DCIT 8(2), MUMBAI V. HINDUJA VENTURES LTD, MUMBAI

ITA 2504/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 48649 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-04-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: H
• Next Hearing Date: 11-04-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 31-03-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Difference of opinion; Change of opinion
• Section: 92C; 92E; 10B

Judgement Text

IN THE INCOME TAX APPELLTE TRIBUNAL MUMBAI BENCHES H : MUMBAI BEFORE SHRI R.S.SYAL, ACCOUNTANT MEMBER AND SHRI V.DURGA RAO, JUDICIAL MEMBER ITA. NO. 2504/MUM/2010 ASSESSMENT YEAR 2003-2004 DCIT, 8 (2) MUMBAI VS. M/S. HINDUJA VENTURES LTD. MUMBAI 400 093 PAN AAACH2058N (APPELLANT) (RESPONDENT) FOR APPELLANT : SHRI R.K. GUPTA FOR RESPONDENT : -NONE- ORDER PER V.D.RAO, J.M. 1. THIS APPEAL FILED BY THE REVENUE IS DIRECTED AG AINST THE ORDER OF THE CIT(A)-15, MUMBAI AND IT PERTAINS FOR THE ASSESSMENT YEAR 2003-2004. THE ONLY GROUND URGED BY THE REVENUE READS AS UNDER : ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) IS CORRECT IN DELETING THE PENALTY LEVIED U/S. 271 (1) (C) OF THE I.T. ACT, 1961 OF RS.69,78,825/-, HOLDING THE PENALTY CANNOT BE LEVIE D ON ACCOUNT OF CHANGE OF OPINION ON THE INTERNATIONAL TRANSACTIONS, WITHOUT APPRECIATING THE FACTS OF THE CASE. 2. FACTS IN BRIEF ARE THAT ASSESSEE IS A LIMITED COMPANY ENGAGED IN THE BUSINESS OF I.T. ENABLED SERVICES/BUSINESS PROCESS OUTSOURCING AND IT SERVIC ES. IN RESPECT OF BPO ACTIVITIES, THE ASSESSEE IS PROCESSI NG INSURANCE CLAIMS OF US BASED HEALTH ORGANISATION NAMED AETNA. THE ASSESSEE-COMPANY HAS ALSO DIVERSIFIED IN THE CALL C ENTRE BUSINESS BY OFFERING SERVICES TO US BASED TELECOM C OMPANY. THE ASSESSEE IN RESPECT OF INTERNATIONAL TRANSACTIO NS ENTERED BY THE COMPANY DURING THE PREVIOUS YEAR 2002-2003, THE ITA. NO. 2504/MUM/2010 M/S. HINDUJA VENTURES LTD. 2 METHOD ADOPTED TO COMPUTE TRANSFER PRICE WAS ARRI VED AT AFTER DUE COMPLIANCE WITH THE PROVISIONS OF SECTION 92C OF THE ACT ALONG WITH RULE 10B OF THE IT RULES BY TAKING S UPPORT FROM I) ACCOUNTANTS REPORT OF THE PREVIOUS ASSESSM ENT YEAR 2002-03 U/S 92E OF THE ACT AND, II) TRANSFER PRICIN G STUDY REPORT PREPARED BY THE PRICE WATERHOUSE COOPERS PVT . LTD. (PWC). THE PRICE WATERHOUSE COOPERS PT. LTD. AFTER STUDYING THE CASE OF THE ASSESSEE AND ALSO OECD GUIDELINES RECOMMENDED THE TRANSACTIONAL NET MARGIN METHOD. ACCORDINGLY, THE ASSESSEE HAD ADOPTED THE ABOVE ME THOD FOR COMPUTING THE ARMS LENGTH PRICE FOR ITS INTERNATION AL TRANSACTIONS. HOWEVER, THE ASSESSING OFFICER AT THE TIME OF ASSESSMENT DISALLOWED PART OF THE COMMISSION PAID B Y THE ASSESSEE TO ITS ASSOCIATE ENTERPRISE HDMT INC. USA ON THE GROUND THAT DURING THE YEAR THE ASSESSEE INCREASED THE COMMISSION PAID TO HDMT 12% TO 20% AND OBSERVED THA T BY PAYING 12% COMMISSION THE ASSESSEE WAS LEFT WITH SU BSTANTIAL HIGHER MARGIN THAN ALL COMPARABLE COMPANIES. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFF ICER HAD OBSERVED THAT AS PER THE TRANSFER PRICING OFFICER R EPORT, THE TRANSFER PRICING OFFICER HAD RESTRICTED THE COMMISS ION PAYMENT CLAIMED TO HAVE BEEN PAID BY THE ASSESSEE TO THE ASSOCIATE ENTERPRISE AT RS.474.74 LAKHS TO RS.284.8 4 LAKHS RESULTING IN AN ADJUSTMENT OF RS.189.09 LAKHS. ACCO RDINGLY, AN ADDITION OF RS.189.09 LAKHS WAS MADE TO THE TOTA L INCOME UNDER SECTION 92CA(4) AND SUBSEQUENTLY INITIATED PE NALTY PROCEEDINGS UNDER SECTION 271(1) (C) OF THE ACT. DU RING THE COURSE OF PENALTY PROCEEDINGS, THE ASSESSEE HAS EXP LAINED BEFORE THE ASSESSING OFFICER THAT THERE IS AN INCRE ASE IN EXPENDITURE OF THE ASSOCIATED ENTERPRISE IN TERMS O F MAN POWER TRAVEL COMMUNICATION EXPENSES. HOWEVER, THE A SSESSING OFFICER HAD NOT ACCEPTED THE EXPLANATION OF THE ASS ESSEE AND OBSERVED THAT THE ENHANCEMENT OF THE COMMISSION FRO M 12% ITA. NO. 2504/MUM/2010 M/S. HINDUJA VENTURES LTD. 3 TO 20% WAS NOT AT ARMS LENGTH AND IMPOSED PENALTY U NDER SECTION 271 (1) (C) OF THE ACT. 3. AGGRIEVED, ASSESSEE CARRIED THE MATTER IN APPEA L BEFORE THE CIT(A). IT WAS SUBMITTED BEFORE THE LEAR NED CIT(A) THAT ASSESSEE HAS SUBMITTED ALL THE DETAILS I.E., A CCOUNTS REPORT OF THE PREVIOUS YEAR 2002-2003 UNDER SECTION 92E OF THE ACT, TRANSFER PRICING REPORT PREPARED BY PRICE WATERHOUSE COOPERS PT. LTD. AND AS PER THE EXPERT OPINION THE ASSESSEE HAS FOLLOWED THE TRANSACTIONAL NET MARGIN METHOD FO R COMPUTING THE ARMS LENGTH PRICE FOR ITS INTERNATION AL TRANSACTIONS. ACCORDINGLY, PAYMENT WAS MADE TO HTMT INC. USA, FROM 12% TO 20%. IT WAS ALSO SUBMITTED BEFORE THE CIT(A) THAT THE APPELLANT SALES INCREASED IN ASSESS MENT YEAR 2002-2003 TO RS.2385 LAKHS AS AGAINST RS.1085 LAKHS IN PREVIOUS YEAR 2001-2002 AND THERE IS AN INCREASE OF 120% OVERALL PREVIOUS YEAR. THE EXPENSES OF HTMT INC. AL SO INCREASED. THE ASSESSEE HAS FURTHER SUBMITTED BEFOR E THE CIT(A) THAT PENALTY UNDER EXPLANATION 7 TO 271 (1) (C) CANNOT BE LEVIED ON THE FACTS OF THE ASSESSEE BECAUSE THE SAID EXPLANATION ITSELF STATES THAT THE ASSESSEE PROVES TO THE SATISFACTION OF THE ASSESSING OFFICER OR THE COMMIS SIONER, THE PRICE CHARGED IN ITS TRANSACTION WAS COMPUTED IN AC CORDANCE WITH THE PROVISIONS CONTAINED IN SECTION 92C AND IN THE MANNER PRESCRIBED UNDER THAT SECTION IN GOOD FAITH AND DUE DILIGENCE, NO PENALTY CAN BE LEVIED. ASSESSEE AFTER TAKING THE EXPERT OPINION I.E., PRICE WATERHOUSE COOPERS PT. L TD. FOLLOWED THE TRANSFER PRICING METHOD. THEREFORE, THERE IS NO JUSTIFICATION TO INVOKE THE PENALTY IN THE PRESENT CASE. 4. THE LEARNED CIT(A), AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, DELETED THE PENALTY. T HE RELEVANT PORTION OF THE ORDER OF THE LEARNED CIT(A) EXTRACTE D AS UNDER : ITA. NO. 2504/MUM/2010 M/S. HINDUJA VENTURES LTD. 4 4. I HAVE PERUSED THE TRANSFER PRICING OFFICERS ORDE R, ASSESSMENT ORDER, PENALTY ORDER AND EXAMINED THE WRITTEN SUBMISSION OF THE APPELLANT. PENALTY PROCEEDINGS ARE DISTINCT FROM ASSESSMENT PROCEEDINGS. MERELY BECAUSE AN ADDITION HAS BEEN MADE WHICH HAS EITHER BEEN ACCEPTED OR CONFIRMED IN 1 ST APPEAL DOES NOT IPSO FACTO LEAD TO THE CONCLUSION THAT THE TAXPAYER HAS CONCEALED ITS INCOME. THE CONSIDERATION WHICH APPLY FOR LEVY OF PENALTY IS DIFFERENT FROM THAT WHICH OBTAINS WHILE MAKING ADDITION OR DISALLOWANCE IN ASSESSMENT. 4.1. THIS POSITION OF THE LAW ASSUMES GREATER IMPORTANCE WHEN WE ARE DEALING WITH LEVY OF PENALTY UNDER CHAPTER X. OF THE I.T. ACT WHICH DEALS WITH SPECIAL PROVISIONS RELATING TO TRANSFER PRICING REGULATIONS . THIS IS BECAUSE THE LEVY OF CONCEALMENT PENALTY IN SUCH MATTERS IS GOVERNED BY EXPLANATION 7 OF THE SECTION 271 (1) (C). THE WORDING OF THE EXPLANATION 7 IS DIFFERENT FROM EXPLANATION 1 WITH PROVISION (A) & (B) WHICH MAINLY LAYS DOWN THE LAW ON LEVY OF PENALTY ON OTHER REGULAR PROVISIONS OF THE ACT. 4.2. IN THE EXPLANATION 7 THE WORD GOOD FAITH AND DUE DILIGENCE HAS BEEN USED. A PENALTY CAN ONLY BE LEVIED IF THE TAX PAYER HAS NOT ACTED WITH GOOD FAITH AS WELL AS DUE DILIGENCE. APPLIED TO THE FAC TS OF THE CASE, IT IS OBSERVED THAT THE ADJUSTMENT MAD E BY THE A.O. WAS ON ACCOUNT OF DIFFERENCE OF OPINION TO THE EXTENT OF COMMISSION PAYABLE TO THE AE. THE ASSESSING OFFICER HAS REDUCED THE SAME TO 12% AS THIS WAS THE RATE FOR EARLIER YEAR. HE FAILED TO TA KE INTO ACCOUNT THE GROWTH OF BUSINESS THIS YEAR AND HIGH OPERATING MARGINS EARNED BY THE APPELLANT. HE HAS ALSO NOT HIGHLIGHTED ANY COMPARABLE HAVING THE SAME BUSINESS OR SERVICE, VOLUME AND TERRITORY, HAD PAID ONLY 12%. THUS RESTRICTING THE COMMISSION PAYMENT TO 12% IS A SUBJECTIVE ONE. PENALTY U/S 271 (1) (C) AND THAT TOO UNDER EXPLANATION 7 IS NOT ELIGIBLE ON THE FACTS OF THE CASE. TRANSFER PRICING IS NOT AN EXACT SCIENCE AND THE ARMS LENGTH PRICE IS A N ESTIMATE ONLY AND IT IS INHERENT IN TRANSFER PRICIN G THAT REASONABLE PEOPLE CAN END UP DRAWING DIFFERENT CONCLUSIONS FROM THE SAME FACTS. THE RECENT ORDER O F THE ITAT IN VERTEX CUSTOMER SERVICES CITED BY THE APPELLANT WHICH DEALS WITH TRANSFER PRICING ADJUSTMENT AND EXPLANATION 7 SQUARELY APPLIES IN THIS CASE. THERE IS NOTHING ON THE RECORD TO SUGGES T THAT THE APPELLANT DID NOT ACT IN GOOD FAITH AND ITA. NO. 2504/MUM/2010 M/S. HINDUJA VENTURES LTD. 5 DUE DILIGENCE. THE EXPLANATION OFFERED BY THE APPELLANT IS BONAFIDE AND THERE IS NEITHER ANY CONCEALMENT OF INCOME NOR FURNISHING OF INACCURATE PARTICULARS OF INCOME. THUS, THE PENALTY SO LEVIED IS DELETED. 5. NONE APPEARED FOR THE ASSESSEE. WE HAVE HEARD T HE LEARNED DR, WHO SUPPORTED THE ORDERS OF THE ASSESSI NG OFFICER. 6. PENALTY IMPOSED IN THE PRESENT CASE ON THE GRO UND THAT ASSESSEE HAS PAID EXCESS COMMISSION TO THE ASS OCIATE ENTERPRISE. ACCORDING TO THE ASSESSING OFFICER, THE PAYMENT WAS EXCESS. THE LEARNED CIT(A) HAS CONSIDERED THE E NTIRE FACTUAL MATRIX OF THE CASE AND GAVE A CATEGORICAL FINDING THAT THE ASSESSING OFFICER HAS REDUCED THE PAYMENT OF CO MMISSION FROM 20% TO 12% IGNORING THE GROWTH OF THE BUSINESS AND HIGH OPERATING MARGINS EARNED BY THE ASSESSEE. HE GAVE A FURTHER FINDING THAT THE ASSESSING OFFICER HAS NOT HIGHLIGH TED ANY COMPARABLE CASES HAVING SIMILAR BUSINESS OR SERVIC ES, VOLUME AND TERRITORY HAD PAID ONLY 12% AND ALSO OBSERVED T HAT THERE IS NOTHING ON RECORD TO SUGGEST THAT THE APPELLANT DID NOT ACT IN GOOD FAITH AND DILIGENCE AND THE EXPLANATION OFF ERED BY THE ASSESSEE IS A BONAFIDE. THERE IS NO MATERIAL ON REC ORD TO SUGGEST THAT THE ASSESSEE IS NEITHER CONCEALED THE INCOME NOR FURNISHED INACCURATE PARTICULARS. AFTER CONSIDE RING THE ENTIRE FACTS AND CIRCUMSTANCES OF THE CASE AND ALSO IN VIEW OF SPECIFIC FINDING GIVEN BY THE CIT(A) WE FIND NO INF IRMITY IN THE ORDER PASSED BY THE CIT(A) AND THE SAME IS HEREBY U PHELD. ACCORDINGLY, APPEAL FILED BY THE REVENUE IS DISMIS SED. ITA. NO. 2504/MUM/2010 M/S. HINDUJA VENTURES LTD. 6 7. IN THE RESULT, APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT, ON THIS 27 TH DAY OF APRIL, 2011. SD/- SD/- (R.S.SYAL) (V.D.RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATE 27 TH APRIL, 2011 VBP/- COPY TO 1. ITO 15 (2) (2), MUMBAI 2. HOTEL CRYSTAL (MUMBAI) CONDUCTORS, 9, GLIDER LAN E, LAMINGTON ROAD, NAVJIVAN SOCIETY, MUMBAI 400 008 PAN AACFH3207-L 3. CIT(A)-26, MUMBAI 4. CIT, CITY-15, MUMBAI 5. DR H BENCH 6. GUARD FILE (TRUE COPY) BY ORDER ASST. REGISTRAR, ITAT, MUMBAI BENCHES MUMBAI.