2023 (9) TMI 479 - AT - Income Tax

TP Adjustment - Adjustment to Arm Length Price (ALP) u/s 92C - MAM - Import of men's wear for resale made by the Appellant from its Associated Enterprises (AE) - HELD THAT - 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 2019 (3) TMI 1696 - ITAT MUMBAI 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 . Thus the contention of the assessee in applying RPM as the most appropriate method is upheld. Accordingly, the order passed by the TPO/AO on this issue is set aside and the TPO/AO is directed to de novo benchmark the international transaction pertaining to import of men s wear for resale by applying RPM as the most appropriate method. As a result, ground no.1, raised in assessee s appeal is allowed for statistical purposes. Addition u/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 balance of sundry creditors as unexplained and taxing the same as income u/s 115BBE - DRP held that the addition proposed by the AO is not justified, however, directed the AO to verify that the addition to creditors is on account of trade creditors and the character of royalty - HELD THAT - As we find that in respect of this issue also the learned DRP issued directions to the AO to verify certain aspects as noted in 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.

Summary

Issues Involved:
1. Transfer pricing adjustment for the "import of men's wear for resale."
2. Addition under section 69C of the Act by treating loans and advances as "unexplained."
3. Treating the outstanding balance of sundry creditors as "unexplained" and taxing the same as income under section 115BBE of the Act.
4. Initiation of penalty proceedings under section 270A and 271AAC(1) of the Act.

Summary:

Issue 1: Transfer Pricing Adjustment
The assessee challenged the adjustment of Rs. 35,32,063 to the Arm's Length Price (ALP) under section 92C of the Income Tax Act, 1961, made by the AO and DRP based on the TPO's application of the Transaction Net Margin Method (TNMM). The assessee contended that the Resale Price Method (RPM) was the most appropriate method given its trading and distribution activities without value addition. The Tribunal referenced its earlier decision in the assessee's case for AY 2011-12, which upheld RPM as the most appropriate method for benchmarking the international transaction of "import of men's wear for resale." Consequently, the Tribunal directed the TPO/AO to de novo benchmark the transaction using RPM. Ground no.1 was allowed for statistical purposes.

Issue 2: Loans and Advances as "Unexplained"
The AO treated the increase in loans and advances of Rs. 1,31,02,653 during AY 2017-18 as unexplained expenditure under section 69C, citing a lack of supporting evidence. The DRP, while agreeing with the assessee's claim that the advances were for security deposits, directed the AO to verify the advances through banking channels and their recording in the books. The Tribunal found the DRP's directions for further verification contrary to section 144C(8) of the Act, which prohibits such directions. Thus, the Tribunal deleted the addition made by the AO. Ground no.2.4 was allowed, rendering other issues in ground no.2 academic.

Issue 3: Sundry Creditors as "Unexplained"
The AO treated Rs. 8,04,10,641 out of total sundry creditors of Rs. 15,46,19,525 as unexplained due to lack of documentary evidence. The DRP directed the AO to verify the nature of these creditors. The Tribunal found these directions contrary to section 144C(8) and thus unsustainable. Consequently, the Tribunal deleted the addition made by the AO. Ground no.3.5 was allowed, rendering other issues in ground no.3 academic.

Issue 4: Penalty Proceedings
The initiation of penalty proceedings under section 270A and 271AAC(1) was deemed premature and dismissed.

Conclusion:
The appeal by the assessee was partly allowed for statistical purposes. The Tribunal directed the TPO/AO to re-benchmark the international transaction using RPM and deleted the additions made under sections 69C and 115BBE based on the DRP's unsustainable directions. Penalty proceedings were dismissed as premature.