2018 (4) TMI 1709 - HC - Income Tax

High Court allows appeal delay, upholds Transfer Pricing adjustment, admits appeal on expenditure characterization.

THE PR. COMMISSIONER OF INCOME TAX-4 Versus GAP INTERNATIONAL SOURCING INDIA PVT. LTD.

The High Court granted condonation of delay in re-filing the appeal based on reasons provided. Regarding Transfer Pricing adjustment, the Court upheld the ... TP Adjustment - MAM selection - As submitted that the assessee company renders support services and the findings of the TPO and DRP with respect to its controlling critical functions in regard to the merchandising, fabric sourcing, product integrity, quality assurance etc. meant that there was significant differences in the international transactions as opposed to those by the assessee in the case of Li and Fung India Pvt. Ltd. [2014 (1) TMI 501 - DELHI HIGH COURT] - HELD THAT:- This Court is of the opinion that on this aspect question of law does not arise. The findings of the ITAT with respect to the functional similarity, indeed identity, between the assessee in the case of Li and Fung India Pvt. Ltd. (supra) and the assessee in the present case, is clear. The assessee, like in the case of Li and Fung India Pvt. Ltd. (supra), did not assume any risk and was dependent entirely for reimbursement of its expenses by the associated enterprises (‘AEs’) and was entitled to the annual and identical markup of 5% over the annual expenditure. Having regard to these facts, the Court is of the opinion that the application of the rule in Li and Fung India Pvt. Ltd. (supra) was appropriate and therefore this question of law does not arise. Nature of expenses - revenue or capital expenditure - HELD THAT:- Appeal admitted on:- “(1) Whether the ITAT erred in deleting the addition of ₹ 1,75,16,800/- made by the Assessing officer on account of Rent Expenses ignoring the fact that the same is capital expenditure in connection with business activities?” Issues Involved:1. Condonation of delay in re-filing the appeal.2. Transfer Pricing adjustment.3. Characterization of expenditure as capital or revenue.Condonation of Delay:The High Court, in response to the application for condonation of delay in re-filing the appeal, has granted the condonation based on the reasons provided in the application. The delay has been officially condoned, and the application stands disposed of.Transfer Pricing Adjustment:In the appeal under Section 260-A of the Income Tax Act, 1961, the Revenue raised two questions. Firstly, regarding the Transfer Pricing adjustment deleted by the Income Tax Appellate Tribunal (ITAT). The Revenue argued that the ITAT erred in following a previous ruling of the Court, asserting significant differences in international transactions. However, the Court found that the functional similarity between the present case and the precedent cited was clear. The Court concluded that the application of the rule in the precedent was appropriate, and thus, the question of law did not arise in this aspect.Characterization of Expenditure:The second question raised in the appeal pertained to the characterization of an expenditure claimed by the Revenue as capital expenditure. The assessee contended that the expenditure fell within the Revenue's stream. The Court determined that this question did indeed arise and admitted the appeal for further consideration. The specific question of law highlighted for consideration was whether the ITAT erred in deleting the addition made by the Assessing Officer on account of Rent Expenses, considering it as capital expenditure related to business activities. Notice was issued to the respondent-assessee, and the appeal was listed for a hearing on a specified date.This judgment addresses the issues of condonation of delay, Transfer Pricing adjustment, and the characterization of expenditure as capital or revenue, providing detailed analysis and decisions on each aspect based on the arguments presented by the parties involved.