INTIMATE FASHIONS (INDIA) PVT. LTD.,KANCHEEPURAM vs. DCIT, CHENNAI

आदेश / O R D E R

PER MANJUNATHA.G, ACCOUNTANT MEMBER:

The assessee has filed four appeals. The appeals filed by the assessee for AYs 2009-10, 2011-12 & 2014-15 are directed against final

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assessment order of the Assessing Officer (in short “AO") passed

u/s.143(3) r.w.s.144C(13) of the Income Tax Act, 1961 (in short “the Act"),

in pursuant to Dispute Resolution Panel (in short “DRP") directions issued

u/s.144C(5) of the Act, dated 06.05.2019 & 31.07.2018. The appeal filed

by the assessee for AY 2015-16 is against the order of the Commissioner

of Income Tax (Appeals)-6, Chennai, dated 25.06.2019. Since, the facts

are identical and issues are common, for the sake of convenience, these

appeals were heard together and are being disposed off, by this

consolidated order.

all four assessment years. Therefore, for the sake of brevity, grounds of

appeal filed in IT (TP) A No.48/Chny/2019 for the AY 2009-10, are re-

produced as under:

The grounds of appeal listed below are without prejudice to each other.

The TPO/AO/DRP further erred in not appreciating the fact that the appellant's profit margin (14.10%) was higher than that earned by the comparable companies (6.36%) under

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secondary analysis using TNMM, which demonstrates that the appellant had no intention to erode tax base.

Also, the TPO/AO/DRP failed to appreciate that Hon'ble Tribunal in its order for subject assessment year (AY 2009-10) had not doubted the documents that were adduced before the TPO/DRP (in first round of proceedings) to establish the services rendered by its AE and the benefits derived therefrom.

Further, in AY 2001-02. AY 2002-03 and AY 2003-04, the Hon'ble Tribunal in appellant's own case had set aside the order for impugned transaction of payment of sales commission and restored the file to the AO with direction to decide it de novo in accordance with law. Thereafter, the Assessing officer perused the supporting documents provided by the Assessee and considering all the facts and circumstances, allowed the payment of sales commission.

Further, the TPO/AO/DRP failed to appreciate that the Hon'ble Tribunal in the appellant's own case in AY 2009-10, AY 2012-13 and AY 2013-14 has accepted that the agency commission paid by the Appellant was for the purpose of business wholly and-exclusively based on the turnover and therefore TPO/AO/DRP should not have questioned the transaction entered into,

The TPO/AO/DRP ought to have appreciated that the agency commission payment made by the Appellant has been accepted in the past (by the TPO up to AY 2007-08 and during AY 2010-11; by the AO in his order post Hon'ble Tribunal's direction in AY 2001-02, 2002-03 and 2003-04 and post CIT(A) order in AY 2004-05), to be allowable as arm's length and there is no change in facts and circumstances of the impugned international transaction vis- a-vis such years.

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Further, the DRP/ TPO/ AO have retained TNMM as most appropriate method for determining the ALP of other transactions, but has failed to appreciate the fact that payment of agency commission is already factored in the sales price and hence is at arm's length. 11. The learned AO erred in levying interest under section 234B and 234C of the Act. 12. The learned AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act The Appellant craves leave to add to / alter / amend / substitute any of the above grounds of appeal, at the time, before or at the time of hearing of the appeal, so as to enable the Appellate authority to decide this appeal according to law. 3. The brief facts of the case are that the assessee, M/s.Intimate

Fashions India Pvt. Ltd., (in short “M/s.IFIPL") is a joint venture between

M/s.MAS Capital Pvt. Ltd., Sri Lanka (in short “M/s.MAS, Sri Lanka"),

M/s.Triumph International Overseas Ltd., Liechtenstein (in short

“M/s.Triumph") and M/s.Mast Industries Inc., USA (in short “M/s.Mast,

USA"). The company is engaged in the business of manufacturing and sale

of intimate garments, lingerie, briefs, swimwear and other related items

and primarily exports the manufactured garments to M/s.Mast, USA. The

assessee had entered into international transactions, which were duly

reported in the transfer pricing documentation. During the course of

scrutiny assessment proceedings, the TPO/AO made certain

adjustments/disallowances to the assessee’s income, which was upheld by

the DRP/Ld.CIT(A). Below is the summary of adjustments made by the

AO/TPO and upheld by the DRP/Ld.CIT(A), against which, the assessee is

in appeal before the Tribunal:

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Assessment Year 2009-10 2011-12 2014-15 2015-16 (Remand) Issues ITA ITA IT (TP) A IT (TP) A No.802/ No.2725/ No.48/Chny/ No.54/Chny/ Chny/ Chny/ 2019 2018 2016 2019 Transfer Pricing Adjustment towards √ √ √ - payment of agency commission Disallowance under Section 36(i)(v)(a) of Grounds - - - the Income Tax Act, 1961 ('the Act') withdrawn Disallowance of additional depreciation claimed under Section 32(i)(iia) of the Act Grounds - - - on Air Circuit Breakers on the basis that withdrawn they are not a part of plant and machinery Disallowance of additional depreciation Grounds claimed under Section 32(i)(iia) of the Act - - - withdrawn @ 10% claimed in Year 2 Disallowance under Section 80JJAA of the - √ √ √ Act

appeal for AYs 2009-10, 2011-12 & 2014-15, TP is adjustment towards

payment of agency commission. The facts with regard to impugned dispute

are that the assessee had entered into an agency agreement dated

18.03.1999 with M/s.Triumph, and agreed to pay 5% sales commission on

the net sales for rendering various agency services. Subsequently, the

assessee had entered into an agreement dated 14.09.2009 with M/s.MAS

Intimate (Private) Ltd., Sri Lanka, (in short “M/s.MAS Intimate, Sri Lanka")

for provision of agency services in connection with sale of products outside

India, and agreed that 5% sales commission on net sales will be paid in

respect of agency services, and 3% on net sales in case of designated

products/services. The above payments were established to be at Arm’s

Length Price (in short “ALP") as per the bench marking under Comparable

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Uncontrolled Price (in short “CUP") method adopted by the assessee for AYs

2009-10 & 2011-12 considering that rate of 5% was less than the rate

prescribed by RBI which was at 12.5%. The assessee had also alternatively

bench marked the international transactions under TNMM for the AYs 2009-

10 & 2011-12 and claimed that operating profit margin on cost of the

assessee is higher than that of comparable companies. Further, for the AY

2014-15, the transactions were established to be ALP as per TNMM.

Alternatively, the rate of agency commission was also bench marked under

CUP based on the rate prescribed by the RBI. The TPO rejected the bench

mark approach adopted by the assessee and concluded that agency

commission paid by the assessee to M/s.Triumph & M/s.MAS, Sri Lanka, at

‘nil’ on the basis that the assessee could not furnish necessary evidences

to prove rendering of services by the AEs and need for such payment.

Since, the entire sales were made to M/s.Mast, USA, one of the joint

venture partners and shareholders of the assessee company, the TPO

concluded that since no independent party would be willing to pay such

commission as per CUP, the ALP of the transaction was determined at ‘NIL’.

The DPR/Ld.CIT(A) upheld the downward adjustment made by the TPO/AO

towards agency commission paid to AEs on the ground that except

furnishing few samples, e-mail correspondence between assessee’s

company and AEs, no credible evidence has been submitted to prove

rendering of services, and payment of agency commission, which is

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commensurate with services rendered by the AE. Aggrieved by the order

of the DRP/Ld.CIT(A), the assessee is in appeals before us.

the issue related to payment of agency commission was under dispute from

AY 2001-02, where the Tribunal for the AY 2001-02, has set aside the issue

to the file of the TPO/AO to re-examine the ALP of international transactions

with respect to agency commission paid to AEs in light of various evidences

filed by the assessee including scope of work specified in agreement

between the parties, relevant evidences filed in support of rendering of

services, etc. He, further submitted that the Ld.CIT(A) for the AY 2004-05

had relied upon the order of the Tribunal for AYs 2001-02 to 2003-04, and

deleted the disallowance of agency commission and Revenue not

challenged the said order of the Ld.CIT(A) and the issue had reached

finality. He further submitted that once the matter has reached finality, for

subsequent years without there being any change in the facts, different

view cannot be taken. In this regard, he relied upon the decision of the

Hon’ble Madras High Court in the case of M/s.Sutherland Global Services

Pvt. Ltd., Chennai, in TCA No.32 of 2019 dated 23.09.2020.

placed reliance on the Article-5 of the Joint Venture (in short “JV")

agreement, wherein M/s.Mast, USA, has an obligation to buy at least 50%

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of the goods produced by the assessee. Based on this clause, the TPO

arrived at a conclusion that since one of the JV partners only buying goods,

there is no need to pay commission to another JV partner. The Ld.Counsel

for the assessee in this regard submitted that JV agreement between

parties is not a new fact brought on record for the first time and the same

has always available before the lower authorities even in earlier assessment

years. He further submitted that the issue of payment of agency

commission was referred to the TPO from AYs 2003-04 to 2007-08,

wherein, no adjustment was proposed by the TPO. For AY 2010-11, the

TPO issued a show cause notice and no adjustment was made. He, further

submitted that when Revenue accepted payment of agency commission is

genuine for some years, for few years, it cannot dispute the payment only

on the ground that JV partner is buying goods. He further submitted that

the assessee has filed the details of rendering of services by AEs and also

filed various correspondence including e-mails between the assessee and

AEs to prove that both parties are specialized in marketing of goods

manufactured by the assessee and also provided various services. Once,

the AO/TPO accepted the fact that AEs have provided services, then, the

TPO cannot question the necessity of such services and in this regard, he

relied upon the decision of the Hon’ble Delhi High Court in the case of CIT

v. M/s.EKL appliances reported in [2012] 345 ITR 241. He further

submitted that the JV was formed by three independent parties.

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allow to pay agency commission to one of the JV partners without actual

benefit arriving to the JV. He further submitted that the AO/TPO is

disregarded aggregation approach adopted by the assessee for

benchmarking the transaction and in this regard, he relied upon the

decision of the Hon’ble Delhi High Court in the case of M/s.Magneti Marelli

Powertrain India (P) Ltd. v. DCIT reported in [2016] 290 CTR 60 (Delhi)

and submitted that the same has been approved by the Hon’ble Supreme

Court in the case of SLP (Civil) No. 15244/2017 dated 25.10.2016.

Therefore, he submitted that when the AO is not disputing rendering of

services by the AEs, then, he cannot question necessity of such services

and payment made thereon.

DRP/Ld.CIT(A) submitted that for AYs 2001-02 to 2004-05, agency

commission has been disallowed u/s.37(1) of the Act, and hence, those

years cannot be considered. For AYs 2005-06 to 2007-08, no adjustment

has been made by the TPO/AO. For AY 2008-09, the issue is pending for

adjudication. For AY 2009-10, the issue has been set aside to the file of

the AO/Ld.CIT(A) to examine the claim of the assessee. The TPO/AO

brought out clear facts that except email correspondence, no evidence has

been filed to justify, and rendering of services by AEs. Further, as per JV

agreement between the assessee and its partners, there is an obligation on

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M/s.Mast, USA, to buy 50% of goods manufactured by the assessee. The

assessee has sold 100% to JV partner as per agreement. Under these

facts, the assessee could not explain why it has paid agency commission to

an entity in Hong Kong when entire services have been rendered in

connection with sales made in USA. Therefore, the AO/TPO has made

adjustments towards agency commission and their orders should be

upheld.

record and gone through orders of the authorities below. The assessee is a

Joint Venture between M/s.MAS, Sri Lanka, M/s.Triumph and M/s.Mast,

USA. The company is engaged in the business of manufacturing and sale

of intimate garments and accessories. As per JV agreement between the

assessee and its partners, one of the JV partner M/s.Mast, USA, must buy

at least 50% of goods manufactured by the assessee. Further, as admitted

by the Ld.Counsel for the assessee 100% sales achieved by the assessee

company for these three assessment years is only made to M/s.Mast, USA.

Therefore, it is necessary to examine payment of agency commission to

M/s.Triumph and M/s.MAS, Sri Lanka, in light of JV agreement between the

parties and agency agreement between two AEs and assessee and relevant

evidences filed by the assessee. There is no dispute with regard to the fact

that this issue is subject matter of litigation right from AY 2001-02 onwards.

In initial years and up to AY 2004-05, the AO has disallowed agency

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commission u/s.37(1) of the Act, on the ground that said expenditure is

not incurred wholly and exclusively for the purpose of business of the

assessee. For AYs 2005-06 to 2007-08, there is no adjustment. The issue

has been first disputed by the AO under TP regulations for AY 2009-10 and

subsequent assessment years, and which is pending for adjudication before

this Tribunal. In the first round of litigation for AY 2009-10, the issue has

been set aside for de novo consideration by following the decision of

Tribunal for earlier assessment years. Therefore, it can be said that the

issue has not adjudicated by the Tribunal on merits and thus, arguments

of the Ld.Counsel for the assessee that the issue has attained finality

because of the order of the Tribunal for earlier assessment years in view of

the fact that the Ld.CIT(A) has directed the AO to delete additions for AYs

2001-02 to 2003-04 is not correct.

admitted fact that as per JV agreement between assessee and its partners,

M/s.Mast, USA, must purchase at least 50% of goods manufactured by the

assessee. It is also an admitted fact that 100% sales made by the assessee

for these three years is sold to M/s.Mast, USA alone. But, the assessee has

paid commission to M/s.Triumph, M/s.MAS, Sri Lanka, two AEs which are

situated in different countries. The assessee claimed that AEs have

provided services in connection with marketing, production of garments

manufactured by the assessee and in this regard, the Ld.Counsel for the

IT (TP) A No.48/Chny/2019 ITA No.802/Chny/2016 IT (TP) A No.54/Chny/2018 & ITA No.2725/Chny/2019 :: 12 :: assessee took us to various clauses of agency agreement and scope of services specified in said agreement. The Ld.Counsel for the assessee had also took us to few email correspondence between the assessee and its AEs in connection with manufacturing and selling of goods. We have gone through JV agreement between assessee and its JV partners and as per said agreement, M/s.Mast, USA, must buy at least 50% of goods and merchandise manufactured by the assessee and in fact, the assessee has sold 100% sales to M/s.Mast, USA alone, and there is no dispute in this regard. We have also gone through agency agreement between M/s.Triumph & assessee, and M/s.MAS, Sri Lanka & assessee, and we find

that although, various scope of work has been specified in the agreement, but fact remains that the assessee could not file any credible evidence to prove that what services these two AEs are provided to the assessee in connection with sales made to M/s.Mast, USA. We further noted that the assessee explains general clauses in agreement between the assessee and AEs and argued that these services, including design for product manufactured by the assessee in line with change in industrial requirements and scheduling of production & sales, advisory in connection with procurement of materials, etc., had been provided, but could not file any evidences to prove the AEs have rendered services to the assessee. We have also gone through a chart showing few samples, email correspondence between the assessee and AEs for all three assessment

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years and on perusal of these emails, what we understood is that these are

general correspondence between assessee and its AEs regarding follow up

on orders and delivery, production planning, and capacity assessment

introduction of a new model and communications of order confirmations,

etc., However, these emails does not show any light on the services

rendered by these two AEs in connection with sales made in USA.

Therefore, we are of the considered view that the assessee could not file

any evidences to prove that AEs have rendered services to justify payment

of agency commission.

rendered services in connection with achieving sales targets, identifying

new customers, collection follow up, etc. The assessee could not even

furnish any evidences to prove that there are negotiations between the

assessee and the AEs with regard to marketing strategy, sales targets,

credit period, etc. In absence of any evidences with regard to rendering of

services by the AEs, in our considered view, the TPO/AO has rightly bench

marked payment of agency commission as ‘nil’, because, it is for the

assessee to discharge its onus by filing necessary evidences to prove

rendering of services, which is pre-requisite for making any payment. In

so far as arguments of the assessee that in light of decisions of the Hon’ble

Delhi High Court in the case of M/s.EKL appliances (supra) and also in the

case of CIT v. Gujarat Guardian Ltd., reported in [2009] 222 CTR 526

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(Delhi), we find that there is no dispute with regard to ratio laid down by

the Hon’ble Delhi High Court in so far as cost benefit ratio, because, the AO

cannot question necessity to incur such expenditure and also the benefit

derived by the assessee by incurring cost. But, what is relevant to see is

whether the assessee has filed evidences to prove rendering of services to

justify payment of commission. In this case, the assessee could not even

file any evidences except few email correspondence and thus, we are of the

considered view that there is no error in the reasons given by the

TPO/DRP/Ld.CIT(A) to reject the arguments of the assessee.

res judicata and rule of consistency in light of certain judicial precedents.

The Ld.Counsel for the assessee, in light of decision of the Hon’ble Supreme

Court in the case of Radhasoami Satsang v. CIT reported in [1991] 100

CTR 267 (SC) submitted that even though, res judicata is not applicable

to income tax proceedings, but the rule of consistency needs to be followed,

unless there is a change in facts when compared to earlier Financial Years.

We find that the Hon’ble Supreme Court held that res judicata is not

applicable to the income tax proceedings. However, rule of consistency

needs to be followed. There is no dispute on this legal aspect, because,

when there is no change in the facts and circumstances of the case, the AO

needs to take a consistent view on this issue. But, in the present case, if

you go through sequence of events right from AY 2001-02 onwards, the

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Department has disputed payments of agency commission and in earlier

assessment years, the same has been disallowed u/s.37(1) of the Act, as

wholly and exclusively not incurred for the purpose of business and up to

AY 2008-09, the issue has been in some years accepted by the AO without

any dispute and in some years, the addition has been made by the AO was

finally deleted by the Ld.CIT(A). It is also an admitted fact that the

assessee paying agency commission on the basis of very same agreement,

but fact remains that from AY 2009-10 onwards, the issue has been

examined in light of TP provisions, where ALP of international transactions

of the assessee is required to be verified with reference to price charged by

similar entities in uncontrolled transactions and also payments should be

examined in light of evidences filed by the assessee. In this case, the TPO

has made downward adjustment towards agency commission at ‘nil’ on the

ground that the assessee could not file evidences to justify rendering of

services by AE and payment of commission is commensurate with rendering

of services. Therefore, in our considered view, the arguments of the

assessee in light of rule of consistency and res judicata does not hold good.

We further noted that the assessee also argued the issue in light of

aggregation approach adopted by the assessee and benchmark method

adopted by the TPO in light of Rule 10B(1) of the Income Tax Rules, 1962,

under CUP method the price charged or paid for property transferred or

services provided in a comparable uncontrolled transaction, or a number of

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such transactions, is identified. Thus, for the purpose of applying CUP

method, services rendered by the assessee have to be compared with price

paid for similar services received by parties in uncontrolled transactions.

No doubt, in order to apply CUP method, the AO has to bring on record

comparable cases of similar nature in uncontrolled transactions. But, fact

remains that in the present case, the AO categorically held that the

assessee could not prove rendering of services by its AE for the business

and also how assessee made payment of agency commission to two parties

when 100% goods sold by the assessee was purchased by one of the JV

partners as per JV agreement. Therefore, we are of the considered view

that the arguments of the assessee with regard to aggregation approach

and bench marking method adopted by the TPO, is incorrect. In so far as

various case laws relied upon by the assessee those case laws are not

applicable to this case, because, the TPO has made 100% adjustment on

the ground that said expenditure is paid without any services from its AEs.

the case, we are of the considered view that there is no error in the reasons

given by the DPR/Ld.CIT(A) to sustain additions made by the AO/TPO

towards TP adjustment on payment of agency commission and thus, we are

inclined to uphold the findings of the DRP/Ld.CIT(A) and reject the ground

taken by the assessee for AYs 2009-10, 2011-12 & 2014-15.

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appeal is for AYs 2011-12, 2014-15 & 2015-16 is disallowance u/s.80JJAA

of the Act. During the AYs 2011-12, 2014-15 & 2015-16, the assessee

claimed deduction u/s.80JJAA of the Act, in respect of additional wages paid

to newly appointed employees and claim made by the assessee, has been

allowed in the year in which assessee has made its claim. However, the

AO restricted the deduction u/s.80JJAA of the Act, to 30% of the salary paid

to additional employees in subject assessment year alone, but disallowed

claim of remaining amount in successive two assessment years.

of the Act, submitted that as per said provisions, deduction is allowed to an

amount equal to 30% of additional wages paid to new workmen employed

by the assessee in the previous year for three assessment years, including

the assessment year relevant to previous year in which such employment

is provided. Therefore, he submitted that the assessee is entitled for

deduction to the extent of 30% of the additional wages during subject

assessment year and for consecutive two years, and thus, suitable

directions may be given to the AO to verify the claim of the assessee and

allow as per law.

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set aside to the file of the AO for verification and to decide the issue in

accordance with law as per provisions of Sec.80JJAA of the Act.

on record. As per provisions of Sec.80JJAA of the Act, where the gross total

income of an assessee to whom section 44AB applies, includes any profits

and gains derived from business, there shall, subject to the conditions

specified in sub-section (2), be allowed a deduction of an amount equal to

thirty per cent of additional employee cost incurred in the course of such

business in the previous year, for three assessment years including the

assessment year relevant to the previous year in which such employment

is provided. From the above provision, it is evident that the assessee is

eligible for deduction u/s.80JJAA of the Act, to the extent of 30% of

additional wages paid during the subject assessment year and for

consecutive two years. Therefore, we are of the considered view that the

AO is erred in not allowing deduction claimed u/s.80JJAA of the Act, for

subsequent two assessment years, even though, the law is very clear in as

much as the assessee is entitled for deduction for next two assessment

years @ 30% wages paid to new workmen and this proportion is supported

by the decision of ITAT Bangalore Benches in the case of DCIT v. Page

Industries Ltd., reported in [2015] 60 taxmann.com 498 (Bangalore-Trib.),

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where it has been clearly stated that the assessee is entitled for deduction

u/s.80JJAA of the Act, for subsequent two assessment years. We further

noted that the DRP has accepted the claim of the assessee for the AY 2011-

12 and directed the AO to verify whether conditions are satisfied to allow

deduction for three consecutive years. Therefore, we are of the considered

view that the issue needs to go back to the file of the AO and thus, we set

aside the issue to the file of the AO for all three assessment years, and

direct the AO to verify the claim of the assessee in light of our discussion

given hereinabove, and if assessee satisfies conditions specified in sub-

section (2), then, the AO is directed to allow the claim of the assessee for

subsequent two assessment years.

appeal for AY 2011-12 is disallowance u/s.36(1)(v)(a) r.w.s.43B of the Act,

towards employee’s contribution to PF & ESI. The Ld.Counsel for the

assessee submitted that the assessee wants to withdraw the ground, and

thus, grounds of appeal filed by the assessee for AY 2011-12 on the issue

of disallowance u/s.36(1)(v)(a) of the Act, is treated dismissed as

withdrawn.

appeal for AYs 2011-12 & 2014-15 is disallowance of additional depreciation

claimed on Air Circuit Brakers. The Ld.Counsel for the assessee submitted

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Order pronounced on the 31st day of May, 2023, in Chennai.

Sd/- Sd/- (महावीर िसंह) (मंजूनाथा.जी) (MANJUNATHA.G) (MAHAVIR SINGH) उपा�� /VICE PRESIDENT लेखा सद�य/ACCOUNTANT MEMBER चे�ई/Chennai, �दनांक/Dated: 31st May, 2023. TLN आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ� / Appellant 3. आयकर आयु� / CIT 5. गाड� फाईल / GF 2. ��यथ� / Respondent 4. िवभागीय �ितिनिध / DR