ACIT.CIR-6(3), MUMBAI v. M/S. L OREAL INDIA PVT. LTD., MUMBAI

ITA 6745/MUM/2008 | 2002-2003
Pronouncement Date: 28-01-2011 | Result: Dismissed

Appeal Details

RSA Number 674519914 RSA 2008
Assessee PAN AAACL0738K
Bench Mumbai
Appeal Number ITA 6745/MUM/2008
Duration Of Justice 2 year(s) 2 month(s) 3 day(s)
Appellant ACIT.CIR-6(3), MUMBAI
Respondent M/S. L OREAL INDIA PVT. LTD., MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 28-01-2011
Appeal Filed By Department
Order Result Dismissed
Bench Allotted L
Tribunal Order Date 28-01-2011
Date Of Final Hearing 09-12-2010
Next Hearing Date 09-12-2010
Assessment Year 2002-2003
Appeal Filed On 24-11-2008
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L MUMBAI BEFORE SHRI T.R. SOOD A.M. AND SHRI V. DURGA RAO J.M. ITA NO. 6745/M/2008 ASSESSMENT YEAR: 2002-03 ASSTT. COMMISSIONER OF INCOME-TAX APPELLANT CIRCLE 6(3) MUMBAI. VS. M/S LOREAL INDIA PVT. LTD. RESPONDENT A-WING RHONE POULENE HOUSE S.K. AHIRE MARG WORLI MUMBAI 400 025 (PAN AAACL 0738 K) APPELLANT BY : MR. NARENDER SINGH RESPONDENT BY : MR. SUDHIR NAYAK/MAULIK DOSHI ORDER PER V. DURGA RAO J.M.: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF CIT(A) - XV MUMBAI PASSED ON 17/07/2009 FOR THE A SSESSMENT YEAR 2002-03 WHEREIN THE REVENUE HAS RAISED THE FOLLOWIN G GROUNDS OF APPEAL:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E LD. CIT(A) ERRED IN ALLOWING THE APPEAL OF THE ASSESSEE IN AS MUCH AS IN ACCEPTING THE COST PLUS METHOD ADOPTED BY THE ASSES SEE TO ARRIVE AT ARMS LENGTH PRICE AND REJECTING THEREBY THE CAL CULATION OF ARMS LENGTH PRICE DETERMINED BY THE TPO BY APPLYIN G TRANSACTION NET MARGIN METHOD WHICH CONSIDERING THE BUSINESS OF THE ASSESSEE WAS THE MOST APPROPRIATE METHOD TO DETERMI NE THE ARMS LENGTH PRICE. ITA NO. 6745/M/08 M/S LOREAL INDIA PVT. LTD. 2 2. THE APPELLANT PRAYS THAT THE ORDER OF CIT(A) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE AO BE RESTORED . 2. THE FACTS IN BRIEF ARE THAT THE ASSESSEE IS A SU BSIDIARY OF LOREAL SA FRANCE ENGAGED IN THE BUSINESS OF MANUFA CTURING AND DISTRIBUTION OF COSMETICS AND BEAUTY PRODUCTS. DURI NG THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR THE ASSESSEE HAD ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS A SSOCIATED ENTERPRISES (AE):- NATURE OF INTERNATIONAL TRANSACTION` TRANSFER PRICING METHOD ADOPTED TOTAL VALUE OF TRANSACTION (IN ` .) PURCHASE OF RAW MATERIAL COST PLUS METHOD (CPM) 52 880 462/- PURCHASE OF FINISHED GOODS RESALE PRICE METHOD (RPM) 44 332 255/- SALE OF OBSOLETE STOCK COMPARABLE UNCONTROLLED PRICE (CUP) (BENCHMARKED AT IMPORT PRICE) 38 238/- PURCHASE OF CAPITAL ASSET CUP (REIMBURSEMENT OF COST AT ACTUAL) 85 100/- REIMBURSEMENT OF EXPENSES (PAYMENTS) CUP (REIMBURSEMENT OF COST AT ACTUAL) 3 725 838/- REIMBURSEMENT OF TRANSFER EXPENSES (RECEIPTS) CUP (REIMBURSEMENT OF COST AT ACTUAL) 4 437 786/- PAYMENT OF MARKETING SERVICE COSTS CUP (ALLOCATION OF COST BASED ON REASONABLE APPORTIONMENT KEY) 8 398 779/- 3. THE TRANSFER PRICING OFFICER (TPO) COMPLETED THE ASSESSMENT U/S 92CA(3) BY APPLYING TRANSACTION NET MARGIN MET HOD (TNMM) IN RESPECT OF INTERNATIONAL TRANSACTION RELATING TO PU RCHASE OF RAW MATERIALS (BY REJECTING THE COST PLUS METHOD USED F OR DETERMINING ALP) AND RECOMPUTED THE ARMS LENGTH PRICE (ALP) IN RESPECT OF PURCHASE OF RAW MATERIALS FOR MANUFACTURING. HOWEVE R THE TPO HAD NOT MADE ANY ADJUSTMENT TO THE ALP OF PURCHASE OF F INISHED GOODS IN ITA NO. 6745/M/08 M/S LOREAL INDIA PVT. LTD. 3 DISTRIBUTION SEGMENT BECAUSE THE OPERATING MARGINS OF THE ASSESSEE IN THE SAID SEGMENT BEING COMMENSURATE WITH THE OPERAT ING MARGINS OF THE COMPARABLE COMPANIES. NO ADJUSTMENTS WHERE ALSO MADE ON OTHER TRANSACTIONS WHERE CUP METHOD WAS APPLIED. THE AO H AD ACCEPTED THE ADDITIONS MADE BY THE TPO WHILE COMPLETING THE ASSESSMENT U/S 143(3) OF THE ACT 1961. 4. BEING AGGRIEVED THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A). THE MAIN CONTENTION OF THE ASSESSEE BE FORE THE CIT(A) WAS THAT THE TPO/AO WRONGLY REJECTED THE COST PLUS METH OD ADOPTED BY THE ASSESSEE FOR COMPUTING ALP IN MANUFACTURING SEG MENT IMPOSING A TRANSACTION NET MARGIN METHOD FOR COMPUTING THE A RMS LENGTH PRICE DISREGARDING THE RECOMMENDATIONS MADE BY THE OECD G UIDELINES. ACCORDING TO THE TPO I) UNDER CPM METHOD GROSS MA RGINS CANNOT BE CONSIDERED AS OTHER FACTORS SUCH AS ADVERTISEMENT MARKETING AND DISTRIBUTION PLAY A MAJOR ROLE IN DETERMINING THE T URNOVER AND PROFITABILITY OF THE COMPANY II) GROSS MARGIN IN C ASE OF COMPARABLE CASES CANNOT BE RELIED UPON BECAUSE OF THE PRODUCT DIFFERENCES OF COMPARABLE COMPANIES AND III) THE COMPARABLE COMPA NIES WERE COMPARED ON WHOLE ENTITY BASIS WITHOUT MAKING DISTI NCTION BETWEEN MANUFACTURING AND DISTRIBUTION SEGMENT HENCE GROSS MARGIN BASIS CANNOT BE CONSIDERED AS THE COMPARABLE COMPANIES M AY BE PERFORMING OTHER FUNCTIONS ALSO. BASED ON THE ABOV E REASONS THE COST PLUS METHOD ADOPTED BY THE ASSESSEE WAS REJECTED AN D OBSERVED THAT OPERATING MARGIN OF THE ASSESSEE UNDER MANUFACTURIN G SEGMENT WAS 11.6% WHICH WAS LESS THAN THE AVERAGE PROFIT MARGIN OF COMPARABLE COMPANIES OF 14.49%. HENCE THE PROFIT MARGIN OF 14 .49% ON THE SALES OF MANUFACTURING SEGMENT WAS APPLIED AND AN ADDITIO N OF ` . 1 99 00 000/- WAS MADE. 5. THE LEARNED AR OF THE ASSESSEE HAD SUBMITTED BEF ORE THE CIT(A) THAT THE ASSESSEE IS ACTING AS A CONTRACT MANUFACTU RER AND IS CARRYING LESS THAN NORMAL RISK. THE MANUFACTURED PRODUCTS AN D THE TECHNOLOGICAL PROCESSES USED IN PRODUCTION HAD BEEN DEVELOPED BY ITS ITA NO. 6745/M/08 M/S LOREAL INDIA PVT. LTD. 4 OVERSEAS ASSOCIATED ENTERPRISES. THE ASSESSEE HAD N OT DEVELOPED COSMETICS ON ITS OWN NOR HAD IT USED ANY PROPRIETA RY NON-ROUTINE INTANGIBLE OF ITS OWN DURING THE PRODUCTION PROCESS . THE ASSESSEE WAS ONLY RESPONSIBLE FOR DAY TO DAY COMMERCIAL FUNCTION S LIKE PRODUCTION SCHEDULING AND INVENTORY MANAGEMENT. HENCE THE ASS ESSEE WAS CHARACTERIZED AS A LICENSED MANUFACTURER EXPOSED T O LESS THAN NORMAL RISK WHILE CARRYING OUT SUCH ACTIVITIES. CO NSEQUENTLY COST PLUS METHOD (CPM) WAS USED TO TEST THE ARMS LENGTH NATURE OF THE INTERNATIONAL TRANSACTION INVOLVING PURCHASE OF RAW MATERIALS. IT WAS FURTHER SUBMITTED BEFORE THE CIT(A) THAT CPM IS A T RADITIONAL AND TRANSACTIONAL METHOD WHICH IS TYPICALLY APPLIED TO TEST THE PRICE OF GOODS THAT ARE MANUFACTURED AND THEN SOLD AND IS GE NERALLY APPROPRIATE WHEN THE PARTY BEING EXAMINED IS NOT EN GAGED IN SIGNIFICANT VALUE ADDING ACTIVITIES. IT IS USED FOR EVALUATING THE SALE OF PRODUCTS BY MANUFACTURERS WHERE THE MANUFACTURER D OES NOT OWN ANY VALUABLE NON-ROUTINE INTANGIBLES AND OTHERWISE INCURS LIMITED ECONOMIC RISK IN THE TRANSACTION. IT WAS ALSO SUBMI TTED BEFORE THE CIT(A) THAT THE ASSESSEE HAD ON COST PLUS METHOD EA RNED A GROSS MARGIN OF 83.66% ON INPUT COST AS AGAINST 59% ON IN PUT COST EARNED BY COMPARABLE COMPANIES. IT WAS SUBMITTED BEFORE TH E CIT(A) THAT THE TPO AND AO HAD ACCEPTED THE METHOD ADOPTED BY THE ASSESSEE IN THE SUBSEQUENT YEARS VIZ. 2003-04 AND 2004-05 BASED ON SIMILAR FACTS AND CIRCUMSTANCES OF THE CASE UNDER CONSIDERATION BY OBSERVING THAT THE COST PLUS METHOD AS THE MOST APPROPRIATE METHOD AND GROSS MARGIN COMPARISON AS THE PROFIT LEVEL INDICATOR TO BENCHMARK THE PURCHASE OF RAW MATERIAL AND PACKING MATERIALS IN T HE MANUFACTURING SEGMENT. THE LEARNED AR HAD SUBMITTED THAT THE METH OD ADOPTED BY THE ASSESSEE AS PER THE GUIDELINES OF OECD. HE FURT HER SUBMITTED THAT IN THE PROCESS ADOPTED THE ASSESSEE HAD TAKEN CARE TO ELIMINATE SERVICE AND TRADING COMPANIES AND SELECTED ONLY THO SE COMPANIES WHOSE MAIN ACTIVITY WAS MANUFACTURING. IT WAS CONTE NDED THAT THE TPO ADOPTED THE TNMM METHOD WHICH IS CONTRARY TO TH E OECD ITA NO. 6745/M/08 M/S LOREAL INDIA PVT. LTD. 5 GUIDELINES WHEREAS THE METHOD ADOPTED BY THE ASSESS EE IS IN CONSONANCE WITH THE PROVISIONS OF SECTION 92C AND R ULES THEREUNDER. 6. THE LEARNED CIT(A) AFTER CONSIDERING THE SUBMIS SIONS OF THE ASSESSEE AND THE ORDER OF THE TPO DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE BY HOLDING THAT THE METHOD ADOPTED BY THE ASSESSEE I.E. COST PLUS METHOD IS APPROPRIATE METHOD. THE RELEVANT FIN DINGS OF THE CIT(A) ARE EXTRACTED BELOW FOR THE SAKE OF CLARITY: - THE COST PLUS METHOD (CPM) ADOPTED BY THE APPELLANT APPEARS TO BE APPROPRIATE METHOD AS IT IS BASED ON THE FUNCTIO NS PERFORMED AND NOT ON THE VARIOUS PRODUCT MANUFACTURED. NORMAL LY THE PRICING METHODS GET PRECEDENCE OVER PROFIT METHODS. CPM IS APPLIED TO TEST THE PRICE OF GOODS THAT ARE MANUFACTURED AND THEN SOLD OR TO MEASURE THE VALUE OF SERVICES P ERFORMED BY A SERVICE PROVIDER AND IS GENERALLY APPROPRIATE WHEN THE PARTY BEING EXAMINED IS NOT ENGAGED IN SIGNIFICANT VALUE ADDING ACTIVITIES. EVEN OECD GUIDELINES PREFER METHODS WHICH REQUIRE C OMPUTATION OF ALP DIRECTLY BASED ON GROSS MARGIN OVER A METHOD WHICH REQUIRES COMPUTATION OF ALP IN AN INDIRECT METHOD B ECAUSE COMPARING GROSS MARGINS EXTINGUISHES THE NEED FOR M AKING ADJUSTMENTS IN RELATION TO DIFFERENCES IN OPERATING EXPENSES WHICH COULD BE DIFFERENT FROM ENTERPRISE TO ENTERPR ISE. AS MENTIONED EARLIER THE DIRECT PRICING METHODS (CUP CPM RPM) ARE PREFERABLE TO INDIRECT ENTITY WISE METHODS. IT IS ALSO RELEVANT THAT CPM HAS BEEN ACCEPTED BY THE TPO IN SUBSEQUENT TWO ASSESSMENT YEARS I.E. AY 03-04 AND A Y 04-05 BASED ON SIMILAR FACT PATTERN AND ACCORDINGLY WE SE E NO REASON WHY THE SAME COULD ALSO NOT BE APPLIED FOR THE YEAR UNDER CONSIDERATION. THE TPO IN ITS LETTER DATED 12 TH JUNE 07 HAS CONTENDED THAT THE PRINCIPLE OF RES-JUDICATA IS NOT APPLICABLE TO THE INCOME TAX PROCEEDINGS. WHILE I AGREE THAT THE PRINCIPLE OF RES-JUDICATA DOES NOT APPLY TO THE INCOME TAX PROCE EDINGS HOWEVER AT THE SAME TIME IT IS A JUDICIALLY ACCEPT ED AND WELL SETTLED PRINCIPLE THAT CONSISTENCY SHOULD BE ADOPTE D UNLESS THERE IS A MATERIAL CHANGE IN THE FACTS. HOWEVER THERE I S NO MATERIAL CHANGE IN FACTS AS SUCH IN THESE YEARS. TPOS CONTENTION THAT THE GROSS MARGINS WORKED OUT IN RESPECT OF COMPARABLE CASES CANNOT BE RELIED UPON BECAUSE OF S UBSTANTIAL PRODUCT DIFFERENCE CANNOT BE REGARDED AS CORRECT VI EW AS OECD GUIDELINES ITSELF STATES THAT COMPARABILITY OF GRO SS MARGINS IS PRIMARILY DEPENDENT UPON THE SIMILARITY OF FUNCTION S PERFORMED ITA NO. 6745/M/08 M/S LOREAL INDIA PVT. LTD. 6 AND THE RISK ASSUMED BY THE CONTROLLED AND UNCONTRO LLED ENTERPRISES AND IS LESS DEPENDENT ON SIMILARITY OF PRODUCTS THE CONTENTION OF THE APPELLANT THAT THE COST OF RA W MATERIALS AS A PERCENTAGE OF SALES IS ONLY 7.46% AND ACCORDINGLY IT CAN BE SAID THAT THE APPELLANTS PROFIT CANNOT BE INFLUENC ED MERELY BY COST OF RAW MATERIALS WHICH CONSTITUTE NOMINAL PERC ENTAGE OF SALES CARRIES WEIGHT. FURTHER THE PROFIT LEVEL INDICATOR (PLI) OF GROSS MARGIN USED BY APPELLANT IS A MORE APPROPRIATE MEASURE. THIS PLI M EASURES THE PROFITS MADE BY APPELLANT ON GROSS BASIS VIS-A-VIS THE COMPARABLE COMPANIES AND IF THE SAID MARGIN IS COMMENSURATE WI TH THAT OF COMPARABLE COMPANIES IT COULD BE SAID THAT THE COST OF RAW MATERIAL IS AT ARMS LENGTH. NET PROFIT MARGIN WHIC H IS USED IN TNMM IS AFFECTED BY VARIOUS OTHER FACTORS AND OTHER EXPENSES WHICH ARE OUTSIDE THE PURVIEW OF TRANSFER PRICING. TPOS CONTENTION THAT ASSESSEE CAN WORK OUT SEGMENT AL GP MARGIN IN ITS OWN CASE BUT CANNOT DO THE SAME IN CA SE OF COMPARABLE COMPANIES IS ALSO NOT CORRECT IN VIEW OF ASSESSEES SUBMISSION THAT THE COMPARABLE COMPANIES SELECTED A RE MANUFACTURING COMPANIES AND SEARCH PROCESS ADOPTED BY IT FOR IDENTIFYING AND SELECTING COMPARABLE COMPANIES HAD TAKEN CARE TO ELIMINATE SERVICE AND TRADING COMPANIES. FURTHER OTHER FACTORS MENTIONED BY APPELLANT SUCH AS LOWER CAPACITY UTILISATION ARE ALSO RELEVANT. IN FACT O ECD GUIDELINES ALSO SUPPORT APPELLANTS VIEW. BASED ON ABOVE DISCUSSION IT IS HELD THAT CPM IS T HE MOST APPROPRIATE METHOD AND ACCORDINGLY APPELLANTS INTE RNATIONAL TRANSACTIONS IN RESPECT OF PURCHASE OF RAW MATERIAL S ARE AT ARMS LENGTH REQUIRING NO ADJUSTMENTS. THE ADDITION THUS MADE BY THE TPO IS DELETED. 7. THE LEARNED DR HAS SUBMITTED BEFORE US THAT THE LEARNED CIT(A) UPHELD THE METHOD ADOPTED BY THE ASSESSEE ON THE GR OUND THAT IT IS A DIRECT METHOD. THE CONTENTION OF THE LEARNED DR IS THAT EVEN IF IT IS A DIRECT METHOD THE METHOD ADOPTED BY THE ASSESSEE IS NOT A PROPER METHOD THEREFORE THE CIT(A) IS NOT JUSTIFIED IN U PHOLDING THE METHOD ADOPTED BY THE ASSESSEE. THE FURTHER CONTENTION OF THE LEARNED DR IS THAT THE COMPARABLES ADOPTED BY THE ASSESSEE IS NOT PROPER AND NOT RELEVANT AS THEY ARE IN DIFFERENT PRODUCT. ITA NO. 6745/M/08 M/S LOREAL INDIA PVT. LTD. 7 8. ON THE OTHER HAND THE LEARNED COUNSEL FOR THE A SSESSEE HAS RELIED UPON THE ORDER OF THE CIT(A). 9. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF THE PARTIES AND PERUSED THE RECORD. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A SUBSIDIARY OF LOREAL SA FRANCE ENGAGED IN THE BUS INESS OF MANUFACTURING AND DISTRIBUTION OF COSMETICS AND BEA UTY PRODUCTS. TPO COMPLETED THE ASSESSMENT U/S 92CA(3) BY APPLYI NG TRANSACTION NET MARGIN METHOD (TNMM) IN RESPECT OF INTERNATIONA L TRANSACTION RELATING TO PURCHASE OF RAW MATERIALS BY REJECTING THE COST PLUS METHOD USED ADOPTED BY THE ASSESEE AND MADE AN ADDI TION OF RS. 1 99 00 000/-. THE LEARNED CIT(A) GAVE A CATEGORICA L FINDING THAT THE COST PLUS METHOD ADOPTED BY THE ASSESSEE IS BASED O N THE FUNCTIONS PERFORMED AND NOT ON THE BASIS OF TYPES OF PRODUCT MANUFACTURED AS NORMALLY THE PRICING METHODS GET PRECEDENCE OVER PR OFIT METHODS. THE CIT(A) OBSERVED THAT EVEN ACCORDING TO THE OECD GUI DELINES THE PREFERRED METHOD IS THAT THE METHOD REQUIRES COMPUT ATION OF ALP DIRECTLY BASED ON GROSS MARGIN OVER OTHER METHODS WHICH REQUIRE COMPUTATION OF ALP IN AN INDIRECT METHOD BECAUSE C OMPARING GROSS MARGINS EXTINGUISHES THE NEED FOR MAKING ADJUSTMENT S IN RELATION TO DIFFERENCES IN OPERATING EXPENSES WHICH COULD BE D IFFERENT FROM ENTERPRISE TO ENTERPRISE. THE CIT(A) FURTHER OBSERV ED THAT THE CPM METHOD ADOPTED BY THE ASSESSEE HAS BEEN ACCEPTED BY THE TPO IN THE SUBSEQUENT TWO YEARS NAMELY AY 2003-04 AND 2004-0 5. THE CIT(A) HELD THAT THE FACTS OF THE CASE UNDER CONSIDERATION ARE MATERIALLY IDENTICAL TO THAT OF THE SAID SUBSEQUENT YEARS. ON CAREFUL CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE WE ARE OF THE VIEW THAT THE CIT(A) RIGHTLY UPHELD THE CONTENT ION OF THE ASSESSEE. WE THEREFORE FIND NO INFIRMITY IN THE ORDER OF CI T(A) ON THIS COUNT AND THE SAME IS HEREBY CONFIRMED. ITA NO. 6745/M/08 M/S LOREAL INDIA PVT. LTD. 8 10. IN THE RESULT THE APPEAL OF THE REVENUE IS DIS MISSED. PRONOUNCED IN THE OPEN COURT ON THIS 28 TH DAY OF JANUARY 2011. SD/- SD/- (T.R. SOOD) (V. DU RGA RAO) ACCOUNTANT MEMBER JUDI CIAL MEMBER MUMBAI DATED: 28 TH JANUARY 2011 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A) CONCERNED. 4) THE CIT CONCERNED. 5) THE DEPARTMENTAL REPRESENTATIVE L BENCH I.T .A.T. MUMBAI. BY ORDER //TRUE COPY// ASST. REGISTRAR I.T.A.T. MUMBAI. KV ITA NO. 6745/M/08 M/S LOREAL INDIA PVT. LTD. 9 S.NO. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON 17/1/11 SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR 18/1/11 SR.P.S/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S./P.S 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER