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Judgment
,,,
S. RAVINDRA BHAT,J.",,,
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?â€",,,
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 wholesellers, 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 “Actâ€). 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 levelâ€.,,,
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.â€,,,
S.N.,Product,Sales (INR),"% of the
total turnover
product
1,"Laundry and Home
Care","78,765,810",14.34%
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",