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Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM
Before: SHRI DUVVURU RL REDDY, HON’BLE & SHRI S BALAKRISHNAN, HON’BLE
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.
The assessee has raised various grounds of appeal as detailed in Form-36 of the appeal.
At the outset, the Ld. AR submitted that the Ld. TPO 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.
We have heard both the sides and perused the materials 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
As per the TP documentation study of comparable company 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
The Arithmetic Mean of the comparables selected by the Ld. 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.
In the result, appeal of the assessee is allowed for statistical purposes.
Pronounced in the open Court on the 16th February, 2023.