2021 (2) TMI 1320 - AT - Income Tax

Tribunal Decision: Appeal partly allowed, remand for verification.

ACIT, Circle-12 (1), New Delhi Versus M/s. Hermes India Retails & Distributors Pvt. Ltd.,

ACIT, Circle-12 (1), New Delhi Versus M/s. Hermes India Retails & Distributors Pvt. Ltd., - TMI Issues Involved:1. Admission of additional evidence by CIT(A).2. Exclusion of comparable M/s Alta Moda by CIT(A).3. Adjustment of Rs. 5,32,25,677/- made to the international transaction of reimbursement of expenses to Associated Enterprises (AEs).Detailed Analysis:1. Admission of Additional Evidence by CIT(A):The first ground of appeal challenges the CIT(A)’s acceptance of additional evidence. The Revenue argued that the CIT(A) violated Rule 46A of the Income Tax Rules, 1962, by admitting additional evidence without sufficient justification. The Departmental Representative (DR) contended that the assessee had ample opportunity to present evidence during the transfer pricing proceedings but failed to do so. The DR cited decisions from the Hon’ble Delhi High Court to support the argument that additional evidence should have been referred back to the Assessing Officer/TPO for comments on merit after admission.The assessee countered that the CIT(A) had indeed referred the additional evidence to the Assessing Officer/TPO, who commented on the merits of the evidence. The CIT(A) concluded that the assessee was not given sufficient opportunity during the transfer pricing proceedings, thus justifying the admission of additional evidence under Rule 46A(1)(d). The Tribunal found no error in the CIT(A)’s decision to admit the additional evidence, noting that the TPO had commented on the merits of the evidence regarding the selection of the comparable, M/s Alta Moda. The Tribunal dismissed the Revenue’s ground, finding no violation of Rule 46A.2. Exclusion of Comparable M/s Alta Moda by CIT(A):The second ground of appeal concerns the exclusion of M/s Alta Moda as a comparable. The assessee used the Resale Price Method (RPM) to support its claim that the transaction of purchasing traded goods was at arm’s length. The TPO rejected the comparables selected by the assessee and included M/s Alta Moda, which had a gross profit ratio of 72.30%, leading to a proposed adjustment of Rs. 7,24,81,076/-.The CIT(A) rejected M/s Alta Moda as a comparable, noting significant differences in business models and operations. The CIT(A) observed that M/s Alta Moda was involved in multiple activities, including construction and trading high fashion garments, which made it functionally dissimilar to the assessee. Additionally, the CIT(A) noted discrepancies in the treatment of customs duty in the financials of M/s Alta Moda and the assessee.The Tribunal found that the CIT(A) had not adequately verified the functions of M/s Alta Moda and remanded the issue back to the AO/TPO for further verification. The Tribunal directed that if M/s Alta Moda is found to be functionally similar to the assessee, the AO/TPO should compute the margin of the company in a manner consistent with the Tribunal’s directions.3. Adjustment of Rs. 5,32,25,677/- Made to the International Transaction of Reimbursement of Expenses to AEs:The third ground of appeal involves the adjustment made to the international transaction of reimbursement of expenses. The assessee claimed that the reimbursement of expenses to AEs was on a cost-to-cost basis and thus at arm’s length. The TPO accepted expenses amounting to Rs. 3,46,61,365/- but proposed an adjustment of Rs. 5,32,25,677/- for the remaining expenses, citing a lack of sufficient evidence and credible basis for the payments.The CIT(A) forwarded the additional evidence provided by the assessee to the TPO, who objected to the admission of the evidence but did not comment on its merit. The CIT(A) found that the TPO had disallowed the expenses without sufficient cause and deleted the adjustment. The Tribunal upheld the CIT(A)’s decision, noting that the TPO had not provided any comments on the additional evidence and that the DR had not pointed out any defects in the CIT(A)’s analysis. The Tribunal dismissed the Revenue’s ground, finding no basis for the adjustment.Conclusion:The Tribunal dismissed the first and third grounds of appeal, upholding the CIT(A)’s decisions on the admission of additional evidence and the deletion of the adjustment for reimbursement of expenses. The Tribunal allowed the second ground for statistical purposes, remanding the issue of the comparability of M/s Alta Moda back to the AO/TPO for further verification. The appeal was thus partly allowed for statistical purposes.