ACIT, New Delhi V. M/s Dentsply India Pvt. Ltd., New Delhi

ITA 31/DEL/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 58736 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 1 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-03-2012
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 23-02-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 04-01-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: PRADEEP KUMARDR
• Assessee Lawyers: SM MATHUR
• Keywords: Depreciation; Transfer pricing; Principle of natural justice; International transaction; Additional evidence; Wholly owned subsidiary; Difference of opinion; Arm length price
• Section: 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI B BENC H BEFORE SHRI R.P. TOLANI , JM & SHRI A.N. PAHUJA, AM ITA NO.31/DEL/2011 ASSESSMENT YEAR:2005-06 A.C.I.T., CIRCLE 10(1), NEW DELHI V/S . M/S DENTSPLY INDIA PVT. LTD., PLOT NO.358, FIES PATPARGANJ INDUSTRIAL AREA, DELHI-92 [PAN : AAACD 3171E) (APPELLANT) (RESPONDENT) ASSESSEE BY SHRI S.M. MATHUR, AR REVENUE BY SHRI PRADEEP KUMAR,DR DATE OF HEARING 23-02-2012 DATE OF PRONOUNCEMENT 02-03-2012 O R D E R A.N.PAHUJA:- THIS APPEAL FILED ON 04.01.2011 BY THE REVENUE AGAI NST AN ORDER DATED 29.10.2010 OF THE LEARNED CIT(A)-XX, NEW DELH I, RAISES THE FOLLOWING GROUND:- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ORDER OF THE CIT(A) IS WRONG, PERVERSE, IL LEGAL AND AGAINST THE PROVISIONS OF LAW WHICH IS LIABLE T O BE SET ASIDE. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDIT ION ON A/C OF DIFFERENCE OF ARMS LENGTH PRICE. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN NOT AFFORDING ANY OPPORTUNITY TO THE TPO BEFORE PROCEEDING TO COMPUTE THE MARGINS OF THE COMPARABLES AND THE ASSESSEE. ITA N O.31 /DEL./2011 2 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) HAS ERRED IN NOT CONSIDERING SERVICE INCOME & COMMISSION INCOME AS OPERATING INCOME SPECIALLY WHEN ENTITY LEVEL MARGINS OF THE COMPARABLE COMPANIES ARE BEING CONSIDERED. 5. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) HAS ERRED IN NOT CONSIDERING SEGMENTAL ACCOUNTS OF HEALTHCARE DIVISION IN ADVANCED MICRONICS DEVICE LTD., MORE SO WHEN THE MARGIN WERE RECOMPUTED AFRESH. 6. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ORDER OF THE CIT(A) HAS ERRED IN QUASHING THE APPLICABILITY OF PENALTY U/S 271(1)(C)/271G OF THE ACT. 7. THE APPELLANT CRAVES TO LEAVE, TO ADD, ALTER OR AMEND ANY GROUND OF APPEAL RAISED ABOVE AT THE TIME OF TH E HEARING. 2. ADVERTING FIRST TO GROUND NO.3 IN THE APPEAL, F ACTS, IN BRIEF, AS PER RELEVANT ORDERS ARE THAT RETURN DECLARING LOSS OF ` ` 28,17,554/- FILED ON 31.10.2005 BY THE ASSESSEE, TRADING IN DENTAL MATERIAL & EQUIP MENTS, AFTER BEING PROCESSED ON 30.08.2006 U/S 143(1) OF THE INCOME-TAX ACT, 19 61 (HEREINAFTER REFERRED TO AS THE ACT), WAS SELECTED FOR SCRUTINY WITH THE SERVIC E OF NOTICE U/S 143(2) OF THE ACT. SUBSEQUENTLY, THE ASSESSING OFFICER (A.O. IN SHORT) NOTICED THAT THE ASSESSEE COMPANY, A WHOLLY OWNED SUBSIDIARY OF DENTSPLY INDU STRIES, USA, ENTERED INTO FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS AE:- S.NO. DESCRIPTION OF TRANSACTION METHOD VALUE IN (IN ` `) 1. IMPORT OF RAW MATERIALS AND CONSUMABLES TNMM 16,30,684 2. IMPORT OF FINISHED GOODS TNMM 9,90,97,237 3. INTEREST PAYABLE ON LOAN - 11,45,818 2.1 THE ASSESSEE FOLLOWED TNMM METHOD ON AGGREGATI ON APPROACH IN ORDER TO ESTABLISH ARMS LENGTH PRICE (ALP IN SHORT ) OF THE AFORESAID TRANSACTIONS. ITA N O.31 /DEL./2011 3 ON REFERENCE BY THE AO, THE TPO IN HIS REPORT SUG GESTED ADJUSTMENT OF ` ` 2,28,21,754/- IN THE FOLLOWING TERMS:- IT IS SEEN THAT IN THE CASE OF THE ASSESSEE, T HE OPERATING PROFIT EARNED ON TOTAL COST IS CALCULATED AS UNDER FROM THE AUDITED FINANC IALS. AS THE ASSESSEE COULD NOT JUSTIFY ITS OPERATING PROFITS DEDUCED IN APPEND IX B OF THE TRANSFER PRICING REPORT, FIGURES FROM AUDITED FINANCIALS HAVE BEEN T AKEN AND OTHER INCOME HAS BEEN CONSIDERED AS NON- OPERATING INCOME. [IN ` ] TOTAL OP. INCOME. 18,67,82,237 MATERIALS AND RELATED EXPENSES 14,23,21,068 PERSONNEL EXPENSES 1,65,98,619 SELLING & DISTRIBUTION EXPENSES 1,12,58,859 ADMINISTRATION & OTHER EXPENSES 2,43,85,453 DEPRECIATION 11,26,404 TOTAL OPERATING EXPENSES 19,56,90,403 OPERATING PROFIT -89,09,166 OP/TC PERCENTAGE -4.55% 2.2 IN ORDER TO ARRIVE AT ARMS LENGTH PRICE OF INT ERNATIONAL TRANSACTIONS THE ASSESSEE MUST EARN AN OPERATING MARGIN OF 7.11% OF ITS TOTAL COST WHICH IS ` ` 19,56,90,403/- AS PER AUDITED FINANCIALS. TOTAL COST OF THE ASSESSEE (TC) 19,56,90,403 OPERATING MARGINS @7.11% OF TC 1,39,1,588 OPERATING PROFIT/LOSS AS ABOVE -89,09,166 DIFFERENCE 2,28,21,754 IT CAN THEREFORE, BE CONCLUDED THAT THE INTERNATIO NAL TRANSACTIONS OF THE ASSESSEE IN RESPECT OF IMPORT OF FINISHED GOODS AND RAW MATERIAL ENTERED WITH ITS ASSOCIATED ENTERPRISES ARE NOT AT ARMS LENGTH. TH E ASSESSEE IN ARMS LENGTH CIRCUMSTANCES WOULD EARN A PROFIT OF ` ` 1,39,13,588/- WHEREAS A LOSS OF ` `89,08,166/- IS BEING POSTED. THE DIFFERENCE BETWE EN LOSS REPORTED BY THE ASSESSEE AND ARMS LENGTH PROFIT CALCULATED ON THE BASIS OF COMPARABLES AS ABOVE WOULD BE ` 2,28,21,754/-. THE ARMS LENGTH VALUE OF THE INTER NATIONAL TRANSACTION IN RESPECT OF IMPORT OF FINISHED GOODS, RAW MATERIAL AND PAYMENT OF ITA N O.31 /DEL./2011 4 INTEREST ON EXTERNAL COMMERCIAL BORROWING IS AS ABO VE IS ACCORDINGLY DETERMINED AS UNDER:- [IN ` ] S NO. INTERNATIONAL TRANSACTION BOOK VALUE DIFFERENCE LOADED ARMS LENGTH PRICE DIFFERENCE (%) 1 IMPORT OF RAW MATERIALS AND CONSUMABLES 1630684 365306 1265378 28.87 2 IMPORT OF FINISHED GOODS 99097237 22199762 76897475 28.87 3 INTEREST PAYABLE ON LOAN 1145818 256686 889132 28.87 101873739 22821754 THE ASSESSING OFFICER SHALL INCREASE THE INCOME OF THE ASSESSEECOMPANY BY ` 2,28,21,754/-. 2.3 AFTER RECEIPT OF REPORT OF THE TPO, THE AO ALL OWED AN OPPORTUNITY OF HEARING TO THE ASSESSEE .IN RESPONSE, THE ASSESSEE MERELY SUBMITTED A LETTER DATED 8 TH SEPTEMBER, 2008 FILED BEFORE THE TPO. SINCE THE S AID REPLY HAD ALREADY BEEN CONSIDERED BY THE TPO, THE AO ADDED AN AMOUNT OF ` `2,28,21,754/- IN TERMS OF ORDER DATED 25 TH SEPTEMBER, 2008 U/S 92CA(3) OF THE ACT OF THE TPO. 3. ON APPEAL, THE LD. CIT(A) ADJUDICATED THE ISSUE S IN THE FOLLOWING TERMS:- 7. FROM THE ABOVE GROUNDS FOLLOWING ISSUES EMERGES WHICH REQUIRE ADJUDICATION: I) WHETHER TPO WAS JUSTIFIED IN CONSIDERING THE CUR RENT YEAR DATA FOR THE PURPOSES OF DETERMINING ARMS LENGTH P RICE OF INTERNATIONAL TRANSACTION. II) WHETHER TPOS ACTION OF EXCLUDING COMPARABLE SE LECTED BY APPELLANT WAS JUSTIFIED AND WHETHER ANY ADJUSTMENT IS TO BE MADE FOR COMPUTING OPERATING MARGINS. III) WHETHER THE BENEFIT OF +5% IS AVAILABLE. ITA N O.31 /DEL./2011 5 IV) WHETHER NPM OF THE APPELLANT COMPUTED CORRECTLY . V) WHETHER PENALTY U/S 271(1)(C) AND 271G COULD BE IMPOSED. 3.1 THE LD. CIT(A) WHILE UPHOLDING THE FINDINGS OF THE TPO IN CONSIDERING CURRENT YEARS DATA AND SELECTION OF COMPARABLES VI Z. ASHCO INDUSTRIES LIMITED AND ADVANCED MICRONIC DEVICES LIMITED AND REJECTING THE CLAIM OF THE ASSESSEE FOR BENEFIT OF +/-5% IN TERMS OF PROVISO TO SEC. 92 C(2) OF THE ACT, DELETED THE ADDITION, INDISPUTABLY AFTER ADMITTING ADDITIONAL E VIDENCE WITHOUT ALLOWING ANY OPPORTUNITY TO THE TPO, IN THE FOLLOWING TERMS: 10. I HAVE CAREFULLY GONE THROUGH THE ORDER PASSED BY ASSESSING OFFICER/TPO AND ALSO THE SUBMISSION MADE BY THE APPLICANT, BOTH IN WRITING AS WELL AS ORAL ARGUMENTS ADVANCED DURING THE COURSE OF PROCEEDINGS. I HAVE ALSO EXAMINED THE SEARCH PROCESS CARRIED OUT BY THE ASSESSEE AS CONTAINED IN TP STUDY. ASSESSEE HAS SELECTED TNMM AS THE MOST APPROPRIATE METHOD AS THE NET MARGIN ARE LESS AFFECTED THE TRANSACTIONAL DIFFERENCES THAN ARE THE PRICES OF THE PRODUCT. THE SEARCH CRITERIA BASED O N FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISK ASSUMED BASED OF TWO COMPARABLE WHICH WERE INITIALLY SELECTED BY THE TPO HAS BEEN RETAINED AS FINAL COMPARABLE. 11. ON THE BASIS OF THE FINAL SELECTION OF TWO COMP ARABLES, THE MEAN OF THEIR OPERATING PROFIT EARNED ON TOTAL OPERATING COST BASED ON DATA FOR THE FINANCIAL YEAR 2004-05 WILL BE COMPARED WITH THAT OF THE ASSESSEE COMPANY TO DETERMINE THE ARMS LENGTH PRICE IN REGARDS TO INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2005-06. DURING THE COURSE OF APPELLATE PROCEEDINGS, IT WAS ALSO FOUND THAT, THE TPO HAS CALCULATED THE NET PRO FIT MARGIN BY TAKING OP/TC AS THE PROFIT LEVEL INDICATO R BY ACCEPTING TNMM AS THE MOST APPROPRIATE METHOD. SINCE NEITHER TPO NOR THE APPELLANT HAD ANY GROUNDS OF DISPUTES, REGARDING PLI FOR THE TRADING FUNCTION AND THE USE OF THE APPELLANT AS THE TESTED PARTY, THERE FORE, I HOLD THAT, OP/TC SHOULD BE USED AS THE APPROPRIAT E PLI AND TNMM AS THE MOST APPROPRIATE METHOD. 12. ACCORDINGLY THE APPELLANT WAS CALLED TO PROVIDE THE OP/TC RELIABLE FIGURES FOR THE CURRENT YEAR OF THE ITA N O.31 /DEL./2011 6 COMPARABLES ACCEPTED BY THE TPO, TO DETERMINING THE VALUE OF THE ARMS LENGTH TRANSACTION. THE APPELLAN T SUBMITTED THE AUDITED OP/TC FIGURES OF TWO COMPARABLES AS OBTAINED FROM THE OFFICIAL WEB SITE OF MINISTRY OF CORPORATE AFFAIRS MCA 21 FOR THE FINA NCIAL YEAR 2004-05 RELEVANT TO THE ASSESSMENT YEAR 2005- 06 ON 21.09.2010. AS PER THE FAR ANALYSIS, THE VARIOUS ISSUES RELATED TO THE ADJUSTMENT IN OPERATING PROFIT AND TOTAL COSTS OF BOTH THE COMPARABLE COMPANIES WERE DISCUSSED AND NECESSARY ADJUSTMENTS AS PER THE ACT, ON ACCOUNT OF COMMISSION INCOME, SERVICE CHARGES, INTEREST PAYMENTS AND OTHER INCOMES WERE MADE. SIMILAR ADJUSTMENTS WERE ALSO CONSIDERED TO EVALUATE THE OPERATING PROFIT AND COST OF THE APPELLANT COMPANY. FROM THE ABOVE DISCUSSION AND FINDINGS THE ARMS LENGTH VALUE OF THE TRANSACTION IS DETERMINED WHICH IS AS UNDER:- S.NO. NAME OF THE COMPANY OP/TC (IN %AGE) 1 ASHCO INDUSTRIES LIMITED -16.10 2 ADVANCED MICRONIC DEVICES LIMITED -1.50 MEAN AVERAGE -8.80 THE APPELLANT OPERATING MARGIN TO TOTAL COST AFTER ADJUSTMENT IS AT 3.83% AS SEEN IN PAGE NO.9 BY COMPUTING THE ADJUSTMENTS TO THE INCOME AS PROVIDED IN THE PROVISO TO SECTION 92C(2) OF THE AC T, THE APPELLANT FULLY SATISFY THE ARMS LENGTH PRINCI PLE ENVISAGED UNDER THE ACT. HENCE, THE ARM LENGTH PRICE (ALP) WORKED OUT BY APPELLANT HAS BEEN ACCEPTED AND NO ADJUSTMENT IS REQUIRED. THE IMPUGNED DISALLOWANCES OF `2,28,21,754/- IS DELETED. 13. WHETHER PENALTY U/S 271(1)(C) AND 271G COULD BE IMPUGNED: ITA N O.31 /DEL./2011 7 AS THE ASSESSEE HAS ALREADY FURNISHED ALL THE DETAI LS AND INFORMATIONS OF ITS EXPENDITURES AND AS WELL AS IN COME IN ITS RETURN, AND IN FORM NUMBER 3CEB, AND FURTHER TRANSF ER PRICE STUDY REPORT WHICH DETAILS AND INFORMATIONS IN THE MSELVES, WERE NOT FOUND TO BE INACCURATE NOR COULD BE VIEWED BY THE ASSESSING OFFICER AS THE CONCEALMENT OF INCOME ON I TS PART. IT WAS UP TO THE AUTHORITIES TO ACCEPT ITS CLAIM IN THE RETURN OR NOT. MERELY BECAUSE THE ASSESSEE HAS CLAIMED THE EXPENDITURE, WHICH CLAIM WAS NOT ACCEPTED OR WAS NO T ACCEPTABLE TO THE REVENUE, ON ACCOUNT OF DIFFERENCE IN OPINION, THAT BY ITSELF WOULD NOT, ATTRACT THE PENA LTY U/S 271(1)(C) AND 271G, HENCE, THE QUESTION OF MENS REA DOES NOT ARISES. THE ASSESSING OFFICER HAS MECHANICALLY APPLIED THE PENALTY PROCEEDINGS WITH ANY REASONING. THE SAM E VIEWS WERE TAKEN IN THE JUDGMENT OF HONBLE SUPREME COURT IN (RELIANCE PETROPRODUCTS PRIVATE LTD.) CONSIDERIN G THE FACTS OF CASE AS STATED IN PROCEEDING PARAGRAPHS AN D AS STATED ABOVE THERE IS NO CASE FOR PENALTY. 4. THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LD. CIT(A). THE LD. DR WHILE INVITI NG OUR ATTENTION TO GROUND NO.3 IN THE APPEAL, CONTENDED THAT THE LD. CIT(A) WAS NOT J USTIFIED IN ADMITTING ADDITIONAL EVIDENCE IN CONTRAVENTION OF RULE 46A OF THE IT RUL ES,1962 ,WITHOUT ALLOWING ANY OPPORTUNITY TO THE TPO/AO IN RESPECT OF DATA RELATI NG TO COMPARABLES AND THAT OF THE ASSESSEE ,CONSIDERED BY THE LD. CIT(A). THE LD. DR VEHEMENTLY ARGUED THAT WITHOUT ALLOWING ANY OPPORTUNITY TO THE TPO/AO, THE LD. CIT(A) WAS NOT JUSTIFIED IN DELETING THE ADDITION. THE LD. AR ON BEHALF OF THE ASSESSEE DID NOT OPPOSE THESE SUBMISSIONS OF THE LD. DR AND TO A QUERY BY THE BEN CH, THE LD. AR ADMITTED THAT THE LD. CIT(A) CONSIDERED THE ADDITIONAL MATERIAL W ITHOUT ALLOWING ANY OPPORTUNITY TO THE ASSESSING OFFICER/TPO .AFTER DISCUSSION, BOT H THE PARTIES AGREED THAT MATTER MAY BE RESTORED TO THE FILE OF THE LD. CIT(A ) FOR READJUDIACTION AFTER ALLOWING SUFFICIENT OPPORTUNITY TO THE TPO/AO . 5. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUG H THE FACTS OF THE CASE. INDISPUTABLY, THE LD. CIT(A) CONSIDERED ADDIT IONAL MATERIAL IN RELATION TO TWO COMPARABLES AND THAT OF THE ASSESSEE, WHICH WAS NO T AVAILABLE BEFORE THE TPO/AO. APPARENTLY, THE LD. CIT(A) DID NOT FOLLOW THE PROCEDURE LAID DOWN UNDER ITA N O.31 /DEL./2011 8 RULE 46A OF THE IT RULES,1962 NOR ALLOWED ANY OPPOR TUNITY TO THE AO. THE POWERS OF THE CIT(A) TO ADMIT ADDITIONAL EVIDENCE ARE NOT ONLY IN SITUATIONS WHERE THE EVIDENCE COULD NOT BE PRODUCED BEFORE LOW ER AUTHORITIES OWING TO LACK OF ADEQUATE OPPORTUNITY BUT ALSO IN SITUATIONS WHER E THE FRESH EVIDENCE WOULD ENABLE THE CIT(A) TO DISPOSE OF THE APPEAL OR FOR ANY OTHER SUBSTANTIAL CAUSE. OF COURSE, THE POWER IS TO BE EXERCISED JUDICIOUSLY A ND FOR REASONS TO BE RECORDED. MOREOVER, THE RULES OF NATURAL JUSTICE ARE NOT CODI FIED NOR ARE THEY UNVARYING IN ALL SITUATIONS, RATHER THEY ARE FLEXIBLE. THEY MAY, HOW EVER, BE SUMMARIZED IN ONE WORD : FAIRNESS. IN OTHER WORDS, WHAT THEY REQUIRE IS FAIRNESS BY THE AUTHORITY CONCERNED. OF COURSE, WHAT IS FAIR WOULD DEPEND ON THE SITUATION AND THE CONTEXT. LORD ESHER M.R. IN VOINET VS. BARRETT (1885) 55 L.J . QB 39, OBSERVED: 'NATURAL JUSTICE IS THE NATURAL SENSE OF WHAT IS RIGHT AND W RONG.' IN VIEW OF THE FOREGOING AND IN THE INTEREST OF NATURAL JUSTICE, E SPECIALLY WHEN THE LD. CIT(A) HAVE NOT CONFRONTED THE ADDITIONAL MATE RIAL PLACED BEFORE HIM BY THE ASSESSEE, TO THE AO NOR ALLOWED ANY OPPORTUNITY TO THE TPO , WE HAVE NO ALTERNATIVE BUT TO VACATE THE FINDINGS OF THE LD. C IT(A) AND RESTORE THE MATTER TO HIS FILE WITH THE DIRECTIONS TO READJUDICATE THE ISSUES IN ACCORDANCE WITH LAW AFTER ALLOWING SUFFICIENT OPPORTUNITY TO BOTH THE P ARTIES. SUBJECT TO THESE DIRECTIONS, GROUND NOS.2 TO 6 IN THE APPEAL ARE DIS POSED OF. 6. GROUND NO.1 IN THE APPEAL OF THE REVENUE BEING GENERAL IN NATURE, DOES NOT REQUIRE ANY SEPARATE ADJUDICATION WHILE NO ADDITIONAL GROUND HAVING BEEN RAISED BEFORE US IN TERMS OF RESIDUARY GROUND NO.7 IN THE APPEAL, ACCORDINGLY, BOTH THESE GROUNDS ARE DISMISSED. 7. NO OTHER PLEA OR ARGUMENT WAS MADE BEFORE US. ITA N O.31 /DEL./2011 9 8. IN RESULT, APPEAL IS ALLOWED BUT FOR STATISTICA L PURPOSES. SD/- SD/- (R.P. TOLANI) (A.N. PAHUJA) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) NS COPY OF THE ORDER FORWARDED TO :- 1. ACIT, CIRCLE 10(1), NEW DELHI. 2. M/S DENTSPLY INDIA PVT. LTD., PLOT NO.358, FIES PATPARGANJ INDUSTRIAL AREA, DELHI-92 3. CIT CONCERNED. 4. CIT(A)-XX, NEW DELHI 5. DR, ITAT,B BENCH, NEW DELHI 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, DELHI ORDER PRONOUNCED IN OPEN COURT