Income Tax Appellate Tribunal - Delhi
Ito, New Delhi vs M/S. Tianjin Tianshi India Pvt. Ltd., ... on 9 March, 2020
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: 2006-07
Income Tax Officer, Vs M/s Tianjin Tianshi India Pvt. Ltd.,
War-25(3), 10, Community Centre, Basant
New Delhi 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 against 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 China based TIENS Group of Companies. The business of the assessee , is Trading/Distribution of Food Supplements and Health Care Equipments. The products dealt with by the Company are basically pro ducts manufactured at China or other places by Gro up conce rns. Another Group Entity Tianjin Tianshi Biological Development Company Limited, incorporated at China has established a Foreign Branch Office in India. This is a Foreign 2 ITA No. 2967/Del/2015 Tianjin Tianshi India Pvt. Ltd.
Company with Non-Resident Status falling under the category of an "Associate Enterprise" (AE) of the assessee, while the Indian Branch Office of this company specifically fall under the category of "Permanent Establishment" (PE).
International Transactions:
TPO
4. The assessee had purchased Transactions aggregating 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 refe rence to the TPO for determination of Arm's Length Price Under Section 92CA(3) in respect of this Purchase transactions and the TPO has determine d the TP adjustment of Rs. 2,78,76,273/-.
CIT(A) on TP adjustment:
5. The assessee filed appe al before the ld. CIT (A) who while deciding the quantum appeal, held that ".....The wo rding "to allocate pro fit in diffe rent jurisdiction by controlling prices" are very clear about the different jurisdiction (at least two tax jurisdictio ns of different countries) and emphasis on "Profits should no t be unduly transferre d out of India". In the instant case both the element are absent."
6. Accordingly, the ld. CIT (A) has deleted the addition 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).
3 ITA No. 2967/Del/2015Tianjin Tianshi India Pvt. Ltd.
ITAT on TP adjustment:
7. Vide order dated 27.05.2011 the ITAT has held "(i) th e CIT(A) has erred in observin g that since no cross border transac tio n i s invo lved , the transfer pricing provi sion s are not attrac ted. Once the transactio ns invol ved are in ternation al transac tio ns within th e mean ing of secti on 9 2B( 1) o f the Act, th e Tran sfer Pricing Provisions have rightly been invo lved. (ii) In view of the clear provisions o f sections 92B(1) and secti on 92(1), th ere is no requ irement to prove any mo tive to shift profits outside India o r to evade ta xes in In dia in the related party tran sac tions and the C IT(A) has also erred in placing relian ce on the fact th at no su ch finding was reco rd ed by the AO. Th e issue is as to whether the tran sfer pricing provisions h ave been rig htly held to be not applicable."
8. In conclusion, the ITAT held that the transactions attract the Transfer Pricing provisions. Owing to the directio n of the ITAT, Transfer Pricing Adjustment has been made. Subsequently, the penalty u/s 27 1(1)(c) has been levied by the Assessing Officer and the penalty orde r has been passe d 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 the PE of the foreign AE would not attract the transfer pricing provisions. It was held that the ld. CIT (A) has also held the same vie w and delete d the addition vide the appellate order dated 29.06.2010 in the quantum appeal. It was held that the provisions of Explanation 7 to Section 271(1)(c) are no t attracted in this case and deleted the penalty.4 ITA No. 2967/Del/2015
Tianjin Tianshi India Pvt. Ltd.
Arguments of the ld. DR:
10. He strongly relied on the Explanation 7 to Section 271(1)(c) and on the judgments in the case of Dharmendra Textile Processors 295 ITR 244, Zoom Communication Pvt. Ltd. 327 ITR 510 and Judgment of Hon'ble Apex Court in the case of MAK Data Pvt. Ltd. 358 ITR 593. He filed written submissions detailing the provisions o f the Act and ratio of the judgments.
Arguments of the ld. AR:
11. It was argued that the order of the ITAT dated 27.05.2011 has bee n received in the office of the CIT on 25.07.2011 and hence the penalty order passed on 21.03.2012 is beyond the period of six months from the end of the month in which the order was received by the CIT. It was argued that a pe riod of six months expired on 31.01.2012 as per the provisions of Section 275(1)(a).
12. Further, it was argued that since one of the appellate authorities in quantum proceedings are favo urable, it prove s that the issue is debatable and hence no penalty can be leviable. He also argued that the penalty is not leviable as there is a bonafide claim and the revenue has no t proved any case of furnishing o f inaccurate particulars of income or concealment.
Perusal of the Facts and dec ision thereof:
13. On going back to the core issue of adjustment of ALP, it reveals that the assessee has applied TNMM as the most appropriate method and used NP/TC as PLI. Its margins in the food suppleme nts and health e quipment are 4.2% and 4.2% 5 ITA No. 2967/Del/2015 Tianjin Tianshi India Pvt. Ltd.
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 comparable s whose average margin is 4.45%. In the TP study, the assessee, has used multiple year data for computing the average margin of the comparables while the TPO has used the current year data for calculating the average margin of the comparables. In the TP study the assessee has used NP/TC as PLI while the TPO has used OP/Sales as PLI. Accordingly, the TPO has co mputed the adjustme nt of Rs. 91,37,476/- in the He alth Equipment segment. In the Food Supplement Segment, the assessee has selected 18 comparables and computed the average margin (NP/TC) of these comparables at 4.1, The TPO has chosen only 2 comparables out of 18 comparables from the list of assessee and co mputed the average margin (OP/Sales) at 17% based on current year data. Acco rdingly, the TPO has computed the adjustment of Rs 1,87,38,797/- in the Food Supplement Segment and subsequently levied penalty.
14. In this background, the provisions of Explanation 7 of Section 271(1)(c) are examined. The same reads as under:
"Exp lanatio n 7 - Where in the case of an assessee who h as en tered into an internation al transaction d efined in section 92B, an y amount is add ed o r disallowed in computing the total inco me under sub- section (4) of section 92C, then, th e amo unt so ad ded or disallowed shall, for the p urposes of clause (c) of this su b-section, be deemed to represent the income in resp ect of which p arti culars h ave been concealed o r inaccurate particu lars have been furnished, unless the assessee p ro ves to th e satisfaction o f the Assessing Officer or the or the Commissioner (Appeals) [or the C ommissioner] that th e price charged or p aid in such transaction was computed in accordance with the p ro visions contained in section 92C and in th e manner prescribed under that section, in good faith an d with due diligen ce."6 ITA No. 2967/Del/2015
Tianjin Tianshi India Pvt. Ltd.
15. We find that during the earlier period of transfe r pricing adjustment, it was not even clear whether the transactions are indeed international transactions or no t/or whether the transactions are a subject matter of TP study or not. In the case of Verizon Communication India (P) Ltd. Vs DCIT, the ITAT Delhi has held that when the assessee filed its return of income , the assessee adopting multiple year data for arriving at arm's length price is a bonafide exercise. It was held that under such circumstances the penalty levied cannot be sustained.
16. In the instant case, the adjustment arose due to exclusion of some comparables and the use of current year data by the revenue instead of multiple ye ar data by the assessee 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 attaine d finality at that point of time.
17. The case law of Dharmendra Textile Processors relied by the ld. DR deals with willful concealment versus civil liability. The instant case, doesn't deal with any issue of concealment but adjustme nt. The case of Zoom Communication Pvt. Ltd. dealt with the claim of the assessee which is ex-facie non- allowable , the facts of which are different from the facts o f the prese nt case so far the present case deals with adjustment and determination of ALP. Similarly, the case of MAK Data which deals with voluntarily disclosure versus concealment, hence the ratio is not applicable to the case before us. Further, the provisions of Explanation 7 accords a benefit to the assessees to prove that the price charged are paid in such transactions was computed i n accordance with the provisions of Section 92C 7 ITA No. 2967/Del/2015 Tianjin Tianshi India Pvt. Ltd.
in good faith and due diligence. In the instant case, all the facts have bee n submitted before the reve nue authorities while the assessee sued NP/TC, the reve nue used OP/Sales. This amounts to determination of ALP from a differe nt angle, say at most from the angle of the revenue. It cannot be said that there was any surreptitious mechanism embarked upon by the assessee nor it can be said that the asse ssee failed to exercise their transactions with all the due diligence. In the present case the assessee has prepared its TP report in good faith and with due care. There is nothing on record to disprove the good faith and the due dilige nce discharged by the assessee in determining the ALP of transactions in the TP report submitted by the assessee.
18. Hence, we hereby hold that Explanation 7 to section 271(1)(c) is not attracted in the present case, and hence, it is not a fit case for levying the pe nalty u/s 271(1)(c). Accordingly, the penalty imposed u/s 271(1)(c) is hereby ordered to be delete d.
19. In the result, the appeal of the revenue is dismissed. 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