asst. Commissioner of Income Tax, Circle 9(2)(1), Mumbai (the learned Assessing Officer) under Section 143(3) read with section
The learned Assessing Officer is aggrieved and has raised several issues on transfer pricing adjustment as under:-
“A) Relation of TNMM applied by TPO
1) The Ld. CIT (A) erred on facts and in law in holding that in rejecting the Transactional Net Margin Method (TNMM) adopted by the TPO as the most appropriate method and directing to adopt Resale Price Method (RPM) without appreciating the fact that assessee itself had adopted TNMM for its benchmarking analysis method in subsequent years i.e. A.Y. 2013- 14 and 2014-15.
2) The Ld. CIT (A) erred on facts and in law in holding that RPM as the Most Appropriate Method without appreciating the functional difference between the assessee and the comparables selected for analysis ignoring the fact that the assessee is a full fledged high risk distributor performing marketing and distribution functions with great intensity and is creating marketing intangibles.
3) The Ld. CIT (A) erred on facts and in law erred in relying the decision of in the case of Loreal India (P) Ltd. (ITA No. 1046 of 2012 dated 07/11/2014) ignoring the difference of function emerging from the financials of the assessee that the assessee has incurred AMP expenses at 12.63% of sales and without appreciating the fact that RPM when used as (B) Introduction of Fresh comparables:
1) The Ld. CIT (A) erred on facts and in law in considering/introducing/accepting the fresh comparables viz. S. Kumar & Co. (Traders) Pvt. Ltd., Santowin Corporation Ltd., Vijay Silk House Mumbai Ltd., Visagar Polytex Ltd, which were introduced by the assessee as per the updated data as on 31/03/2012 at the appellate stage (as mentioned in Para 7.11 of order of CIT(A) under consideration)
(i) without offering any opportunity to the TPO to submit his comments and fulfillment of filters as applied by TPO during Transfer pricing audit and ii) Without giving detailed reasons for accepting the fresh comparables submitted by the assessee during appellate proceedings.
2) The Ld. CIT (A) erred on facts and in law in accepting the new search data introduced by the assessee, ignoring the decision of Chennai ITAT in the case of SL Lumax Ltd. [2012] 22 taxmann.com 15 (Chennai) whereby it has been held that "assessee cannot be allowed to bring in a new set of comparables, for if allowed, it will result in an unending exercise since endeavour of all assessee’s would be to bring the ALP within comparable range."
(C) Removal of 3% Filter:
1) The Ld. CIT (A) erred on facts and in law in removing the filter viz, "very low AMP to sales ratio of less than 3% are not selected as comparables" without appreciating the fact that assessee is performing marketing and distribution functions with great intensity and creating marketing intangibles.
(D) Reintroduction of Comparables and Application of Filters:
1) The Ld. CIT (A) erred on facts and in law in rejecting the contention of the TPO regarding the comparables viz. Birla Cotsyn (India) Ltd., Brandhouse Retails Ltd. and Pearl Global India Ltd. and reintroducing those three comparables ignoring the functional difference of these companies and that of the assessee.”
The brief fact shows that assessee is a company engaged in the business of wholesale trading of garments and fashion accessories, under the Bestseller trademarks Vero Moda, ONLY and Jack & Jones. The assessee was incorporated on 27th September, 2010 and is a wholly owned subsidiary of BEST Seller united NL BV, Netherland.
Assessee entered into international transaction of import of goods of ₹43,73,14,940/- benchmarked it by the using resale price method as most appropriate method, compared the gross profit as ratio of direct cost of goods sold as PLI, used prowess data base, selected five comparable companies whose markup on cost was determine at 17.73% and assessee’s markup was 15.93% and therefore, it was stated to be at Arm's Length Price.
With respect to the expenses incurred by the assessee which were reimbursed by the Associated Enterprises, it is the claim of the learned Transfer Pricing Officer that these expenses were incurred for the brand promotion expenses and same were reimbursed by the Associated Enterprises as the assessee has not separately benchmarked the brand promotion expenditure but claim it as a reimbursement and adopted Comparable Uncontrolled Price (CUP) method to say that it is at Arm’s Length.
Aggrieved assessee preferred the appeal before the learned CIT (A). The main argument of the assessee is that the resale price method is most appropriate method and Transactional Net Margin Method adopted by the assessee is not the most appropriate method. It is also the claim that if the Transactional Net Margin Method is applied PLI of the assessee is 6.12% and PLI of the comparable is 5.41% and even otherwise no adjustment can be made.
Aggrieved, the learned AO is in appeal before us. The AO is aggrieved by holding that resale price method is the most appropriate method in case of the assessee held by the learned CIT – A. It is also the claim that the reliance on the decision in the case of Loreal India private limited is also incorrect for the reason that there is a functionality difference. The learned TPO is further aggrieved by introduction of fresh comparables by the learned CIT – A which was introduced by the assessee as per updated data on 31/3/2012 at the appellate stage. It was further claimed that the learned TPO was not granted any opportunity of hearing. The learned AO further challenged the removal of 3% filter of advertisement marketing and promotion expenditure to sales ratio by the learned CIT – A.
The learned departmental representative reiterated the same arguments.
The learned authorized representative supported the order of the learned CIT – A.
We have carefully considered the rival contention and perused the orders of the lower authorities. Here in this case the assessee has adopted the resale price method as the most appropriate method which has been upheld by the learned CIT – A but the learned transfer pricing officer has adopted the transactional net margin method as the
While computing the arm's-length price adopting the transactional net margin method, nine comparables were selected whose average PLI of operating profit/sales was 5.41% and the assessee's margin was 6.12%, the addition was deleted. The learned departmental representative's objection is that the comparable is introduced by the assessee before the learned CIT – A where in some of the cases very low margin of 1% and 2% is shown and therefore such low margin entities could not have been selected. However, he could not show that those entities
In the result, appeal of the AO is dismissed.
Order pronounced in the open court on 29.02.2024.