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

PER S. BALAKRISHNAN, Accountant Member :

This appeal is filed by the assessee against the final assessment order passed U/s. 143(3) r.w.s 144C(3) of the Income Tax Act, 1961 [the Act] for the AY: 2014-15, dated 23/10/2018.

2 2. Brief facts of the case are that the assessee is engaged in

the business of manufacture and distribution of ladies inner ware

and readymade garments on contract basis filed its return of

income for the AY 2014-15 dated 29/11/2014 and admitted NIL

income after setting off of brought forward loss at

Rs.1,90,96,216/-. The assessee paid the tax U/s. 115JB of the

Act. The return was summarily processed U/s. 143(1) of the Act

on 23/12/2014 accepting the return of income. Subsequently,

the case was selected for scrutiny under CASS and notice U/s.

143(2) was issued on 31/8/2015. In response, the assessee

submitted the copy of income tax return, computation of income

tax, tax audit report, Form 3CEB & Form 29B to the Ld. AO.

Subsequently, notice U/s. 142(1) of the Act was issued on

12/7/2016 and served on the assessee on 14/7/2016. The

assessee’s Authorized Representative appeared on 2/8/2016 and

furnished the information called for. Due to change in the

incumbent, notice U/s. 142(1) r.w.s 129 of the Act was issued on

the assessee on 25/10/2017. In response to the notice, the

assessee’s Representative attended before the Ld. AO and

produced the books of accounts and submitted the details called

for from time to time. The Ld. AO on verification of the Form

3CEB furnished by the assessee found that the assessee-

3 company has entered into international transaction with its

Associated Enterprises [AEs] aggregating to Rs. 236.04 Crs

during the AY 2014-15. The Ld. AR therefore made a reference to

the Transfer Pricing Officer [TPO], Hyderabad after taking

necessary approval from the Principal Commissioner of Income

Tax-2, Visakhapatnam for determining the Arm’s Length Price

[ALP] u/s. 92CA(1) of the Act. After providing an opportunity to

the assessee, the Ld. TPO passed the order U/s. 92CA(3) of the

Act on 31/10/2017 determining the adjustment U/s. 92CA at Rs.

17,98,23,483/-. The Ld. AO considering the order of the Ld. TPO,

passed a draft assessment order on 28/12/2017. The Ld. AO

also made an addition of Rs. 32,04,997/- for the delay in

payment of employees contribution of Provident Fund [PF] during

the relevant assessment year 2014-15. Aggrieved by the draft

assessment order, the assessee filed its objections before the

Learned Dispute Resolution Panel, Bangaluru [DRP]. Before the

Ld. DRP the assessee raised various objections particularly on

the rejection of the TP Documentation and selection of

comparables by the Ld. TPO without assigning any proper

reasons for rejection of the comparables. The Ld. DRP

considering the objections raised by the assessee, upheld the

order of the Ld. TPO. The Ld. DRP also rejected the additional

4 grounds filed by the assessee citing the delay in filing the

additional grounds. Considering the directions of the Ld. DRP,

the Ld. AO passed the final assessment order giving effect to the

directions of the Ld. DRP. Aggrieved by the final assessment

order, the assessee is in appeal before us.

detailed in Form-36 of the appeal.

rejected the comparables without assigning any valid reasons as

detailed in para 6 of the Ld. TPO order, which is reproduced

below:

“6. On going through the TP document it is seen that the search process is not in conformity which the TP regulations as also the choice of the filters which resulted in selection of inappropriate comparables. In view of the provisions of section 92C(3), 92C(4), the TP analysis and documentation of the tax-payer is hereby rejected.”

Further, Ld AR submitted that the Ld. TPO provided the CD

containing the independent search of comparables carried out by

the Ld. TPO along with the order copy and has not provided any

opportunity to the assessee to rebut the same. The Ld. AR

argued that the Ld. TPO has neither passed a speaking order nor

5 the objections raised by the assessee before the Ld. DRP were

considered by the Ld. DRP. The Ld. AR therefore pleaded that the

order may be remitted back to the file of the Ld. TPO for fresh

consideration of the material and objections raised by the

assessee and a proper opportunity be provided to the assessee

before conclusion of the TP assessment.

Per contra, the Ld. DR submitted that the assessee has not

used the “extraordinary filter” and hence the TPO has rejected

the TP study adopted by the assessee. The Ld. DR relied on the

order of the Ld. TPO and the Ld. DRP.

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

Authorities. Admittedly the assessee has adopted the TNM

method for benchmarking its international transactions which

were not disputed by the Ld. Revenue Authorities. However, the

Ld. TPO has rejected the TP documentation adopted by the

assessee which is as follows:

Sl no Company Name Unadjusted average margin-3 years (%) 1. Arviva Industries (India) Ltd (11.57)

6 2. Celestial Knits & Fabs Pvt Ltd 3.10 3. Vijay Garments Ltd 3.43 4. Dhruv Globals 3.64 5. Celebrity Fashions Ltd 0.96 6. Samtex Fashions Ltd 3.21 7. Kamdgiri Fashion Ltd 5.40 Arithmetic Mean 1.17

selected by the assessee, the Arithmetic Mean of the ALP is

1.17% . However, the Ld. TPO has selected the following

comparables:

Sl no Company Name Unadjusted Margins AY 2014-15 (%) 1. Nahar Spinning Mills Ltd 13.47 2. Lovable Lingerle Ltd 17.60 3. Seasons Textiles Ltd 11.53 4. Nitin Spinners Ltd 16.05 5. Womens Next Loungeries Ltd 5.96 Arithmetic mean 12.92 Appellant’s Margin as per TP Order 1.03

TPO is 12.92% . Considering the difference in Arithmetic Mean

between the assessee and the comparables, the Ld. TPO made an

adjustment of Rs. 17,98,23,483/-. The argument of the Ld. AR

deserves consideration on the fact that the assessee has not been

provided an opportunity to rebut the comparables selected by the

Ld. TPO, since the CD containing the comparables and the

7 computation of the ALP was provided to the assessee along with

the TP order. Further, the argument of the Ld. AR that wherein

the objections raised by the assessee were not considered by the

Ld. TPO and also the Ld. DRP deserves consideration. The Ld.

AR in his written submissions has stated that with respect to

sundry balances written back of Rs. 35,25,480/- which was

considered as non-operating income by the Ld. TPO without

providing an opportunity to the assessee. Further, the Ld. AR

also contended before us that the loan processing charges of Rs.

13,32,000/- was considered as operating expenses by the Ld.

TPO without providing an opportunity to the assessee. Similar

treatment was also given in inventory valuation amounting to Rs.

1,04,45,656/- and adjustment on account of extraordinary cost

and capacity adjustment wherein the assessee was not provided

any opportunity to represent before the Ld. TPO. We therefore

find that plea of the Ld. AR that matter may be remitted back to

the file of the Ld. TPO deserves consideration. In view of the

above discussions, following the principles of natural justice, we

consider it deem and fit to remit the matter back to the file of the

Ld. TPO and thereby the assessee may be provided opportunity to

make its submissions and rebut the TP documentation adopted

8 by the Ld. TPO. Accordingly, the grounds raised by the assessee are allowed for statistical purposes.

Pronounced in the open Court on the 16th February, 2023.

Sd/- Sd/- (दु�वू� आर.एल रे�डी) (एस बालाकृ�णन) (DUVVURU RL REDDY) (S.BALAKRISHNAN) �या�यकसद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER Dated : 16.02.2023 OKK - SPS

आदेश क� ��त�ल�प अ�े�षत/Copy of the order forwarded to:- �नधा�रती/ The Assessee – Quantum Clothing India Private Limited, 1. Plot No.12, Brandix India Apparel City (SEZ), Pudimadaka Road, Atchutapuram Mandal, Visakhapatnam – 531011. राज�व/The Revenue – Assistant Commissioner of Income Tax, 2. Circle-5(1), 2nd Floor, Direct Taxes Building, MVP Double Road, Visakhapatnam, Andhra Pradesh-530017. 3. The Dispute Resolution Panel-1, Kendriyasadan, 4th Floor, C-Wing, Bengaluru-560034. आयकर आयु�त (अपील)/ The Commissioner of Income Tax 4. (ii) Deputy Commissioner of Income Tax (Transfer Pricing Officer)-2, Hyderabad.

9 �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, �वशाखापटणम/ DR, ITAT, 5. Visakhapatnam गाड� फ़ाईल / Guard file 6. आदेशानुसार / BY ORDER

Sr. Private Secretary ITAT, Visakhapatnam