GENOM BIOTECH P. LTD, MUMBAI V. ITO 10(3)1, MUMBAI

ITA 7214/MUM/2010

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 3865 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 3 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-02-2016
• Appeal Filed By: Assessee
• Bench Allotted: K
• Next Hearing Date: 04-02-2016
• Assessment Year: 2003-2004
• Appeal Filed On: 20-10-2010
• Court: TRIBUNAL
• Department Lawyers: N K CHAND
• Keywords: Transfer pricing; International transaction; Agreed addition
• Section: 92C

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER AND SHRI SANJAY GARG, JUDICIAL MEMBER I.T.A. NO.7214/M/2010 (ASSESSMENT YEAR: 2003 - 2004 ) GENOM BIOTECH P. LTD., 9 TH FLOOR, 907, FILIX COMMERCIAL COMPLEX, OPP. ASIAN PAINTS, L.B.S. MARG, BHANDUP, MUMBAI 400 078. / VS. ITO - 10(3)1, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI 400020. ./ PAN : AABCG1013B ( / APPELLANT) .. ( / RESPONDENT ) / APPELLANT BY : SHRI AMIT KHATIWALA / RESPONDENT BY : SHRI N.K. CHAND, CIT - DR / DATE OF HEARING : 09.02.2016 / DATE OF PRONOUNCEMENT : 1 7 .02.2016 / O R D E R PER D. KARUNAKARA RAO, AM: THIS APPEAL FILED BY THE ASSESSEE ON 20.10.2010 IS AGAINST THE ORDER OF THE CIT (A) 15, MUMBAI DATED 24.8.2010 FOR THE ASSESSMENT YEAR 2003 - 2004. 2. IN THIS APPEAL, THE LEVY OF PENALTY U/S 271(1)(C) OF THE ACT IS THE S UBJECT MATTER OF LITIGATION. BRIEFLY STATED RELEVANT FACTS OF THE CASE ARE THAT TPO MADE AN ADDITION OF RS. 2,05,177/ - U/S 92C OF THE ACT BY VIRTUE OF TRANSFER PRICING ADJUSTMENTS. AO LEVIED PENALTY U/S 271(1)(C) READ WITH EXPLANATION 7 OF THE ACT AMOUNT ING TO RS. 71 ,812/ - . RELEVANT FACTS IN THIS REGARD ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF PHARMACEUTICAL PRODUCTS AND RECORDED INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES (AES) AT CYPRUS, UK AND SWITZ ERLAND. THESE AES EVENTUALLY SOLD THE GOOD S TO THE BUYERS AT UKRAINE. ASSESSEE BENCHMARKED THESE TRANSACTIONS AND CONSIDERED COST PLUS METHOD (CPM) AS MOST APPROPRIATE METHOD. GP OF THE ASSESSE IS 58.4% FOR THE YEAR UNDER CONSIDERATION AGAINST THE INDUS TRIES GP OF 55%. AFTER TP STUDY, THE ASSESSEE 2 CONSIDERED ITS GP AT ARMS LENGTH. DURING THE TP STUDIES BY THE TPO, THE TPO CAME TO KNOW THAT THE AES OF THE ASSESSEE ALSO ENGAGED IN BUYING SIMILAR PRODUCTS FOR SALE OF THE SAME AT UKRAINE. GLOWMED LIMITED , YATAN PHARMACEUTICALS LTD ARE UNRELATED PARTIES FROM WHOM ITS AES ARE PURCHASED THE SAME PRODUCT. THUS, TPO FOUND THESE TRANSACTIONS CONSTITUTE CUP, WHICH IS CAN BE USED FOR BENCHMARKING A COUPLE OF TRANSACTIONS NAMELY (I) KOTELEX INJ. 30 MG AND (II) PERILIUM TAB 0.17. AFTER STUDYING THE PARTIES ANALYSIS AND USING THE ABOVE AS A CUP FOR BENCHMARKING THE TRANSACTIONS, TPO CONCLUDED THAT THE ADJUSTMENT TO THE TUNE OF RS. 2,05,177/ - WAS PROPOSED . THE ALP DATA FOR KOTOLEX AND PERILIUM ARE AS UNDER: - S.NO. PRODUCT SELLING RATE TO AE COMPARABLE RATE SALES QUANTITY PRICE VARIANCE CONVERSION RATE AMOUNT (IN RS.) 1. KETOLEX INJ.30 MG 0.43 0.56 30870 0.13 46.583 186930 2. PERILIUM TAB - 0.17 0.17 0.18 9170 0.01 46.583 18247 TOTAL 2,05,177 3. TPO / AO OBJECTED TO THE TP ANALYSIS OF THE ASSESSEE IN NOT CONSIDERING THE TRANSACTIONS TO TRANSACTION BASIS BY USING CPM METHOD AT THE END OF THE TP STUDIES. ACCORDINGLY, AO MADE ADDITION OF RS. 2,05,177/ - AS EVIDENT FROM PENALTY ORDER. THE ABOVE ADDITION CONSTITUTES AN AGREED ADDITION. 4. PENALTY PROCEEDINGS WERE INITIATED U/S 271(1)(C) OF THE ACT AND PENALTY ORDER WAS PASSED VIDE ORDER DATED 18.5.2007. IN THE SAID ORDER, AO NARRATED THE ABOVE FACTS OF THE CASE AND GAVE AN OPPORTUNITY TO THE ASSESSEE TO EXPLAIN AS TO WHY THE PENALTY COULD NOT BE LEVIED. AS SEEN FROM PAGE 2 OF THE PENALTY ORDER, THE FO LLOWING IS THE EXPLANATION GIVEN BY THE ASSESSEE BEFORE THE AO. THE REASONS FOR DEALING WITH COMPANIES IN CYPRUS, UK & SWITZERLAND AND ROUTING THE EXPORT TRANSACTIONS THROUGH THEM INSTEAD OF SELLING THE GOODS DIRECTLY TO THE MARKETING COMPANY IN UKRAINE I S AS YOU ARE AWARE THAT UKRAINE IS POLITICALLY AND ECONOMICALLY VERY INSTABLE IN THE PERIOD AFTER DISINTEGRATION FROM U.S.S.R. T HE BANKING SYSTEM IS NOT RELIABLE AND THE CURRENCY WAS DEVALUED FROM TIME TO TIME. THEREFORE, IT WAS THOUGHT FIT TO DEAL THROU GH COMPANIES FORMED IN OTHER ADJOINING COUNTRIES HAVING GOOD BANKING CHANNELS AND OTHER BUSINESS CONDUCIVE FACILITIES. MOREOVER, INDIAN BANK ARE NOT RECOGNIZING AND NOT READY TO DEAL WITH UKRANIAN BANKS FAVOURABLE. THEREFORE, GENOM BIOTECH, STARTED EXPORT ING THROUGH THIS ROUTE SINCE 2001 - 02 BY GIVING THE NOMINAL MARK UP AS PER INTERNATIONAL PRACTICE. THE COUNTRY CYPRUS IS MOST PREFERRED DESTINATION FOR DOING BUSINESS AS IT IS AN ATTRACTIVE INTERNATIONAL AND BUSINESS CENTRES SAME AS SWITZERLAND AND UK. 3 5. FROM THE ABOVE, IT IS EVIDENT THAT MOST OF THE EXPLANATION REVOLVES AROUND REQUIREMENT OF THE ASSESSEE TO HAVE AES AT CYPRUS, UK AND SWITZERLAND AND THERE IS NO WORD ABOUT ASSESSEES FAILURE IN USING CUP METHOD INVOLVING TRANSACTION TO TRANSACTION BENCHMA RKING IN ITS TP STUDIES. IT IS AN UNDISPUTED FACT THAT THE SAME PRODUCT WAS EXPORTED BY UNRELATED PARTIES TO AES AND THE SAME CONSTITUTES UNCONTROLLED TRANSACTIONS WHICH SHOULD HAVE BEEN IDEALLY USED IN THE TP STUDIES BY THE ASSESSEE. ASSESSEE ALSO ARGUE D IN THE SUBMISSIONS THAT THERE IS NO CONCEALMENT OF INCOME OR FURNISHING OF INACCURATE PARTICULARS AS THE ASSESSEE AGREED FOR ADDITIONS WHICH AROSE DUE TO PRICE DIFFERENCE WHEN COMPARED WITH THE UNRELATED PARTIES. EVENTUALLY, AO LEVIED PENALTY OF RS. 71, 812/ - . 6. DURING THE PROCEEDINGS BEFORE THE FIRST APPELLATE AUTHORITY, ASSESSEE ALSO FURNISHED EXPLANATION. HOWEVER, THE QUALITY OF SUBMISSIONS IS AGAIN DEFECTIVE SO FAR AS THE FULFILLING OF THE CONDITIONS LAID DOWN IN EXPLANATION 7 TO SECTION 271(1)(C) O F THE ACT. IN THE SAID EXPLANATION 7, THE CONDITIONS ARE EXPRESSLY PROVIDED FOR NON - LEVY OF PENALTY U/S 271(1)(C) OF THE ACT WHEN INVOLVING THE ADDITIONS MADE U/S 92C OF THE ACT. CIT (A) DISCUSSED THE ASSESSEES FAILURE IN MEETING THE SAID CONDITION THAT REVOLVES AROUND THE EXPRESSION GOOD FAITH AND DUE DILIGENCE. EVENTUALLY, THE CIT (A) CAME TO THE CONCLUSIONS THAT THE ASSESSEE DID NOT ACT IN GOOD FAITH WITH DUE DILIGENCE IN USING THE CPM AND NOT USING CUP AS MOST APPROPRIATE METHOD. HE ALSO ANALYZED THE FACT THAT THE ASSESSEE AGREED FOR ADDITIONS THEREBY ADMITTING THE FAILURE ON PART OF THE ASSESSEE IN THIS REGARD. CIT (A) CONFIRMED THE PENALTY AS PER THE DISCUSSION GIVEN IN PARAS 2.6 AND 2.7 OF THE IMPUGNED ORDER DATED 24.8.2010. 7. BEFORE US, LD COU NSEL FOR THE ASSESSEE HEAVILY RELIED ON THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE AO AND THE CIT (A). HE HOWEVER, AGREED TO THE FACT THAT THE ADDITION WAS AGREED UPON AND TO THAT EXTENT, AO / TPO IS JUSTIFIED IN SELECTING CUP AS A MOST APPROPRIATE M ETHOD. FURTHER, HE ALSO SUBMITTED THAT THE ASSESSEE FAILED TO BENCHMARK THE TRANSACTION TO TRANSACTION BASIS INSTEAD THE ASSESSEE BENCHMARKED TRANSACTION ON AGGREGATE BASIS. THE SAME IS EVIDENT FROM THE CPM SELECTED BY THE ASSESSEE. FROM THIS POINT OF V IEW, LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ADDITION / ADJUSTMENT MADE U/S 92C IS JUSTIFIED. HOWEVER, HIS ARGUMENTS REVOLVE AROUND THE PRESENCE OF DUE DILIGENCE AND THE GOOD FAITH WITH 4 WHICH THE ASSESSEE ACTED IN SELECTING THE CPM AS MOST APPROPRI ATE METHOD. HE RELIED ON THE DECISION OF THE ITAT, MUMBAI BENCH IN THE CASE OF DCT VS. RBS EQUITIES INDIA LTD [2011] 133 ITD 77 (MUMBAI), DATED 26.8.2011 WHICH IS RELEVANT FOR THE PROPOSITION THAT THE PENALTY IS NOT LEVYABLE AS PER THE EXPLANATION - 7 TO SECTION 271(1)(C) OF THE ACT IF NO DISHONESTY IS FOUND IN THE CONDUCT OF THE ASSESSEE AND THE ASSESSEE HAS TAKEN A REASONABLE DECISION IN MATTERS OF SELECTING APPROPRIATE METHOD FOR BENCHMARKING THE TRANSACTIONS. HOWEVER, IN RESPONSE TO THE QUERY FROM THE BENCH, AS TO REASONS FOR NOT SELECTING THE CUP METHOD FOR BENCHMARKING THE TRANSACTION TO TRANSACTION BASIS, LD COUNSELS EXPLANATION REVOLVES AROUND THE WRITTEN SUBMISSIONS MADE BY THE ASSESSEE DURING THE PROCEEDINGS BEFORE THE LOWER AUTHORITIES. UNFORTUNATELY, THESE EXPLANATIONS DO NOT THROUGH ANY LIGHT ON THE TWIN CONDITIONS IE (I) GOOD FAITH AND (II) DUE DILIG ENCE. FINALLY, LD COUNSEL FOR THE ASSESSEE ARGUED STATING THAT CONSIDERING THE SMALLNESS OF THE ADDITION OF RS. 2,05,177/ - , ASSESSEE AGREED FOR THE CONDITIONS AND OTHERWISE, THE ADDITIONS MADE BY THE AO COULD HAVE BEEN DELETED THEREFORE, THE PENALTY IS NO T LEVYABLE. 8. ON THE OTHER HAND, SHRI N.K. CHAND, LD DR FOR THE REVENUE TOOK OBJECTION TO THE ARGUMENTS MADE BY THE LD COUNSEL FOR THE ASSESSEE. HE ARGUED STATING THAT IT IS BINDING ON THE ASSESSEE TO BENCHMARK THE INTERNATIONAL TRANSACTIONS WITH AES ON TRANSACTIONS TO TRANSACTION BASIS USING CUP METHOD OF ACCOUNTING WHICH IS INVOLVING UNRELATED PARTIES. ASSESSEE FAILED TO DO SO. THUS, THE LD COUNSELS ARGUMENT WHICH IS BASED ON THE DUE DILIGENCE AND GOOD FAITH IS FAILED. EVEN IF ASSESSEE HAS NOT AGREED TO THE ADJUSTMENT / ADDITION, CONSIDERING TODAYS LAW OF THE LAND, THE ADDITION OF RS. 2,05,177/ - WOULD HAVE BEEN SUSTAINABLE. REGARDING THE TRIBUNALS DECISION IN THE CASE OF RBS EQUITIES INDIA LTD (SUPRA), LD DR DEMONSTRATED THAT THE WAY THE ASSESSEE E XPLAINED AND DISCHARGED THE ONUS IN DEMONSTRATING THE DUE DILIGENCE AND GOOD FAITH. COMING TO THE EXPLANATION OF THE ASSESSEE ON THESE ISSUES, LD CIT - DR UNDERLINED THE ABSENCE OF WRITTEN SUBMISSIONS AS TO HOW THE ASSESSEE DEMONSTRATED THE DUE DILIGENCE AN D GOOD FAITH IN WRITING. ON ALL ACCOUNTS, LD DR MENTIONED THAT THE ASSESSEE FAILS AND THIS IS A FIT CASE FOR LEVY OF PENALTY U/S 271(1)(C) READ WITH EXPLANATION 7 OF THE ACT. FURTHER, LD DR RELIED HEAVILY ON THE DECISION OF THE ITAT DELHI BENCH IN THE CA SE OF ACIT VS. UE TRADE CORPORATION (INDIA) (P) LTD [2011] 45 5 SOT 197 (DELHI) IN SUPPORT OF THE ABOVE. OF COURSE, IT IS ON THE LEGAL PROPOSITION EXPLAINED ABOVE (PARA 4.2 OF THE TRIBUNALS ORDER IS RELEVANT IN THIS REGARD) AND THE REQUIREMENT OF BENCHMARK ING THE TRANSACTION TO TRANSACTION BASIS. HOWEVER, THE SAID CASE IF NOT ON THE PENALTIES. 9. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS THE PAPER BOOKS FILED BEFORE US CONTAINING THE TP STUDY MATERIAL. WE FIND, THERE IS NO DISPUTE ON FACTS. ON FACTS, THE ASSESSEE HAD INTERNATIONAL TRANSACTIONS WITH THE AES AT CYPRUS, UK AND SWITZERLAND ETC., WHO IN TURN SUPPLIES THE MATERIALS TO THE BUYERS IN THE UKRAINE. SIMILARLY, KETOLEX - INJ AND PERILIUM - TAB ALSO SUPP LIED TO UKRINE USING THE AES AT CYPRUS, UK AND SWITZERLAND. THUS, THERE ARE DIRECT CUP USEFUL FOR TP STUDIES OF THE IMPUGNED INTERNATIONAL TRANSACTIONS. WHY THE ASSESSEE DID NOT USE THE SAME? WHY THE ASSESSEE PREFERRED COST PLUS METHOD? THERE IS NO D ISCUSSION OR JUSTIFICATION IN THE ORDERS. THEREFORE, ASSESSEE FAIRLY CONCEDE ON THIS POINT AND AGREED FOR ADJUSTMENT OF THE TWO INTERNATIONAL TRANSACTIONS WHICH GAVE RISE TO ADDITION OF RS . 2,05,177/ - . NOW, THE ISSUE UNDER CONSIDERAT ION RELATES TO CONCE ALMENT OF INCOME OR FURNISHING OF INACCURATE PARTICULARS OF INCOME. WE NEED TO DECIDE IN THE LIGHT OF THE PROVISIONS OF EXPLANATION 7 OF THE INCOME TAX ACT, 1961. THE SAID EXPLANATION 7 READS AS FOLLOWS: - EXPLANATION 7 - WHERE IN THE CASE OF AN ASSES SEE, WHO HAS ENTERED INTO AN INTERNATIONAL TRANSACTION DEFINED IN SECTION 92B, ANY AMOUNT IS ADDED OR DISALLOWED IN COMPUTING THE TOTAL INCOME UNDER SUB - SECTION (4) OF SECTION 92C, THEN, THE AMOUNT SO ADDED OR DISALLOWED SHALL, FOR THE PURPOSES OF CLAUSE ( C) OF THIS SUB - SECTION, BE DEEMED OT REPRESENT THE INCOME IN RESPECT OF WHICH PARTICULARS HAVE BEEN CONCEALED OR INACCURATE PARTICULARS HAVE BEEN FURNISHED, UNLESS THE ASSESSEE PROVES TO THE SATISFACTION OF THE ASSESSING OFFICER OR THE COMMISSIONER (APPEAL S) [OR THE COMMISSIONER] THAT THE PRICE CHARGED OR PAID IN SUCH TRANSACTIONS WAS COMPUTED IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SECTION 92C AND IN THE MANNER PRESCRIBED UNDER THAT SECTION IN GO O D FAITH AND WITH DUE DILIGENCE ]. 10. FROM THE ABOVE, WE NEED TO SEE THE DUE DILIGENCE AND GOOD FAITH OF THE ASSESSEE. FAILURES OF THE ASSESSEE INCLUDE (I) NOT ADOPTING FOR CUP METHOD AND (II) NOT BENCHMARKING EACH OF THE TRANSACTION SEPARATELY. AO ACTUALLY BENCHMARKED ALL TRANSACTIONS IN AG GREGATION WHILE APPLYING THE CPM. ASSESSEE IS WELL AWARE ABOUT THE AVAILABILITY OF CUPS ATLEAST FOR THE TWO INTERNATIONAL TRANSACTIONS. IN THAT SENSE, WE FIND DUE DILIGENCE IS NOT IN EXISTENCE IN NOT USING THE CUP METHOD AND NOT 6 BENCHMARKING THE TRANSACT ION WITH THE TP STUDY. AS SUCH, ASSESSEE AGREED TO THE ABOVE BENCHMARK STUDY OF THE TPO CONSIDERING THE MERITS OF THE T POS PROPOSALS. NEXT CONDITION RELATES TO THE GOOD FAITH. GOOD FAITH IS NOT DEMONSTRATED BEFORE US / LOWER AUTHORITIES. 11. IN FACT, THE ASSESSEE IS SILENT IN THE EXPLANATIONS ON BOTH THE DUE DILIGENCE AND GOOD FAITH ISSUES. WE HAVE PERUSED THE EXPLANATION FURNISHED BY THE ASSESSEE BEFORE THE AO AND THE CIT (A) AND FIND, ASSESSEE IS CASUAL AND HIS EXPLANATION IS GENERAL IN NATURE. WE HAVE ALSO CONSIDERED THE DECISION OF THE TRIBUNAL FILED BEFORE US. ON PERUSAL OF THE SAID TRIBUNALS ORDER IN THE CASE OF RBS EQUITIES INDIA LTD (SUPRA) , WE FIND THE SAME IS DIFFERENCE ON FACTS. CONSIDERING THE ABOVE FACTUAL MATRIX OF THE CASE, WE A RE OF THE OPINION, THIS IS THE FIT CASE FOR LEVY OF PENALTY AND THEREFORE, WE AFFIRM THE DECISION TAKEN BY THE LOWER AUTHORITIES. ACCORDINGLY, GROUNDS RAISED BY THE ASSESSEE ARE DISMISSED. 12. IN THE RESULT, APPEAL OF THE ASSESSEE IS DISMISSED. ORDER PRO NOUNCED IN THE OPEN COU RT ON 17 TH FEBRUARY, 2016. SD/ - SD/ - ( SANJAY GARG ) (D. KARUNAKARA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; 17 .2.2016 . . ./ OKK , SR. PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE . //TRUE COPY// 7 / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI