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TMI Blog2023 (1) TMI 1084X X X X Extracts X X X X X X X X Extracts X X X X ..... missed. 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 consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verdue 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourse of assessment proceedings, the Ld. AO noticed that Form 3CEB report of the assessee company had international transactions with its Associated Enterprises (AEs). Hence, a reference was made to the Transfer Pricing Officer u/s. 92CA(1) of the Act for the international transactions undertaken by the assessee company in the FY 2016-17. Accordingly, the TP matters were examined by the DCIT (TPO)-1, Hyderabad and an order u/s. 92CA(3) of the Act was passed on 21/01/2021 determining the proposed adjustment as follows: Sl No Description Adjustment U/s. 92CA (in Rs.) 1. Purchase and sale transaction 27,43,39,282 2. Payment of royalty for technical support services 13,87,93,645 3. Interest on ECB 9,98,109 4. Interest on trade receivables 55,32,500 5. Reimbursement of expenses 1,85,34,376 6. Reimbursement of expenses received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment centre, New Delhi (Ld. AO) to the extent prejudicial to the appellant is bad in law, contrary to the facts and circumstances of the case and is liable to be quashed. 2. Based on the facts and in the circumstances of the present case, the Final order passed by the Ld. AO being passed not in conformity with the directions issued by the Ld. DRP is bad in law as per provisions of section 144C(13) of the Act and hence liable to be quashed. 3. That the Ld. Dispute Resolution Panel erred in not appreciating that the order of the Ld. JCIT (Transfer Pricing), Hyderabad passed under section 92CA of the Act is contrary to law and thus liable to be quashed. 4. That on the facts and in the circumstances of the case, the Ld. AO/Ld. TPO and the Ld. DRP erred in making an upward adjustment to the transfer price of the appellant s international transactions INR 27,43,39,282/- in respect of manufacture and sale of fabric, INR 13,87,93,645/- in respect of payment of technical support services, INR 9,98,109 in respect of payment of interest on ECB and INR 55,32,500/- on account of imputation of notional interest on outstanding receivables, INR 1,85,34,376/- pertaining to reimburse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditionally proposed by the appellant from the TPO s search matrix being functionally comparable: BSL Limited Salona Cotspin Limited Titaanium Ten Enterprise Ltd Lakhotia Polyesters (India) Ltd 5.10. Rejecting certain filters adopted by the appellant in the TP documentation for the purpose of conducting the economic analysis. 5.11. Application of certain inappropriate filter adopted by the Ld. TPO while conducting the fresh benchmarking analysis. 5.12. Computing the operating mark up on the cost for the comparable companies selected while performing the comparability analysis by considering foreign exchange fluctuations as operating in nature. 5.13. Proposing transfer pricing adjustment in relation to the transactions entered with third parties on sale of fabric wherein principle of transfer pricing is not applied. In doing so, the Ld. AO / TPO erred in computing transfer pricing adjustments not on proportionate basis which was consistently followed in earlier assessment years. 5.14. Not providing appropriate economic adjustments towards material differences between the operational profile of comparable companies and the appellant wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances of the case, the Ld. DRP/AO/TPO erred in : 8.1. Considering overdue receivables from AEs as on international transaction under the provisions of section 92B of the Act. 8.2. Without prejudice to Ground No.7.1 above, ignoring the fact that the appellant does not pay interest in relation to outstanding payable to AEs 8.3. Without prejudice to the ground No. 7.1 and 7.2 above, the Ld. TPO erred in not giving effect to the DRP directions to recomputed the notional interest on outstanding receivables by considering the credit period provided in the inter-company agreement ie., 30 days. 8.4. Without prejudice to ground Nos. 7.1 and 7.2 above, imputing interest using SBI term deposit rate instead of London Interbank Offered Rate (LIBOR). 8.5. Without prejudice to ground nos. 7.1, 7.2 and 7.3 above, the Ld. DRP/AO/TPO erred in disregarding the fact that the appellant is engaged in manufacturing operations wherein the overall credit period of outstanding receivables are higher. Ground for Reimbursement of expenses paid to AE 9. On the facts and in the circumstances of the case, the Ld. DRP/AO/TPO erred in: 9.1 Failing to take cognizance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nufacturing and sale of fabric. 5.15. Without prejudice to the application fo the Transactional Net Margin Method adopted by the appellant for determining the arm s length price of its manufacturing operation, the appellant propose to submit supplementary analysis for demonstrating comparable uncontrolled price as the most appropriate method. 5.16. Based on the facts and circumstances of the present case and in law, the DCIT, Circle 3(1) erred in not providing appropriate economic adjustment towards material difference between the operational profile of comparable companies and the appellant with respect to capacity utilization adjustment: Grounds for disallowance of royalty fee paid: 6.7. Based on the facts and circumstances of the present case and in law, Ld. AO erred in considering the royalty fee expense in the operating cost base while computing the operating mark up of the manufacturing operation and as well determining the arm s length price of the royalty fee transaction on a standalone basis, thereby carried out double scrutiny and made double adjustment to the international transaction pertaining to payment of royalty fee. 7. Grounds No. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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. 10. With respect to Grounds of Appeal and Additional Grounds of Appeal for manufacturing and sale of fabric raised vide Ground No.5, the Ld. AR submitted that the assessee is engaged in the manufacturing and sale of knitted fabrics/apparels for AEs and third party customers. The Ld. AR reiterated that the assessee company is engaged in only one activity ie., manufacturing and sale of fabrics. The Ld. AR further submitted the Ld. TPO has taken the following companies as comparables rejecting the TP documentation submitted by the assessee in the show cause notice issued to the assessee. Sl No Company Name OP/OC As per TPO As per assessee (corrected) 1. Suryaamba Spinning Mills Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered in the impugned assessment year also. Per contra, the Ld. DR invited our attention to paragraph 4 of the Ld. DRP order of the impugned assessment year stating that the reasons why the comparables were considered functionally similar during the impugned assessment year. He therefore pleaded that the order of the Ld. DRP be upheld. 11. We have heard both the sides and perused the material available on record. The Ld. TPO while passing the order U/s. 92CA(3) of the Act rejected the comparables selected by the assessee and considered it inappropriate while stating the rejection for the selection of comparables. The Ld. TPO then further substituted the following companies as comparables: Sl No Company Name OP/OC As per TPO As per assessee (corrected) 1. Suryaamba Spinning Mills Ltd 5.81% 5.81% 2. ShristiCotspinn Pvt ltd 6.29% 6.01% 3. Shri Santhosh Meenakshi Textiles Pvt Ltd 7.62% 1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 14. With respect to Ground No.6, the assessee agitated against the disallowance of Technical Support Service Fee paid to Teejay Lanka PLC. The Ld. AR for the assessee submitted the Technical Services Agreement before the Ld. TPO. The Ld. AR vehemently argued that the Technical Support Service Fee was incurred wholly and exclusively for the purpose of business operations of the assessee. The Ld. AR also further contended that the Technical Support Service Fee paid to its AEs helped the assessee in achieving higher quality and higher standards in its manufacturing process and accordingly the Technical Support Service Fee of Rs. 13,87,93,645/- was paid to its AE. The Ld. AR further submitted that the Ld. TPO ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remitted back to the Ld. TPO. 16. The Ld. AR relied on ITAT, Mumbai Tribunal s order in the case of M/s. Aker Powergas Pvt Ltd vs. DCIT in ITA No,. 2213/M/2017, dated 31/10/2022. 17. Contending the above, the Ld. DR submitted that the UPA negotiated by the assessee does not cover the relevant assessment year and hence it cannot be applied to the impugned assessment year. 18. We have heard both the sides and perused the material available on record. 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. 19. With respect to Ground No.7 ie., payment of interest on ECB, the Ld. AR submitted that the ALP should be considered as LIBOR + 300 basis points as per the RBI Master Circular. The Ld. AR relied on the Coordinate Bench of the Tribunal at Bangalore in IT(TP)A No. 2207/Bang/2016 in the case of M/s. Tuppadahalli Energy India Pvt Ltd vs Deputy Commissioner of Income Tax, dated 13/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 . Consistently following the above decision this ground No 8.1 raised by the assessee is dismissed 23. The assessee also submitted that working capital adjustment was rejected by the Ld. TPO. Further, we find that the dispute is with respect to selection of comparables and not with respect to selection of method adopted by the assessee. In the decision of M/s. Devi Sea Foods Limited (supra) the 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. Further, 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 assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 Rs. 23,47,826/- 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. 28. In the result, appeal of the assessee is partly allowed for statistical purposes. ITA No. 155/Viz/2022 AY: 2018-19 29. This appeal filed by the assessee against the final order of the Ld. Assessing Officer [AO] passed u/s. 143(3) r.w.s. 144C(13) r.w.s 144B of the Income Tax Act, 1961 [the Act] in DIN No. ITBA/AST/S/143(3)/2022-23/104428973(1), dated 29/07/2022 for the AY 2018-19. 30. The assessee has raised the following grounds of appeal: The grounds mentioned herein by the appellant are without prejudice to one another. 1. That the order of the Additional/Joint/Deputy/Assistant Commissioner of Income Tax/Income Tax Officer, National e- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e following comparable companies which were rejected by the Ld. TPO in the immediately preceding AY on account of functional dissimilarity thereby violating the principle of consistency. Mohit Industries Limited WFB Baird Co. India Pvt Ltd EnkayTexfab Private Limited Seasons Textiles Limited SRG Apparels Limited KPR Mills Limited 4.6. Using data which was not contemporaneous and which was not available in the public domain at the time of preparing the TP documentation. 4.7. Not considering the multiple year/prior year data of comparable companies while determining the arm s length price in relation to the appellant s international transactions with its AEs. 4.8. Including companies that are functionally different from the operational profile of the appellant. Mohit Industries Limited WFB Baird Co. India Pvt Ltd EnkayTexfab Private Limited Seasons Textiles Limited Sandhya Spinning Mills Limited Thiagarajar Mills Private Limited SRG Apparels Limited KPR Mills Limited 4.9. Excluding companies selected by the appellant in its TP documentation without giving due cognizance to the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement with the Central Board of Direct Taxes covering the transaction of payment of royalty and the relevant assessment year is covered under the purview of the application. Grounds for disallowance of use of Reserve Bank of India master circular as a valid CUP with regards to payment oif interest on ECB 6. On the facts and in the circumstances of the case the Ld. DRP/AO/TPO erred in 6.1. Considering London Interbank Offered Rate (LIBOR) plus 200 basis points as the arm s length rate for benchmarking the payment of interest on ECB instead of LIBOR plus 450 basis points used by the appellant. 6.2. Disregarding the use of RBI master circular as a valid CUP without providing any cogent reasons for the same. 6.3. Ignoring the judicial precedents relied upon by the appellant in determining the arm s length interest rate paid on the external commercial borrowings availed. Grounds for imputation of notional interest on outstanding receivables. 7. On the facts and in the circumstances of the case, the Ld. DRP/AO/TPO erred in : 7.1. Considering overdue receivables from AEs as on international transaction under the provisions of section 92B of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder: Grounds for manufacturing and sale of fabric. 4.15. Based on the facts and circumstances of the present case and in law, the DCIT, Circle-3(1) (AO) erred in proposing transfer pricing adjustment in relation to the transactions entered with third parties on sale fo fabric wherein principle of transfer pricing is not applied. In doing so, the Ld. AO erred in computing transfer pricing adjustment not on proportionate basis which was consistently followed in earlier assessment years. 4.16. Without prejudice to the application of the Transactional Net Margin Method adopted by the appellant for determining the arm s length price of its manufacturing operation, the appellant propose to submit supplementary analysis for demonstrating comparable uncontrolled price as the most appropriate method. 4.17. Based on the facts and circumstances of the present case and in law, the Ld. AO erred in not providing appropriate economic adjustment towards material difference between the operational profile of comparable companies and the appellant with respect to capacity utilization adjustment: Grounds for disallowance of royalty fee paid: 5.7. Based on the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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