IN HIGH COURT OF DELHI AT NEW DELHI ITA 889/2016 & CM APPL. 45967/2016 RAYBAN SUN OPTICS INDIA LTD. ..... Appellant Through Mr. Nageshwar Rao, Advocate with Mr. Purushottam Anand, Advocate. versus CIT-V ..... Respondent Through Mr. Zoheb Hossain, Sr. Standing Counsel with Mr. Deepak Anand, Jr. Standing Counsel CORAM: JUSTICE S.MURALIDHAR JUSTICE PRATHIBA M. SINGH ORDER 11.07.2017 Dr. S. Muralidhar,J 1. This is appeal by Assessee under Section 260A of Income Tax Act, 1961 ( Act ) directed against order dated 19th April, 2016 passed by Income Tax Appellate Tribunal, Delhi ( ITAT ) in ITA No. 4203/Del./2010 for Assessment! Year ( AY ) 2004-05. 2. Admit. following questions of law are framed for consideration: (i) Whether impugned order passed by ITAT is perverse and unsustainable in law as it is based on erroneous assumption of fact that CUP method was approved by CIT(A) for benchmarking transaction of import of raw material, components and semi-finished goods under Class I segment? ITA 889/2016 Page 1 of 8 (ii) Whether impugned order passed by ITAT is perverse and unsustainable in law as it is based on erroneous assumption of fact that RPM method was approved by CIT(A) for benchmarking transaction of "import of finished goods" under Class II segment? 3. facts in brief are that Appellant, public limited company incorporated under provisions of Companies Act 1956, is primarily engaged in business of manufacturing, importing and selling of sunglasses and prescription frames in India besides exporting raw and semi finished sunglass frames to Luxottica Group. 44.15% shares of Appellant company are held by Ray Ban Indian Holdings Inc. USA, which in turn is indirectly held 100% by Luxottica Group SPA Italy. It is not in dispute that Luxottica Group is Associated Enterprise ( AE ) of Appellant. 4. In Transfer Pricing Study, ( TP Study ) submitted by Appellant before Transfer Pricing Officer (TPO) it set out following classification of functions and international transact^ undertaken by it with its AE during AY in question: Class Nature of International Transaction I Manufacturing segment a) Import of raw materials and components. b) Export of semi-finished goods. c) Import of semi-finished goods. d) Import of capital goods. e) Import of advertising material. II. Trading Segment a) Import of finished goods. b) Import of advertising material. ITA 889/2016 Page 2 of 8 III. Sale of capital goods 5. For benchmarking of transactions undertaken under Class I as well as Class II segments i.e. 'Manufacturing Segment' and 'Trading/Distribution Segment' Appellant in its TP Study adopted Transactional Net Margin Method (TNMM) as Most Appropriate Method (MAM) for purposes of Section 92 (C) of Act. 6. Appellant filed its return for AY in question disclosing international transactions in above segments with its AE. Assessing Officer (AO) made reference to TPO under Section 92(C)(A)(3) of Act for determination of Arm's Length Price (ALP) of international transactions undertaken by Appellant under Class I, II and III segments with its AE. 7. It requires to be noted that fact that Appellant adopted Comparable Uncontrolled Price (CUP) method for benchmarking Class III segment transactions was accepted by TPO. That is therefore not subject matter of present appeal. As far as Class I and Class II segment transactions are concerned, TPO declined to accept benchmarking of Appellant adopting TNMM. By order dated 17 th November 2006, TPO held that CUP method is most direct and reliable method for Class I segment transaction and that Re-sale Price Method (RPM) is MAM for determining ALP of transactions under Class II segment. On that basis, TPO recommended additions to be made to returned income of Assessee. ITA 889/2016 Page 3 of 8 8. On basis of order of TPO assessment order was passed, aggrieved by which Appellant went before Commissioner of Income Tax (Appeals) [GIT (A)]. Before CIT(A) following questions were urged by Appellant: "i Whether reference made by AO to TPO is bad in law making TPO's order void-ab-initio Also, whether mechanical acceptance of TPO's recommendation by AO makes assessment order bad in law. ii. Whether TPO is correct in rejecting TNMM method for transactions related to import of raw material, components and semi-finished goods and instead applying CUP as most appropriate method. iii. Whether TPO is correct in rejecting TNMM method for transaction related to import: of finished goods and instead applying RPM as most appropriate method. iv. Whether Appellant is entitled to benefit of 5% range mentioned in Proviso 92G (2) while computing ALP." 9. As regards questions (ii) and (iii), by order dated 30th January 2010, CIT (A) held in favour of Assessess In other words, CIT(A) disagreed with TPO and upheld contention of Assessee that TNMM was MAM as regards transactions under Class I as well as Class II segments. 10. Aggrieved by order of CIT(A), Revenue went in appeal before ITAT. By impugned order ITAT set aside impugned order of CIT (A) deleting additions made by AO. ITAT remanded matter to TPO/AO for determining afresh ALP of Class I international transactions under CUP method and of Class II international transactions under RPM as per law. ITA 889/2016 Page 4 of 8 11. Mr. Nageshwar Rao, counsel for Assessee at outset pointed out that ITAT has committed certain glaring factual errors in understanding order under appeal before it i.e. order of CIT (A). 12. In para 5 of impugned order it is observed by ITAT that:- As Id. CIT(A) has also upheld application of CUP as most appropriate method, which aspect has not been challenged by Assessee, we hold that TPO was right in applying CUP method for determining ALP of international transaction of import of raw materials, components and semi finished goods.... 13. In para 12 of impugned order, ITAT observes:- TPO applied RPM, which has not been disturbed by ld. CIT(A) and further there is no challenge to it by Assessee. In our considered opinion, RPM is quite useful method where goods purchased by Indian sold without doing any value enhancement. We, therefore, approve application of RPM as most appropriate method.... 14. Court fails to understand how ITAT could have made above two obvious factual errors in .its understanding order of CIT (A). It is apparent from plain reading of order of CIT (A) that it agreed with Assessee that transactions both in Class I and II segments had to be benchmarked by applying TNMM. Therefore, it was factually erroneous on part of ITAT to observe to contrary. 15. Likewise, ITAT proceeded on erroneous assumption of fact that RPM method was approved by CIT(A) for benchmarking class II segment transactions. ITA 889/2016 Page 5 of 8 16. further question arises is whether this Court should now remit matter to ITAT in view of above factual errors. 17.In this context, Mr. Nageshwar Rao, counsel appearing for Assessee, relied on decision dated 19th February 2016 of this Court in ITA No. 157 of 2016 (Commissioner of Income Tax Del II v. Cargill Food India Ltd.) whereby this Court dismissed Revenue's appeal and upheld order dated 10th April 2015 of ITAT in ITA No. 1460/PN/2010. He further pointed out that said judgment of this Court has been upheld by Supreme Court by dismissal of Revenue's SLP (CC 1900/2007) titled Commissioner of Income Tax, Delhi v, Cargill Food India Limited on 28th November 2016. In said order, Supreme Court while dismissing SLP noted that in AYs subsequent to AY in question, Revenue had accepted said Assessee s adoption of certain method as MAM for working out ALP of international transactions for purposes of transfer pricing. 18. Mr. Zoheb Hossain, learned Senior Standing Counsel for Revenue submitted that rule of consistency was relevant for later years whereas in present case it was sought to be argued that assessment of earlier year should not be disturbed in view of orders in subsequent years. According to Mr. Hossain important issue that required to be examined in present case was whether type of transaction in preceding years as well as in subsequent years were similar and whether there was change in functional profile of business of Assessee in subsequent years. ITA 889/2016 Page 6 of 8 19. In this context, it must be recalled that in present appeal we are concerned with AY 2004-05. Mr Rao has placed before Court compilation of orders passed by TPO for AYs 2007-08 to 2010-11. perusal of these detailed orders of TPO for each of above subsequent AYs reveals that in each of TP Studies submitted for those years before TPO, Assessee set out its functional profile which involved same transactions in three segments, viz.. Class I manufacturing segment . Class II trading segment and Class III capital goods segment . There is factually no change in classification or nature of international transactions undertaken or functional profile of Assessee. In other words, functional profile of Assessee for AY in question i.e. AY 2004-05 has not changed in subsequent AYs i.e. 2007-08 to 2010-11. TPO has in each of subsequent AYs i.e. 2007- 08 to 2010-11 accepted TP Study .of Assessee insofar as determination of ALP for Class' T Class II segment international transactions are concerned. 20. Consequently, Court is unable to accept plea of Revenue in present case that Court should proceed on assumption that Assessee "had changed his business profile and functions." If there is, in fact, no change in business profile of Assessee in all these years i.e. in AY 2004-05 as well as subsequent years, there is no warrant for Court to uphold order of ITAT remitting matter to TPO/AO or for this Court to remand appeal to ITAT for fresh consideration. That will be sheer waste of time and would serve no purpose. ITA 889/2016 Page 7 of 8 21. There is one more issue raised by Revenue regarding transfer by Assessee of its advertising, marketing and promotion (AMP) functions to its AE. However, that is not subject matter of present appeal. It is pointed out by Mr Rao that said issue is still pending at various levels in subsequent years. 22. Questions (i) and (ii) are answered in affirmative i.e., in favour of Assessee and against Revenue. Accordingly, this Court sets aside impugned order of ITAT and affirms order of CIT (A). appeal is allowed and application is disposed of but with no orders as to costs. S.MURALIDHAR, J PRATHIBA M. SINGH, J JULY 11,2017 nn ITA 889/2016 Page 8 of 8 Rayban Sun Optics India Ltd. v. CIT-V