MEHTA BROTHERS EXPORTS, MUMBAI V. DCIT CIR 16(3), MUMBAI

ITA 1526/MUM/2009

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8279 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 8 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-11-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: L
• Next Hearing Date: 05-11-2012
• Assessment Year: 2003-2004
• Appeal Filed On: 05-03-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: F V IRANI; N JAYENDRA
• Keywords: Transfer pricing; International transaction; Reasonable cause
• Section: 92D; 92A; 92E; 10B; 6; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'L' BENCH, MUMBAI BEFORE SHRI R.S. SYAL, ACCOUNTNAT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER ITA NO. 1526/MUM/2009 (ASSESSMENT YEAR: 2003-04) M/S. MEHTA BROTHERS EXPORTS DCIT, CIRCLE 16(3) ORICON HOUSE, 4TH FLOOR MATHRU MANDIR, 2ND FLOOR 12, K, DUBASH MARG VS. TARDEV, MUMBAI 400034 MUMBAI 400034 PAN - AAAFM 2744 B APPELLANT RESPONDENT APPELLANT BY: S/SHRI F.V. IRANI & N. JAYENDRA RESPONDENT BY: MS. NEERAJA PRADHAN DATE OF HEARING: 05.11.2012 DATE OF PRONOUNCEMENT: 07.11.2012 O R D E R PER R.S. SYAL, A.M. THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE CIT(A) XVII, MUMBAI ON 14.01.2009 UPHOLDING THE PEN ALTY OF ` 17,81,318/- IMPOSED BY THE ASSESSING OFFICER UNDER SECTION 271A A OF THE ACT. 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE ASSES SEE FILED ITS RETURN ON 01.12.2003 DECLARING TOTAL INCOME OF ` 42,63,640/-. THE REPORT IN FORM NO. 3CEB, AS REQUIRED UNDER SECTION 92E WAS FILED SEPAR ATELY IN THE TAPAL ON 01.12.2003. DURING THE COURSE OF ASSESSMENT PROCEED INGS THE ASSESSEE WAS CALLED UPON TO EXPLAIN AS TO WHY REFERENCE UNDER SE CTION 92CA BE NOT MADE DUE TO ITS TRANSACTION WITH M/S. POLY DIAM NV OF ` 8,51,41,549/-. THE ASSESSEE SUBMITTED THAT THE TRANSACTIONS WITH M/S. PLOY DIAM NV CANNOT BE SUBJECTED TO TRANSFER PRICING REGULATIONS SINCE BOTH THE ENTERPRISES ARE NOT ASSOCIATED ENTERPRISES WITHIN THE MEANING OF SE CTION 92A OF THE ACT. IT WAS EXPLAINED THAT NONE OF THE PARTNERS OF THE ASSE SSEE FIRM HAVE ANY STAKE IN M/S. POLY DIAM NV AND VICE VERSA. M/S. POLY DIAM NV WAS STATED TO BE ITA NO. 1526/MUM/2009 M/S. MEHTA BROTHERS EXPORTS 2 AN ENTITY REGISTERED IN BELGIUM OWNED BY SHRI SHAIL ESH MEHTA, BROTHER OF ONE OF THE PARTNERS OF THE ASSESSEE FIRM. SINCE THE RE WAS NO PARTICIPATION IN THE MANAGEMENT OR CONTROL OR CAPITAL OF M/S. POLY D IAM NV, IT WAS CLAIMED THAT BOTH THE ENTERPRISES WERE NOT LIABLE TO BE CON SIDERED AS ASSOCIATED ENTERPRISES WITHIN THE DEFINITION OF SECTION 92A. T HE AO CALLED UPON THE ASSESSEE TO PRODUCE DOCUMENTS AS PRESCRIBED UNDER R ULE 10D OF THE I.T. RULES, 1962 REGARDING INTERNATIONAL TRANSACTIONS F OR WHICH REPORT IN FORM NO. 3CEB WAS FILED. SINCE NO SUCH DOCUMENTS WERE SU BMITTED, THE AO MADE A MENTION IN THE ASSESSMENT ORDER ABOUT IMPOSITION OF PENALTY UNDER SECTION 271AA AND SECTION 271G. FROM PAGE NO. 3 ONW ARDS STARTING WITH PARA NO. 4 WITH THE CAPTION DISALLOWANCE U/S. 40A( 2)(B), THE AO OBSERVED THAT THE ASSESSEE HAD TOTAL IMPORT OF ` 8.51 CRORES AND EXPORT OF 8.90 CRORES WITH THE SAID ASSOCIATED ENTERPRISE. ONCE AGAIN THE AO REQUIRED THE ASSESSEE TO SUBMIT NECESSARY DOCUMENTS REQUIRED UND ER SECTION 92A READ WITH RULE 10B AND JUSTIFY HOW THE PRICE CHARGED OR PAID WAS IN ACCORDANCE WITH RULE 10B. IN RESPONSE TO THE AOS REQUEST, AS SESSEE SUBMITTED THAT NO METHOD OF DETERMINATION OF ALP WAS APPLICABLE. THE AO OBSERVED THAT THE ASSESSEE HAS SHOWN THE SAME TRANSACTION WITH M/S. P OLY DIAM NV IN FORM NO. 3CD AS TRANSACTION COVERED U/S. 40A(2)(B). HENC E, I HAVE NO OPTION BUT TO FIND OUT THAT WHETHER THE PAYMENT MADE BY M/S. P OLY DIAM NV COVERED U/S. 40A(2)(B) IS AT PAR WITH PAYMENT MADE TO OTHER THIRD UNRELATED PARTY. APPLYING THE AVERAGE METHOD, THE AO WORKED OUT THE EXCESSIVE PAYMENT MADE TO M/S. POLY DIAM NV AND ACCORDINGLY MADE ADDI TION OF ` 89,83,540/- UNDER SECTION 40A(2)(B) ON ACCOUNT ROUGH PURCHASES OF DIAMONDS FROM M/S. POLY DIAM NV. FROM THE COMPUTATION OF TOTAL INCOME AT THE END OF THE ASSESSMENT ORDER, IT CAN BE SEEN THAT THIS ADDITION HAS BEEN MADE WITH THE REMARKS ADDITION ON ACCOUNT OF EXCESS PAYMENT U/S. 40A(2)(B) OF THE I.T. ACT AS DISCUSSED IN ORDER. THEREAFTER PENALTY PROC EEDINGS WERE INITIATED UNDER SECTION 271AA AND A PENALTY OF ` 17.81 LAKHS WAS IMPOSED. 3. WHEN THE APPEAL OF THE ASSESSEE CAME UP BEFORE THE LEARNED CIT(A), IT WAS ARGUED ON BEHALF OF THE ASSESSEE THAT THERE WAS NO PARTICIPATION IN THE MANAGEMENT OR CONTROL OR CAPITAL OF THE ASSESSEE BY THE OTHER ENTERPRISE EITHER DIRECTLY OR INDIRECTLY AND THEREFORE THE TWO ENTITIES DO NOT FALL WITHIN ITA NO. 1526/MUM/2009 M/S. MEHTA BROTHERS EXPORTS 3 THE MEANING OF ASSOCIATED ENTERPRISES. IT WAS CLAIM ED THAT IN ORDER TO IMPOSE OR CONFIRM PENALTY UNDER SECTION 271AA, IT I S OF PARAMOUNT IMPORTANCE TO CONSIDER AS TO WHETHER THE CONDITIONS SPECIFIED UNDER SECTION 92A(1) WERE SATISFIED OR NOT. MERE SATISFACTION OF THE CONDITIONS OF SUB- SECTION 2 OF SECTION 92A WOULD NOT MAKE TWO ENTERPR ISES ASSOCIATED ENTERPRISES. IT WAS ALSO CLAIMED THAT THERE WAS A R EASONABLE CAUSE FOR FAILURE TO KEEP AND MAINTAIN INFORMATION AND DOCUMENT UNDER SECTION 92D ON ACCOUNT OF ITS BONA FIDE BELIEF THAT THE PENALTY WAS LIABLE TO BE DELETED. THE LEARNED CIT(A) OBSERVED THAT THE ASSESSEE HAS NOT M AINTAINED INFORMATION UNDER SECTION 92D ON THE GROUND THAT THERE WAS NO T RANSACTION BETWEEN TWO ASSOCIATED ENTERPRISES. THE LEARNED CIT(A) CAME TO HOLD THAT SECTION 92A(1) AND SECTION 92A(2) ARE INDEPENDENT OF EACH OTHER AN D BOTH CANNOT BE READ AS A SINGLE PIECE OF PROVISION IN TOTALITY. HE CLAS SIFIED THE INSTANT TRANSACTION UNDER CLAUSE (J) OF SUB-SECTION (2) OF SECTION 92A AND ACCORDINGLY HELD THE ASSESSEE AND M/S. POLY DIAM NV TO BE ASSOCIATED ENT ERPRISES UNDER SECTION 92A. MAINTENANCE OF DOCUMENTS AND INFORMATION AS P RESCRIBED UNDER RULE 10D WAS HELD TO BE NECESSARY. IN THE ABSENCE OF ASS ESSEE HAVING MAINTAINED SUCH DOCUMENTS, THE CIT(A) HELD THAT THERE WAS A DE FAUT UNDER SECTION 92D REQUIRING IMPOSITION OF PENALTY UNDER SECTION 271AA . HE, THEREFORE, UPHELD THE PENALTY. 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD. PENALTY UNDER SECTION 271AA IS LEVIABLE DUE TO FAILURE TO KEEP AND MAINTAIN DOCUMENTS IN RESPECT OF INTERNATI ONAL TRANSACTIONS. MAINTENANCE OF SUCH INFORMATION OR DOCUMENTS, ETC. IS REQUIRED AS PER SECTION 92D. SECTION 92D, IN TURN, APPLIES TO PERSO NS WHO HAVE ENTERED INTO AN INTERNATIONAL TRANSACTION. AN INTERNATIONAL TRAN SACTION HAS BEEN DEFINED UNDER SECTION 92B(1) AS A TRANSACTION BETWEEN TWO O R MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON-RESIDEN TS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE P ROPERTY, ETC.. THUS IT IS MANIFEST THAT SECTION 92D CAN APPLY ONLY WHEN THERE IS AN INTERNATIONAL ITA NO. 1526/MUM/2009 M/S. MEHTA BROTHERS EXPORTS 4 TRANSACTION AND THERE CAN BE INTERNATIONAL TRANSACT ION ONLY IF IT IS BETWEEN TWO ASSOCIATED ENTERPRISES. 5. THE ENTIRE CONTROVERSY CENTRES AROUND THE QUESTION AS TO WHETHER THE ASSESSEE AND M/S. POLY DIAM NV ARE ASSOCIATED ENTER PRISES OR NOT. T HE QUESTION IS AS TO WHETHER SUB-SECTION (1) TO SECTIO N 92A SHOULD BE READ INDEPENDENT OF SECTION 92A(2). THE CASE OF THE DEPA RTMENT IS THAT SUB- SECTION (2) OF SECTION 92A CONTAINS A DEEMING CLAUS E. ONCE THE CASE IS COVERED UNDER ANY OF THE CLAUSE (A TO M) IT WOULD B E CONSIDERED THAT THE TWO ENTERPRISES ARE ASSOCIATED ENTERPRISES. THE USE OF THE WORDS DEEMED TO BE IN SUB-SECTION (2) OF SECTION 92A, AS PER THE LEARN ED D.R., CLEARLY SUGGESTS THAT THERE IS NO NEED TO GO TO SUB-SECTION (1) OF S ECTION 92A AND SUCH DEEMING PROVISION SHOULD BE READ IN ISOLATION. 6. PER CONTRA, THE CASE OF THE ASSESSEE AB INITIO BEFORE THE AUTHORITIES BELOW IS THAT SUB-SECTION (2) CANNOT BE READ IN ISOLATION . IT HAS TO BE IN CONJUNCTION WITH SUB-SECTION (1). UNLESS A CASE SATISFIES THE REQUIREMENT OF BOTH THE SUB-SECTIONS, THE RELATION BETWEEN THE ENTERPRISES CANNOT BE CONSIDERED AS THAT OF ASSOCIATED ENTERPRISES. IN SUPPORT OF THIS CONTENTION, THE LEARNED A.R. HAS RELIED UPON AN ARTICLE, A COPY OF WHICH WAS ALS O FILED BEFORE THE LEARNED CIT(A), TO SUPPORT THE CONTENTION THAT THERE ARE TW O VIEWS AS TO WHETHER BOTH SUB-SECTIONS (1) AND (2) OF SECTION 92A APPLY INDEP ENDENTLY OR JOINTLY. IN THIS ARTICLE ALMOST SIMILAR CASE, AS OBTAINING BEFORE US, HAS BEEN CONSIDERED BY WAY OF AN EXAMPLE IN WHICH ONE BROTHER IS IN BELGIU M AND OWNS A COMPANY AND THE OTHER BROTHER IS IN INDIA AND OWNS ANOTHER COMPANY. A VIEW HAS BEEN EXPRESSED IN THIS ARTICLE THAT UNDER SECTION 9 2A(2)(J) THE TWO COMPANIES WILL BE AES, BUT CONDITION UNDER SECTION 92A(1) WIL L NOT BE FULFILLED AS NONE OF THE BROTHERS OR THEIR COMPANIES PARTICIPATE IN T HE CAPITAL, CONTROL OR MANAGEMENT OF EACH OTHER HENCE BOTH THE COMPANIES W ILL NOT BE AES. 7. HERE IT IS RELEVANT TO NOTE THAT SECTION 271 AA IS SUBJECT TO SECTION 273B. SECTION 273B, IN TURN, PROVIDES THAT NOTWITH STANDING ANYTHING CONTAINED IN THE PROVISIONS OF THE RELEVANT SECTIO NS INCLUDING SECTION ITA NO. 1526/MUM/2009 M/S. MEHTA BROTHERS EXPORTS 5 271AA, NO PENALTY SHALL BE IMPOSED IF ONE PROVES T HAT THERE WAS A REASONABLE CAUSE FOR THE FAILURE AS PRESCRIBED IN T HE CONCERNED SECTION. THE ASSESSEE WAS CONSISTENTLY HARPING ON THE VIEW THAT M/S. POLY DIAM NV IS NOT ITS ASSOCIATED ENTERPRISE AND SUCH OPINION ABOU T THE TWO ENTERPRISES AS NON AES IS SUPPORTED BY AN ARTICLE. IN SUCH A SITU ATION IT CAN BE CONSIDERED AS A GOOD GROUND FOR BELIEVING THAT BOTH WERE NOT T HE ASSOCIATED ENTERPRISES AND AS SUCH THERE WAS NO NEED TO MAINTAIN THE RECOR DS/DOCUMENTS AS PER SECTION 92D OF THE ACT. WE WANT TO MAKE IT CLEAR T HAT WE HAVE DESISTED FROM EXPRESSING ANY VIEW ON AS TO WHETHER, AS PER LAW, B OTH THE ENTITIES CONSTITUTE ASSOCIATED ENTERPRISES OF EACH OTHER IN A SITUATION PREVAILING BEFORE US. SUFFICE TO SAY, THERE IS A REASONABLE CA USE FOR THE ASSESSEE TO ENTERTAIN A VIEW THAT BOTH ARE NOT THE ASSOCIATED E NTERPRISES. IN OUR CONSIDERED OPINION THE ASSESSEE IS COVERED UNDER TH E SHELTER OF SECTION 273B, REQUIRING NON-IMPOSITION OF ANY PENALTY UNDER SECTION 271AA. 8. THERE IS ANOTHER INTERESTING ASPECT OF THIS M ATTER. OBVIOUSLY THE QUESTION OF IMPOSING PENALTY UNDER SECTION 271AA CA N ARISE IF THERE IS SOME INTERNATIONAL TRANSACTION BETWEEN THE ASSOCIATED EN TERPRISES. WE HAVE OBSERVED FROM THE ASSESSMENT ORDER THAT THE AO PROC EEDED AND, IN FACT, MADE ADDITION OF ` 17.81 LAKHS BY APPLYING THE PROVISIONS OF SECTION 4 0A(2). THE TRANSFER PRICING PROVISIONS UNDER CHAPTER X OF THE ACT HAVE NOT BEEN INVOKED FOR MAKING THIS ADDITION. IT IS FURTHER REL EVANT TO NOTE THAT THE LEARNED CIT(A) DELETED THE ADDITION IN THE QUANTUM PROCEEDINGS. WHEN THE MATTER CAME UP BEFORE THE TRIBUNAL, THE MATTER HAS BEEN RESTORED TO THE FILE OF THE AO FOR CONSIDERING THE ISSUE AFRESH AS PER T HE JUDGEMENT OF THE HON'BLE BOMBAY HIGH COURT, AS REFERRED TO IN THE OR DER, WITHIN THE PROVISIONS OF SECTION 40A(2)(B). NEEDLESS TO SAY T HAT THE PROVISIONS OF SECTION 40A(2)(B) APPLY FOR COMPUTING EXCESS AMOUNT OF EXPENDITURE INCURRED IN RELATION TO THE PERSONS SPECIFIED IN CL AUSE (B) OF SECTION 40A(2), BEING THE RELATED PERSONS/CONCERNS. IT IS UNLIKE S ECTION 92A UNDER WHICH ONLY THE INTERNATIONAL TRANSACTIONS BETWEEN THE ASS OCIATED ENTERPRISES, AS DEFINED UNDER SECTION 92A, CAN BE CONSIDERED UNDER CHAPTER X OF THE ACT. THUS THE DIFFERENCE BETWEEN THE SCOPE OF SECTION 40 A(2) ON ONE HAND AND ITA NO. 1526/MUM/2009 M/S. MEHTA BROTHERS EXPORTS 6 SECTION 92 ON THE OTHER, IS NOT QUITE SIMILAR. WH EREAS, EVERY TRANSACTION OF INCURRING EXPENSES IN RELATION TO THE SPECIFIED PER SONS UNDER CLAUSE (B) OF SECTION 40A(2) BRINGS A CASE FOR CONSIDERATION UNDE R THIS PROVISION, THE PROVISIONS OF SECTION 92, BEING THE TRANSFER PRICIN G PROVISIONS, ARE NOT ACTIVATED UNLESS THERE ARE TWO ASSOCIATED ENTERPRIS ES WITHIN THE MEANING OF SECTION 92A. WHEN THE AO, IN THE INSTANT CASE, PRO CEEDED WITH SECTION 40A(2) IGNORING SECTION 92, HE IMPLIEDLY RESTRICTED HIS SCOPE TO SECTION 40A(2) ALONE. IF HE HAS NOT CONSIDERED IT AS AN INT ERNATIONAL TRANSACTION BETWEEN TWO ASSOCIATED ENTERPRISES, THE PROVISIONS OF SECTION 92D REQUIRING MAINTENANCE OF INFORMATION AND DOCUMENTS IN RESPECT OF AN INTERNATIONAL TRANSACTION, CANNOT APPLY. NATURALLY, IF SECTION 92 D CANNOT APPLY, THE ONLY COROLLARY WHICH CAN FOLLOW IS THAT SECTION 271AA AL SO CANNOT APPLY. WE, THEREFORE, SET ASIDE THE ORDER OF THE LEARNED CIT(A ) AND DIRECT TO DELETE THE PENALTY. 9. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALL OWED. ORDER PRONOUNCED IN THE OPEN COURT ON 07 TH NOVEMBER, 2012 SD/- SD/- (VIJAY PAL RAO) (R.S. SYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 7 TH NOVEMBER, 2012 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) XVII, MUMBAI 4. THE CIT XVI, MUMBAI CITY 5. THE DR, L BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.