9911796707
TMI Blog2023 (1) TMI 1084X X X X Extracts X X X X X X X X Extracts X X X X ..... se are that the assessee-company, M/s. Teejay India Private Limited (formerly known as M/s. Ocean India Pvt Ltd) is engaged in the business of manufacturing and exporting of knitted fabrics/apparels at Brandix APSEZ, Atchutapuram, Visakhapatnam. The assessee filed its return of income for the AY 2017-18 on 29/11/2017 declaring total income of Rs. NIL. Subsequently, the case was selected for scrutiny under CASS and notices U/s. 143(2) of the Act was issued on 23/08/2018. Subsequently notice U/s. 142(1) was issued along with an annexure calling for relevant details. In the course of assessment proceedings, the Ld. AO noticed that Form 3CEB report of the assessee company had international transactions with its Associated Enterprises (AEs). Hence, a reference was made to the Transfer Pricing Officer u/s. 92CA(1) of the Act for the international transactions undertaken by the assessee company in the FY 2016-17. Accordingly, the TP matters were examined by the DCIT (TPO)-1, Hyderabad and an order u/s. 92CA(3) of the Act was passed on 21/01/2021 determining the proposed adjustment as follows: Sl No Description Adjustment U/s. 92CA (in Rs.) 1. Purchase and sale transaction 27,43,39,2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t are without prejudice to one another. 1. That the order of the Additional/Joint/Deputy/Assistant Commissioner of Income Tax/Income Tax Officer, National e-assessment centre, New Delhi (Ld. AO) to the extent prejudicial to the appellant is bad in law, contrary to the facts and circumstances of the case and is liable to be quashed. 2. Based on the facts and in the circumstances of the present case, the Final order passed by the Ld. AO being passed not in conformity with the directions issued by the Ld. DRP is bad in law as per provisions of section 144C(13) of the Act and hence liable to be quashed. 3. That the Ld. Dispute Resolution Panel erred in not appreciating that the order of the Ld. JCIT (Transfer Pricing), Hyderabad passed under section 92CA of the Act is contrary to law and thus liable to be quashed. 4. That on the facts and in the circumstances of the case, the Ld. AO/Ld. TPO and the Ld. DRP erred in making an upward adjustment to the transfer price of the appellant's international transactions INR 27,43,39,282/- in respect of manufacture and sale of fabric, INR 13,87,93,645/- in respect of payment of technical support services, INR 9,98,109 in respect of payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction Fabrics & Apparels Limited 5.9. Rejecting the following companies that were additionally proposed by the appellant from the TPO's search matrix being functionally comparable: * BSL Limited * Salona Cotspin Limited * Titaanium Ten Enterprise Ltd * Lakhotia Polyesters (India) Ltd 5.10. Rejecting certain filters adopted by the appellant in the TP documentation for the purpose of conducting the economic analysis. 5.11. Application of certain inappropriate filter adopted by the Ld. TPO while conducting the fresh benchmarking analysis. 5.12. Computing the operating mark up on the cost for the comparable companies selected while performing the comparability analysis by considering foreign exchange fluctuations as operating in nature. 5.13. Proposing transfer pricing adjustment in relation to the transactions entered with third parties on sale of fabric wherein principle of transfer pricing is not applied. In doing so, the Ld. AO / TPO erred in computing transfer pricing adjustments not on proportionate basis which was consistently followed in earlier assessment years. 5.14. Not providing appropriate economic adjustments towards material differences between the op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e circumstances of the case, the Ld. DRP/AO/TPO erred in : 8.1. Considering overdue receivables from AEs as on international transaction under the provisions of section 92B of the Act. 8.2. Without prejudice to Ground No.7.1 above, ignoring the fact that the appellant does not pay interest in relation to outstanding payable to AEs 8.3. Without prejudice to the ground No. 7.1 and 7.2 above, the Ld. TPO erred in not giving effect to the DRP directions to recomputed the notional interest on outstanding receivables by considering the credit period provided in the inter-company agreement ie., 30 days. 8.4. Without prejudice to ground Nos. 7.1 and 7.2 above, imputing interest using SBI term deposit rate instead of London Interbank Offered Rate (LIBOR). 8.5. Without prejudice to ground nos. 7.1, 7.2 and 7.3 above, the Ld. DRP/AO/TPO erred in disregarding the fact that the appellant is engaged in manufacturing operations wherein the overall credit period of outstanding receivables are higher. Ground for Reimbursement of expenses paid to AE 9. On the facts and in the circumstances of the case, the Ld. DRP/AO/TPO erred in: 9.1 Failing to take cognizance of the fact that such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation fo the Transactional Net Margin Method adopted by the appellant for determining the arm's length price of its manufacturing operation, the appellant propose to submit supplementary analysis for demonstrating comparable uncontrolled price as the most appropriate method. 5.16. Based on the facts and circumstances of the present case and in law, the DCIT, Circle 3(1) erred in not providing appropriate economic adjustment towards material difference between the operational profile of comparable companies and the appellant with respect to capacity utilization adjustment: Grounds for disallowance of royalty fee paid: 6.7. Based on the facts and circumstances of the present case and in law, Ld. AO erred in considering the royalty fee expense in the operating cost base while computing the operating mark up of the manufacturing operation and as well determining the arm's length price of the royalty fee transaction on a standalone basis, thereby carried out double scrutiny and made double adjustment to the international transaction pertaining to payment of royalty fee." 7. Grounds No. 1 & 4 are general in nature and therefore they need no adjudication. 8. With respect to Ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order dated 13/10/2022 which is deemed to be considered within the limitation period specified U/s. 144C(13) of the Act. We therefore dismiss this plea raised by the assessee and proceed to adjudicate the other grounds. Thus, Grounds No. 2 & 3 raised by the assessee are dismissed. 10. With respect to Grounds of Appeal and Additional Grounds of Appeal for manufacturing and sale of fabric raised vide Ground No.5, the Ld. AR submitted that the assessee is engaged in the manufacturing and sale of knitted fabrics/apparels for AEs and third party customers. The Ld. AR reiterated that the assessee company is engaged in only one activity ie., manufacturing and sale of fabrics. The Ld. AR further submitted the Ld. TPO has taken the following companies as comparables rejecting the TP documentation submitted by the assessee in the show cause notice issued to the assessee. Sl No Company Name OP/OC As per TPO As per assessee (corrected) 1. Suryaamba Spinning Mills Ltd 5.81% 5.81% 2. ShristiCotspinn Pvt ltd 6.29% 6.01% 3. Shri Santhosh Meenakshi Textiles Pvt Ltd 7.62% 1.31% 4. Kalpataruvu Spinning Mills Pvt Ltd 9.49% 9.43% 5. PrasunaVamsikrishnaSpg. Mills Pvt Ltd 10. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Co. Pvt Ltd 24.19% 24.23% 15. Orbit Exports Ltd 33.83% 32.82% 12. However, we find that during the AY 2017-18 the following comparables were rejected by the Ld. DRP as it is considered functionally dissimilar: (i) Vardhaman Textiles Limtied (ii) Sarla Performance Fibers Limited (iii) Indocount Industries Ltd (iv) Prathishta Weaving & Knitting Co Ltd 13. Further, the Ld. AR relied on the recitals of the Mumbai Tribunal in the case of M/s. Orbit Exports Limited in ITA No. 6360/Mum/2018 wherein it is stated that the comparable companies selected by the TPO, M/s. Orbit Exports Limited, is engaged in manufacturing, trading and export of fabrics whereas the assessee is engaged in only one activity ie., manufacturing and sale of fabrics and does not carry out any trading activity. Considering the above facts, we find merit in the argument of the Ld. AR that the fundamentally dissimilar companies rejected by the DRP during the AY 2017-18 and 2018-19 and M/s. Orbit Exports Limited, shall be removed from the comparables and accordingly the (Arms Length Price) ALP of the assessee be recomputed after removing the above dissimilar companies. We therefore direct the Ld. TPO t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered by the AO or details of technical know how received by the assessee from its AE. The Ld. DR further contended that after purchasing the fabrics the AE further processed and manufactured the same into garments, and therefore the marketing and brand utilization advantages are totally enjoyed by the AEs. Further, the Ld. DR submitted that there was no commercial or economic value addition to the assessee as visible from the Profit & Loss Account in comparison with the previous year. The Ld. DR therefore vehemently argued that the assessee could not establish with relevant documentary evidence and failed to justify the chargeability of royalty. 15. Countering the above the Ld. AR argued that the assessee is in the process of negotiation of anUnilateral Advance Pricing Agreement (APA) with CBDT on this issue. The Ld. AR further submitted that it is in the final stage of the discussions with the CBDT with respect to the conclusion of the APA on the payment of royalties. He therefore pleaded that the issue may be deferred, subject to the final outcome of the APA and the matter may be remitted back to the Ld. TPO. 16. The Ld. AR relied on ITAT, Mumbai Tribunal's order in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. DRP. The Ld. AR relied on the case of the jurisdictional Bench of the ITAT in the case of M/s. Devi Sea Foods Limited vs. DCIT in ITAT No.75/Viz/2022, dated 9/9/2022. Per contra, the Ld. DR submitted that there were various decisions where interest be charged as per the SBI deposit rates. The Ld. DR vehemently argued that the notional interest on outstanding receivables cannot be subsumed in the working capital adjustments and hence pleaded that the order of the Ld. DRP be upheld. 22. We have heard both the sides and perused the material available on record and the orders of the Ld. Revenue Authorities. In Ground No.8.1 the assessee contested that the receivables is not an international transaction under the provisions of section 92B of the Act. While deciding on the identical issue the ITAT in the case of M/s. Devi Sea Foods Limited vs. DCIT in ITAT No.75/Viz/2022, dated 9/9/2022, held as follows: "7..........There is no dispute with regard to the fact that receivables is included under the definition of international transaction consequent to the amendments made by the Finance Act, 2012 w.e.f 1/4/2002. Therefore we are of the considered view that there is no merit in the ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has taken the land on lease in 2009 for a period of 23 years and has paid a sum of Rs. 5.40 Crs. The Ld. AR submitted that the assessee is entitled to amortize these leasehold charges during the entire period of lease which should not and cannot be considered as capital expenditure. The Ld. AR submitted that various judicial precedents have held that the lease hold charges of land for a long term lease shall be amortized over the period of lease. Per contra, the Ld. DR relied on the order of the Ld. DRP. 27. We have heard both the sides and perused the material available on record. Admittedly the assessee has paid a sum of Rs. 5.40 Crs for a period of 23 years for taking the land on lease. It is the case of the Ld. AO that it is one time lumpsum payment and a prior period expenditure which cannot be apportioned during the impugned assessment year as revenue expenditure. The assessee has claimed proportionate share of amortization of leasehold charges amounting to Rs. 23,47,826/- for the relevant assessment year. There are various judicial pronouncements as submitted by Ld AR, with respect to amortization of the leasehold charges over the lease period, and therefore we ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, 1962 on the basis that the search process applied by the company which is not in conformity with the Indian TP Regulations and in stating that the company did not apply appropriate filters. 4.2. Not considering the current year data filter (ie financial year 2017-18) which would lead to rejection of comparable companies selected by the company based on data available for the FY preceding the current year (FY 2016-17). 4.3. Computing the markup on operating cost of the company. While doing so, the Ld. DRP/TPO have considered foreign exchange fluctuation as operating in nature while considering provision for doubtful advances as a non-operating expense and liabilities no longer required written back as nonoperating income as against the treatment adopted in the transfer pricing document. 4.4. The Ld. AO/TPO erred in rejection of comparability analysis carried out by the assessee in the TP documentation and in conducting a fresh comparability analysis for the manufacture and sale of fabric. 4.5. Selecting the following comparable companies which were rejected by the Ld. TPO in the immediately preceding AY on account of functional dissimilarity thereby violating the princip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant by disallowing the royalty paid to its AE in relation to know how provided by the AE during the year; 5.2. In doing so, the Ld. AO/TPO erred in rejecting the benchmarking analysis furnished by the assesse and determined the ALP of the said international transaction to NIL. 5.3. Challenging the commercial expediency of any expenditure incurred by the appellant, even when such expenses have been incurred wholly and exclusively for the purpose of business operations. 5.4. Disregarding the evidence filed by the appellant substantiating the benefits received to it by payment of technical support service fee to its AE. 5.5. Ignoring the fact that the know how received by the appellant from its AE is essential for carrying out its business activities and improving its manufacturing process. 5.6. Ignoring the fact that the appellant has filed an application for entering into a Unilateral Advanced Pricing Agreement with the Central Board of Direct Taxes covering the transaction of payment of royalty and the relevant assessment year is covered under the purview of the application. Grounds for disallowance of use of Reserve Bank of India master circular as a valid C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in earlier years. 8.3. The Ld. AO completely erred in considering lease amortization charge as a prior period expenditure just because of liability without considering the fact that such are to be considered as period cost and should be debited to P & L Account under the mercantile system of accounting." In addition to the original grounds of appeal raised, the assessee also filed additional grounds of appeal as follows: Without prejudice to the grounds (ground No. 4.1 to 4.14 in relation to grounds for manufacturing and sale of fabric) and (ground 5.1 to 5.6 for disallowance of royalty fee paid) mentioned in the aforementioned appeal and even though assuming but not accepting to the approach adopted by the Ld. AO/TPO, it is humbly pleaded before the Hon'ble Bench to grant the appellant leave for accepting the admission of the additional grounds stated as under: Grounds for manufacturing and sale of fabric. 4.15. Based on the facts and circumstances of the present case and in law, the DCIT, Circle-3(1) (AO) erred in proposing transfer pricing adjustment in relation to the transactions entered with third parties on sale fo fabric wherein principle of transfer pricing is no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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