TMI Blog2021 (2) TMI 1320X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 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 matt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rity 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. - ITA No.4315/Del./2014 - - - Dated:- 23-2-2021 - SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI O.P. KANT, ACCOUNTANT MEMBER For the Appellant : Shri Surenderpal, CIT(DR) For the Respondent : Sh. Salil Agarwal, Adv. Sh. Madhur Agarwal, Adv. Sh. Shailesh Gupta, CA Sh. Sanjeev Jain, CA ORDER PER O.P. KANT, AM: This appeal by the Deputy Commissioner of Income-tax, Circle-12(1), New Delhi [in short the Assessing Officer(AO) ] is directed against order dated 05/05/2014 passed by the CIT (Appeals)-XX, New Delhi [in short the Ld. CIT(A) ] the case of M/s Hermes India Retail and Distributors Private Limited (in short the assessee ) for assessment year 2009-10 raising following grounds: 1. On the facts and circumstances of the case an in law, the Ld. CIT(A) has erred in accepting evidence produced at appellate stage, as the assessee had failed to demonstrate that its case was covered under any of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies appeared before the Tribunal through Video Conferencing facility and filed papers electronically. 4. The first ground of the appeal is against admission of additional evidences by the Learned CIT(A). Before us, the Learned Departmental Representative (DR) submitted that Ld. CIT(A) has admitted additional evidences in violation of Rule 46A of Income Tax Rules, 1962 (in short the Rules ). According to him, the assessee appeared 11 times before the learned TPO during transfer pricing proceedings, which lasted for around one year, but failed to produce the evidences before the learned TPO. He submitted that the assessee has not demonstrated before the Learned CIT(A) as how it fulfilled requirement of Rule 46A of the Rules. The learned DR relied on the decision of the Hon ble Delhi High Court in the case of Manish Buildwell Pvt. Ltd. reported in 245 CTR 397 and Jansampark Advertising and Marketing Private Limited reported in 375 ITR 373 and submitted that after admission of the additional evidences, those evidences should have been referred to the Assessing Officer/TPO for his comments on merit. 4.1 On the contrary, the Learned Counsel of the assessee relied on the finding of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings , which was produced by the assessee and concluded that no sufficient opportunity was provided to the assessee and, therefore, he admitted additional evidence. The relevant finding of the Learned CIT(A) is reproduced as under: 4.1.4 The Show Cause Notice dated 17/01/2013 proposing (i)Kewal Kiran Clothing Ltd as comparable with proposed GP rate of 60.98% (ii)rejecting 8 comparables used in TP study (iii)asking for details of reimbursement of Expenses was received by the appellant only on 19/01/2013 through mail. Written submission rejecting Kewal Kiran as a comparable and sample copies of re-imbursement of expenses were filed by the appellant on 28/01/2013. New Comparable namely Alta moda garments Ltd was proposed by TPO on 28/01/2013 vide entry in order sheet. Written submission was filed by appellant vide letter dated 29/01/2013. The Order u/s 92CA(3) determining the TP adjustment of Rs. 12.57 crores was passed by TPO on 29/01/2013. The sequence of events shows that the appellant was not given ^proper opportunity to furnish evidence during TP proceedings. During the appellate proceedings, the appellant has submitted five paper books. The submission of the appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not considered by the AO, and can do what the AO can do and can direct the AO to do what he has failed to do, as held by the Supreme Court in the case of CIT vs. Kanpur Coal Syndicate (1964) 53 ITR 225 (SC) but in this case, the CIT(A) did not exercise this right. This power, which is recognized in sub-s. (4) of s. 250, has to be exercised by the CIT(A) and there should be material on record to show that he, while disposing of the appeal, had directed further enquiry and called for the confirmation letters from the assessee even in respect of receipt of monies from customers by way of cheques. Rule 46A is a provision in the IT Rules, 1962 which is invoked, on the other hand, by the assessee who is in an appeal before the CIT(A). Once the assessee invokes r. 46A and prays for admission of additional evidence before the CIT(A), then the procedure prescribed in the said rule has to be scrupulously followed. The fact that sub-s. (4) of s. 250 confers powers on the CIT(A) to conduct an enquiry as he thinks fit, while disposing of the appeal, cannot be relied upon to contend that the procedural requirements of r. 46A need not be complied with. If such a plea of the assessee is accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... produced by him during the course of proceedings before the Assessing Officer, except in the following circumstances, namely : (a) where the Assessing Officerhas refused to admit evidence which ought to have been admitted; or (b) where the appellant was prevented by sufficient cause from producing the evidence which he was called upon to produce by the Assessing Officer; or (c) where the appellant was prevented by sufficient cause from producing before the Assessing Officerany evidence which is relevant to any ground of appeal; or (d) where the Assessing Officerhas made the order appealed against without giving sufficient opportunity to the appellant to adduce evidence relevant to any ground of appeal. (2) No evidence shall be admitted under sub-r. (1) unless the Deputy Commissioner (Appeals) or, as the case may be, the Commissioner (Appeals) records in writing the reasons for its admission. (3) The Deputy Commissioner (Appeals) or, as the case may be, the Commissioner (Appeals) shall not take into account any evidence produced under sub-r. (1) unless the Assessing Officerhas been allowed a reasonable opportunity (a) to examine the evidenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and rebut the same, has not been complied with. There is nothing in the order of the CIT(A) to show that the AO was confronted with the confirmation letters received by the assessee from the customers who paid the amounts by cheques and asked for comments. Thus, the end result has been that additional evidence was admitted and accepted as genuine without the AO furnishing his comments and without verification. Since this is an indispensable requirement, we are of the view that the Tribunal ought to have restored the matter to the CIT(A) with the direction to him to comply with sub-r. (3) of r. 46A . In our opinion and with respect, the error committed by the Tribunal is that it proceeded to mix up the powers of the CIT(A) under sub- s. (4) of s. 250 with the powers vested in him under r. 46A. The Tribunal seems to have overlooked sub-r. (4) of r. 46A [sic-s. 250] which itself takes note of the distinction between the powers conferred by the CIT(A) under the statute while disposing of the assessee s appeal and the powers conferred upon him under r. 46A. The Tribunal erred in its interpretation of the provisions of r. 46A vis- -vis s. 250(4). Its view that since in any case the CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt to be maintained at time of the Transfer Pricing study under Rule 10D. 4.7 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. 5. In ground no. 2, the Revenue has challenged exclusion of comparable M/s Alta Moda. 5.1 The facts in brief qua the issue in dispute are that the assessee reported following international transactions: Nature of International Transaction Most Appropriated Method Profit Level Indicator (PLI) Tested Party s Margin Comparables Margin Value of International Transaction Purchase of Traded Goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,342,000.00 4,306,125.00 Purchases 14,087,500.00 2,250,869.00 Direct costs - 136,806.00 Franchise commission 4,812,500.00 - Total 22,242,000.00 6,693,800.00 Amount Ratio Ratio Amount Cost of goods sold to sales ratio (Before franchise commission) 12,909,699 (32%) 1:3 3,351,800 (16%) 1:6 Cost of goods sold to sales ratio (After franchise commission) 17,722,199 (44%) 4:9 3,351,800 (16%) 1:6 4.3.4 I have carefully gone through the order passed u/s 92CA(3), submission of the appellant and the remand report. The appellant has stated that the TPO ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the appellant company comparable with M/s Alta Moda Garments, percentage of custom duty i.e. 36.51% should be added to the GP margin of 45.11% declared by the appellant company. Thus the adjusted G.P. margin comes to 81.62%, which is higher than the GP margin of comparable company, Alta Moda Garments i.e. 72.3%. 5.3 Further, the Ld. CIT(A) accepted the five foreign comparable companies and their airthmatic mean gross profit margin ( 29.86%) being less than the gross profit margin of the assessee (45.11%), the Ld. CIT(A) deleted the transfer pricing adjustment of ₹ 7,24,81,076/-. 5.4 Before us, the Learned DR submitted that the Ld. CIT(A) has rejected the comparable by making frivolous claims that M/s. Alta Moda is a brand and trademark holder and is not into retailing business and following franchise model. According to him, M/s Alta Moda has paid Frenchise commission in subsequent assessment year and, therefore, in the year under consideration it cannot be rejected on the ground of different business model. 5.5 The Learned Counsel of the assessee, on the other hand, relied on the order of the Ld. CIT(A). He also referred to the annual report of the company file ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany 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. Further, on page 183 of the paperbook-1, in Director s Report, under the head review of the operations it is mentioned as under: Alta Moda commenced its operations at its flagship store in Hyderabad on 16th Feb., 2008. The store was received very well and has clocked reasonably strong sales in the last one year. The second outlet was opened in Chennai on 24th April, 2008 on a franchisee basis. The Company had also started the concept of Shop N Shop, having established two more outlets in Hyderabad. All the retail outlets are located in up market areas. The company has achieved a top line of Rs.208 lakhs for the financial year ending 31st March, 2009. 5.10 Thus, the company has its own store and during the relevant year opened a franchisees store also, but no income from franchise commission has been shown in the year under consideration therefore there is no impact of franchise store on the gross profit margin reported in financial statement of the company in the year under con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue in dispute are that the assessee has shown reimbursement of expenses paid at Rs.8,78,87,042/-, towards cost reimbursement to its AEs. According to the assessee, these expenses were incurred by the Associated Enterprises towards third parties, which have been reimbursed by the assessee on the cost to cost basis. In view of the assessee, these intra-group transaction of reimbursement are on cost to cost basis, and thus at arm s-length. The assessee submitted that reimbursement of the expenses broadly include two types of expenses. Firstly, the expenses in the nature of hotel rent, salary, fees, travel expenses, courier charges, office stationary etc. which are categorized as revenue expenses and debited to the profit and loss account under various heads. Secondly, expenses in the nature of the capital expenditure, such as laptop purchased, furniture and air-conditioner purchase etc. which have been capitalized by adding to the fixed asset accounts. The assessee filed invoices/debit notes of the above expenses on sample basis. The learned TPO, however, observed that the assessee did not provide breakup of the reimbursement expenses and sample invoices provided were either not re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii) Administrative, Selling Other Expenses of Rs 4,749,927/-, (iv) Fixed Rent Rates of Rs 3,810,585/-, (v) Communication Expenses of Rs 1,785,665/-, (vi) Furniture Fixtures of Rs 762,920/-, (vii) Wages Allowances of Rs 566,830/-, (viii) Miscellaneous Expenses of Rs 4,539/- and (x) Computers of s 40,500/-. The appellant has also stated that all the relevant details of Rs.8,78,87,042/- had already been filed by the appellant company vide its reply dated 12/4/2012 and 26/4/2012 (Page No. 167 to 190 of the Paper Book No.l) as per the earlier requisition of the TPO. The said details were not considered by the TPO while passing order u/s 92CA(3). The appellant has stated that the disallowance of Rs.38,10,585/- on account of fixed rent 8s rates relates the payment to the landlord of the premises of the Oberoi Hotel. The appellant has stated that the disallowance of Rs.3,62,39,803/- out of reimbursement relates to capital expenditure such as Leasehold Improvement expenditure. The appellant has also stated that the Purchases of Rs.58,82,335/- included in reimbursement of expenses were initial purchases due to start-up operations and were on cost-to-cost basis without any markup. D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the initial year of operation were duly reimbursed by the appellant company on cost to cost basis without any mark-up. Considering the facts of the case I am of the view that the TPO has wrongly determined the TP adjustment of Rs.5,32,25,677/- out of reimbursement expenses of Rs.8,78,87,042/- paid to its AE. Accordingly, the AO/TPO is directed to delete the addition of Rs 5,32,25,677/- on account of the TP adjustment out of reimbursements expenses. This issue is decided in favour of the appellant. 6.3 Before us, the learned DR submitted that despite show cause notice dated 17/01/2013 to provide details of head-wise reimbursement of expenses and its purpose issued by the learned TPO, only sample bills were furnished by the assessee and therefore learned TPO is justified in proposing the adjustment. 6.4 The learned Counsel of the assessee, on the other hand, relied on the order of the Learned CIT(A) and submitted that details of entire expenditure ₹ 8,78,87,042/- was furnished before the Learned CIT(A), who forwarded those details including bills/invoices of the expenses for his/her comments. The Learned Counsel also referred to the copy of invoices of those expen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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