M/S CELIO FUTURE FASHION PRIVATE LIMITED,MUMBAI vs. ADDL/JT/CIT/DY/ASSTT/ITO/NFAC, DELHI, DELHI

The present appeal has been filed by the assessee challenging the impugned final assessment order dated 24/02/2022, passed under section 143(3) read with section 144C(13) and section 144B of the Income Tax Act, 1961 ("the Act"), pursuant to the directions dated 27/01/2022, issued by the learned Commissioner of Income Tax (DRP–1), Mumbai–1, [“learned DRP”], under section 144C(5) of the Act for the assessment year 2017–18.

“1. Adjustment of Rs. 35,32,063 to Arm Length Price (ALP) under section 92C of the Income Tax Act, 1961 (The Act)-Tax effect Rs.11,67,806. That on the facts and circumstances of the case, learned Assessing Officer (National Faceless Assessment Centre) and Dispute Resolution Panel (DRP) has erred both in law as well on facts in making adjustment M/s. Celio Future Fashion Pvt. Ltd. ITA no.741/Mum./2022 of Rs. 35,32,063, towards ALP of Import of men's wear for resale made by the Appellant from its Associated Enterprises (AE), based on the observation of Transfer Pricing Officer (TPO) under section 920 of the Act by applying external Transaction Net Margin Method (TNMM). 1.1. Ld. DRP/AO has erred in rejecting Retail Sales Price (RPM) method adopted by the Appellant as the most appropriate method for justifying ALP and ignored the fact that the appellant is engaged in trading and distribution activities without any value addition to products. 1.2. Ld. DRP/AO has erred in law and facts of the case while rejecting foreign AE as tested party without considering that the tested party was selected by the appellant post analysis of functions performed, risk borne and assets used by the appellant and tested party. Without prejudice to above grounds, 1.3. Ld. DRP/AO has erred in law and facts of the case while applying external TNMM as the most appropriate method for benchmarking import of men's wear transaction with AE instead of internal TNMM. Hence, Appeal.

2. Treating loans and advances given as unexplained and taxing the same as income under section 115BBE of the Act- Rs. 1,31,02,653 - Tax effect Rs. 86,64,260. That on the facts and circumstances of the case, Id. AO has erred both in law as well as on facts by treating increase in loans and advances of Rs 1,31,02,653 during AY 2017-18 as unexplained expenditure under section 69C of the Act. 2.1. Ld. AO erred in facts of the case by alleging that appellant has not submitted supporting details with explanations and reconciliation without appreciating the submission of the appellant wherein signed rental agreements, extract of relevant bank accounts highlighting the payment made and reconciliation with books of accounts was submitted. 2.2. Ld. AO erred in law and facts of the case while making addition under section 69C of the Act treating the Jeans and advances given as unexplained expenditure without appreciating the fact that the amount is not in nature of expenditure and are assets of the company. 2.3. Ld. AO erred in law and facts of the case by treating the amount paid towards security deposit as unexplained expenditure while rental payments of rent to same parties is allowed and considered genuine. 2.4. Ld. DRP has erred in law and facts of the case by delegating its power to Id. AO of making further +verification / enquiry, which is prohibited by section 144C(8) of the Act. Ld. DRP has further erred by directing ld. AO to conduct verification, despite the fact that additional evidences were sent to Id. AO during the course of proceedings before DRP and no reply was received by ld. AO on the same. Hence, Appeal. Page | 2

M/s. Celio Future Fashion Pvt. Ltd. ITA no.741/Mum./2022

4. That on the facts and under the circumstances of the case, the ld. AO has erred both on the law as well as facts in initiating penalty proceeding under section 270A and 271AAC(1) of the Act.

M/s. Celio Future Fashion Pvt. Ltd. ITA no.741/Mum./2022 5. The appellant craves leave to add, alter, delete, rectify and modify any of the grounds of appeals before or at the time of hearing the appeal.

3. The issue arising in ground no.1, raised in assessee‟s appeal, is pertaining to transfer pricing adjustment in respect of international transaction of „import of men’s wear for resale‟.

“7.3. We have heard the parties on this issue and perused the record. Admittedly, the assessee is a mere distributor of men’s wear, imported from its AE. In the following cases, it has been held that Re-sale Price Method is the most appropriate method to benchmark the international transactions when finished goods are purchased by the assessee from its AE, which are ready to be sold in the market without any value addition: i. Fujitsu India (P) Ltd., Vs. ACIT [101 taxmann.com 322] (Delhi-Trib); ii. Burberry India Pvt. Ltd., Vs. ACIT in & 7684/Del/2017, dt. 22-06-2018; iii. Bose Corporation India (P) Ltd., Vs. ACIT [77 taxmann.com 194] (Delhi- Trib); iv. CIT Vs. L’Oreal India (P) Ltd., [53 taxmann.com 432] (Bombay); 7.3.i. For the sake of convenience, we extract below the operative portion of the order passed by the Delhi Bench of this Tribunal in the case of Burberry India Pvt. Ltd., Vs. ACIT in ITA Nos. 758 & 7684/Del/2017, dt. 22-06-2018: “15. We have gone through the record in the light of the submissions on either side. It is an admitted fact that in this case the assessee is merely purchasing and selling the products without adding any value to the core product. Further, Ld. TPO did not dispute the characterisation of the assessee as in the TP document and also accepted the functional profile of the assessee as a routine distributor. Ld. DRP, however, recorded that the assessee has incurred substantial AMP, and other expenses, in relation to its turnover, and is therefore, not a simple distributor in terms of the requirement of using RPM. Now we shall proceed to examine the law applicable these facts.

M/s. Celio Future Fashion Pvt. Ltd. ITA no.741/Mum./2022 16. In Nokia India (P) Ltd. v. Dy. CIT[2014] 52 taxmann.com 492/153 ITD 508 (Delhi), the Delhi bench of the ITAT held that,- 9. Sub-clause (i) of clause (b) of Rule 10B(1) deals with identifying the price at which the goods purchased from an AE is resold. Sub-clause (ii) of clause (b) of Rule 10B(1) talks of reducing the amount of normal gross profit margin of comparable uncontrolled transactions from such resale price of the assessee. Sub- clause (iii) states that the result of subclause (ii) is further reduced by the expenses incurred in connection with the purchase of goods and sub-clause (iv) provides that the amount so deduced under sub-clause (iii) is adjusted on account of differences in the international transaction and comparable uncontrolled transactions which materially affect the amount of gross profit margin in the open market. Finally, sub-clause (v) provides that the adjusted price found under sub- clause (iv) is taken as arm's length price in respect of purchase of goods from the AE. When we consider the methodology given under RPM, more specifically sub- clauses (i) and (v), it becomes patent that sub-clause (i) refers to 'property purchased by the enterprise ... is resold ' and sub-clause (v) refers to 'arm's length price in respect of the purchase of the property ... by the enterprise '. A close scrutiny of the above two sub-clauses along with the remaining sub-clauses of rule 10B(1)(b) makes it clear beyond doubt that RPM is best suited for determining ALP of an international transaction in the nature of purchase of from an AE which are resold as such to unrelated parties. Ordinarily, this method pre- supposes no or insignificant value addition to the goods purchased from foreign AE.

9. Similarly, in Swarovski India Pvt. Ltd. v. ACIT, the ITAT held: "Adverting to the facts of the instant case, we find that the assessee purchased Crystal goods and Crystal components from its AE. No value addition was made to such imports. The goods were sold as such. In the given circumstances, the RPM is the most appropriate method for determining the ALP of the international transaction of' Import of Crystal goods and Crystal components."

M/s. Celio Future Fashion Pvt. Ltd. ITA no.741/Mum./2022 "Thus, the RPM method identifies the price at which the product purchased from the A.E. is resold to a unrelated party. Such price is reduced by normal gross profit margin i.e., the gross profit margin accruing in a comparable controlled transaction on resale of same or similar property or services. The RPM is mostly applied in a situation in which the reseller purchases tangible property or obtain services from an A.E. and reseller does not physically alter the tangible goods and services or use any intangible assets to add substantial value to the property or services i.e., resale is made without any value addition having been made."

11. This view has also been affirmed by the Bombay High Court in its judgment dated 07.11.2014 in Commissioner of Income Tax v. L'Oreal India Pvt. Ltd. (ITA No. 1046 of 2012), where the Court found that there was no error in law committed by the ITAT when it held that RPM was the Most Appropriate Method in case of distribution or marketing activities especially when goods are purchased from associated entities and there are sales effected to unrelated parties without any further processing. In fact, a Division Bench of this Court in its decision in Bausch & Lomb Eyecare (India) Pvt. Ltd. v. Additional Commissioner of Income Tax, (2016) 381 ITR 227 (Del), while considering the decision of this Court in Sony Ericsson Mobile Communications India Pvt. Ltd. v. Commissioner of Income Tax, (2015) 374 ITR 118 (Del), noted that: "The RP Method loses its accuracy and reliability where the reseller adds substantially to the value of the product or the goods are further processed or incorporated into a more sophisticated product or when the product/service is transformed."

M/s. Celio Future Fashion Pvt. Ltd. ITA no.741/Mum./2022 on 31/03/2017. In response thereto, the assessee provided the names of a few parties against whom loans/advances are shown and claimed the same to be towards security deposits. In the absence of confirmation from the parties and documentary evidence in support of loans/advances, the AO vide draft assessment order held that the assessee has failed to prove the genuineness and creditworthiness of the parties against whom the loans/advances are shown in its balance sheet. Accordingly, the AO, vide draft assessment order, proposed to make an addition of Rs.1,31,02,653, being the amount shown towards loans/advances during the year under consideration as „unexplained’.

“Directions of the DRP 10.1 The panel has considered the submissions made by the assessee. During the course of hearing before the DRP the assessee had filed additional evidence in form of rent agreements with parties on sample basis to whom advances have been made towards security deposits for store, warehouse and offices taken on rent by the assessee forehead business use. The additional evidence was forwarded to the assessing officer using the relevant module of ITBA, for examination and comments on merits. However, till the date of issuing these directions no response has been received from the AQ. 10.2 The Panel notes that the assessing officer has proposed addition of advances made by the assessee which are duly recorded in the books of accounts, and reflected in the balance sheet of the assessee. The AO has not clarified that under which section of the Income Tax Act, the said addition is proposed to be made. This obviously cannot be made under section 68 of the Act as it is not a credit appearing in the books of accounts. Similarly, it cannot be made under section 69 as the advance made is recorded in the books of accounts. It is claimed by the assessee that the advances are towards a security deposits of various stores, warehouse and offices taken on rent by the assessee for its business use. The assessee has also provided details of advances given during AY 2017-18 wherein vendor name, PAN No.. additions made during the year etc. are mentioned. As additional evidence the assessee has filed copies of rental agreement in respect of parties to whom major advances have been made. 10.3 In view of the above, the panel is of the opinion that the proposed addition is not called for. However, the assessing officer should verify that Page | 9

M/s. Celio Future Fashion Pvt. Ltd. ITA no.741/Mum./2022 advances have been made by the assessee through banking channels and are properly recorded in the books of accounts and the details are reconciled with the increasing advances during the year. Accordingly, objection No. 6 of the assessee is allowed, subject to verification by the AO.”

10. In conformity with the learned DRP‟s directions, the AO issued a letter to the assessee asking to submit rental agreements, ledger account copies of the aforesaid parties in assessee‟s books of accounts, and bank account statements highlighting the loans and advances given to the parties. In response thereto, the assessee provided the name of the parties along with their PAN No., amount of advance, date of advance, mode of payment, the rental agreement, and extract of bank statement evidencing payment. The AO, vide impugned final assessment order, did not agree with the submissions of the assessee and held that the amount of advances/loan does not reconcile with the supporting ledger extract of each party as appearing in assessee‟s books and the assessee has also not produced the confirmation letter from the parties who have received the said advances. Accordingly, the AO, vide impugned final assessment order, treated the advances amounting to Rs.1,31,02,653, as „unexplained’ and disallowed the same under section 69C of the Act. Being aggrieved, the assessee is in appeal before us.

M/s. Celio Future Fashion Pvt. Ltd. ITA no.741/Mum./2022 However, the learned DRP directed the AO to verify certain aspects. At this stage, it is relevant to note the provisions of section 144C(8) of the Act, which reads as under:-

“(8) The Dispute Resolution Panel may confirm, reduce or enhance the variations proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub-section (5) for further enquiry and passing of the assessment order.”

12. Therefore, 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) of the Act. However, the 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 para 10.3 of its order 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. As a result, ground no.2.4, raised in assessee‟s appeal is allowed. Since the relief has been granted to the assessee on this short issue, the other issues raised in ground no.2, are rendered academic and therefore, are left open.

M/s. Celio Future Fashion Pvt. Ltd. ITA no.741/Mum./2022 amount shown towards sundry creditors as „unexplained’ and proposed to add the same to the total income of the assessee at a special rate under section 115BBE of the Act.

“12. Directions of the DRP 12.1 The panel has considered the submissions made by the assessee. During the course of hearing before the DRP the assessee had filed additional evidence in form confirmation from creditors on sample basis. The additional evidence was forwarded lo Assessing officer using the relevant module of ITBA, for examination and comments on merits. However, till the date of issuing these directions no response has been received from the AO. 12.2 The panel notes that as per the assessee the sundry creditors as on 31 March 2017 are for purchases made by the assessee and royalty transaction with its AE. As stated by the assessee the transactions of purchase and also transaction of royalty with AE are recorded in the books of accounts. The panel, in principle, agrees with the assessee that if the original transactions have been accepted then there is no reason to disallow the credit balance appearing at the end of the year in respective accounts on account of transactions undertaken during the year. The assessee, in form of additional evidence has furnished confirmation from 12 parties and has given reconciliation of their credit balance in its books of account. The panel has perused the additional evidence and it is seen that the transactions are in respect of purchases made by the assessee and also on account of payment of royalty to Lelio International SA. 12.3 thus the panel is of the opinion that the additions proposed not justified. However, the AO should verify the addition to creditors are or account of trade creditors and character for royalty. The AO should also verify the reconciliation given by the assessee in respect of confirmation from 12 parties produced by 8 during the course of hearing before the DRP. Accordingly, objection No. 7 of the assessee is allowed. subject to verification by the AO.”

“Information/document required: Please furnish information of sundry creditors of Rs.15,46,19,525/- as on 31st March, 2017 and also in respect of those Page | 12

M/s. Celio Future Fashion Pvt. Ltd. ITA no.741/Mum./2022 accounts which have been squared off during the financial year 2016-17 in a tabular form as per Annexure-II enclosed to this letter. You are also requested to furnish ledger account copies of the said parties in your books of account & confirmation letters from the sundry creditors and also your ledger account as appearing in their books of account. Please furnish the details of credit purchases and clarify whether the addition to sundry creditor is on account of trade creditor or the transaction is in the nature of royalty.”

17. After perusal of the details filed by the assessee, as noted in para 4.3- 4.4 of the final assessment order, the AO came to the conclusion that out of total sundry creditors of Rs.15,46,19,525, the assessee has explained sundry creditors of Rs.7,42,08,884, with supporting documentary evidence and the same is reconciled. It was further held that in respect of the remaining sundry creditors of Rs.8,04,10,641, the assessee has not submitted any documentary evidence like ledger accounts, confirmation letter, and reconciliation statements, and therefore, genuineness and creditworthiness of the same is not proved, thus remains „unexplained’. Accordingly, vide final assessment order, the AO treated the expenditure for sundry creditors of Rs.8,04,10,641, as „unexplained’ and disallowed the same under section 69C of the Act. Being aggrieved, the assessee is in appeal before us.

18. Having considered the submissions of both sides and perused the material available on record, we find that in respect of this issue also the learned DRP issued directions to the AO to verify certain aspects as noted in para 12.3 of its 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. As a result, ground no.3.5, raised in assessee‟s appeal is allowed. Since the relief has been granted to the assessee on this short issue, the other issues raised in ground no.3, are rendered academic and therefore are left open.

19. Ground No.4, raised in assessee‟s appeal is pertaining to the initiation of penalty proceedings, which is premature in nature. Therefore, the same is dismissed. Page | 13

M/s. Celio Future Fashion Pvt. Ltd. ITA no.741/Mum./2022