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2016 (4) TMI 1121 - ITAT DELHI

2016 (4) TMI 1121 - ITAT DELHI - TMI - Transfer pricing adjustment - Held that:- CIT(A) is not bound by the TP study undertaken by the Assessing Officer for T P adjustment, we are of the considered view that the contentions raised by the Ld. D.R. are not sustainable and no ground is made out to interfere into the findings returned by Ld. CIT(A) for the following reasons:

i) that when the Assessing Officer has lost sight of the fact that trading activities have been carried out by the .....

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rate claimed by the assessee @ 14.44% by comparing it with the group as a whole without discussing the total number of functions being carried out by the Altria group;

iii) that the Assessing Officer has also lost sight of the fact that assessee company having branch offices in India, is a distributor having responsibility for its business operation in India including market risk, price risk etc. So, keeping in view the facts, Ld. CIT(A) has rightly applied the resale price method (RP .....

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of the assessee is not comparable with the FAR of its group company;

vi) that Ld. CIT(A) after considering all these facts, TP study undertaken by the assessee company initially on the basis of two comparables showing GP @ 6.81% as against GP rate of assessee company @ 14.44% and during the appellate proceedings, the appellant filed fresh search on the basis of three comparables showing average GP @ 18.31% has rightly held the international transaction at arms length; vii) that Ld. C .....

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9.2013 entered into between the assessee company with Fillet Morris Products SA shows that assessee company was appointed as non exclusive distributor of the product manufactured by the assessee in the territory of India making it ineligible to compare with its group company;

x) that it is further agreed in the agreement (supra) that the assessee company shall sell the products of its parent company at prices agreed by the parties from time to time and in these circumstances, it was n .....

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benefit of + 5%, the TP study adopted by the assessee company is at armís length;

xii) that fresh search brought out on record by the assessee company for TP study goes to prove that the assessee company has brought out on record detailed comparison of its distribution agreement with the comparable company namely God fray Phillips India showing GP rate of 4.42% which is much lower than the assessee company;

xiii) that the contention of Ld. D.R. that fresh TP study adopted .....

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Del/2012 - Dated:- 21-3-2016 - SHRI R.S.SYAL, ACCOUNTANT MEMBER SHRI KULDIP SINGH, JUDICIAL MEMBER For The Assessee : Sh. Neeraj Jain, Adv., Sh. Raonit Kotjal, CA, Sh. Puneet Chugn, C.A. For The Respondent : Sh. Amrendra , CIT, DR, Sh. Rahul Cyors, Sr. DR ORDER PER KULDIP SINGH, JM: Appellant Dy. Director of Income Tax, Circle-2(1), New Delhi hereinafter referred to as the revenue by filing the present appeal sought to set aside the impugned order dated 16.7.2012 passed by CIT(A), New Delhi on t .....

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he basis of the operating profit percentage on sales of its group company since it was not possible to correctly determine the taxable profits on the basis of profit and loss account prepared by it which inter-alia included expenses of capital nature and were not admissible. 3. Whether on the facts and circumstances of the case the CIT(A) has erred in not appreciating that the AO has correctly rejected the transfer pricing analysis submitted by the assessee company which has only two comparables .....

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olving similar issue. 2. Briefly stated facts of this case are : during the processing of return of income filed by the assessee for assessment year 2004-05, the case was selected for scrutiny and consequent to the notice issued u/s 143(2) Shri Arun Sawara, C.A. attend the precedence from time to time, filed submissions and replies to the clarifications / questions raised. 3. Assessee company is a wholly owned subsidiary of FTR Holding S.A. (Swiss Holding Company) and is one of the group compani .....

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₹ 7,10,50,023/- and entertain to following international transactions with its associated enterprises (A.E.) S.No. Particulars Transaction Value (Rs.) Benchmarking Method Assessee s Margins Comparables Margins Conclusion 1 Purchase of cigarettes for resale 1,54,26,346 Resale Price Method ( RPM ) Gross Profit / Sales (GP/Sales) : 14.43% 6.81% (on Average Data) At Arm s Length 2 Provision of Services 2,45,83,466 Transactional Net Margin Method ( TNMM ) OP / TC : 5.00% 7.33% (on Average Data .....

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/-. Assessee in its transfer pricing study chosen two comparables and taken the basis for comparison of profit on the basis of so-called alternative practical approach based on Resale Price Method. AO rejected the comparables taken by the assessee as not correct one as none of the comparable has actually incurred net loss in its trading transactions. Assessee explained the reason for net loss as huge expenditure incurred without comparable receipts. TPO noticed that the assessee has sold his ent .....

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ts own group companies who are dealing with the same brand and thereby rejected the TP report. AO has not examined the issue of allow ability of expenditure for determination of the taxable profit. AO has taken weighted average of the operating profit rate of the group at 16.57 and hold the 50% of the profit to be attributable to the activities of the assessee in India and computed the taxable income of the assessee in India at 70% of ₹ 1,11,84,340/- i.e. 78,29,038/-. 7. Assessee carried t .....

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export of tobacco leaves; and Provides services to its Associated Enterprises i.e. marketing support services. 9. Undisputedly assessee company is a part of group namely Altria group and Indian branch office is PE of the Assessee Company. AO after rejecting the TP study adopted by the assessee company on the basis of which it has considered its international transactions to be at an arm s length adopted the GP rate of its group which is at 16.57% as against GP rate of 14.44% on gross turnover of .....

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ear 2004 and 18.82% for the year 2003. The brand is a very important feature of Cigarette market. Brand loyalty plays a vital role with regard to sales of a particular brand. The price of a brand is not dependent upon any other brand of cigarette, so it the sales margin. Therfore in such a unique market situation, it would be imprudent to compare the margin of the assessee with any other entity trading in other brands. The only prudent comparability will be with the assessee s group only, who ar .....

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branch is relevant for determination of the profit of the assessee in India, yet it is not the only criteria for determining the profit, considering the arrangement under which the assessee operates. Even if we consider the audit report, there are various expenditures claimed in the profit and loss account, which are not allowable for the purpose of computation of taxable Income of the assessee in India as per the provisions of Income Tax Act. For instance, trade offer expenses amounting to  .....

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both manufacturing and selling, 50% of the profit is held to be attributable to the activities of the assessee in India. Total turn over of the assessee in India ₹ 7,10,50,023/- Operating Profit of the assessee ₹ 1,17,72,989/- (Applying the rate of 16.57%) Less 5% u/s 44C ₹ 5,88,649/- Total Income ₹ 1,11,84,340/- As the manufacturing and other related activities have been undertaken outside India and sales have been made in India, it is found proper to attribute income of .....

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d. DR also emphasised that since the assessee is a group company of Altria group having been specifically incorporated for groups operation in India, it is a case of brand intensive sale of the world known Marlboro Cigarettes brand , the AO has rightly adopted the GP rate of group company instead of transfer pricing study adopted by the assessee company for TP adjustment. 10. But this contention of the ld. DR is not tenable on the grounds inter alia that no cogent reasons have been recorded for .....

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ed by the assessee company summarily. 11. Bare perusal of aforesaid findings returned by the Assessing Officer goes to prove that he has proceeded on the basis of assumptions and guesswork that brand loyalty plays a vital role with regard to sales of a particulars brand which cannot be compared with any other entity trading in other brands by losing sight of the fact and reasons that the assessment year under consideration is the first year of operation, in which assessee company incurred huge e .....

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ounts for both manufacturing and selling at 50% of the profit attributable to the activities of the assessee in India, that too without providing opportunity of being heard to the assessee. AO also proceeded on the basis of reasonableness by attributing 30% of the profit outside India and remaining 70% to India where sales have taken place by ignoring law applicable to the facts and circumstances of this case. 13. At the very outset, it is fairly conceded by Ld. D.R. that there is no dispute reg .....

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nciples of attribution of profits as per Article 7 of India-Switzerland Tax Treaty and as per the Arm s Length Principles; that assessee carried out a detailed FAR analysis (Functions performed, assets employed and risk assumed) and its operation in India and then determined the Arm s Length Margin, which is required to be attributed to a Permanent Establishment (PE) using the third party industry benchmark; that Assessing Officer has also erroneously presumed that assessee is the main performin .....

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by the independent distributor; that assessee also adopted fresh search comparables during appellate proceedings by taking three comparable company apart from the two comparables already adopted in the TP study and has shown the more gross margin of the comparable company @ 15.70% or 18.31% as against the gross margin earned by the assessee @ 14.43% and by applying + 5% ranged the assessee s international transaction at arm s length. Ld. CIT(A) has reproduced the fresh search of comparables unde .....

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ollowing reasons: i) that when the Assessing Officer has lost sight of the fact that trading activities have been carried out by the assessee company for a period of five months only during the year under consideration and in such a short period it is not feasible for expenses of Indian Branch Offices to be set off by income generated out of trading activities because during the initial years of operation, expense of a company ought to be at higher side; ii) that the Assessing Officer has merely .....

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risk, price risk etc. So, keeping in view the facts, Ld. CIT(A) has rightly applied the resale price method (RPM) for benchmarking, which is the most appropriate method in this case;; iv) that gross margin of the assessee company cannot be compared with the group company as the assessee company is an importer and distributor of cigarettes in India without any value addition; v) that when the assessee company is not maintaining any warehouse nor it has any R&D activities and trade mark is als .....

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31% has rightly held the international transaction at arms length; vii) that Ld. CIT(A) has also rightly considered the detailed comparison of assessee s distribution agreement with another company namely God fray Phillips India showing GP rate of 4.42% and this comparison is showing distribution segment of the appellant at Arm s Length Principle; viii) that Arm s Length nature of distribution segment of assessee company has otherwise not been disputed by TPO during Assessment Year 2005-06; ix) .....

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