Indian Additives Limited, CHENNAI V. ACIT, CHENNAI

ITA 511/CHNY/2013

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 2536 (ITAT-CHENNAI)
• Duration Of Justice: 2 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-06-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 05-06-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 26-03-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RU GEORGE
• Assessee Lawyers: M VISWANATHAN
• Keywords: Transfer pricing; International transaction
• Section: 92D; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER I.T.A. NO. 511/MDS/2013 (ASSESSMENT YEAR : 2006-07) M/S INDIAN ADDITIVES LTD., EXPRESS HIGHWAY, MANALI, CHENNAI - 600 068. PAN : AAACI 1445 G (APPELLANT) V. THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE II(3), CHENNAI - 600 034 . (RESPONDENT) APPELLANT BY : SHRI M. VISWANATHAN, FCA RESPONDENT BY : SMT. RUBY GEORGE, CIT DATE OF HEARING : 05.06.2013 DATE OF PRONOUNCEMENT : 05.06.2013 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : GRIEVANCE OF THE ASSESSEE IN THIS APPEAL IS THAT T HE LEVY OF PENALTY OF ` 61,16,013/- MADE BY THE ASSESSING OFFICER UNDER SE CTION 271AA OF INCOME-TAX ACT, 1961 (IN SHORT 'THE ACT'), WAS CONFIRMED BY CIT(APPEALS), ON ITS APPEAL. 2. FACTS APROPOS ARE THAT ASSESSEE HAD INTERNATIONA L TRANSACTIONS WITH ITS ASSOCIATE ENTERPRISES DURING THE RELEVANT PREVIOUS YEAR. TPO, DURING THE PROCEEDINGS BEFORE HER, WAS OF THE OPINI ON THAT ASSESSEE I.T.A. NO. 511/MDS/13 2 HAD FAILED TO MAINTAIN A RECORD OF COMPARABLE UNCON TROLLED TRANSACTIONS, AS PER RULE 10B OF INCOME-TAX RULES, 1962, IN THE COST PLUS METHOD FOLLOWED BY IT. SUCH FAILURES WERE ENU MERATED BY THE TPO AS UNDER:- DETAILS/DOCUMENTS CALLED FOR BY TPO DETAILS/DOCUMENTS FILED BY THE ASSESSEE REMARKS OF TPO A RECORD OF THE ECONOMIC AND MARKET ANALYSIS, FORECASTS, BUDGETS OR ANY OTHER FINANCIAL ESTIMATES PREPARED BY THE ASSESSEE FOR THE BUSINESS AS A WHOLE AND FOR EACH DIVISION OF PRODUCT SEPARATELY, WHICH MAY HAVE A BEARING ON THE INTERNATIONAL TRANS- ACTIONS ENTERED INTO BY THE ASSESSEE. ECONOMIC AND MARKET ANALYSIS HAS NOT BEEN MADE. ASSESSEE COMPANY HAS FILED ONLY A COPY OF THE BUDGET DOCUMENT WHICH WAS PLACED BEFORE THE BOARD. IN THE ECONOMIC AND MARKET ANALYSIS, THE ASSESSEE COMPANY SHOULD HAVE ANALYZED THE ECONOMIC SCENARIO VIS A VIS THE INDUSTRY AND SHOULD HAVE CORRELATED THE ECONOMIC AND MARKET TRENDS WITH THE BUSINESS OF THE ASSESSEE COMPANY. THUS ASSESSEE COMPANY HAS FAILED TO DO THE ECONOMIC AND MARKET ANALYSIS. A RECORD OF UNCONTROLLED TRANS- ACTIONS TAKEN INTO ACCOUNT FOR ANALYZING THEIR COMPARABILITY WITH THE INTERNATIONAL TRANS- ACTIONS; THE ASSESSEE STATED THAT IAL OPERATES IN AN INDUSTRY WHICH HAS ONLY TWO DOMESTIC PLAYERS IN INDIA, WHO HAVE ADOPTED THE MANUFACTURE AND SALE BUSINESS MODEL. THE ASSESSEE COMPANY SHOULD HAVE GIVEN THE COMPARABLE DATA. HAVING REGARD TO ABOVE STATUTORY PROVISIONS, IT IS CLEAR THAT BURDEN TO ESTABLISH THAT INTER- I.T.A. NO. 511/MDS/13 3 IALS COMPETITOR IS LUBRIZOL INDIA PRIVATE LIMITED, BASED IN MUMBAI. IN VIEW OF THE FACT THAT LIPL IS ALSO AN UNLISTED COMPANY LIKE IAL, IALS TRANSACTIONS WITH COCL, COPL AND COSA CANNOT BE COMPARED WITH TRANSACTIONS OF LIPL WITH ITS ASSOCIATE ENTERPRISES (IF ANY), FOR WANT OF AVAILABILITY OF DATA NATIONAL TRANSACTION WAS CARRIED AT ALP IS ON THE TAXPAYER. THE ASSESSEE COMPANY HAS ALSO TO FURNISH COMPARABLE TRANSACTIONS, APPLY APPROPRIATE METHOD FOR DETERMINATION OF ALP AND JUSTIFY THE SAME BY PRODUCING RELEVANT MATERIAL AND DOCUMENTS BEFORE THE REVENUE AUTHORITIES. INTER- NATIONAL TRANSACTIONS CARRIED BY TAXPAYER ARE CROSS-BORDER TRANS- ACTIONS. IT IS VERY DIFFICULT, IF NOT IMPOSSIBLE FOR THE TPO TO FIND RELEVANT DATA OF AN EXACT OR OF A SIMILAR TRANSACTION OR PROFIT MADE NOT ONLY BY THE TAXPAYER, BUT ALSO BY OTHER SIMILARLY SITUATED UNCONTROLLED ENTER- PRISES. KNOWLEDGE OF ECONOMIC CONDITIONS PREVAILING AT THE PLACE WHERE TRANSACTIONS ARE CARRIED IS ALSO ESSENTIAL. THE VERY NATURE OF THIS JOB OF COLLECTION OF DATA IS SUCH THAT THE ASSESSEE IS IN THE BEST POSITION TO GATHER THE REQUISITE INFORMATION. I.T.A. NO. 511/MDS/13 4 A RECORD OF THE ANALYSIS PERFORMED TO EVALUATE COMPARABILITY OR UNCONTROLLED TRANS- ACTIONS WITH THE RELEVANT INTERNATIONAL TRANSACTIONS. THE ASSESSEE HAS NOT FILED THE DETAILS. THE ASSESSEE COMPANY HAS NOT PERFORMED THE ANALYSIS COMPARING THE CONTROLLED TRANSACTIONS AND UNCONTROLLED TRANS- ACTIONS. A RECORD OF THE ACTUAL WORKING CARRIED OUT FOR DETERMINING THE ARM'S LENGTH PRICE, INCLUDING DETAILS OF THE COMPARABLE DATA AND FINANCIAL INFORMATION USED IN APPLYING THE MOST APPROPRIATE METHOD AND ADJUSTMENTS, IF ANY, WHICH WERE MADE TO ACCOUNT FOR DIFFERENCES BETWEEN THE INTER- NATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANS- ACTIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS; THE ASSESSEE HAS GIVEN INVOICE WISE, DETAILS OF COST AND SELLING PRICES. THE ASSESSEE HAS CHOSEN TO ADOPT COST PLUS METHOD. THE ASSESSEE WAS REQUIRED TO DETERMINE THE GROSS PROFIT MARK UP TO SUCH COSTS. THE APPROPRIATE MARK UP CAN BE DETER- MINED BY AN INTERNAL AND EXTERNAL COMPARISON. THE ASSESSEE HAS NOT FILED ANY SUCH COMPARABLE DATA. THE ASSESSEE COMPANY HAS NOT FILED ANY WORKING FOR DETERMINATION OF ALP AND COMPARABLE DATA USED TO DETERMINE THE ARM'S LENGTH PRICE. THE ASSUMPTIONS, POLICIES AND PRICE NEGOTIATIONS, IF ANY WHICH HAVE CRITICALLY AFFECTED THE DETERMINATION OF THE ARM'S LENGTH PRICE; THE ASSESSEE HAS STATED THE METHOD ADOPTED WITH RESPECT TO PURCHASE AND SALES TRANSACTIONS. WHEREAS WITH RESPECT TO ROYALTY, TECHNICAL SERVICES AND COMMERCIAL SERVICES, IT HAS STATED THAT ALP IS DETERMINED AS PER JV APPROVED BY GOI. THE ASSESSEE COMPANY HAS NOT STATED THE PRICING POLICIES AND HAS NOT GIVEN ANY COMPARABLE PRICES INSTEAD GIVEN ONLY ITS TRANSACTION VALUE. I.T.A. NO. 511/MDS/13 5 DETAILED JUSTIFICATION FOR CHOOSING THE MOST APPROPRIATE METHOD UNDER THE PROVISION OF INDIAN INCOME TAX LAW FOR DETERMINING ARM'S LENGTH PRICE IN THE INTERNATIONAL TRANS- ACTIONS THE ASSESSEE HAS PROVIDED JUSTIFICATION OF METHOD ADOPTED WITH RESPECT TO PURCHASE AND SALE. THE ASSESSEE COMPANY HAS NOT ADOPTED ANY SPECIFIC METHOD AS MENTIONED IN THE RULE 10B AS THE MOST APPROPRIATE METHOD FOR DETERMINATION OF ALP WITH RESPECT TO ROYALTY, TECHNICAL SERVICES AND COMMERCIAL SERVICES. 3. WHEN ASSESSEE WAS PUT ON NOTICE BY THE A.O., ITS REPLY WAS THAT IT HAD COMPLIED WITH THE REQUIREMENTS UNDER SE CTION 92D OF THE ACT. AS PER THE ASSESSEE, DETAILED SUBMISSIONS WER E FILED BEFORE THE TRANSFER PRICING OFFICER AND BASED ON SUCH DETAILS, SHE HAD SUBMITTED HER REPORT. THE TRANSFER PRICING OFFICER REACHED A CONCLUSION THAT THERE WAS NO REQUIREMENT FOR ANY AD JUSTMENT IN THE VALUE OF THE INTERNATIONAL TRANSACTION SHOWN BY THE ASSESSEE. THEREFORE, AS PER THE ASSESSEE, PENALTY UNDER SECTI ON 271AA WAS NOT WARRANTED. 4. HOWEVER, THE ASSESSING OFFICER WAS NOT SATISFIED WITH THE ABOVE REPLY. ACCORDING TO HIM, RULE 10B AND SECTIO N 92D WERE MANDATORY AND ASSESSEE WAS OBLIGED TO MAINTAIN ALL DOCUMENTS AS PER RULE 10B. AS PER THE A.O., NON-MAINTENANCE OF INFORMATION AND DOCUMENTATIONS WITH RESPECT TO COMPETITORS OF THE A SSESSEE VIS--VIS I.T.A. NO. 511/MDS/13 6 UNCONTROLLED TRANSACTION IN ESTABLISHING PRICE OF I NTERNATIONAL TRANSACTION, WAS A FAILURE WHICH WARRANTED LEVY OF PENALTY UNDER SECTION 271AA OF THE ACT. HE THUS LEVIED PENALTY O F ` 61,21,013/- AT 2% OF THE VALUE OF INTERNATIONAL TRANSACTION. 5. ASSESSEES APPEAL BEFORE CIT(APPEALS) DID NOT ME ET WITH ANY SUCCESS. 6. NOW BEFORE US, LEARNED A.R., STRONGLY ASSAILING THE ORDERS OF AUTHORITIES BELOW, SUBMITTED THAT THE ASSESSEE WAS FOLLOWING COST PLUS METHOD FOR EVALUATING ITS INTERNATIONAL TRANSA CTIONS. AS PER LEARNED A.R., ALL REQUIRED DOCUMENTATIONS SO FAR AS COST PLUS METHOD WAS APPLIED, WERE MAINTAINED BY THE ASSESSEE AND PR ODUCED BEFORE THE TPO. EVEN IF THERE WAS ANY BREACH, IT WAS VENI AL. TPO HAD FOUND THAT THERE WAS NO ADJUSTMENT REQUIRED TO THE VALUE OF INTERNATIONAL TRANSACTION, BASED ON THE DOCUMENTS M AINTAINED AND SUBMITTED BY THE ASSESSEE. THEREFORE, THE CONCLUSI ON THAT SUCH DOCUMENTS SUFFERED FROM ANY INFIRMITY WAS UNFOUNDED . HENCE, ACCORDING TO HIM, PENALTY WAS UNJUSTLY LEVIED ON TH E ASSESSEE. RELIANCE WAS PLACED ON THE DECISION OF MUMBAI BENCH OF THIS TRIBUNAL IN THE CASE OF ACIT V. SMITH AND NEWPHEW H EALTHCARE P. LTD. [16 ITR (TRIB.) 253]. I.T.A. NO. 511/MDS/13 7 7. PER CONTRA, LEARNED D.R. SUBMITTED THAT THE MAND ATORY REQUIREMENTS UNDER RULE 10B WAS NOT MET BY THE ASSE SSEE. ASSESSEE HAD NOT MAINTAINED THE REQUIRED DOCUMENTAT IONS, AND THE FAILURES WERE SPECIFICALLY POINTED OUT BY THE ASSES SING OFFICER IN THE PENALTY ORDER. ASSESSEE COULD NOT GIVE ANY EXPLANA TION FOR SUCH FAILURE. THEREFORE, ACCORDING TO HER, PENALTY WAS RIGHTLY LEVIED. 7. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. FAILURES, WHICH WERE POINTED OUT BY THE ASSESSING O FFICER HAVE BEEN LISTED AT PARA TWO ABOVE. THERE IS NO DISPUTE THAT ASSESSEE HAD FILED A COPY OF BUDGET DOCUMENT AS THE RECORD OF ECONOMIC AND MARKET ANALYSIS, FORECASTS AND BUDGETS. UNLESS AND UNTIL A RECORD OF ECONOMIC AND MARKET ANALYSIS HAVE A BEARING ON THE INTERNATIONAL TRANSACTION, THE RULE DOES NOT REQUIRE MAINTENANCE OF SUCH RECORDS. ASSESSEE HAD FOLLOWED COST PLUS METHOD FOR ITS ARM' S LENGTH PRICE ANALYSIS. WHEN SUCH COST PLUS METHOD WAS ADOPTED B Y THE ASSESSEE AND ACCEPTED BY THE TPO, THE RECORD OF ECO NOMIC AND MARKET ANALYSIS, FORECASTS AND BUDGETS MAY NOT HAVE MUCH RELEVANCE. VIS--VIS RECORD OF UNCONTROLLED TRANSA CTIONS, ASSESSEE HAD GIVEN NAME OF A COMPETITOR AND THE REASON WHY I T WAS UNABLE TO PROVIDE DETAILS OF TRANSACTION UNDERTAKEN BY SUCH C OMPETITOR, NAMELY, I.T.A. NO. 511/MDS/13 8 M/S LUBRIZOL INDIA PRIVATE LIMITED. VIS--VIS RECO RD MAINTAINED FOR EVALUATING COMPARABILITY, SINCE ASSESSEE WAS FOLLOW ING COST PLUS METHOD, WHICH WAS ACCEPTED BY THE TPO, IT CANNOT BE STATED THAT THERE WAS ANY FAILURE OF THIS NATURE. THUS, AFTER GOING THROUGH EACH OF THE FAILURES POINTED OUT BY THE A.O., WE ARE OF THE OPINION THAT THESE FAILURES WERE NOT SUCH GRAVE, CALLING FOR APPLICATI ON OF THE PENALTY PROVISIONS OF SECTION 271AA OF THE ACT. 8. SECTION 271AA IS REPRODUCED HEREUNDER:- 271AA. WITHOUT PREJUDICE TO THE PROVISIONS OF SECTI ON 271, IF ANY PERSON FAILS TO KEEP AND MAINTAIN ANY SUCH INFO RMATION AND DOCUMENT AS REQUIRED BY SUB-SECTION (1) OR SUB-SECT ION (2) OF SECTION 92D, THE ASSESSING OFFICER OR COMMISSIONER (APPEALS) MAY DIRECT THAT SUCH PERSON SHALL PAY, BY WAY OF PENALT Y, A SUM EQUAL TO TWO PER CENT OF THE VALUE OF EACH INTERNATIONAL TRA NSACTION ENTERED INTO BY SUCH PERSON. THE WORD USED IS MAY DIRECT AND NOT SHALL DIRECT . THERE IS A DISCRETION VESTED ON THE ASSESSING OFFICER WHETHER TO LEVY A PENALTY OR NOT. IN OUR OPINION, SUCH DISCRETION HAS TO BE USED JUDICIALLY, CONSIDERING THE FAILURES OF THE ASSESSEE VIS--VIS THE RECORDS REQUIRED TO BE MAINTAINED UNDER RULE 10B AND ITS RELEVANCE T O THE METHOD FOLLOWED FOR EVALUATING THE VALUE OF THE INTERNATIO NAL TRANSACTIONS. IN OUR OPINION, IF SUCH DISCRETION WAS JUDICIALLY USED , THEN THERE WAS NO CASE FOR LEVYING A PENALTY HERE. AS HELD BY MUMBAI BENCH OF THIS I.T.A. NO. 511/MDS/13 9 TRIBUNAL IN THE CASE OF SMITH AND NEWPHEW HEALTHCAR E P. LTD. (SUPRA), WHEN THE ASSESSING OFFICER HAD FOUND NO DI FFICULTY IN EXAMINING THE CORRECTNESS OF THE PRICE ADOPTED BY T HE ASSESSEE IN RESPECT OF INTERNATIONAL TRANSACTION WITH ASSOCIATE ENTERPRISES AND WHERE NO ADDITION WAS MADE BY THE ASSESSING OFFICER IN THE ORDER OF ASSESSMENT IN RESPECT OF THE INTERNATIONAL TRANSACT ION WITH ASSOCIATE ENTERPRISES, THERE WAS NO JUSTIFICATION IN IMPOSING PENALTY UNDER SECTION 271 AA OF THE ACT. IN THE CIRCUMSTANCES OF THE CASE, WE ARE OF THE OPINION THAT PENALTY UNDER SECTION 271AA WAS NOT WARRANTED HERE ALSO. SUCH PENALTY IS DELETED. 9. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS A LLOWED. ORDER WAS PRONOUNCED IN THE COURT ON WEDNESDAY, THE 5 TH OF JUNE, 2013, AT CHENNAI. SD/- SD/- (CHALLA NAGENDRA PRASAD) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 5 TH JUNE, 2013. KRI. COPY TO: APPELLANT/RESPONDENT/CIT(A)-I, COIMBATORE/ CIT-I (JUDL), CHENNAI/D.R./GUARD FILE