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PER R.S. SYAL, VP:

This appeal filed by the assessee is directed against the final assessment order dated 25.12.2016 passed by the Assessing Officer (AO) u/s 143(3) read with section 144C(13) of the Income-tax Act, 1961 (hereinafter also called 'the Act') in relation to the assessment year 2012-13.

2. The only issue raised in this appeal is against the making of transfer pricing adjustment amounting to Rs.48,90,27,914/-.

3. Succinctly, the facts of the case are that the assessee is an Indian company, which is a part of the Oriflame Group founded in 1967. This group provides about 1000 products in skin care, make-up, fragrances and toiletries through its various subsidiaries and independent licensees across 60 countries all over the world and 3.6 million independent consultants in these countries. The assessee is, inter alia, engaged in the trading of beauty products. The main business activity of the assessee under this segment is distribution and sales of cosmetic products directly to customers through its consultants, i.e., without the chain of wholesalers and retailers. A return of income was filed along with Form No. 3CEB giving details of international transactions. The Assessing Officer made reference to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of the international transactions. Here it is relevant to mention that the assessee earned revenue from sale of finished goods and traded goods. There is no dispute as regards sale of finished goods. The entire controversy in the instant appeal is in respect of traded goods. The assessee employed Resale Price Method (RPM) for demonstrating that its international transaction of purchase of traded goods was at ALP. Certain comparables were chosen by the assessee. The TPO observed that only Modicare Ltd. was a direct marketer, like the assessee. He, therefore, rejected the other companies chosen by the assessee as comparable and treated Modicare Ltd. as a sole comparable. GP/Sales margin of Modicare Ltd. was initially computed at 71.87% as against the assessee's similar margin at 48.27%. After entertaining the assessee's objections, the TPO determined margin of Modicare Ltd. at 69.35%. This was treated as arm's length margin (GP/Operating income). By applying this rate as an arm's length margin, the TPO computed transfer pricing adjustment u/s 92CA of the Act amounting to Rs.48,90,27,914/-. The assessee remained unsuccessful before the Dispute Resolution Panel (DRP). The Assessing Officer made the above addition in the final assessment order, against which the assessee has come up in appeal before us.

4. We have heard the rival submissions and perused the relevant material on record. It is observed that the assessee is continuing the business model as a direct marketer since last several years. In the immediately preceding three years also, the assessee applied the RPM as the most appropriate method to prove that its international transaction of purchase of traded goods was at ALP, which was not disputed by the TPO. In such earlier years also, the TPO shortlisted Modicare Ltd. as the only comparable from a list of companies claimed as comparable by the assessee. The view of the AO/TPO in such earlier years was challenged before the tribunal. The assessee, apart from assailing the comparability of Modicare Ltd., also contended before the Tribunal that certain other companies engaged in similar products, even though selling through the distribution network, should also be included, albeit after suitable adjustment on account of working capital. The Tribunal, vide its order dated 24.03.2017 (in ITA No.960/Del/2014 and others), for the immediately three preceding assessment years 2009-10, 2010-11 and 2011-12 upheld the application of the RPM as the most appropriate method in the given circumstances. It was so held on the premise that the assessee was not making any value addition to the imports from its AEs before sale to the eventual customers. The Tribunal approved the selection of Modicare Ltd. as a comparable. It further added that:

"Ideally, the tax authorities should not have selected Modicare as a standalone comparable. The tax authorities should have carried out a search or directed the assessee to carry out a fresh search ensuring that the comparables selected were primarily engaged in direct sales with no meaningful value addition activities. To the extent possible, products similarity should have been aspired for and if it was found in a particular year that it was not available, then carrying out the necessary adjustments on the comparable selected attempted to approach near comparable FAR." The assessee's contention that the other retailers dealing in similar type of products should also be considered with suitable adjustment, came to be jettisoned vide para 5.13 of the order in which the Tribunal held that the retail sellers should be rejected at the very outset. Eventually, the Tribunal restored the matter to the file of TPO/AO for carrying out necessary adjustments to the profit margin of Modicare Ltd., by giving further liberty to the assessee to place on record certain other comparables in direct marketing. The assessee has not filed any rectification petition against it. Admittedly, the facts and circumstances of the instant year are, mutatis mutandis, similar to those of immediately preceding three assessment years. In that view of the matter, the earlier order of the tribunal becomes a precedent to be respectfully followed.

7. On a specific query as to why the ld. AR was so inclined to make a shift to the TNMM, it was submitted that Modicare Ltd. was left as the only comparable as a direct marketer, and that too with certain other differences and there were not many companies to be considered as comparable. It was submitted that the TNMM is more tolerant to functional differences and, as the sequitur, a wider range of companies can also be roped in under this method which are not strictly comparable. We are unable to accept this contention for the obvious reason that similarity of the functions performed under any of the methods for determining the ALP is essential and cannot be dispensed with even under the TNMM. The Hon'ble jurisdictional High Court in Rampgreen Solutions Pvt. Ltd. (supra) has held that the selection of comparables does not differ with the methods adopted and the comparables should be selected on the basis of similarity found even under the TNMM. Relevant discussion made in paras 42 and 43 accentuates the importance of functional similarity even under the TNMM :`Before concluding, there is yet another aspect of the matter that needs consideration. The Tribunal proceeded on the basis that while applying TNMM method, broad functionality is sufficient and it is not necessary that further effort be taken to find a comparable entity rendering services of similar characteristics as the tested entity. The DRP held that TNMM allows flexibility and tolerance in selection of comparables, as functional dissimilarities are subsumed at net margin levels, as compared to Resale Price Method or Comparable Uncontrolled Price Method and, therefore, the functional dissimilarities pointed out by the Assessee did not warrant rejection of eClerx and Vishal as comparables. .... In our view, the aforesaid approach would not be apposite. Insofar as identifying comparable transactions/entities is concerned, the same would not differ irrespective of the transfer pricing method adopted. In other words, the comparable transactions/entities must be selected on the basis of similarity with the controlled transaction/entity. Comparability of controlled and uncontrolled transactions has to be judged, inter alia, with reference to comparability factors as indicated under rule 10B(2) of the Income Tax Rules, 1962. Comparability analysis by TNMM method may be less sensitive to certain dissimilarities between the tested party and the comparables. However, that cannot be the consideration for diluting the standards of selecting comparable transactions/entities.' It is apparent from the above discussion that there is no compromise on the functional similarity even under the TNMM. Thus the contention of the ld. AR in this regard does not hold water.