2016 (8) TMI 1238 - AT - Income Tax

TPA - selection of comparable - Held that - The assessee company is a company incorporated in Switzerland. It is one of the group companies of Altria Group USA which is engaged in the business of manufacturing and trading cigarettes and other tobacco product internationally. The assessee is into trading of Malbaro brand of cigarettes and tobaccos in India and is operating in India through a branch. The Indian branch is engaged in trading of cigarettes/tobacco leaves and is providing representation and logistics / marketing support services to / on behalf of the group entities, thus companies functionally dissimilar with that of assessee need to deselected from final list of comparable.

Summary

Issues Involved:
1. Validity of the Assessment Order passed under the directions of the Learned Dispute Resolution Panel (DRP).
2. Upward adjustment to the operating margin of the Service segment and the determination of Arm’s Length Price (ALP).
3. Set-off of brought forward losses/unabsorbed depreciation.
4. Charging of interest under section 234B.
5. Initiation of penalty proceedings under section 271(1)(c) for concealment of income.

Issue-wise Detailed Analysis:

1. Validity of the Assessment Order:
The appellant contended that the Assessment Order passed under the directions of the DRP was vitiated due to the DRP’s failure to apply its mind appropriately. The tribunal did not provide a specific ruling on this issue, focusing instead on the substantive issues regarding the adjustments and comparables.

2. Upward Adjustment to Operating Margin and Determination of ALP:
The DRP upheld the upward adjustment to the operating margin of the Service segment, confirming the addition of ?19,98,418 to the appellant's income. The appellant argued against the rejection and inclusion of certain comparables by the Transfer Pricing Officer (TPO).

- Rejection of Comparables:
- Capital Trust Ltd.: The DRP upheld the TPO’s rejection of this company due to its losses. However, the tribunal found that the foreign consultancy segment of Capital Trust Ltd. was similar to the market support segment of the appellant. Citing precedents, the tribunal held that companies with high profits or losses should not be rejected if they are functionally similar, thus including Capital Trust Ltd. as a valid comparable.
- Agrima Consultant International Ltd.: The TPO excluded this company due to its negative economic trend. The tribunal found that the nature of services rendered by Agrima was similar to the appellant's market support services. Therefore, it was included in the final list of comparables.

- Inclusion of Comparables:
- IDC (India) Ltd.: The appellant objected to the inclusion of this company, arguing it was a Knowledge Process Outsourcing (KPO) unit, not comparable to the appellant’s back-office support services. The tribunal agreed, citing a precedent that KPO services are not comparable to non-KPO services, thus excluding IDC (India) Ltd. from the list of comparables.
- Empire Industries Ltd.: The appellant argued that this company was engaged in trading and indenting of industrial and medical equipment, making it functionally dissimilar. The tribunal agreed and excluded Empire Industries Ltd. from the list of comparables.

The tribunal concluded that the TPO's adjustments were partially incorrect, and the appellant's grounds on this issue were allowed.

3. Set-off of Brought Forward Losses/Unabsorbed Depreciation:
The appellant contended that the DRP did not give the complete benefit of set-off of brought forward losses/unabsorbed depreciation. The tribunal set aside this ground to the Assessing Officer for verification and to follow the directions as per the DRP order.

4. Charging of Interest under Section 234B:
This ground was deemed consequential in nature and was not adjudicated upon by the tribunal.

5. Initiation of Penalty Proceedings under Section 271(1)(c):
The appellant argued against the initiation of penalty proceedings for concealment of income, citing a lack of adequate satisfaction for such initiation. The tribunal found this ground to be premature and did not adjudicate on it.

Conclusion:
The appeal filed by the assessee was partly allowed for statistical purposes. The tribunal directed the inclusion and exclusion of specific comparables in the determination of ALP, set aside the issue of set-off of losses to the Assessing Officer, and did not adjudicate on the issues of interest under section 234B and penalty proceedings under section 271(1)(c). The order was pronounced in the open court on 26th August 2016.