Income Tax Appellate Tribunal - Delhi
Jcit (Osd), New Delhi vs M/S Michelin India Pvt. Ltd., New Delhi on 10 January, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'I-2', NEW DELHI
Before Sh. N. K. Saini, AM and Sh. Kuldip Singh, JM
ITA No. 1874/Del/2011 : Asstt. Year : 2003-04
Jt. Commissioner of Income Vs M/s Michelin India Pvt. Ltd.,
Tax (OSD), Circle-6(1), 84 E, C-6 Lane, Off Central Avenue,
New Delhi Sainik Farms, New Delhi
(APPELLANT) (RESPONDENT)
PAN No. AAACM0067E
Assessee by : Sh. Nageshwar Rao, Adv.
Revenue by : Sh. H. K. Choudhary, CIT DR
Date of Hearing : 11.10.2017 Date of Pronouncement : 10.01.2018
ORDER
Per N. K. Saini, AM:
This is an appeal by the assessee against the order dated 24.03.2006 passed by the AO u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act).
2. Following grounds have been raised in this appeal:
"1. The order of Learned CIT(Appeals) is erroneous & contrary to facts & law.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.1,05,50,000/- made by Assessing Officer on account of T.P. Adjustments.
3. The Ld. CIT(A) ignored the finding recorded by the TPO & Assessing Officer and the fact that the 2 ITA No. 1874/Del/2011 Michelin India Pvt. Ltd.
TNMM method has been correctly adopted by TPO & Assessing Officer as against RPM directed in the impugned order.
4. The appellant craves leave to add, to alter, or amend any grounds of the appeal raised above at the time of hearing."
3. The only grievance of the department in this appeal relates to the deletion of addition of Rs.1,05,50,000/- on account of TP adjustment made by the AO, directed by the ld. CIT(A) to adopt RPM method as against TNMM method which was adopted by the AO/TPO.
4. Facts of the case in brief are that the assessee filed the return of income on 28.11.2013 declaring loss of Rs.36,08,670/- which was processed u/s 143(1) of the Act. Later on, the case was selected for scrutiny and the AO referred the case to the TPO to determine the arm's length price. The TPO observed that Schedule 9 of profit and loss accounts revealed that there were certain expenses like salaries, staff welfare, travelling & conveyance, freight outward, advertisement & publicity and octroi charges which were directly connected with the selling and distribution function. However, neither in the case of the assessee nor in the case of comparables, the same had been considered for comparability, therefore, the manner in 3 ITA No. 1874/Del/2011 Michelin India Pvt. Ltd.
which the RPM has been applied, had not given the true picture of the comparability analysis. The TPO adopted TNMM method instead of RPM considered by the assessee as the most appropriate method and the impugned addition was made.
5. Being aggrieved the assessee carried the matter to the ld. CIT(A) who directed the AO to apply the RPM method instead of TNMM by observing in paras 8.4 to 8.6 of the impugned order as under:
"I have carefully examined the issue and also considered detailed submissions made by the appellant and other relevant material placed on record. The issue has been discussed in detail in the Hon'ble Pune ITAT judgment in the case of Asst. Commissioner of Income Tax vs MSS India Pvt. Ltd., wherein it was held that "22. In a situation in which the revenue authorities seek to disturb the method of determining the arms length price, as adopted by the assessee, it is necessary for them to demonstrate that, on the given facts of the case, a particular method will be more appropriate vis-a-vis the method adopted by the assessee, and such an appropriateness of method must be shown on the touchstone of the factors set out in Rule 10C(2) above. The ALP adjustments are counter measures to ensure that the prices at which international transactions are entered into by the associated enterprises are not so 4 ITA No. 1874/Del/2011 Michelin India Pvt. Ltd.
contrived as to adversely affect the domestic tax base, and, therefore, most appropriate method should be decided in the light of this basic governing principle alone. The consideration as to which method will be more beneficial to the revenue authorities is certainly not germane to the selection of most appropriate method. While there is no particular order or priority of methods which the assessee must follow, and no method can inavariability be considered to be more reliable than others, on a conceptual note, transactional profit methods (i.e. Transactional Net Margin Method and Profit Split Method) are treated as methods of last resort which are pressed into service only when the standard methods, which are also termed as 'traditional methods', ( i.e. Comparable Uncontrolled Price Method, Resale Price Method and Cost Plus Method) cannot be reasonably applied. The OECD Guidelines also recognize this fact and state that transactional profit methods might be used to "approximate arms length conditions when traditional methods cannot be relied applied alone or exceptionally cannot be applied at all". We are in considered agreement with this approach. In our considered view, the transaction profit methods should be applied only when standard or traditional methods are incapable of being properly applied on the facts of a case. While traditional methods seek to compute the prices at which international transactions would normally be entered into by the associated enterprise, but for their interdependence and relationship, transactional profit methods seek to compute the profits that 5 ITA No. 1874/Del/2011 Michelin India Pvt. Ltd.
the tested party would normally earn on such transactions with unrelated parties. It is only axiomatic that the profits earned by an enterprise is dependent on several factors, and not only on the prices at which transactions have been entered into with the associated enterprises. The profit based results thus admit possibility of vitiation of results by a number of factors which are not relevant to the determination of prices at which international transactions are entered into by the associated enterprises. These methods, which are a step removed from the methods of computing the prices at which independent transactions would normally take place in respect of the product or service, must therefore be put to service when the traditional methods, which seek to compute prices in independent situations, fail or are incapable of being implemented, as there are large number of situations in which, for a variety of reasons, traditional methods are simply unworkable. The inputs necessary for applying the traditional methods are not always available and that is the reason that despite better results produced by these methods, these methods are not as much put to use. However, whenever necessary inputs for applying one of these methods are available and there is no dispute about comparability of those inputs, there is no good reason to resort to transactional profit methods. It would thus follow that in a situation in which the assessee has followed one of the standard methods of determining ALP, such a method cannot be discarded in preference over transactional 6 ITA No. 1874/Del/2011 Michelin India Pvt. Ltd.
profit methods unless the revenue authorities are able to demonstrate the fallacies in application of standard methods. In any event, any preference of one method over the other method must be justified by the Transfer Pricing Officer on the basis of cogent material and sound reasoning. Let us, in the light of this factual position, revert to the facts of this case."
Similar views have been discussed in the Hon'ble Mumbai ITAT judgment in the case of M/s STAR DIAMOND GROUP Vs DEPUTY DIRECTOR OF INCOME TAX, wherein it was held that "13. This finding in our humble opinion is wrong for the reason that the CIT(A) has adopted these very comparables, along with three others while arriving at the operating margins at para 7.16 of his order. As the assessee is a trader, without value addition to the goods, we find force in the submission of the assessee that resale price method is the most appropriate method for determining the ALP with respect to AB transaction. In fact, the Revenue has accepted this method in earlier two years. The Transfer Pricing Officer in his order dated 7-3-2005 for the assessment year 2002- 2003 and order dated 20-3-2006 for the assessment year 2003-2004, has agreed with the computation of arms length price made by the assesses under the resale price method. If the comparables are not found appropriate, fresh comparables can be searched, but the method adopted need not be rejected".
7 ITA No. 1874/Del/2011Michelin India Pvt. Ltd.
Further, Reference can be made to OECD guidelines pertaining to the choice of most appropriate method which are as under:
"A Selection of the most appropriate transfer pricing method to the circumstances of the case.
2.3 Traditional transaction methods are regarded as the most direct means of establishing whether conditions in the commercial and financial relations between associated enterprises are arm's length. This is because any difference in the price of a controlled transaction from the price in a comparable uncontrolled transaction can normally be traced directly to the commercial and financial relations made or imposed between the enterprises, and the arm's length conditions can be established by directly substituting the price in the comparable uncontrolled transaction for the price of the controlled transaction. As a result, where, taking account of the criteria described at paragraph 2.2, a traditional transaction method and a transactional profit method can be applied in an equally reliable manner, the traditional transaction method is preferable to the transactional profit method. Moreover, where, taking account of the criteria described at paragraph 2.2, the comparable uncontrolled price method (CUP) and another transfer pricing method can be applied in an equally reliable manner, the CUP method is to be 8 ITA No. 1874/Del/2011 Michelin India Pvt. Ltd.
preferred. See paragraphs 2.13-2.20 for a discussion of the CUP method.
2.4 There are situations inhere transactional profit methods are found to be more appropriate than traditional transaction methods. For example, cases where each of the parties makes valuable and unique contributions in relation to the controlled transaction, or where the parties engage in highly integrated activities, may make a transactional profit split more appropriate than a one-sided method. As another example, where there is no or limited publicly available reliable gross margin information on third parties, traditional transaction methods might be difficult to apply in cases other than those where there are internal comparables, and a transactional profit method might be the most appropriate method in view of the availability of information.
2.5 However, it is not appropriate to apply a transactional profit method merely because data concerning uncontrolled transactions are difficult to obtain or incomplete in one or more respects. The same criteria listed in paragraph 2.2 that were used to reach the initial conclusion that none of the traditional transactional methods could be reliably applied under the circumstances must be considered again in evaluating the reliability of the transactional profit method."
8.5 Since Transfer Pricing regulations around the world are modeled on OECD guideline, one has to 9 ITA No. 1874/Del/2011 Michelin India Pvt. Ltd.
form an opinion on TP issues keeping in mind OECD recommendations and OECD clearly attaches higher priority to RPM method against TNMM.
Further, Indian Accounting Standards and Companies Act, also provide sufficient guidance for computation of gross profits.
In computing the margins for comparable companies, the Appellant has relied upon the quantitative information available in the notes to accounts of the audited financial statement of the comparable companies. Each of the comparables selected has separately reported its sales from trading activity and the cost for such purchases in the Notes to Accounts of their audited financial statements. In a trading activity involving the simple purchase and resale of goods (without substantial or any value addition), the only direct cost involved which is relevant for the computation of the gross margin, is the payment made for the purchases also commonly referred to as cost of sales.
In this regard, reference can also be drawn from Schedule VI of the Companies Act, 1956 which casts an obligation on companies to submit the quantitative information (quantity and value of purchases, opening stock, closing stock and sales) of each principal product traded by such companies. The relevant extract of Part II to Schedule VI of the Companies Act, 1956 has been reproduced below for your kind reference:
10 ITA No. 1874/Del/2011Michelin India Pvt. Ltd.
"3. The profit and loss account shall set out the various items relating to the income and expenditure of the company arranged under the most convenient heads; and in particular, shall disclose the following information in respect of the period covered by the account:
(i)(a) The turnover, that is, the aggregate amount for which sales are affected by the company, giving the amount of sales in respect of each class of goods dealt with by the company, and indicating the quantities of such sales for each class separately.
(b) In the case of trading companies, the purchases made and the opening and closing stocks, giving break-up in respect of each class of goods traded in by the company and indicating the quantities thereof."
Now, Accounting Standard 2 ("AS 2") on valuation of inventory issues by the ICAI specifically provides the cost that should be considered while determining the value of purchases and stock/inventory. Relevant extracts are as follow:
"6. The cost of inventories should comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.
Costs of Purchase: The costs of purchase consist of the purchase price including duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), 11 ITA No. 1874/Del/2011 Michelin India Pvt. Ltd.
freight inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebates, duty drawbacks and other similar items are deducted in determining the costs of purchase".
Further, after going through the facts of the case I am of the opinion that Appellant is a pure trader engaged in reselling of finished goods without adding any value to the end product it is selling in the market, hence is a more than reasonable candidate for application of RPM. For applying transactional methods, there has to be really indispensable argument in favor of transactional methods. Such indispensable arguments have not been highlighted in the response furnished by TPO.
Further, going through the submission made by the Appellant, I agree with the Appellant arguments that differences that exist are not material to impact the application of RPM method.
8.6 In view of the above discussion, I hold that RPM is accepted to be the most appropriate method and if the Appellant's transaction for import of finished goods is at arm's length as per RPM method then no adjustment is required to be made to Appellant income."
6. Now the department is in appeal. The ld. DR strongly supported the orders of the AO/TPO. It was further submitted that the ld. CIT(A) admitted the additional 12 ITA No. 1874/Del/2011 Michelin India Pvt. Ltd.
evidence, even when the proper opportunity was given by the AO/TPO. It was contended that the TNMM method had been correctly adopted by the TPO/AO. Therefore, the ld. CIT(A) was not justified in directing to adopt RPM as the most appropriate method.
7. In his rival submissions, the ld. Counsel for the assessee submitted that the department for the succeeding assessment years 2005-06, 2008-09 and 2009-10 had accepted the RPM as the most appropriate method and the facts for the year under consideration are similar to those assessment years, therefore, the ld. CIT(A) was fully justified in directing the AO/TPO to adopt RPM as the most appropriate method. It was further submitted that the issue under consideration is squarely covered by the decisions of the various benches of the ITAT and the Hon'ble Bombay High Court. The reliance was placed on the following case laws:
Ø CIT Vs L'Oreal India (P.) Ltd. (2015) 53 Taxmann.com 432 (Bom.) Ø ITO Vs L'oreal India P. Ltd. in ITA No. 5423/Mum/2009, order dated 25.04.2012 Ø DCIT Vs Delta Power Solution India P. Ltd. in ITA No. 3004/Del/2013, order dated 14.03.2016 13 ITA No. 1874/Del/2011 Michelin India Pvt. Ltd.
8. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is an admitted fact that the TPO has accepted the RPM as the most appropriate method for the assessments 2005-06, 2008-09 and 2009-10, which is evident from the observation of the ld. CIT(A) in para 4.8 of the order dated 13.03.2013 for the assessment year 2007- 08 which read as under:
"4.8 It was also brought to the notice that the TPO has accepted RPM as the most appropriate method in the case of the appellant for the AY 2005-06 and subsequently in the AY 2008-09 and 2009-10. The appellant continues to be a reseller of tyres and tubes in all these years."
9. It is also noticed that for the assessment year 2007-08, the ld. CIT(A) directed the TPO to adopt the RPM as the most appropriate method and deleted the additions made by the AO under TNMM. In the present case, nothing is brought on record to substantiate that the facts for the year under consideration were different from the assessment years 2005-06, 2007-08, 2008-09 and 2009-10. Therefore, on the principles of consistency also, the RPM was rightly directed by the ld. CIT(A) to be adopted as the most appropriate method for the year under consideration.
14 ITA No. 1874/Del/2011Michelin India Pvt. Ltd.
10. On a similar issue, the Hon'ble Bombay High Court in the case of CIT Vs L'Oreal India (P.) Ltd. (supra) held as under:
"7. After having perused the relevant part of the order passed by the Commissioner and the Tribunal on this question, we are in agreement with Mr. Pardiwalla that the Tribunal did not commit any error of law apparent on the face of the record nor can the findings can be said to be perverse. The Tribunal has found that the TPO has passed an order earlier accepting this method. The Tribunal has noted in para 19 of the order under challenge that this method is one of the standard method and the OECD (Organization of Economic Commercial Development) guidelines also state in case of distribution or marketing activities when the goods are purchased from associated entities and there are sales effected to unrelated parties without any further processing, then, this method can be adopted. The findings of fact are based on the materials which have been produced before the Commissioner as also the Tribunal. Further, it was highlighted before the Commissioner as also the Tribunal that the RPM has been accepted by the TPO in the preceding as well as succeeding assessment years. That is in respect of distribution segment activity of the Assessee. In such circumstances, and when no distinguishing features were noted by the Tribunal, it did not commit any error in allowing the Assessee's Appeal. Such findings do not raise any substantial question of law. The Appeal is devoid of merits and is, therefore, dismissed. There would be no orders as to costs."15 ITA No. 1874/Del/2011
Michelin India Pvt. Ltd.
11. Similarly, the ITAT Delhi Bench 'F', New Delhi in the case of DCIT Vs Delta Power Solution India P. Ltd. in ITA No.3004/Del/2013 (supra) held as under:
"6.1. It is observed that the primary objective of the assessee is of manufacturing /trading/ assembling of Telecom Power Equipment, visual display products, industrial automation and magnetic components, etc. The only issue in dispute is in regards to the MAM for determining ALP in respect of the trading section. The assessee had used TNMM as MAM for arriving at the ALP in respect of purchase of raw materials, export of finished goods and in respect of Transaction relating to import of industrial automation products and sales commission it had used RPM as MAM. The ld. AR submitted that as there is no value addition in respect of goods sold by the assessee and therefore RPM is the MAM for determining ALP in respect of these two heads being import of industrial automation products and sales commission.
6.2. It is observed that the ld.CIT(A) has dealt with the issues relating to the timing difference and sufficient data not being available to reconcile the change in the market, change in rate of exchange, change in cost etc. at length in paragraph 3.1.at pages 3 to 9. The ld.CIT(A) has reproduced in paragraph G, the relevant extract of the accepted position for A.Y: 2009-10, wherein the TPO has accepted the RPM as the most appropriate method for calculating the ALP in respect of trading segment."16 ITA No. 1874/Del/2011
Michelin India Pvt. Ltd.
12. We, therefore, by keeping in view the aforesaid narrated facts, the ratio laid down by the Hon'ble Bombay High Court and respectfully following the aforesaid decision dated 14.03.2016 of the ITAT Delhi Bench 'F', New Delhi in ITA No. 3004/Del/2013 for the assessment year 2008-09 in the case of DCIT Vs Delta Power Solution India P. Ltd., are of the view that the ld. CIT(A) was fully justified in directing the AO/TPO to adopt RPM as the most appropriate method instead of TNMM applied by them. Accordingly, we do not see any infirmity in the impugned order and do not see any merit in this appeal of the department.
13. In the result, the appeal of the department is dismissed. (Order Pronounced in the Court on 10/01/2018) Sd/- Sd/-
(Kuldip Singh) (N. K. Saini)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 10/01/2018
*Subodh*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
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