TaxTMI 
TaxTMI 
2020 (1) TMI 606
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....Section 144C (13) of the Income tax Act, 1961 ("the Act") read Section 143(3) of the Act, for the aforesaid assessment year on the following among other grounds: 1. Adjustment /Addition to Total Income INR 7,880,245 On the facts and in the circumstances of the case and in law, the learned Transfer Pricing Officer ('TPO') and the learned AO erred in proposing and the Hon'ble Dispute Resolution Panel ('DRP') further erred in confirming the proposed addition of INR 7,880,245 to the Appellant's total income of INR 198,044,775. 2. Transfer pricing adjustment of INR 68,63,889 on account of royalty shortfall in connection with the international transaction of provision of technical assistance and advisory services 2.1 On the facts and in the circumstances of the case and in law, the learned TPO /AO erred in proposing and the Hon'ble DRP further erred in confirming the proposed addition of INR 68,63,889 to the arm's length price determined by the appellant in respect of the international transaction of provision of technical assistance and advisory services. 2.2. The learned TPO / AO has erred in rejecting and the....
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....he gross profit on cost earned by Appellant from its AE trading segment. 3.5 The learned TPO /AO and the Hon'ble DRP failed to appreciate that even if the recovery of samples were to be considered as routine trading activity, the same should be merged with normal trading activity of AE segment for the purpose of benchmarking. 4. Initiation of penalty proceedings under section 271(1)(c) of the Act The learned AO has erred in both in laws and on facts, in initiating penalty proceedings under section 271(1)(c) of the act against the appellant. 5. Each one of the above grounds of appeal is without prejudice to the other. 6. The appellant reserves the right to amend, alter or add to the grounds of appeal." 2. Briefly stated, the assessee company which is engaged in the business of manufacturing and trading of clothing and cloth accessories viz. shirts, neckties, trousers, accessories like cufflinks, belts, wallets etc. had e-fled its return of income for A.Y 2011-12 on 30.11.2011, declaring its total income at Rs. 19,80,44,775/-. The return of income filed by the assessee was processed as such under Sec. 143(1) of the Act. Subsequently....
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.... of the proceedings was signed on 04.04.2008, it was noticed by the TPO that there was no mention in the 'agreement' about the exclusion of any area or services as was claimed by the assessee before him. On the basis of his aforesaid deliberations, the TPO worked out the 'royalty' @3% on the entire sales of Rs. 700,362,813/- of the AE. Accordingly, the TPO worked out an adjustment of Rs. 68,63,889/- towards shortfall in 'royalty' charged by the assessee on its AE. 5. Further, in the course of the proceedings it was observed by the TPO that the assessee had recovered from its AE. viz. M/s Zodiac Clothing Company, UAE LLC an amount of Rs. 86,16,123/-, of which Rs. 56,08,743/- was on account of cost of samples and the balance amount was towards freight cost. On a perusal of the records, it was observed by the TPO that the assessee company on a regular basis was buying fabrics for samples on behalf of its AE. It was noticed by the TPO, that the assessee had charged 7.5% on cost of samples (after recovering the salvage value) as mark-up on the said transactions. Observing, that gathering of samples which was a pre-requisite for a successful textile business which was the main/core ac....
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....e AE, therein resulting into an adjustment of Rs. 68,63,889/- towards shortfall in 'royalty' charged by the assessee from its AE; and (ii). that, as to whether the A.O/TPO are justified in adopting the gross margin rate of 26.98% (trading segment-AE) of the assesee and making an adjustment of Rs. 10,16,356/- towards shortfall of the amount recoverable by the assessee on account of supply of samples to its AE. 10. We shall first advert to the working of the 'royalty' @3% on the entire sales of Rs. 700,362,813/- of the AE by the TPO, which therein had resulted into an adjustment of Rs. 68,63,889/- towards shortfall in 'royalty' charged by the assessee from its AE. As is discernible from the orders of the lower authorities, the assessee during the year had provided technical assistance and services to its AE, viz. M/s Zodiac Clothing Company, UAE LLC. In the course of providing of the aforesaid services the assessee had carried out certain functions viz. (i). participation in meetings with customers, if required; (ii). display of products at international fairs and exhibitions; (iii). product development; (iv). preparation and approval of samples and prototypes of garments and fabr....
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....ality control. As such, it was the claim of the ld. A.R that the assessee based on the 'agreement' dated 09.11.2002 and the letter of understanding dated 02.01.2003 was consistently over the years in receipt of the fees for technical assistance and advisory services rendered by it to its AE. It is the claim of the ld. A.R, that after the expiry of the five year period of the 'agreement' dated 09.11.2002, the assessee had renewed the 'agreement' on 05.04.2008, with the same terms and conditions. Further, the assessee had revised the 'royalty' rates from 2.5% to 3% vide a letter dated 06.05.2008, with the same terms and conditions. As observed by us hereinabove, the assessee during the year under consideration was in receipt of 'royalty' of Rs. 1,41,46,995/- [@3% of Rs. 46,71,99,282/- i.e the manufacturing sales-export]. 12. We have given a thoughtful consideration to the issue before us and find substantial force in the contentions advanced by the ld. A.R. In our considered view, there is substance in the claim of the ld. A.R that the 'agreement' dated 04.04.2008 between the assessee and its AE, viz. M/s Zodiac Clothing Company, UAE LLC, was merely an extension of the earlier ....
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....the aforesaid international transaction of the assessee. Accordingly, the TPO applied the gross margin rate of 26.98% and carried out an adjustment of Rs. 10,16,356/- towards shortfall of the amount recoverable by the assessee on account of supply of samples to its AE. 14. As is discernible from the records, the assessee procured the fabrics from third party in India for its AE in UAE. If the fabrics were not exported to the AE, it would be sold to a third party in India and the difference, if any, would be recovered from the AE. For carrying out the sampling activity, the costs therein involved would be recovered by the assessee from the AE, for which the assessee would raise a mark-up of 7.5% (after recovering the salvage value) on its AE. The assessee would recover the cost plus mark-up of 7.5% on the cost of the samples (after recovering of the salvage value), that were not picked up by the AE. During the year under consideration, the assessee had recovered from its AE, viz. M/s Zodiac Clothing Company, UAE LLC an amount of Rs. 86,16,123/-, of which Rs. 56,08,743/- was on account of sale of samples and the balance amount was towards freight cost. 15. We have given a thoug....
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.... 2011-12 in ITA No. 995/Mum/2017 is allowed in terms of our aforesaid observations. ITA No. 106/Mum/2017 A.Y 2012-13 19. We shall now advert to the appeal of the assessee for A.Y 2012-13. The assessee has assailed the impugned order on the following grounds of appeal : "The Appellant objects to the order of the learned Assessing Officer ('AO') dated 31 October 2016 (received on 10 November 2016) passed under Section 143(3) read with Section 92CA and Section 144C (13) of the Income tax Act, 1961 ("the Act"), for the aforesaid assessment year on the following among other grounds: 1. Adjustment /Addition to Total Income INR 93,871,430 On the facts and in the circumstances of the case and in law, the learned Transfer Pricing Officer ('TPO') and the learned AO erred in proposing and the Hon'ble Dispute Resolution Panel ('DRP') further erred in confirming the proposed addition of INR 9,795,413 to the Appellant's total income of INR 84,076,020. 2. Transfer pricing adjustment of INR 9,297,422 on account of royalty shortfall in connection with the international transaction of provision of technical assistance and advi....
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..../- offered for disallowance by the Appellant. 3.2 The learned AO erred in applying Rule 8D and the Hon'ble DRP erred in confirming the action of the learned AO in applying Rule 8D without giving any finding by the AO to the effect that he was not satisfied with the correctness of the amount offered for by the Appellant for disallowance u/s. 14A of the Income Tax Act, 1961. 3.3. The learned AO erred in making and the Hon'ble DRP erred in confirming the action of the learned AO in recomputing the disallowance uls.14A without appreciating that the methodology followed by the Appellant has been accepted in the previous assessment years by the tax authorities. 4. Initiation of penalty proceedings under section 271(1)(c) of the Act The learned AO has erred in both in law and on facts, in initiating penalty proceedings under section 271(1)(c) of the Act against the Appellant. 5. Each one of the above grounds of appeal is without prejudice to the other 6. The appellant reserves the right to amend, alter or add to the ground of the appeal." 20. Briefly stated, the assessee company had e-fled its return of income for A.Y 2012-1....
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....e company at Rs. 9,38,71,430/-. 26. Aggrieved, the assessee has assailed the final assessment order passed by the A.O under Sec. 143(3) r.w.s 144C(13), dated 29.09.2016, in appeal before us. 27. We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record. As regards the adjustment of Rs. 92,97,422/- made by the A.O/TPO to the ALP of the fees for technical know-how received by the assessee from its AE viz. M/s Zodiac Clothing Company UAE LLC, we find, that as the facts and the issue therein involved remains the same as were there before us in the appeal of the assessee for the immediately preceding year i.e A.Y 2011-12, therefore, our order therein passed while disposing off the 'Ground of appeal No. 2' in the said appeal, would apply mutatis mutandis for the disposal of the Ground of appeal No. 2 in the present appeal of the assessee for A.Y 2012-13 in ITA No. 106/Mum/2013. Accordingly, the Ground of appeal No. 2 is allowed on the same terms. 28. We shall now advert to the claim of the assessee that the A.O had erred in working out the disallowance under Sec.14A at Rs. 8,54,221/-. On a ....
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....he ld. A.R that as the assessee had sufficient own funds which would justify the investments made in the exempt income yielding assets, therefore, no disallowance of any part of the correlating interest expenditure was called for under Sec. 14A r.w Rule 8D(2)(ii). In our considered view, the aforesaid claim of the ld. A.R is principally fortified by the order of the Hon'ble High Court of Bombay in the case of CIT Vs HDFC Bank Ltd. (2014) 366 ITR 505 (Bom). In the said case, it was observed by the Hon'ble High Court that where the assesse's capital, profit reserves, surplus and current account deposits were higher than the investment in tax-free securities, it would have to be presumed that investment made by the assessee would be out of the interest-free funds available with assessee and no disallowance would be warranted u/s 14A. Although we are principally in agreement with the aforesaid claim of the ld. A.R, however, in the absence of the facts and figures in support of the said claim, we refrain from adjudicating the same. Accordingly, we restore the issue to the file of the A.O, who shall after verifying the veracity of the aforesaid claim of the assessee, therein readjudi....