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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 ..... on the 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 and the AO was not given the opportunity to examine the fresh comparables submitted during the appellate proceedings. 4. Whether on the facts and circumstances of the case the CIT(A) has erred in holding that interest u/s 234B was not chargeable in this case by relying upon the decision in the case of DIT vs. Jacobs Civil Incorporated/ Mitsubishi by ignoring that the said decision has not been accepted by the Department and against which a SLP has been filed before the Hon'ble Supreme Court involving 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 scr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock at nil. 6. From the result of business segment it has come on record that the assessee's group is earning operating profit at 16.60% for the year 2004 and 18.82% for the year 2003. TPO taking the role of Brand royalties as important feature with regard to the sales of a particular brand came to the conclusion that the price of brand is not dependent upon any other brand of cigarettes and thus AO made the comparability of assessee company with its 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 Rs. 1,11,84,340/- i.e. 78,29,038/-. 7. Assessee carried the matter before the Ld. CIT(A) who has allowed the appeal. Feeling aggrieved the revenue has come up before the Tribunal by way of filing the present appeal. 8. Assessee company is one of the group companies of Phillip Morris U.S.A. engaged in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidering 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 Rs. 88,43,852/-, professional & consultancy services and various other expenses. Some of the expenses charged are capital in nature. Since, for determination of taxable profit, the operating profit of the group is being resorted to, the aspect of allowability of expenditure is not considered as of now in this rder. In view of the income of the assessee is recomputed as under :- The weighted average of the operating profit rate of the group is 16.57. Since this operating margin accounts for 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 Rs. 7,10,50,023/- Operating Profit of the assessee Rs. 1,17,72,989/- (Applying the rate of 16.57%) Less 5% u/s 44C Rs. 5,88,649/- Total Income Rs. 1,11,84,340/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asis of profit margin of the group for bench marking without analysing the economic and marketing conditions of both the companies. 12. Assessing Officer again proceeded to recompute the income of the assessee on the basis guesswork by taking operating margin accounts 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 regarding the extended marketing supports services rendered by the assessee company and the only dispute is regarding the aspect of distribution. Ld. A.R. for the assessee by relying upon the impugned order passed by Ld. CIT(A) contended inter alia that the Assessing Officer has applied the operating profit rate of the group arbitrarily without any basis and without considering the assessee's duly audited accounts; that profits and lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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