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TMI Blog2016 (4) TMI 1121X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - I.T.A. Nos.5202 /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 the grounds inter alia that : 1. Whether on facts and circumstances of the case, the CIT(A) has failed to appreciate that the AO had correctly applied the operating profit percentage on sales of assessee s group company [ M/s Altira Group Inc.] as under a unique market situations brand royalty of a product played a vital role in the sale. 2. Whether on the facts and circumstances of the case the CIT(A) has failed to appreciate that the AO was correct in determining the incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) At Arm s Length 5. On the basis o f TP study adopted by the assessee company for the purposes of transfer pricing analysis the assessee considered the aforesaid international transactions to be at an arm s length. In the earlier years assessee has shown profit for rendering services to the group companies at cost plus method but during the year under consideration, it has shown loss amounting to ₹ 1,28,45,971/- marked as operating loss out of total trading turnover of ₹ 7,10,50,023/-. Assessee in its transfer pricing study chosen two co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is at 16.57% as against GP rate of 14.44% on gross turnover of ₹ 7,10,50,023/- adopted by the assessee company. AO after applying the GP rate of 16.57% and after allowing 5% reduction u/s 44C of the Act ear-marked 70% of the income to PE in India and thereby assessed the income at ₹ 78,29,038/-. The AO after rejecting the TP study relied upon by the assessee company for transfer pricing adjustment has returned the following findings :- As is reflected from the above statement, the assessee s group is earning operating profit of 16.60% for the year 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 are dealing in the same brand. Therefore the T.P. study and the T.P. Report are not reliable in the unique environment of tobacc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e profit outside India and remaining 70% to India where the sales have taken place. Therefore, the taxable income in India is 70% of ₹ 1,11,84,340/- which comes out to be ₹ 78,29,038/-. The Ld. 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 rejecting the TP study adopted by the assessee company nor disclosed the methodology adopted by him by affording an opportunity of being heard to the assessee to consider the international transaction at an arm s length ; that the DR has failed to explain as to which method has been adopted by the AO to determine the international transaction at arm s length ; that when the AO has himself not justified the segregation made by the assessee company he was not empowered to reject the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... third party industry benchmark; that Assessing Officer has also erroneously presumed that assessee is the main performing arm of the company through which all the activities of the company are carried out by ignoring the fact of Altria Group (of which assessee company is a wholly owned subsidiary) is engaged in a vide area of functions, own significant tangible and intangible assets and operates vast geographical spread; that if the gross margin is determined based on margin computed by Assessing Officer, it results into gross margin of approximately 49%, which is much higher than the average gross margin earned 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 undertaken by the assessee during appellate proceedings in para 5.3.2 and 5.3.3 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 cons ..... 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