9911796707
TMI Blog2020 (1) TMI 606X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act") read Section 143(3) of the Act, for the aforesaid assessment year on the following among other grounds: 1. Adjustment /Addition to Total Income INR 7,880,245 On the facts and in the circumstances of the case and in law, the learned Transfer Pricing Officer ('TPO') and the learned AO erred in proposing and the Hon'ble Dispute Resolution Panel ('DRP') further erred in confirming the proposed addition of INR 7,880,245 to the Appellant's total income of INR 198,044,775. 2. Transfer pricing adjustment of INR 68,63,889 on account of royalty shortfall in connection with the international transaction of provision of technical assistance and advisory services 2.1 On the facts and in the circumstances of the case and in law, the learned TPO /AO erred in proposing and the Hon'ble DRP further erred in confirming the proposed addition of INR 68,63,889 to the arm's length price determined by the appellant in respect of the international transaction of provision of technical assistance and advisory services. 2.2. The learned TPO / AO has erred in rejecting and the Hon'ble DRP erred in upholding the action of the learned TPO / AO in rejecting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t even if the recovery of samples were to be considered as routine trading activity, the same should be merged with normal trading activity of AE segment for the purpose of benchmarking. 4. Initiation of penalty proceedings under section 271(1)(c) of the Act The learned AO has erred in both in laws and on facts, in initiating penalty proceedings under section 271(1)(c) of the act against the appellant. 5. Each one of the above grounds of appeal is without prejudice to the other. 6. The appellant reserves the right to amend, alter or add to the grounds of appeal." 2. Briefly stated, the assessee company which is engaged in the business of manufacturing and trading of clothing and cloth accessories viz. shirts, neckties, trousers, accessories like cufflinks, belts, wallets etc. had e-fled its return of income for A.Y 2011-12 on 30.11.2011, declaring its total income at Rs. 19,80,44,775/-. The return of income filed by the assessee was processed as such under Sec. 143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act. 3. During the course of the assessment proceedings the A.O made a reference under Sec. 92 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aforesaid deliberations, the TPO worked out the 'royalty' @3% on the entire sales of Rs. 700,362,813/- of the AE. Accordingly, the TPO worked out an adjustment of Rs. 68,63,889/- towards shortfall in 'royalty' charged by the assessee on its AE. 5. Further, in the course of the proceedings it was observed by the TPO that the assessee had recovered from its AE. viz. M/s Zodiac Clothing Company, UAE LLC an amount of Rs. 86,16,123/-, of which Rs. 56,08,743/- was on account of cost of samples and the balance amount was towards freight cost. On a perusal of the records, it was observed by the TPO that the assessee company on a regular basis was buying fabrics for samples on behalf of its AE. It was noticed by the TPO, that the assessee had charged 7.5% on cost of samples (after recovering the salvage value) as mark-up on the said transactions. Observing, that gathering of samples which was a pre-requisite for a successful textile business which was the main/core activity of the assessee company, the TPO was of the view that the assessee should have charged an appropriate mark-up. On a perusal of the segmental profitability of the trading segment (AE) of the assessee, it was noticed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ading segment-AE) of the assesee and making an adjustment of Rs. 10,16,356/- towards shortfall of the amount recoverable by the assessee on account of supply of samples to its AE. 10. We shall first advert to the working of the 'royalty' @3% on the entire sales of Rs. 700,362,813/- of the AE by the TPO, which therein had resulted into an adjustment of Rs. 68,63,889/- towards shortfall in 'royalty' charged by the assessee from its AE. As is discernible from the orders of the lower authorities, the assessee during the year had provided technical assistance and services to its AE, viz. M/s Zodiac Clothing Company, UAE LLC. In the course of providing of the aforesaid services the assessee had carried out certain functions viz. (i). participation in meetings with customers, if required; (ii). display of products at international fairs and exhibitions; (iii). product development; (iv). preparation and approval of samples and prototypes of garments and fabrics; (v). sourcing/vendor development; (vi). advice on production systems; (vii). providing patterns and optimum fabric utilisation drawings; (viii). advice on quality control; (ix). advice for banking, forex transactions and documenta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istance and advisory services rendered by it to its AE. It is the claim of the ld. A.R, that after the expiry of the five year period of the 'agreement' dated 09.11.2002, the assessee had renewed the 'agreement' on 05.04.2008, with the same terms and conditions. Further, the assessee had revised the 'royalty' rates from 2.5% to 3% vide a letter dated 06.05.2008, with the same terms and conditions. As observed by us hereinabove, the assessee during the year under consideration was in receipt of 'royalty' of Rs. 1,41,46,995/- [@3% of Rs. 46,71,99,282/- i.e the manufacturing sales-export]. 12. We have given a thoughtful consideration to the issue before us and find substantial force in the contentions advanced by the ld. A.R. In our considered view, there is substance in the claim of the ld. A.R that the 'agreement' dated 04.04.2008 between the assessee and its AE, viz. M/s Zodiac Clothing Company, UAE LLC, was merely an extension of the earlier 'agreement' dated 09.11.2002, with the same terms and conditions. Also, we are persuaded to subscribe to the claim of the ld. A.R that the letter of understanding dated 02.01.2003 between the assessee and its AE, viz. M/s Zodiac Clothing Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pply of samples to its AE. 14. As is discernible from the records, the assessee procured the fabrics from third party in India for its AE in UAE. If the fabrics were not exported to the AE, it would be sold to a third party in India and the difference, if any, would be recovered from the AE. For carrying out the sampling activity, the costs therein involved would be recovered by the assessee from the AE, for which the assessee would raise a mark-up of 7.5% (after recovering the salvage value) on its AE. The assessee would recover the cost plus mark-up of 7.5% on the cost of the samples (after recovering of the salvage value), that were not picked up by the AE. During the year under consideration, the assessee had recovered from its AE, viz. M/s Zodiac Clothing Company, UAE LLC an amount of Rs. 86,16,123/-, of which Rs. 56,08,743/- was on account of sale of samples and the balance amount was towards freight cost. 15. We have given a thoughtful consideration to the aforesaid issue before us and are unable to persuade ourselves to subscribe to the comparison of mark-up of 7.5% on cost of samples (fabrics) charged by the assessee on its AE with the segmental profitability of trading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unds of appeal : "The Appellant objects to the order of the learned Assessing Officer ('AO') dated 31 October 2016 (received on 10 November 2016) passed under Section 143(3) read with Section 92CA and Section 144C (13) of the Income tax Act, 1961 ("the Act"), for the aforesaid assessment year on the following among other grounds: 1. Adjustment /Addition to Total Income INR 93,871,430 On the facts and in the circumstances of the case and in law, the learned Transfer Pricing Officer ('TPO') and the learned AO erred in proposing and the Hon'ble Dispute Resolution Panel ('DRP') further erred in confirming the proposed addition of INR 9,795,413 to the Appellant's total income of INR 84,076,020. 2. Transfer pricing adjustment of INR 9,297,422 on account of royalty shortfall in connection with the international transaction of provision of technical assistance and advisory services 2.1 On the facts and in the circumstances of the case and in law, the learned TPO / AO erred in proposing and the Hon'ble DRP further erred in confirming the proposed addition of INR 9,297,422 to the arm's length price determined by the Appellant in respect of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Income Tax Act, 1961. 3.3. The learned AO erred in making and the Hon'ble DRP erred in confirming the action of the learned AO in recomputing the disallowance uls.14A without appreciating that the methodology followed by the Appellant has been accepted in the previous assessment years by the tax authorities. 4. Initiation of penalty proceedings under section 271(1)(c) of the Act The learned AO has erred in both in law and on facts, in initiating penalty proceedings under section 271(1)(c) of the Act against the Appellant. 5. Each one of the above grounds of appeal is without prejudice to the other 6. The appellant reserves the right to amend, alter or add to the ground of the appeal." 20. Briefly stated, the assessee company had e-fled its return of income for A.Y 2012-13 on 30.11.2012, declaring a total income of Rs. 8,40,76,020/-. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act. 21. During the course of the assessment proceedings, the A.O made a reference under Sec. 92CA(1) of the Act to the Additional Commissioner of Income-tax (Transfer Pricing)-4(3), Mumbai (for short. 'TPO'). On a perusal of the TP St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnical know-how received by the assessee from its AE viz. M/s Zodiac Clothing Company UAE LLC, we find, that as the facts and the issue therein involved remains the same as were there before us in the appeal of the assessee for the immediately preceding year i.e A.Y 2011-12, therefore, our order therein passed while disposing off the 'Ground of appeal No. 2' in the said appeal, would apply mutatis mutandis for the disposal of the Ground of appeal No. 2 in the present appeal of the assessee for A.Y 2012-13 in ITA No. 106/Mum/2013. Accordingly, the Ground of appeal No. 2 is allowed on the same terms. 28. We shall now advert to the claim of the assessee that the A.O had erred in working out the disallowance under Sec.14A at Rs. 8,54,221/-. On a perusal of the orders of the lower authorities, we find, that the assessee company had received an exempt dividend income of Rs. 2,13,32,278/- during the year under consideration. In its return of income for the year under consideration, the assessee had on a suo-motto basis offered a disallowance of an amount of Rs. 3,56,230/- under Sec. 14A of the Act. As claimed by the assessee, the aforesaid disallowance u/s 14A of Rs. 3,56,230/- compris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 05 (Bom). In the said case, it was observed by the Hon'ble High Court that where the assesse's capital, profit reserves, surplus and current account deposits were higher than the investment in tax-free securities, it would have to be presumed that investment made by the assessee would be out of the interest-free funds available with assessee and no disallowance would be warranted u/s 14A. Although we are principally in agreement with the aforesaid claim of the ld. A.R, however, in the absence of the facts and figures in support of the said claim, we refrain from adjudicating the same. Accordingly, we restore the issue to the file of the A.O, who shall after verifying the veracity of the aforesaid claim of the assessee, therein readjudicate the same. In case, the assesse's capital, profit reserves, surplus and current account deposits are found to be higher than its investment in tax-free securities, then the disallowance of the interest expenditure made by the A.O under Sec. 14A r.w Rule 8D(2)(ii) shall stand vacated. Needless to say, the A.O shall in the course of the 'set aside' proceedings afford a reasonable opportunity of being heard to the assessee. The Ground of appe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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