TMI Blog2024 (2) TMI 747X X X X Extracts X X X X X X X X Extracts X X X X ..... ne activity ie., processing services. Further, we also find from the annual report Kewal Kiran Clothing Limited has incurred huge processing charges by sub-contracting the work to other entities such as the assessee-company, hence it cannot be considered as a comparable for the computation of ALP of the assessee. Virat Industries Ltd is functionally different from that of the assessee-company and cannot be considered as a comparable for the computation of ALP. Liabilities no longer required written back - whether it has to be treated as operating income or non-operating income while computing the mark-up of the assessee? - HELD THAT:- Since this liability was waived off by BAL, it was written back and considered as income in the impugned AY. Respectfully following the ratio laid down in the case of Pr. CIT vs. Tetra Pak India Ltd [ 2023 (10) TMI 43 - BOMBAY HIGH COURT] , we direct the Ld. AO to include the liabilities written back in the impugned assessment year as operating income. TPO has not considered certain expenses such as provision for doubtful debts, provisions for warranties, provision of doubtful deposits and miscellaneous expenditure written off as operating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te material differences with that of the comparable companies and decide on this issue accordingly. We also direct the assessee to submit necessary documentation to the Ld. AO / TPO on this issue. Accordingly, this ground raised by the assessee is allowed for statistical purposes. Computation of the notional interest on outstanding receivables - HELD THAT:- We reject the arguments of the Ld. AR that outstanding receivable is not an international transaction. Whether separate adjustment is required to be made in respect of receivables? - We find that from the directions of the Ld. DRP that the assessee has not demonstrated the working capital adjustments before the Ld. Revenue Authorities while determining the ALP under TNM method both for the Tested Party and the comparables. We hereby direct the Ld. AO / TPO to examine and consider the appropriate adjustments arising out of the working capital differences in the computation of the ALP. The assessee is also directed to submit the working relating to working capital adjustments of the assessee company. Following the principle of consistency if the working capital adjustments on the ALP has been already factored in its p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt (Rs) Brandix Essentials Limited Fixed Assets 2,55,613 Brandix Essentials Limited Purchase of Fixed Assets 59,59,880 Brandix Apparel Limited Income from Processing Services 140,99,04,987 Brandix 13 PVT Ltd Payment for services 1,01,672 Brandix Mauritius Holdings Ltd Buy back of shares 42,14,93,000 Brandix Apparel Ltd Recovery of expenses 93,76,528 Brandix Apparel Ltd Recovery of expenses 66,96,55,903 Brandix Mauritius Holdings Ltd Reimbursement of expartite 1,80,50,882 Brandix Essentials Ltd Reimbursement of expenses 32,64,831 Brandix Apparel Ltd Reimbursement of expenses 37,82,725 Brandix Intimate Apparel Ltd Reimbursem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. Virat Industries Ltd 221778024 173896678 47881346 27.53 Average 19.58 The Ld. TPO did not refute the TNMM as the most appropriate method [MAM]. The Ld. TPO issued a show-cause notice on 16/10/2017 asking the assessee as to why the additions as mentioned in the show-cause notice should not be made? In reply to the show cause notice, the assessee contended the comparability of the chosen comparables by the Ld. TPO for the following entities: 1. Maral Overseas Ltd 2. Kitex Garments Ltd 3. Kewal Kiran Clothing Ltd 4. Virat Industries Ltd The main contention of the assessee is that the above comparables are in the business of manufacturing of garments and not in the processing services. The Ld. AR also objected to the Ld. TPO considering the outstanding receivables as international transaction and has applying the interest rate of 6.5% on the outstanding receivables by making an adjustment of Rs. 3,26,65,774/- in addition to the adjustment made on acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant s international transactions of Rs. 273,522,396 on account of imputation of notional interest on outstanding receivables. Grounds for processing services: 4. On the facts and in the circumstances of the case and in law, with respect to adjustment to the transfer price of processing services the Ld. DRP / AO / TPO erred in 4.1. Rejecting the TP documents maintained by the appellant u/s. 92D of the Act in good faith and with due diligence. 4.2. Rejecting the comparability analysis carried out by the assessee in TP documentation and in conducting a fresh comparability analysis for processing services. 4.3. Not providing any methodical search process during the course of assessment proceedings based on which the comparability analysis was undertaken by the Ld. TPO and accordingly, cherry picking the most favourable companies while arriving at the arm s length mark-up. 4.4. Using data, which was not contemporaneous and which was not available in the public domain at the time of preparing the TP documentation. 4.5. Not considering the multiple year / prior year data of comparable companies while determining the arm s length price in relation to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and (iii) Virat Industries Ltd by stating that these three companies are manufacturers of garments and are not engaged in processing services. In fact the Ld AR submitted that these comparables outsource processing services and incurs huge processing expenses. It was submitted that therefore these companies are not comparable to the assessee-company and hence required to be excluded. The Ld. AR also in his written submissions stated that from the annual reports of M/s. Kewal Kiran Clothing Ltd in Note 2.15 discloses that it holds huge inventories for the purpose of manufacturing activities. Similarly, the Ld. AR also referred to Note 2.25 wherein M/s. Kewal Kiran Clothing Limited has paid huge processing charges of Rs. 1,866.46 lakhs. The Ld. AR also referred to the fact that M/s. Kewal Kiran Clothing Limited manufactures Killer brand materials for sale. Similarly, the Ld. AR also referred to the financial statement of M/s. Kitex Garments Limited wherein under corporate information it is mentioned that the company is engaged in the manufacturing of fabric and readymade garments. Further, the Ld. AR also referred to Note-22 wherein M/s. Kitex Garments Limited has paid an amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kewal Kiran Clothing Limited wherein it can be seen that it is engaged in earning revenues from various segments. The Ld. AR reiterated that the assessee is engaged only in one segment ie., processing services. The Ld. AR also submitted that similarly Kitex Garments Ltd and Virat Industries Ltd were also engaged in various activities and also cannot be compared with the assessee-company. The Ld. AR also once again pleaded that since the said three companies are functionally different from the operational profile of the assessee-company, these companies are to be excluded from the comparables. Further, the Ld. DR submitted that as per the annual report of Kewal Kiran Clothing Limited it has not provided the segmental information as it has not crossed the threshold limit as prescribed under Accounting Standard-17 [AS] of the Institute of Chartered Accountants of India [ICAI] and hence not provided the same. 7. We have considered the rival contentions and perused the material available on record and the written submissions made by the assessee. 8. Grounds No. 1 and 2 are general in nature and therefore they need no adjudication. 9. Ground No.3 relates to the upward adjus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lower Quartile 8.04% Upper Quartile 8.83% The contention of the assessee in Ground No.4.8 is with respect to rejection of the TP documentation by the Ld. TPO without assigning any cogent reasons. From the order of the Ld. TPO, we find that the Ld. TPO has generally mentioned that the search process made by the assessee in the TP document is not in conformity with the TP regulations and also the choice of filters selected by the assessee resulted in selection of inappropriate comparables. However, the Ld. TPO did not elaborate on the inappropriate filters adopted by the assessee. We also find that the Ld. TPO has made an independent search using Capitallineplus and Prowess databases by adopting the following filters: (i) Companies with Sales 1 Crore (ii) Companies with Financial Year end 31/03/2014 (iii) Companies with positive networth (iv) Companies with diminish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 of the annual report, we find that Kitex Garments Limited has incurred processing charges wherein the contention of the Ld. AR is that Kitex Garments Limited has sub-contracted the work to other entities like that of the assessee. We find from the annual report (page 40) that Kitex Garments Limited is engaged in manufacture of fabric and readymade garments and exports the same. Thus in our opinion, Kitex Garments Limited is engaged in the manufacturing process whereas the assessee is engaged in the business of processing of garments thereby leading to the conclusion that the operations of Kitex Garments Limited are functionally different from that of the assessee-company. We therefore direct the Ld. TPO to exclude Kitex Garments Limited from the list of comparables for the aforesaid reasons. (ii)Comparable of Kewal Kiran Clothing Ltd: From the annual report submitted by the assessee we find that Kewal Kiran Clothing Limited is the owner of brands such as Killer and operating in a different operating model by holding huge inventories. Further, we find that Kewal Kiran Clothing Limited is also engaged in the business of manufacturing and marketing of apparels and trading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of the Bombay High Court which is extracted herein below: 8. As regard the credit to profit and loss account on account of liabilities written back amounting to Rs. 6,15,59,011/- the details of the liabilities written back were made available to CIT(A) as well as ITAT. Both, on facts, and having considered those details, have come to conclusion accepting the Assessee s contention that those liabilities belong to earlier years and are directly relatable to the regular business operations of the assessee and since these liabilities were no longer payable to business creditors should be allowed to be written back in the AY under consideration and the same was rightly offered to tax as business income u/s. 41(1) of the Act. Therefore, on facts it was accepted that these liabilities written back were arising out of normal business operations and hence form part of operating income of the assessee. The Ld. AR therefore submitted that the AE waived the air freight charges relatable to regular business operations of the assessee, and hence the assessee has written back the liability as no longer payable. Further, the Ld. AR submitted that the details of these expenditure whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se liabilities were no longer payable to business creditors should be allowed to be written back in the AY under consideration and the same was rightly offered to tax as business income u/s. 41(1) of the Act. Therefore, on facts it was accepted that these liabilities written back were arising out of normal business operations and hence form part of operating income of the assessee. The argument of the Ld DR could not be accepted for the reason that in accounting principles that a liability in the form of provision shall be created in the books of accounts in the year of accrual of expenses until the actual payment is made. Since this liability was waived off by BAL, it was written back and considered as income in the impugned AY. Respectfully following the ratio laid down by the Hon ble Bombay High Court in the case of Pr. CIT vs. Tetra Pak India Ltd (supra), we direct the Ld. AO to include the liabilities written back in the impugned assessment year as operating income. 13. With respect to Ground No. 4.10 the Ld. AR contended that these expenditure were considered as operating expenditure in the previous years and thereby similarly when these expenses are being written ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n account of hedging cannot be considered as an operating item and thus the taxpayer contention cannot be accepted. Thus, the Ld. TPO has observed that the foreign exchange fluctuations on account of hedging operations cannot be considered as operating item. However, in the instant case we find that the assessee has not engaged in hedging activities and foreign exchange loss is a transactional loss and in our opinion it should be considered as an operating cost for mark-up purposes. Further there is also merit in the argument of the Ld DR wherein the ratio laid in the cases NVH India Auto Parts P Ltd (supra) and Phoenix Comtrade P Ltd (supra) was emphasised. Therefore, we find no infirmity in the order of the Ld. Revenue Authorities and accordingly, this ground raised by the assessee is dismissed. 17. With respect to Ground No. 4.12 , the assessee has pleaded that material difference providing appropriate adjustments in the working capital between the assessee and the comparable companies selected by the Ld. TPO was not considered by the Ld. DRP. Per contra, the Ld. DR relied on the order of the Ld. DRP. 18. We have heard both the sides and perused the material availabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Ld. AR that outstanding receivable is not an international transaction. Having said so, the issue is whether separate adjustment is required to be made in respect of receivables, the contention of the Ld. AR is that the average realization period is only 79.63 days which is within the industry standards and hence notional interest should not be imputed. The notional interest is charged by the Ld. AO based on the SBI Term Deposit Rate has adopted 6.50% on the outstanding receivables beyond a period of 30 days as directed by Ld DRP.The Ld. AR also pleaded the working capital adjustment shall also be undertaken for the companies selected as comparables by the Ld. TPO.The Ld. DR submitted that the Ld. TPO has taken lowest rate for the application of interest on outstanding receivables from the website of SBI Term Deposit Rates for the term under consideration. The Ld. DR also referred to page 364 of the paper book wherein the assessee in the computation of share valuation has adopted a discount rate of 15.58%. The Ld. DR also referred to page 472 of the paper book wherein the assessee s basis for interest payable is one month LIBOR + 3.5% on the ECBs obtained by them. He therefo ..... 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