BRANDIX APPARAL INDIA PRIVATE LIMITED,,VISAKHAPATNAM vs. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE - 5(1), VISAKHAPATNAM

PER S. BALAKRISHNAN, Accountant Member :

This appeal filed by the assessee against the final assessment order passed U/s. 143(3) r.w.s 144C of the Income Tax Act, 1961 [the Act] dated 29/10/2018.

2 2. Briefly stated the facts of the case are that the assessee is

engaged in the provision of processing services in relation to

manufacture of garments to the Brandix Group of companies.

The assessee, M/s. Brandix Apparel India Private Limited (in

short BAI) is compensated on a cost plus basis for such

processing services. The assessee filed its return of income for

the AY 2014-15 on 30/11/2014 admitting a total income of Rs.

3,80,09,800/-. Subsequently, the case was selected for scrutiny

under CASS and notice U/s. 143(2) of the Act was issued on

8/9/2015 and served on the 21/9/2015. The assessee later filed

a revised return of income on 31/3/2016 by claiming an

exemption of Rs. 4,73,25,503/- U/s. 10AA of the Act and

however, paid tax on book profits. Later on, notices U/s. 143(2)

and 142(1) of the Act were issued on 12/7/2016. Further, notice

U/s. 142(1) r.w.s 129 of the Act was issued on 25/10/2017 due

to change in the incumbent. In response to the notices, the

assessee’s Authorized Representative appeared and submitted the

documents called for as per the notice dt 25/10/2017. On

perusal of the submissions made by the assessee’s

Representative, the Ld. AO noticed that the assessee has entered

into an international transaction with its Associated Enterprises

[AEs] aggregating to Rs.268.19 Crs during the previous year

relating to the AY 2014-15 as detailed below:

Associated Enterprise Nature of transaction Amount (Rs) Brandix Essentials Limited Fixed Assets 2,55,613 Brandix Essentials Limited Purchase of Fixed Assets 59,59,880 Brandix Apparel Limited Income from Processing Services 140,99,04,987 Brandix 13 PVT Ltd Payment for services 1,01,672 Brandix Mauritius Holdings Buy back of shares 42,14,93,000 Ltd Brandix Apparel Ltd Recovery of expenses 93,76,528 Brandix Apparel Ltd Recovery of expenses 66,96,55,903 Brandix Mauritius Holdings Reimbursement of expartite 1,80,50,882 Ltd Brandix Essentials Ltd Reimbursement of expenses 32,64,831 Brandix Apparel Ltd Reimbursement of expenses 37,82,725 Brandix Intimate Apparel Ltd Reimbursement of expenses 74,83,898 Brandix Apparel Ltd Recovery of Pre-commencement 3,68,47,180 Brandix Apparel Ltd Liability no longer required 9,91,13,198

Officer, Hyderabad [TPO] after obtaining necessary approval from

the Ld. Principal Commissioner of Income Tax-2, Visakhapatnam

for determining the Arm’s Length Price [ALP] U/s. 92CA(1) of the

Act. The Ld TPO rejected the TP analysis and documentation of

the assessee. The Ld. TPO carried out an independent search

using Capitallineplus and Prowess databases by using the

following filters:

(i) Companies with Sales > 1 Crore (ii) Companies with Financial Year end 31/03/2014 (iii) Companies with positive net worth (iv) Companies with diminishing revenue / persistent loss are rejected (v) Companies with extraordinary circumstances

are rejected (vi) Companies with related party transactions less than 25%

The Ld. TPO using the above filters arrived at a different set of

comparables and thereby the Arithmetic Mean of the Profit Level

Indicator [PLI] of the comparables was computed as under:

S.No Name of the OR OC OP OP/OC Comparable 1. Maral Overseas 220453 194278 26175 13.47 Ltd 2. Kitex Garments 1595222544 1356526616 238695928 17.60 Ltd 3. SP Apparel Ltd 359959300 322750571 37208729 11.53 4. Kewal Kiran 48835 42080 6754 16.05 Clothing Ltd 5. Sudar Industries 380818773 359408490 21410283 5.96 Ltd 6. Virat Industries 221778024 173896678 47881346 27.53 Ltd Average 19.58

The Ld. TPO did not refute the TNMM as the most appropriate

method [MAM]. The Ld. TPO issued a show-cause notice on

16/10/2017 asking the assessee as to why the additions as

mentioned in the show-cause notice should not be made? In reply

to the show cause notice, the assessee contended the

comparability of the chosen comparables by the Ld. TPO for the

following entities:

The main contention of the assessee is that the above

comparables are in the business of manufacturing of garments

and not in the processing services. The Ld. AR also objected to

the Ld. TPO considering the outstanding receivables as

international transaction and has applying the interest rate of

6.5% on the outstanding receivables by making an adjustment of

Rs. 3,26,65,774/- in addition to the adjustment made on account

of income from processing services for Rs. 27,35,22,396/-. The

Ld. AO considering the upward adjustments made by the Ld. TPO

passed a draft assessment order on 28/12/2017. Aggrieved by

the draft assessment order, the assessee filed its objections

before the Ld. Dispute Resolution Panel [DRP]. Before the Ld.

DRP, the assessee made various submissions including

objections were raised with respect to selection of comparables in

relation to processing services and requested the Ld. DRP to

exclude the companies which are functionally not comparable

with that of the functions performed by the assessee. Further,

the assessee also raised objections with respect to the notional

6 interest on overdue receivables before the Ld. DRP. Considering

the submissions of the assessee, the Ld. DRP concluded that the

assessee has performed all the activities relating to

manufacturing functions such as procurement, warehousing,

processing, packing & labeling and shipment. The Ld. DRP

therefore by relying on the assessee’s TP study report, rejected

the plea of the assessee that it was a mere service provider and

therefore it is functionally not comparable to manufacturer.

Similarly, by relying on various judicial pronouncements, Ld.

DRP directed the Ld. TPO to compute the interest on outstanding

receivables thereby considering the outstanding receivables as

international transaction as inserted by Finance Act, 2012 w.e.f

2002 and directed the Ld. TPO to allow a credit period of 30 days

and compute the interest beyond the period of 30 days. The Ld.

AO giving effect to the directions of the Ld. DRP passed the final

assessment order on 29/10/2018 making the addition towards

TP Adjustment of Rs. 28,14,06,365/-. Aggrieved by the final

assessment order of the Ld. AO, the assessee is in appeal before

us by raising the following grounds of appeal:

“1. That the order of the Ld. ACIT, Circle-5(1), Visakhapatnam 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.

Grounds for processing services:

4.1. Rejecting the TP documents maintained by the appellant U/s. 92D of the Act in good faith and with due diligence.

4.2. Rejecting the comparability analysis carried out by the assessee in 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 Ld. 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 AEs.

4.6. Characterizing the appellant as in entrepreneur undertaking manufacturing activities, where in fact, the appellant is a low risk captive service provider undertaking processing services for its AEs.

4.7. Including companies that are functionally different from the operational profile of the appellant.

4.8. Excluding the companies selected by the appellant in its TP documentation without providing any cogent reasons for exclusion.

4.9. Not considering liabilities no longer required written back as operating in nature while computing the mark-up of the appellant.

4.10. Not considering certain expense such as provision for doubtful debts, provision for warranties, provision of doubtful deposits, and miscellaneous expenditure written off, as operating in nature on the premise that these are not the routine operating costs in determining the operating mark-up of the comparable companies.

4.11. Considering foreign exchange loss as operating in nature while determining the mark-up on cost of the appellant.

4.12. Not providing appropriate adjustments towards material difference between the operational profile of comparable companies and the appellant.

Grounds for imputation of notional interest outstanding receivables.

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, ignoring the fact that the appellant does not pay interest to the AEs in relation to outstanding payable to AEs.

5.3. Without prejudice to Ground Nos. 5.1 & 5.2 above imputing interest using SBI term deposit rate instead of LIBOR.

9 4. At the outset, the Ld. Authorized Representative [AR] argued

that the assessee is a job work service provider and does not

manufacture goods which is evident from the fact that the

assessee is not holding any inventories. It was further submitted

by the Ld. AR that the assessee’s source of income is “income

from processing services” for Rs. 140,99,04,987/-. The Ld. AR

vehemently objected to the three comparables viz., (i) Kitex

Garments Ltd, (ii) Kewal Kiran Clothing Ltd and (iii) Virat

Industries Ltd by stating that these three companies are

manufacturers of garments and are not engaged in processing

services. In fact the Ld AR submitted that these comparables

outsource processing services and incurs huge processing

expenses. It was submitted that therefore these companies are

not comparable to the assessee-company and hence required to

be excluded. The Ld. AR also in his written submissions stated

that from the annual reports of M/s. Kewal Kiran Clothing Ltd in

Note 2.15 discloses that it holds huge inventories for the purpose

of manufacturing activities. Similarly, the Ld. AR also referred to

Note 2.25 wherein M/s. Kewal Kiran Clothing Limited has paid

huge processing charges of Rs. 1,866.46 lakhs. The Ld. AR also

referred to the fact that M/s. Kewal Kiran Clothing Limited

manufactures “Killer” brand materials for sale. Similarly, the Ld.

10 AR also referred to the financial statement of M/s. Kitex

Garments Limited wherein under “corporate information” it is

mentioned that the company is engaged in the manufacturing of

fabric and readymade garments. Further, the Ld. AR also referred

to Note-22 wherein M/s. Kitex Garments Limited has paid an

amount of Rs. 12,09,77,618/- as processing charges. The Ld. AR

also argued that similar information is stated in the case of M/s.

Virat Industries Limited wherein this company has also paid the

processing charges of Rs. 1,34,26,071/- as mentioned in Note 26

of the financial statements. The Ld. AR therefore pleaded that all

the three companies outsourced the processing of the finished

goods and has paid for the manufacturing of branded garments.

It was further submitted that in the instant case, the assessee is

not engaged in manufacturing of branded garments but only

processes garments as per the specifications of the customers

under the directions of the parent company viz., Brandix Apparel

Company, Sri Lanka, (in short referred as BAL). The Ld. AR

therefore pleaded that the three comparables may be removed

from the calculation of Arithmetic Mean of the PLI with that of

the assessee.

11 5. Countering the arguments of the Ld. AR, the Ld. DR argued

that from the analysis of the P & L Account, it is seen that the

net book profit declared by the assessee is equivalent to the other

income. Further, the Ld. DR also referred to the agreement

between the Brandix Apparel India Pvt Limited and Brandix

Apparel Limited, Sri Lanka wherein it was stated that the

assessee is a “contract manufacturer”. Further, the Ld. DR also

referred to the TP study of the assessee wherein it was mentioned

that a large scale manufacturing facilities was established in

Brandix India SEZ, Visakhapatnam and argued that the assessee

maintains huge assets which are required for process of the

manufacturing activities. The Ld. DR also referred to a flow

diagram submitted in page 108 wherein the significant functions

performed by BAI states that the assessee is engaged in

procurement, warehousing, processing, packing & labeling and

shipment. The Ld. DR also submitted that the assessee directly

supplies to the end customers and not to BAL.

submitted that the agreement between the BAI and BAL as per

clause-2 is with respect to supply of services only. The Ld. AR

also reiterated that the assessee does not carry any inventory

12 and the procurement is funded by BAL, and BAI does not bear

the risk for the manufactured goods. The Ld. AR also referred to

the revenues of Kewal Kiran Clothing Limited and also referred to

the segment reporting furnished by Kewal Kiran Clothing Limited

wherein it can be seen that it is engaged in earning revenues

from various segments. The Ld. AR reiterated that the assessee

is engaged only in one segment ie., processing services. The Ld.

AR also submitted that similarly Kitex Garments Ltd and Virat

Industries Ltd were also engaged in various activities and also

cannot be compared with the assessee-company. The Ld. AR also

once again pleaded that since the said three companies are

functionally different from the operational profile of the assessee-

company, these companies are to be excluded from the

comparables. Further, the Ld. DR submitted that as per the

annual report of Kewal Kiran Clothing Limited it has not provided

the segmental information as it has not crossed the threshold

limit as prescribed under Accounting Standard-17 [AS] of the

Institute of Chartered Accountants of India [ICAI] and hence not

provided the same.

material available on record and the written submissions made

by the assessee.

they need no adjudication.

Ld. TPO / AO for which specific grounds have been raised vide

Grounds No. 4 and 5 and accordingly it has been adjudicated.

comparables by the Ld. TPO wherein the plea of the assessee is

that the objections of the assessee in the selection of

comparables by Ld TPO, were not considered by the Ld. DRP. On

this issue, the main contention of the Ld. AR is that the assessee

in its TP document submitted before us has determined the ALP

of the Tested Party based on the combined results of Search-1

and Search-2 and has arrived at the following comparables and

computed the arithmetic mean accordingly:

Sl Name of the Company Data Source Average No NPI 1. Sudar Industries Ltd P 13.53% 2. Suryakiran International Ltd P 4.86% 3. Caprolactam Chemicals Ltd P 3.45%

Mean 7.98% Median 8.21% Lower Quartile 8.04% Upper Quartile 8.83%

The contention of the assessee in Ground No.4.8 is with respect

to rejection of the TP documentation by the Ld. TPO without

assigning any cogent reasons. From the order of the Ld. TPO, we

find that the Ld. TPO has generally mentioned that the search

process made by the assessee in the TP document is not in

conformity with the TP regulations and also the choice of filters

selected by the assessee resulted in selection of inappropriate

comparables. However, the Ld. TPO did not elaborate on the

inappropriate filters adopted by the assessee. We also find that

the Ld. TPO has made an independent search using

Capitallineplus and Prowess databases by adopting the following

filters:

(i) Companies with Sales > 1 Crore (ii) Companies with Financial Year end 31/03/2014 (iii) Companies with positive networth (iv) Companies with diminishing revenue / persistent loss are rejected (v) Companies with extraordinary circumstances are rejected (vi) Companies with related party transactions less than 25%

The Ld. AO thus arrived at the following comparables thereby

computed the OP/OC as detailed below:

S.No Name of the OR OC OP OP/OC Comparable 1. Maral Overseas Ltd 220453 194278 26175 13.47 2. Kitex Garments Ltd 1595222544 1356526616 238695928 17.60 3. SP Apparel Ltd 359959300 322750571 37208729 11.53 4. Kewal Kiran Clothing 48835 42080 6754 16.05 Ltd 5. Sudar Industries Ltd 380818773 359408490 21410283 5.96 6. Virat Industries Ltd 221778024 173896678 47881346 27.53 Average 19.58

The objection of the assessee is with respect to inclusion of the

following comparables which were functionally considered as

comparables by the Ld TPO with that of the assessee whereas

according to assessee, which are in fact not comparable viz., (i)

Kitex Garments Ltd, (ii) Kewal Kiran Clothing Ltd and (iii) Virat

Industries Ltd. The assessee also vide in its grounds of appeal

pleaded to reject the above three comparables as they are

functionally different from that of the operational profile of the

assessee-company.

16 (i) Comparable ofKitex Garments Ltd:

From the submissions of the assessee-company and on going

through the annual report filed by the Ld. AR, we find that Kitex

Garments Limited is engaged in manufacturing of fabrics and

export its fabrics and sells to domestic customers directly.

Further, from Note-22 of the annual report, we find that Kitex

Garments Limited has incurred processing charges wherein the

contention of the Ld. AR is that Kitex Garments Limited has sub-

contracted the work to other entities like that of the assessee.

We find from the annual report (page 40) that Kitex Garments

Limited is engaged in manufacture of fabric and readymade

garments and exports the same. Thus in our opinion, Kitex

Garments Limited is engaged in the manufacturing process

whereas the assessee is engaged in the business of processing of

garments thereby leading to the conclusion that the operations of

Kitex Garments Limited are functionally different from that of the

assessee-company. We therefore direct the Ld. TPO to exclude

Kitex Garments Limited from the list of comparables for the

aforesaid reasons.

(ii)Comparable of Kewal Kiran Clothing Ltd:

From the annual report submitted by the assessee we find that

Kewal Kiran Clothing Limited is the owner of brands such as

“Killer” and operating in a different operating model by holding

huge inventories. Further, we find that Kewal Kiran Clothing

Limited is also engaged in the business of manufacturing and

marketing of apparels and trading of lifestyle accessories and

generating power from Wind Mills. Further, Kewal Kiran Clothing

Limited is also engaged in branding and advertising activities

under its brand name “Killer”. This leads to the conclusion that

Kewal Kiran Clothing Limited is engaged in a diversified activities

and deriving income from various kinds of operations whereas

the assessee is engaged only in one activity ie., processing

services. Further, we also find from the annual report Kewal

Kiran Clothing Limited has incurred huge processing charges by

sub-contracting the work to other entities such as the assessee-

company. We therefore are of the opinion that Kewal Kiran

Clothing Limited is functionally different from that of the

operations of the assessee and hence it cannot be considered as a

comparable for the computation of ALP of the assessee and

18 thereby directing the Ld. TPO to exclude Kewal Kiran Clothing

Limited from the list of comparables for the aforesaid reasons.

(iii) Comparable of Virat Industries Ltd:

From the annual report submitted by the assessee, it is found

that Virat Industries Limited focuses on manufacturing of socks

from yarn whereas the assessee is engaged in processing of

garments from fabrics. Similar to the above two entities viz.,

Kitex Garments Limited and Kewal Kiran Clothing Limited, Virat

Industries Limited also holds huge inventories and fully engaged

in the manufacturing of garments. We also find that Virat

Industries Limited has also engaged in sub-contracting the

processing works to job-workers such as the assessee-company.

Therefore, in our opinion, Virat Industries Limited is functionally

different from that of the assessee-company and cannot be

considered as a comparable for the computation of ALP with that

of the assessee-company for the aforesaid reasons. Accordingly,

we hereby direct the Ld. AO to exclude Virat Industries Limited

from the list of comparables. Thus, Grounds No. 4.1 to 4.8

raised by the assessee are allowed.

longer required written back whether it has to be treated as

operating income or non-operating income while computing the

mark-up of the assessee, the Ld. AR relied on the judgment of the

Hon’ble Bombay High Court in the case of Pr. CIT-4 vs. Tetra Pak

India Pvt Ltd in Income Tax Appeal No. 876 of 2018. The Ld. AR

referred to para 8 of the said decision of the Bombay High Court

which is extracted herein below:

“8. As regard the credit to profit and loss account on account of liabilities written back amounting to Rs. 6,15,59,011/- the details of the liabilities written back were made available to CIT(A) as well as ITAT. Both, on facts, and having considered those details, have come to conclusion accepting the Assessee’s contention that those liabilities belong to earlier years and are directly relatable to the regular business operations of the assessee and since these liabilities were no longer payable to business creditors should be allowed to be written back in the AY under consideration and the same was rightly offered to tax as business income U/s. 41(1) of the Act. Therefore, on facts it was accepted that these liabilities written back were arising out of normal business operations and hence form part of operating income of the assessee.”

The Ld. AR therefore submitted that the AE waived the air freight

charges relatable to regular business operations of the assessee,

and hence the assessee has written back the liability as no longer

payable. Further, the Ld. AR submitted that the details of these

expenditure which was allowed as operating expenditure in the

earlier years was also submitted before the Ld. AO. The Ld AR

20 pleaded that since it was treated as operating expenditure in the

earlier years, the liability for such expenditure which was created

in earlier years and written back in the current assessment year

and therefore should be treated as an operating income.

Countering the arguments of the Ld. AR, the Ld. DR submitted

that the issue before the Hon’ble Bombay High Court is factually

different because as per 4-B of the substantial question of law

raised before the Hon’ble Bombay High Court is with respect to

whether this item represents provisions made in the earlier years

which has been reversed in AY 2002-03 and do not constitute

income from the operations of the assessee. The Ld. DR therefore

submitted that it was provision of two earlier years and not an

expenditure which was reversed and therefore the case relied on

by the assessee is factually different from the present facts of the

assessee’s case.

incurred air freight expenses for which liability which was

created in the books of accounts in the prior years has been

written off during the impugned assessment year, since it is no

longer considered as a liability in the books of accounts of the

assessee. In this connection, the assessee has also submitted

the waiver letter issued by Brandix Apparels Limited, Sri Lanka

which is enclosed in page 44 of the paper book. These air freight

expenses when incurred in the prior years wherein it was

included in the operating cost of the assessee. However, the Ld.

TPO has considered it as non-operating when this liability has

been written back in the impugned assessment year. Reliance

placed by the assessee in the case of Pr. CIT vs. Tetra Pak India

Ltd (supra) wherein in para 8 of its order, the Hon’ble Bombay

High Court has held as follows:

“8. As regard the credit to profit and loss account on account of liabilities written back amounting to Rs. 6,15,59,011/- the details of the liabilities written back were made available to CIT(A) as well as ITAT. Both, on facts, and having considered those details, have come to conclusion accepting the Assessee’s contention that those liabilities belong to earlier years and are directly relatable to the regular business operations of the assessee and since these liabilities were no longer payable to business creditors should be allowed to be written back in the AY under consideration and the same was rightly offered to tax as business income U/s. 41(1) of the Act. Therefore, on facts it was accepted that these liabilities written back were arising out of normal business operations and hence form part of operating income of the assessee.”

The argument of the Ld DR could not be accepted for the reason

that in accounting principles that a liability in the form of

provision shall be created in the books of accounts in the year of

accrual of expenses until the actual payment is made. Since this

22 liability was waived off by BAL, it was written back and

considered as income in the impugned AY. Respectfully following

the ratio laid down by the Hon’ble Bombay High Court in the case

of Pr. CIT vs. Tetra Pak India Ltd (supra), we direct the Ld. AO to

include the liabilities written back in the impugned assessment

year as operating income.

these expenditure were considered as operating expenditure in

the previous years and thereby similarly when these expenses are

being written off in the subsequent years as no longer payable it

has to be considered as operating income in the year in which it

has been written off. The Ld DR relied on the orders of Revenue

authorities.

raised the issue that the Ld. TPO has not considered certain

expenses such as provision for doubtful debts, provisions for

warranties, provision of doubtful deposits and miscellaneous

expenditure written off as operating in nature. The submission

of the Ld. AR that due to political instability in Visakhapatnam

arising out of the agitations due to bifurcation of the separate

state of Telangana, the assessee was forced to incur certain

23 expenditure to minimize the impact of the agitations on the work

output of the processing unit. However, the Ld. Revenue

Authorities rejected the contention of the Ld. AR stating that the

assessee has not furnished any details of the expenses before the

Ld. TPO. We therefore direct the assessee to produce the details

of expenditure incurred by the assessee which was considered as

extraordinary to the Ld. TPO / AO. We direct the Ld. AO / TPO to

provide one more opportunity to the assessee for submission of

the details of expenditure and decide the allowability in

accordance with law. Accordingly, this ground raised by the

assessee is allowed for statistical purposes.

the foreign exchange loss is non-operating in nature in the

determination of the mark-up on cost of the assessee. Countering

the arguments of the Ld. AR, the Ld. DR referred to the Ld. TPO

order wherein it is observed as a transaction loss and not a

hedging loss and hence it has to be considered as a operating in

nature. The Ld DR placed reliance in the case of NVH India Auto

Parts P Ltd vs DCIT [156 taxman.com 330 (Chennai Trib)] and

Phoenix Comtrade P Ltd vs DCIT [149 taxman.com 389 (Mumbai

24 Trib)] wherein it was held that Foreign exchange loss is

operating in nature.

submission was that the foreign exchange loss was considered as

operating in nature, whereas the Ld. TPO has stated in his order

that the foreign exchange loss should be considered as non-

operating. The Ld. TPO in para 11(d) of the order passed U/s.

92CA(3) has observed as under:

“11(d). Hence, foreign exchange fluctuations on account of hedging cannot be considered as an operating item and thus the taxpayer contention cannot be accepted.”

Thus, the Ld. TPO has observed that the foreign exchange

fluctuations on account of hedging operations cannot be

considered as operating item. However, in the instant case we

find that the assessee has not engaged in hedging activities and

foreign exchange loss is a transactional loss and in our opinion it

should be considered as an operating cost for mark-up purposes.

Further there is also merit in the argument of the Ld DR wherein

the ratio laid in the cases NVH India Auto Parts P Ltd (supra) and

Phoenix Comtrade P Ltd (supra) was emphasised. Therefore, we

25 find no infirmity in the order of the Ld. Revenue Authorities and

accordingly, this ground raised by the assessee is dismissed.

that material difference providing appropriate adjustments in the

working capital between the assessee and the comparable

companies selected by the Ld. TPO was not considered by the Ld.

DRP. Per contra, the Ld. DR relied on the order of the Ld. DRP.

available on record as well as the orders of the Ld. Revenue

Authorities on the issue. From the directions of the Ld. DRP in

para 2.5.1, it is observed that the Ld. DRP has held that the

assessee has not demonstrated with any data or information and

the impact of difference on the pricing, cost and profits. Even

before us, the Ld. AR has not provided any documents regarding

the working capital adjustments. Following the principles of

natural justice, in order to provide one more opportunity to the

assessee, we hereby direct the Ld. AO / TPO to consider the

impact of working capital adjustments of the assessee company

and appropriate material differences with that of the comparable

companies and decide on this issue accordingly. We also direct

the assessee to submit necessary documentation to the Ld. AO /

TPO on this issue. Accordingly, this ground raised by the

assessee is allowed for statistical purposes.

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.

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 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.The Ld. AR also pleaded

the working capital adjustment shall also be undertaken for the

companies selected as comparables by the Ld. TPO.The Ld. DR

submitted that the Ld. TPO has taken lowest rate for the

application of interest on outstanding receivables from the

website of SBI Term Deposit Rates for the term under

consideration. The Ld. DR also referred to page 364 of the paper

book wherein the assessee in the computation of share valuation

has adopted a discount rate of 15.58% . The Ld. DR also referred

to page 472 of the paper book wherein the assessee’s basis for

interest payable is one month LIBOR + 3.5% on the ECBs

obtained by them. He therefore pleaded that the Ld. TPO has

rightly considered the rate and hence needs to be upheld.

Countering the arguments of the Ld. DR, the Ld. AR submitted

that when TNM method is used, no adjustment can be made with

respect to notional interest of outstanding receivables as it is

already subsumed in the computation of ALP under TNM method.

On this issue the Ld AR relied on the case of Devi Sea Foods

(supra) and pleaded that the same ratio be applied.

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 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.

29 22. 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 thereunder would take care of such notional interest

cost. Accordingly, this ground raised by the assessee is allowed

for statistical purposes.

which are consequential in nature and thereforeneeds no

adjudication.

statistical purposes as indicated herein above.

30 Pronounced in the open Court on 13th February, 2024.

Sd/- Sd/- (दु�वू�आर.एलरे�डी) (एसबालाकृ�णन) (DUVVURU RL REDDY) (S.BALAKRISHNAN) �या�यकसद�य/JUDICIAL MEMBER लेखासद�य/ACCOUNTANT MEMBER Dated :13.02.2024 OKK - SPS

आदेशक���त�ल�पअ�े�षत/Copy of the order forwarded to:- �नधा�रती/ The Assessee–Brandix Apparel India Private Limited, 1. APSEZ, Pudimadaka Road, Atchutapuram Mandal, Visakhapatnam – 530011. राज�व/The Revenue –Assistant Commissioner of Income Tax, Circle- 2. 5(1), Visakhapatnam. 3. The Principal Commissioner of Income Tax, आयकरआयु�त (अपील)/ The Commissioner of Income Tax 4. �वभागीय��त�न�ध, आयकरअपील�यअ�धकरण, �वशाखापटणम/ DR,ITAT, 5. Visakhapatnam गाड�फ़ाईल / Guard file 6. आदेशानुसार / BY ORDER

Sr. Private Secretary ITAT, Visakhapatnam