2017 (7) TMI 907 - AT - Income Tax

Tribunal excludes companies from comparables, instructs AO on OP/TC percentage mean calculation

Philip Morris Services India SA Versus Additional Director of Income Tax, Range-2, International Taxation, New Delhi

Philip Morris Services India SA Versus Additional Director of Income Tax, Range-2, International Taxation, New Delhi - Tmi Issues Involved:1. Validity of the order passed by the Assessing Officer (AO) under section 143(3) read with section 144C of the Income Tax Act, 1961.2. Jurisdictional error in the reference made by the AO to the Transfer Pricing Officer (TPO) without recording reasons.3. Error in assessing the returned income based on the directions of the Dispute Resolution Panel (DRP).4. Inclusion of certain comparables (IDC India Limited and Empire Industries Limited) by the DRP which were not proposed by the AO/TPO in the draft order.5. Comparability of IDC India Limited and Empire Industries Limited with the appellant.6. Errors in making an upward adjustment to the operating margin of the Service Segment.7. Initiation of penalty proceedings under section 271(1)(c) read with section 274 of the Act.8. Disregard of the arm’s length price determined by the appellant in its Transfer Pricing documentation.9. Use of current year data instead of multiple year/prior years' data by the AO/TPO.Issue-wise Detailed Analysis:1. Validity of the AO’s Order:The appellant contended that the order passed by the AO under section 143(3) read with section 144C of the Act was bad in law. The Tribunal did not specifically address this issue in the judgment.2. Jurisdictional Error in Reference to TPO:The appellant argued that the AO did not record any reasons in the draft assessment order for referring the matter to the TPO for computation of the Arm’s Length Price (ALP). The Tribunal did not specifically address this jurisdictional error in the judgment.3. Error in Assessing Returned Income:The appellant contended that the AO erred in assessing the returned income of Rs. 1,14,47,127 at Rs. 1,28,46,321 based on the directions of the DRP. The Tribunal's decision to include/exclude certain comparables impacted the final assessed income.4. Inclusion of IDC India Limited and Empire Industries Limited:The Tribunal noted that the DRP included IDC India Limited and Empire Industries Limited as comparables, which were not proposed by the AO/TPO in the draft order. The appellant argued that this inclusion was invalid and bad in law. The Tribunal followed its earlier decision in the appellant's own case for the preceding year, directing the AO to exclude IDC India Limited and Empire Industries Limited from the list of comparables.5. Comparability of IDC India Limited and Empire Industries Limited:The Tribunal examined the functional dissimilarities between the appellant and the comparables. It upheld the exclusion of IDC India Limited, as it is a knowledge process outsourcing unit not comparable to the appellant's back-office support services. Similarly, Empire Industries Limited was excluded as it is engaged in trading and indenting activities, which are not comparable to the appellant's market support services.6. Errors in Upward Adjustment to Operating Margin:The appellant argued against the upward adjustment made by the AO/TPO to the operating margin of the Service Segment. The Tribunal directed the AO to include Agrima Consultants International Ltd. and exclude IDC India Ltd. and Empire Industries Ltd. from the list of comparables. If the appellant’s margin is within the ±5% range, no adjustment is required.7. Initiation of Penalty Proceedings:The appellant contended that the AO erred in initiating penalty proceedings under section 271(1)(c) read with section 274 of the Act. The Tribunal did not specifically address this issue in the judgment.8. Disregard of Arm’s Length Price Determined by Appellant:The appellant argued that the AO/TPO disregarded the arm’s length price determined by it in its Transfer Pricing documentation. The Tribunal’s decision to include/exclude certain comparables affected the determination of the arm’s length price.9. Use of Current Year Data:The appellant contended that the AO/TPO erred in using current year data instead of multiple year/prior years' data. The Tribunal did not specifically address this issue in the judgment.Conclusion:The Tribunal allowed the appeal of the assessee, directing the AO to include Agrima Consultants International Ltd. and exclude IDC India Ltd. and Empire Industries Ltd. from the list of comparables. The AO was instructed to work out the average mean of OP/TC percentage and, if within the ±5% range, no adjustment was required. The other grounds were treated as academic in nature following the decision on Ground Nos. 4 and 5.