DCIT, New Delhi V. M/s Philip Morris Services India (S.A) India Branch Office, New Delhi

ITA 5202/DEL/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 6455 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 5 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-03-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I1
• Assessment Year: 2004-2005
• Appeal Filed On: 08-10-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA CIT DR SH RAHUL CYORS
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Permanent establishment; Wholly owned subsidiary
• Section: 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1, NEW DELHI BEFORE SHRI R.S.SYAL, ACCOUNTANT MEMBER SHRI KULDIP SINGH, JUDICIAL MEMBER I.T.A. NOS.5202 /DEL/2012 (ASSESSMENT YEARS 2004-05) DCIT VS. PHILLIP M ORRIS SERVICES INDIA (S.A.) INDIA BRANCH OFFICE CIRCLE 2(1), 28, BARAKHAMBA ROAD, NEW DELHI NEW DELHI PAN : AACCP 2770K APPELLANT) (RESPONDENT) ASSESSEE BY : SH. NEERAJ JAIN, ADV. SH. RAONIT KOTJAL, CA SH. PUNEET CHUGN, C.A. REVENUE BY : SH. AMRENDRA , CIT, DR SH. RAHUL CYORS, SR. DR DATE OF HEARING: 16.02.2016 DATE OF PRONOUNCEMENT: 21.03.2016 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 AP PEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 16.7.2012 PASSED BY CIT(A), NE W 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 APPL IED THE OPERATING PROFIT PERCENTAGE ON SALES OF ASSESSEES GROUP COM PANY [ M/S ALTIRA 2 ITA NO. 5202/DEL/2012 PHILIP MORRIS SERVICES INDIA (S.A.) GROUP INC.] AS UNDER A UNIQUE MARKET SITUATIONS BRA ND ROYALTY OF A PRODUCT PLAYED A VITAL ROLE IN THE SALE. 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE THE CIT(A) HAS FAILED TO APPRECIATE THAT THE AO WAS CORRECT IN DET ERMINING THE INCOME OF THE ASSESSEE ON THE BASIS OF THE OPERATIN G PROFIT PERCENTAGE ON SALES OF ITS GROUP COMPANY SINCE IT WAS NOT POSS IBLE TO CORRECTLY DETERMINE THE TAXABLE PROFITS ON THE BASIS OF PROFI T AND LOSS ACCOUNT PREPARED BY IT WHICH INTER-ALIA INCLUDED EXPENSES O F CAPITAL NATURE AND WERE NOT ADMISSIBLE. 3. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE 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 T HE OPPORTUNITY TO EXAMINE THE FRESH COMPARABLES SUBMITTED DURING T HE 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 CHA RGEABLE 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 HONBLE SUPREME COURT INVOLVING SI MILAR ISSUE. 2. BRIEFLY STATED FACTS OF THIS CASE ARE : DURIN G THE PROCESSING OF RETURN OF INCOME FILED BY THE ASSESSEE FOR ASSESSMENT YEAR 20 04-05, THE CASE WAS SELECTED FOR SCRUTINY AND CONSEQUENT TO THE NOTICE ISSUED U/ S 143(2) SHRI ARUN SAWARA, C.A. ATTEND THE PRECEDENCE FROM TIME TO TIME, FILED SUBMISSIONS AND REPLIES TO THE CLARIFICATIONS / QUESTIONS RAISED. 3. ASSESSEE COMPANY IS A WHOLLY OWNED SUBSIDIARY OF FTR HOLDING S.A. (SWISS HOLDING COMPANY) AND IS ONE OF THE GROUP COM PANIES OF PHILLIP MORRIS U.S.A. AND IS INTO THE BUSINESS OF MANUFACTURING AN D TRADING OF CIGARETTES AND OTHER TOBACCO PRODUCTS MAIN OPERATION OF THE ASSESS EE COMPANY IS 3 ITA NO. 5202/DEL/2012 PHILIP MORRIS SERVICES INDIA (S.A.) IMPORT AND DISTRIBUTION OF THE MARLBORO BRAND OF C IGARETTES IN INDIA AS WELL AS EXPORT OF TOBACCO LEAVES ; AND PROVIDES SERVICES TO ITS ASSOCIATED ENTERPRISES I.E . MARKETING SUPPORT SERVICES. 4. DURING THE ASSESSMENT YEAR UNDER CO NSIDERATION THE ASSESSEE HAS SHOWN LOSS OF RS. 1,28,45,971/- AS OPERATING LOSS FROM TO TAL TURNOVER OF RS. 7,10,50,023/- AND ENTERTAIN TO FOLLOWING INTERNATIONAL TRANSACTIO NS WITH ITS ASSOCIATED ENTERPRISES (A.E.) S.NO. PARTICULARS TRANSACTION VALUE (RS.) BENCHMARKING METHOD ASSESSEES MARGINS COMPARABLES MARGINS 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 ARMS LENGTH 2 PROVISION OF SERVICES 2,45,83,466 TRANSACTIONAL NET MARGIN METHOD (TNMM) OP / TC : 5.00% 7.33% (ON AVERAGE DATA) AT ARMS LENGTH 5. ON THE BASIS O F TP STUDY ADOPTED BY THE ASS ESSEE COMPANY FOR THE PURPOSES OF TRANSFER PRICING ANALYSIS THE ASSESSEE CONSIDERED THE AFORESAID INTERNATIONAL TRANSACTIONS TO BE AT AN ARMS LENGTH . IN THE EARLIER YEARS ASSESSEE HAS SHOWN PROFIT FOR RENDERING SERVICES TO THE GRO UP COMPANIES AT COST PLUS METHOD BUT DURING THE YEAR UNDER CONSIDERATION, IT HAS SHOWN LOSS AMOUNTING TO RS. 1,28,45,971/- MARKED AS OPERATING LOSS OUT OF T OTAL TRADING TURNOVER OF RS. 7,10,50,023/-. ASSESSEE IN ITS TRANSFER PRICING STU DY CHOSEN TWO COMPARABLES AND TAKEN THE BASIS FOR COMPARISON OF PROFIT ON THE BASIS OF SO-CALLED ALTERNATIVE PRACTICAL APPROACH BASED ON RESALE PR ICE METHOD. AO REJECTED THE COMPARABLES TAKEN BY THE ASSESSEE AS NOT CORRECT ON E AS NONE OF THE COMPARABLE HAS ACTUALLY INCURRED NET LOSS IN ITS TRADING TRANS ACTIONS. ASSESSEE EXPLAINED THE REASON FOR NET LOSS AS HUGE EXPENDITURE INCURRED WITHOUT COMPARABLE RECEIPTS. TPO NOTICED THAT THE ASSESSEE HAS SOLD HIS ENTIRE P URCHASES DURING THE YEAR LEAVING CLOSING STOCK AT NIL. 4 ITA NO. 5202/DEL/2012 PHILIP MORRIS SERVICES INDIA (S.A.) 6. FROM THE RESULT OF BUSINESS SEGMENT IT HAS C OME ON RECORD THAT THE ASSESSEES GROUP IS EARNING OPERATING PROFIT AT 16. 60% FOR THE YEAR 2004 AND 18.82% FOR THE YEAR 2003. TPO TAKING THE ROLE OF BR AND ROYALTIES AS IMPORTANT FEATURE WITH REGARD TO THE SALES OF A PARTICULAR BR AND 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 RE JECTED THE TP REPORT. AO HAS NOT EXAMINED THE ISSUE OF ALLOW ABILITY OF EXPE NDITURE FOR DETERMINATION OF THE TAXABLE PROFIT. AO HAS TAKEN WEIGHTED AVERAGE O F THE OPERATING PROFIT RATE OF THE GROUP AT 16.57 AND HOLD THE 50% OF THE PROFIT T O BE ATTRIBUTABLE TO THE ACTIVITIES OF THE ASSESSEE IN INDIA AND COMPUTED TH E 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. CI T(A) WHO HAS ALLOWED THE APPEAL. FEELING AGGRIEVED THE REVENUE HAS COME UP B EFORE THE TRIBUNAL BY WAY OF FILING THE PRESENT APPEAL. 8. ASSESSEE COMPANY IS ONE OF THE GROUP COMPAN IES OF PHILLIP MORRIS U.S.A. ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADI NG OF CIGARETTES AND OTHER TOBACCO PRODUCTS AND OPERATES THROUGH ITS INDIAN BR ANCH AUTHORISED TO CARRY OUT ACTIVITIES INTER ALIA THAT : IMPORT AND DISTRIBUTION OF THE MARLBORO BRAND OF CI GARETTES IN INDIA AS WELL AS EXPORT OF TOBACCO LEAVES; AND PROVIDES SERVICES TO ITS ASSOCIATED ENTERPRISES I.E . MARKETING SUPPORT SERVICES. 9. UNDISPUTEDLY ASSESSEE COMPANY IS A PART OF GROUP NAMELY ALTRIA GROUP AND INDIAN BRANCH OFFICE IS PE OF THE ASSESSEE COMP ANY. AO AFTER REJECTING THE TP STUDY ADOPTED BY THE ASSESSEE COMPANY ON TH E BASIS OF WHICH IT HAS 5 ITA NO. 5202/DEL/2012 PHILIP MORRIS SERVICES INDIA (S.A.) CONSIDERED ITS INTERNATIONAL TRANSACTIONS TO BE A T AN ARMS LENGTH ADOPTED THE GP RATE OF ITS GROUP WHICH IS AT 16.57% AS AGAINST GP RATE OF 14.44% ON GROSS TURNOVER OF RS. 7,10,50,023/- ADOPTED BY THE ASSESS EE 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 RS. 78,29,038/-. THE AO AFTER REJECTING THE TP STUDY RELIED UPON BY THE ASSESSEE COMPANY FOR TRANSFER PRICING ADJUSTMEN T HAS RETURNED THE FOLLOWING FINDINGS :- AS IS REFLECTED FROM THE ABOVE STATEMENT, THE ASS ESSEES 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 MARK ET. BRAND LOYALTY PLAYS A VITAL ROLE WITH REGARD TO SALES OF A PARTICULAR BRAND. TH E 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 IMPRUDE NT TO COMPARE THE MARGIN OF THE ASSESSEE WITH ANY OTHER ENTITY TRADING IN OTHER BRANDS. THE ONLY PRUDENT COMPARABILITY WILL BE WITH THE ASSESSEES GROUP ONL Y, 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 TOBACCO BUSINESS. THEREFORE AS STATE D ABOVE, THE PROFIT MARGIN OF THE GROUP WOULD BE THE RELEVANT BENCHMARK FOR ARRIV ING AT THE PROFIT OF THE ASSESSEE. THE ASSESSEE HAS FILED ITS AUDITED ACCOUNTS IN RES PECT OF THE BRANCH. IT IS HOWEVER POINTED OUT THAT THE PRESENT ASSESSMENT IS ON THE ASSESSEE WHO IS OPERATING IN INDIA THROUGH A BRANCH. THEREFORE, THO UGH THE AUDITED ACCOAUNT OF BRANCH IS RELEVANT FOR DETERMINATION OF THE PROFIT OF THE ASSESSEE IN INDIA, YET IT IS NOT THE ONLY CRITERIA FOR DETERMINING THE PROFIT, C ONSIDERING THE ARRANGEMENT UNDER WHICH THE ASSESSEE OPERATES. EVEN IF WE CONSIDER THE AUDIT REPORT, THERE ARE VA RIOUS EXPENDITURES CLAIMED IN THE PROFIT AND LOSS ACCOUNT, WHICH ARE NOT ALLOWABL E FOR THE PURPOSE OF COMPUTATION OF TAXABLE INCOME OF THE ASSESSEE IN IN DIA AS PER THE PROVISIONS OF INCOME TAX ACT. FOR INSTANCE, TRADE OFFER EXPENSES AMOUNTING TO RS. 88,43,852/-, PROFESSIONAL & CONSULTANCY SERVICES AND VARIOUS OTH ER 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 RDE R. IN VIEW OF THE INCOME OF THE ASSESSEE IS RECOMPUTED AS UNDER :- THE WEIGHTED AVERAGE OF THE OPERATING PROFIT RATE O F THE GROUP IS 16.57. SINCE THIS OPERATING MARGIN ACCOUNTS FOR BOTH MANUFACTURI NG 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. 1,1 7,72,989/- (APPLYING THE RATE OF 16.57%) LESS 5% U/S 44C RS. 5,88,649/- TOTAL INCOME RS. 1,11,84,340/- 6 ITA NO. 5202/DEL/2012 PHILIP MORRIS SERVICES INDIA (S.A.) AS THE MANUFACTURING AND OTHER RELATED ACTIVITIES H AVE BEEN UNDERTAKEN OUTSIDE INDIA AND SALES HAVE BEEN MADE IN INDIA, IT IS FOUN D PROPER TO ATTRIBUTE INCOME OF THE ASSESSEE IN INDIA ON REASONABLE BASIS. CONSIDER ING THE UNIQUE MARKET SITUATION IN WHICH THE ASSESSEE OERATES; PROCESSES INVOLVED IN MANUFACTURING OF CIGARETTES; VALUE ATTACHED TO THE BRAND MARLBORO; AND OTHER RELEVANT FACETS OF SELLING CIGARETTES-IT IS HELD REASONABLE TO ATTRIBU TE 30% OF THE PROFIT OUTSIDE INDIA AND REMAINING 70% TO INDIA WHERE THE SALES HAVE TAK EN PLACE. THEREFORE, THE TAXABLE INCOME IN INDIA IS 70% OF RS. 1,11,84,340/- WHICH COMES OUT TO BE RS. 78,29,038/-. THE LD. DR ALSO EMPHASISED THAT SINCE THE ASSESSEE IS A GROUP COMPANY OF ALTRIA GROUP HAVING BEEN SPECIFICALLY INCORPORAT ED 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 G P RATE OF GROUP COMPANY INSTEAD OF TRANSFER PRICING STUDY ADOPTED BY THE AS SESSEE COMPANY FOR TP ADJUSTMENT. 10. BUT THIS CONTENTION OF THE LD. DR IS NOT TE NABLE ON THE GROUNDS INTER ALIA THAT NO COGENT REASONS HAVE BEEN RECORDED FOR REJ ECTING THE TP STUDY ADOPTED BY THE ASSESSEE COMPANY NOR DISCLOSED THE METHODOLO GY ADOPTED BY HIM BY AFFORDING AN OPPORTUNITY OF BEING HEARD TO THE ASSE SSEE TO CONSIDER THE INTERNATIONAL TRANSACTION AT AN ARMS LENGTH ; THAT THE DR HAS FAILED TO EXPLAIN AS TO WHICH METHOD HAS BEEN ADOPTED BY THE AO TO DETE RMINE THE INTERNATIONAL TRANSACTION AT ARMS LENGTH ; THAT WHEN THE AO HAS HIMSELF NOT JUSTIFIED THE SEGREGATION MADE BY THE ASSESSEE COMPANY HE WAS NOT EMPOWERED TO REJECT THE TP STUDY ADOPTED BY THE ASSESSEE COMPANY SUMMARILY. 11. BARE PERUSAL OF AFORESAID FINDINGS RETURNED B Y THE ASSESSING OFFICER GOES TO PROVE THAT HE HAS PROCEEDED ON THE BASIS OF ASSU MPTIONS AND GUESSWORK THAT BRAND LOYALTY PLAYS A VITAL ROLE WITH REGARD TO SAL ES OF A PARTICULARS BRAND WHICH CANNOT BE COMPARED WITH ANY OTHER ENTITY TRADING IN OTHER BRANDS BY LOSING SIGHT OF THE FACT AND REASONS THAT THE ASSESSMENT YEAR UN DER CONSIDERATION IS THE FIRST 7 ITA NO. 5202/DEL/2012 PHILIP MORRIS SERVICES INDIA (S.A.) YEAR OF OPERATION, IN WHICH ASSESSEE COMPANY INCURR ED HUGE EXPENSES WITHOUT COMPARABLE RECEIPT. THUS, ASSESSEE COMPANY CANNOT B E COMPARED WITH THE ASSESSEES GROUP COMPANY ONLY WITHOUT ANALYSING TH E FUNCTIONAL AND RISK DISPARITIES BETWEEN THE TWO COMPANY. ASSESSING OFF ICER MERELY DECIDED ON THE BASIS OF PROFIT MARGIN OF THE GROUP FOR BENCH MARKI NG WITHOUT ANALYSING THE ECONOMIC AND MARKETING CONDITIONS OF BOTH THE COMPA NIES. 12. ASSESSING OFFICER AGAIN PROCEEDED TO RECOMPUT E THE INCOME OF THE ASSESSEE ON THE BASIS GUESSWORK BY TAKING OPERATING MARGIN A CCOUNTS FOR BOTH MANUFACTURING AND SELLING AT 50% OF THE PROFIT ATTR IBUTABLE TO THE ACTIVITIES OF THE ASSESSEE IN INDIA, THAT TOO WITHOUT PROVIDING O PPORTUNITY OF BEING HEARD TO THE ASSESSEE. AO ALSO PROCEEDED ON THE BASIS OF REA SONABLENESS BY ATTRIBUTING 30% OF THE PROFIT OUTSIDE INDIA AND REMAINING 70% T O 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 S ERVICES 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 IMPUG NED ORDER PASSED BY LD. CIT(A) CONTENDED INTER ALIA THAT THE ASSESSING OFFI CER HAS APPLIED THE OPERATING PROFIT RATE OF THE GROUP ARBITRARILY WITHOUT ANY BA SIS AND WITHOUT CONSIDERING THE ASSESSEES DULY AUDITED ACCOUNTS; THAT PROFITS AND LOSES OFFERED FOR TAXATION BY THE ASSESSEE ARE IN LINE WITH THE PRINCIPLES OF ATT RIBUTION OF PROFITS AS PER ARTICLE 7 OF INDIA-SWITZERLAND TAX TREATY AND AS PER THE AR MS LENGTH PRINCIPLES; THAT ASSESSEE CARRIED OUT A DETAILED FAR ANALYSIS (FUNCT IONS PERFORMED, ASSETS EMPLOYED AND RISK ASSUMED) AND ITS OPERATION IN IND IA AND THEN DETERMINED THE ARMS LENGTH MARGIN, WHICH IS REQUIRED TO BE ATTRIB UTED TO A PERMANENT ESTABLISHMENT (PE) USING THE THIRD PARTY INDUSTRY B ENCHMARK; THAT ASSESSING 8 ITA NO. 5202/DEL/2012 PHILIP MORRIS SERVICES INDIA (S.A.) 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 ASSE SSEE COMPANY IS A WHOLLY OWNED SUBSIDIARY) IS ENGAGED IN A VIDE AREA OF FUNC TIONS, OWN SIGNIFICANT TANGIBLE AND INTANGIBLE ASSETS AND OPERATES VAST GE OGRAPHICAL SPREAD; THAT IF THE GROSS MARGIN IS DETERMINED BASED ON MARGIN COMPUTED BY ASSESSING OFFICER, IT RESULTS INTO GROSS MARGIN OF APPROXIMATELY 49%, WHI CH IS MUCH HIGHER THAN THE AVERAGE GROSS MARGIN EARNED BY THE INDEPENDENT DIST RIBUTOR; THAT ASSESSEE ALSO ADOPTED FRESH SEARCH COMPARABLES DURING APPELLATE P ROCEEDINGS BY TAKING THREE COMPARABLE COMPANY APART FROM THE TWO COMPARABLES A LREADY ADOPTED IN THE TP STUDY AND HAS SHOWN THE MORE GROSS MARGIN OF THE CO MPARABLE COMPANY @ 15.70% OR 18.31% AS AGAINST THE GROSS MARGIN EARNED BY THE ASSESSEE @ 14.43% AND BY APPLYING + 5% RANGED THE ASSESSEES INTERNATIONAL TRANSACTION AT ARMS LENGTH. LD. CIT(A) HAS REPRODUCED THE FRESH SEARCH OF COMPARABLES UNDERTAKEN BY THE ASSESSEE DURING APPELLATE PROCEED INGS IN PARA 5.3.2 AND 5.3.3 OF THE IMPUGNED ORDER. 14. KEEPING IN VIEW THE FACTS AND CIRCUMSTANCES OF THE CASE; FINDINGS RETURNED BY THE ASSESSING OFFICER AND THE FACT THAT LD. CIT(A) IS NOT BOUND BY THE TP STUDY UNDERTAKEN BY THE ASSESSING OFFICER FO R 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 O F THE FACT THAT TRADING ACTIVITIES HAVE BEEN CARRIED OUT BY THE ASS ESSEE COMPANY FOR A PERIOD OF FIVE MONTHS ONLY DURING THE YEAR UNDER CO NSIDERATION 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 TR ADING ACTIVITIES BECAUSE 9 ITA NO. 5202/DEL/2012 PHILIP MORRIS SERVICES INDIA (S.A.) 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 ASSESSEES GROUP COMPANIES BY REJECTING TP STUDY AD OPTED BY THE ASSESSEE COMPANY AS AGAINST GP RATE CLAIMED BY THE ASSESSEE @ 14.44% BY COMPARING IT WITH THE GROUP AS A WHOLE WITHOUT D ISCUSSING 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 BENCHMARK ING, WHICH IS THE MOST APPROPRIATE METHOD IN THIS CASE;; IV) THAT GROSS MARGIN OF THE ASSESSEE COMPANY CANNO T BE COMPARED WITH THE GROUP COMPANY AS THE ASSESSEE COMPANY IS A N IMPORTER AND DISTRIBUTOR OF CIGARETTES IN INDIA WITHOUT ANY VALU E ADDITION; V) THAT WHEN THE ASSESSEE COMPANY IS NOT MAINTAININ G ANY WAREHOUSE NOR IT HAS ANY R&D ACTIVITIES AND TRADE MARK IS ALS O OWNED BY THE GROUP COMPANY, MANUFACTURING IS ALSO DONE BY THE GROUP CO MPANY 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 FAC TS, TP STUDY UNDERTAKEN BY THE ASSESSEE COMPANY INITIALLY ON THE BASIS OF TWO COMPARABLES SHOWING GP @ 6.81% AS AGAINST GP RATE O F ASSESSEE COMPANY @ 14.44% AND DURING THE APPELLATE PROCEEDIN GS, THE APPELLANT FILED FRESH SEARCH ON THE BASIS OF THREE COMPARABLE S SHOWING AVERAGE GP @ 18.31% HAS RIGHTLY HELD THE INTERNATIONAL TRANSAC TION AT ARMS LENGTH; 10 ITA NO. 5202/DEL/2012 PHILIP MORRIS SERVICES INDIA (S.A.) VII) THAT LD. CIT(A) HAS ALSO RIGHTLY CONSIDERED TH E DETAILED COMPARISON OF ASSESSEES DISTRIBUTION AGREEMENT WIT H ANOTHER COMPANY NAMELY GOD FRAY PHILLIPS INDIA SHOWING GP RATE OF 4 .42% AND THIS COMPARISON IS SHOWING DISTRIBUTION SEGMENT OF THE A PPELLANT AT ARMS LENGTH PRINCIPLE; VIII) THAT ARMS LENGTH NATURE OF DISTRIBUTION SEGM ENT OF ASSESSEE COMPANY HAS OTHERWISE NOT BEEN DISPUTED BY TPO DURI NG ASSESSMENT YEAR 2005-06; IX) THAT A BARE PERUSAL OF THE DISTRIBUTION AGREEME NT DATED 01.09.2013 ENTERED INTO BETWEEN THE ASSESSEE COMPANY WITH FILL ET MORRIS PRODUCTS SA SHOWS THAT ASSESSEE COMPANY WAS APPOINTED AS NON EXCLUSIVE DISTRIBUTOR OF THE PRODUCT MANUFACTURED BY THE ASSE SSEE IN THE TERRITORY OF INDIA MAKING IT INELIGIBLE TO COMPARE WITH ITS GROU P COMPANY; X) THAT IT IS FURTHER AGREED IN THE AGREEMENT (SUPR A) THAT THE ASSESSEE COMPANY SHALL SELL THE PRODUCTS OF ITS PARENT COMPA NY AT PRICES AGREED BY THE PARTIES FROM TIME TO TIME AND IN THESE CIRCUMST ANCES, IT WAS NOT FEASIBLE TO ACQUIRE THE OPERATING PROFIT RATES OF T HE GROUP ARBITRARILY FOR BENCHMARKING WITHOUT CONSIDERING THE ASSESSEES DUL Y AUDITED ACCOUNT; XI) THAT LD. CIT HAS RIGHTLY CAME TO THE CONCLUSION ON THE BASIS OF TP STUDY ADOPTED BY THE ASSESSEE COMPANY DURING APPELL ATE PROCEEDINGS VIDE WHICH THREE COMPARABLE COMPANIES HAVE BEEN TAKEN SH OWING GP RATE OF THREE NEW COMPARABLES @ 18.31% AS AGAINST GP RATE O F ASSESSEE COMPANY SHOWN @ 14.44% AND BY APPLYING THE SAFE HAR BOUR RULE HAVING BENEFIT OF + 5%, THE TP STUDY ADOPTED BY THE ASSESSEE COMPANY I S AT ARMS LENGTH; XII) THAT FRESH SEARCH BROUGHT OUT ON RECORD BY THE ASSESSEE COMPANY FOR TP STUDY GOES TO PROVE THAT THE ASSESSEE COMPAN Y HAS BROUGHT OUT ON 11 ITA NO. 5202/DEL/2012 PHILIP MORRIS SERVICES INDIA (S.A.) RECORD DETAILED COMPARISON OF ITS DISTRIBUTION AGRE EMENT WITH THE COMPARABLE COMPANY NAMELY GOD FRAY PHILLIPS INDIA S HOWING 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 RE LIED UPON WITHOUT PROVIDING OPPORTUNITY OF BEING HEARD TO THE A.O. /T PO, 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 ARMS LENGTH PRINCIPLE; XV) THAT THE A.O. HAS ALSO ARBITRARILY DISALLOWED V ARIOUS EXPENSES CLAIMED BY THE ASSESSEE WITHOUT SPECIFYING HOW AND WHICH OF THE EXPENSES ARE NOT ALLOWABLE. 15. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE WE FIN D NO GROUND TO INTERFERE INTO THE IMPUGNED ORDER PASSED BY LD. CIT(A), CONSE QUENTLY PRESENT APPEAL OF THE REVENUE IS HEREBY DISMISSED. 16. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST MARCH., 2016. SD./- SD./- (R.S.SYAL) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATE: 21.03.2016 BINITA/SP COPY FORWARDED TO:- 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT (A)-, NEW DELHI. 5. THE DR, ITAT, LOKNAYAK BHAWAN, KHAN MARKET, NEW DEL HI. TRUE COPY. BY ORDER 12 ITA NO. 5202/DEL/2012 PHILIP MORRIS SERVICES INDIA (S.A.) NO. DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 16.02.2016 SR. PS/PS 2 DRAFT PLACED BEFORE AUTHOR 16.02.2016 SR. PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM/AM 5 APPROVED DRAFT COMES TO THE SR. PS/PS 2 1 / 3 / 1 6 SR. PS/PS 6 KEPT FOR PRONOUNCEMENT 2 1 / 3 SR. PS/PS 7 FILE SENT TO BENCH CLERK 2 1 / 3 SR. PS/PS 8 DATE ON WHICH THE FILE GOES TO HEAD CLERK 9 DATE ON WHICH FILE GOES TO A.R. 10 DATE OF DISPATCH OF ORDER