INCOME TAX ACT, 1961

Section 92C

Transfer pricing - Determination of ALP - Selection MAM and comparables - Functional dissimilarity

Assessee engaged in trading of beauty products imported finished products from its AE. To benchmark said transaction, assessee adopted TNMM as the MAM and suggested comparables. TPO rejected TNMM method adopted by assessee and proceeded to adopt Resale Price Method. He rejected all the comparables of assessee applying filter of different business model, turnover less than Rs. 1 crores trading sales/total sales ratio less than 50%, duplication of the companies, negative company 25% related party transaction filter and different financial year. Thereafter, he selected single comparable, namely, Modicate Limited and accordingly, suggested TP adjustment. Held: Modicare Ltd. had different functions as compared to assessee. There was also difference in case of goods sold ratio and value-added expenses which was apparent from the fact that in case of Modi Care Ltd. cost of goods sold ranges from 22% to 28% of its total operating cost and value-added expenses/operating expenses were more than 70%. Modicare Ltd. had also recorded franchisee expenses and hence, it could not be inferred wholly as a direct seller. In view of such differences, it would be very difficult to carry out adjustment especially with regard to product portfolio, functional portfolio, etc. Adjustment if at all can be made would be to some extent of differential accounting treatment for incentive/discount.Even the TPO in her remand report was unable to demonstrate incomparable product profile of Modi Care Ltd. and assessee and how comparability adjustment was possible on account of such huge difference in product profile. Further, the service fee earned by assessee was on account of renewal fees and handling fees received from the individual consultants, engaged in distribution of assessee's product and directly related to assessee's business. Whereas, service fee earned by Modi Care Ltd. was on account of annual maintenance contract (AMC). This factor also vitiated the comparability analysis and once Modi Care Ltd. which was the sole comparable was removed, then TNMM had to be adopted as the MAM and that too be without enlarging the comparables, i.e., the comparables selected by assessee had to be examined under TNNM.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2013-14

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