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2023 (1) TMI 1084 - AT - Income TaxAssessment u/s 144C - AO passed the final assessment order without giving effect to the directions of the Ld. DRP - limitation period specified U/s. 144C(13) - HELD THAT - In the instant case the assessee has accepted the final assessment order passed by the Ld. AO on 21/7/2022. The assessee has neither raised objections nor challenged the order dated 21/7/2022 but has preferred to file a rectification petition U/s. 154 - As pointed out by the Ld. DR, any order passed by the Ld. AO can be rectified U/s. 154 and the Ld. AO has rightly rectified the order on 13/10/2022. Therefore, we are of the considered view that the original assessment order passed by the Ld. AO on 21/7/2022 is valid in law as it has been rectified by 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. TP Adjustment - Comparable selection - HELD THAT - 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 to compute the ALP as directed above. Fundamentally, in the absence of similarity between the comparables selected by Ld TPO and the assessee either during the current or any other previous or subsequent assessment year as held by LD DRP, should not be considered for the impugned assessment year also. Accordingly, this ground raised by the assessee is allowed for statistical purposes. Disallowance of Technical Support Service Fee paid to Teejay Lanka PLC - assessee submitted the Technical Services Agreement before the Ld. TPO - AR vehemently argued that the Technical Support Service Fee was incurred wholly and exclusively for the purpose of business operations of the assessee - HELD THAT - We find merit in the argument of the Ld. AR and we are of the considered view that it would be deemed fit to remit the matter back to the Ld. TPO to decide the case on merits subject to final outcome of the Advance Pricing Agreement (APA) with CBDT by the assessee. We therefore allow these Grounds No.6 raised by the assessee for statistical purposes. Payment of interest on ECB - AR submitted that the ALP should be considered as LIBOR 300 basis points as per the RBI Master Circular - HELD THAT - We find from the Master Circular relied on by Ld AR, that RBI prescribed the maximum cap interest on ECBs with different tenures. Therefore, the Ld. DRP has rightly determined the ALP as LIBOR 200 basis points considering it rational based on several judicial decisions while directing the Ld TPO to adopt the interest rate @ LIBOR 200 basis points. We are therefore not inclined to interfere with the order of the Ld. DRP and hence this ground raised by the assessee is dismissed. Notional interest on outstanding receivables - AR submitted that the notional interest is subsumed in the working capital and no further adjustment is required as proposed by the Ld. DRP - assessee contested that the receivables is not an international transaction under the provisions of section 92B of the Act - HELD THAT - While deciding on the identical issue the ITAT in the case of M/s. Devi Sea Foods Limited. 2022 (9) TMI 587 - ITAT VISAKHAPATNAM 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 argument of Ld AR that receivables is not an international transaction. Working capital adjustment - HELD THAT - In the decision of M/s. Devi Sea Foods Limited 2022 (9) TMI 587 - ITAT VISAKHAPATNAM Tribunal has held that when TNM method is considered as the most appropriate method which was also not disputed by the Revenue the net margin thereunder would take care of such notional interest cost. We also direct the Ld. TPO to consider the working capital adjustment and its impact on the profits of the assessee vis- -vis its comparables. We are therefore of a considered view that no upward adjustment on the outstanding receivables is required and therefore we direct the Ld. AO to delete the upward adjustment made towards overdue receivables from AE. The contention of the Ld. AR that the assessee does not pay interest in relation to outstanding payable to AEs is of no relevance. Further, the Ld. DRP has provided a notional credit period of 30 days which is reasonable in the instant case. Accordingly this ground raised by the assessee is partly allowed for statistical purposes. Reworking charges carried out by the AE in relation to export - AE incurred certain expenses for reworking on behalf of the assessee on the fabric sold by the assessee to third party customers in Sri Lanka - HELD THAT - We find that the assessee has not provided any details as reworking charges carried out by the AE in relation to export with supporting evidences either before the Ld. Revenue Authorities or before us. We therefore concur with the decision of the Ld. DRP and upheld the TP adjustment made by the TPO in this regard. Thus, the Grounds No. 9 10 grounds raised by the assessee are dismissed. Nature of expenses - Disallowance of leasehold amortization charges - HELD THAT - 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. Assessee has claimed proportionate share of amortization of leasehold charges 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 are of the considered view that the leasehold charges paid by the assessee shall be proportionately claimed as revenue expenditure, over the lease period and hence the amortization of leasehold charges claimed by the assessee for the relevant assessment year shall be allowed as revenue expenditure during the impugned assessment year. We therefore allow this ground raised by the assessee.
Issues Involved:
1. Validity of the final assessment order passed by the Ld. AO without following the directions of the Ld. DRP. 2. Transfer pricing adjustments related to the manufacturing and sale of fabric. 3. Disallowance of royalty fee paid for technical support services. 4. Determination of arm's length price for interest on external commercial borrowings (ECB). 5. Imputation of notional interest on outstanding receivables. 6. Reimbursement of expenses paid and received. 7. Disallowance of leasehold amortization charges. Detailed Analysis: 1. Validity of the Final Assessment Order: The assessee argued that the final assessment order passed by the Ld. AO on 21/7/2022 was not in conformity with the directions of the Ld. DRP, making it invalid under section 144C(13) of the Act. The Ld. DR contended that the error was due to system miscommunication and could be rectified under section 154 of the Act. The tribunal held that since the Ld. AO rectified the order on 13/10/2022, the original assessment order was valid in law. Thus, the grounds raised by the assessee on this issue were dismissed. 2. Transfer Pricing Adjustments: The tribunal addressed various grounds related to transfer pricing adjustments for the manufacturing and sale of fabric. The Ld. AR submitted that the comparables selected by the Ld. TPO were functionally dissimilar. The tribunal found merit in the argument and directed the Ld. TPO to recompute the ALP after removing dissimilar companies. The tribunal emphasized that fundamentally dissimilar companies rejected by the DRP in previous or subsequent assessment years should not be considered for the impugned assessment year. 3. Disallowance of Royalty Fee Paid: The assessee contended that the technical support service fee paid to its AE was incurred wholly and exclusively for business operations. The Ld. DR argued that the assessee failed to provide documentary evidence justifying the payment. The tribunal found merit in the assessee's argument and remitted the matter back to the Ld. TPO to decide on merits, subject to the final outcome of the Advance Pricing Agreement (APA) with CBDT. 4. Arm's Length Price for Interest on ECB: The Ld. AR argued that the ALP should be considered as LIBOR + 300 basis points as per the RBI Master Circular. The Ld. DR contended that LIBOR + 200 basis points was appropriate. The tribunal upheld the Ld. DRP's determination of LIBOR + 200 basis points, considering it rational based on several judicial decisions. 5. Imputation of Notional Interest on Outstanding Receivables: The assessee argued that notional interest is subsumed in the working capital and no further adjustment is required. The tribunal, following the decision in M/s. Devi Sea Foods Limited, held that no upward adjustment on the outstanding receivables is required and directed the Ld. AO to delete the adjustment. The tribunal also directed the Ld. TPO to consider the working capital adjustment and its impact on profits. 6. Reimbursement of Expenses: The assessee contended that the AE incurred expenses on behalf of the assessee, which were reimbursed on a cost-to-cost basis. The tribunal found that the assessee failed to provide supporting evidence for the reworking charges and upheld the TP adjustment made by the TPO. 7. Disallowance of Leasehold Amortization Charges: The assessee argued that leasehold charges should be amortized over the lease period and not considered as capital expenditure. The tribunal agreed with the assessee, allowing the amortization of leasehold charges as revenue expenditure during the relevant assessment year. Conclusion: The tribunal partly allowed the appeals for statistical purposes, directing the Ld. TPO to recompute the ALP for transfer pricing adjustments and to delete the upward adjustment on outstanding receivables. The tribunal upheld the Ld. DRP's determination of the ALP for interest on ECB and the disallowance of reimbursement of expenses. The tribunal allowed the amortization of leasehold charges as revenue expenditure.
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