TaxTMI 
TaxTMI 
2024 (2) TMI 747
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....r CASS and notice u/s. 143(2) of the Act was issued on 8/9/2015 and served on the 21/9/2015. The assessee later filed a revised return of income on 31/3/2016 by claiming an exemption of Rs. 4,73,25,503/- u/s. 10AA of the Act and however, paid tax on book profits. Later on, notices u/s. 143(2) and 142(1) of the Act were issued on 12/7/2016. Further, notice u/s. 142(1) r.w.s 129 of the Act was issued on 25/10/2017 due to change in the incumbent. In response to the notices, the assessee's Authorized Representative appeared and submitted the documents called for as per the notice dt 25/10/2017. On perusal of the submissions made by the assessee's Representative, the Ld. AO noticed that the assessee has entered into an international transaction with its Associated Enterprises [AEs] aggregating to Rs. 268.19 Crs during the previous year relating to the AY 2014-15 as detailed below: Associated Enterprise Nature of transaction Amount (Rs) Brandix Essentials Limited Fixed Assets 2,55,613 Brandix Essentials Limited Purchase of Fixed Assets 59,59,880 Brandix Apparel Limited Income from Processing Services 140,99,04,987 Brandix 13 PVT Ltd Payment for s....
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....use notice should not be made? In reply to the show cause notice, the assessee contended the comparability of the chosen comparables by the Ld. TPO for the following entities: 1. Maral Overseas Ltd 2. Kitex Garments Ltd 3. Kewal Kiran Clothing Ltd 4. Virat Industries Ltd The main contention of the assessee is that the above comparables are in the business of manufacturing of garments and not in the processing services. The Ld. AR also objected to the Ld. TPO considering the outstanding receivables as international transaction and has applying the interest rate of 6.5% on the outstanding receivables by making an adjustment of Rs. 3,26,65,774/- in addition to the adjustment made on account of income from processing services for Rs. 27,35,22,396/-. The Ld. AO considering the upward adjustments made by the Ld. TPO passed a draft assessment order on 28/12/2017. Aggrieved by the draft assessment order, the assessee filed its objections before the Ld. Dispute Resolution Panel [DRP]. Before the Ld. DRP, the assessee made various submissions including objections were raised with respect to selection of comparables in relation to processing services and....
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....th due diligence. 4.2. Rejecting the comparability analysis carried out by the assessee in TP documentation and in conducting a fresh comparability analysis for processing services. 4.3. Not providing any methodical search process during the course of assessment proceedings based on which the comparability analysis was undertaken by the Ld. TPO and accordingly, cherry picking the most favourable companies while arriving at the arm's length mark-up. 4.4. Using data, which was not contemporaneous and which was not available in the public domain at the time of preparing the TP documentation. 4.5. Not considering the multiple year / prior year data of comparable companies while determining the arm's length price in relation to the appellant's international transactions with its AEs. 4.6. Characterizing the appellant as in entrepreneur undertaking manufacturing activities, where in fact, the appellant is a low risk captive service provider undertaking processing services for its AEs. 4.7. Including companies that are functionally different from the operational profile of the appellant. 4.8. Excluding the companies selected b....
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....uded. The Ld. AR also in his written submissions stated that from the annual reports of M/s. Kewal Kiran Clothing Ltd in Note 2.15 discloses that it holds huge inventories for the purpose of manufacturing activities. Similarly, the Ld. AR also referred to Note 2.25 wherein M/s. Kewal Kiran Clothing Limited has paid huge processing charges of Rs. 1,866.46 lakhs. The Ld. AR also referred to the fact that M/s. Kewal Kiran Clothing Limited manufactures "Killer" brand materials for sale. Similarly, the Ld. AR also referred to the financial statement of M/s. Kitex Garments Limited wherein under "corporate information" it is mentioned that the company is engaged in the manufacturing of fabric and readymade garments. Further, the Ld. AR also referred to Note-22 wherein M/s. Kitex Garments Limited has paid an amount of Rs. 12,09,77,618/- as processing charges. The Ld. AR also argued that similar information is stated in the case of M/s. Virat Industries Limited wherein this company has also paid the processing charges of Rs. 1,34,26,071/- as mentioned in Note 26 of the financial statements. The Ld. AR therefore pleaded that all the three companies outsourced the processing of the finished g....
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....e-company. The Ld. AR also once again pleaded that since the said three companies are functionally different from the operational profile of the assessee-company, these companies are to be excluded from the comparables. Further, the Ld. DR submitted that as per the annual report of Kewal Kiran Clothing Limited it has not provided the segmental information as it has not crossed the threshold limit as prescribed under Accounting Standard-17 [AS] of the Institute of Chartered Accountants of India [ICAI] and hence not provided the same. 7. We have considered the rival contentions and perused the material available on record and the written submissions made by the assessee. 8. Grounds No. 1 and 2 are general in nature and therefore they need no adjudication. 9. Ground No.3 relates to the upward adjustment made by the Ld. TPO / AO for which specific grounds have been raised vide Grounds No. 4 and 5 and accordingly it has been adjudicated. 10. Grounds No. 4.1 to 4.8 relate to the selection of comparables by the Ld. TPO wherein the plea of the assessee is that the objections of the assessee in the selection of comparables by Ld TPO, were not considered by the Ld. DRP. On this i....
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.... of the Comparable OR OC OP OP/OC 1. Maral Overseas Ltd 220453 194278 26175 13.47 2. Kitex Garments Ltd 1595222544 1356526616 238695928 17.60 3. SP Apparel Ltd 359959300 322750571 37208729 11.53 4. Kewal Kiran Clothing Ltd 48835 42080 6754 16.05 5. Sudar Industries Ltd 380818773 359408490 21410283 5.96 6. Virat Industries Ltd 221778024 173896678 47881346 27.53 Average 19.58 The objection of the assessee is with respect to inclusion of the following comparables which were functionally considered as comparables by the Ld TPO with that of the assessee whereas according to assessee, which are in fact not comparable viz., (i) Kitex Garments Ltd, (ii) Kewal Kiran Clothing Ltd and (iii) Virat Industries Ltd. The assessee also vide in its grounds of appeal pleaded to reject the above three comparables as they are functionally different from that of the operational profile of the assessee-company. (i) Comparable ofKitex Garments Ltd: From the submissions of the assessee-company and on going through the annual report fi....
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.... annual report submitted by the assessee, it is found that Virat Industries Limited focuses on manufacturing of socks from yarn whereas the assessee is engaged in processing of garments from fabrics. Similar to the above two entities viz., Kitex Garments Limited and Kewal Kiran Clothing Limited, Virat Industries Limited also holds huge inventories and fully engaged in the manufacturing of garments. We also find that Virat Industries Limited has also engaged in sub-contracting the processing works to job-workers such as the assessee-company. Therefore, in our opinion, Virat Industries Limited is functionally different from that of the assessee-company and cannot be considered as a comparable for the computation of ALP with that of the assessee-company for the aforesaid reasons. Accordingly, we hereby direct the Ld. AO to exclude Virat Industries Limited from the list of comparables. Thus, Grounds No. 4.1 to 4.8 raised by the assessee are allowed. 11. With respect to Ground No 4.9 regarding liabilities no longer required written back whether it has to be treated as operating income or non-operating income while computing the mark-up of the assessee, the Ld. AR relied on the judgme....
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.... 12. We have heard the rival contentions. The assessee has incurred air freight expenses for which liability which was created in the books of accounts in the prior years has been written off during the impugned assessment year, since it is no longer considered as a liability in the books of accounts of the assessee. In this connection, the assessee has also submitted the waiver letter issued by Brandix Apparels Limited, Sri Lanka which is enclosed in page 44 of the paper book. These air freight expenses when incurred in the prior years wherein it was included in the operating cost of the assessee. However, the Ld. TPO has considered it as non-operating when this liability has been written back in the impugned assessment year. Reliance placed by the assessee in the case of Pr. CIT vs. Tetra Pak India Ltd (supra) wherein in para 8 of its order, the Hon'ble Bombay High Court has held as follows: "8. As regard the credit to profit and loss account on account of liabilities written back amounting to Rs. 6,15,59,011/- the details of the liabilities written back were made available to CIT(A) as well as ITAT. Both, on facts, and having considered those details, have come to conclusion....
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....curred by the assessee which was considered as extraordinary to the Ld. TPO / AO. We direct the Ld. AO / TPO to provide one more opportunity to the assessee for submission of the details of expenditure and decide the allowability in accordance with law. Accordingly, this ground raised by the assessee is allowed for statistical purposes. 15. The Ld. AR also argued with respect to Ground No.4.11 that the foreign exchange loss is non-operating in nature in the determination of the mark-up on cost of the assessee. Countering the arguments of the Ld. AR, the Ld. DR referred to the Ld. TPO order wherein it is observed as a transaction loss and not a hedging loss and hence it has to be considered as a operating in nature. The Ld DR placed reliance in the case of NVH India Auto Parts P Ltd vs DCIT [156 taxman.com 330 (Chennai Trib)] and Phoenix Comtrade P Ltd vs DCIT [149 taxman.com 389 (Mumbai Trib)] wherein it was held that Foreign exchange loss is operating in nature. 16. We have heard the rival contentions. The Ld. AR's submission was that the foreign exchange loss was considered as operating in nature, whereas the Ld. TPO has stated in his order that the foreign exchange loss sh....
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....tion of the Ld. AR that outstanding receivables cannot be considered as an international transaction and therefore no adjustment can be made with respect to the notional interest on the outstanding receivables. The Ld. DR submitted that this Bench of the Tribunal in the case of Devi Sea Foods limited (supra) vide para-7 of its order, the Tribunal has held that receivables is included under the definition of international transaction consequent to the amendments made by the Finance Act, 2012 w.e.f 01.04.2002 and hence it is an international transaction. 20. We have heard the arguments. This Bench of the Tribunal in the case of Devi Sea Foods limited (supra) vide para-7 of its order, the Tribunal has held as follows: "7. We have heard the rival submissions and perused the material available on record and the orders of the Authorities below. Admitted facts are that the assessee sells to both the AEs non-AE where the AE being the major debtor. There is no dispute with regard to the fact that receivables is included under the definition of international transaction consequent to the amendments made by the Finance Act, 2012 w.e.f 01.04.2002. Therefore we are of the considered....