TaxTMI 
TaxTMI 
2023 (9) TMI 479
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....he case, learned Assessing Officer (National Faceless Assessment Centre) and Dispute Resolution Panel (DRP) has erred both in law as well on facts in making adjustment of Rs. 35,32,063, towards ALP of Import of men's wear for resale made by the Appellant from its Associated Enterprises (AE), based on the observation of Transfer Pricing Officer (TPO) under section 920 of the Act by applying external Transaction Net Margin Method (TNMM). 1.1. Ld. DRP/AO has erred in rejecting Retail Sales Price (RPM) method adopted by the Appellant as the most appropriate method for justifying ALP and ignored the fact that the appellant is engaged in trading and distribution activities without any value addition to products. 1.2. Ld. DRP/AO has erred in law and facts of the case while rejecting foreign AE as tested party without considering that the tested party was selected by the appellant post analysis of functions performed, risk borne and assets used by the appellant and tested party. Without prejudice to above grounds, 1.3. Ld. DRP/AO has erred in law and facts of the case while applying external TNMM as the most appropriate method for benchmarking import....
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....ordingly, the creditors for the said purchases cannot be considered as unexplained. 3.2. Ld. AO has erred in law by not appreciating that additional evidence in form of confirmation for sundry creditors as on 31.03.2017 were provided on sample basis, which was perused and accepted by Hon'ble DRP. Ld. AO has not followed specific directions provided by Hon'ble DRP for verification of additional evidence, exceeding its authority and has therefore erred in law while treating balance creditors of Rs. 8.04 crores as unexplained expenditure u/s 69C of the Act. 3.3. Ld. AO has erred in law by treating accrued expense, creditors of expenses and creditors below 5 lakhs as unexplained expenditure for want of supporting evidences, exceeding the directions provided by Hon'ble DRP. 3.4. Ld. AO has erred in law and in facts by treating accrued expense as 'unexplained expenditure' alleging that genuineness and creditworthiness of the same was not proved, without appreciating that accrued expenses represents provision for expenses and does not involve actual payment or credit. 3.5. Ld. DRP has erred in law and facts of the case by delegating ....
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....its associated enterprise. The assessee purchased finished goods (men's wear) from its associated enterprise for the purpose of stock and sale in the domestic market. For benchmarking the said international transaction, the assessee applied Resale Price Method ("RSM") as most appropriate method. The TPO vide order dated 05/01/2021, passed under section 92CA(3) of the Act rejected the benchmarking analysis conducted by the assessee and applied Transactional Net Margin Method ("TNMM") as the most appropriate method and computed the transfer pricing adjustment of Rs. 1,02,73,426, in respect of international transaction pertaining to "import of men's wear for resale' by considering assessee as the tested party. The learned DRP vide its directions, inter-alia, rejected the objections filed by the assessee following its directions rendered in assessee's own case for the assessment year 2011-12, wherein TNMM was held to be the most appropriate method to benchmark the international transaction of purchase of finished goods from associated enterprise. In conformity with the directions issued by the learned DRP, the Assessing Officer ("AO") passed the impugned final assessment order. Being a....
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....m 492/153 ITD 508 (Delhi), the Delhi bench of the ITAT held that,- 9. Sub-clause (i) of clause (b) of Rule 10B(1) deals with identifying the price at which the goods purchased from an AE is resold. Sub-clause (ii) of clause (b) of Rule 10B(1) talks of reducing the amount of normal gross profit margin of comparable uncontrolled transactions from such resale price of the assessee. Sub-clause (iii) states that the result of subclause (ii) is further reduced by the expenses incurred in connection with the purchase of goods and sub-clause (iv) provides that the amount so deduced under sub-clause (iii) is adjusted on account of differences in the international transaction and comparable uncontrolled transactions which materially affect the amount of gross profit margin in the open market. Finally, sub-clause (v) provides that the adjusted price found under sub-clause (iv) is taken as arm's length price in respect of purchase of goods from the AE. When we consider the methodology given under RPM, more specifically sub-clauses (i) and (v), it becomes patent that sub-clause (i) refers to 'property purchased by the enterprise ... is resold ' and sub-clause (v) refers to ....
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....nsaction of' Import of Crystal goods and Crystal components." 10. A similar view has been adopted by the Mumbai bench of the ITAT in Mattel Toys v. Deputy Commissioner of Income Tax, (2013) 158 TTJ (Mum) 461: "Thus, the RPM method identifies the price at which the product purchased from the A.E. is resold to a unrelated party. Such price is reduced by normal gross profit margin i.e., the gross profit margin accruing in a comparable controlled transaction on resale of same or similar property or services. The RPM is mostly applied in a situation in which the reseller purchases tangible property or obtain services from an A.E. and reseller does not physically alter the tangible goods and services or use any intangible assets to add substantial value to the property or services i.e., resale is made without any value addition having been made." 11. This view has also been affirmed by the Bombay High Court in its judgment dated 07.11.2014 in Commissioner of Income Tax v. L'Oreal India Pvt. Ltd. (ITA No. 1046 of 2012), where the Court found that there was no error in law committed by the ITAT when it held that RPM was the Most Appropriate Method in case....
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....but natural that only those expenses can have bearing on the gross profit that are debited to the Trading account. As the amount of advertisement and marketing expenses falls 'below the line' and finds its place in the Profit and loss account, the higher or lower spend on it cannot affect the amount of gross profit and the resultant ALP under the RPM. If the assessee has incurred more expenses on advertisement and promotion, which, in the opinion of the ld. DR went on to brand building for an AE, then, the transfer pricing adjustment on account of such AMP expenses was separately called for. Since the TPO has not made any separate adjustment on account of AMP expenses and has given effect to the same under TNMM, we hold that the incurring of such higher advertisement and marketing spend would not affect the calculation of ALP under the RPM. Ex consequenti, we hold that RPM prima facie appears to be the most appropriate method in the facts and circumstances of the instant case. 19. The above decisions clinch the issue involved in this matter and squarely applicable to the facts of the case. We, therefore, while respectfully following the same hold that the RPM is th....
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....bstantiate the claim of loans/advances appearing in the balance sheet as on 31/03/2017. In response thereto, the assessee provided the names of a few parties against whom loans/advances are shown and claimed the same to be towards security deposits. In the absence of confirmation from the parties and documentary evidence in support of loans/advances, the AO vide draft assessment order held that the assessee has failed to prove the genuineness and creditworthiness of the parties against whom the loans/advances are shown in its balance sheet. Accordingly, the AO, vide draft assessment order, proposed to make an addition of Rs. 1,31,02,653, being the amount shown towards loans/advances during the year under consideration as "unexplained'. 9. The learned DRP, vide its directions, held that the proposed addition is not called for, however, directed the AO to make certain verifications, such as advances have been made through banking channels, advances are recorded in the books of accounts and the details are reconciled with the increasing advances during the year. The relevant directions of the learned DRP are reproduced as under:- "Directions of the DRP 10.1 The pa....
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....ong with their PAN No., amount of advance, date of advance, mode of payment, the rental agreement, and extract of bank statement evidencing payment. The AO, vide impugned final assessment order, did not agree with the submissions of the assessee and held that the amount of advances/loan does not reconcile with the supporting ledger extract of each party as appearing in assessee's books and the assessee has also not produced the confirmation letter from the parties who have received the said advances. Accordingly, the AO, vide impugned final assessment order, treated the advances amounting to Rs. 1,31,02,653, as "unexplained' and disallowed the same under section 69C of the Act. Being aggrieved, the assessee is in appeal before us. 11. We have considered the submissions of both sides and perused the material available on record. It is evident from the record that in order to substantiate its claim that the amount shown as loans/advances in its books are towards security deposits to various parties for stores, warehouse, and office taken on rent, the assessee filed additional evidence in the form of rent agreement with various parties on a sample basis before the learned DRP. Furt....
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....cts of the case pertaining to this issue, as emanating from the record, are: During the assessment proceedings, it was observed that the assessee has shown an amount of Rs. 15,46,19,525, towards sundry creditors. Accordingly, the assessee was asked to furnish the details of sundry creditors along with the confirmation supported by documentary evidence to prove the genuineness and creditworthiness of the creditors. In the absence of any response from the assessee, the AO vide draft assessment order treated the amount shown towards sundry creditors as "unexplained' and proposed to add the same to the total income of the assessee at a special rate under section 115BBE of the Act. 15. The learned DRP, vide its directions, held that the addition proposed by the AO is not justified. However, directed the AO to verify that the addition to creditors is on account of trade creditors and the character of royalty. The learned DRP further directed the AO to verify the reconciliation given by the assessee in respect of confirmation from 12 parties produced during the hearing before the DRP. The relevant directions of the learned DRP are reproduced as under:- "12. Directions of the D....
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....ion letters from the sundry creditors and also your ledger account as appearing in their books of account. Please furnish the details of credit purchases and clarify whether the addition to sundry creditor is on account of trade creditor or the transaction is in the nature of royalty." 17. After perusal of the details filed by the assessee, as noted in para 4.3-4.4 of the final assessment order, the AO came to the conclusion that out of total sundry creditors of Rs. 15,46,19,525, the assessee has explained sundry creditors of Rs. 7,42,08,884, with supporting documentary evidence and the same is reconciled. It was further held that in respect of the remaining sundry creditors of Rs. 8,04,10,641, the assessee has not submitted any documentary evidence like ledger accounts, confirmation letter, and reconciliation statements, and therefore, genuineness and creditworthiness of the same is not proved, thus remains "unexplained'. Accordingly, vide final assessment order, the AO treated the expenditure for sundry creditors of Rs. 8,04,10,641, as "unexplained' and disallowed the same under section 69C of the Act. Being aggrieved, the assessee is in appeal before us. 18. Having conside....