TMI Blog2023 (9) TMI 479X X X X Extracts X X X X X X X X Extracts X X X X ..... s 69C - treating loans and advances as unexplained - DRP held that the proposed addition is not called for, however, directed the AO to make certain verifications, such as advances have been made through banking channels, advances are recorded in the books of accounts and the details are reconciled with the increasing advances during the year - HELD THAT:- As per section 144C(8) of the Act, the DRP can confirm, reduce, or enhance the variation(s) proposed in the draft assessment order, while issuing the directions under section 144C(5) - DRP is not empowered to set aside any proposed variation or issue any direction for further enquiry and passing the assessment order, as was done in the present case. Therefore, we are of the considered view that the various directions issued by the learned DRP in respect of verification on various aspects are completely contrary to the provisions of section 144C(8) of the Act and the final assessment order passed by the AO in conformity with these directions on this issue are not legally sustainable. Accordingly, the addition made by the AO pursuant to the directions of the learned DRP on this issue is deleted. Treating the outstanding b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the fact that the appellant is engaged in trading and distribution activities without any value addition to products. 1.2. Ld. DRP/AO has erred in law and facts of the case while rejecting foreign AE as tested party without considering that the tested party was selected by the appellant post analysis of functions performed, risk borne and assets used by the appellant and tested party. Without prejudice to above grounds, 1.3. Ld. DRP/AO has erred in law and facts of the case while applying external TNMM as the most appropriate method for benchmarking import of men's wear transaction with AE instead of internal TNMM. Hence, Appeal. 2. Treating loans and advances given as unexplained and taxing the same as income under section 115BBE of the Act- Rs. 1,31,02,653 - Tax effect Rs. 86,64,260. That on the facts and circumstances of the case, Id. AO has erred both in law as well as on facts by treating increase in loans and advances of Rs 1,31,02,653 during AY 2017-18 as unexplained expenditure under section 69C of the Act. 2.1. Ld. AO erred in facts of the case by alleging that appellant has not submitted supporting details with explanations and rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... editors below 5 lakhs as unexplained expenditure for want of supporting evidences, exceeding the directions provided by Hon'ble DRP. 3.4. Ld. AO has erred in law and in facts by treating accrued expense as 'unexplained expenditure' alleging that genuineness and creditworthiness of the same was not proved, without appreciating that accrued expenses represents provision for expenses and does not involve actual payment or credit. 3.5. Ld. DRP has erred in law and facts of the case by delegating its power to Id. AO of making further verification / enquiry, which is prohibited by section 144C(8) of the Act. Ld. DRP has further erred by directing ld. AO to conduct verification, despite the fact that additional evidences were sent to Id. AO during the course of proceedings before DRP and no reply was received by Id. AO on the same. Without prejudice to above grounds, 3.6. Ld. AO has erred in law and in facts by making impugned addition of Rs. 8.04 crores as unexplained expenditure under section 69C of the Act, without appreciating that the amount represents closing balance as on 31.03.2017 and the corresponding expense incurred during the year have been not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he tested party. The learned DRP vide its directions, inter-alia, rejected the objections filed by the assessee following its directions rendered in assessee s own case for the assessment year 2011-12, wherein TNMM was held to be the most appropriate method to benchmark the international transaction of purchase of finished goods from associated enterprise. In conformity with the directions issued by the learned DRP, the Assessing Officer ( AO ) passed the impugned final assessment order. Being aggrieved, the assessee is in appeal before us. 5. Having considered the submissions of both sides and perused the material available on record, we find that the coordinate bench of the Tribunal in assessee s own case in M/s.Celio Future Fashion Private Limited v/s ACIT, in ITA No.1928/Mum./2016, for the assessment year 2011-12, vide order dated 15/03/2019, while deciding a similar issue held that RPM is the most appropriate method for benchmarking the international transaction of import of men s wear for resale . The relevant findings of the coordinate bench, in the aforesaid decision, are reproduced as under:- 7.3. We have heard the parties on this issue and perused the record. Adm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally affect the amount of gross profit margin in the open market. Finally, sub-clause (v) provides that the adjusted price found under sub-clause (iv) is taken as arm's length price in respect of purchase of goods from the AE. When we consider the methodology given under RPM, more specifically sub-clauses (i) and (v), it becomes patent that sub-clause (i) refers to 'property purchased by the enterprise ... is resold ' and sub-clause (v) refers to 'arm's length price in respect of the purchase of the property ... by the enterprise '. A close scrutiny of the above two sub-clauses along with the remaining sub-clauses of rule 10B(1)(b) makes it clear beyond doubt that RPM is best suited for determining ALP of an international transaction in the nature of purchase of from an AE which are resold as such to unrelated parties. Ordinarily, this method pre-supposes no or insignificant value addition to the goods purchased from foreign AE. 17. While noting the above decision also, Hon ble jurisdictional High Court, in Principal Commissioner of Income-tax-6 v. Matrix Cellular International Services (P.) Ltd. [2018] 90 taxmann.com 54 (Delhi) found that, - 8. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stantial value to the property or services i.e., resale is made without any value addition having been made. 11. This view has also been affirmed by the Bombay High Court in its judgment dated 07.11.2014 in Commissioner of Income Tax v. L'Oreal India Pvt. Ltd. (ITA No. 1046 of 2012), where the Court found that there was no error in law committed by the ITAT when it held that RPM was the Most Appropriate Method in case of distribution or marketing activities especially when goods are purchased from associated entities and there are sales effected to unrelated parties without any further processing. In fact, a Division Bench of this Court in its decision in Bausch Lomb Eyecare (India) Pvt. Ltd. v. Additional Commissioner of Income Tax, (2016) 381 ITR 227 (Del), while considering the decision of this Court in Sony Ericsson Mobile Communications India Pvt. Ltd. v. Commissioner of Income Tax, (2015) 374 ITR 118 (Del), noted that: The RP Method loses its accuracy and reliability where the reseller adds substantially to the value of the product or the goods are further processed or incorporated into a more sophisticated product or when the product/service is transformed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and marketing spend would not affect the calculation of ALP under the RPM. Ex consequenti, we hold that RPM prima facie appears to be the most appropriate method in the facts and circumstances of the instant case. 19. The above decisions clinch the issue involved in this matter and squarely applicable to the facts of the case. We, therefore, while respectfully following the same hold that the RPM is the most appropriate method in the facts and circumstances of this case and accordingly direct the Ld. TPO to adopt the RPM as the most appropriate method for benchmarking the international transaction . 7.3. ii. The facts prevailing in the instant case are also that the assessee is the distributor of men s wear imported from its AE. It does not carry out any value addition. Though the assessee is alleged to have incurred huge expenses on advertisement and market promotion, the same would not increase the inherent value of the products. In the case of simple distribution of products, it has been consistently held in the above said case laws that the Resale Price method (RPM) is the most appropriate method. Under the RPM, the profits are compared at Gross Margin level, in wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that the proposed addition is not called for, however, directed the AO to make certain verifications, such as advances have been made through banking channels, advances are recorded in the books of accounts and the details are reconciled with the increasing advances during the year. The relevant directions of the learned DRP are reproduced as under:- Directions of the DRP 10.1 The panel has considered the submissions made by the assessee. During the course of hearing before the DRP the assessee had filed additional evidence in form of rent agreements with parties on sample basis to whom advances have been made towards security deposits for store, warehouse and offices taken on rent by the assessee forehead business use. The additional evidence was forwarded to the assessing officer using the relevant module of ITBA, for examination and comments on merits. However, till the date of issuing these directions no response has been received from the AQ. 10.2 The Panel notes that the assessing officer has proposed addition of advances made by the assessee which are duly recorded in the books of accounts, and reflected in the balance sheet of the assessee. The AO has not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the material available on record. It is evident from the record that in order to substantiate its claim that the amount shown as loans/advances in its books are towards security deposits to various parties for stores, warehouse, and office taken on rent, the assessee filed additional evidence in the form of rent agreement with various parties on a sample basis before the learned DRP. Further, it cannot be disputed that the additional evidence filed by the assessee was forwarded by the learned DRP to the AO for examination and comments on merits. However, as noted in the learned DRP s directions, till the date of issuing the directions no response was received from the AO. As noted above, the learned DRP agreed with the submission of the assessee and held that the proposed addition is not called for either under section 68, as no credit is appearing in the books of accounts of the assessee, or under section 69, as the advances have been duly recorded in the books of accounts. However, the learned DRP directed the AO to verify certain aspects. At this stage, it is relevant to note the provisions of section 144C(8) of the Act, which reads as under:- (8) The Dispute Resolution Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO to verify that the addition to creditors is on account of trade creditors and the character of royalty. The learned DRP further directed the AO to verify the reconciliation given by the assessee in respect of confirmation from 12 parties produced during the hearing before the DRP. The relevant directions of the learned DRP are reproduced as under:- 12. Directions of the DRP 12.1 The panel has considered the submissions made by the assessee. During the course of hearing before the DRP the assessee had filed additional evidence in form confirmation from creditors on sample basis. The additional evidence was forwarded lo Assessing officer using the relevant module of ITBA, for examination and comments on merits. However, till the date of issuing these directions no response has been received from the AO. 12.2 The panel notes that as per the assessee the sundry creditors as on 31 March 2017 are for purchases made by the assessee and royalty transaction with its AE. As stated by the assessee the transactions of purchase and also transaction of royalty with AE are recorded in the books of accounts. The panel, in principle, agrees with the assessee that if the original ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts, and therefore, genuineness and creditworthiness of the same is not proved, thus remains unexplained . Accordingly, vide final assessment order, the AO treated the expenditure for sundry creditors of Rs. 8,04,10,641, as unexplained and disallowed the same under section 69C of the Act. Being aggrieved, the assessee is in appeal before us. 18. Having considered the submissions of both sides and perused the material available on record, we find that in respect of this issue also the learned DRP issued directions to the AO to verify certain aspects as noted in para 12.3 of its directions, which are contrary to the provisions of section 144C(8) of the Act as the same specifically prohibits issuing any direction for further enquiry. Therefore, we are of the considered view that these directions and the final assessment order passed by the AO in conformity with the same on this issue are not legally sustainable. Accordingly, the addition made by the AO pursuant to the directions of the learned DRP on this issue is deleted. As a result, ground no.3.5, raised in assessee s appeal is allowed. Since the relief has been granted to the assessee on this short issue, the other issues ra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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