ITO, New Delhi V. M/s. Tianjin Tianshi India Pvt. Ltd., New Delhi

ITA 2967/DEL/2015

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 3191 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 9 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-03-2020
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Assessment Year: 2006-2007
• Appeal Filed On: 13-05-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Permanent establishment
• Section: 271(1)(c); 92C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH G, NEW DELHI BEFORE MS. SUSHMA CHOWLA, VICE PRESIDENT DR. B. R. R. KUMAR, ACCOUNTANT MEMBER ITA NO. 2967/DEL/2015 : ASSTT. YEAR: 2 006-07 INCOME TAX OFFICER, WAR-25(3), NEW DELHI VS M/S TIANJIN TIANSHI INDIA PVT. LTD., 10, COMMUNITY CENTRE, BASANT LOK, NEW DELHI-110057 (APPELLANT ) (RESPONDENT) PAN NO. AABCT5611J ASSESSEE BY : SH. UPVAN GUPTA, ADV. REVENUE BY : SH. H. K. CHOUDHARY, CIT DR 8 DATE OF HEARING: 30.01.2020 DATE OF PRONOUNCEMENT: 09.03.2020 ORDER PER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER: THE PRESENT APPEAL HAS BEEN FILED BY THE REVENUE A GAINST THE ORDERS OF THE LD. CIT(A)-44, NEW DELHI DATED 12 .02.2015. 2. FACTS TAKEN FROM THE ORDER OF THE LD. CIT (A). HISTORY AND BACKGROUND: 3. THE ASSESSEE IS ONE OF THE GROUP COMPANIES OF CH INA BASED TIENS GROUP OF COMPANIES. THE BUSINESS OF THE ASSES SEE, IS TRADING/DISTRIBUTION OF FOOD SUPPLEMENTS AND HEALTH CARE EQUIPMENTS. THE PRODUCTS DEALT WITH BY THE COMPANY ARE BASICALLY PRODUCTS MANUFACTURED AT CHINA OR OTHER P LACES BY GROUP CONCERNS. ANOTHER GROUP ENTITY TIANJIN TIANSH I BIOLOGICAL DEVELOPMENT COMPANY LIMITED, INCORPORATED AT CHINA HAS ESTABLISHED A FOREIGN BRANCH OFFICE IN INDIA. THIS IS A FOREIGN ITA NO. 2967/DEL/2015 TIANJIN TIANSHI INDIA PVT. LTD. 2 COMPANY WITH NON-RESIDENT STATUS FALLING UNDER THE CATEGORY OF AN ASSOCIATE ENTERPRISE (AE) OF THE ASSESSEE, WHI LE THE INDIAN BRANCH OFFICE OF THIS COMPANY SPECIFICALLY FALL UND ER THE CATEGORY OF PERMANENT ESTABLISHMENT (PE). INTERNATIONAL TRANSACTIONS: TPO 4. THE ASSESSEE HAD PURCHASED TRANSACTIONS AGGREGAT ING TO RS.17,49,72,636/- FROM THE INDIAN BRANCH OFFICE OF M/S TIANJIN TIANSHI BIOLOGICAL DEVELOPMENT COMPANY LIMITED (PE) . THE ASSESSING OFFICER MADE A REFERENCE TO THE TPO FOR D ETERMINATION OF ARMS LENGTH PRICE UNDER SECTION 92CA(3) IN RESP ECT OF THIS PURCHASE TRANSACTIONS AND THE TPO HAS DETERMINED TH E TP ADJUSTMENT OF RS. 2,78,76,273/-. CIT(A) ON TP ADJUSTMENT: 5. THE ASSESSEE FILED APPEAL BEFORE THE LD. CIT (A) WHO WHILE DECIDING THE QUANTUM APPEAL, HELD THAT .....THE WO RDING TO ALLOCATE PROFIT IN DIFFERENT JURISDICTION BY CONTRO LLING PRICES ARE VERY CLEAR ABOUT THE DIFFERENT JURISDICTION (AT LEA ST TWO TAX JURISDICTIONS OF DIFFERENT COUNTRIES) AND EMPHASIS ON PROFITS SHOULD NOT BE UNDULY TRANSFERRED OUT OF INDIA. IN THE INSTANT CASE BOTH THE ELEMENT ARE ABSENT. 6. ACCORDINGLY, THE LD. CIT(A) HAS DELETED THE ADDI TION OF RS. 2,78,76,273/- IN THE QUANTUM APPEAL. THE DEPARTMENT HAD FILED AN APPEAL BEFORE THE ITAT AGAINST THE SAID ASSESSEE ORDER PASSED BY THE LD. CIT(A). ITA NO. 2967/DEL/2015 TIANJIN TIANSHI INDIA PVT. LTD. 3 ITAT ON TP ADJUSTMENT: 7. VIDE ORDER DATED 27.05.2011 THE ITAT HAS HELD (I) THE CIT(A) HAS ERRED IN OBSERVING THAT SINCE NO CROSS BORDER TRANSACTION IS INVOLVED, THE TRANSFER PRICING PROVI SIONS ARE NOT ATTRACTED. ONCE THE TRANSACTIONS INVOLVED ARE INTER NATIONAL TRANSACTIONS WITHIN THE MEANING OF SECTION 92B( 1) OF THE ACT, THE TRANSFER PRICING PROVISIONS HAVE RIGHTLY BEEN INVOL VED. (II) IN VIEW OF THE CLEAR PROVISIONS OF SECTIONS 92B(1) AND SECTION 92(1), THERE IS NO REQUIREMENT TO PROVE ANY MOTIVE TO SHIFT PROFITS OU TSIDE INDIA OR TO EVADE TAXES IN INDIA IN THE RELATED PARTY TRANSACTI ONS AND THE CIT(A) HAS ALSO ERRED IN PLACING RELIANCE ON THE FACT THAT NO SUCH FINDING WAS RECORDED BY THE AO. THE ISSUE IS AS TO WHETHER THE TRANSFER PRICING PROVISIONS HAVE BEEN RIGHTLY HELD TO BE NOT APPLICABLE. 8. IN CONCLUSION, THE ITAT HELD THAT THE TRANSACTIO NS ATTRACT THE TRANSFER PRICING PROVISIONS. OWING TO THE DIREC TION OF THE ITAT, TRANSFER PRICING ADJUSTMENT HAS BEEN MADE. SUBSEQUENTLY, THE PENALTY U/S 271(1)(C) HAS BEEN LE VIED BY THE ASSESSING OFFICER AND THE PENALTY ORDER HAS BEEN PA SSED ON 21.03.2012. CIT(A) ON PENALTY: 9. WHILE DELETING THE PENALTY, THE LD. CIT (A) HELD THAT THE ASSESSEE WAS UNDER BELIEF THAT THE PURCHASE FROM TH E PE OF THE FOREIGN AE WOULD NOT ATTRACT THE TRANSFER PRICING P ROVISIONS. IT WAS HELD THAT THE LD. CIT (A) HAS ALSO HELD THE SAM E VIEW AND DELETED THE ADDITION VIDE THE APPELLATE ORDER DATED 29.06.2010 IN THE QUANTUM APPEAL. IT WAS HELD THAT THE PROVISI ONS OF EXPLANATION 7 TO SECTION 271(1)(C) ARE NOT ATTRACTE D IN THIS CASE AND DELETED THE PENALTY. ITA NO. 2967/DEL/2015 TIANJIN TIANSHI INDIA PVT. LTD. 4 ARGUMENTS OF THE LD. DR: 10. HE STRONGLY RELIED ON THE EXPLANATION 7 TO SECT ION 271(1)(C) AND ON THE JUDGMENTS IN THE CASE OF DHARM ENDRA TEXTILE PROCESSORS 295 ITR 244, ZOOM COMMUNICATION PVT. LTD. 327 ITR 510 AND JUDGMENT OF HONBLE APEX COURT IN T HE CASE OF MAK DATA PVT. LTD. 358 ITR 593. HE FILED WRITTEN SU BMISSIONS DETAILING THE PROVISIONS OF THE ACT AND RATIO OF TH E JUDGMENTS. ARGUMENTS OF THE LD. AR: 11. IT WAS ARGUED THAT THE ORDER OF THE ITAT DATED 27.05.2011 HAS BEEN RECEIVED IN THE OFFICE OF THE CIT ON 25.07 .2011 AND HENCE THE PENALTY ORDER PASSED ON 21.03.2012 IS BEY OND THE PERIOD OF SIX MONTHS FROM THE END OF THE MONTH IN W HICH THE ORDER WAS RECEIVED BY THE CIT. IT WAS ARGUED THAT A PERIOD OF SIX MONTHS EXPIRED ON 31.01.2012 AS PER THE PROVISI ONS OF SECTION 275(1)(A). 12. FURTHER, IT WAS ARGUED THAT SINCE ONE OF THE AP PELLATE AUTHORITIES IN QUANTUM PROCEEDINGS ARE FAVOURABLE, IT PROVES THAT THE ISSUE IS DEBATABLE AND HENCE NO PENALTY CA N BE LEVIABLE. HE ALSO ARGUED THAT THE PENALTY IS NOT LE VIABLE AS THERE IS A BONAFIDE CLAIM AND THE REVENUE HAS NOT PROVED ANY CASE OF FURNISHING OF INACCURATE PARTICULARS OF INCOME OR C ONCEALMENT. PERUSAL OF THE FACTS AND DECISION THEREOF: 13. ON GOING BACK TO THE CORE ISSUE OF ADJUSTMENT O F ALP, IT REVEALS THAT THE ASSESSEE HAS APPLIED TNMM AS THE M OST APPROPRIATE METHOD AND USED NP/TC AS PLI. ITS MARGI NS IN THE FOOD SUPPLEMENTS AND HEALTH EQUIPMENT ARE 4.2% AND 4.2% ITA NO. 2967/DEL/2015 TIANJIN TIANSHI INDIA PVT. LTD. 5 RESPECTIVELY. IN THE FIRST SEGMENT THE ASSESSEE HAS SELECTED 18 COMPARABLES WHOSE AVERAGE NP/TC MARGIN IS 4.1% AND IN THE SECOND SEGMENT, THE ASSESSEE HAS SELECTED 5 COMPARA BLES WHOSE AVERAGE MARGIN IS 4.45%. IN THE TP STUDY, THE ASSESSEE, HAS USED MULTIPLE YEAR DATA FOR COMPUTING THE AVERA GE MARGIN OF THE COMPARABLES WHILE THE TPO HAS USED THE CURRE NT YEAR DATA FOR CALCULATING THE AVERAGE MARGIN OF THE COMP ARABLES. IN THE TP STUDY THE ASSESSEE HAS USED NP/TC AS PLI WHI LE THE TPO HAS USED OP/SALES AS PLI. ACCORDINGLY, THE TPO HAS COMPUTED THE ADJUSTMENT OF RS. 91,37,476/- IN THE HEALTH EQU IPMENT SEGMENT. IN THE FOOD SUPPLEMENT SEGMENT, THE ASSESS EE HAS SELECTED 18 COMPARABLES AND COMPUTED THE AVERAGE MA RGIN (NP/TC) OF THESE COMPARABLES AT 4.1, THE TPO HAS CH OSEN ONLY 2 COMPARABLES OUT OF 18 COMPARABLES FROM THE LIST O F ASSESSEE AND COMPUTED THE AVERAGE MARGIN (OP/SALES) AT 17% B ASED ON CURRENT YEAR DATA. ACCORDINGLY, THE TPO HAS COMPUTE D THE ADJUSTMENT OF RS 1,87,38,797/- IN THE FOOD SUPPLEME NT SEGMENT AND SUBSEQUENTLY LEVIED PENALTY. 14. IN THIS BACKGROUND, THE PROVISIONS OF EXPLANATI ON 7 OF SECTION 271(1)(C) ARE EXAMINED. THE SAME READS AS U NDER: EXPLANATION 7 - WHERE IN THE CASE OF AN ASSESSEE W HO HAS ENTERED INTO AN INTERNATIONAL TRANSACTION DEFINED IN SECTIO N 92B, ANY AMOUNT IS ADDED OR DISALLOWED IN COMPUTING THE TOTAL INCOM E UNDER SUB- SECTION (4) OF SECTION 92C, THEN, THE AMOUNT SO ADD ED OR DISALLOWED SHALL, FOR THE PURPOSES OF CLAUSE (C) OF THIS SUB-S ECTION, BE DEEMED TO REPRESENT THE INCOME IN RESPECT OF WHICH PARTICU LARS HAVE BEEN CONCEALED OR INACCURATE PARTICULARS HAVE BEEN FURNI SHED, UNLESS THE ASSESSEE PROVES TO THE SATISFACTION OF THE ASSESSIN G OFFICER OR THE OR THE COMMISSIONER (APPEALS) [OR THE COMMISSIONER] TH AT THE PRICE CHARGED OR PAID IN SUCH TRANSACTION WAS COMPUTED IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SECTION 92C AND IN THE MANNER PRESCRIBED UNDER THAT SECTION, IN GOOD FAITH AND WITH DUE DILI GENCE. ITA NO. 2967/DEL/2015 TIANJIN TIANSHI INDIA PVT. LTD. 6 15. WE FIND THAT DURING THE EARLIER PERIOD OF TRANS FER PRICING ADJUSTMENT, IT WAS NOT EVEN CLEAR WHETHER THE TRANS ACTIONS ARE INDEED INTERNATIONAL TRANSACTIONS OR NOT/OR WHETHER THE TRANSACTIONS ARE A SUBJECT MATTER OF TP STUDY OR NO T. IN THE CASE OF VERIZON COMMUNICATION INDIA (P) LTD. VS DCIT, TH E ITAT DELHI HAS HELD THAT WHEN THE ASSESSEE FILED ITS RETURN OF INCOME, THE ASSESSEE ADOPTING MULTIPLE YEAR DATA FOR ARRIVING A T ARM'S LENGTH PRICE IS A BONAFIDE EXERCISE. IT WAS HELD TH AT UNDER SUCH CIRCUMSTANCES THE PENALTY LEVIED CANNOT BE SUSTAINE D. 16. IN THE INSTANT CASE, THE ADJUSTMENT AROSE DUE T O EXCLUSION OF SOME COMPARABLES AND THE USE OF CURRENT YEAR DAT A BY THE REVENUE INSTEAD OF MULTIPLE YEAR DATA BY THE ASSESS EE AND ALSO TAKING OP/SALES INSTEAD OF NP/TC AS PLI. THE ISSUE OF APPLICABILITY OF CURRENT YEAR DATA OR MULTIPLE YEAR DATA HAS NOT BEEN ATTAINED FINALITY AT THAT POINT OF TIME. 17. THE CASE LAW OF DHARMENDRA TEXTILE PROCESSORS R ELIED BY THE LD. DR DEALS WITH WILLFUL CONCEALMENT VERSUS CI VIL LIABILITY. THE INSTANT CASE, DOESNT DEAL WITH ANY ISSUE OF CO NCEALMENT BUT ADJUSTMENT. THE CASE OF ZOOM COMMUNICATION PVT. LTD. DEALT WITH THE CLAIM OF THE ASSESSEE WHICH IS EX-FA CIE NON- ALLOWABLE, THE FACTS OF WHICH ARE DIFFERENT FROM TH E FACTS OF THE PRESENT CASE SO FAR THE PRESENT CASE DEALS WITH ADJ USTMENT AND DETERMINATION OF ALP. SIMILARLY, THE CASE OF MAK DA TA WHICH DEALS WITH VOLUNTARILY DISCLOSURE VERSUS CONCEALMEN T, HENCE THE RATIO IS NOT APPLICABLE TO THE CASE BEFORE US. FURT HER, THE PROVISIONS OF EXPLANATION 7 ACCORDS A BENEFIT TO TH E ASSESSEES TO PROVE THAT THE PRICE CHARGED ARE PAID IN SUCH TR ANSACTIONS WAS COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF S ECTION 92C ITA NO. 2967/DEL/2015 TIANJIN TIANSHI INDIA PVT. LTD. 7 IN GOOD FAITH AND DUE DILIGENCE. IN THE INSTANT CAS E, ALL THE FACTS HAVE BEEN SUBMITTED BEFORE THE REVENUE AUTHORITIES WHILE THE ASSESSEE SUED NP/TC, THE REVENUE USED OP/SALES. THI S AMOUNTS TO DETERMINATION OF ALP FROM A DIFFERENT ANGLE, SAY AT MOST FROM THE ANGLE OF THE REVENUE. IT CANNOT BE SAID THAT TH ERE WAS ANY SURREPTITIOUS MECHANISM EMBARKED UPON BY THE ASSESS EE NOR IT CAN BE SAID THAT THE ASSESSEE FAILED TO EXERCISE TH EIR TRANSACTIONS WITH ALL THE DUE DILIGENCE. IN THE PRE SENT CASE THE ASSESSEE HAS PREPARED ITS TP REPORT IN GOOD FAITH A ND WITH DUE CARE. THERE IS NOTHING ON RECORD TO DISPROVE THE GO OD FAITH AND THE DUE DILIGENCE DISCHARGED BY THE ASSESSEE IN DET ERMINING THE ALP OF TRANSACTIONS IN THE TP REPORT SUBMITTED BY T HE ASSESSEE. 18. HENCE, WE HEREBY HOLD THAT EXPLANATION 7 TO SEC TION 271(1)(C) IS NOT ATTRACTED IN THE PRESENT CASE, AND HENCE, IT IS NOT A FIT CASE FOR LEVYING THE PENALTY U/S 271(1)(C ). ACCORDINGLY, THE PENALTY IMPOSED U/S 271(1)(C) IS HEREBY ORDERED TO BE DELETED. 19. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 09/03/2020. SD/- SD/- (SUSHMA CHOWLA) (DR. B. R. R. KUMAR) VICE PRESIDENT ACCOUNTANT MEMBER DATED: 09/03/2020 *SUBODH* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR