2021 (2) TMI 1320 - AT - Income Tax

TP Addition - Admissibility of additional evidences by CIT-A - HELD THAT - On perusal of the order sheet of transfer pricing proceedings it is undisputed that query regarding the comparable M/s Alta Moda was made only one day prior to the passing of the order by the TPO and thus it is evident that no sufficient opportunity was provided to the assessee to adduce evidence in support to challenge of the comparable namely M/s Alta Moda. Thus we do not find any error in the finding of the Ld. CIT(A) that the assessee is eligible for filing additional evidences under Rule 46A(1)(d) of the Rules. In view of the decision of the Hon ble Delhi High Court in the case of Manish Buldwell Private Limited 2010 (12) TMI 760 - ITAT - DELHI (E) the Ld. CIT(A) was required to forward the additional evidences for the comment of the Learned AO/TPO on merit. The assessee has produced additional evidence before the Ld. CIT(A) which were forwarded to the Learned TPO. The Ld. CIT(A) in the impugned order has reproduced the comment of the TPO on the issue of selection of comparable M/s Alta Moda and reimbursement of expenses. On perusal of the above comments of the Learned TPO we find that that there is no violation on the part of Ld CIT(A). He had duly forwarded all evidences for the comment of the Ld. TPO but the Ld. TPO consciously did not give any comment on the evidences related to reimbursement of expenses. The Ld. CIT(A) can t be faulted in such circumstances for the inaction of the Ld TPO. In view of above facts and circumstances we don t find any violation on the part of Ld. CIT(A) in admitting additional evidences under Rule 46A of the Rules. The ground no. 1 of the appeal is accordingly dismissed. Exclusion of comparable M/s Alta Moda - . As far as contention of the learned Counsel that the company M/s Alta Moda is engaged in construction we find that under the clause of general information (schedule -13) to the significant accounting policies and notes of account. The remark of business of construction may be with reference to construction of the store however for verifying this fact beyond doubt we feel it appropriate to set aside the finding of the Learned CIT(A) on the issue in dispute and restore the matter back to the AO/TPO for ascertaining the functions of the company during relevant year from the company itself using authority under section 133(6) of the Act. As to whether the company is in retailing through its own shop or though Franchise model is concerned on perusal of chart of financial statement of the company for financial year 2008-09 (i.e. assessment year under consideration) available in impugned order we find that in financial year 2008-09 no franchise commission has been shown as received. As far as the ground that while computing margin of the Company the custom duty paid on import of products has been excluded is concerned we are of the opinion that for comparability gross profit margin of both the company and the assessee has to be computed in similar manner. Both in the case of assessee as well as in the comparable company treatment of the custom duty has to be given in the similar manner. If the custom duty is part of the trading account then same is to be treated in identical manner while computing the gross profit margin of the company as well as the assessee. Since we have already rendered the issue of verifying the function of the company to the Ld AO/TPO so if the company is found to functionally similar to the assessee the Ld AO/TPO shall compute the margin of the company in view of our direction above. Appeal of the Revenue is accordingly allowed for the statistical purposes Adjustment to the international transaction of reimbursement of expenses to Associated Enterprises (AEs) - HELD THAT - There is no dispute on the fact that only sample bills of expenses reimbursed to the AEs were produced before the learned TPO during original transfer pricing proceedings and therefore the learned TPO proposed adjustment in respect of the expenses for which bills/invoices were not produced before her. During appellate proceedings before the CIT(A) the assessee has produced entire details of expenses reimbursed along with bills/invoices as additional evidence which were forwarded by the Learned CIT(A) to the learned TPO for his comments. TPO objected to the admission of the additional evidences and abstained from giving his comments on the evidences of expenses which shows that he was unable to point out any defect in the evidences of the assessee. Before us the Ld DR has also not pointed out any defect or irregularity in analysis of the CIT(A) on the issue of expenses reimbursed. In such circumstances no useful purpose will be served by sending the matter back to Ld. TPO. We accordingly reject the arguments of the Ld. DR and dismiss the ground No. 3 of the appeal.

Summary

Issues Involved:
1. Admission of additional evidence by CIT(A).
2. Exclusion of comparable M/s Alta Moda by CIT(A).
3. Adjustment of Rs. 5,32,25,677/- made to the international transaction of reimbursement of expenses to Associated Enterprises (AEs).

Detailed Analysis:

1. Admission of Additional Evidence by CIT(A):
The first ground of appeal challenges the CIT(A)’s acceptance of additional evidence. The Revenue argued that the CIT(A) violated Rule 46A of the Income Tax Rules, 1962, by admitting additional evidence without sufficient justification. The Departmental Representative (DR) contended that the assessee had ample opportunity to present evidence during the transfer pricing proceedings but failed to do so. The DR cited decisions from the Hon’ble Delhi High Court to support the argument that additional evidence should have been referred back to the Assessing Officer/TPO for comments on merit after admission.

The assessee countered that the CIT(A) had indeed referred the additional evidence to the Assessing Officer/TPO, who commented on the merits of the evidence. The CIT(A) concluded that the assessee was not given sufficient opportunity during the transfer pricing proceedings, thus justifying the admission of additional evidence under Rule 46A(1)(d). The Tribunal found no error in the CIT(A)’s decision to admit the additional evidence, noting that the TPO had commented on the merits of the evidence regarding the selection of the comparable, M/s Alta Moda. The Tribunal dismissed the Revenue’s ground, finding no violation of Rule 46A.

2. Exclusion of Comparable M/s Alta Moda by CIT(A):
The second ground of appeal concerns the exclusion of M/s Alta Moda as a comparable. The assessee used the Resale Price Method (RPM) to support its claim that the transaction of purchasing traded goods was at arm’s length. The TPO rejected the comparables selected by the assessee and included M/s Alta Moda, which had a gross profit ratio of 72.30%, leading to a proposed adjustment of Rs. 7,24,81,076/-.

The CIT(A) rejected M/s Alta Moda as a comparable, noting significant differences in business models and operations. The CIT(A) observed that M/s Alta Moda was involved in multiple activities, including construction and trading high fashion garments, which made it functionally dissimilar to the assessee. Additionally, the CIT(A) noted discrepancies in the treatment of customs duty in the financials of M/s Alta Moda and the assessee.

The Tribunal found that the CIT(A) had not adequately verified the functions of M/s Alta Moda and remanded the issue back to the AO/TPO for further verification. The Tribunal directed that if M/s Alta Moda is found to be functionally similar to the assessee, the AO/TPO should compute the margin of the company in a manner consistent with the Tribunal’s directions.

3. Adjustment of Rs. 5,32,25,677/- Made to the International Transaction of Reimbursement of Expenses to AEs:
The third ground of appeal involves the adjustment made to the international transaction of reimbursement of expenses. The assessee claimed that the reimbursement of expenses to AEs was on a cost-to-cost basis and thus at arm’s length. The TPO accepted expenses amounting to Rs. 3,46,61,365/- but proposed an adjustment of Rs. 5,32,25,677/- for the remaining expenses, citing a lack of sufficient evidence and credible basis for the payments.

The CIT(A) forwarded the additional evidence provided by the assessee to the TPO, who objected to the admission of the evidence but did not comment on its merit. The CIT(A) found that the TPO had disallowed the expenses without sufficient cause and deleted the adjustment. The Tribunal upheld the CIT(A)’s decision, noting that the TPO had not provided any comments on the additional evidence and that the DR had not pointed out any defects in the CIT(A)’s analysis. The Tribunal dismissed the Revenue’s ground, finding no basis for the adjustment.

Conclusion:
The Tribunal dismissed the first and third grounds of appeal, upholding the CIT(A)’s decisions on the admission of additional evidence and the deletion of the adjustment for reimbursement of expenses. The Tribunal allowed the second ground for statistical purposes, remanding the issue of the comparability of M/s Alta Moda back to the AO/TPO for further verification. The appeal was thus partly allowed for statistical purposes.