Intimate Fashions (India) Pvt Ltd Vs DCIT (ITAT Chennai)
ITAT Chennai held that assessee failed furnish any evidences to prove that there are negotiations between assessee and AEs with regard to marketing strategy, sales targets, credit period, etc. Accordingly, TPO/AO has rightly bench marked payment of agency commission as ‘nil’.
Facts- The assessee, M/s.Intimate Fashions India Pvt. Ltd., (M/s.IFIPL) is a joint venture between M/s.MAS Capital Pvt. Ltd., Sri Lanka (M/s.MAS, Sri Lanka), M/s.Triumph International Overseas Ltd., Liechtenstein (M/s.Triumph) and M/s.Mast Industries Inc., USA (M/s.Mast, USA). The company is engaged in the business of manufacturing and sale of intimate garments, lingerie, briefs, swimwear and other related items and primarily exports the manufactured garments to M/s.Mast, USA. The assessee had entered into international transactions, which were duly reported in the transfer pricing documentation.
During the course of scrutiny assessment proceedings, the TPO/AO made certain adjustments/disallowances to the assessee’s income, which was upheld by the DRP/Ld.CIT(A). Below is the summary of adjustments made by the AO/TPO and upheld by the DRP/Ld.CIT(A), against which, the assessee is in appeal before the Tribunal
Conclusion-Held that the assessee could not even furnish any evidences to prove that there are negotiations between the assessee and the AEs with regard to marketing strategy, sales targets, credit period, etc. In absence of any evidences with regard to rendering of services by the AEs, in our considered view, the TPO/AO has rightly bench marked payment of agency commission as ‘nil’, because, it is for the assessee to discharge its onus by filing necessary evidences to prove rendering of services, which is pre-requisite for making any payment.
We are of the considered view that there is no error in the reasons given by the DPR/Ld.CIT(A) to sustain additions made by the AO/TPO towards TP adjustment on payment of agency commission and thus, we are inclined to uphold the findings of the DRP/Ld.CIT(A) and reject the ground taken by the assessee for AYs 2009-10, 2011-12 & 2014-15.
Held that it is evident that the assessee is eligible for deduction u/s.80JJAA of the Act, to the extent of 30% of additional wages paid during the subject assessment year and for consecutive two years. Therefore, we are of the considered view that the AO is erred in not allowing deduction claimed u/s.80JJAA of the Act, for subsequent two assessment years, even though, the law is very clear in as much as the assessee is entitled for deduction for next two assessment years @ 30% wages paid to new workmen.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
The assessee has filed four appeals. The appeals filed by the assessee for AYs 2009-10, 2011-12 & 20 14-15 are directed against final assessment order of the Assessing Officer (in short “AO”) passed u/s.143(3) r.w.s.144C(13) of the Income Tax Act, 1961 (in short “the Act”), in pursuant to Dispute Resolution Panel (in short “DRP”) directions issued u/s.144C(5) of the Act, dated 06.05.2019 & 31.07.2018. The appeal filed by the assessee for AY 2015-16 is against the order of the Commissioner of Income Tax (Appeals)-6, Chennai, dated 25.06.2019. Since, the facts are identical and issues are common, for the sake of convenience, these appeals were heard together and are being disposed off, by this consolidated order.
2. The assessee has, more or less, raised common grounds of appeal in all four assessment years. Therefore, for the sake of brevity, grounds of appeal filed in IT (TP) A No.48/Chny/2019 for the AY 2009-10, are reproduced as under:
The grounds of appeal listed below are without prejudice to each other.
1. The order passed by the Joint Commissioner of Income tax (OSD), Corporate Circle – 2, Chennai (Assessing Officer or the AO) pursuant to the order of the Deputy Commissioner of Income-tax, TPO-2(2) (Transfer pricing officer or TPO) and the directions issued by the Dispute Resolution Panel – 2, Bangalore (‘DRP’), is erroneous and bad in law, to the extent the same is prejudicial to the Appellant.
2. The TPO/AO/DRP erred in law and in facts, in not identifying any uncontrolled comparable transaction while considering Comparable Uncontrolled Price (‘CUP’) method as the most appropriate method to benchmark the impugned international transactions pertaining to payment of sales commission which is contrary to the requirement of law based on Rule 1 0C of the Income Tax Rules, 1962.
3. The TPO/AO/DRP having failed to identify any comparable uncontrolled transaction, erred in law and facts in not considering either the uncontrolled price as provided in RBI manual or Transactional Net Margin Method (TNMM) undertaken by the appellant as secondary analysis for benchmarking.
The TPO/AO/DRP further erred in not appreciating the fact that the appellant’s profit margin (14.10%) was higher than that earned by the comparable companies (6.36%) under secondary analysis using TNMM, which demonstrates that the appellant had no intention to erode tax base.
4. The TPO/AO/DRP erred in not considering the evidence or substantial documentation submitted by the Appellant in the proper perspective for proving the services received and the benefits derived for making the payment of commission.
Also, the TPO/AO/DRP failed to appreciate that Hon’ble Tribunal in its order for subject assessment year (AY 2009-10) had not doubted the documents that were adduced before the TPO/DRP (in first round of proceedings) to establish the services rendered by its AE and the benefits derived therefrom.
Further, in AY 2001-02. AY 2002-03 and AY 2003-04, the Hon’ble Tribunal in appellant’s own case had set aside the order for impugned transaction of payment of sales commission and restored the file to the AO with direction to decide it de novo in accordance with law. Thereafter, the Assessing officer perused the supporting documents provided by the Assessee and considering all the facts and circumstances, allowed the payment of sales commission.
5. The TPO/AO/DRP grossly erred, in law and in facts, by exceeding their jurisdiction in determining whether or not a transaction should have been carried out by the Appellant while determining the ALP as ‘Nil’. Further, by doing so, the TPO questioned the commercial expediency which is ultra vires of the Act.
Further, the TPO/AO/DRP failed to appreciate that the Hon’ble Tribunal in the appellant’s own case in AY 2009-1 0, AY 2012-13 and AY 2013-14 has accepted that the agency commission paid by the Appellant was for the purpose of business wholly and-exclusively based on the turnover and therefore TPO/AO/DRP should not have questioned the transaction entered into,
6. The TPO/AO/DRP erred in law and in facts, by violating the principles of consistency and judicial discipline by not following the binding judicial precedents in Appellant’s own case as well as other decisions of higher appellate forums, thereby leading to undue harassment to the appellant and chaos in administration of tax laws.
The TPO/AO/DRP ought to have appreciated that the agency commission payment made by the Appellant has been accepted in the past (by the TPO up to AY 2007-08 and during AY 2010-11; by the AO in his order post Hon’ble Tribunal’s direction in AY 2001-02, 2002-03 and 2003-04 and post CIT(A) order in AY 2004-05), to be allowable as arm’s length and there is no change in facts and circumstances of the impugned international transaction vis-a-vis such years.
7. The TPO/AO/DRP erred in holding that the complete JV agreement was not made available to the tax authorities in the earlier assessment years despite sharing evidences to the contrary.
8. The TPO/AO/DRP have failed to appreciate that the Appellant is a three party Joint Venture (‘JV’) where in the JV partners act as independent parties and that no independent party would agree to make a payment without receipt of services.
9. The TPO/AO/DRP have grossly erred in facts by holding the sales orders provided by Triumph to Appellant as obligatory, basis an erroneous interpretation of the JV agreement between the partners, when the Agency Agreement between Appellant and Triumph explicitly requires a compensation to be paid for provision of such sales orders.
10. The DRP/ TPO/ AO have failed to appreciate that the sale price of products exported to Associated Enterprises (‘AE’) has been fixed keeping in mind the FAR analysis of the Appellant and that sales commission would be payable for sale orders obtained by AEs.
Further, the DRP/ TPO/ AO have retained TNMM as most appropriate method for determining the ALP of other transactions, but has failed to appreciate the fact that payment of agency commission is already factored in the sales price and hence is at arm’s length.
11. The learned AO erred in levying interest under section 234B and 234C of the Act.
12. The learned AO has erred in initiating penalty proceedings under section 271 (1)(c) of the Act
The Appellant craves leave to add to / alter / amend / substitute any of the above grounds of appeal, at the time, before or at the time of hearing of the appeal, so as to enable the Appellate authority to decide this appeal according to law.
3. The brief facts of the case are that the assessee, M/s.Intimate Fashions India Pvt. Ltd., (in short “M/s.IFIPL”) is a joint venture between M/s.MAS Capital Pvt. Ltd., Sri Lanka (in short “M/s.MAS, Sri Lanka”), M/s.Triumph International Overseas Ltd., Liechtenstein (in short “M/s.Triumph”) and M/s.Mast Industries Inc., USA (in short “M/s.Mast, USA”). The company is engaged in the business of manufacturing and sale of intimate garments, lingerie, briefs, swimwear and other related items and primarily exports the manufactured garments to M/s.Mast, USA. The assessee had entered into international transactions, which were duly reported in the transfer pricing documentation. During the course of scrutiny assessment proceedings, the TPO/AO made certain adjustments/disallowances to the assessee’s income, which was upheld by the DRP/Ld.CIT(A). Below is the summary of adjustments made by the AO/TPO and upheld by the DRP/Ld.CIT(A), against which, the assessee is in appeal before the Tribunal:
