TEEJAY INDIA PVT LTD, Visakhapatnam V. DCIT, CIRLCE 3(1), VISAKHAPATNAM

ITA 155/VIZ/2022

AI Insights

Teejay India Private Limited appealed against the final orders of the Deputy Commissioner of Income Tax, which included adjustments to their income due to transfer pricing issues and disallowances related to technical support service fees and leasehold amortization charges. The Tribunal examined the comparables used by the TPO, the adjustments made for international transactions, and the application of the Transactional Net Margin Method (TNMM) for determining the ALP. The Tribunal found that some companies used as comparables were functionally dissimilar and directed their removal from the analysis. The Tribunal also addressed the issue of whether the technical support service fees and leasehold charges were justifiably claimed as expenses.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 135725 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 4 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-01-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: DB
• Next Hearing Date: 13-12-2022
• Assessment Year: misc
• Appeal Filed On: 25-08-2022
• Other Referred Cases: Toyota Tsusho India P. Ltd vs. Joint / Deputy Commissioner of Income Tax, Michael Page International Recruitment (P.) Ltd vs. DCIT, Aker Powergas Pvt Ltd vs. DCIT, Devi Sea Foods Limited vs. DCIT, Dr. Reddy's Laboratories Limited vs. Addl. CIT, Infotech Enterprises Limited vs. Addl. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Opportunity of being heard; Corroborative evidences; Notional interest; Revenue expenditure
• Section: 154; 143(3); 92D; 92B; 142(1); 143(2); 153; 92CA

Judgement Text

आयकरअपीलȣयअͬधकरण, ͪवशाखापटणमपीठ, ͪवशाखापटणम IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM Įीदुåवूǽआरएलरेɬडी, ÛयाǓयकसदèयएवंĮीएसबालाकृçणन, लेखासदèयकेसम¢ BEFORE SHRI DUVVURU RL REDDY, HON’BLE JUDICIAL MEMBER & SHRI S BALAKRISHNAN, HON’BLE ACCOUNTANT MEMBER आयकरअपीलसं./ I.T.A. No.154 & 155/Viz/2022 (Ǔनधा[रणवष[/ Assessment Year :2017-18 & 2018-19) Teejay India Private Limited, Plot No. 15, Brandix, APSEZ, Pudimadaka Road, Atchutapuram Mandal, Visakhapatnam-530011. PAN: AAACO9452H Vs. Deputy Commissioner of Income Tax, Circle-3(1), Visakhapatnam. (अपीलाथȸ/ Appellant) (Ĥ×यथȸ/ Respondent) अपीलाथȸकȧओरसे/ Appellant by : Sri Darpan Kirpalani, Advocate Ĥ×याथȸकȧओरसे/ Respondent by : Sri MN Murthy Naik, CIT-DR सुनवाईकȧतारȣख/ Date of Hearing : 14/12/2022 घोषणाकȧतारȣख/Date of Pronouncement : 23/01/2023 O R D E R PER S. BALAKRISHNAN, Accountant Member : Both the captioned appeals are filed by the assessee against the final orders of the Ld. Assessing Officer for the AYs 2017-18 and 2018-19. Since the issues raised in all these appeals are identical, for the sake of convenience these two appeals are 2 clubbed, heard together and disposed off in this consolidated order. ITA No. 154/Viz/2022 (AY 2017-18) 2. This appeal filed by the assessee against the final order of the Ld. Assessing Officer [AO] passed u/s. 143(3) r.w.s. 144C(13) r.w.s 144B of the Income Tax Act, 1961 [the Act] in DIN No. ITBA/AST/S/143(3)/2022-23/1043968604(1), dated 21/07/2022 for the AY 2017-18. 3. Brief facts of the case are that the assessee-company, M/s. Teejay India Private Limited (formerly known as M/s. Ocean India Pvt Ltd) is engaged in the business of manufacturing and exporting of knitted fabrics/apparels at Brandix APSEZ, Atchutapuram, Visakhapatnam. The assessee filed its return of income for the AY 2017-18 on 29/11/2017 declaring total income of Rs. NIL. Subsequently, the case was selected for scrutiny under CASS and notices U/s. 143(2) of the Act was issued on 23/08/2018. Subsequently notice U/s. 142(1) was issued along with an annexure calling for relevant details. In the course of assessment proceedings, the Ld. AO noticed that Form 3CEB report of the assessee company had international transactions 3 with its Associated Enterprises (AEs). Hence, a reference was made to the Transfer Pricing Officer u/s. 92CA(1) of the Act for the international transactions undertaken by the assessee company in the FY 2016-17. Accordingly, the TP matters were examined by the DCIT (TPO)-1, Hyderabad and an order u/s. 92CA(3) of the Act was passed on 21/01/2021 determining the proposed adjustment as follows: Sl No Description Adjustment U/s. 92CA (in Rs.) 1. Purchase and sale transaction 27,43,39,282 2. Payment of royalty for technical support services 13,87,93,645 3. Interest on ECB 9,98,109 4. Interest on trade receivables 55,32,500 5. Reimbursement of expenses 1,85,34,376 6. Reimbursement of expenses received 42,428 Total adjustment U/s. 92CA 43,82,40,338 4. The Ld. AO made further addition of Rs. 23,47,827/- claimed by the assessee as Amortization of lease hold rights for the relevant AY. The Ld. AO accordingly passed the draft assessment order on 28/09/2021. Aggrieved by the draft assessment order, the assessee preferred an appeal before the Ld. Dispute Resolution Panel-1, Bengaluru [DRP]. The Ld. AR made various submissions before the Ld. DRP with respect to comparables selected by the Ld. Transfer Pricing Officer [TPO] as 4 proposed in the order u/s 92CA(3) of the Act. The Ld. AR further submitted various documents with respect to the Arm’s Length Price of the interest rate on external commission borrowings. Further, the Ld. AR also submitted before the Ld. DRP regarding justification of payment of Technical Support Service Fee before the Ld. DRP. The Ld. AR contended the treatment of notional interest receivable as international transaction. Considering the above submissions made by the Ld. AR, the Ld. DRP directed the Ld. TPO to re-compute the ALP of the international transactions in accordance with the direction of the Ld. DRP. Before the Ld. TPO passed the consequential order giving effect to the directions of the Ld. DRP, the Ld. AO (NFAC) passed the assessment order u/s. 143(3) r.w.s 144C(13) r.w.s 144B of the Act on 21/7/2022. However, the Ld. TPO passed the giving effect order vide DIN and Order No. ITBA/COM/F/17/2022-23/1044175903(1), dated 27/7/2022. Aggrieved by the final order passed by Ld. AO without following the directions of the Ld. DRP, the assessee filed a rectification petition u/s 154 of the Act on 16/8/2022 before the Ld.AO (NFAC), New Delhi. The Ld.AO (NFAC) rectified the final assessment order passed on 21/7/2022 vide DIN & Order No.ITBA/REC/S/154_1/2022-23/1046293235(1),dated 13/10/2022 by following the directions of the Ld. DRP. 5 Aggrieved by the final assessment order passed by the Ld.AO (NFAC) on 21/7/2022 and later rectified on 13/10/2022, the assessee filed the present appeal before us. 5. The assessee has raised the following grounds of appeal: “The grounds mentioned herein by the appell ant are wi thout prejudice to one another. 1. Th at the order of the Addi tion al /Joint/Deputy/Assistant Commissioner of Income Tax/ Income Tax Officer, Nation al e- assessment centre, Ne w Del hi (Ld. AO) to the extent p rejudici al to the appell ant is b ad in l aw, con trary to the facts and circumstances of the case and is l iabl e to be quashed. 2. Based on the f acts and in the circums tances of the present case, the Final order p assed by the Ld. AO being passed not in conformity wi th the di rections issued by the Ld. DRP is b ad in l aw as per provisions of section 144C(13) of the Act and hence l iabl e to be quashed. 3. Th at the Ld. Dispute Resol ution Panel erred in not appreci ating th at the orde r of the Ld. JCIT (Transfer Pricing), Hyderab ad passed under section 92CA of the Act is contrary to l aw an d thus l iabl e to be quashed. 4. Th at on the f acts an d in the circumstances of the case, the Ld. AO/Ld. TPO and the Ld. DRP erred in making an up ward adjustment to the transfer price of the appel l ant’s intern ation al trans actions INR 27,43,39,282/- in respect of manufacture and sal e of fabric, INR 13,87,93,645/- in respect of payment of technical support services, INR 9,98,109 in respect of payment of interest on ECB and INR 55,32,500/- on account of imputation of notional interest on outstanding receivables, INR 1,85,34,376/- pertaining to reimbursement of expenses and INR 42,426/- ag ainst rei mbursement of expenses received. A. Grounds of Appeal on Transfer Pricing Issues Grounds for manufacturing and sale of fabric 5. On the facts and in the circumstances fo the case and in l aw, wi th respect to adjustment to the transfer price of manuf acturing an d s al e of fabric, the Ld. DRP/AO/TPO erred in 5.1. Rejecting the transfer pricing documentation maintained b y the Compan y, in good faith, as required under section 92D of the Act re ad wi th Rul e 10D of the income tax Rul es, 1962 on the basis th at the search process appl ied by the comp any which is not in conformity wi th the Indi an TP Re gul ations and in stating th at the comp any di d not appl y appropri ate fil ters. 6 5.2. Not considering the current ye ar data fil ter (ie financi al ye ar 2016-17) which woul d l ead to rejection of comparabl e companies sel ected by the comp an y b ase d on data av ail abl e for the FY preceding the current ye ar (FY 2015-16). 5.3. The Ld. AO/TPO erred in rejection of comp arabil ity an al ysis carried out by the assessee in the TP documentation and in conducting a fresh comparabil ity an al ysis for the manufacture an d s al e of fabric. 5.4. Sel ecting the foll o wing comparabl e company by the Ld. TPO in the previous AYs on account of functional dissimil ari ty.  Guetermann Indi a P riv ate Limited 5.5. Using data which was not contemporan eous and which was not av ail abl e in the publ ic domain at the time of prep aring the TP documentation. 5.6. Not considering the mul tipl e year/prior ye ar data of comp arabl e companies whil e determining the arm’s l ength price in rel ation to the appell ant’s intern atio nal trans actions wi th its AEs. 5.7. Incl uding companies th at are functional ly different from the operation al profil e of the appell ant.  Vardhman Tex til es Limited  Sarl a Performance Fibers Limited  Morarjee Textil es Limited  Orbit Exports Limi ted  Prathishth a We aving Knitting Co Limite d  Kal paturuvu Spinning Mill s Pvt Limited  GM Syntex Pvt Ltd  Nitin Spinners Limited  Guetermann Indi a P riv ate Limited 5.8. Excl uding companies sel ected by the appel l ant in its TP documentation wi thout giving due cognizance to the appell ant’s contentions.  Ragh av Industries l imited  Junction Fabrics & Apparel s Limited 5.9. Rejecting the follo wing comp anies th at were addition al l y proposed by the appell ant from the TPO’s search matrix being functionall y comparabl e:  BSL Limited  Sal ona Cotspin Limited  Titaanium Ten Enterp rise Ltd  Lakhoti a Pol yesters ( In di a) Ltd 5.10. Rejecting certain fil ters adopted by the appell ant in the TP documentation for the purpose of conducting the economic an al ysis. 7 5.11. Appl ication of certain inappropri ate fil ter adopte d by the Ld. TPO whil e conducting the fresh benchmarking an al ysis. 5.12. Computing the operating mark up on the cost for the comp arabl e companies sel ected whil e performing the comp arabil ity an al ysis by considering foreign exchange fluctuations as operating in nature. 5.13. Proposing transfer pricing adjustment in rel ation to the trans actions entered wi th third p arties on sal e of fabric whe rein principl e of transfer pricing is not appl ied. In doing so, the Ld. AO / TPO erre d in computing transfer pricing adjustments not on proportionate b asis which was consistentl y foll owe d in earl ier assessment ye ars. 5.14. Not providing appropri ate economic adjustments to wards materi al differences between the operation al profil e of comp arabl e companies and the appell ant with respect to working capital adjustments. Grounds for disallowance of royalty fee paid 6. On the facts and in the circumstances of the case, the Ld. DRP/AO/TPO erred in: 6.1. Making an adjustment of INR 13,87,93,645 to the income of the appel l ant by dis al l o wing the fee pai d to its AE in rel ation to the technical assistance provided b y the AE during the ye ar; 6.2. Rejecting the technical support services agreement furnished by the appell ant and determined the ALP of the sai d intern ation al trans action to be NIL wh ere as the agreement is not the onl y document which shoul d be considered to dete rmine the ALP and benefits derived shoul d al so be considered whil e arriving at ALP; 6.3. Chal l enging the commerci al expediency of any expenditure incurred by the appell ant, even when such expenses have been incurred whol l y and excl usivel y for the purpose of business operations. 6.4. Disregarding the evidence fil ed by the appell ant substanti ating the benefits received to it by p ayment of technical support service fee to its AE. 6.5. Ignoring the f act th at the technical support received by the appel l ant from i ts AE are essenti al for carrying out i ts business activi ties and improving its manuf acturi ng process. 6.6. Ignoring the fact th at the appell ant h as filed an appl ication for entering into a Unil ateral Adv ance d Pricing Agreement wi th the Central Board of Direct Taxes coveri ng the trans action of payment of royal ty and the rel evant assessment ye ar is covered under the purvie w of the appl ication. 8 Grounds for disallowance of use of Reserve Bank of India master circular as a valid CUP with regards to payment oif interest on ECB 7. On the facts and in the circumstances of the case the Ld. DRP/AO/TPO erred in 7.1. Considering London Interb ank Offered Rate (L IBOR) pl us 200 basis points as the arm’s l ength rate for benchmarking the payment of i8nterest on ECB inste ad o f LIBOR pl us 350 basis points used by the appell ant. 7.2. Disregarding the use of RBI maste r circul ar as a v al id CUP wi thout providing any cogent re asons for the same. 7.3. Ignoring the judicial precedents rel ied upon by the appell ant in determining the arm’s l ength interest rate pai d on the external commerci al borro wings av ail ed. Grounds for imputation of notional interest on outstanding receivables. 8. On the facts an d in the circums tance s of the case, the Ld. DRP/AO/TPO erred in : 8.1. Considering overdue receivabl es from AEs as on intern ation al trans action under the provisions of section 92B of the Act. 8.2. Without prejudice to Ground No.7.1 above,ignoring the fact th at the appell ant does not pay i nterest in rel ation to outstanding p ayabl e to AEs 8.3. Without prejudice to the ground No. 7.1 and 7.2 above, the Ld. TPO erred in not giving effect to the DRP directions to recomputed the notional interest on outstanding receivabl es by considering the credit periodprovided in the inter-comp any ag reement ie., 30 days. 8.4. Without prejudice to ground Nos. 7.1 and 7.2 above, imputing interest using SBI term deposit rate inste ad of London In terb ank Offered Rate (L IBOR). 8.5. Without prejudice to ground nos. 7.1, 7.2 and 7.3 above, the Ld. DRP/AO/TPO erred in disreg arding the fact th at the appel l ant is engaged in manuf acturing operations whe rein the overal l credit period of outstan ding receivabl es are higher. Ground for Reimbursement of expenses paid to AE 9. On the facts and in the circumstances of the case, the Ld. DRP/AO/TPO erred in: 9.1 Fail ing to take cognizance of the f act th at such expenses has been incurred by the AE on behal f of the appell ant which was reimbursed on cost to cost b asis. 9.2. Ignoring the sampl e compy of the invoices furnished buy the appel l ant to substanti ate the n ature of expenses reimbursed to the AR. 9 Grounds for reimbursement of expenses received from AE 10. On the facts and in the circums tances of the case, the Ld. DRP/AO/TPO erred in: 10.1. Making the TP adjustment by adopting the other method an d appl ying the 10% markup on account of recovery of expenses incurred by the appell ant on behal f of the AE. 10.2. Fail ing to appreci ate th at such cost h as been incurred by the appel l ant on behal f of the AE and h as been cross charged to its AE on cost to cost b asis. B. Grounds for disallowance of leasehold amortization charges. 11. On the facts and in the circums tances of the case, the Ld. DRP/AO erred in: 11.1. Disal l o wing l and l ease hol d amortization charges of Rs. 23,47,826/- by concl uding that s ame as an apportionment of prior period expenditure and furthe r th at the s ame is dis al l owabl e expenditure since there is no concept of deferred revenue expenditure in IT Act and al l that the expenses must be al l owed in the ye ar in which it is incurred. 11.2. Fail ing to appreci ate th at the comp any foll o ws mercan til e system of accounting whe rein the period costs rel ating to rel evant ye ar are accounted for in th at year even if the l iabil ity for the same was se ttl ed in earl ier ye ars . 11.3. The Ld. AO completel y erred in considering l ease amortization charge as a p rior period expenditure j ust because of l iabil ity wi thout considering fact th at such are to be considered as period cost and shoul d be debited to P & L Account under the mercan til e system of accounting.” 6. In addition to the original grounds of appeal raised, the assessee also filed additional grounds of appeal as follows: Without prejudice to the grounds (ground No. 5.1 to 5.14 in rel ation to grounds for manuf acturing and s al e of f abric) an d (ground 6.1 to 6.6 for disal l owance of royal ty fee paid) men tioned in the aforementioned appe al and even though assuming but not accepting to the appro ach adopte d by the Ld. AO/TPO, it i s humbl y pl eaded before the Hon’bl e Bench to grant the appell ant l eave for accep ting the admission of the addi tion al grounds state d as under: Grounds for manufacturing and sale of fabric. 5.15. Without prejudice to the appl ication fo the Trans actional Net Margin Method adopte d by the appell ant for determining the arm’s l ength price of its manuf acturing operati on, the appell ant propose 10 to submit supplementary an al ysis for demonstrating comp arabl e uncontrolled price as the most appropri ate method. 5.16. Based on the facts and circums tances of the present cas e an d in l aw, the DCIT, Ci rcl e 3(1) erred in not providing appropri ate economic adjustment to wards materi al difference between the operation al profil e of comparabl e companies and the appell ant wi th respect to cap aci ty util ization adjustment: Grounds for disallowance of royalty fee paid: 6.7. Based on the facts and circums tances of the present cas e an d in l aw, Ld. AO erred in considering the royal ty fee expense in the operating cost b ase whil e computing the operating mark up of the manufacturing operation and as well determining the arm’s l ength price of the royal ty fee trans acti on on a stan dal one basis, thereby carried out double scrutiny and made doubl e adjustment to the internation al trans action pertaining to payment of royal ty fee.” 7. Grounds No. 1 & 4 are general in nature and therefore they need no adjudication. 8. With respect to Grounds No. 2 & 3, at the outset, the Ld. AR argued that the Ld. AO has passed the final assessment order on 21/7/2022 without giving effect to the directions of the Ld. DRP. The Ld. AR quoted section 144C(10) of the Act wherein it is mandated that every direction issued by the Ld. DRP should be binding on the Ld. Assessing Officer. The Ld. AR also further quoted section 144(13) of the Act that the Assessing Officer shall , in conformity with the directions, complete, notwithstanding anything to the contrary contained in section 153 or section 153B, the assessment without providing any further opportunity of being heard to the assessee, within one month from the end of the month in which such direction is 11 received. The Ld. AR therefore pleaded that since rectified assessment order was passed on 13/10/2022 which is not in conformity with the provisions of section 144C(13) of the Act, the order passed by the Ld. AO is non-est. In this connection, the Ld. AR relied on the Coordinate Bench of Bangaluru Tribunal in IT(TP) A No. 175/Bang/2022 in the case of Toyota Tsusho India P. Ltd vs. Joint / Deputy Commissioner of Income Tax, order dated 09/09/2022. The Ld. AR argued that the facts of the case are similar to the facts in the instant case of the assessee. Per contra, the Ld. DR in the written submission contended that the error happened because of system’s miscommunication among two different offices due to structural changes which happened in the Department from 2020 onwards. The Ld. DR relied on the order of the ITAT, Mumbai Bench in the case of Michael Page International Recruitment (P.) Ltd (143 taxmann.com 253). The Ld. DR further argued that it is a rectifiable mistake which is very much curable U/s. 292 of the Act. 9. We have heard both the sides and perused the material available on record. In the instant case the assessee has accepted the final assessment order passed by the Ld. AO on 21/7/2022. The assessee has neither raised objections nor challenged the order dated 21/7/2022 but has preferred to file a rectification petition U/s. 154 of the Act. As 12 pointed out by the Ld. DR, any order passed by the Ld. AO can be rectified U/s. 154 of the Act and the Ld. AO has rightly rectified the order on 13/10/2022. Therefore, we are of the considered view that the original assessment order passed by the Ld. AO on 21/7/2022 is valid in law as it has been rectified by the order dated 13/10/2022 which is deemed to be considered within the limitation period specified U/s. 144C(13) of the Act. We therefore dismiss this plea raised by the assessee and proceed to adjudicate the other grounds. Thus, Grounds No. 2 & 3 raised by the assessee are dismissed. 10. With respect to Grounds of Appeal and Additional Grounds of Appeal for manufacturing and sale of fabric raised vide Ground No.5, the Ld. AR submitted that the assessee is engaged in the manufacturing and sale of knitted fabrics/apparels for AEs and third party customers. The Ld. AR reiterated that the assessee company is engaged in only one activity ie., manufacturing and sale of fabrics. The Ld. AR further submitted the Ld. TPO has taken the following companies as comparables rejecting the TP documentation submitted by the assessee in the show cause notice issued to the assessee. 13 Sl No Company Name OP/OC As per TPO As per assessee (corrected) 1. Suryaamba Spinning Mills Ltd 5.81% 5.81% 2. ShristiCotspinn Pvt ltd 6.29% 6.01% 3. Shri Santhosh Meenakshi Textiles Pvt Ltd 7.62% 1.31% 4. Kalpataruvu Spinning Mills Pvt Ltd 9.49% 9.43% 5. PrasunaVamsikrishnaSpg. Mills Pvt Ltd 10.71% 9.06% 6. S A P L Industries Pvt Ltd 11.03% 11.04% 7. G M Syntex Pvt Ltd 12.65% 10.27% 8. Nitin Spinners Ltd 12.76% 12.27% 9. Guetemann India Pvt Ltd 13.99% 11.38% 10. Vardhman Textiles Ltd 14.20% 13.34% 11. Morarjee Textiles Ltd 15.47% 15.46% 12. Sarla Performance Fibres Ltd 18.68% 17.25% 13. Indo Count Inds. Ltd 21.27% 19.91% 14. Prathishta Weaving & Knitting Co. Pvt Ltd 24.19% 24.23% 15. Orbit Exports Ltd 33.83% 32.82% The Ld. AR submitted that the following companies have been considered functionally dissimilar by the Ld. DRP in the AY 2017-18 and 2018-19. Sl No Company Name 1. Kalpataruvu Spinning Mills Pvt Ltd 2. G M Syntex Pvt Ltd 3. Guetemann India Pvt Ltd 4. Vardhman Textiles Ltd 5. Sarla Performance Fibres Ltd 6. Prathishta Weaving & Knitting Co. Pvt Ltd 14 The Ld. AR therefore pleaded that the functional dissimilar companies considered by the Ld. DRP in subsequent assessment years should not be considered in the impugned assessment year also. Per contra, the Ld. DR invited our attention to paragraph 4 of the Ld. DRP order of the impugned assessment year stating that the reasons why the comparables were considered functionally similar during the impugned assessment year. He therefore pleaded that the order of the Ld. DRP be upheld. 11. We have heard both the sides and perused the material available on record. The Ld. TPO while passing the order U/s. 92CA(3) of the Act rejected the comparables selected by the assessee and considered it inappropriate while stating the rejection for the selection of comparables. The Ld. TPO then further substituted the following companies as comparables: Sl No Company Name OP/OC As per TPO As per assessee (corrected) 1. Suryaamba Spinning Mills Ltd 5.81% 5.81% 2. ShristiCotspinn Pvt ltd 6.29% 6.01% 3. Shri Santhosh Meenakshi Textiles Pvt Ltd 7.62% 1.31% 4. Kalpataruvu Spinning Mills Pvt Ltd 9.49% 9.43% 5. PrasunaVamsikrishnaSpg. Mills 10.71% 9.06% 15 Pvt Ltd 6. S A P L Industries Pvt Ltd 11.03% 11.04% 7. G M Syntex Pvt Ltd 12.65% 10.27% 8. Nitin Spinners Ltd 12.76% 12.27% 9. Guetemann India Pvt Ltd 13.99% 11.38% 10. Vardhman Textiles Ltd 14.20% 13.34% 11. Morarjee Textiles Ltd 15.47% 15.46% 12. Sarla Performance Fibres Ltd 18.68% 17.25% 13. Indo Count Inds. Ltd 21.27% 19.91% 14. Prathishta Weaving & Knitting Co. Pvt Ltd 24.19% 24.23% 15. Orbit Exports Ltd 33.83% 32.82% 12. However, we find that during the AY 2017-18 the following comparables were rejected by the Ld. DRP as it is considered functionally dissimilar: (i) Vardhaman Textiles Limtied (ii) Sarla Performance Fibers Limited (iii) Indocount Industries Ltd (iv) Prathishta Weaving & Knitting Co Ltd 13. Further, the Ld. AR relied on the recitals of the Mumbai Tribunal in the case of M/s. Orbit Exports Limited in ITA No. 6360/Mum/2018 wherein it is stated that the comparable companies selected by the TPO, M/s. Orbit Exports Limited, is engaged in manufacturing, trading and export of fabrics whereas the assessee is engaged in only one activity ie., manufacturing 16 and sale of fabrics and does not carry out any trading activity. Considering the above facts, we find merit in the argument of the Ld. AR that the fundamentally dissimilar companies rejected by the DRP during the AY 2017-18 and 2018-19 and M/s. Orbit Exports Limited, shall be removed from the comparables and accordingly the (Arms Length Price) ALP of the assessee be recomputed after removing the above dissimilar companies. We therefore direct the Ld. TPO to compute the ALP as directed above. Fundamentally, in the absence of similarity between the comparables selected by Ld TPO and the assessee either during the current or any other previous or subsequent assessment year as held by LD DRP, should not be considered for the impugned assessment year also. Accordingly, this ground raised by the assessee is allowed for statistical purposes. 14. With respect to Ground No.6, the assessee agitated against the disallowance of Technical Support Service Fee paid to Teejay Lanka PLC. The Ld. AR for the assessee submitted the Technical Services Agreement before the Ld. TPO. The Ld. AR vehemently argued that the Technical Support Service Fee was incurred wholly and exclusively for the purpose of business operations of the assessee. The Ld. AR also further contended that the 17 Technical Support Service Fee paid to its AEs helped the assessee in achieving higher quality and higher standards in its manufacturing process and accordingly the Technical Support Service Fee of Rs. 13,87,93,645/- was paid to its AE. The Ld. AR further submitted that the Ld. TPO has erred in rejecting the aggregation approach of the assessee and has held that the assessee has failed to justify the receipt of technical support services which are closely linked to the manufacturing activity. The Ld. AR submitted that the Ld. TPO has rejected the aggregation approach followed by the assessee. The Ld. AR relied on the decision of the Coordinate Bench of ITAT in Societe General Global Solutions Private Limited vs. DCIT in IT(TP)A No. 2580/Bang/2017. The Ld. AR also relied on the decision of the Hon’ble Delhi High Court in the case of Pr.CIT vs. AVERY DENNISON (INDIA) PVT LTD. Per Contra the Ld. DR in his written submission contended that the assessee has paid 4% of the total sale revenue as royalty to its AE namely Teejay Lanka PLC. The Ld. DR further submitted that the Ld. AO has rightly rejected the TP study of the assessee adopting the CUP method and has used the other method after examining the nature of transactions and therefore determined the royalty 18 payable is NIL.T he Ld. DR submitted that no documentary evidence for the services rendered was provided by the assessee and no explanation was furnished as to how commercially it enhanced the productivity. The Ld. DR further contended that the assessee could not justify what are the actual services rendered by the AO or details of technical know how received by the assessee from its AE. The Ld. DR further contended that after purchasing the fabrics the AE further processed and manufactured the same into garments, and therefore the marketing and brand utilization advantages are totally enjoyed by the AEs. Further, the Ld. DR submitted that there was no commercial or economic value addition to the assessee as visible from the Profit & Loss Account in comparison with the previous year. The Ld. DR therefore vehemently argued that the assessee could not establish with relevant documentary evidence and failed to justify the chargeability of royalty. 15. Countering the above the Ld. AR argued that the assessee is in the process of negotiation of anUnilateral Advance Pricing Agreement (APA) with CBDT on this issue. The Ld. AR further submitted that it is in the final stage of the discussions with the CBDT with respect to the conclusion of the APA on the payment of royalties. He therefore pleaded that the issue may be deferred, subject to the final outcome of the APA and the matter may be remitted back to the Ld. TPO. 19 16. The Ld. AR relied on ITAT, Mumbai Tribunal’s order in the case of M/s. Aker Powergas Pvt Ltd vs. DCIT in ITA No,. 2213/M/2017, dated 31/10/2022. 17. Contending the above, the Ld. DR submitted that the UPA negotiated by the assessee does not cover the relevant assessment year and hence it cannot be applied to the impugned assessment year. 18. We have heard both the sides and perused the material available on record. We find merit in the argument of the Ld. AR and we are of the considered view that it would be deemed fit to remit the matter back to the Ld. TPO to decide the case on merits subject to final outcome of the Advance Pricing Agreement (APA) with CBDT by the assessee. We therefore allow these Grounds No.6 raised by the assessee for statistical purposes. 19. With respect to Ground No.7 ie., payment of interest on ECB, the Ld. AR submitted that the ALP should be considered as LIBOR + 300 basis points as per the RBI Master Circular. The Ld. AR relied on the Coordinate Bench of the Tribunal at Bangalore in IT(TP)A No. 2207/Bang/2016 in the case of M/s. Tuppadahalli Energy India Pvt Ltd vs Deputy Commissioner of Income Tax, dated 13/10/2017. Per 20 contra, the Ld. DR submitted that LIBOR + 200 basis points is considered as appropriate and it was also confirmed by the Ld. DRP. He therefore pleaded that the order of the Ld. DRP may be upheld on this issue. 20. We have heard both the sides and perused the material available on record. The Ld. AO relied on the decision of the ITAT in Dr. Reddy’s Laboratories Limited vs. Addl. CIT in ITA No. 2229/H/2011 and 85/H/2013 dated 2/1/2017 and the decision of the ITAT, Hyderabad in the case of Infotech Enterprises Limited vs. Addl. CIT in ITA No. 115/Hyd/2011, dated 16/1/2014. We find from the Master Circular relied on by Ld AR, that RBI prescribed the maximum cap interest on ECBs with different tenures. Therefore, the Ld. DRP has rightly determined the ALP as LIBOR + 200 basis points considering it rational based on several judicial decisions while directing the Ld TPO to adopt the interest rate @ LIBOR + 200 basis points. We are therefore not inclined to interfere with the order of the Ld. DRP and hence this ground raised by the assessee is dismissed. 21. Ground No.8 relates to notional interest on outstanding receivables. On this issue, t he Ld. AR submitted that the notional interest is subsumed in the working capital and no further 21 adjustment is required as proposed by the Ld. DRP. The Ld. AR relied on the case of the jurisdictional Bench of the ITAT in the case of M/s. Devi Sea Foods Limited vs. DCIT in ITAT No.75/Viz/2022, dated 9/9/2022. Per contra, the Ld. DR submitted that there were various decisions where interest be charged as per the SBI deposit rates. The Ld. DR vehemently argued that the notional interest on outstanding receivables cannot be subsumed in the working capital adjustments and hence pleaded that the order of the Ld. DRP be upheld. 22. We have heard both the sides and perused the material available on record and the orders of the Ld. Revenue Authorities. In Ground No.8.1 the assessee contested that the receivables is not an international transaction under the provisions of section 92B of the Act. While deciding on the identical issue the ITAT in the case of M/s. Devi Sea Foods Limited vs. DCIT in ITAT No.75/Viz/2022, dated 9/9/2022, held as follows: “7..........There is no dispute wi th regard to the fact th at receiv abl es is incl uded under the definition of internation al trans action consequent to the amendme nts made by the Fin ance Act, 2012 w.e.f 1/4/2002. Therefore we are of the considered vie w th at there is no me rit in the argument of Ld AR th at receiv abl es is not an intern ation al trans action ..........” 22 Consistently following the above decision this ground No 8.1 raised by the assessee is dismissed 23. The assessee also submitted that working capital adjustment was rejected by the Ld. TPO. Further, we find that the dispute is with respect to selection of comparables and not with respect to selection of method adopted by the assessee. In the decision of M/s. Devi Sea Foods Limited (supra) the Tribunal has held that when TNM method is considered as the most appropriate method which was also not disputed by the Revenue the net margin thereunder would take care of such notional interest cost. Further, we also direct the Ld. TPO to consider the working capital adjustment and its impact on the profits of the assessee vis-à-vis its comparables. We are therefore of a considered view that no upward adjustment on the outstanding receivables is required and therefore we direct the Ld. AO to delete the upward adjustment made towards overdue receivables from AE. The contention of the Ld. AR that the assessee does not pay interest in relation to outstanding payable to AEs is of no relevance. Further, the Ld. DRP has provided a notional credit period of 30 days which is reasonable in the instant case. Accordingly this ground raised by the assessee is partly allowed for statistical purposes. 23 24. With respect to Grounds No.9 and 10, the Ld. AR submitted that the AE has incurred certain expenses for reworking on behalf of the assessee on the fabric sold by the assessee to third party customers in Sri Lanka. The Ld. AR submitted that these are actual cost incurred by the AE on behalf of the assessee to third party customers and hence to be reimbursed to the AE. Per contra, the Ld. DR relied on the order of the Ld. DRP. 25. We have heard both the parties and perused the material available on record. We find that the assessee has not provided any details as reworking charges carried out by the AE in relation to export with supporting evidences either before the Ld. Revenue Authorities or before us. We therefore concur with the decision of the Ld. DRP and upheld the TP adjustment made by the TPO in this regard. Thus, the Grounds No. 9 & 10 grounds raised by the assessee are dismissed. 26. Ground No.11 relates to disallowance of leasehold amortization charges. The Ld. AR submitted that the assessee has taken the land on lease in 2009 for a period of 23 years and has paid a sum of Rs. 5.40 Crs. The Ld. AR submitted that the assessee is entitled to amortize these leasehold charges during 24 the entire period of lease which should not and cannot be considered as capital expenditure. The Ld. AR submitted that various judicial precedents have held that the lease hold charges of land for a long term lease shall be amortized over the period of lease. Per contra, the Ld. DR relied on the order of the Ld. DRP. 27. We have heard both the sides and perused the material available on record. Admittedly the assessee has paid a sum of Rs. 5.40 Crs for a period of 23 years for taking the land on lease. It is the case of the Ld. AO that it is one time lumpsum payment and a prior period expenditure which cannot be apportioned during the impugned assessment year as revenue expenditure. The assessee has claimed proportionate share of amortization of leasehold charges amounting to Rs. 23,47,826/- for the relevant assessment year. There are various judicial pronouncements as submitted by Ld AR, with respect to amortization of the leasehold charges over the lease period, and therefore we are of the considered view that the leasehold charges paid by the assessee shall be proportionately claimed as revenue expenditure, over the lease period and hence the amortization of leasehold charges claimed by the assessee for Rs. 23,47,826/- for the relevant assessment year shall be allowed as revenue expenditure during 25 the impugned assessment year. We therefore allow this ground raised by the assessee. 28. In the result, appeal of the assessee is partly allowed for statistical purposes. ITA No. 155/Viz/2022 AY: 2018-19 29. This appeal filed by the assessee against the final order of the Ld. Assessing Officer [AO] passed u/s. 143(3) r.w.s. 144C(13) r.w.s 144B of the Income Tax Act, 1961 [the Act] in DIN No. ITBA/AST/S/143(3)/2022-23/104428973(1), dated 29/07/2022 for the AY 2018-19. 30. The assessee has raised the following grounds of appeal: “The grounds mentioned herein by the appell ant are wi thout prejudice to one another. 1. Th at the order of the Addi tion al /Joint/Deputy/Assistant Commissioner of Income Tax/ Income Tax Officer, Nation al e- assessment centre, Ne w Del hi (Ld. AO) to the extent p rejudici al to the appell ant is b ad in l aw, con trary to the facts and circumstances of the case and is l iabl e to be quashed. 2. Th at the Ld. Dispute Resol ution Panel erred in not appreci ating th at the order of the Ld. DCIT/ACIT, TP-3 Hyderab ad (Transfer Pricing Officer), passed under section 92CA of the Act is contrary to l aw an d thus l iabl e to be quashed. 3. Th at on the f acts an d in the circumstances of the case, the Ld. AO/Ld. TPO and the Ld. DRP erred in making an up ward adjustment to the transfer price of the appel l ant’s intern ation al trans actions INR 311,013,646/- in respect of manuf acture and 26 sal e of fabric, INR 174,580,352/- in respect of payment of royal ty, INR 5,439,746 in respect of payment of interest on ECB an d INR 5,287,269/- on account of imputation of notional interest on outstanding receiv abl es. A. Grounds of Appeal on Transfer Pricing Issues Grounds for manufacturing and sale of fabric 4. On the facts and in the circumstances fo the case and in l aw, wi th respect to adjustment to the transfer price of manuf acturing an d s al e of fabric, the Ld. DRP/AO/TPO erred in 4.1. Rejecting the transfer pricing documentation maintained by the Comp any, in good faith, as required under section 92D of the Act re ad wi th Rul e 10D of the income tax Rul es, 1962 on the basis th at the search process appl ied by the company which is not in conformity wi th the Indi an TP Regul ations and in stating th at the comp any did not appl y appropri ate fil ters. 4.2. Not considering the current ye ar data fi l ter (ie financi al year 2017-18) which woul d l ead to reje ction of comparabl e comp anies sel ected by the comp any b ased on data av ail abl e for the FY preceding the current ye ar (FY 2016-17). 4.3. Computing the markup on operating cost of the company. While doing so, the Ld. DRP/TPO have considered foreign exchange fluctuation as operating in nature whil e considering provision for doubtful adv an ces as a n on-operating expense an d l iabil ities no l onger required written back as non- operating income as ag ainst the tre atment adopte d in the transfer pricing document. 4.4. The Ld. AO/TPO erred in rejection of comp arabil ity an al ysis carried out by the assessee in the TP documentation and in conducting a fresh comparabil ity an al ysis for the manufacture an d s al e of fabric. 4.5. Sel ecting the foll owing comp arabl e comp anies which were rejected by the Ld. TPO in the immedi atel y preceding AY on account of functional dissimil arity there by viol ating the principl e of consistency.  Mohit Industries Limited  WFB Bai rd & Co. Indi a Pv t Ltd  EnkayTexf ab Priv ate Limite d  Se asons Textil es Limited  SRG Apparel s Limited  KPR Mill s Limited 4.6. Using data which was not contemporan eous and which was not av ail abl e in the publ ic domain at the time of prep aring the TP documentation. 4.7. Not considering the mul tipl e year/prior ye ar data of comp arabl e companies whil e determining the arm’s l ength price 27 in rel ation to the appellant’s intern atio nal trans actions wi th its AEs. 4.8. Incl uding companies th at are functional ly different from the operation al profil e of the appell ant.  Mohit Industries Limited  WFB Bai rd & Co. Indi a Pv t Ltd  EnkayTexf ab Priv ate Limite d  Se asons Textil es Limited  Sandhya Spinning Mill s Limited  Thi ag araj ar Mill s Private Limite d  SRG Apparel s Limited  KPR Mill s Limited 4.9. Excl uding companies sel ected by the appel l ant in its TP documentation wi thout giving due cognizance to the appell ant’s contentions.  SueryaaKnit we al Limited  Soma Textil es & Industries Limited  Santosh Fine Fab Limited  Lakhoti a Pol yester Limi ted  Titaanium Ten Enterp rise Limited  ManomayTex Indi a Li mite d  Junction Fabrics & Apparel s Limited 4.10. Not considering the fol l owing addi tion al comp arabl e company proposed by the appell ant identified from the search matrix share d by the Ld. TPO during the assessment proceedings.  BSL Limited ( Seg) 4.11. Rejecting certain fil ters adop ted by th e appell ant in the TP documentation for the purpose of conducting the economic an al ysis. 4.12. Appl ication of certain inappropri ate fil ters whil e arriving at the final set of comparabl e companies. 4.13. Computing the operating mark up on the cost for the comp arabl e companies sel ected whil e performing the comp arabil ity an al ysis by considering provision for doubtful adv ances as a non-operating expense an d l iabil ities no l onger required wri tten b ack as non-operating in nature respectivel y. 4.14. Not providing appropri ate economic adjustments to wards materi al differences between the operation al profil e of comp arabl e companies and the appell ant with respect to working capital adjustments. Grounds for disallowance of royalty fee paid 5. On the facts an d in the circums tan ces of the case, the Ld. DRP/AO/TPO erred in: 28 5.1. Making an adjustment of INR 174,580,352/- to the income of the appell ant by dis al l o wing the ro yal ty p aid to its AE in rel ation to kno w ho w provide d by the AE during the year; 5.2. In doing so, the Ld. AO/TPO erred in rejecting the benchmarking an al ysis furnished by the assesse and determined the ALP of the said inte rnation al trans action to NIL. 5.3. Chal l enging the commerci al expediency of any expenditure incurred by the appell ant, even when such expenses have been incurred whol l y and excl usivel y for the purpose of business operations. 5.4. Disregarding the evidence fil ed by the appell ant substanti ating the benefits received to it by payment of technical support service fee to its AE. 5.5. Ignoring the fact th at the know ho w rece ived by the appell ant from its AE is essenti al for carrying out its business activi ties and improving its manufacturing process. 5.6. Ignoring the fact th at the appell ant h as fil ed an appl ication for entering into a Unil ateral Adv anced Pricing Agreement wi th the Central Board of Direct Taxes covering the trans action of p ayment of ro yal ty and the relevan t assessment ye ar is covered under the purview of the appl ication. Grounds for disallowance of use of Reserve Bank of India master circular as a valid CUP with regards to payment oif interest on ECB 6. On the facts and in the circumstances of the case the Ld. DRP/AO/TPO erred in 6.1. Considering London Interb ank Offered Rate (L IBOR) pl us 200 basis points as the arm’s l ength rate for benchmarking the payment of inte rest on ECB inste ad o f LIBOR pl us 450 basis points used by the appell ant. 6.2. Disregarding the use of RBI maste r circul ar as a v al id CUP wi thout providing any cogent re asons for the same. 6.3. Ignoring the judicial precedents rel ied upon by the appell ant in determining the arm’s l ength interest rate pai d on the external commerci al borro wings av ail ed. Grounds for imputation of notional interest on outstanding receivables. 7. On the facts an d in the circums tance s of the case, the Ld. DRP/AO/TPO erred in : 7.1. Considering overdue receivabl es from AEs as on intern ation al trans action under the provisions of section 92B of the Act. 29 7.1.1 Without prejudice to Ground No.7.1 above, ignoring the fact th at the appell ant does no t p ay interest in rel ation to outstanding p ayabl e to AEs 7.2. Without prejudice to the ground No. 7.1 and 7.2 above, the Ld. DRP/AO/TPO erred in disreg arding the fact th at the appel l ant is engaged in manuf acturing operations wherin the overal l credit period of outstan ding receivabl es are higher. 7.3. Without prejudice to ground Nos. 7.1 , 7.2 and 7.3 the Ld. DRP/AO/TPO erred in considering outstan ding receivabl es from third p arties as wel l as domestic rel ated parties whil e computing the notional adjustment. 7.4. Without prejudice to Ground Nos. 7.1, 7.2, 7.3 and 7.4 above, imputing interest using SBI te rm deposit rate inste ad of London Interb ank Offered Rate (L IBOR). C. Grounds for disallowance of leasehold amortization charges. 8. On the facts and in the circumstances of the case, the Ld. DRP/AO erred in: 8.1. Disal l o wing l and l ease hol d amortization charges of Rs. 23,47,826/- by concluding that s ame as an apportionment of prior period expenditure and further th at the s ame is dis al l owabl e expenditure since there is no concept of deferred revenue expenditure in IT Act an d al l that the expenses must be al l owed in the ye ar in which it is incurred. 8.2. Fail ing to appreci ate th at the comp an y foll o ws me rcan til e system of accounting whe rein the period costs rel ating to rel evant ye ar are accounted for in that ye ar even if the l iabil ity for the same was se ttl ed in earl ier ye ars. 8.3. The Ld. AO completel y erred in considering l ease amortization charge as a prior period expenditure just because of l iabil ity wi thout considering the fact th at such are to be considered as period cost and shoul d be debited to P & L Account under the mercan til e system of accounting.” In addition to the original grounds of appeal raised, the assessee also filed additional grounds of appeal as follows: Without prejudice to the grounds (ground No. 4.1 to 4.14 in rel ation to grounds for manuf acturing and s al e of f abric) an d (ground 5.1 to 5.6 for disal l owance of royal ty fee paid) men tioned in the aforementioned appe al and even though assuming but not accepting to the appro ach adopte d by the Ld. AO/TPO, it i s humbl y pl eaded before the Hon’bl e Bench to grant the appell ant l eave for accep ting the admission of the addi tion al grounds state d as under: Grounds for manufacturing and sale of fabric. 30 4.15. Based on the facts and circums tances of the present cas e an d in l aw, the DCIT, Circl e-3(1) (AO) erred in proposing transfer pricing adjustment in rel ation to the trans actions entered wi th third p arties on s al e fo fabric wherein principle of transfer pricing is not appl ied. In doing so, the Ld. AO e rred in computing transfe r pricing adjustment no t on proportio nate b asis which was consistently foll owe d in earl ier assessment ye ars. 4.16. Without prejudice to the appl ication of the Trans actional Net Margin Method adopte d by the appell ant for determining the arm’s l ength price of its manuf acturing operati on, the appell ant propose to submit supplementary an al ysis for demonstrating comp arabl e uncontrolled price as the most appropri ate method. 4.17. Based on the facts and circums tances of the present cas e an d in l aw, the Ld. AO erred in not providing appropri ate economic adjustment to wards materi al difference between the operation al profil e of comparabl e companies and the appell ant wi th respect to cap aci ty util ization adjustment: Grounds for disallowance of royalty fee paid: 5.7. Based on the facts and circums tances of the present cas e an d in l aw, Ld. AO erred in considering the royal ty fee expense in the operating cost b ase whil e computing the operating mark up of the manufacturing operation and as well determining the arm’s l ength price of the royal ty fee trans acti on on a stan dal one basis, thereby carried out double scrutiny and made doubl e adjustment to the internation al trans action pertaining to payment of royal ty fee.” 31. All the issues raised by the assessee in this appeal are identical to the grounds raised by the assessee in its appeal in ITA No. 154/Viz/2022 which is adjudicated by us in the above paragraphs of this order. Since the issues raised in the instant appeal are identical to the that of the assessee appeal in ITA No. 154/Viz/2022, our decision given therein while dealing with the relevant grounds mutatis mutandis applies to the similar grounds raised in the instant appeal also. It is ordered accordingly. 31 32. In the result, appeal of the assessee is partly allowed for statistical purposes. Pronounced in the open Court on the 23 rd January, 2023. Sd/- Sd/- (दुåवूǽआर.एलरेɬडी) (एसबालाकृçणन) (DUVVURU RL REDDY) (S.BALAKRISHNAN) ÛयाǓयकसदèय/JUDICIAL MEMBER लेखासदèय/ACCOUNTANT MEMBER Dated : 23.01.2023 OKK - SPS आदेशकȧĤǓतͧलͪपअĒेͪषत/Copy of the order forwarded to:- 1. Ǔनधा[ǐरती/ The Assessee–Teejay India Private Limited, Plot No. 15, Brandix, APSEZ, Pudimadaka Road, Atchutapuram Mandal, Visakhapatnam-530011. 2. राजèव/The Revenue – Deputy Commissioner of Income Tax, Circle-3(1), Visakhapatnam, Andhra Pradesh. 3. The Principal Commissioner of Income Tax, (ii) The Dispute Resolution Panel-1, KendriyaSadan, 4 th Floor, C-Wing, Bengaluru-560034. 4. आयकरआयुÈत (अपील)/ The Commissioner of Income Tax (ii) Deputy Commissioner of Income Tax, Transfer Pricing Officer-1, Hyderabad. 5. ͪवभागीयĤǓतǓनͬध, आयकरअपीलȣयअͬधकरण, ͪवशाखापटणम/ DR,ITAT, Visakhapatnam 6. गाड[फ़ाईल / Guard file आदेशानुसार / BY ORDER Sr. Private Secretary ITAT, Visakhapatnam