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2016 (4) TMI 1121 - AT - Income TaxTransfer 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 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 taken GP rate @ 16.57% of assessee s group companies by rejecting TP study adopted by the assessee company as against GP 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 (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 also owned by the group company, manufacturing is also done by the group company and as such FAR 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. 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) that a bare perusal of the distribution agreement dated 01.09.2013 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 not feasible to acquire the operating profit rates of the group arbitrarily for benchmarking without considering the assessee s duly audited account; xi) that Ld. CIT has rightly came to the conclusion on the basis of TP study adopted by the assessee company during appellate proceedings vide which three comparable companies have been taken showing GP rate of three new comparables @ 18.31% as against GP rate of assessee company shown @ 14.44% and by applying the safe harbour rule having benefit of 5%, the TP study adopted by the assessee company is at arm s 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 by the assessee during appellate proceedings, cannot be relied upon without providing opportunity of being heard to the A.O. /TPO, is not tenable because the fresh TP study adopted by the assessee apparently goes in favour of the Revenue showings distribution segment of the assessee at arm s length principle; xv) that the A.O. has also arbitrarily disallowed various expenses claimed by the assessee without specifying how and which of the expenses are not allowable.
Issues Involved:
1. Application of Operating Profit Percentage on Sales 2. Determination of Taxable Profits 3. Rejection of Transfer Pricing Analysis 4. Chargeability of Interest under Section 234B Issue-Wise Detailed Analysis: 1. Application of Operating Profit Percentage on Sales: The Revenue contended that the CIT(A) failed to appreciate that the AO correctly applied the operating profit percentage on sales of the assessee’s group company, emphasizing that brand royalty played a vital role in sales under unique market situations. The AO adopted a weighted average operating profit rate of the group at 16.57% and attributed 50% of the profit to the assessee's activities in India, leading to a taxable income of ?78,29,038/-. The Tribunal noted that the AO's approach was based on assumptions and did not consider the functional and risk disparities between the assessee and its group companies. The CIT(A) rightly applied the resale price method (RPM) for benchmarking, which was deemed the most appropriate method. 2. Determination of Taxable Profits: The AO determined the income based on the operating profit percentage of the group, arguing that the assessee's profit and loss account included expenses of a capital nature that were not admissible. However, the Tribunal found that the AO did not provide cogent reasons for rejecting the TP study adopted by the assessee nor disclosed the methodology used. The CIT(A) considered that the assessee's trading activities were carried out for only five months during the year under consideration, leading to higher expenses without comparable receipts. The Tribunal upheld the CIT(A)'s decision, noting that the AO's approach was arbitrary and lacked a proper basis. 3. Rejection of Transfer Pricing Analysis: The AO rejected the transfer pricing analysis submitted by the assessee, which included only two comparables, and claimed that the AO was not given the opportunity to examine fresh comparables submitted during appellate proceedings. The Tribunal observed that the AO did not justify the rejection of the TP study and failed to explain the method used to determine the arm's length nature of the international transactions. The CIT(A) accepted the fresh search comparables submitted by the assessee during appellate proceedings, which showed that the assessee's transactions were at arm's length. The Tribunal found no ground to interfere with the CIT(A)'s findings. 4. Chargeability of Interest under Section 234B: The Revenue argued that the CIT(A) erred in holding that interest under Section 234B was not chargeable, relying on a decision in the case of DIT vs. Jacobs Civil Incorporated/Mitsubishi, which the Department had not accepted and against which a Special Leave Petition (SLP) was filed before the Supreme Court. The Tribunal did not specifically address this issue in the detailed analysis, focusing instead on the primary issues related to transfer pricing and determination of taxable profits. Conclusion: The Tribunal upheld the CIT(A)'s order, dismissing the Revenue's appeal. The Tribunal found that the AO's approach was arbitrary, lacked proper basis, and did not provide cogent reasons for rejecting the TP study adopted by the assessee. The CIT(A) correctly applied the RPM for benchmarking and considered the fresh comparables submitted by the assessee, which showed that the international transactions were at arm's length. The Tribunal emphasized the importance of analyzing the functional and risk disparities between the assessee and its group companies and upheld the CIT(A)'s findings on the determination of taxable profits and the application of operating profit percentage on sales.
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