Facts of the Case

The assessee, Luxottica India Eyewear Pvt. Ltd., is an Indian subsidiary of Luxottica Holland B.V. and is engaged in the business of trading sunglasses. For Assessment Year 2010–11, the assessee filed its return of income declaring a loss of ₹1,91,90,414/-. The case was selected for scrutiny, and owing to international transactions with its associated enterprises, a reference was made to the Transfer Pricing Officer under Section 92C.

The TPO proposed adjustments aggregating to ₹13,19,05,725/-, comprising ₹10,05,85,356/- in respect of purchase of finished goods and ₹3,13,20,369/- on account of advertisement, marketing and promotion (AMP) expenses, treating AMP as a separate international transaction by applying the Bright Line Test. After DRP directions, the final adjustment was reduced to ₹10,41,94,007/-.

The assessee appealed to the ITAT, challenging both the AMP adjustment and the ALP determination in respect of purchase of finished goods, contending that Resale Price Method (RPM) was the most appropriate method instead of TNMM. The ITAT, by a common order dated 26.05.2017, remanded the matter to the TPO primarily in view of the Delhi High Court decision in Sony Ericsson Mobile Communications India Pvt. Ltd., which had disapproved application of the Bright Line Test.

Issues Involved

Whether the ITAT was justified in remanding the transfer pricing matter to the TPO without adjudicating the specific grounds raised by the assessee relating to ALP adjustment on purchase of finished goods, and whether remand on AMP issues automatically covered other transfer pricing adjustments.

Petitioner’s Arguments

The assessee contended that the ITAT failed to adjudicate detailed grounds specifically challenging the transfer pricing adjustment on purchase of finished goods, including rejection of RPM and adoption of TNMM. It was argued that AMP expenses being remanded could not automatically result in remand of ALP determination for purchase of finished goods, especially when the grounds raised were distinct and required separate adjudication.

Respondent’s Arguments

The Revenue contended that the ITAT’s remand was comprehensive and that once the matter was sent back to the TPO, all transfer pricing aspects, including purchase of finished goods, would be examined afresh. It was argued that no prejudice was caused to the assessee.

Court Order / Findings

The Delhi High Court held that a plain reading of the impugned ITAT order showed no discussion or adjudication of the grounds raised by the assessee relating to transfer pricing adjustment on purchase of finished goods. The Court observed that determination of ALP for AMP expenses does not necessarily entail adjudication of ALP in respect of purchase of finished goods.

The Court found that the ITAT had proceeded on an erroneous assumption that remand of AMP issues would automatically result in reconsideration of all other transfer pricing issues. Such an approach was held to be legally unsustainable, as specific grounds raised by the assessee were required to be independently examined and adjudicated.

Important Clarification

The Court clarified that while remand may be warranted in appropriate cases, the ITAT is duty-bound to adjudicate all grounds raised before it or clearly specify the scope of remand. Open-ended or vague remand directions cannot substitute adjudication of distinct and independent issues.

Final Outcome

The appeal was disposed of. The Delhi High Court set aside the impugned order to the extent it failed to adjudicate the grounds relating to transfer pricing adjustment on purchase of finished goods and remanded the matter back to the ITAT to consider and decide those grounds afresh by a reasoned order, without expressing any opinion on the merits.

 Link to download the order - https://www.mytaxexpert.co.in/uploads/1769850738_LUXOTTICAINDIAEYEWEARPVTLTD.VsASSISTANTCOMMISSIONEROFINCOMETAX.pdf

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