Teejay India Private Limited, Visakhapatnam V. The Assistant Commissioner of Income Tax, Circle - 5(1), Visakhapatnam

ITA 626/VIZ/2018

• Counselvise Citation: [2024] 101 COUNSELVISE.COM (IT) 8751 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 5 year(s) 1 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-02-2024
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: DB
• Next Hearing Date: 21-01-2024
• Assessment Year: 2014-2015
• Appeal Filed On: 25-12-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing
• Section: 143(3); 92D; 92B; 142(1); 143(1); 201; 144C; 143(2); 92CA

Judgement Text

आयकरअपीलीयअिधकरण, िवशाखापटणम पीठ, िवशाखापटणम IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM ŵी दुʫूŜ आर एल रेǭी, Ɋाियक सद˟ एवं ŵी एस बालाकृ ˁन, लेखा सद˟ के समƗ BEFORE SHRI DUVVURU RL REDDY, HON’BLE JUDICIAL MEMBER & SHRI S BALAKRISHNAN, HON’BLE ACCOUNTANT MEMBER (Through Hybrid Hearing) आयकर अपील सं./(I.T.)I.T.A.No.626/Viz/2018 (िनधाŊरण वषŊ / Assessment Year : 2014-15) Teejay India Private Limited APSEZ, Pudimadaka Road Atchutapuram Mandal Visakhapatnam [PAN : AAACO9452H] Vs. Asst.Commissioner of Income Tax Circle-5(1) Visakhapatnam (अपीलाथŎ/ Appellant) (ŮȑथŎ/ Respondent) अपीलाथŎ की ओर से/ Appellant by : Shri Darpan Kirpalani ŮȑाथŎ की ओर से / Respondent by : Dr.Satyasai Rath, CIT(DR) सुनवाई की तारीख / Date of Hearing : 22.01.2024 घोषणा की तारीख/Date of Pronouncement : 13.02.2024 आदेश /O R D E R Per Shri Balakrishnan S, Accountant Member This appeal is filed by the assessee against the final assessment order passed u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 (in short Act) dated 25.10.2018. 2. Brief facts of the case are that the assessee, M/s Teejay India Private Limited (formerly known as M/s Ocean India Pvt. Ltd.) engaged in the business of manufacturing and exporting knitted fabrics / apparels at Brandix APSEZ, Atchutapuram, Visakhapatnam, filed it’s return of income 2 (I.T) I.T.A No.626/Viz/2018, A.Y.2014-15 Teejay India Private Limited, Visakhapatnam for the A.Y.2014-15, declaring Nil income after adjusting the brought forward losses. The return was processed u/s 143(1) of the Act, assessing total income at Rs.2,68,01,746/-. Subsequently, the case was selected for scrutiny under CASS and notice u/s 143(2) was issued and served on the assessee on 11.09.2015. Subsequently, notices u/s 143(2) and 142(1) of the Act along with questionnaires were issued and served on the assessee. Due to change in incumbent, another notice u/s 142(1) r.w.s. 129 of the Act was issued on 25.10.2017. In response to the notices, the assessee’s representative appeared and furnished the details called for. The Ld.AO on verification of Form 3CEB, found that the assessee company has entered into international transactions with it’s Associate Enterprises (AE) aggregating to Rs.126.92 crores, relevant to the A.Y.2014-15. The case was referred to DCIT, Hyderabad for determination of arm’s length price in respect of international transaction, relevant to the A.Y.2014-15 vide letter in F.No.AACCB6569L/2014-15 dated 30.09.2016 after obtaining prior approval from the Ld.Principal Commissioner of Income Tax (PCIT)- 2, Visakhapatnam. The assessee’s representative appeared before the TPO and submitted the information called for. Considering the submissions made by the assessee’s representative and the TP documents submitted by the assessee, the Ld.TPO observed that the search process adopted by 3 (I.T) I.T.A No.626/Viz/2018, A.Y.2014-15 Teejay India Private Limited, Visakhapatnam the assessee is not in conformity with the TP regulations as the choice of filters were inappropriate, thereby, rejected the TP document of the assessee. The Ld.TPO, thereafter adopting the six filters as detailed in his report, arrived at a different set of comparables and computed the operating profit to operating cost as PLI as per the details given below: Sl.No. Name of Comparable OR OC OP OP/OC 1. Morarjee Textiles Ltd 3919415000 3347190000 572225000 17.10 2. Winsome Textiles Ltd. 5036806000 4450532000 586274000 13.17 3. Bannari Amman Spinning Mills Ltd. 6997274407 6195427031 801847376 12.94 4. DCM Ltd. 4715378000 4282851000 432527000 10.10 5. Banwara Syntex Ltd. 1212199000 10910278000 1211718000 11.11 6. Sarla Performance Fibers Ltd. 2476145000 2196461000 276984000 12.73 7. Trident Ltd. 38728900000 34058300000 460600000 13.71 8. K.G.Denim Ltd. 5919952000 5602688000 317264000 5.66 9. Arvind Ltd. 47927000000 41673600000 6253400000 15.01 10. RSWM Ltd. 28740888000 26147286000 2593602000 9.92 11. Indo Count Industries Ltd. 14109098000 12857106000 1251992000 9.74 12. GHCL Ltd. 22242088000 19035725000 3203363000 16.84 13. Vardhman Textiles Ltd. 51859305000 42126127000 9733178000 23.10 14. HimatsingkaSeide Ltd. 9855289000 9097143000 758146000 8.33 Average 12.82 3. However, the TPO has not disputed the most appropriate method(MAM) and TNMM method selected by the assessee. Thereafter, the Ld.TPO issued show cause notice to the assessee. The assessee, in 4 (I.T) I.T.A No.626/Viz/2018, A.Y.2014-15 Teejay India Private Limited, Visakhapatnam reply to the show cause notice raised contentions on the comparability of the following chosen comparables. (i) Bannari Amman Spinning Mills Ltd (ii) Arvind Ltd. (iii) GHCL Ltd (iv) Vardhman Textiles (v) Morarjee Textiles Ltd. (vi) DCM Ltd (vii) Sarla Performance Fibers Ltd (viii) Trident Ltd. The Ld.TPO, considering the contentions of the assessee rejected the objections of the assessee, computed the PLI on the basis of comparables selected by him as proposed in the show cause notice. Further, the Ld.TPO also computed the notional interest on outstanding receivables, thereby making the total TP adjustment aggregating to Rs.22,26,84,796/-. 4. Aggrieved by the draft assessment order passed by the Ld.AO, incorporating the TPO adjustments, the assessee filed it’s objections before the Ld.DRP. The assessee contested the comparables selected by the TPO and stated that the assessee has also adopted the same filters 5 (I.T) I.T.A No.626/Viz/2018, A.Y.2014-15 Teejay India Private Limited, Visakhapatnam while selecting the comparables. The assessee, therefore, pleaded before the DRP that the comparables selected by the assessee in TP study report be considered. With respect to the notional interest on outstanding receivables, the assessee pleaded that it is not an international transaction. Considering all the objections of the assessee, the Ld.DRP rejected the objections raised by the assessee and directed the Ld.AO/TPO to compute the ALP as proposed in the order of the Ld.TPO. Giving effect to the directions of the Ld.DRP, the Ld.AO passed final assessment order on 25.10.2018. 5. Aggrieved by the final assessment order, the assessee is in appeal before us by raising the following grounds : 1. That the order of the learned Assistant Commissioner of Income Tax, Circle-5(1), Visakhapatnam (“learned AO”) to the extent prejudicial to the Appellant is bad in law, contrary to the facts and circumstances of the case and is liable to be quashed. 2. That the learned Dispute Resolution Panel (“learned DRP”) erred in not appreciating that the order of the learned Deputy Commissioner of Income Tax, Transfer Pricing Officer-2, Hyderabad (“learned TPO”) passed under section 92CA of the Income Tax Act, 1961(“the Act”) is contrary to law and thus liable to be quashed. 3. That on facts and in the circumstances of the case, the learned AO/learned TPO and the learned DRP erred in making an upward adjustment to the transfer price of the Appellant’s International transactions of INR 191,652,124 in respect of manufacture and sale 6 (I.T) I.T.A No.626/Viz/2018, A.Y.2014-15 Teejay India Private Limited, Visakhapatnam of fabric and INR 2,700,626 on account of imputation of notional interest in outstanding receivables. Grounds for manufacturing and sale of fabric 4. On the fact and in the circumstances of the case and in law, with respect to adjustment to the transfer price of processing services, the learned DRP/AO/TPO erred in : 4.1. Rejecting the transfer pricing (TP) documentation maintained by the Appellant under Section 92D of the Act, in good faith and with due diligence. 4.2. Rejecting the comparability analysis carried out by the Assessee in the 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 learned 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 Associated Enterprises (‘AEs’). 4.6. Including companies that are functionally different from the operational profile of the Appellant. 4.7. Excluding the companies selected by the Appellant in its TP documentation without providing any cogent reasons for exclusion. 7 (I.T) I.T.A No.626/Viz/2018, A.Y.2014-15 Teejay India Private Limited, Visakhapatnam 4.8. Computing the operating mark-up on cost of the Appellant while performing the comparability analysis. 4.9. Computing the operating mark-up on cost for companies while performing the comparability analysis. 4.10. Proposing transfer pricing adjustment in relation to the transactions entered with third parties on sale of fabric amounting to INR 508,282,760 wherein principle of transfer pricing is not applied. 4.11. Not providing appropriate adjustments towards material differences between the operational profile of comparable companies and the Appellant. Grounds for imputation of notional interest on outstanding receivables 5. On facts and in the circumstances of the case, the learned DRP/AO/TPO erred in : 5.1. Considering overdue receivables from AEs as an international transaction under the provisions of Section 92B of the Act. 5.2. Without prejudice to ground no.5.1 above 5.2.1. ignoring the fact that the Appellant does not pay interest to the AEs in relation to outstanding payable to AEs. 5.2.2. Not computing notional on the net receivable amount. 5.3. Without prejudice to ground nos.5.1, 5.2 & 5.3 above, imputing interest using SBI term deposit rate instead of LIBOR. That the Appellant craves leave to add to and / or to alter, amend, rescind, modify the grounds herein below or produce further documents before or at the time of hearing of this Appeal. 8 (I.T) I.T.A No.626/Viz/2018, A.Y.2014-15 Teejay India Private Limited, Visakhapatnam 6. Ground No.1 and 2 are general in nature which does not require any adjudication. 7. Ground No.3 relates to upward adjustment in respect of international transaction, wherein separate grounds were raised in ground No.4 and 5 which is adjudicated accordingly. 8. Ground No.4 relates to selection of comparables by the Ld.TPO. At the outset, the Ld.AR argued that the TPO has rejected the comparables selected by the assessee, after adopting the similar filters as chosen by the Ld.TPO without assigning any proper valid reasons for rejecting the same. The Ld.AR submitted that the Ld.TPO has generally stated that the choice of filters and the search process is not in conformity with the TP regulations and therefore, the TP analysis and documentation of the assessee is hereby rejected. However, the Ld.TPO has adopted similar filters while arriving at the 14 comparables as listed in the TPO report. He, therefore, pleaded that the comparables meeting the filters adopted by the TPO for the companies selected by the assessee in it’s TP study report be considered for determination of PLI. The Ld.AR further submitted that the Ld.DRP has also not discussed about the comparables which are in consistence with the comparables selected by the assessee. 9 (I.T) I.T.A No.626/Viz/2018, A.Y.2014-15 Teejay India Private Limited, Visakhapatnam 9. Per contra, the Ld.DR argued that the Ld.DRP has considered the objections raised by the assessee with respect to comparables selected by the Ld.TPO and has discussed at length, why these comparables selected by the TPO are upheld. The Ld.DR further submitted that the Ld.DRP gave detailed reasons for selection of comparables by the Ld.TPO. He, therefore, pleaded that the order of the Ld.DRP be upheld. 10. We have heard both the parties and perused the material available on record. Admittedly, the assessee and the Ld.TPO has adopted the same filters in the selection of comparables except two additional filters selected by the Ld.TPO as follows : (i) Companies with financial year end 31.03.2014 (ii) Companies with foreign export service income less than 25% are rejected. We find that the Ld.DRP while considering the submissions made by the assessee with respect to the objections of selection of certain comparables in a detailed manner, upheld the comparables selected by the Ld.TPO by giving detailed reasons for such selection by the Ld.TPO. We do not find any infirmity in the selection of comparables upheld by the Ld.DRP. Admittedly, there is also dispute on the method adopted by the assessee. In these given circumstances, considering the facts of the case, we find that the Ld.DRP has rightly upheld the comparables adopted by 10 (I.T) I.T.A No.626/Viz/2018, A.Y.2014-15 Teejay India Private Limited, Visakhapatnam the Ld.TPO and we are not inclined to intervene into the selection of comparables, thereby resulting in adoption of PLI at 12.35%. Accordingly, the grounds raised by the assessee in 4.1 to 4.11 are dismissed. 11. With respect to ground No.5 regarding computation of notional interest on outstanding receivables, the contention of the Ld.AR that outstanding receivables cannot be considered as an international transaction and therefore no adjustment can be m ade w it h res pect to the n otion al in t eres t on t he out st an d in g rec eivables . T he L d . DR s ubm it t ed t hat t his Ben c h of the T ribun al in the cas e of Devi Sea F oods lim ited (s up ra) vid e para-7 of it s ord er, the T ribun al has held t hat re ceivables is inc luded un der t he defin ition of int ern at ion al t ra ns act ion c ons equent t o t he amend m en ts ma de by the F in an ce Act , 201 2 w .e.f 01.0 4.20 02 an d hen ce it is an int ern at ion al trans act ion . 12. We have heard t he argumen ts . T his Ben ch of the T ribun al in the c ase of Devi Se a F oods lim it ed (s up ra) vid e p ara-7 of its ord er, the T ribun al has held as follows : “7 . We h av e he ar d t he ri v al s ub mis s i on s an d pe r us ed t h e ma t er i al av ai l ab l e o n r ec or d a nd th e o rd ers of t he Au th or i t i es be l o w. Admi t t ed f ac ts ar e th at t he as se sse e s e ll s to bot h th e AE s n on-A E wh er e t h e AE be i ng th e maj or de bt or . T he r e i s n o d is put e wi t h r eg ar d t o t he f ac t t ha t re c ei v abl e s i s i nc l ud ed un de r t h e d ef i n i t i on of i n t er na ti o n a l t ra ns ac t i on co ns eq ue nt t o t he am end me nt s m ad e by t h e Fi n anc e Ac t, 201 2 w. e. f 11 (I.T) I.T.A No.626/Viz/2018, A.Y.2014-15 Teejay India Private Limited, Visakhapatnam 01. 04. 200 2. T h er ef o re we ar e of t he c on s i dere d v i ew t hat t he r e is no me ri t i n t he ar gu me nt o f Ld A R t hat r e ce i va ble s i s not a n i n te r nat i o nal t ra ns ac t i on. “ We therefore follow ing the same rati o, rej ect the argum ents o f the Ld. AR that outstanding re ce iv able is not a n interna tional transa ctio n. Ha v ing said so , the i ssue is w hether sepa rate adj ustm en t is re quired to be made in respe ct o f receiv ables, the conten tion o f th e Ld. A R is that the av erage realiza tion period is only 79.63 day s w hich is w ithin the indus try standards a n d hence notio nal inte rest should not be imputed. The notional inte rest is charg ed by the Ld. A O ba sed on the SBI Term D eposit R ate has adopted 6.50 % on the ou tstand in g receiv ables bey ond a period of 30 day s as direc ted by Ld D R P. 13. We have heard the riv al conten tions . We find that f rom th e direc tion s of the Ld. D RP that the assesse e ha s not de monstrate d the w ork ing capital adj ustme nts before th e Ld. R ev e nue A uthorities w hile determining the A LP unde r TN M meth od both fo r the Teste d Party and the com parables. I n the case of Dev i S eafoods Ltd ( sup ra ) this Ben ch has tak e n th e follow ing v iew : Whe n T N M me t ho d is co ns i de re d a s t he mo s t a ppr o pr i at e m et h od , wh i c h was al s o no t di s pu te d b y R ev en ue , t he ne t ma r gi n t h er e und er wo ul d t a ke ca re o f s uc h not i o n a l i nt e re s t c os t . I t was f u rt h er expl a i ne d by Ld . AR t ha t t he i m pa ct of t he d el a y i n co ll ec t i on o f re c ei v abl e s wo ul d ha ve a b ear i n g o n t he wor ki ng ca pi t a l of t he as s es s ee. W e fi nd th at t he se wo r ki ng c ap i t al adj us t me nt s on t he ALP has b ee n a l re ad y f a ct o re d i n i ts pri ci n g / pr of i t a bil i t y vi s-à-vi s t hat of i t s co mp ar abl es . We t h er ef o r e ar e of th e c on si d er e d vi e w 12 (I.T) I.T.A No.626/Viz/2018, A.Y.2014-15 Teejay India Private Limited, Visakhapatnam t hat an y f ur t he r a dj us t m en t t o t he ma rg i n of t he ass es s ee o n t he out s t an di ng r ec ei v ab l es c an no t be j us t i fi ed an d n o s ep ar at e up wa r d adj u s tm e nt on out s t a n di ng ex po rt r ec e i va bl e s i s r eq ui r ed and t her e f or e we di r ec t t he L d. AO t o del et e t he u pwar d adj u s tm e nt ma de t owa rd s ov e rd ue r ec e i va bl es f r om AE. W e t he ref or e al l ow t hi s gr ou nd ra i se d by t he as s es s ee. 14. We hereby direct the Ld . A O / TP O to ex amine and consider the appropriate adj ustme n ts arising ou t of the w ork ing capital di fferen ce s in the com putation o f the A LP. The asse sse e is also directe d to submi t the w ork ing relating to w ork ing capital adj ustments of the assessee compa ny . Follow ing the principle of consisten cy if the w ork ing ca pital adj ustments o n the A LP ha s bee n already factored in i ts pric ing / profi tability v is-à-v is that of its com para bles furthe r adj ustment to the marg in of the asses se e on the o utsta nding re ceiv ables canno t be j ustifie d a nd no separate upw ard adj ustment on ou tstand in g receiv ables is required, sin ce TN M method is con side red as the mos t appropriate method, w hich w as a lso not disputed by R ev enue, the ne t marg in there under w ould ta ke care of such no tional inte rest cos t. Ac cord ingly , this ground raise d by the assessee is allowe d for statisti cal pur pose s. 15. In the result, the appeal of the assessee is partly allowed for statistical purpose. 13 (I.T) I.T.A No.626/Viz/2018, A.Y.2014-15 Teejay India Private Limited, Visakhapatnam Order pronounced in the open court on 13 th February, 2024. Sd/- Sd/- (दुʫूŜ आर.एल रेǭी) (एस बालाकृ ˁन) (DUVVURU RL REDDY) (S.BALAKRISHNAN) Ɋाियकसद˟/JUDICIAL MEMBER लेखा सद˟/ACCOUNTANT MEMBER Dated : 13.02.2024 L.Rama, SPS आदेश कᳱ ᮧितिलिप अᮕेिषत/Copy of the order forwarded to:- 1. िनधाŊįरती/ The Assessee– M/s Teejay India Private Limited, APSEZ, Pudimadaka Road, Atchutapuram Mandal, Visakhapatnam 2. राजˢ/The Revenue – The Asst.Commissioner of Income Tax, Circle-5(1) Visakhapatnam 3. The Principal Commissioner of Income Tax, Visakhapatnam 4. िवभागीय Ůितिनिध, आयकर अपीलीय अिधकरण, िवशाखापटणम/ DR,ITAT, Visakhapatnam 5.गाडŊ फ़ाईल / Guard file आदेशानुसार / BY ORDER Sr. Private Secretary ITAT, Visakhapatnam