ITAT Chennai Rules Against Revenue in Farida Group Commission Income Dispute — Additions Held Legally Unsustainable
Background and Overview
The Income Tax Appellate Tribunal, Chennai Bench, recently pronounced a significant ruling in a batch of appeals filed by multiple companies belonging to the well-known Farida Group, collectively engaged in the manufacture and export of leather footwear. The appeals were directed against final assessment orders passed by the Assistant Commissioner of Income Tax, Central Circle 3(2), Chennai, under Section 147 read with Section 144C(13) of the Income Tax Act, 1961, covering Assessment Years 2019–20 through 2022–23.
The assessees before the Tribunal were:
- M/s. Farida Shoes Pvt. Ltd.
- M/s. Farida Classic Shoes Pvt. Ltd.
- M/s. Delta Shoes Pvt. Ltd.
- M/s. Aston Shoes Pvt. Ltd.
- M/s. India Shoes Exports Pvt. Ltd.
Together, these entities operate as part of the Farida Group, with a combined group turnover of approximately Rs. 1,800 crores, primarily driven by exports of leather footwear to international markets.
Genesis of the Dispute — Search and Seizure Operations
A search and seizure operation under Section 132 of the Income Tax Act, 1961 was conducted on the Farida Group on 23.08.2022. Following the search, the cases of the assessee companies were centralized before the Central Circle for coordinated assessment proceedings. The cases were thereafter referred to the Transfer Pricing Officer (TPO) for determination of the Arm's Length Price (ALP) of international transactions.
During the search operation conducted at No. 151/4, Mount Poonamallee Road, Ramapuram, Chennai, the Revenue seized:
- Books of account pertaining to M/s. Pacific Strides Pvt. Ltd., Singapore (formerly known as M/s. Farida Shoes Pacific Pvt. Ltd.)
- Debit notes raised by PSPL upon suppliers of the Farida Group towards alleged commission payments
- Email correspondences allegedly evidencing procurement facilitation arrangements
Note: PSPL was managed by Irshad Ahmed Mecca, with shareholding held by Irshad Ahmed Mecca, Iqbal Ahmed Mecca, Israr Ahmed Mecca, and Ashfaque Ahmed Mecca — all members of the same promoter family. Additionally, one Smt. Suganya, associated with the accounts function of M/s. Farida Holdings Pvt. Ltd., was found to be maintaining PSPL's books of account.
The Core Corporate Tax Issue — PSPL Commission Attributed as Undisclosed Income
The Assessing Officer's Position
Based on the seized materials and statements recorded during the search from Smt. Suganya and Mr. Chittibabu (Associate Head – Accounts of M/s. Farida Shoes Pvt. Ltd. and Accounts Head of PSPL, Singapore), the Assessing Officer concluded that:
- The commission income earned by PSPL represented inflated purchase costs in the hands of the Farida Group companies
- The commission arrangement was a device to divert taxable profits outside India
- The commission income earned by PSPL should be treated as undisclosed income of the respective assessee companies
Accordingly, the AO made additions aggregating to Rs. 4,75,40,690/- across various assessment years, attributed entity-wise as follows:
| Company | Total Addition (Rs.) |
|---|---|
| M/s. Farida Shoes Pvt. Ltd. | 1,36,93,986 |
| M/s. Farida Classic Shoes Pvt. Ltd. | 1,25,55,278 |
| M/s. Delta Shoes Pvt. Ltd. | 62,41,717 |
| M/s. Aston Shoes Pvt. Ltd. | 93,30,343 |
| M/s. India Shoes Exports Pvt. Ltd. | 57,19,366 |
| Grand Total | 4,75,40,690 |
Submissions on Behalf of the Assessees
The Learned Authorised Representative advanced the following contentions in defence of the assessee companies:
PSPL is a legally recognized, independently incorporated entity in Singapore, carrying on genuine business activities in its own right. It is neither fictitious nor a conduit.
PSPL files tax returns in Singapore and has consistently disclosed the commission income before Singapore tax authorities, where it has been assessed and taxed accordingly.
The commission was received directly from overseas suppliers — not from the Farida Group companies — for services including vendor identification, price negotiations, procurement coordination, quality control support, and related commercial facilitation.
No money trail exists linking PSPL's commission receipts back to the assessee companies. There is no evidence of fund diversion, circular routing, or repatriation of funds.
Purchase prices were at arm's length, as demonstrated through independent customs import data and comparable pricing information from leading international leather suppliers including JBS S.A. (Brazil) and Sadesa, establishing that import prices paid by the assessees were competitive and not inflated.