TaxTMI 
TaxTMI 
2024 (2) TMI 747
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....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 services 1,01,672 Brandix Mauritius Holdings Ltd Buy back of shares 42....
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....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 requested the Ld. DRP to exclude the companies which are functionally not comparable with that of the functions performed by the assessee. Further, the assessee also raised objections with respect to the notional interest on overdue receivables before the Ld. DRP. Considering th....
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....as 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 by the appellant in its TP documentation without providing any cogent reasons for exclusion. 4.9. Not considering liabilities no longer required written back as operating in nature while computing the mark-up of the appellant. 4.10. Not considering certain expense such as provision for doubtful debts, provision for warranties, provision of doubtful deposits, and mis....
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....ufactures "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 goods and has paid for the manufacturing of branded garments. It was further submitted that in the instant case, the assessee is not engaged in manufacturing of branded garments but only processes garments as per the specifications of the customers under the directions of the parent company viz., Brandix Apparel Company, Sri Lanka, (in short referred as BAL). The Ld. AR therefore pleaded that the three comparables may be removed from the ca....
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.... 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 issue, the main contention of the Ld. AR is that the assessee in its TP document submitted before us has determined the ALP of the Tested Party based on the combined results of Search-1 and Search-2 and has arrived at the following comparables and computed the arithmetic mean accordingly: Sl No Name of the Company Data Source Average NPI 1. Sudar Industries Ltd P 13.53% 2. Suryakiran International Ltd P 4.86% 3. Caprolactam Chemicals Ltd ....
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....ssessee 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 filed by the Ld. AR, we find that Kitex Garments Limited is engaged in manufacturing of fabrics and export its fabrics and sells to domestic customers directly. Further, from Note-22 of the annual report, we find that Kitex Garments Limited has incurred processing charges wherein the contention of the Ld. AR is that Kitex Garments Limited has sub-contracted the work to other entities like that of the assessee. We find from the annual report (page 40) that Kitex Garments Limited is engaged in manufacture of fabric and readymade garments and exports the same. Thus in our opinion, Kitex Garments Limited is engaged in the manufacturing process whereas the assessee is engaged in the business of processing of garments ....
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....ith 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 judgment of the Hon'ble Bombay High Court in the case of Pr. CIT-4 vs. Tetra Pak India Pvt Ltd in Income Tax Appeal No. 876 of 2018. The Ld. AR referred to para 8 of the said decision of the Bombay High Court which is extracted herein below: "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 accepting the Assessee's contention that those liabilities belong to earlier years and are directly relatable to the regular business operations of the assessee and since these liabilities were no longe....
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....iance 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 accepting the Assessee's contention that those liabilities belong to earlier years and are directly relatable to the regular business operations of the assessee and since these liabilities were no longer payable to business creditors should be allowed to be written back in the AY under consideration and the same was rightly offered to tax as business income u/s. 41(1) of the Act. Therefore, on facts it was accepted that these liabilities written back were arising out of normal business operations and hence form part of operating income of the assessee." The argument of the Ld DR could not be accepted for the reason that in accounting principles that a liability in the form of provision shall be created in the books of accounts in t....
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....ce 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 should be considered as non-operating. The Ld. TPO in para 11(d) of the order passed u/s. 92CA(3) has observed as under: "11(d). Hence, foreign exchange fluctuations on account of hedging cannot be considered as an operating item and thus the taxpayer contention cannot be accepted." Thus, the Ld. TPO has observed that the foreign exchange fluctuations on account of hedging operations cannot be considered as operating item. However, in the instant case we find that the assessee has not engaged in hedging activities and foreign exchange loss is a transactional loss and in our opinion it should be considered as an operating cost for mark-up purposes. Further there is also merit in the argument of the Ld DR wherein the ratio laid in the cases NVH....
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....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 view that there is no merit in the argument of Ld AR that receivables is not an international transaction. " We therefore following the same ratio, reject the arguments of the Ld. AR that outstanding receivable is not an international transaction. Having said so, the issue is whether separate adjustment is required to be made in respect of receivables, the contention of the Ld. AR is that the average realization period is only 79.63 days which is within the industry standards and hence notional interest should not be imputed. The notional interest is charged by the Ld. AO based on the SBI Term Deposit Rate has adopted 6.50% on the outstanding receivables beyond a period of 30 days as directed by Ld DRP.The Ld. AR also pleaded the working capital adjustment shall al....