Philip Morris Services India SA (India Branch), New Delhi V. ADIT (LD. AO), New Delhi

ITA 5380/DEL/2010

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 7326 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 8 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 04-08-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 30-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: N C SWAIN
• Keywords: Depreciation; Transfer pricing; International transaction; Initiation of penalty proceedings; Wholly owned subsidiary; Unabsorbed depreciation
• Section: 92D

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1, NEW DELHI BEFORE SHRI N. K. SAINI, ACCOUNTANT MEMBER AND SMT. BEENA A. PILLAI, JUDICIAL MEMBER I.T.A. NO.5380/DEL/2010 (ASSESSMENT YEAR 2006-07) PHILIP MORRIS SERVICES VS. ADIT (LD.AO), INDIA SA (INDIA BRANCH) CIRCLE 2(1), 8 TH FLOOR, DLF CENTRE, NEW DELHI PARLIAMENT STREET, NEW DELHI-110 001 GIR / PAN :AACCP2770K (APPELLANT) (RESPONDENT) APPELLANT BY :SHRI AJAY VOHRA, SR. ADV. SHRI NEERAJ JAIN, ADV. SHRI PUNEET CHUGH, CA RESPONDENT BY :SHRI N C SWAIN, CIT DR DATE OF HEARING: 04.08.2016 DATE OF PRONOUNCEMENT: 26.08.2016 ORDER PER BEENA A. PILLAI, JM: THE PRESENT APPEAL ARISES OUT OF THE ORDER DATED 20.10.2009 PASSED BY ADIT, CIRCLE 2(1), NEW DELHI F OR THE ASSESSMENT YEAR 2006-07 ON THE FOLLOWING GROUNDS OF APPEAL: THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, A ND IN LAW; 1. THAT THE ASSESSMENT ORDER PASSED IN PURSUANCE TO THE DIRECTIONS ISSUED BY THE LEARNED DISPUTE SOLUTI ON PANEL ('LD. DRP') IS A VITIATED ORDER AS THE LD. DR P ERRED BOTH ON FACTS AND IN LAW IN CONFIRMING THE ADDITION MADE BY THE LD. ASSESSING OFFICER ('AO') T O 2 I.T.A.NO.5380./DEL/2010 THE APPELLANT'S INCOME BY ISSUING THE ORDER WITHOUT APPROPRIATE APPLICATION OF MIND; 2. THE LD. DRP ERRED BOTH ON FACTS AND IN LAW IN UPHOLDING THE UPWARD ADJUSTMENT TO THE OPERATING MARGIN OF THE SERVICE SEGMENT OF THE APPELLANT, MAD E BY THE LD. TPO, AND CONFIRMING THE ADDITION OF RS. 19,98,418 TO THE INCOME OF THE APPELLANT BY HOLDING THAT ITS INTERNATIONAL TRANSACTION UNDER THE SERVIC E SEGMENT OF THE APPELLANT DOES NOT SATISFY THE ARM'S LENGTH PRINCIPLE ENVISAGED UNDER THE ACT. IN DOING SO THE LD. DRP HAS GROSSLY ERRED IN AGREEING WITH THE LD. TPO'S ACTION OF: 2.1. DISREGARDING THE ALP, AS DETERMINED BY THE APPELLANT IN THE TRANSFER PRICING ('TP') DOCUMENTATION MAINTAINED BY IT IN TERMS OF SECTION 92D OF THE ACT READ WITH RULE 10D OF THE INCOME-TAX RULES, 1962 ('RULES'); 2.2. USING CURRENT YEAR DATA FOR COMPARABLE COMPANIES, I.E., DATA FOR FY 2005-06, DESPITE THE FACT THAT THE SAME WAS NOT AVAILABLE WITH THE APPELLANT AT THE TIME OF PREPARING ITS TP DOCUMENTATION REPORT; 2.3. DISTURBING THE NEW SET OF COM PARABLES ARRIVED AT BY THE APPELLANT UNDER THE FRESH SEARCH AND AGGREGATING THE COMPARABLE SET OF COMPANIES USED IN THE TP AUDIT OF THE APPELLANT IN EARLIER YEAR I.E. 2004-05, WITHOUT GIVING ANY REGARD/ CONSIDERING THE REASONS/ EXPLANATIONS PROVIDED BY THE APPELLANT FOR NOT INCLUDING SUCH - FUNCTIONALLY UNCOMPARABLE - COMPANIES FOR BENCHMARKING THE APPELLANT'S SERVICES SEGMENT 2.4. ARBITRARILY REJECTING THE LOSS MAKING COMPANIES TO ARRIVE AT THE FINAL SET OF COMPARABLE COMPANIES TO DETERMINE THE ARM'S LENGTH MARGIN; 3 I.T.A.NO.5380./DEL/2010 2.5. NOT ALLOWING ANY APPROPRIATE ADJUSTMENTS TO THE APPELLANT TO ACCOUNT FOR THE DIFFERENCES IN INTENSITY OF FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISK ASSUMED BETWEEN THE APPELLANT AND COMPARABLES; AND 2.6. DISREGARDING JUDICIAL PRONOUNCEMENTS IN INDIA IN UNDERTAKING THE TP ADJUSTMENT; 3. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE & IN LAW, THE LD. DRP ERRED IN: 3.1. NOT GIVING THE COMPLETE BENEFIT OF SET-OFF OF BROUGHT FORWARD LOSSES/UNABSORBED DEPRECIATION OF EARLIER YEARS AS CLAIMED IN THE RETURN OF INCOME WHILE COMPUTING THE ASSESSED INCOME. 3.2 AGREEING WITH THE LD. AO IN CHARGING INTEREST UNDER SECTION 2348 OF THE ACT. 3.3 AGREEING WITH THE LD. AO'S ACT OF INITIATION OF PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT FOR CONCEALMENT OF INCOME WITHOUT RECORDING ANY ADEQUATE SATISFACTION FOR SUCH INITIATION. THE ABOVE GROUNDS ARE WITHOUT PREJUDICE TO EACH OTHER. 2. THE ASSESSEE FILED ITS RETURN OF INCOME DECLARIN G TOTAL INCOME OF RS.39,44,335/- ON 24.11.2006. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE LD. ASSESSING OFFICER OBSERVED CERTAIN INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS AE. ACCORDINGLY, REF ERENCE WAS MADE TO THE TPO-II(2) FOR DETERMINATION OF ARM S LENGTH PRICE (ALP) U/S 92CA(3) OF THE ACT IN RESPEC T OF 4 I.T.A.NO.5380./DEL/2010 INTERNATIONAL TRANSACTION. THE ASSESSEE COMPANY IS A COMPANY INCORPORATED IN SWITZERLAND. IT IS ONE OF THE GROUP COMPANIES OF ALTRIA GROUP USA WHICH IS ENGAGE D IN THE BUSINESS OF MANUFACTURING AND TRADING CIGARETTE S AND OTHER TOBACCO PRODUCT INTERNATIONALLY. THE ASSESSE E IS INTO TRADING OF MALBARO BRAND OF CIGARETTES AND TOB ACCOS IN INDIA AND IS OPERATING IN INDIA THROUGH A BRANCH . THE INDIAN BRANCH IS ENGAGED IN TRADING OF CIGARETTES/T OBACCO LEAVES AND IS PROVIDING REPRESENTATION AND LOGISTIC S / MARKETING SUPPORT SERVICES TO / ON BEHALF OF THE GR OUP ENTITIES. 2.1 THE INTERNATIONAL TRANSACTION ENTERED INTO BY T HE ASSESSEE IS AS FOLLOWS: S.N. NATURE OF TRANSACTION METHOD BY USED ASSESS EE VALUE OF TRANSACTION METHOD PLI 1 PURCHASE OF CIGARETTES 45,382,050 2 EXPORT OF TOBACCO LEAVES 130,687,923 3 SERVICES RENDERED TNMM OP/TC 31,889,661 2.2 THE ASSESSEE TREATED ITSELF AS TESTED PARTY IN THE TP REPORT FOR THE PURPOSE OF T P ANALYSIS. THE ASSESS EE USED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD (MAM) FOR BENCHMARKING THE INTERNATIONAL TRANSACTION. IN THE TP REPORT, THE P ROFIT LEVEL INDICATOR (PLI) USED IN THE DISTRIBUTION SEGMENT IS OP/SALES RATIO AND THE MARGIN WAS ARRIVED @ 1.28%. IN THE T P REPORT, THE ASSESSEE HAD SELECTED 5 COMPARA BLES WHICH ARE AS UNDER: 5 I.T.A.NO.5380./DEL/2010 S.NO. NAME OF THE COMPANY WEIGHTED AVERAGE AS PER TP STUDY UPDATED MARGIN WITH CURRENT YEAR DATA 1 ALFRED HERBERT (INDIA) LTD. -10.91% -29.74% 2 PRIYA INTERNATIONAL LTD. 17.51% 22.58% 3 UJJWAL LTD. 3.78% DATA NOT AVAILABLE 4 SHANTI SALES LTD. 1.61% DATA NOT AVAILABLE 5 FORTUNE COMMUNICATIONS LTD. 3.15% DATA NOT AVAILABLE AVERAGE 3.15% -3.58% ASSESSEES MARGIN 5% 5% 2.3 THE ASSESSEE HAD A MEAN MARGIN OF OP/SALES AT 0.32%. SUBSEQUENTLY, DURING THE TP PROCEEDINGS, TH E ASSESSEE CONDUCTED FRESH SEARCH INCLUDING THE FOLLO WING COMPARABLE COMPANIES: S.NO. NAME OF THE COMPANY OP/TC(%) 1 CYBER MEDIA EVENTS LTD. 9.42% 2 EDUCATIONAL CONSULTANTS (INDIA) LTD. 2.72% 3 PRIYA INTERNATIONAL LTD. (INDENTING SEGMENT) 22.5 8% 4 AGRIMA CONSULTANTS INTERNATIONAL LTD. -7.76% 5 CAPITAL TRUST (FOREIGN CONSULTANCY SEGMENT) -11.1 1% 6 TATA SERVICES LTD. 6.35% 7 HINDUSTAN HOUSING CO. LTD. 9.68% 8 IDC (INDIA) LTD. 14/49% 9 EMPIRE INDUSTRIES LTD. (TRADING & INDENTING SEGMENT) 15.79% 10 TIMES INFOTAINMENT MEDIA LTD. -13.24% 11 CONTRACT ADVERTISING INDIA PVT. LTD. 21.07% 12 FORTUNE COMMUNICATIONS PVT. LTD. DATA NOT AVILABLE MEAN 6.36% 2.4 OUT OF THE ABOVE 12 COMPARABLE COMPANIES, LD. T PO SELECTED 7 COMPARABLES TO BENCHMARK MARKETING AND REPRESENTATIVE SERVICES WHICH ARE AS UNDER: 6 I.T.A.NO.5380./DEL/2010 S.NO. NAME OF THE COMPANY OP/TC(%) 1 CYBER MEDIA EVENTS LTD. 9.42% 2 EDUCATIONAL CONSULTANTS (INDIA) LTD. 2.72% 3 PRIYA INTERNATIONAL LTD. (INDENTING SEGMENT) 22.5 8% 4 TATA SERVICES LTD. 6.35% 5 HINDUSTAN HOUSING CO. LTD. 9.68% 6 IDC (INDIA) LTD. 14/49% 7 EMPIRE INDUSTRIES LTD. (TRADING & INDENTING SEGMENT) 15.79% 8 MEAN 11.58% 2.5 THE ISSUE BEFORE US IS REGARDING INAPPROPRIATE REJECTION / INCLUSION OF CERTAIN COMPANIES IN THE F INAL LIST OF COMPARABLES WHICH ARE AS UNDER: I) THE ASSESSEE HAS DISPUTED REJECTION OF FOLLOWING COMPANIES: (A) CAPITAL TRUST LTD. (B) AGRIMA CONSULTANTS INTERNATIONAL LTD. THE ASSESSEE HAS ALSO DISPUTED INCLUSION OF FOLLOWI NG COMPANIES BEING ; (A) IDC INDIA LTD. (B) EMPIRE INDUSTRIES LTD. (TRADING & INDENTING SEGMENT) 2.6 BEFORE DEALING WITH THE COMPARABILITY OF THESE COMPANIES, WITH THAT OF THE ASSESSEE, IT IS NECESSA RY SINE QUA NON TO ANALYSE THE FUNCTIONAL PROFILE OF THE ASSESSEE BEFORE US. FROM THE TP STUDY PRESENT AT PAGES 11-6 9 OF THE PAPER BOOK, IT IS OBSERVED AS UNDER: ULTERIA GROUP INC. THROUGH ITS WHOLLY OWNED SUBSIDIARIES, PHILIP MORRIS USA INC. IPM USA) PHILI P MORRIS INTERNATIONAL INC. (PMI) AND ITS MAJORITY OW NED (88.1%) SUBSIDIARY, KRAFT FOODS INC. (KRAFT) IS ENG AGED 7 I.T.A.NO.5380./DEL/2010 IN THE MANUFACTURE AND SALE OF VARIOUS CONSUMER PRODUCTS INCLUDING CIGARETTES, PACKAGED GROCERY PRODUCTS, SNACKS, BEVERAGES, CHEESE AND CONVENIENT MEALS. ALTRIAS NET REVENUES FOR 2005 AND 2004 WER E $97854 AND $89610 MILLION RESPECTIVELY. PHILIP MORRIS SERVICES INDIA S.A. (SWITZERLAND), A WHOLLY OWNED SUBSIDIARY OF FT HOLDING S.A. (SWISS HOLING COMPANY) HAD SET-UP ITS BRANCH IN AUGUST 30, 2001 IN INDIA. IT WAS PRIMARILY ENGAGED IN PROVIDI NG SERVICES TO ITS GROUP COS. DURING THE 2003-04 FINANCIAL YEAR. PM INDIA STARTED THE IMPORT TRADIN G OF CIGARETTES IN INDIA. FROM FINANCIAL YEAR 2004-05, PM INDIA ALSO STARTED EXPORTING TOBACCO LEAVES TO GROU P COS. AS A PART OF ITS BUSINESS OPERATIONS, PM INDIA, OPERATES IN THE TOBACCO INDUSTRY. THEREFORE, THE PERFORMANCE OF PM INDIA IS INTER LINKED TO THE PERFORMANCE OF TOBACCO INDUSTRY. THE FOLLOWING SECTION CONTAINS AN ANALYSIS DESIGNED TO PROVIDE AN OVERVIEW OF THE INDUSTRY UNDER WHICH PM INDIA OPERATES. AN OVERVIEW OF THE INDUSTRY WOULD ASSIST IN THE UNDERSTANDING OF THE BUSINESS RISKS FACED BY, OPERATIONAL CHARACTERISTICS OF, AND ASSETS EMPLOYED BY PM INDIA IN RELATION TO OTHER PLAYERS IN INDUSTR Y. THE MARKET FOR TOBACCO PRODUCTS IS HIGHLY COMPETITIVE, CHARACTERIZED BY BRAND RECOGNITION AND LOYALTY, WITH PRODUCT QUALITY, PRICE, BRANDING AND PACKAGING CONSTITUTING THE SIGNIFICANT METHODS OF COMPETITION. PROMOTIONAL ACTIVITIES INCLUDE, IN CE RTAIN INSTANCES AND WHERE PERMITTED BY LAW, ALLOWANCES, THE DISTRIBUTION OF INCENTIVE ITEMS, PRICE PROMOTIO NS AND OTHER DISCOUNTS. THE PRODUCT DEVELOPMENT, INNOVATION / R&D AND PRODUCTION AND BRAND DEVELOPMENT ARE UNDERTAKEN BY THE GROUP COS. PM INDIA, ON THE OTHER HAND IS ENGAGED IN THE BUSINESS OF IMPORT TRADING OF CIGARETTES, IMPORTED FROM GROUP COS. AND EXPORT OF 8 I.T.A.NO.5380./DEL/2010 TOBACCO LEAVES TO GROUP COS. APART FROM THIS, IT AL SO PROVIDES REPRESENTATION SERVICES TO / ON BEHALF OF THE OVERSEAS GROUP COS. ACCORDINGLY, THE INDIAN ENTITY PERFORMS ROUTINE FUNCTIONS IN THE VALUE CHAIN OF TH E GROUP. FUNCTIONS PERFORMED BY GROUP COS FUNCTIONS PERFORMED 4.3.1 TRADEMARK OWNER: GROUP COS OWN THE RIGHTS TO VARIOUS 'TRADEMARKS, TRADE NAMES AND OTHE R COMMERCIAL AND PRODUCT INTANGIBLES. GROUP COS EXPLO IT THESE RIGHTS IN A VARIETY OF WAYS, SUCH AS LICENSIN G THEM TO RELATED AND UNRELATED PARTIES FOR THE PRODUCTION AND SALE OF CIGARETTES, AS WELL AS HAVIN G CIGARETTES PRODUCED UNDER CONTRACT MANUFACTURING ARRANGEMENTS. 4.3.2 MANUFACTURER: GROUP COS MANUFACTURE, MARKET, SELL AND DISTRIBUTE QUALITY CIGARETTES IN M ORE THAN 160 COUNTRIES AROUND THE WORLD. 4.3.3 RESEARCH AND DEVELOPMENT: THE PRIMARY ROLE OF THE R&D FUNCTION IS TO CREATE AND COMMERCIALIZE PRODUCTS THAT ADDRESSES ADULT CONSUMERS' AND SOCIETAL EXPECTATIONS. WHILST ENSURI NG COMPLIANCE WITH EXTERNAL REGULATIONS AND INTERNAL STANDARDS, ACTIVITIES INCLUDE RESEARCH INTO, AND DEVELOPMENT OF, PRODUCTS WHICH HAVE THE POTENTIAL T O REDUCE THE HARM CAUSED BY THE HARMFUL COMPOUNDS IN CIGARETTE SMOKE. 4.3.4 MARKETING AND SALES: TO PROMOTE ITS OWN SALES AND THE SALES OF ITS LICENSEES, AS APPROPRIAT E AND IN ACCORDANCE WITH LOCAL MARKET CONDITIONS, CUSTOMS, AND PRACTICES AND AS PERMITTED BY LOCAL LA WS AND REGULATIONS, GROUP COS SPEND SIGNIFICANT AMOUNT S FOR DIRECT AND INDIRECT ADVERTISING AND PROMOTION O F BRAND NAMES AND TRADEMARKS. 9 I.T.A.NO.5380./DEL/2010 4.3.5 WORLD WIDE SUPPLY OF PRODUCTS TO DISTRIBUTORS/SUBSIDIARIES: GROUP COS. ARE RESPONSIB LE FOR LOGISTICS MANAGEMENT, SUPPLY OF GOODS TO DISTRIBUTORS/ SALES OFFICES, PROVIDING POST SALES SUPPORT, ETC. 4.3.6 GENERAL MANAGEMENT FUNCTIONS: GROUP COS TAKE CARE OF GROUP FUNCTIONS LIKE SUBSIDIARY OPERATIONS, LOGISTICS, IT, HR, QUALITY MANAGEMENT, FACILITY MANAGEMENT, COMMUNICATIONS, ETC. FURTHER, GROUP COS ARE RESPONSIBLE FOR DEVELOPING THE LONG TERM STRATEGY OF THE GROUP. 4.3.7 ACCORDINGLY, GROUP COS VIRTUALLY OWN ALL THE VALUABLE INTELLECTUAL PROPERTY RIGHTS (PATENTS, KNOW-HOW, ETC.) AND OTHER COMMERCIAL OR MARKETING INTANGIBLES (BRAND NAMES, TRADEMARKS, LOGOS ETC.) A ND ARE INVOLVED IN PRODUCT DEVELOPMENT AND MANUFACTURING. THEY ARE ENGAGED IN PRODUCT INNOVATION, MANUFACTURING AND BRAND DEVELOPMENT OPERATIONS, WHICH ARE KEY CONTRIBUTORS TO THE OVERA LL VALUE GENERATED BY THE GROUP. FUNCTIONS PERFORMED BY ASSESSEE: 4.3.8 PM INDIA UNDERTAKES IMPORT TRADING OF MARLBORO CIGARETTES AND ASSUMES LIMITED RISKS ASSOCIATED WITH CARRYING OUT SUCH BUSINESS. FURTHER , PM INDIA EXPORTS TOBACCO LEAVES TO GROUP COS AND ALSO PROVIDES REPRESENTATION SERVICES TO GROUP COS. 4.3.9 THE ABOVE FUNCTIONS PERFORMED BY PM SERVICES INDIA CAN BE CATEGORIZED INTO TWO CLASS OF TRANSACTIONS: CLASS I: TRADING OF CIGARETTES AND TOBACCO LEAVES A RE INCLUDED UNDER THIS CLASS OF TRANSACTION. CLASS II: REPRESENTATION SERVICES ARE INCLUDED UNDE R THIS CLASS OF TRANSACTION. 10 I.T.A.NO.5380./DEL/2010 4.3.10 ACCORDINGLY, THE FUNCTIONS PERFORMED BY PM INDIA, UNDER THESE THREE CLASSES, ARE DESCRIBED IN THE FOLLOWING PARAGRAPHS: CLASS I: TRADING OF CIGARETTES AND TOBACCO LEAVES 4.3.11 PM INDIA HAS ENTERED INTO A DISTRIBUTION AGREEMENT WITH PHILIP MORRIS PRODUCTS S.A., A COMPANY REGISTERED IN SWITZERLAND. PM INDIA UNDERTAKES THE FOLLOWING FUNCTIONS PERTAINING TO IT S DISTRIBUTION ACTIVITIES: 4.3.12 IMPORT AND RESALE: PM INDIA IMPORTS CIGARETTES FROM PHILIP MORRIS PRODUCTS S.A. AND RES ELLS TO DISTRIBUTORS WHO ARE ITS CUSTOMERS IN INDIA. THI S FUNCTION INCLUDES TAKING ORDERS FROM DISTRIBUTORS A ND PLACING THEM WITH MANUFACTURERS, SHIPMENT TRACKING, CLEARANCE OF GOODS THROUGH LOCAL CUSTOMS, INVOICING ETC. PM INDIA DOES NOT MAINTAIN ANY WAREHOUSES/DEPOTS FOR RENDERING THESE SERVICES. THE IMPORTED CIGARETTES ARE DIRECTLY SENT TO DISTRIBUTO RS' WAREHOUSES. PM INDIA HAS APPOINTED TWO DISTRIBUTORS , ONE DISTRIBUTOR IS RESPONSIBLE FOR SALES AND DISTRIBUTION IN THE NORTH AND CENTRAL INDIA AND THE OTHER DISTRIBUTOR IS RESPONSIBLE FOR SALES AND DISTRIBUTION IN THE WESTERN AND SOUTHERN PARTS OF INDIA. THESE DISTRIBUTORS UNDERTAKE THE STORAGE AND LOGISTICS FUNCTION, MAINTAIN SALES FORCE AND ARE RESPONSIBLE FOR APPOINTING DEALERS AND RETAILERS IN THEIR TERRITORIES AND PUSHING SALES THROUGH THEM. 4.3.13 SALES CO-ORDINATION: PM SERVICES INDIA SA HAS A SMALL TEAM TO CONDUCT SALES LIAISON ACTIVITIE S FOR CONTINUOUS INTERACTION WITH THE DISTRIBUTORS SETTIN G TARGETS AND HELPING THEM WITH COORDINATION OF SALES ACTIVITIES. THE SALES CO-ORDINATION TEAM ASSISTS TH E DISTRIBUTORS TO ACHIEVE THE DESIRED SALES VOLUME THROUGH CAREFULLY PLANNED STRATEGIES AND FIELD IMPLEMENTATION. 11 I.T.A.NO.5380./DEL/2010 4.3.14 THE MARKETING CO-ORDINATION TEAM IS RESPONSIBLE FOR GATHERING INFORMATION ABOUT THE MARKET, CONSUMER PREFERENCES, ETC. FOR DEVELOPING MARKETING STRATEGY AND PLANS FOR INDIA, IN CONSULTATION WITH GROUP COS. IT WORKS CLOSELY WITH GROUP COS TO CO- ORDINATE MARKET SURVEYS, PACKAGING AND BRAND RELATED ACTIVITIES ALONG WITH ENSURING COMPLIANCE W ITH LOCAL REGULATORY REQUIREMENTS. 4.3.15 FROM FINANCIAL YEAR 04-05, PM INDIA ALSO STARTED EXPORTING TOBACCO LEAVES TO GROUP COS. PM INDIA ENTERED INTO AN AGREEMENT WITH GROUP COS FOR SUPPLY OF TOBACCO LEAVES. THE TOBACCO LEAVES VENDOR S ARE HOWEVER DECIDED AND APPROVED BY GROUP COS. EVEN THE PURCHASE PRICE IS DIRECTLY NEGOTIATED BETWEEN THE VENDOR AND GROUP COS. PM INDIA BASICALLY FACILITATES THE PROCESS OF LEAVES EXPORTS BY LOOKING AFTER THE CUSTOMS CLEARANCE, SHIPMENT AND LOGISTICS, ENSURING TIMELY DELIVERY OF LEAVES ETC. PM INDIA RELEASES PAYMENTS TO THE VENDORS ONLY AFTER RECOVERING THE MONEY FROM GROUP COS. 2.5 ON ANALYSING FUNCTIONS PERFORMED BY THE ASSESSE E, IT HAS BEEN CATEGORIZED AS A LOW RISK COMPANY IN INDIA . IT IS ALSO REPORTED TO BE NOT OWNING ANY INTANGIBLE AND D OES NOT UNDERTAKE ANY RESEARCH AND DEVELOPMENT THAT LEA DS TO THE DEVELOPMENT OF NON ROUTINE INTANGIBLE OF BRAND MALBORO. ACCORDINGLY, THE ASSESSEE IS IMPORTER A ND RESELLER OF BRANDED PRODUCT, THE FUNDS BEING OWNED BY AE. THE SALE OF BRANDED PRODUCT TO A DISTRIBUTOR CARRIE S WITH THE STATUS OF EMPLOYEES RIGHT TO USE OF SUPPLIER T RADE MARK AND TRADE NAME OWNED FOR THE PURPOSE OF SELLIN G THE SUPPLIERS PRODUCTS. AS PER THE TP STUDY, THE ASSES SEE BEFORE US DOES NOT HAVE ANY ADDITIONAL RIGHT TO USE AND 12 I.T.A.NO.5380./DEL/2010 EXPLAIN THE MARKETING INTANGIBLE OWNED BY THE GROUP COMPANY. ACCORDINGLY, THE ASSESSEE HAS BEEN CATEGO RIZED TO BE ROUTINE DISTRIBUTOR UNDER CLASS I AND THE SER VICE PROVIDER UNDER CLASS II EXPOSED TO LIMITED RISK ASS OCIATED WITH CARRYING OUT SUCH BUSINESS. 2.6 ON THE BASIS OF ABOVE FACTS, WE NOW CONSIDER EA CH OF THE COMPANIES AS UNDER: 3. CAPITAL TRUSTS LTD.:- THIS COMPANY HAS BEEN SELECTED BY THE ASSESSEE, WHICH IS REJECTED BY LD. TPO AS IT HAS INCURRED LOSSES. THE LD. A.R. SUBMITTED THA T THIS COMPANY PROVIDES SERVICES TO A FOREIGN BANK, WHICH HAS DEVELOPED CORRESPONDENT RELATIONSHIP OF FOREIGN BAN K WITH INDIAN BANKS, PROVIDING ASSISTANCE TO FACILITIES OP ERATIONS BETWEEN FOREIGN BANKS, PROMOTING THE SERVICES OFFER ED BY FOREIGN BANKS AND CANVASSING FOR DOCUMENTARY CREDIT BUSINESS, REFERRING TRADE FINANCE PROPOSALS, ASSIST ING FOREIGN BANKS IN COUNTRY REVIEW, MONITORING OF BUSI NESS & INVESTMENT OPPORTUNITIES IN INDIA. 3.1 THE DRP HAS UPHELD THE REJECTION OF THIS COMPAN Y AS COMPARABLE BY HOLDING THAT THE FOREIGN CONSULTANCY SEGMENT HAS MINISCULE PROPORTION OF TOTAL REVENUE. 3.2 ON PERUSAL OF FINANCIAL STATEMENT OF THE COMPAN Y PLACED AT PAGES 1-32 OF THE PAPER BOOK, IT IS OBSER VED THAT THE FUNCTIONAL PROFILE OF THIS COMPANY UNDER FOREIG N CONSULTANCY SEGMENT IS SIMILAR TO THE MARKET SUPPOR T SEGMENT OF THE ASSESSEE BEFORE US. LD. A.R. PLACED RELIANCE ON THE DECISION OF THIS TRIBUNAL IN THE CA SE OF 13 I.T.A.NO.5380./DEL/2010 NORTEL NETWORK INDIA PVT. LTD. VS ACIT IN I.T.A. NO . 4765/DEL/2011, WHERE THE SAID COMPARABLE HAS BEEN INCLUDED IN THE SET OF COMPARBLES. 3.3 IN OUR VIEW, FOREIGN CONSULTANCY SEGMENT HAS BE EN REPORTED TO BE THE PRIMARY BUSINESS SEGMENT OF THIS COMPANY IN THE AUDITED FINANCIALS. BY APPLYING THE RATIO LAID DOWN BY HON'BLE HIGH COURT IN THE CASE OF CRYSCAPITAL INVESTMENT ADVISORS (INDIA) PVT. LTD. V S. DCIT, I.T.A.NO. 417/2014 THAT BECAUSE A COMPARABLE COMPAN Y HAS ABNORMALLY HIGH PROFITS OR LOSSES, THE COMPARAB LE CANNOT BE REJECTED. 3.4 THE ASSESSEE ALSO PLACED RELIANCE UPON THE DECI SION OF MUMBAI TRIBUNAL IN THE CASE OF GOLDMAN SACHS IND IA SECURITY PVT. LTD. VS ACIT IN I.T.A. NO. 7724/MUM./ 2011 WHEREIN THIS COMPANY HAS BEEN CONSIDERED AS COMPARA BLE IN THE NATURE OF SERVICES RENDERED BY THE COMPARABL E WERE EXACTLY ON THE SIMILAR LINES AS THAT OF THE ASSESSE E THEREIN, DURING THE YEAR UNDER CONSIDERATION. 3.5 SIMILAR IS THE SITUATION BEFORE US AND IN OUR CONSIDERED VIEW, THE COMPANY RUNNING LOSSES CANNOT BE DISQUALIFIED AS A LEGITIMATE COMPARABLE UNLESS ANY FUNCTIONAL DISSIMILARITY IS BROUGHT ON RECORD BY TH E AUTHORITIES BELOW. RESPECTFULLY FOLLOWING THE ABOV E DECISIONS, WE HOLD THAT THIS COMPANY IS A VALID COMPARABLE AND SHOULD BE INCLUDED. 14 I.T.A.NO.5380./DEL/2010 4. AGRIMA CONSULTANT INTERNATIONAL LTD.: THIS COMPANY WAS INCLUDED BY THE ASSESSEE AND EXCLUDED B Y LD. TPO ON THE BASIS THAT THIS COMPANY IS SHOWING A NEGATIVE ECONOMIC TREND. LD. A.R. SUBMITTED THAT T HE TURNOVER OF THIS COMPANY IS RS.1.05 CRORES WHILE TH E ASSESSEE HAS A TURNOVER OF RS.3.18 CRORES. LD. A.R . SUBMITTED THAT FROM THE ANNUAL ACCOUNTS PLACED AT P AGES 51-55, THE COMPANY WAS CARRYING ON WITH THE ACTIVIT IES OF PREPARATION OF FEASIBILITY REPORT IN RESPECT OF CEM ENT GRINDING PLANT. 4.1 LD. A.R. SUBMITTED THAT THIS ACTIVITY CARRIED O N BY THE COMPARABLE COMPANY IS AKIN TO THE MARKET SUPPOR T SERVICES PROVIDED BY THE ASSESSEE AND MERELY BECAUS E THERE IS NEGATIVE TREND IN THE ECONOMY OF THE COMPA NY, CANNOT BE EXCLUDED FROM THE LISTS OF COMPARBLES. T HE SEGMENT DETAILS IN RESPECT OF THE FEASIBILITY REPOR T MUST BE TAKEN INTO CONSIDERATION. THE AUTHORITIES BELOW HA VE NOT BROUGHT ON RECORD ANY FUNCTIONAL DISSIMILARITY BETW EEN THIS COMPANY AND THAT OF THE ASSESSEE. SINCE THE N ATURE OF SERVICES RENDERED BY THIS COMPANY WAS SIMILAR TO THAT OF THE ASSESSEE, WE UPHOLD THE INCLUSION OF THIS COMPARABLE TO THE FINAL LIST. 5. IDC (INDIA) LTD.: THIS COMPARABLE HAS BEEN SELECTED BY LD. TPO WHICH HAS BEEN OBJECTED BY THE ASSESSEE. LD. A.R. SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY NO T SIMILAR WITH THAT OF THE ASSESSEE. HE SUBMITTED THA T THE ACTIVITIES PERFORMED BY THIS COMPANY IS MORE OF THE 15 I.T.A.NO.5380./DEL/2010 KNOWLEDGE PROCESS AND REQUIRES EXTREMELY SKILLED PERSONNEL FOR THE SAME. THE COMPANY IS ALSO INTO RESEARCH AND SURVEY ACTIVITIES INCLUDING A VERY HIG H LEVEL MANAGEMENT CONSULTANCY. THE ASSESSEE HAS PLACED RELIANCE UPON THE DECISION OF HON'BLE DELHI HIGH CO URT IN THE CASE OF RAMPGREEN SOLUTIONS PVT. LTD. VS CIT IN I.T.A.NO. 102/2015 WHEREIN THE HON'BLE COURT HAS HE LD THAT WHERE THE TESTED PARTY IS NOT A KPO SERVICE PR OVIDER, AN ENTITY RENDERING KPO SERVICES CANNOT BE CONSIDER ED AS A COMPARABLE FOR THE PURPOSE OF TP ANALYSIS. HE AL SO PLACED RELIANCE UPON THE DECISION OF THIS TRIBUNAL IN THE CASE OF MICROSOFT CORPORATION INDIA PVT. LTD. VS DC IT IN I.T.A. NO. 5766/DEL/2011 WHEREIN THIS COMPANY HAS B EEN CHARACTERIZED AS AN INFORMATION TECHNOLOGY, RESEARC H AND ADVISORY FIRM. FURTHER, IT HAS BEEN HELD THAT HIS COMPANY EARNS ITS INCOME IN THE FORM OF RESEARCH AND SURVEY . 5.1 WE HAVE PERUSED THE ABOVE DETAILS PLACED IN THE PAPER BOOK AND THE JUDGEMENTS RELIED UPON BY THE LD . A.R. IT IS ALSO OBSERVED FROM THE FUNCTIONAL PROFIL E THAT THIS COMPANY IS IN THE KNOWLEDGE PROCESS OUTSOURCIN G UNIT AND CANNOT BE COMPARED WITH THE BACK OFFICE SU PPORT SERVICES CARRIED BY THE ASSESSEE. RESPECTFULLY FOL LOWING THE RATIO LAID DOWN BY HON'BLE DELHI HIGH COURT IN THE CASE OF RAMPGREEN SOLUTIONS PVT. LTD. VS CIT (SUPRA ), WE ACCORDINGLY REJECT THIS COMPANY FROM THE LIST OF COMPARABLES. 16 I.T.A.NO.5380./DEL/2010 6. EMPIRE INDUSTRIES LTD: THIS COMPANY HAS BEEN INCLUDED BY THE TPO WHICH HAS BEEN OBJECTED BY THE ASSESSEE FOR THE REASON THAT IT IS ENGAGED IN THE DISTRIBUTION AND SALE SUPPORT OF HIGHLY TECHNICAL M ACHINES AND PHARMACEUTICALS. LD. A.R. SUBMITTED THAT THIS COMPANY IS ENGAGED IN THE TRADING AND INDENTING OF INDUSTRIAL AND MEDICAL EQUIPMENTS AND MACHINE TOOLS , THEREFORE, CANNOT BE RECORDED AS A COMPARABLE WITH THAT OF THE ASSESSEE. THE ASSESSEE HAS PLACED RELIANCE ON THE DECISION OF BANGALORE TRIBUNAL IN THE CASE OF CISCO SYSTEMS INDIA PVT. LTD. VS DCIT IN I.T.A. NO. 271/BANG./2014. 6.1 WE HAVE PERUSED THE ANNUAL REPORT OF THIS COMPA NY PLACE AT PAGES 33-50 OF THE PAPER BOOK. IT IS OBSE RVED THAT THIS COMPANY EARNS ITS PRIMARY SOURCE OF INCOM E FROM MANUFACTURING, TRADING AND INDENTING ACTIVITIE S, THEREFORE, IT CANNOT BE A COMPARABLE WITH THE MARKE T SUPP[ORT SERVICES CARRIED OUT BY THE ASSESSEE. WE ARE, THEREFORE, OF THE CONSIDERED OPINION THAT THIS COMP ANY HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLES. 7. IN VIEW OF ABOVE DISCUSSION, GROUND NO.2 OF THE ASSESSEES APPEAL STANDS ALLOWED. 8. GROUND NO.3.1 OF THE ASSESSEES APPEAL STANDS SE T ASIDE TO THE ASSESSING OFFICER FOR VERIFICATION AND FOLLOWING THE DIRECTIONS AS PER DRP ORDER. 9. GROUND NO.3.2 BEING CONSEQUENTIAL IN NATURE, IS NOT ADJUDICATED UPON AND GROUND NO.3.3 IS PREMATURE. 17 I.T.A.NO.5380./DEL/2010 ACCORDINGLY, GROUNDS RAISED BY THE ASSESSEE STAND ALLOWED. 10. IN THE RESULT, APPEAL FILED BY THE ASSESSEE STA NDS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 26 TH AUG., 2016. SD./- SD./- (N. K. SAINI) (BEENA A. PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATE:26.08.2016 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 DELHI. TRUE COPY. BY ORDER (ITAT, NEW DELHI) S.NO. DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON SR. PS/PS 2 DRAFT PLACED BEFORE AUTHOR 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 26/8/16 SR. PS/PS 6 KEPT FOR PRONOUNCEMENT 26/8 SR. PS/PS 7 FILE SENT TO BENCH CLERK 26/8 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