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Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM
Before: SHRI DUVVURU RL REDDY, HON’BLE & SHRI S BALAKRISHNAN, HON’BLE
आयकरअपीलीयअिधकरण, िवशाखापटणम पीठ, िवशाखापटणम IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM "ी दु"ू" आर एल रे"ी, "ाियक सद" एवं "ी एस बालाकृ"न, लेखा सद" के सम" BEFORE SHRI DUVVURU RL REDDY, HON’BLE JUDICIAL MEMBER & SHRI S BALAKRISHNAN, HON’BLE ACCOUNTANT MEMBER (Through Hybrid Hearing) आयकर अपील सं./(I.T.)I.T.A.No.626/Viz/2018 (िनधा"रण वष" / Assessment Year : 2014-15) Teejay India Private Limited Vs. Asst.Commissioner of APSEZ, Pudimadaka Road Income Tax Atchutapuram Mandal Circle-5(1) Visakhapatnam Visakhapatnam [PAN : AAACO9452H] (अपीलाथ"/ Appellant) (""थ"/ Respondent) अपीलाथ" की ओर से/ Appellant by : Shri Darpan Kirpalani ""ाथ" की ओर से / Respondent by : Dr.Satyasai Rath, CIT(DR) सुनवाई की तारीख / Date of Hearing : 22.01.2024 घोषणा की तारीख/Date of Pronouncement : 13.02.2024 आदेश /O R D E R
Per Shri Balakrishnan S, Accountant Member
This appeal is filed by the assessee against the final assessment
order passed u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 (in short Act) dated 25.10.2018.
Brief facts of the case are that the assessee, M/s Teejay India Private Limited (formerly known as M/s Ocean India Pvt. Ltd.) engaged in the business of manufacturing and exporting knitted fabrics / apparels at Brandix APSEZ, Atchutapuram, Visakhapatnam, filed it’s return of income 2 (I.T) Teejay India Private Limited, Visakhapatnam for the A.Y.2014-15, declaring Nil income after adjusting the brought forward losses. The return was processed u/s 143(1) of the Act, assessing total income at Rs.2,68,01,746/-. Subsequently, the case was selected for scrutiny under CASS and notice u/s 143(2) was issued and served on the assessee on 11.09.2015. Subsequently, notices u/s 143(2) and 142(1) of the Act along with questionnaires were issued and served on the assessee.
Due to change in incumbent, another notice u/s 142(1) r.w.s. 129 of the Act was issued on 25.10.2017. In response to the notices, the assessee’s representative appeared and furnished the details called for. The Ld.AO on verification of Form 3CEB, found that the assessee company has entered into international transactions with it’s Associate Enterprises (AE) aggregating to Rs.126.92 crores, relevant to the A.Y.2014-15. The case was referred to DCIT, Hyderabad for determination of arm’s length price in respect of international transaction, relevant to the A.Y.2014-15 vide letter in F.No.AACCB6569L/2014-15 dated 30.09.2016 after obtaining prior approval from the Ld.Principal Commissioner of Income Tax (PCIT)- 2, Visakhapatnam. The assessee’s representative appeared before the TPO and submitted the information called for. Considering the submissions made by the assessee’s representative and the TP documents submitted by the assessee, the Ld.TPO observed that the search process adopted by 3 (I.T) Teejay India Private Limited, Visakhapatnam the assessee is not in conformity with the TP regulations as the choice of filters were inappropriate, thereby, rejected the TP document of the assessee. The Ld.TPO, thereafter adopting the six filters as detailed in his report, arrived at a different set of comparables and computed the operating profit to operating cost as PLI as per the details given below:
Sl.No. Name of Comparable OR OC OP OP/OC 1. Morarjee Textiles Ltd 3919415000 3347190000 572225000 17.10 2. Winsome Textiles Ltd. 5036806000 4450532000 586274000 13.17 3. Bannari Amman 6997274407 6195427031 801847376 12.94 Spinning Mills Ltd.
4. DCM Ltd. 4715378000 4282851000 432527000 10.10 5. Banwara Syntex Ltd. 1212199000 10910278000 1211718000 11.11 6. Sarla Performance 2476145000 2196461000 276984000 12.73 Fibers Ltd.
7. Trident Ltd. 38728900000 34058300000 460600000 13.71 8. K.G.Denim Ltd. 5919952000 5602688000 317264000 5.66 9. Arvind Ltd. 47927000000 41673600000 6253400000 15.01 10. RSWM Ltd. 28740888000 26147286000 2593602000 9.92 11. Indo Count Industries 14109098000 12857106000 1251992000 9.74 Ltd.
12. GHCL Ltd. 22242088000 19035725000 3203363000 16.84 13. Vardhman Textiles 51859305000 42126127000 9733178000 23.10 Ltd.
14. HimatsingkaSeide 9855289000 9097143000 758146000 8.33 Ltd. Average 12.82
However, the TPO has not disputed the most appropriate method(MAM) and TNMM method selected by the assessee. Thereafter, the Ld.TPO issued show cause notice to the assessee. The assessee, in 4 (I.T) Teejay India Private Limited, Visakhapatnam reply to the show cause notice raised contentions on the comparability of the following chosen comparables.
(i) Bannari Amman Spinning Mills Ltd (ii) Arvind Ltd. (iii) GHCL Ltd (iv) Vardhman Textiles (v) Morarjee Textiles Ltd. (vi) DCM Ltd (vii) Sarla Performance Fibers Ltd (viii) Trident Ltd.
The Ld.TPO, considering the contentions of the assessee rejected the objections of the assessee, computed the PLI on the basis of comparables selected by him as proposed in the show cause notice. Further, the Ld.TPO also computed the notional interest on outstanding receivables, thereby making the total TP adjustment aggregating to Rs.22,26,84,796/-.
Aggrieved by the draft assessment order passed by the Ld.AO, incorporating the TPO adjustments, the assessee filed it’s objections before the Ld.DRP. The assessee contested the comparables selected by the TPO and stated that the assessee has also adopted the same filters 5 (I.T) Teejay India Private Limited, Visakhapatnam while selecting the comparables. The assessee, therefore, pleaded before the DRP that the comparables selected by the assessee in TP study report be considered. With respect to the notional interest on outstanding receivables, the assessee pleaded that it is not an international transaction. Considering all the objections of the assessee, the Ld.DRP rejected the objections raised by the assessee and directed the Ld.AO/TPO to compute the ALP as proposed in the order of the Ld.TPO. Giving effect to the directions of the Ld.DRP, the Ld.AO passed final assessment order on 25.10.2018.
Aggrieved by the final assessment order, the assessee is in appeal before us by raising the following grounds :
1. That the order of the learned Assistant Commissioner of Income Tax, Circle-5(1), Visakhapatnam (“learned 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. That the learned Dispute Resolution Panel (“learned DRP”) erred in not appreciating that the order of the learned Deputy Commissioner of Income Tax, Transfer Pricing Officer-2, Hyderabad (“learned TPO”) passed under section 92CA of the Income Tax Act, 1961(“the Act”) is contrary to law and thus liable to be quashed.
3. That on facts and in the circumstances of the case, the learned AO/learned TPO and the learned DRP erred in making an upward adjustment to the transfer price of the Appellant’s International transactions of INR 191,652,124 in respect of manufacture and sale 6 (I.T) Teejay India Private Limited, Visakhapatnam of fabric and INR 2,700,626 on account of imputation of notional interest in outstanding receivables.
Grounds for manufacturing and sale of fabric
4. On the fact and in the circumstances of the case and in law, with respect to adjustment to the transfer price of processing services, the learned DRP/AO/TPO erred in :
4.1. Rejecting the transfer pricing (TP) documentation maintained by the Appellant under Section 92D of the Act, in good faith and with due diligence.
4.2. Rejecting the comparability analysis carried out by the Assessee in the TP documentation and in conducting a fresh comparability analysis for processing services.
4.3. Not providing any methodical search process during the course of assessment proceedings based on which the comparability analysis was undertaken by the learned TPO and accordingly, cherry picking the most favourable companies while arriving at the arm’s length mark-up.
4.4. Using data, which was not contemporaneous and which was not available in the public domain at the time of preparing the TP documentation.
4.5. 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 Associated Enterprises (‘AEs’).
4.6. Including companies that are functionally different from the operational profile of the Appellant.
4.7. Excluding the companies selected by the Appellant in its TP documentation without providing any cogent reasons for exclusion.
7 (I.T) Teejay India Private Limited, Visakhapatnam 4.8. Computing the operating mark-up on cost of the Appellant while performing the comparability analysis.
4.9. Computing the operating mark-up on cost for companies while performing the comparability analysis.
4.10. Proposing transfer pricing adjustment in relation to the transactions entered with third parties on sale of fabric amounting to INR 508,282,760 wherein principle of transfer pricing is not applied.
4.11. Not providing appropriate adjustments towards material differences between the operational profile of comparable companies and the Appellant.
Grounds for imputation of notional interest on outstanding receivables
5. On facts and in the circumstances of the case, the learned DRP/AO/TPO erred in :
5.1. Considering overdue receivables from AEs as an international transaction under the provisions of Section 92B of the Act.
5.2. Without prejudice to ground no.5.1 above 5.2.1. ignoring the fact that the Appellant does not pay interest to the AEs in relation to outstanding payable to AEs.
5.2.2. Not computing notional on the net receivable amount.
5.3. Without prejudice to ground nos.5.1, 5.2 & 5.3 above, imputing interest using SBI term deposit rate instead of LIBOR.
That the Appellant craves leave to add to and / or to alter, amend, rescind, modify the grounds herein below or produce further documents before or at the time of hearing of this Appeal.
8 (I.T) Teejay India Private Limited, Visakhapatnam
Ground No.1 and 2 are general in nature which does not require any adjudication.
Ground No.3 relates to upward adjustment in respect of international transaction, wherein separate grounds were raised in ground No.4 and 5 which is adjudicated accordingly.
Ground No.4 relates to selection of comparables by the Ld.TPO. At the outset, the Ld.AR argued that the TPO has rejected the comparables selected by the assessee, after adopting the similar filters as chosen by the Ld.TPO without assigning any proper valid reasons for rejecting the same.
The Ld.AR submitted that the Ld.TPO has generally stated that the choice of filters and the search process is not in conformity with the TP regulations and therefore, the TP analysis and documentation of the assessee is hereby rejected. However, the Ld.TPO has adopted similar filters while arriving at the 14 comparables as listed in the TPO report. He, therefore, pleaded that the comparables meeting the filters adopted by the TPO for the companies selected by the assessee in it’s TP study report be considered for determination of PLI. The Ld.AR further submitted that the Ld.DRP has also not discussed about the comparables which are in consistence with the comparables selected by the assessee.
9 (I.T) Teejay India Private Limited, Visakhapatnam
Per contra, the Ld.DR argued that the Ld.DRP has considered the objections raised by the assessee with respect to comparables selected by the Ld.TPO and has discussed at length, why these comparables selected by the TPO are upheld. The Ld.DR further submitted that the Ld.DRP gave detailed reasons for selection of comparables by the Ld.TPO. He, therefore, pleaded that the order of the Ld.DRP be upheld.
We have heard both the parties and perused the material available on record. Admittedly, the assessee and the Ld.TPO has adopted the same filters in the selection of comparables except two additional filters selected by the Ld.TPO as follows :
(i) Companies with financial year end 31.03.2014 (ii) Companies with foreign export service income less than 25% are rejected. We find that the Ld.DRP while considering the submissions made by the assessee with respect to the objections of selection of certain comparables in a detailed manner, upheld the comparables selected by the Ld.TPO by giving detailed reasons for such selection by the Ld.TPO. We do not find any infirmity in the selection of comparables upheld by the Ld.DRP. Admittedly, there is also dispute on the method adopted by the assessee. In these given circumstances, considering the facts of the case, we find that the Ld.DRP has rightly upheld the comparables adopted by 10 (I.T) Teejay India Private Limited, Visakhapatnam the Ld.TPO and we are not inclined to intervene into the selection of comparables, thereby resulting in adoption of PLI at 12.35%. Accordingly, the grounds raised by the assessee in 4.1 to 4.11 are dismissed.
With respect to ground No.5 regarding computation of notional interest on outstanding receivables, the contention of the Ld.AR that outstanding receivables cannot be considered as an international transaction and therefore no adjustment can be made with respect to the notional interest on the outstanding receivables. The Ld. DR submitted that this Bench of the Tribunal in the case of Devi Sea Foods limited (supra) vide para-7 of its order, the Tribunal has held that receivables is included under the definition of international transaction consequent to the amendments made by the Finance Act, 2012 w.e.f 01.04.2002 and hence it is an international transaction.
We have heard the arguments. This Bench of the Tribunal in the case of Devi Sea Foods limited (supra) vide para-7 of its order, the Tribunal has held as follows:
“7. We have heard the rival submissions and perused the material available on record and the orders of the Authorities below. Admitted facts are that the assessee sells to both the AEs non-AE where the AE being the major debtor. There is no dispute with regard to the fact that receivables is included under the definition of international transaction consequent to the amendments made by the Finance Act, 2012 w.e.f 11 (I.T) Teejay India Private Limited, Visakhapatnam 01.04.2002. 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. “ We therefore following the same ratio, reject the arguments of the Ld. AR that outstanding receivable is not an international transaction. Having said so, the issue is whether separate adjustment is required to be made in respect of receivables, the contention of the Ld. AR is that the average realization period is only 79.63 days which is within the industry standards and hence notional interest should not be imputed. The notional interest is charged by the Ld. AO based on the SBI Term Deposit Rate has adopted 6.50% on the outstanding receivables beyond a period of 30 days as directed by Ld DRP.
We have heard the rival contentions. We find that from the directions of the Ld. DRP that the assessee has not demonstrated the working capital adjustments before the Ld. Revenue Authorities while determining the ALP under TNM method both for the Tested Party and the comparables. In the case of Devi Seafoods Ltd (supra) this Bench has taken the following view:
When TNM method is considered as the most appropriate method, which was also not disputed by Revenue, the net margin thereunder would take care of such notional interest cost. It was further explained by Ld.AR that the impact of the delay in collection of receivables would have a bearing on the working capital of the assessee. We find that these working capital adjustments on the ALP has been already factored in its pricing / profitability vis-à-vis that of its comparables. We therefore are of the considered view 12 (I.T) Teejay India Private Limited, Visakhapatnam that any further adjustment to the margin of the assessee on the outstanding receivables cannot be justified and no separate upward adjustment on outstanding export receivables is required and therefore we direct the Ld.AO to delete the upward adjustment made towards overdue receivables from AE. We therefore allow this ground raised by the assessee.
We hereby direct the Ld. AO / TPO to examine and consider the appropriate adjustments arising out of the working capital differences in the computation of the ALP. The assessee is also directed to submit the working relating to working capital adjustments of the assessee company. Following the principle of consistency if the working capital adjustments on the ALP has been already factored in its pricing / profitability vis-à-vis that of its comparables further adjustment to the margin of the assessee on the outstanding receivables cannot be justified and no separate upward adjustment on outstanding receivables is required, since TNM method is considered as the most appropriate method, which was also not disputed by Revenue, the net margin there under would take care of such notional interest cost.
Accordingly, this ground raised by the assessee is allowed for statistical purposes.
In the result, the appeal of the assessee is partly allowed for statistical purpose.