Pr. Commissioner Of Income Tax- 2, Delhi vs. M/S. Burberry India Pvt. Ltd.

$~123
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Date of Decision: 24.10.2024
+ ITA 471/2019
PR. COMMISSIONER OF INCOME
TAX- 2, DELHI ..... Appellant
Through: Mr Aseem Chawla, SSC with Ms
Pratishtha Chaudhary, Advocates.

Versus
M/S. BURBERRY INDIA PVT. LTD. ..... Respondent
Through: Mr Vishal Kalra and Mr S.S.
Tomar, Advocates.
CORAM:
HON'BLE MR. JUSTICE VIBHU BAKHRU
HON'BLE MS. JUSTICE SWARANA KANTA SHARMA

VIBHU BAKHRU, J. (Oral)
1. The Revenue has filed the present appeal under Section 260A of
the Income Tax Act, 1961 (hereafter the Act ) impugning an order
dated 22.06.2018 (hereafter the impugned order ) passed by the
Income Tax Appellate Tribunal (hereafter the Tribunal ) in ITA Nos.
758/Del/2017 and 7684/Del/2017 captioned Burberry India Pvt. Ltd.
V. ACIT Circle 5(1) New Delhi , in respect of the assessment years
(AY) 2012-13 and 2013-14 respectively.
2. The respondent (assessee) had preferred the appeal (ITA
No.758/Del/2017) impugning an order dated 30.11.2016 passed by the
Assessing Officer (AO) pursuant to the order dated 18.10.2016 passed
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by the learned Dispute Resolution Panel (DRP) in respect of the AY
2012-13. In addition, the assessee had also filed an appeal (being ITA
No.7684/Del/2017) before the learned Tribunal impugning an order
dated 19.12.2016 passed by the AO in respect of the AY 2013-14.
The AO had passed the aforesaid order pursuant to the directions
issued by the DRP on 15.09.2017. Since both the appeals (ITA Nos.
758/Del/2017 and 7684/Del/2017) involved a common question, the
same were taken up by the learned Tribunal together. These appeals
were disposed of by a common order dated 22.06.2018 – that is, the
impugned order. However, the present appeal is confined to the
learned Tribunal’s decision in ITA No.758/Del/2017 in respect of the
AY 2012-13.
3. The controversy involved in the present appeal relates to the
most appropriate method required to be used for benchmarking the
international transaction entered by the assessee for determining the
Arms Length Price (ALP). The learned Tribunal held that the Resale
Price Method (RPM) would be the most appropriate method and had
accordingly, directed the Transfer Pricing Officer (TPO) to adopt the
same for benchmarking the international transaction – import of the
finished goods for a declared value of ₹28,88,97,371/-.
UESTIONS OF AW
Q L
4. The Revenue has projected the following questions for
consideration of this Court:
“A. Whether, the Hon’ble ITAT erred in directing the TPO to
apply RPM in respect of transaction relating to import of
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furnished goods without giving cogent reasons as to how
this method is the Most Appropriate Method for
benchmarking this transaction, in spite of the fact that the
TPO/DRP in the original order had given elaborate
reasons for rejecting RPM as MAM for this transaction?
B. Whether the Hon’ble ITAT erred in directing the TPO to
apply RPM as MAM without considering the fact that
complete information about business profile and financial
data in respect of comparable under RPM method should
be available which were not found in public domain?”
T HE C ONTEXT
5. The assessee was incorporated in January, 2010 and is engaged
in trading of imported luxury goods bearing the trademark ‘Burberry’.
The assessee is a joint venture of Burberry International Holdings Ltd.
UK and Genesis Colours Private Limited, India. The said entities
owned equity capital of the assessee in the ratio of 51:49.

6. The assessee retails the said luxury products from outlets, which
are directly managed by it. The assessee operates seven luxury retail
stores – two in Delhi and one each in Gurgaon, Hyderabad, Chennai,
Mumbai and Bangalore.
7. The assessee filed its return of income for the AY 2012-13 on
30.11.2012, declaring a loss of ₹1,80,33,018/- during the said AY.
The assessee had undertaken the following international transactions
and reflected the same in Form-3 CEB:

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8. The AO made a reference to the TPO for determining the ALP
under Section 92CA(3) of the Act.
9. The assessee furnished its Transfer Pricing Documentation to
the TPO to establish that its international transactions were based on
ALP’s basis.
10. Insofar as the international transactions relating to
reimbursement of the costs received / receivable; receipt of marketing
contribution; and accounts payable are concerned, there is no
controversy and the TPO has accepted the same. However, the TPO
did not accept the assessee’s transfer pricing study in respect of the
international transactions relating to the import of finished goods for a
value of ₹28,88,97,371/-
11. The assessee had used a Comparable Uncontrolled Price (CUP)
method as the most appropriate method and had corroborated the same
by RPM method to establish the ALP. The TPO did not accept that
the CUP or the RPM are the most appropriate method. The TPO
adopted the Transactional Net Margin Method (TNMM) as the most
appropriate method and selected operating profit/operating cost
(OP/OC) as the profit level indicator (PLI) for determining the ALP.
The TPO also proceeded to finalise the set of comparable entities. The
TPO rejected two out of the three entities selected by the assessee as
comparable on the ground that the functional profile of the said
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entities was different. However, the TPO accepted the remaining third
entity (Shoppers stop Limited) as a comparable entity.
12. In addition, the TPO also selected four other entities as
comparable to the assessee for determining the ALP.

13. The assessee raised the objections to the inclusion of some of
the entities. Whilst the TPO accepted the assessee’s objection in
regard to one of the entities, however, it rejected the objections in
regard to the others.
14. Accordingly, the TPO selected the following four comparable
entities for determining the ALP:-

15. Based on the mean PLI, the TPO has determined the ALP’s
Adjustment as under:-

16. Accordingly, the TPO passed an order under Section 92CA (3)
of the Act directing the AO to enhance the assessee’s declared income
by sum of ₹6,94,58,591/- under Section 92CA of the Act.
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Additionally, the TPO also observed that the AO may examine the
issue regarding the initiation of the penalty under Section 271(1)(c) of
the Act.
17. In view of the above directions, the AO issued the draft
assessment order dated 04.03.2016 under Section 143(3) of the Act
assessing the assessee’s income at ₹5,14,25,573/-. This was computed
by adding the sum of ₹6,94,58,591/- to the returned loss of
₹1,80,33,018/-.
18. The assessee filed the objections to the draft assessment order
dated 04.03.2016 before the Dispute Resolution Panel (DRP). Apart
from contending that the AO had committed a jurisdictional error in
referring the matter to the TPO without recording any reasons, the
assessee also objected to the rejection of the CUP and RPM as the
most appropriate method. The assessee also objected to the use of one
of the entity Avenue Supermarts Limited as a comparable entity to the
assessee on the ground that it was not functionally similar to the
assessee.

19. In addition, the assessee also objected to the TPO in rejecting
the working capital adjustment and lease rent adjustment for
determining the PLI of the selected comparable entities.
20. The DRP accepted the assessee’s objection regarding the
requirement to make an adjustment on account of working capital and
to confine the application of mean PLI only to the value of the
international transactions in question. The DRP directed the TPO to
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compute the working capital adjustment in accordance with the
specific directions issued by the DRP and to further restrict the
transfer pricing adjustment to the international transactions in
question.

21. Thereafter, the AO passed the final assessment order dated
30.11.2016, based on the directions issued by the DRP.


22. The assessee appealed the said assessment order dated
30.11.2016 before the learned Tribunal, which was allowed in terms
of the impugned order.
23. A plain reading of the impugned order indicates that the
assessee had confined its challenge to the final assessment order dated
30.11.2016 and the order passed by the TPO in respect of the findings
pertaining to the rejection of the CUP method as corroborated by the
RPM and substituting the same with TNMM as the most appropriate
method.
24. The TPO and the DRP had rejected RPM as a most appropriate
method for computing the ALP on the ground that the assessee had
incurred significant advertisement, marketing and promotion (AMP)
expenses. The learned Tribunal faulted the TPO and the DRP for
rejecting RPM on the aforesaid ground and held,in the given facts, that
RPM is the most appropriate method. The learned Tribunal also held
that there was no dispute regarding the functional profile of the
assessee. Therefore, the findings that the assessee was not a simple
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distributor on account of incurring substantial AMP expenses, was not
justified.
25. The learned Tribunal relied upon its earlier decision in Nokia
India (P) Ltd v. Dy CIT : (2014) 52 taxman.com 492/153 ITD 508
(Delhi) as well as the decision of this Court in Principal
Commissioner of Incometax-6 v. Matrix Cellular International
Services (P) Ltd : (2018) 90 taxman.com 54 (Delhi) in arriving at the
aforesaid conclusion that RPM is the most appropriate method for
benchmarking the international transaction in question.
R EASONS AND C ONCLUSION
26. In view of the above, the only issue required to be considered
by this Court is whether in the given facts, the learned Tribunal’s
conclusion that RPM is the most appropriate method, is erroneous.

27. At the outset, it is material to note that there is no cavil as to the
functional profile of the assessee. Admittedly, the assessee is engaged
in importing of goods bearing brand name ‘Burberry’ from its
Associate Enterprise (AE) and retailing the same through its stores.
The assessee does not add any value to the said goods; the same are
sold in the same condition as imported. It is in these given facts that
the learned Tribunal had concluded that RPM method would be the
most appropriate method.
28. The United Nations Practical Manual on Transfer Pricing for
Developing Countries (2021) briefly describes the RPM as under:-
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“4.3 Traditional Transaction Methods: Resale
Price Method (RPM)
4.3.1 Introduction to RPM
4.3.1.1 The Resale Price Method (RPM) is one of
the traditional transaction methods that can be used
to determine whether a transaction reflects the
arm’s length principle. The Resale Price Method
focuses on the related sales company which
performs marketing and selling functions as the
tested party in the transfer pricing analysis. This is
depicted in Figure 4.D.2 below.
4.3.1.2 The Resale Price Method analyzes the price
of a product that a related sales company (i.e.
Associated Enterprise 2 in Figure 4.D.2) charges to
an unrelated customer (i.e. the resale price) to
determine an arm’s length gross margin, which the
sales company retains to cover its sales, general
and administrative (SG&A) expenses, and still
make an appropriate profit. The appropriate profit
level is based on the functions it performs, the
assets it uses and the risks it assumes. The
remainder of the product’s price is regarded as the
arm’s length price for the intragroup transactions
between the sales company (i.e. Associated
Enterprise 2) and a related company (i.e.
Associated Enterprise 1). As the method is based
on arm’s length gross profits rather than directly
determining arm’s length prices (as with the CUP
Method) the Resale Price Method requires less
direct transactional (product) comparability than
the CUP Method.
Figure 4.D.2
Resale Price Method

Resale price = US$100
Resale price margin (25%) = US$ 25
Arm’s length transfer price = US$ 75

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4.3.1.3 Consequently, under the RPM the starting
point of the analysis for using the method is the
sales company. Under this method the transfer
price for the sale of products between the sales
company (i.e. Associated Enterprise 2) and a
related company (i.e. Associated Enterprise 1) can
be described in the following formula:
TP = RSP x (1-GPM), where:
➢ TP = the Transfer Price of a product sold
between a sales company and a related
company;
➢ RSP = the Resale Price at which a product is
sold by a sales company to unrelated
customers; and
➢ GPM = the Gross Profit Margin that a
specific sales company should earn, defined
as the ratio of gross profit to net sales. Gross
profit is defined as Net Sales minus Cost of
Goods Sold.”

29. It is also relevant to refer to the following passage from the said
text relating to the issue of the required comparability in RPM:-
“4.3.4 Comparability in Applying the Resale Price
Method
4.3.4.1 An uncontrolled transaction is considered
comparable to a
controlled transaction if:
➢ There are no differences between the
transactions being compared that materially
affect the gross margin (for example,
contractual terms, freight terms etc.); or
➢ Reasonably accurate adjustments can be
performed to eliminate the effect of such
differences.
4.3.4.2 As noted above, the Resale Price Method is
more typically applied on a functional than on a
transactional basis so that functional comparability
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is typically more important than product
comparability. Product differences will probably
be less critical for the Resale Price Method applied
on a functional basis than for the CUP Method,
because it is less probable that product differences
will have a material effect on profit margins than
on price. One would expect a similar level of
compensation for performing similar functions
across different activities.
4.3.4.3 While product differences may be more
acceptable in applying the Resale Price Method as
compared to the CUP Method, the property
transferred should still be broadly similar in the
controlled and uncontrolled transactions.
Significant differences between the nature of the
products sold in the controlled and uncontrolled
transactions may reflect differences in functions
performed, assets used or risks assumed. Such
differences might suggest differences in arm’s
length gross margins.
4.3.4.4 The compensation for a distribution
company should generally be the same whether it
sells washing machines or dryers, because the
functions performed (including risks assumed and
assets used) are similar for the two activities. It
should also be noted, however, that distributors
engaged in the sale of markedly different products
cannot be compared. The price of a washing
machine will, of course, differ from the price of a
dryer, as the two products are not substitutes for
each other. Although product comparability is less
important under the Resale Price Method, greater
product similarity is likely to provide more reliable
transfer pricing results. It is not always necessary
to conduct a resale price analysis for each
individual product line distributed by the sales
company. Instead, the Resale Price Method can be
applied more broadly, for example based on the
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gross margin a sales company should earn over its
full range of broadly similar products.
4.3.4.5 As the gross profit margin remunerates a
sales company for performing marketing and
selling functions; the Resale Price Method
especially depends on comparability regarding
functions performed, risks assumed and assets
used. The Resale Price Method thus focuses on
functional comparability. A similar level of
compensation is expected for performing similar
functions (using similar assets and assuming
similar risks) across different activities. If there are
material differences that affect the gross margins
earned in the controlled and the uncontrolled
transactions, adjustments should be made to
account for such differences. In general,
comparability adjustments should be performed on
the gross profit margins of the uncontrolled
transactions. The operating expenses in connection
with the functions performed, assets used and risks
assumed should be taken into account in this
respect, as these differences are frequently
reflected in different operating expenses.”

30. In the present case, the assessee had used the RPM as a
corroborative method for benchmarking the international transactions
relating to the import of the finished goods. The assessee had
compared gross profit margin from the sale of such imported luxury
products with the gross profit margin of comparable entities in respect
of the similar transaction (namely sale of the imported products in
domestic markets). The assessee also relied upon the OECD
Guidelines as well as the Guidance Note issued by the ICAI in support
of its contention regarding use of RPM as the most appropriate
method for benchmarking the international transactions in question.
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The same being in respect of the activities for purchase of the goods
from related parties and resale to the unrelated parties. The assessee
had highlighted that RPM would be the most appropriate in cases
where the reseller does not add any value to the products purchased
and sold.
31. In the present case, the DRP had accepted the TPO’s conclusion
that RPM was not the most appropriate method, essentially, for the
reason that the assessee had incurred about ₹5.44 Crores towards
AMP expenses, which the DRP considered as substantial.
Accordingly, the DRP had also concluded that the assessee is not a
simple distributor.
32. The relevant extract of the DRP’s order dated 18.10.2016 is as
under:-
“6. In his order, the TPO has discussed this issue in
considerable detail. This discussion is not being
repeated here for the sake of brevity. The TPO has
pointed out that RPM can only be used as the
MAM if the products/services are similar. The
TPO has also pointed out that similarity of market
conditions, functions performed, accounting
treatment and products/services rendered, between
the assessee and the comparables, is essential for
use of RPM, and the assessee has failed to
demonstrate such similarity.
7. As per its Form no. 3CD, the assessee has a
gross profit rate of 54.96% and a net profit rate of
(-) 14.73%. In its P&L account, the assessee has
debited about Rs.28.97 Cr. Towards ‘other
expenses’ and shown substantial loss. The assessee
has incurred about Rs.5.44 Cr. towards
‘advertisement and marketing expenses’ on a
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turnover of about Rs.61.55 Cr. It is claimed that
about Rs.2.42 Cr. has been reimbursed towards
advertisement and marketing expenses however, it
is clear that the assessee has incurred substantial
AMP, and other expenses, in relation to its
turnover, and is therefore, not a simple distributor
in terms of the requirements of using RPM. The
assessee has failed to demonstrate that the
comparables have also incurred similar
expenditure and have a similar functional profile
required for RPM analysis.”

33. Before the learned Tribunal, the assessee contended that it had
not incurred heavy expenditure on AMP expenses and other
comparable entities had also incurred similar expenses.
34. The learned Tribunal accepted the said contention and faulted
the DRP for finding that the assessee is not a simple distributor. The
learned Tribunal noted that there was no dispute as to the assessee
merely purchased and sold the products without adding any value to
the core products. And, the assessee’s functional profile as a routine
distributor was not disputed by the TPO.
35. The question whether RPM is the most appropriate method in
cases of the distributor that purchases the products from its AE and
resells the same to unrelated parties without any further processes is
covered by the several decisions.
36. In Commissioner of Income tax v. L’Oreal India (P) Limited :
(2015) 53 taxman.com 432(Bombay) the Division Bench of Bombay
High Court had considered the Revenue’s challenge to an order passed
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by the learned Tribunal in a similar case holding that the RPM was the
most appropriate method in a case where the assessee had imported
the finished goods and resold the same in the same condition. In the
aforesaid context, the Bombay High Court had observed as under:-
“7. After having perused the relevant part of the
order passed by the Commissioner and the
Tribunal on this question, we are in agreement
with Mr. Pardiwalla that the Tribunal did not
commit any error of law apparent on the face of
the record nor can the findings can be said to be
perverse. The Tribunal has found that the TPO has
passed an order earlier accepting this method. The
Tribunal has noted in para 19 of the order under
challenge that this method is one of the standard
method and the OECD (Organization of Economic
Commercial Development) guidelines also state in
case of distribution or marketing activities when
the goods are purchased from associated entities
and there are sales effected to unrelated parties
without any further processing, then, this method
can be adopted. The findings of fact are based on
the materials which have been produced before the
Commissioner as also the Tribunal. Further, it was
highlighted before the Commissioner as also the
Tribunal that the RPM has been accepted by the
TPO in the preceding as well as succeeding
assessment years. That is in respect of distribution,
segment activity of the Assessee. In such
circumstances, and when no distinguishing
features were noted by the Tribunal, it did not
commit any error in allowing the Assessee’s
Appeal. Such findings do not raise any substantial
question of law. The Appeal is devoid of merits
and is, therefore, dismissed. There would be no
orders as to costs.”

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37. In Principal Commissioner of Incometax-6 v. Matrix Cellular
International Services (P) Ltd : (2018) 90 taxman.com 54 (Delhi)
this Court considered the question whether the Tribunal had erred in
adopting RPM for determining the ALP in relation to the assessee’s
business of reselling and distributing the sim cards imported from
AEs. The relevant extract of the said decision is set out below:-
“7. The dispute before the Court is whether the
ITAT erred in adopting the RPM in order to
determine the arms’ length price in relation to the
assessee’s business. In the relevant assessment
year, the assessee had four AEs. Three of them
were wholly owned subsidiaries, whereas in the
fourth, the assessee held 49% shareholding. The
ITAT found that the AEs were engaged in the
business of identifying, negotiating and buying
SIM cards from the networks of different countries
and selling them to the assessee. This arrangement,
according to the assessee, foreign networks were
reluctant to deal with foreign companies. The
ITAT, relying on the TPO’s order, found that the
business of the assessee only involved re-selling or
distributing the SIM cards imported from the AEs,
without making any value addition. The ITAT also
found that there was no distinction between airtime
and SIM cards, as no value could be added to the
airtime resold by the assessee. Since the SIM cards
are resold without making any value addition, the
ITAT concluded that the assessee carried out
purely trading business, and hence the RPM was
the Most Appropriate Method for calculating arms’
length price.
8. This Court finds that once the ITAT, on
considering the relevant facts as well as the order
of the TPO, had concluded that the business of the
assessee was merely that of a pure trader, and there
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was no value addition made before re-selling the
particular products (i.e. the SIM cards), its
consequent finding that RPM is the Most
Appropriate Method, is irreproachable. In Nokia
India (P) Ltd. v. Dy. CIT, (2014) 52 taxmann.com
492/153 ITD 508 (Delhi), the Delhi bench of the
ITAT held:
“A close scrutiny of the above two
sub-clauses along with the remaining
sub-clauses of r. 10B(1)(b) makes it
clear beyond doubt that RPM is best
suited for determining ALP of an
international transaction in the nature
of purchase of goods from an AE
which are resold as such to unrelated
parties. Ordinarily, this method
presupposes no or insignificant value
addition to the goods purchased from
foreign AE. In a case the goods so
purchased are used either as raw
material for manufacturing finished
products or are further subjected to
processing before resale, then RPM
cannot be characterized as a proper
method for benchmarking the
international transaction of purchase
of goods by the Indian enterprise from
the foreign AE.”
9. Similarly, in Swarovski India (P.) Ltd. v. Asstt.
CIT (2017) 78 taxmann.com 325 (Delhi – Trib.),
the ITAT held:
“Adverting to the facts of the instant
case, we find that the assessee
purchased Crystal goods and Crystal
components from its AE. No value
addition was made to such imports.
The goods were sold as such. In the
given circumstances, the RPM is the
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most appropriate method for
determining the ALP of the
international transaction of' Import of
Crystal goods and Crystal
components.”
10. A similar view has been adopted by the
Mumbai bench of the ITAT in Mattel Toys India
(P.) Ltd. v. Dy. CIT (2013) 34 taxmann.com
203/144 ITD 76:
“Thus, the RPM method identifies the
price at which the product purchased
from the A.E. is resold to a unrelated
party. Such price is reduced by
normal gross profit margin i.e., the
gross profit margin accruing in a
comparable controlled transaction on
resale of same or similar property or
services. The RPM is mostly applied
in a situation in which the reseller
purchases tangible property or obtain
services from an A.E. and reseller
does not physically alter the tangible
goods and services or use any
intangible assets to add substantial
value to the property or services i.e.,
resale is made without any value
addition having been made.”
11. This view has also been affirmed by the
Bombay High Court in its judgment dated
07.11.2014 in CIT v. L’Oreal India (P.) Ltd.
(2015) 53 taxmann.com 432/228 Taxman 360,
where the Court found that there was no error in
law committed by the ITAT when it held that RPM
was the Most Appropriate Method in case of
distribution or marketing activities especially when
goods are purchased from associated entities and
there are sales effected to unrelated parties without
any further processing. In fact, a Division Bench of
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this Court in its decision in Bausch & Lomb
Eyecare (India) Pvt. Ltd. v. Addl. CIT (2016) 381
ITR 227/237 Taxman 24/65 taxmann.com 141
(Delhi), while considering the decision of this
Court in Sony Ericsson Mobile Communications
India Pvt. Ltd. v. CIT (2015) 374 ITR 118/231
Taxman 113/55 taxmann.com 240 (Delhi ) , noted
that:
“The RP Method loses its accuracy
and reliability where the reseller adds
substantially to the value of the
product or the goods are further
processed or incorporated into a more
sophisticated product or when the
product/service is transformed.”

38. The aforesaid decision was also followed by this Court in The
Pr. Commissioner of Income Tax-3 v. Fujitsu India Private Limited:
Neutral Citation: 2023: DHC:7952-DB.
39. In the present case, as noted above, the learned Tribunal had
accepted the assessee’s contention that its AMP expenses were not
excessive and were similar to those incurred by other comparable
entities.
40. There is no cavil that the AMP activities are a part of the
functional profile of the assessee. In the given facts, the DRP’s
decision that the assessee was not a ‘routine distributor’ is clearly
unsustainable.
41. In view of the above, we find no merits in the Revenue’s
challenge to the decision of the learned Tribunal. No substantial
question of law arises in the present appeal.
Signature Not Verified
Digitally Signed
By:TARUN RANA
Signing Date:09.05.2025
17:30:02

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42. The appeal is, accordingly, dismissed.


VIBHU BAKHRU, J


SWARANA KANTA SHARMA, J
OCTOBER 24, 2024
‘gsr’/M


Note : Corrected by the order dated 03.03.2025 passed in CM *
Appl. No.10499/2025.
Signature Not Verified
Digitally Signed
By:TARUN RANA
Signing Date:09.05.2025
17:30:02

ITA No.471/2019 Page 20 of 20