JT International (India) Private Limited, (Presently known as Polisetty Somasundaram Tobacco Products (I) P. Ltd., Hyderabad V. Dy.CIT, Circle-2(1), Hyderabad

ITA 422/HYD/2014

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6134 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 11 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-02-2017
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 07-12-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 12-03-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Related party transaction; Business income; Depreciation; Transfer pricing; International transaction; Additional evidence; Commercial expediency; Set aside
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 92C; 271(1)(b); 139; 143(3); 92; 37(1); 13; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER I.T.A. NO. 422/HYD/2014 ASSESSMENT YEAR: 2009-10 JT INTERNATIONAL (INDIA) PRIVATE LIMITED, (PRESENTLY KNOWN AS POLISETTY SOMASUNDARAM TOBACCO PRODUCT (I) P LTD) HYDERABAD [PAN: AAACM1680P] VS DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-2(1), HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : MR. KANCHUN KAUSHAL, MR. ALIASGER RAMPURAWALA & MR. ABHIROOP BHARGAV, ARS FOR REVENUE : SHRI K.V.N. CHARYA, CIT-DR DATE OF HEARING : 07-12-2016 DATE OF PRONOUNCEMENT : 17-02-2017 O R D E R PER B. RAMAKOTAIAH, A.M. : THIS IS AN APPEAL BY ASSESSEE AGAINST THE ORDER OF TH E ASSESSING OFFICER (AO) U/S. 143(3) R.W.S. 92CA FURTH ER R.W.S. 144C(5) OF THE INCOME TAX ACT [ACT] CONSEQUENT TO THE D IRECTIONS GIVEN BY THE DISPUTE RESOLUTION PANEL [DRP], HYDERAB AD, DATED 26-12-2013. THE ISSUE IN THIS APPEAL IS WITH REFEREN CE TO THE TRANSFER PRICING (TP) ADJUSTMENTS MADE BY THE AO/TPO. ASSESSEE HAS RAISED THE GROUNDS AS UNDER: I.T.A. NO. 422/HYD/2014 :- 2 - : ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW: 1. THE LD AO/LEARNED DEPUTY COMMISSIONER OF INCOME- TAX (TRANSFER PRICING)-II, HYDERABAD (LD TPO') AND THE HON'BLE D ISPUTE RESOLUTION PANEL, HYDERABAD (HON'BLE DRP') ERRED IN MAKING AN ADJUST MENT OF INR 124,600,364 TO THE ARM'S LENGTH PRICE OF THE APPELL ANT'S INTERNATIONAL TRANSACTIONS .. 2. THE HON'BLE DRP ERRED IN UPHOLDING THE DECISION OF THE LD AO / LD TPO OF REJECTING THE TP DOCUMENTATION MAINTAINED BY THE APPELLANT AND INVOKING PROVISIONS OF SUBSECTION 3 OF 92C OF THE A CT, CONTENDING THAT THE INFORMATION AND DATA USED IN THE COMPUTATION OF THE ARM'S LENGTH PRICE ARE NOT RELIABLE OR CORRECT. 3. THE LD TPO/AO/DRP ERRED IN LAW AND ON FACTS OF T HE CASE IN REJECTING THE TRANSACTION BY TRANSACTION APPROACH ADOPTED BY THE APPELLANT AND AGGREGATING ALL THE INTERNATIONAL TRANSACTIONS USIN G TRANSACTIONAL NET MARGIN 'METHOD ('TNMM') AS THE MOST APPROPRIATE MET HOD. WHILE DOING SO, LD TPO/DRP HAS ERRED IN REJECTING THE COMPARABLE UN CONTROLLED PRICE METHOD (CUP') AND TNMM ADOPTED BY THE APPELLANT FO R DIFFERENT TRANSACTIONS. 4. THE LD TPO/AO/DRP ERRED IN DETERMINING THE PROFI TABILITY OF THE APPELLANT BY AGGREGATING THE TRANSACTIONS HAVING RE GARD TO THE UNCONTROLLED ENTERPRISES AND IN DOING SO, ERRED BY IGNORING THE FACT THAT, IF AT ALL AN ADJUSTMENT HAD TO BE UNDERTAKEN, IT COULD ONLY BE WITH REFERENCE TO THE PROFIT ELEMENT EMBEDDED IN THE CONTROLLED TR ANSACTIONS. 5. THE LD AO/LD TPO HAS ARBITRARILY SELECTED THE CO MPANIES AS COMPARABLE WITHOUT SHARING THE SEARCH PROCESS, THE METHODOLOGY APPLIED AND THE QUALITATIVE AND QUANTITATIVE CRITERION. 6. THE LD AO/LD TPO ERRED IN SELECTING COMPANIES WH ICH ARE INCOMPARABLE IN SCALE OF OPERATIONS AND HAVING DIFFERENT BUSINES S PROFILE AS COMPARED TO JTI INDIA AND DO NOT SATISFY THE TEST OF COMPARABIL ITY. 7. THE LD AO/TPO ERRED IN DETERMINING THE ARM'S LEN GTH PRICE WITH RESPECT TO THE MANAGEMENT FEE AND IT CHARGES PAID AS RS. NI L. 8. THE LD AO/LD TPO ERRED IN CONSIDERING SALES PROM OTIONAL EXPENSES INCURRED IN CONNECTION WITH THE SALES UNDERTAKEN BY THE APPELLANT AS MARKETING SPEND ON THE PROMOTION OF INTANGIBLES OWN ED BY THE AE, WITHOUT HAVING REGARD TO BUSINESS, COMMERCIAL AND R EGULATORY CONDITIONS IN WHICH THE APPELLANT OPERATES. 9. THE LD AO / LD TPO ERRED IN APPLYING BRIGHT LINE TEST AS AN ALTERNATE ANALYSIS FOR DETERMINATION OF EXCESS MARKETING SPEN D BY THE APPELLANT I.T.A. NO. 422/HYD/2014 :- 3 - : WITHOUT APPRECIATING THAT SUCH BENCHMARK IS NOT APP LICABLE GIVEN THE FACTS AND CIRCUMSTANCES OF THE APPELLANT. 10. THE LD AO/ LD TPO ERRED IN COMPARING THE PURCHA SE PRICE OF THE PROCESSED TOBACCO WITH PUBLISHED PRICE OF DIFFERENT GRADES OF TOBACCO AVAILABLE IN PUBLIC DOMAIN, RENDERING SUCH COMPARIS ON FALLACIOUS. 11. THE LD TPO/HON'BLE DRP ERRED IN NOT APPRECIATIN G THE INFORMATION SUBMITTED BY THE APPELLANT AS 'ADDITIONAL EVIDENCE' CORROBORATING THE ARM'S LENGTH NATURE OF ALL THE INTERNATIONAL TRANSA CTIONS. THE GROUNDS MENTIONED .ABOVE ARE WITHOUT PREJUDICE TO ONE ANOTHER. THE APPELLANT CRAVES LEAVE TO ADD TO AND/OR TO ALTE R, AMEND, RESCIND, MODIFY THE GROUNDS HEREIN ABOVE OR PRODUCE FURTHER DOCUMENTS BEFORE OR AT THE TIME OF HEARING OF THIS APPEAL. 2. BRIEFLY STATED, ASSESSEE IS ENGAGED IN THE MANUFAC TURE OF CIGARETTES. ASSESSEE-COMPANY FILED RETURN OF INCOM E ON 25-09-2009 ADMITTING NIL INCOME. THE CASE WAS CONVE RTED TO SCRUTINY AND AS ASSESSEE HAS INTERNATIONAL TRANSACTION S, THE MATTER WAS REFERRED TO TRANSFER PRICING OFFICER [TPO] FOR THE ARMS LENGTH PRICE DETERMINATION. ASSESSEE, M/S. JT INTERNA TIONAL INDIA PRIVATE LIMITED IS PRESENTLY KNOWN AS POLISETTY SOMASU NDARAM TOBACCO PRODUCTS (I) P. LTD., BY VIRTUE OF CHANGE OF I TS NAME DT. 26- 06-2012. IT WAS INCORPORATED ON 24 TH SEPTEMBER, 1993. UPON ACQUISITION OF RJ REYNOLDS INTERNATIONAL BY M/S. JT I NTERNATIONAL INC, THE NAME OF THE INDIAN COMPANY WAS CHANGED FROM MODI RJR LIMITED TO JT INTERNATIONAL (INDIA) LTD., AND BECAME PART OF JAPAN TOBACCO INTERNATIONAL GROUP. THE NAME WAS AGAIN CHAN GED TO M/S. JT INTERNATIONAL INDIA PRIVATE LIMITED ON 16-01 -2002. CONSEQUENTLY, IN MARCH, 2009, THE SHAREHOLDING PATTERN HAS CHANGED AND NOW IT IS HELD BY JT INTERNATIONAL MAURIT IUS PRIVATE LIMITED AT 50% AND ON INDIAN PROMOTERS AT 50%. DURING THE FINANCIAL YEAR ENDED WITH MARCH 31, 2009, ASSESSEE W AS ENGAGED I.T.A. NO. 422/HYD/2014 :- 4 - : IN THE BUSINESS OF MANUFACTURING OF CIGARETTES AND DI STRIBUTING THEM WITHIN INDIAN MARKET UNDER THE BRAND NAME GOLD C OAST AND WINSTON. ITS MANUFACTURING OPERATIONS COMMENCED FROM AUGUST, 2002 FROM ITS FACTORY NEAR HYDERABAD. IT WAS STATED THA T ASSESSEE IS A LICENSED MANUFACTURER AND DOES NOT OWN ANY UNIQ UE INTELLECTUAL PROPERTIES RELATED TO THE TECHNOLOGY AND THE PRODUCTS WHICH IT MANUFACTURES IN THE INDIAN MARKET. THE INTERN ATIONAL TRANSACTIONS ENTERED INTO BY ASSESSEE DURING THE YEAR A RE AS UNDER: SR.NO. PARTICULARS AMOUNT (RS) 1. PURCHASE OF RAW TOBACCO LEAF 4,56,29,711 2. PAYMENT OF PROCESSING CHARGES 2,82,58,945 3. PURCHASE OF NON - TOBACCO MATERIAL 5,73,04,796 4. PAYM ENT OF MANAGEMENT SERVICE CHARGES TOWARDS DEPUTATION OF PERSONNEL 2,13,34,200 5. PAYMENT OF IT/SAP CHARGES 1,21,62,810 6. REIMBURSEMENT OF PACKAGING DEVELOPMENT CHARGES 41,89,940 7. REIMBURSEMENT OF EXPENSE 26,050 TOTAL: 16,89,06,452 3. ASSESSEE ADOPTED TRANSACTION BY TRANSACTION APPROAC H UNDER CUP METHOD AND CARRIED OUT BENCH MARKING OF THE TRANSACTIONS. HOWEVER, IN THE TP PROCEEDINGS, THE TPO CARRIED OUT THE BENCH MARKING OF THE TRANSACTIONS BY AGGREGATING ALL THE INTERNATIONAL TRANSACTIONS AND ADOPTED TNMM FOR DETERMIN ING ALP. DURING THE TP PROCEEDINGS, THE TPO IDENTIFIED TWO COMP ANIES., M/S. GODFREY PHILIPS INDIA LTD., AND M/S VST INDUSTRI ES AS BEING COMPARABLE AND ARRIVED AT AN ARITHMETIC MEAN OF 13.40% AS BEING ARMS LENGTH MARGIN AND COMPARED WITH THE MARGIN OF AS SESSEE AT (-) 230.12%. ON THE TOTAL AMOUNT OF RS. 16,89,06,452/ - PAID TO AE UNDER VARIOUS HEADS, THE OPERATING REVENUE BASED ON TH E RATIO WAS ARRIVED AT 5,11,61,764/-. ON THIS, OPERATING COST WAS DETERMINED I.T.A. NO. 422/HYD/2014 :- 5 - : AT RS. 4,43,06,088/- ADOPTING TO 13.40% OF THE COMPAR ABLE COMPANIES. SINCE ASSESSEE PAID RS. 16,89,06,452/-, THE DIFFERENCE OF RS. 12,46,00,364/- WAS CONSIDERED AS ADJUSTMENT U/ S. 92CA(3) OF THE ACT. IN THE TP REPORT IN ADDITION TO THE TNMM A DOPTED BY THE TPO, HE ALSO ANALYSED UNDER CUP METHOD IN PARA 10 AND JUSTIFIED THE ADJUSTMENT TAKING THE SAME COMPARABLES AS BASIS. THE DRP DID NOT ACCEPT ASSESSEES OBJECTIONS AND CONFI RMED THE TP ANALYSIS AS MADE BY THE TPO. AO COMPLETED THE FINAL ORDER IN COMPLIANCE TO THE ORDERS OF THE DRP WHICH IS IN APPEAL BEFORE US. 4. LD. COUNSEL REFERRING TO THE ORDERS OF THE AUTHORITI ES SUBMITTED THAT THE ANALYSIS UNDERTAKEN BY THE TPO AS AFFIR MED BY THE DRP IS FAULTY SINCE ACCORDING TO THE DEPARTMENT, THE IMPORTS SHOULD HAVE BEEN MADE BY ASSESSEE AT 27% OF THE PRICE S WITH 73% DISCOUNT WHICH IS NOT COMMERCIALLY JUSTIFIED. IT WAS SUBMITTED THAT ASSESSEE HAD GROSS SALES OF RS. 56.72 CRORES AND MA TERIALS COST WAS RS. 13.78 CRORES AND OPERATING EXPENSES ARE AT 57 .85 CRORES. ASSESSEE ALSO HAD FINANCIAL CHARGES OF RS. 23.93 CR ORES AND AFTER PROVIDING FOR DEPRECIATION ADJUSTMENTS, THE TOTAL EXPENDI TURE WAS RS. 95.38 CRORES, RESULTING IN A LOSS OF RS. 73.09 C RORES DURING THE YEAR. IT WAS SUBMITTED THAT ASSESSEE HAD CARRIED FORWAR D LOSSES OF RS. 168 CRORES; THEREFORE, THE ORDER MENTIONS THE LOSS AT RS. 220 CRORES WHICH INCLUDES THE CARRIED FORWARD LOSSES. I T WAS SUBMITTED THAT THE ANALYSIS DONE BY THE TPO IS NOT CORRECT AS ASSES SEE HAS JUSTIFIED THE TRANSACTIONS ON CUP METHOD WHEREAS THE TPO ADOPTED TNMM AS THE BASIS. AS FAR AS THE COMPARABILITY ANAL YSIS IS CONCERNED, LD. COUNSEL OBJECTED TO THE SELECTION OF TW O COMPANIES I.E., M/S. GODFREY PHILIPS INDIA LTD., AND M/S. VST INDUSTRIES. THE I.T.A. NO. 422/HYD/2014 :- 6 - : OBJECTIONS OF ASSESSEE WITH REFERENCE TO THESE COMPANIE S ARE AS UNDER: M/S. GODFREY PHILIPS INDIA LTD : 4.1. THE TPO/DRP UPHELD THE INCLUSION OF THE M/S. GO DFREY PHILIPS INDIA LTD., WITHOUT INCORPORATING ANY OBJECTIONS ON FUNCTIONAL DIFFERENCES POINTED OUT BY ASSESSEE. IT WA S CONTENDED THAT THE SAID COMPANY IS FUNCTIONALLY DIFFERENT AS IT IS ENGAGED NOT ONLY IN THE MANUFACTURE AND SALE OF CIGARETTES BUT ALS O INTO CHEWING PRODUCTS AND TEA. IT IS ALSO INVOLVED IN OTHE R BRANDS SUCH AS PAN MASALA, VARIOUS FINE TEAS ETC. LD.TPO CONSIDERED CIGARETTE AND TOBACCO PRODUCTS AS A SEGMENT FOR COMPARISON TO ASS ESSEE. IT WAS SUBMITTED THAT ASSESSEE IS ENGAGED ONLY IN SALE OF CIGARETTES, WHEREAS M/S. GODFREY PHILIPS INDIA LTD., IS ENGAGED IN SALE OF UN- MANUFACTURED TOBACCO, UN-CUT TOBACCO ALONG WITH SALE O F CIGARETTES. THE SEGMENTAL DETAILS PERTAINING TO ONLY SAL E OF CIGARETTES ARE NOT AVAILABLE AND THEREFORE, THE BASIS O F COMPARISON WHEN THERE IS TRADING ALSO IN THE UN-MANUFACTURED TOBAC CO AND CIGARS WILL MAKE THE COMPANY NOT COMPARABLE WITH ASSE SSEE. ASSESSEE DID NOT INVOLVE IN ANY TRADING ACTIVITIES. IT WAS SUBMITTED THAT M/S. GODFREY PHILIPS INDIA LTD., DOES NOT HAVE A SPECIFIC SEGMENT IN RELATION TO THE SALE OF CIGARETTES ALONE. LD. COUNSEL RELIED ON THE DECISIONS OF THE CO-ORDINATE BENCH IN TH E CASE OF INTOTO SOFTWARE INDIA PVT. LTD., VS. ACIT IN ITA NO. 1196/HYD/2010 (AS AFFIRMED BY THE AP HIGH COURT) AND PEGASYSTEMS WORLDWIDE INDIA PVT. LTD., VS. ACIT IN IT A NO. 1758/HYD/2014 TO SUBMIT THAT WHEN SEGMENTAL DETAILS ARE NOT AVAILABLE, THE COMPANY CANNOT BE SELECTED AS COMPARAB LE, WHEN THERE ARE FUNCTIONAL DIFFERENCES BETWEEN ASSESSEES MA NUFACTURING I.T.A. NO. 422/HYD/2014 :- 7 - : ACTIVITY AND COMPARABLE COMPANIES MANUFACTURING AND TR ADING ACTIVITY. IT WAS ALSO SUBMITTED THAT M/S. GODFREY PHILIP S INDIA LTD., HAS RELATED PARTY TRANSACTIONS TO THE EXTENT OF 44.5% OF THE SALE AS CAN BE SEEN FROM PAGE 45 OF THE ANNUAL REPORT AND THER EFORE, THE PARAMETER FOR EXCLUDING COMPANIES WITH EXCEEDINGLY HIGH RELATED PARTY TRANSACTIONS SHOULD HAVE BEEN CONSIDERED BY THE TPO/DRP. LD. COUNSEL RELIED ON THE DECISION OF IVY COMPUTECH PVT. LTD., VS. ACIT IN ITA NO. 1558/HYD/2010 IN THIS REGARD FOR EXC LUDING THE ABOVE COMPANY ON RPT FILTER. IT WAS SUBMITTED THAT DU E TO FUNCTIONAL DIFFERENCE AND ALSO HAVING HIGH LEVEL OF RPT, OPERATIONAL RESULTS OF M/S. GODFREY PHILIPS INDIA LTD., CANNOT BE COMPARED TO THAT OF ASSESSEE. VST INDUSTRIES LTD: 4.2. ASSESSEE CONTESTS ABOUT THIS COMPARABLE ON FUNCTIO NAL DIFFERENCE. IT WAS SUBMITTED THAT VST INDUSTRIES IS ENGAG ED IN MANUFACTURE AND SALE OF TOBACCO AND RELATED PRODUCTS IN INDIA AND IT IS NOT SPECIFICALLY ENGAGED IN SALE OF CIGARETTES A LONE. IN ADDITION TO THAT, SAID COMPANY IS ALSO ENGAGED IN SALE OF LEAF TOBACCO AND UN-MANUFACTURED TOBACCO LIKE THAT OF M/S. GODFREY PHIL IPS INDIA LTD., AND SEGMENTAL DETAILS ARE NOT AVAILABLE. ACCORDIN GLY, FOLLOWING THE CASE LAW RELIED UPON IN THE ABOVE COMPARABLE, IT WAS SUBMITTED THAT THIS COMPANY IS ALSO NOT A COMPARABLE COMPANY. IT W AS SUBMITTED THAT ONCE ALL THE COMPARABLE COMPANIES SELECTED BY THE TPO FAILS THE TEST OF COMPARABILITY BASED ON THE FUN CTIONAL ANALYSIS, THE ENTIRE TP ANALYSIS FAILS. ACCORDINGLY, IT WAS SUBMITTED THAT THE TP ADJUSTMENT SO MADE IS TO BE DELETED. I.T.A. NO. 422/HYD/2014 :- 8 - : 5. LD. COUNSEL FURTHER SUBMITTED THAT ASSESSEE JUSTIFIED ITS TP STUDY VIS--VIS EACH INTERNATIONAL TRANSACTION. THE RE ARE TWO COMPONENTS OF PAYMENTS; PAYMENT FOR PURCHASE OF RAW TOB ACCO LEAF AMOUNTING TO RS. 4,56,29,711/- AND PAYMENT OF PROCESS ING CHARGES AMOUNTING TO RS. 2,82,58,945/-. IT WAS SUBM ITTED THAT RAW-MATERIAL REQUIRED FOR MANUFACTURING OF CIGARETTES IS ENTIRELY SOURCED FROM ITS AE. JTI GROUP LEVERAGES ON THE BENE FIT OF BULK PURCHASES FOR ITS AFFILIATES AND PURCHASES THE RAW TOBA CCO LEAF FROM INDEPENDENT THIRD PARTY SUPPLIERS. THE JTI GROUP IN TU RN SELLS SUCH RAW TOBACCO LEAF TO JTI INDIA. THE RAW MATERIAL IS DIRECTLY SENT TO JTI INDIAS AE- JTI TOBACCO SDN BHD, MALAYSIA FOR STORAGE AND SUBSEQUENT PROCESSING. JTI, MALAYSIA HAS A TEMPERATURE AND HUMIDITY CONTROL WARE-HOUSE THAT ENABLES STORAGE OF RAW TOBACCO LEAVES FOR LONG PERIOD OF TIME. JTI INDIA UTILIZES SUCH FACILITY TO STORE ITS RAW MATERIAL UNTIL IT IS PROCESSED INTO CUT F ILLER BY JTI, MALAYSIA. JTI, MALAYSIA CHARGES JTI INDIA ON THE SAL E OF RAW TOBACCO ON A COST TO COST BASIS WITHOUT ANY MARK-UP. I T WAS SUBMITTED THAT DURING THE FY.2008-09, JTI INDIA PURCHASE D 3,43,140 KGS OF RAW LEAF FROM ITS AE. THE INVOICES IN RELATION TO SUCH PURCHASES HAVE BEEN SUBMITTED TO TPO AND REFERRED TO THE FOLLOWING TABLE: INVOICE NO. AMOUNT (USD) AMOUNT (INR) PRICE PER KG OF LEAF QUANTITY IN KGS 95619067 2,525 1,01,500 2.53 1,000 95619340 86,113 34,37,961 2.85 30,170 95620179 61,764 25,67,593 2.87 22,220 95620178 61,819 25,69,844 2.78 21,550 95620490 25,283 10,80,074 4.02 58,730 95620491 176,017 75,19,448 3.00 6,290 95621153 643 27,430 3.39 190 95622136 260,417 1,24,92,814 2.83 91,990 95624017 325,724 1,58,33,046 2.93 111,000 TOTAL: 1,000,304 4,56,29,711 343,140 AVERAGE PER KG PRICE OF LEAF 3.02 I.T.A. NO. 422/HYD/2014 :- 9 - : 5.1. ADDITIONALLY, JTI MALAYSIA RENDERS PROCESSING SERVICES IN RELATION TO RAW TOBACCO PURCHASED BY INDIA. JTI MALAYSIA CHARGES MATERIAL COST INCLUDING OF DIRECT AND INDIREC T COSTS (SUCH AS LABOUR COST, GENERAL FACTORY AND MANUFACTURING EXP ENSES) WITH A STANDARD MARKUP TO JTI INDIA. THE AGREEMENT ENTERED BY ASSESSEE WITH ITS AE FOR PROCESSING OF RAW TOBACCO LEAF IS AS UNDER: BILLING PRICE TO INDIA USD PER KG CFS 1235 (IN USD) CRES AND CASING 0.23 NTM AND PACKING 0.16 CONVERSION COST 0.51 MARK UP (FINANCE AND OTHER CHARGES) 0.23 TOTAL PROCESSING FEES 1.13 FREIGHT FROM SHAH ALAM TO PORT KLANG 0.06 TOTAL BILLING TO INDIA 1.19 5.2. SINCE BOTH THE TRANSACTIONS; IMPORT OF RAW LEAF A ND PROCESSING OF RAW LEAF WAS CLOSELY LINKED, ASSESSEE AGGREGATED BOTH THE TRANSACTIONS AND ANALYSED THEM UNDER CUP METHOD. LD. COUNSEL RELIED ON RULE 10A(D) TO DEFINE A TRANSACTION TO INCLUDE A NUMBER OF CLOSELY LINKED TRANSACTIONS. HE FURTHER RELI ED ON OECD GUIDELINES REGARDING COMBINED TRANSACTION APPROACH AN D CONCEPT OF CLOSELY LINKED TRANSACTIONS. LD. COUNSEL RELIED ON THE DECISION RENDERED BY ITAT, MUMBAI IN THE CASE OF BOSKALIS IN TERNATIONAL DREDGING INTERNATIONAL CV VS. DCIT [167 TTJ 737 (MUM) ] FOR DEFINING CLOSELY LINKED TRANSACTIONS. BASED ON THE A BOVE, IT WAS SUBMITTED THAT SINCE THE TRANSACTIONS INFLUENCE EACH OTHER , THEY SHOULD BE CONSIDERED TOGETHER. IT WAS FURTHER SUBMITTED TH AT CORRECT PRICE PAID WAS COMPARED WITH A THIRD PARTY QU OTE OBTAINED FROM BOMMIDALA ENTERPRISES PVT. LTD., UNDER CUP METHOD. IT WAS SUBMITTED THAT THE TPO REJECTED THE SAME, WHEREAS IT WAS SUBMITTED THAT THE QUOTATION WAS CONTEMPORANEOUS HAVING I.T.A. NO. 422/HYD/2014 :- 10 -: OBTAINED DURING THE COURSE OF THE YEAR AND ALSO RELIE D ON THE FOLLOWING DECISIONS OF THE ITAT WHICH HELD THAT QUOTATI ON WOULD BE A VALID COMPARABLE PRICE AND CAN BE CONSIDERED AS A CUP: I. ADIT (IT) 3(2) VS. BALLAST NEDAM DREDGING (ITA NOS. 6531/MUM/2006 & 1591/MUM/2008); II. TECUMSEH PRODUCTS INDIA PRIVATE LIMITED VS. ASST. COMMISSIONER OF INCOME-TAX (ITA NO. 1686/HYD/2010); III. TOLL GLOBAL FORWARDING INDIA PVT. LTD., VS. DCIT (ITA NO. 5025/DEL/2010); IV. GULF ENERGY MARITIME SERVICES PVT. LTD., VS. INCOME T AX OFFICER (ITA NO. 3812/MUM/2015) 5.3. IT WAS FURTHER SUBMITTED THAT INSERTION OF RULE 10AB OF THE IT RULES ACCEPTING PRICE TO BE CHARGED AS INCLUDIN G PRICE AS WOULD HAVE BEEN HYPOTHETICALLY PAID, IT WAS SUBMITTED THAT THE AMENDMENT HAS BEEN HELD TO BE RETROSPECTIVE IN THE CASE OF TOLL GLOBAL FORWARDING INDIA PVT. LTD., VS. DCIT (ITA NO. 5025/DEL/2010) (SUPRA). 6. IT WAS FURTHER SUBMITTED THAT APART FROM CUP DATA SUBMITTED BY ASSESSEE DURING THE COURSE OF TP PROCEED INGS, ASSESSEE ALSO SUBMITTED THIRD PARTY INVOICES TO SUBSTAN TIATE CUP METHOD DURING THE DRP STAGE. THE INVOICES WERE IN REL ATION TO THIRD PARTY FROM GNT INDIA SUPPLYING AND RAW LEAVES TO A THIRD PARTY IN SWITZERLAND, THE ANALYSIS SHOWED THAT AVERAGE PURCHASE PRICE OF LEAF SUPPLIED BY A PARTY WAS AT 3.69 USD PE R KG, WHEREAS IT WAS SUPPLIED AT 3.02 USD PER KG BY JTI GROUP TO ASSES SEE. EVEN BASED ON THE ANALYSIS SUBMITTED BY ASSESSEE, THE TRANSAC TION I.T.A. NO. 422/HYD/2014 :- 11 -: SATISFIES ARMS LENGTH REQUIREMENT. BASED ON THE ABOV E, IT WAS SUBMITTED THAT BENCH MARKING PROCEDURE ADOPTED BY THE TPO IS NOT CORRECT AND ASSESSEES EXERCISE UNDERTAKEN IN THE TP STUDY SHOULD BE UPHELD. 7. COMING TO THE PURCHASE OF NON-TOBACCO MATERIAL AMOUNTING TO RS. 5,73,04,796/-, IT WAS SUBMITTED THAT AS SESSEE PURCHASED NON-TOBACCO MATERIAL SUCH AS TIPPING PAPER , ALUMINUM FOIL, INNER LINER ETC., WHICH ARE SUPPLIED BY TWO O F ITS AES- JTI, SWITZERLAND AND JTI TOBACCO SDN BHD, MALAYSIA, WHO A CT AS GLOBAL PROCURER FOR THE AFFILIATES WITHIN THE JTI GROUP GLOBAL LY. THESE NON- TOBACCO MATERIALS ARE NECESSARY TO MAINTAIN THE QUALITY STANDARDS THAT THE JTI INDIA HAS TO COMPLY WITH AND IN COMPLETION OF MANUFACTURE AND PACKING OF CIGARETTE. THE AES HAVE INCURRED COST TOWARDS PURCHASE OF NON-TOBACCO MATERIAL AND CERTAIN OTHER EXPENSES ON BEHALF OF JTI INDIA AND JTI GROUP TAKES ADVANTAGE OF BULK PURCHASES FROM INDEPENDENT THIRD PARTY VENDORS. THESE HAVE BEEN CROSS CHARGED WITHOUT ANY MARKUP BY AE TO JTI INDIA. IT WAS SUBMITTED THAT THE CUP METHOD HAS BEEN CONSIDERED MOST APPROPRIATE TP METHOD TO ARRIVE AT THE ARMS LENGTH PRIC E FOR THE SAID INTERNATIONAL TRANSACTIONS IN PURCHASE OF NON-TOBA CCO MATERIAL. BACK TO BACK INVOICES WERE SUBMITTED TO SUPP ORT THE PRICE CHARGED. HOWEVER, TPO REJECTED THE CUP ANALYS IS ON THE REASON THAT NO INVOICES WERE FURNISHED. EVEN DURING THE DRP PROCEEDINGS, THE TPO JUSTIFIED THE TNMM WHEREAS ASSES SEE JUSTIFIED THE CUP METHOD BY MENTIONING VARIOUS STAGES IN WHICH CUP METHOD IS APPLICABLE. IT WAS SUBMITTED THAT THE CONC LUSIONS DRAWN BY THE TPO AND DRP THAT CUP METHOD IS NOT APPLICA BLE IN BACK TO BACK TRANSACTIONS IS NOT CORRECT. IT WAS SUBMITTED THAT I.T.A. NO. 422/HYD/2014 :- 12 -: PURCHASE BETWEEN THIRD PARTY AND APPARENT AE IS AN UN CONTROLLED TRANSACTIONS AND SO A DIRECT CUP IS AVAILABLE. LD. CO UNSEL RELIED ON THE DECISION OF ITAT CHENNAI IN THE CASE OF REDING TON (INDIA) LTD., VS. ADDL. CIT [59 SOT 152] CHENNAI TRIB (URO) . IT WAS SUBMITTED THAT THE EVIDENCE PROVIDED CLEARLY DEMONSTRATE THERE EXISTED A CUP, HENCE CUP METHOD OUGHT TO HAVE BEEN ADO PTED ON AN AGGREGATE BASIS. 8. THERE ARE OTHER ISSUES WITH REFERENCE TO PAYMENT O F MANAGEMENT CHARGES AMOUNTING TO RS. 2,13,34,200/- AND PAYMENT OF IT/SAP CHARGES AMOUNTING TO RS. 1,21,62,81 0/-. IT WAS SUBMITTED THAT THESE TWO PAYMENTS MADE TO AES AS PER THE AGREEMENTS WERE CONSIDERED AT NIL ON A BENEFIT TEST BY THE TPO. IT WAS SUBMITTED THAT THESE PAYMENTS ARE MADE FOR VARIOUS SE RVICES RENDERED, COMMERCIAL EXPEDIENCY AND ON THE BASIS OF VALID AGREEMENTS. IT WAS SUBMITTED THAT THERE IS ONLY 1% MARK UP ON MANAGEMENT SERVICES PROVIDED BY AE WHICH ARE INTENDED TO DEFRAY ADMINISTRATIVE COST OF PAY ROLL MAINTENANCE AND BUT FOR SUCH MARK UP, THE TRANSACTION TAKES THE CHARACTER OF UNCONTROLLED TRANSACTION WITH A THIRD PARTY. LIKE-WISE, THE SAP SERVICES ARE PROVIDED WITH A MARKUP OF 5% ON THE COST AS ADMINISTRATIVE COSTS. THIS W AS JUSTIFIED ON THE BASIS OF EUROPEAN BENCHMARKING ANALY SIS BEFORE TPO. LD. COUNSEL RELIED ON VARIOUS DECISIONS AS UND ER: A. NEED FOR SERVICES: I. ITAT MUMBAI IN THE CASE OF DRESSER RAND INDIA PRI VATE LIMITED VS. ACIT IN ITA NO. 8753/MUM/2010. I.T.A. NO. 422/HYD/2014 :- 13 -: B. COMMERCIAL EXPEDIENCY: I. CIT VS. DHANRAJGIRJI RAJA NARASINGIRJI [91 ITR 5 44] (HON'BLE SUPREME COURT); II. CIT VS. EKL APPLIANCES LTD [345 ITR 241] (DELHI) ; III. CIT VS. CUSHMAN AND WEKEFIELD (INDIA) P. LTD., [269 CTR 16] (DEL); C. ALP OF AN INTERNATIONAL TRANSACTION CANNOT BE NIL: I. MCCANN ERICKSON INDIA P. LTD [ITA NO. 5871/DEL/20 11] (DEL.); II. AWB INDIA PVT. LTD., VS. DCIT (ITA NO. 6480/DEL/2 012) (DEL); III. DCIT VS. M/S. DIEBOLD SOFTWARE SERVICES PVT. LTD (ITA NO. 4347/DEL/2012) (DEL.); IV. PLATINUM GUILD INDIA PRIVATE LIMITED VS. DCIT (ITA NO. 7720/MUM/2012) (MUM); V. MERCK LTD. VS. DCIT (148 ITD 513) (MUM.); D. BENEFIT TEST: I. SAFRAN AEROSPACE INDIA P. LTD., VS. DCIT [ITA NO. 1261/BANG/2010]; E. NO ADJUSTMENT ON COST RELATING TO DEPUTATION OF PERSONNEL : I. ROYAL CANIN INDIA PRIVATE LIMITED VS. ADDL. CIT [I T(TP)A NO. 784/MUM/2016]; 8.1. IT WAS SUBMITTED THAT THE TRANSACTIONS OF MANAGEMENT CHARGES AND SAP CHARGES ARE TO BE TREATED AS ARMS LE NGTH AND ADJUSTMENT MADE BY THE TPO SHOULD BE DELETED. I.T.A. NO. 422/HYD/2014 :- 14 -: 9. WITH REFERENCE TO REIMBURSEMENT OF EXPENSES AND PACKING CHARGES AMOUNTING TO RS. 42,15,990/-, IT WAS SUBMITTED THAT JTI, INDIA REIMBURSES SUCH EXPENSES AT COST AND S INCE THE REIMBURSEMENT WAS AT COST, CUP METHOD WAS CONSIDERED AS MOST APPROPRIATE METHOD, BUT IGNORING THESE SUBMISSIONS THE TPO HAS COMBINED THESE TRANSACTIONS WITH PURCHASES AND OTHER FE ES PAID UNDER THE TNMM ANALYSIS. IT WAS SUBMITTED THAT CUP IS THE MOST APPROPRIATE METHOD FOR THE REIMBURSEMENT OF EXPENSES AN D RELIED ON THE FOLLOWING DECISIONS OF THE ITAT: I. LEE HARRIS POMROY ARCHITECTS PC VS. DCIT (ITA NO. 382/KOL/2015); II. FOSROC CHEMICALS INDIA P. LTD., VS. DCIT (ITA NO. 148/BANG/2014) 9.1. RELYING ON THE ABOVE, IT WAS SUBMITTED THAT TRANSAC TION OF REIMBURSEMENT EXPENSES WHICH IS A PURE COST TO COST TRANSACTION BE TREATED AS ARMS LENGTH AND ADJUSTMENT MADE BY THE T PO SHOULD BE DELETED. 10. IN REPLY, LD.DR SUBMITTED THAT TNMM ADOPTED BY THE TPO/DRP FOR BENCH MARKING OF THE INTERNATIONAL TRANSA CTIONS FOLLOWING THE AGGREGATED APPROACH IS JUSTIFIED BASED ON FACTS. IT WAS FURTHER SUBMITTED THAT A THIRD PARTY QUOTE FROM BOMMID ALA ENTERPRISES PVT. LTD., CANNOT BE CONSIDERED AS A CUP FO R BENCH MARKING TRANSACTIONS PURCHASE OF TOBACCO MATERIAL. WHILE ACCEPTING THAT BACK TO BACK INVOICES CAN BE CONSIDERED FOR BENCH MARKING UNDER CUP METHOD, IT WAS SUBMITTED THAT ASSESSEE HAS NOT SUBMITTED THE INVOICES THEREFORE, TPO ADOPTED TNMM FO R I.T.A. NO. 422/HYD/2014 :- 15 -: TRANSACTION OF PURCHASE OF NON-TOBACCO MATERIAL ALSO. WITH REFERENCE TO PAYMENT OF MANAGEMENT SERVICES AND SAP SE RVICES. LD.DR RELIED ON THE ANALYSIS OF TPO THAT NO BENEFIT WAS DERIVED ACCORDINGLY THE PAYMENT IS CONSIDERED AT NIL. LD.DR R ELIED ON THE DECISION IN AY. 2004-05 WHILE DEFENDING THE TPOS OR DER VIZ-A-VIZ MANAGEMENT CHARGES. FURTHER, IT WAS SUBMITTED THAT ASSESS EE DOES NOT REQUIRE ANY SAP SERVICES SINCE IT IS A MANUF ACTURING COMPANY. 11. IN REPLY, LD. COUNSEL SUBMITTED THAT TNMM ADOPTED B Y THE TPO BY FOLLOWING AN AGGREGATED APPROACH OF ALL TH E TRANSACTIONS IS BAD IN LAW. FURTHER IT WAS SUBMITTED THAT THE QUOTES PROVIDE A VALID CUP, BASED ON LEGAL SUBMISSIO NS AND THE BACK TO BACK INVOICES PROVIDED BY ASSESSEE SHOULD BE EXAMINED UNDER CUP ONLY, AS ACCEPTED BY THE LD.CIT-DR. WITH REFERENCE TO SERVICES ALSO IT WAS SUBMITTED THAT ASSESSEE GOT BENEFIT I N RESPECT OF MANAGERIAL SERVICES PROVIDED AND MAINLY THESE AR E DEPUTATION OF PERSONNEL WHOSE SALARIES ARE PAID BY ASSESSEE. HOWE VER, THE DECISION REGARDING QUANTIFICATION OF SALARY OF SECOND ED EMPLOYEE PERTAINING TO AY. 2004-05 DOES NOT APPLY TO THE PRESENT YEAR. IT WAS SUBMITTED THAT BOTH SAP SERVICES AND MANAGERIAL SE RVICES ARE PROVIDED TO THE COMPANY AND THESE ARE BEING PROVIDED WITH COST PLUS BASIS, WHICH CANNOT BE DISALLOWED ON BENEFIT TES T. 12. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERU SED THE ORDERS OF THE AUTHORITIES. BEFORE ADVERTING TO THE METHOD ADOPTED, WE NOTICE THAT ASSESSEES TURNOVER AS STATED IN PAGE 12 OF THE ORDER WAS RS. 56,72,39,402/- WHICH ALSO TALLIES W ITH THE SALE SHOWN IN THE P&L A/C. HOWEVER, AO WHILE CONSIDERIN G THE RATIOS I.T.A. NO. 422/HYD/2014 :- 16 -: IN PARA 6 IN PAGE 3 OF THE TP ORDER, TOOK THE OPERATIN G REVENUE AT RS. 22,19,53,116/-. AS SEEN FROM THE P&L A/C, THIS A MOUNT IS AFTER EXCLUDING THE EXCISE DUTY WHICH WAS INCLUDED I N THE SALES. HOWEVER, WHETHER A SIMILAR EXERCISE WAS DONE FOR EXC LUDING EXCISE DUTY OUT OF THE RAW-MATERIAL PURCHASES OR ANY OTHER TAXE S INVOLVED OUT OF THE OPERATING COST WAS NOT FORTHCOMING FROM THE ORDER OF THE TPO. IT IS ALSO NOT CLEAR WHETHER SIMILAR EXERCISE WA S UNDERTAKEN FOR THE TWO COMPARABLES SELECTED BY THE TPO. IN THE A BSENCE OF THIS EXERCISE, ADOPTING THE OPERATING REVENUE AT RS. 22, 19,53,116/- AS AGAINST RS. 56,72,39,402/- OF RECEIPTS WILL CERTAIN LY EFFECT THE WORKING FOR THE PURPOSE OF COMPARABILITY. FURTHER, A S SEEN FROM THE OPERATING COST ALSO, WE ARE UNABLE TO ARRIVE AT THE FIGURES OF OPERATING COST AT RS. 73,27,22,611/-. AS SEEN FROM THE P&L A/C, THE TOTAL EXPENDITURE SHOWN BY ASSESSEE IS RS. 95,37,78 ,733/- AND THE LOSS SHOWN FOR THE YEAR WAS RS. 73,09,58,662/-. THE COMPONENT OF THE COST ADOPTED BY THE TPO ON THE BASIS O F WHICH THE OP/OR AT (-)230.12% AND OP/OC AT (-) 69.71% IS NO T VERIFIABLE AS CORRECT OR NOT? FURTHER, WHEN TNMM IS ADOPTED AS A METHOD AT OPERATING LEVEL OF THE COMPANY, INSTEAD OF MA KING ADJUSTMENTS ON TOTAL SALES OR TOTAL REVENUE OR ON THE BASI S OF THE OPERATING COST, THE TPO SURPRISINGLY TOOK THE PAYMENTS MADE TO AE AS THE BASIS AND BY BACKWARD WORKING OF AMOUNT, ARRIV ED AT OPERATING COST ALLOWABLE AT RS. 4,43,06,088/- AND THE DIFFERENCE BETWEEN THE AMOUNT PAID AND THIS ALLOWABLE COST WAS TAK EN AS DOWNWARD ADJUSTMENT FOR THE PURPOSE OF 92CA. INSPITE OF GIVING OUR BEST EFFORTS TO UNDERSTAND THIS METHODOLOGY, IT MUST BE ADMITTED THAT WE FAIL TO UNDERSTAND THE LOGIC IN THE METH OD ADOPTED BY THE AO/TPO WHILE COMPLETING THE TP STUDY. IN OUR HUMBLE OPINION, THE METHOD ADOPTED IS NOT A PRESCRIBED METHOD AS I.T.A. NO. 422/HYD/2014 :- 17 -: WE HAVE BEEN OBSERVING IN VARIOUS OTHER TP CASES. SINCE THE VERY BASIS FOR ARRIVING AT THE TP ADJUSTMENT IS NOT VERIFIABL E EITHER ON THE FIGURES ADOPTED OR ON THE METHOD ADOPTED, WE ARE NO T IN A POSITION TO EXAMINE AND AFFIRM THE TP STUDY MADE BY THE TPO ON THIS FUNDAMENTAL ISSUE ITSELF. 13. COMING TO THE OBJECTIONS OF ASSESSEE, WE AGREE W ITH ASSESSEE ON THE SELECTION OF TWO COMPARABLES. BOTH M/ S. GODFREY PHILIPS INDIA LTD., AND M/S VST INDUSTRIES ARE IN THE BUSINESS OF MANUFACTURING OF CIGARETTES BUT AS RIGHTLY SUBMITTED BY ASSESSEE, M/S. GODFREY PHILIPS INDIA LTD., IS ALSO INVOLVED IN MANUFACTURING OF VARIOUS OTHER NON-TOBACCO PRODUCTS. NOT ONLY THAT EV EN IF THE SEGMENTAL REPORTS OF TOBACCO BUSINESS IS CONCERNED, THE N THAT COMPANY IS ALSO HAVING LOT OF TRADING ACTIVITY AND IT C ERTAINLY FAILS THE RELATED PARTY TRANSACTIONS (RPT) FILTER. THUS, M/ S. GODFREY PHILIPS INDIA LTD., CANNOT BE CONSIDERED AS A COMPARA BLE COMPANY UNLESS THE COST PERTAINING TO MANUFACTURING ACTIVITY OF TOBACCO IS EXCLUSIVELY OBTAINED BY THE AO. WHEN NO SUCH INFORMA TION IS AVAILABLE ON RECORD, THEREFORE, ADOPTING THE INFORMATIO N FROM THE PUBLIC DOMAIN WITHOUT SEGMENTAL RESULTS OF MANUFACTURIN G ACTIVITY ALONE CANNOT BE ADOPTED FOR THE PURPOSE OF COMPARABILI TY ANALYSIS. THIS GIVES SKEWED RESULTS. 13.1. SIMILAR OBJECTIONS ARE ALSO WITH M/S VST INDU STRIES, WHEREIN ALSO THERE IS TRADING ACTIVITY AND SEGMENTAL D ETAILS OF MANUFACTURING ACTIVITY ARE NOT AVAILABLE IN PUBLIC D OMAIN. THUS, SELECTION OF THE TWO COMPARABLE COMPANIES FAILS ON FU NCTIONAL DIFFERENCES AND SO THE ADJUSTMENTS MADE BASED ON THE AB OVE DATA CANNOT BE SUSTAINED. I.T.A. NO. 422/HYD/2014 :- 18 -: 13.2. IN ADDITION TO THE ABOVE, ASSESSEE IS ALSO OBJ ECTING TO REJECTION OF THE QUOTES SUBMITTED BY IT AS WELL AS THE S ALE INVOICES FROM THIRD PARTY WHICH ARE PASSED ON TO ASSESSEE WITH OUT ANY MARKUP WHILE PURCHASING RAW-MATERIAL EITHER OF TOBACCO OR OTHER RAW-MATERIALS. IN OUR OPINION, THE TPO HAS NOT EXAMIN ED THIS ISSUE AND HAS REJECTED OUT-RIGHTLY WITHOUT EXAMINING THE AS SESSEES CONTENTIONS. VARIOUS CASE LAW RELIED ON BY ASSESSEE, WHICH WE DO NOT INTEND TO REPEAT HERE FOR THE SAKE OF BREVITY, HOWE VER, ESTABLISHES THAT VARIOUS QUOTES OBTAINED FROM VARIOUS ES TABLISHED AUTHORITIES CAN BE ACCEPTED. EVEN THE LAW HAS BEEN A MENDED SUBSEQUENTLY TO PROVIDE ADOPTION OF HYPOTHETICAL PRICE IN THE ABSENCE OF ANY ACTUAL PRICE. THUS, THE TPOS OBSERVA TION THAT THESE QUOTES CANNOT BE RELIED IS NOT PROPER. MOREOVER, THE QUOTES WERE OBTAINED DURING THE YEAR FROM BOMMIDALA BROTHERS AND IT IS A CONTEMPORANEOUS QUOTE, VERACITY OF WHICH SHOULD HAVE BEEN EXAMINED BY THE TPO INSTEAD OF REJECTING IT OUT-RIGHTLY . NOT ONLY THAT ASSESSEE ALSO FURNISHED QUOTE FROM THIRD PARTY DUR ING THE PROCEEDINGS BEFORE THE DRP; EVEN THOSE WERE REJECTED. IN OUR VIEW, THE PROCEDURE ADOPTED BY THE TPO IS NOT APPROPRIATE AND HE SHOULD HAVE CONSIDERED ASSESSEES CONTENTIONS ON CUP METHOD SINCE THE PURCHASE OF TOBACCO AND PAYMENT OF PROCESSIN G CHARGES ARE CLOSELY RELATED TRANSACTIONS. AS FAR AS THE MANAGE MENT CHARGES AND SAP CHARGES ARE CONCERNED, THE GENUINENESS OF TH E EXPENDITURE HAS NOT BEEN DOUBTED AS THE SAID EXPENDITURE WAS NOT DISALLOWED U/S. 37(1) OF THE ACT. EVEN THOUGH ASSESSE ES OPERATIONS HAVE RESULTED IN LOSS, THERE IS NO DISALLO WANCE OF ANY SUCH EXPENDITURE, AS NOT PERTAINING TO ASSESSEES BUSI NESS. THEREFORE, TPOS ANALYSIS ON BENEFIT TEST AND DETERMIN ING THE AMOUNT AT NIL CANNOT BE ACCEPTED. THE HON'BLE DELHI H IGH COURT I.T.A. NO. 422/HYD/2014 :- 19 -: IN THE CASE OF CIT VS. EKL APPLIANCES LTD [345 ITR 24 1] (DELHI) HAS ALREADY HELD THAT THE REVENUE CANNOT ASSUME THE ROLE OF ASSESSEE TO DECIDE HOW MUCH IS THE REASONABLE EXPENDITURE HAVIN G REGARD TO THE CIRCUMSTANCES OF THE CASE. IT IS ALSO HELD THAT IT IS NOT OPEN TO TPO TO QUESTION THE JUDGMENT OF THE APPLICANT AS TO HOW IT SHOULD CONDUCT ITS BUSINESS REGARDING THE NECESSITY OR OTHERWI SE OF INCURRING EXPENDITURE IN THE INTEREST OF ITS BUSINESS. AS ALREADY POINTED OUT EARLIER, THE AO HAS NOT QUESTIONED THE EXPEND ITURE PER SE IN THE ASSESSMENT ORDER. THEREFORE, IN OUR OPINION, TPO HAS EXCEEDED HIS BRIEF IN DETERMINING THE MANAGEMENT AND SAP CHARGES AT NIL ON THE SO CALLED BENEFIT TEST. WE DO NO T APPROVE THE STAND TAKEN BY THE TPO ON THIS AND AGREE WITH ASSESSEES CONTENTIONS ON THIS ISSUE. 13.3. EVEN ASSESSEES CONTENTIONS THAT SOME OF THE EXPENDITURE LIKE REIMBURSEMENT EXPENDITURE WAS WITH A N OMINAL MARKUP IS NOT EXAMINED BY THE TPO AT ALL. SINCE THE A MOUNTS ADOPTED BY THE TPO AS WELL AS THE METHOD ADOPTED IS NOT PROPER AND SINCE ASSESSEES CONTENTIONS OF CUP METHOD HAS NOT BEEN CORRECTLY APPRECIATED BY THE TPO, WE HAVE NO OPTION THAN TO SET ASIDE THE ENTIRE ORDER OF THE TPO. MOREOVER, THE TWO C OMPARABLE COMPANIES SELECTED BY THE TPO ALSO FAIL ON FUNCTIONA LITY TEST. THEREFORE, COMPARING ASSESSEE-COMPANYS AE TRANSACTIO NS ON THAT BASIS CANNOT BE APPROVED. IN VIEW OF THAT, WE SET ASID E THE ORDERS OF THE TPO AND DRP AND RESTORE THE TP STUDY TO THE FILE OF THE AO/TPO TO CONSIDER IT AFRESH AND RE-EXAMINE ASSESSEE S CONTENTIONS IN THE LIGHT OF THE SUBMISSIONS BEFORE US A ND THE CASE LAW RELIED UPON. TPO SHOULD GIVE DUE OPPORTUNITY TO A SSESSEE AND HE WOULD BE FREE TO EXAMINE ANY OTHER COMPARABLE CO MPANIES IN I.T.A. NO. 422/HYD/2014 :- 20 -: CASE TNMM IS CONSIDERED AS A MOST APPROPRIATE METHOD. HOWEVER, WE ARE NOT GIVING ANY FINDING ON EITHER AS MOST APPROP RIATE METHOD OR ON THE CONTENTIONS RAISED BY ASSESSEE BEFORE US, AS IT MAY PRECLUDE TPO TAKING ANY INDEPENDENT DECISION. THEREF ORE, THE ENTIRE ISSUE OF TP STUDY IS RESTORED TO THE FILE OF THE T PO FOR FRESH EXAMINATION AND CONSIDERATION AND HE SHOULD KEEP IN M IND THE SUBMISSIONS OF ASSESSEE, THE LAW ON THE SUBJECT AND TO DECIDE BASED ON FACTS. ASSESSEE IS FREE TO MAKE SUBMISSIONS AND NECESSARY DATA/OBJECTIONS BEFORE THE TPO/DRP IF REQUIR ED. ACCORDINGLY, THE ORDER OF THE AO DT. 06-01-2014 ALONG WITH THE ORDERS OF THE DRP AND TPO ARE SET ASIDE AND THE ENTIRE MATTER IS RESTORED TO THE FILE OF THE AO/TPO FOR FRESH ADJUDICATIO N. GROUNDS ARE CONSIDERED ALLOWED FOR STATISTICAL PURPOSES. 14. IN THE RESULT, APPEAL OF ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 17 TH FEBRUARY, 2017 SD/- SD/- (P. MADHAVI DEVI) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEM BER HYDERABAD, DATED 17 TH FEBRUARY, 2017 TNMM I.T.A. NO. 422/HYD/2014 :- 21 -: COPY TO : 1. JT INTERNATIONAL (INDIA) PRIVATE LIMITED, (PRESE NTLY KNOWN AS POLISETTY SOMASUNDARAM TOBACCO PRODUCTS (I) P. L TD), SY.NO. 581/1, 581/2, 582, 583, IDA UPPAL, HYDERABAD ; 2. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-2( 1), HYDERABAD. 3. DISPUTE RESOLUTION PANEL (DRP), HYDERABAD. 4. DIRECTOR OF INCOME TAX (IT & TP), HYDERABAD. 5. ADDL. COMMISSIONER OF INCOME TAX (TRANSFER PRICI NG), HYDERABAD. 6. D.R. ITAT, HYDERABAD. 7. GUARD FILE.