Delhi High Court
Oriflame India Private Limited vs Assistant Commissioner Of Income ... on 10 April, 2018
$~4 to 7
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Date of decision: 10.04.2018
+ ITA 811/2017
ORIFLAME INDIA PRIVATE LIMITED ..... Appellant
versus
ASSISTANT COMMISSIONER OF INCOME TAX
..... Respondent
+ ITA 812/2017
ORIFLAME INDIA PRIVATE LIMITED ..... Appellant
versus
ASSISTANT COMMISSIONER OF INCOME TAX
..... Respondent
+ ITA 813/2017
ORIFLAME INDIA PRIVATE LIMITED ..... Appellant
versus
DEPUTY COMMISSIONER OF INCOME TAX..... Respondent
+ ITA 825/2017
ORIFLAME INDIA PRIVATE LIMITED ..... Appellant
versus
ADDITIONAL COMMISSIONER OF INCOME TAX,
..... Respondent
Present: Mr.Himanshu Sinha and Mr. Bhuwan Dhoopar,
Advocates for petitioner.
Mr.Deepak Anand, Jr.Standing Counsel for Revenue.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE A.K. CHAWLA
MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT)
%
1 Admit.
2 The following question of law arises for consideration in all
these appeals:
"1.Did the ITAT fall into error in regard to the finding with
respect to inclusion of a comparable Modicare Limited and
the exclusion of the other comparables, (which are involved
in trading in similar products), having regard to the facts
and circumstances of the case?"
3 The appellant is a wholly owned subsidiary of Oriflame
Investments Limited, Mauritius. Its business is the distribution and
sale of cosmetic products primarily through direct selling channel.
The direct seller to individual intermediaries is characterized as
"consultant" who then sells the products to the user. This distribution
system does not involve other trade intermediaries, as the whole-
sellers, distributors and stockist etc. The assessee offered its income
tax return and also filed transfer pricing reports, as required, as it was
involved in internal transaction of the filing within the meaning of
Section 92(A) of the Income Tax Act (hereinafter referred to as the
"Act"). The Transfer Pricing adjustment made by the TPO was for
Rs.14,29,23,995/-, for Assessment Year 2009-10 and other amounts
for later A.Ys. The assessee challenged the methodology and
approached the DRP, it was unsuccessful for each of the assessment
years. Having regard to the TPO determination and ruling of the final
assessment only by the Assessment Officer, it became the subject
matter of challenge before the ITAT. The appellant's grievance is that
the ITAT noted the significant difference between the entities which
were involved in marketing the products through direct marketing
between the loan direct marketing comparables i.e. Modicare Ltd. and
the assessee. The grievance nevertheless, the ITAT directed a remand
categorically ruling out the case of Modicare Limited (supra). It is
highlighted on behalf of the assessee in this regard that the significant
differences between the two i.e. Modicare and the assessee are
incapable of adjustment. Learned counsel highlighted upon this
functional dissimilarity with respect to the differential products range
in which both the entities were involved; the low proportion of total
product turnover attributable to cosmetic and related line (personal
care) and the most segmental data. It is submitted that having regard to
these circumstances, the ITAT's findings are both inconsistent and
contrary to law on functional differences. It was also submitted that
having regard to these functional differences, the assessee had offered
other comparables that did not involve direct marketing but were
trading entities with appropriate adjustments having regard to the
dissimilarities that could be eliminated and appropriately adjusted.
These issues were, however, not considered and no findings were
returned.
4 Learned counsel for the Revenue relied upon Rule 10B of the
Income Tax Rules, 1962 and submitted that the impugned order
should not be interfered with. It was stated that the dissimilarity, if
any and even the appropriateness of the "Most Appropriate Method"
can however be argued by the assessee consequent upon the remand.
It is stated that appropriate adjustment with regard to the alleged
dissimilarity can be carried out by the Revenue Authorities in regard
to the facts and circumstances of the case. The ITAT's findings
pertinently with respect to the appropriateness or otherwise of
Modicare Ltd. as a comparable are contained in paras 5.9, 5.11 and
5.12 of the impugned order. The Tribunal noted that Modicare Ltd. as
a standalone comparable (since all other comparables were eliminated
by the revenue authorities at the early stage of the proceedings) was
"ideally not an appropriate comparable" and has also canvassed that
the comparables selected by the taxpayer have wrongly been rejected
by the tax authorities. In paras 5.8 and 5.9 it is stated as follows:
"5.8 Thus when considered in the light of the aforesaid
statutory Rules, we find that the tax authorities while
considering the grievance of the tax payer admittedly
have taken a position contrary to what has been
envisaged under the Rules.
5.9. Having so addressed, we find that over the years
primarily the taxpayer has raised the issue that Modi
Care Ltd. as a stand-alone comparable was ideally not
an appropriate comparable and has also canvassed that
the comparables selected by the taxpayer have wrongly
been rejected by the tax authorities. One of the many
lines of arguments taken by the taxpayer is that firstly
Modi Care Ltd. has a very limited cosmetic and personal
care product category thus it lacks product similarity;
secondly it also has income from franchisees, hence it is
not a similar service, thirdly its discounts are below the
line expense and Revenue recognition policies are also
significantly incomparable; fourthly it has high AMP
spend; fifthly it has fluctuating sales; its incentives
schemes are different it has wide variation between its
gross margins and net margins thereby giving weight to
the allegation that heavy functions are being performed
at the operating level".
5 Its final conclusions with respect to Modicare Ltd. include the
observations that the comparable company differed from the assessee
in reporting its cost. The highlighted differences were in regard to the
discount, transportation costs, insurance and performing the warranty
function as operating expenses or its costs of goods sold or the
difference in the inventory valuation method. These variations will
affect the gross margin. The Tribunal then concluded in para 5.12 as
follows:
"Accordingly, in view of the above, we are of the
considered view that ideally the tax authorities should
not have selected Modi Care Pvt. Ltd. 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 directs sales with no meaningful
value addition activities. To the extent possible product
similarities 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
comparables selected attempted to approach near
comparable FAR. Thus complying with the
requirements of sub-Rule (2) and (3) of Rule 10B and
sub-clause (iv) of clause (b) of sub-Rule (1) of Rule 10B
ideally more comparables should have been selected. We
note that there is sufficient guidance and clarity in the
aforesaid statutory provisions to ensure that the
grievance of the assessee can be addressed as it has
amply been provided that wherever the gross margins
are demonstrated to be impacted either with
incomparable activities; functions, accounting practices;
product dissimilarities; etc. then necessary adjustments
should be made. Herein noting that the tax payer's first
grievance is that with necessary adjustments, even if
Modi Care Limited is taken as a standalone comparable
as has been done by the tax authorities even then
adjustments proposed by the tax payer on valid grounds
namely incomparable activities, functions accounting
and Revenue recognition policies etc. is necessitated. We
are given to understand that service income has been
excluded by the TPO himself in the subsequent years and
in fact in one of the years in the present proceedings. It
has been argued that if the adjustments are thus made
then no adjustments to be arm's length price of the
assessee would be necessitated. We note that the tax
authorities have not considered the calculations as
principally they have been of the opinion that no relief
was warranted. Holding the said approach of the tax
authorities contrary to the statutory position we direct
the TPO to look into the claim of adjustments required to
be made to Modi Care Limited. While so directing it is
made clear that the responsibility for providing the
supporting data to the satisfaction of the TPO rests with
the assessee. The TPO cannot be burdened to look for
possible adjustments. In case the tax payer does not
succeed on this ground then the TPO may consider
directing the assessee to carry out a search of
comparable companies from the list of direct sellers in
the market, as has been referred to in the TPO in the
respective years and the CIT(A) has also specifically
mentioned the direct sellers at pages 8 and 9 of his order.
The comparable companies with suitable adjustments
adhering to the requirements as set out in sub-Rule (1),
(2) and (3) of Rule 10B of the IT Rules may be selected."
6 It is notable at the outset from the above quotation that the Tribunal
was conscious of the significant differences yet it did not address how these
differences could be adjusted so to speak. The assessee is involved solely in
the marketing of cosmetics. However, Modicare Ltd. is also engaged in the
marketing of other products, "laundary and home care, personal care, tea,
agriculture, jewellery, cosmetics and health care" and "others". Each one
of these have a separate proportion to the total product turnover. A tabular
chart in this regard appears to have been noticed by the Tribunal in its
impugned order, the same is reproduced herein as below:
S.N. Product Sales (INR) % of the
total
turnover
product
1 Laundry and Home 78,765,810 14.34%
Care
2 Personal Care 120,292,729 21.89%
3 Agriculture 79,718,481 14.51%
4 Tea 8,045,875 1.46%
5 Jewellery 53,766,590 9.79%
6 Cosmetics 86,129,350 15.68%
7 Healthcare 88,886,747 16.18%
8 Others 33,819,599 6.16%
Total 549,425,182
7 The assessee argued that the dissimilarity with respect to the products
sold and the proportion borne by each of the turnover cannot but impact the
profitability of the entity as a whole and further emphasized that segmental
laid for each of these product lines is missing for the relevant year (with
respect to the data available vis-à-vis Modicare Ltd.). In the opinion of this
Court, it is of vital importance and was not addressed by the ITAT which
even while noticing the significant differences and seemingly accepting the
assessee's arguments nevertheless did not exclude Modicare Ltd. altogether.
In the opinion of this Court, this is a very vital infirmity which needs to be
corrected.
8 As far as the reasoning of the Revenue Authorities, which has not
been commented upon by the ITAT for excluding the other comparables
offered by the assessee goes, for one, it was stated that mere acceptance in
the past of such comparable did not bind the Revenue. The other was with
respect to the differential marketing strategy adopted for the two sets of
entities i.e. the trading entity/comparable on the one hand as opposed to the
direct marketing entity i.e. assessee on the other hand. The assessee had
stressed that if appropriate marketing was made from the data available, the
differential marketing strategy per se would not pose a difficulty with respect
to the transfer pricing adjustment. The Court finds some merits in the
arguments, especially since what the Revenue Authorities would be left with
if the ITAT's order was not to be disturbed, would be what a comparable in
the form of Modicare Ltd (supra).
9 In view of the above reasons, this Court is of the opinion that the
appeal should be re-examined by the ITAT; it should be addressed on these
two aspects i.e. firstly, the appropriateness of including Modicare Ltd.
having regard to the availability of data with respect to the different product
segments, and secondly, involving the comparable, the functional difference
with respect to its marketing strategy (i.e. discount, transportation costs,
insurance and performing the warranty function). Having regard to the
factors mentioned in clause 5.10 of the impugned order, the ITAT is also
directed to re-examine whether and to what extent adjustment can be
reasonably made, having regard to the available data in respect to the trading
comparables offered for ALP determination, for all the relevant years by the
assessee. It is also directed to consider the feasibility again having regard to
the available data for all the concerned assessment years- marking
appropriate adjustments (including with respect to the working capital
adjustments as is sought to be urged by the assessee) in regard to the trading
comparables offered by the assessee for these given years.
10 This Court is of the opinion that the ITAT may task the Transfer
Pricing Officer (TPO) with specific remand report on these issues and seek a
report in a time bound manner and thereafter proceed to return its findings
having regard to the parties' submissions. All the rights and contentions of
the parties are kept open. Having regard to the above directions, it is open
to the assessee to urge that TNMM is the most appropriate method instead of
RPM. In these circumstances, it is also clarified that in the event the
submission is accepted there would be no enlarging of a comparable offered.
11 The parties are directed to be present before the ITAT on 2 nd of May,
2018.
12 Appeals are allowed in the above terms.
S. RAVINDRA BHAT, J
A. K. CHAWLA, J
APRIL 10, 2018
ndn
