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Income Tax Appellate Tribunal, DELHI BENCH “H”: NEW DELHI
O R D E R PER M. BALAGANESH, A. M.: 1. The Assessee Massimo Dutti India Pvt. Ltd. (hereinafter referred to as „assessee) by filing the present appeal sought to set aside the impugned order dated 19.07.2022 passed by the Assessing Officer (AO) under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (for short „the Act‟) inconsonance with the order passed by the Dispute Resolution Panel (DRP) dated 07.06.2022 u/s 144C(5) and order of TPO dated 15.09.2022 passed u/s 92CA(3).
The Ground No. 1 raised by the Assessee is general in nature and does not require any specific adjudication.
The Ground Nos. 2 and 3 raised by the Assessee are challenging the Transfer Pricing adjustment with respect to international transaction pertaining to import of finished goods.
We have heard the rival submissions and perused the materials available on record. The Assessee was incorporated on 12-12-2013 as a joint venture between Grupo Massimo Dutti S.A (Massimo Dutti Spain) and Trent, the retail arm of the Tata group. The Assessee is engaged in the fashion retail business and operates the „Massimo Dutti‟ chain of retail stores in India which sells garments, shoes and accessories. The Assessee is a „routine distributor‟ and assumes all routine risks associated with its local business operations and employs routine tangible assets. During the year under consideration, amongst others, the Assessee entered into an international transaction with respect to import of finished goods from its Associated Enterprise (AE) for resale in India. For benchmarking the impugned international transaction, the Assessee selected „Resale Price Method‟ (RPM) as the Most Appropriate Method (MAM) with Gross profit /Sales as the relevant Profit Level Indicator (PLI). The Assessee considered itself as the tested party. The tested party‟s margin was 45.65%. The Assessee selected few comparables which are engaged in the similar line of activity and the average margin of the comparables was 31.16%. Accordingly, the Assessee considered its international transaction with respect to import of finished goods with its AE to be at Arm's Length Price (ALP).
The Learned TPO rejected the RPM applied by the Assessee as the MAM by holding that Assessee is not a mere routine distributor and it had incurred costs mandated by its AE in brand building, promotion, marketing, advertising and creation of intangibles. Accordingly, the Learned TPO applied Transactional Net Margin Method (TNMM) as the MAM and correspondingly substituted the PLI with Operating Profit / Operating Revenue (OP/OR) to ascertain the ALP of the international transaction of import of finished goods for resale in India. The Learned TPO also rejected the Assessee‟s claim of fixed cost (rent) adjustment and accordingly recomputed the Assessee‟s operating margin at - 4.35 %. The Learned TPO, however, accepted the selection of comparables of the Assessee in its Transfer Pricing Study Report (TPSR). The comparables margin using TNMM and the PLI of OP / OR was arrived at 5.79 % and when this was compared with the Assessee‟s operating margin of - 4.35 %, the Learned TPO proposed a Transfer Pricing adjustment of Rs. 4,63,82,408/-.
Since the Learned TPO while applying TNMM as the MAM for benchmarking the import of finished goods did not grant the working capital adjustment to the Assessee, the Learned DRP directed the Learned TPO to re-verify the working capital adjusted margins of the comparable companies supplied by the Assessee. Pursuant to the directions of the Learned DRP, the Learned TPO brought down the transfer pricing adjustment to Rs 2,39,65,362/-. From the business profile of the Assessee and on perusal of the TPSR, we find that Assessee is merely a routine distributor assuming all the routine risks associated with its local business operations and employs tangible routine tangible assets. It was argued that on the other hand, the AE operate as an entrepreneur undertaking high degree of functions as well as assuming higher degree of risks. The functions performed by the Assessee are as under:- a) Procurement - The Assessee performs a forecast of demand and sales for the products in the local market. In case the products are not sold by the Assessee by the end of the sales period, market risk of the same is borne by the Assessee. Thus the Assessee operates on a relatively autonomous basis in India. b) Inventory management - Once the goods are imported into India the Assessee is responsible for warehousing / stocking the same in its retail outlets till they are sold to the customers in India. The Assessee bears the entire cost associated with warehousing of its products in India. c) Sales and marketing - The Assessee handles the local sales and distribution of its products in India. The Assessee is responsible for after sales service such as handling customer complaints and arranging product returns. d) Pricing - Based on its extensive knowledge of the local market, the Assessee is responsible for defining the prices offered to its customers together with its AEs in line with the group's pricing policy. Further the negotiations are possible based on varying regional and local market conditions such as market capacity, customer preferences, price responsiveness.
The Assessee being a reseller, procures 100 % of its inventory of finished goods from its AEs and then in turn resells those through retail stores run by it in the local territory. These retail stores are primarily located in big malls or shopping complexes where the rentals for the retail store are very high. Hence the Assessee bears that rental cost also to house its inventory procured from its AEs and resells the same. Hence the entire risks are assumed by the Assessee herein as a routine distributor.
We hold the Assessee to be a routine distributor assuming market risk, limited inventory risk, product liability risk and limited bad debts risk. Whereas the AE is classified as the principal of the business undertaking the manufacturing functions, headquarter functions, marketing functions etc and assuming risks associated to the business including the shareholders risk. Therefore the Assessee is duly justified to consider itself as the tested party based on the functions performed by it and ALP is to be determined based on the same.
There is absolutely no dispute that no value addition has been made by the Assessee to the imported products from its AE. The Assessee simply operates as a routine distributor of apparel, clothes and accessories and footwear. Hence, adoption of RPM as the MAM is correct in the facts and circumstances of the instant case and not TNMM. Since, there is no dispute with regard to the adoption of comparable companies of the Assessee by the learned TPO, even while applying TNMM as the MAM, there is no need to address on the margins of the comparable companies. We have already held herein above that RPM should be adopted as the MAM in the facts and circumstances of the instant case based on the functions performed, assets employed and risks assumed by the Assessee. Hence, the margins of the Assessee with regard to import of finished goods by adopting PLI of GP / sales is to be considered correct. The Learned AR before us rightly placed reliance on the decision of the Coordinate Bench of this Delhi Tribunal in the case of Burberry India Private Limited vs ACIT in and dated 22-6-2018 , wherein it was held as under.
“15. We have gone through the record in the light of the submissions on either side. It is an admitted fact that in this case the assessee is merely purchasing and selling the products without adding any value to the core Page | 5 product. Further, Ld. TPO did not dispute the characterisation of the assessee as in the TP document and also accepted the functional profile of the assessee as a routine distributor. Ld. DRP, however, recorded that the assessee has incurred substantial AMP, and other expenses, in relation to its turnover, and is therefore, not a simple distributor in terms of the requirement of using RPM Now we shall proceed to examine the law applicable these facts.
In Nokia India (P) Ltd. v. Dy. CIT[2014] 52 taxmann.com 492/153 ITD 508 (Delhi), the Delhi bench of the ITAT held that,- 9. Sub-clause (i) of clause (b) of Rule 10B(1) deals with identifying the price at which the goods purchased from an AE is resold. Sub- clause (ii) of clause (b) of Rule 10B(1) talks of reducing the amount of normal gross profit margin of comparable uncontrolled transactions from such resale price of the assessee. Sub-clause (iii) states that the result of sub-clause (ii) is further reduced by the expenses incurred in connection with the purchase of goods and sub-clause (iv) provides that the amount so deduced under sub- clause (ii) is adjusted on account of differences in the international transaction and comparable uncontrolled transactions which materially affect the amount of gross profit margin in the open market. Finally, sub-clause (v) provides that the adjusted price found under sub-clause (iv) is taken as arm's length price in respect of purchase of goods from the AE. When we consider the methodology given under RPM, more specifically sub-clauses (i) and (v), it becomes patent that sub-clause (i) refers to property purchased by the enterprise... is resold and sub-clause (u) refers to 'arm's length price in respect of the purchase of the property... by the enterprise. A close scrutiny of the above two sub-clauses along with the remaining sub-clauses of rule 10B(1)(b) makes it clear beyond doubt that RPM is best suited for determining ALP of an international transaction in the nature of purchase of from an AE which are resold as such to unrelated parties. Ordinarily, this method pre-supposes no or insignificant value addition to the goods purchased from foreign AE.
While noting the above decision also, Hon'ble jurisdictional High Court, in Principal Commissioner of Income-tax-6 v. Matrix Cellular International Services (P.) Ltd. [2018] 90 taxmann.com 54 (Delhi) found that, 8. This Court finds that once the ITAT, on considering the relevant facts as well as the order of the TPO, had concluded that the business of the assessee uns merely that of a pure trader, and there was no value addition made before re selling the particular products (Be the SIM cards), its d. v. Deputy consequent finding that RPM is the Most Appropriate Method, in irreproachable. In Nakin India (P) Ltd. Commissioner of Income Tax, (2015) 167 TTJ (Del) 243, the Delhi bench of the ITAT held "A close scrutiny of the above two stub-clauses along with the remaining sub-clauses of r. 108(1)(b) makes it clear beyond doubt that RPM is best suited for determining ALP of an international transaction in the nature of purchase of goods from an AE which are resold as such to unrelated parties. Ordinarily, this method presupposes no or insignificant value addition to the goods purchased from foreign AE. In a case the goods so purchased are used either as raw material for manufacturing finished products or are further subjected to processing before resale, then RPM cannot be characterized as a proper method for benchmarking the international transaction of purchase of goods by the Indian enterprise from the foreign AЕ."
Similarly, in Swarovski India Pvt. Ltd. v. ACIT, IT'A No. 5621/Del/2014, the ITAT held: "Adverting to the facts of the instant case, we find that the assessee purchased Crystal goods and Crystal components from its AE. No value addition was made to such imports. The goods were sold as such. In the given circumstances, the RPM is the most appropriate method for determining the ALP of the international transaction of Import of Crystal goods and Crystal components."
A similar view has been adopted by the Mumbai bench of the ITAT in Mattel Toys v. Deputy Commissioner of Income Tax, (2013) 158 TTJ (Mum) 461: Thus, the RPM method identifies the price at which the product purchased from the A.E. is resold to a unrelated party. Such price is reduced by normal gross profit margin i.e., the gross profit margin accruing in a comparable controlled transaction on resale of same or similar property or services. The RPM is mostly applied in a situation in which the reseller purchases tangible property or obtain services from an A.E. and reseller does not physically alter the tangible goods and services or use any intangible assets to add substantial value to the property or services Le, resale is made without any value addition having been made
This view has also been affirmed by the Bombay High Court in its judgment dated 07.11.2014 in Commissioner of Income Tax v. L'Oreal India Pvt. Ltd. (ITA No. 1046 of 2012). where the Court found that there was no error in tow committed by the ITAT when it held that RPM was the Most Appropriate Method in case of distribution or marketing activities especially when goods are purchased from associated entities and there are sales effected to unrelated parties without any further processing. In fact, a Division Bench of this Court in its decision in Bausch & Lomb Eyecare (India) Pvt. Ltd. u. Additional Commissioner of Income Tax, (2016) 381 ITR 227 (Del), while considering the decision of this Court in Sony Ericsson Mobile Communications India Put. Ltd. v. Commissioner of Income Tax, (2015) 374 ITR 118 (Del), noted that: "The RP Method loses its accuracy and reliability where the reseller adds substantially to the value of the product or the goods are further processed or incorporated into a more sophisticated product or when the product/service is transformed.
12. Therefore, a contrario, when the reseller does not add any value to the product of the goods, the RP method would be appropriate for determining the arms' length price. 18. In respect of the observations of the Ld. DRP that the assessee has incurred substantial AMP, and other expenses, in relation to its turnover, and is therefore, not a simple distributor in terms of the requirement of using RPM, Ld. AR has rightly placed reliance on the decision reported in Nokia India Private Limited vs. DCIT (2015) 153 ITD 508 (Delhi-trib.) wherein it was held that the incurring of high advertisement and marketing expenses by the assessee vis-a-vis the other comparable companies does not in any manner affect the determination of ALP under the RPM. In the above decision it was held that, - The Id. DR vehemently argued against the application of RPM in the given circumstances as the most ost appropriate method by contending that the assessee incurred huge advertisement and marketing expenses. In view of such incurring of expenses, the Id. DR stated that the better course would be to apply TNMM which would consider operating profit. We are unable to accept the contention advanced on behalf of the Revenue. The obvious reason for this is that the incurring of high advertisement and marketing expenses by the assesse vis-a-vis the other comparable companies does not in any manner affect the determination of ALP under the RPM. When we consider gross profit in numerator and net sales in denominator, all the expenses debited to the Profit & loss account automatically stand excluded. It is but natural that only those expenses can have bearing on the gross profit that are debited to the Trading account. As the amount of advertisement and marketing expenses falls below the line and finds its place in the Profit and loss account, the higher or lower spend on it cannot affect the amount of gross profit and the resultant ALP under the RPM. If the assessee has incurred more expenses on advertisement and promotion, which, in the opinion of the Id. DR went on to brand building for an AE, then, the transfer pricing adjustment on account of such AMP expenses was separately called for. Since the TPO has not made any separate adjustment on account of AMP expenses and has given effect to the same under TNMM, we hold that the incurring of such higher advertisement and marketing spend would not affect the calculation of ALP under the RPM. Ex consequenti, we hold that RPM prima facie appears to be the most appropriate method in the facts and circumstances of the instant case.
The above decisions clinch the issue involved in this matter and squarely applicable to the facts of the case. We, therefore, while respectfully following the same hold that the RPM is the most appropriate method in the facts and circumstances of this case and accordingly direct the Ld. TPΟ to adopt the RPM as the most appropriate method for benchmarking the international transaction.
In view of the fact that we have approved the RPM as the most appropriate method for benchmarking the international transaction relating to the import of finished goods, all other grounds become academic and do not require any adjudication.”
9. It is also pertinent to note that the Hon‟ble Jurisdictional High Court had affirmed the findings of the aforesaid decision of this Tribunal in the case of PCIT vs Burberry India Pvt. Ltd. in of 2019 dated 24- 10-2024 reported in 169 taxmann.com 6 (Del HC).
10. Respectfully following the same and in view of the aforesaid observations, the Ground No. 2 raised by the Assessee is allowed.
11. In view of our decision in Ground No. 2, the adjudication of Ground Nos. 3 and 4 raised by the Assessee become academic and they are left open.
The Ground No. 5 raised by the Assessee is only seeking benefit of set off of brought forward loss and unabsorbed depreciation of assessment year 2017-18. The learned AO is hereby directed to address the said issue of brought forward business loss and unabsorbed depreciation as per law in view of our aforesaid decision in Ground No. 2.
The Ground No. 6 raised by the Assessee is challenging the levy of interest under section 234B of the Act which is consequential in nature.
The Ground No. 7 raised by the Assessee is challenging the initiation of penalty proceedings under section 274 read with section 270A of the Act which would have no legs to stand in view of our aforesaid decision in Ground No. 2.
In the result, the appeal of the Assessee is allowed.
Order pronounced in the open court on 08/12/2025.