Income Tax Appellate Tribunal - Mumbai
Mehta Brothers Exports , Mumbai vs Assessee on 5 November, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
"L" Bench, Mumbai
Before Shri R.S. Syal, Accountnat Member
and Shri Vijay Pal Rao, Judicial Member
ITA No. 1526/Mum/2009
(Assessment Year: 2003-04)
M/s. Mehta Brothers Exports DCIT, Circle 16(3)
Oricon House, 4th Floor Vs. Mathru Mandir, 2nd Floor
12, K, Dubash Marg Tardev, Mumbai 400034
Mumbai 400034
PAN - AAAFM 2744 B
Appellant Respondent
Appellant by: S/Shri F.V. Irani & N. Jayendra
Respondent by: Ms. Neeraja Pradhan
Date of Hearing: 05.11.2012
Date of Pronouncement: 07.11.2012
ORDER
Per R.S. Syal, A.M.
This appeal by the assessee is directed against the order passed by the CIT(A) XVII, Mumbai on 14.01.2009 upholding the penalty of `17,81,318/- imposed by the Assessing Officer under section 271AA of the Act.
2. Briefly stated facts of the case are that the assessee filed its return on 01.12.2003 declaring total income of `42,63,640/-. The report in Form No. 3CEB, as required under section 92E was filed separately in the tapal on 01.12.2003. During the course of assessment proceedings the assessee was called upon to explain as to why reference under section 92CA be not made due to its transaction with M/s. Poly Diam NV of `8,51,41,549/-. The assessee submitted that the transactions with M/s. Ploy Diam NV cannot be subjected to transfer pricing regulations since both the enterprises are not associated enterprises within the meaning of section 92A of the Act. It was explained that none of the partners of the assessee firm have any stake in M/s. Poly Diam NV and vice versa. M/s. Poly Diam NV was stated to be 2 ITA No. 1526/Mum/2009 M/s. Mehta Brothers Exports an entity registered in Belgium owned by Shri Shailesh Mehta, brother of one of the partners of the assessee firm. Since there was no participation in the management or control or capital of M/s. Poly Diam NV, it was claimed that both the enterprises were not liable to be considered as associated enterprises within the definition of section 92A. The AO called upon the assessee to produce documents as prescribed under Rule 10D of the I.T. Rules, 1962 regarding international transactions for which report in Form No. 3CEB was filed. Since no such documents were submitted, the AO made a mention in the assessment order about imposition of penalty under section 271AA and section 271G. From page No. 3 onwards starting with para no. 4 with the caption "Disallowance u/s. 40A(2)(b)", the AO observed that the assessee had total import of `8.51 crores and export of 8.90 crores with the said associated enterprise. Once again the AO required the assessee to submit necessary documents required under section 92A read with rule 10B and justify how the price charged or paid was in accordance with Rule 10B. In response to the AO's request, assessee submitted that no method of determination of ALP was applicable. The AO observed that "the assessee has shown the same transaction with M/s. Poly Diam NV in Form No. 3CD as transaction covered u/s. 40A(2)(b). Hence, I have no option but to find out that whether the payment made by M/s. Poly Diam NV covered u/s. 40A(2)(b) is at par with payment made to other third unrelated party". Applying the average method, the AO worked out the excessive payment made to M/s. Poly Diam NV and accordingly made addition of `89,83,540/- under section 40A(2)(b) on account rough purchases of diamonds from M/s. Poly Diam NV. From the computation of total income at the end of the assessment order, it can be seen that this addition has been made with the remarks "Addition on account of excess payment u/s. 40A(2)(b) of the I.T. Act as discussed in order". Thereafter penalty proceedings were initiated under section 271AA and a penalty of `17.81 lakhs was imposed.
3. When the appeal of the assessee came up before the learned CIT(A), it was argued on behalf of the assessee that there was no participation in the management or control or capital of the assessee by the other enterprise either directly or indirectly and therefore the two entities do not fall within 3 ITA No. 1526/Mum/2009 M/s. Mehta Brothers Exports the meaning of associated enterprises. It was claimed that in order to impose or confirm penalty under section 271AA, it is of paramount importance to consider as to whether the conditions specified under section 92A(1) were satisfied or not. Mere satisfaction of the conditions of sub- section 2 of section 92A would not make two enterprises associated enterprises. It was also claimed that there was a reasonable cause for failure to keep and maintain information and document under section 92D on account of its bona fide belief that the penalty was liable to be deleted. The learned CIT(A) observed that the assessee has not maintained information under section 92D on the ground that there was no transaction between two associated enterprises. The learned CIT(A) came to hold that section 92A(1) and section 92A(2) are independent of each other and both cannot be read as a single piece of provision in totality. He classified the instant transaction under clause (j) of sub-section (2) of section 92A and accordingly held the assessee and M/s. Poly Diam NV to be associated enterprises under section 92A. Maintenance of documents and information as prescribed under Rule 10D was held to be necessary. In the absence of assessee having maintained such documents, the CIT(A) held that there was a defaut under section 92D requiring imposition of penalty under section 271AA. He, therefore, upheld the penalty.
4. We have considered the rival submissions and perused the relevant material on record. Penalty under section 271AA is leviable due to failure to keep and maintain documents in respect of international transactions. Maintenance of such information or documents, etc. is required as per section 92D. Section 92D, in turn, applies to persons who have entered into an international transaction. An international transaction has been defined under section 92B(1) as a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, etc.. Thus it is manifest that section 92D can apply only when there is an international 4 ITA No. 1526/Mum/2009 M/s. Mehta Brothers Exports transaction and there can be international transaction only if it is between two associated enterprises.
5. The entire controversy centres around the question as to whether the assessee and M/s. Poly Diam NV are associated enterprises or not. The question is as to whether sub-section (1) to section 92A should be read independent of section 92A(2). The case of the Department is that sub- section (2) of section 92A contains a deeming clause. Once the case is covered under any of the clause (a to m) it would be considered that the two enterprises are associated enterprises. The use of the words "deemed to be"
in sub-section (2) of section 92A, as per the learned D.R., clearly suggests that there is no need to go to sub-section (1) of section 92A and such deeming provision should be read in isolation.
6. Per contra, the case of the assessee ab initio before the authorities below is that sub-section (2) cannot be read in isolation. It has to be in conjunction with sub-section (1). Unless a case satisfies the requirement of both the sub-sections, the relation between the enterprises cannot be considered as that of associated enterprises. In support of this contention, the learned A.R. has relied upon an article, a copy of which was also filed before the learned CIT(A), to support the contention that there are two views as to whether both sub-sections (1) and (2) of section 92A apply independently or jointly. In this article almost similar case, as obtaining before us, has been considered by way of an example in which one brother is in Belgium and owns a company and the other brother is in India and owns another company. A view has been expressed in this article that under section 92A(2)(j) the two companies will be AEs, but condition under section 92A(1) will not be fulfilled as none of the brothers or their companies participate in the capital, control or management of each other hence both the companies will not be AEs.
7. Here it is relevant to note that section 271AA is subject to section 273B. Section 273B, in turn, provides that notwithstanding anything contained in the provisions of the relevant sections including section 5 ITA No. 1526/Mum/2009 M/s. Mehta Brothers Exports 271AA, no penalty shall be imposed if one proves that there was a reasonable cause for the failure as prescribed in the concerned section. The assessee was consistently harping on the view that M/s. Poly Diam NV is not its associated enterprise and such opinion about the two enterprises as non AEs is supported by an article. In such a situation it can be considered as a good ground for believing that both were not the associated enterprises and as such there was no need to maintain the records/documents as per section 92D of the Act. We want to make it clear that we have desisted from expressing any view on as to whether, as per law, both the entities constitute associated enterprises of each other in a situation prevailing before us. Suffice to say, there is a reasonable cause for the assessee to entertain a view that both are not the associated enterprises. In our considered opinion the assessee is covered under the shelter of section 273B, requiring non-imposition of any penalty under section 271AA.
8. There is another interesting aspect of this matter. Obviously the question of imposing penalty under section 271AA can arise if there is some international transaction between the associated enterprises. We have observed from the assessment order that the AO proceeded and, in fact, made addition of `17.81 lakhs by applying the provisions of section 40A(2). The transfer pricing provisions under Chapter X of the Act have not been invoked for making this addition. It is further relevant to note that the learned CIT(A) deleted the addition in the quantum proceedings. When the matter came up before the Tribunal, the matter has been restored to the file of the AO for considering the issue afresh as per the judgement of the Hon'ble Bombay High Court, as referred to in the order, within the provisions of section 40A(2)(b). Needless to say that the provisions of section 40A(2)(b) apply for computing excess amount of expenditure incurred in relation to the persons specified in clause (b) of section 40A(2), being the related persons/concerns. It is unlike section 92A under which only the international transactions between the associated enterprises, as defined under section 92A, can be considered under Chapter X of the Act. Thus the difference between the scope of section 40A(2) on one hand and 6 ITA No. 1526/Mum/2009 M/s. Mehta Brothers Exports section 92 on the other, is not quite similar. Whereas, every transaction of incurring expenses in relation to the specified persons under clause (b) of section 40A(2) brings a case for consideration under this provision, the provisions of section 92, being the transfer pricing provisions, are not activated unless there are two associated enterprises within the meaning of section 92A. When the AO, in the instant case, proceeded with section 40A(2) ignoring section 92, he impliedly restricted his scope to section 40A(2) alone. If he has not considered it as an international transaction between two associated enterprises, the provisions of section 92D requiring maintenance of information and documents in respect of an international transaction, cannot apply. Naturally, if section 92D cannot apply, the only corollary which can follow is that section 271AA also cannot apply. We, therefore, set aside the order of the learned CIT(A) and direct to delete the penalty.
9. In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 07th November, 2012 Sd/- Sd/-
(Vijay Pal Rao) (R.S. Syal)
Judicial Member Accountant Member
Mumbai, Dated: 7th November, 2012
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A) - XVII, Mumbai
4. The CIT- XVI, Mumbai City
5. The DR, "L" Bench, ITAT, Mumbai
By Order
//True Copy//
Assistant Registrar
ITAT, Mumbai Benches, Mumbai
n.p.