INCOME TAX APPELLATE TRIBUNAL - DELHI

ITA No.736/Del/2009, ITA No.1055/Del/2013 (assessment year 2004-05)

Shri G. D. Agrawal And Shri Chandra Mohan Garg,JJ.

Shri Sanjeev Kapoor, CA. For the Petitioner :
Shri Sameer Sharma, Sr. DR. For the Respondent :

The order of the Bench was delivered by

G. D. Agrawal, VP.-ITA No.736/Del/2009

This appeal by the assessee is directed against the order of learned CIT(A)-XX, New Delhi dated 26th December, 2008 for the AY 2004-05.

2. Ground Nos.1 to 4 raised by the assessee read as under:-
"1. The order passed by the Hnb. CIT(A) XX is bad in law and on the facts of the case.
2. The Hnb. CIT(A) XX has erred in rejecting the comparables on the following grounds:
• Data not available on Public domain for the A.Y. 2004-05 • The functions performed by the comparables and the appellant are all together different.
• The comparable is a continuous loss making entity for the last four years.

3. The learned appellate Commissioner has erroneously confirmed the act of the assessing officer to consider the current year data for conducting the Transfer pricing, instead of the preceding two years data available on the Public domain.

This is despite the fact that the current year data of the comparables is not available on the Public domain, till the due date of filing the Income Tax return.

Further proviso to Rule 10B(4) lays down that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared.

4. The determination of Arm's Length Price at Rs. 6,32,98,266/- against the declared value of Rs. 5,47,15,000/- is unjust and arbitrary."

3. The facts of the case are that the assessee is a private limited company which is in the business of manufacturing and trading of home decorative items, cutlery, tableware etc. made from brass, aluminium, stainless steel and iron. Admittedly, the assessee is an associated enterprise of Michael Aram Inc., USA. The goods manufactured by the assessee in India are supplied to its associated enterprise viz., Michael Aram Inc., USA. Since the transaction of sale between the assessee and the AE was international transaction, the TP study was made by the assessee by which TNMM was considered as the most appropriate method. The PLI of the assessee was computed at -8.44% whereas PLI of the average eight comparables selected by the assessee worked out at -14.83% which are as under:-

4. While working out the operative profit, the assessee had taken the average of the multi year data i.e. assessee has taken the data of the comparable companies for FY 2001-02 and 2002-03. The Assessing Officer rejected the multi year data taken by the assessee for TP study. He also rejected some of the comparables and included few comparables on its own and thereafter worked out the PLI at 5.99% as under:-

5. On appeal, learned CIT(A) partly accepted the assessee's contention and rejected few items selected by the TPO and also included few items rejected by the TPO. However, he also rejected the assessee's theory of multi year data and considered the data of the relevant financial year i.e. 2003-04 and determined the PLI at 1.24% as under:-

6. The Revenue is not in appeal against the order of learned CIT(A) while the assessee, aggrieved by the order of the CIT(A), is in appeal before us.

7. At the time of hearing before us, the assessee's argument was two fold - (i) it is contended by the learned counsel that the CIT(A) was not justified in rejecting the use of multi year data in TP study by the assessee. He stated that Rule 10B(4) of the Income-tax Rules, which is the guideline for determining arm's length price, prescribed the use of multi year data. Therefore, the CIT(A) should not have rejected the use of multi year data in the TP study. In support of this contention, he relied upon the decision of ITAT in the case of TNT India P.Ltd. Vs. ACIT - [2012] 15 ITR (Trib) 263 (ITAT Bang-A). (ii) the rejection of two comparables by the CIT(A). It was stated by the learned counsel that the CIT(A) rejected three comparables viz., Hitkari China Ltd., Innovative Tech Pack Ltd. and S & Y Mills Ltd. The assessee does not have much grievance against rejection of S & Y Mills Ltd. because, admittedly, they are in different product than the product being manufactured by the assessee. However, it is contended that the learned CIT(A) was not justified in rejecting the two comparables considered by the assessee in its TP study viz., Hitkari China Ltd. and Innovative Tech Pack Ltd. He stated that these two companies are in the same line of business in which the assessee is carrying on the business. He also stated that merely because they are loss making companies would not be a ground for rejecting them as comparables. In support of this contention, he relied upon the decision of ITAT in the case of Trilogy E-business Software India P.Ltd. Vs. DCIT - [2013] 23 ITR (Trib) 464 (ITAT Bang-A). He further stated that in the case of Innovative Tech Pack Ltd., the CIT(A) has also observed that the company does not have the funds because its net worth is negative. It is stated by the learned counsel that the company had sufficient funds through debt. Therefore, merely because the company has a negative net worth, it should not be a ground for rejecting Innovative Tech Pack Ltd. as comparable. He, therefore, stated that the assessee's TP study may be accepted and the addition sustained by the CIT(A) should be deleted.

8. Learned DR, on the other hand, relied upon the order of CIT(A) and stated that CIT(A) was more than reasonable in determining the arm's length price just by applying the PLI of 1.24%. He further stated that Rule 10B(4) provides for considering the current year data only. Only proviso to the above Rule enables the applicability of multi year data provided certain conditions prescribed in the proviso are satisfied. It has nowhere been proved by the assessee that the condition prescribed in the proviso has been satisfied. Therefore, the CIT(A) rightly rejected the use of multi year data by the assessee. With regard to comparables, he referred to the order of learned CIT(A) and stated that the three comparables of the assessee rejected by the CIT(A) were for good and sufficient reasons. In this regard, he referred to page 13 of the CIT(A)'s order and pointed out that in the case of Hitkari China Ltd., the data relating to FY 2003-04 which is relevant to assessment year 2004-05 was not available in public domain. The assessee had also considered the data of two years back which were relevant to AY 2002-03 while the assessee's appeal is for AY 2004-05. With regard to innovative Tech Pack Ltd., the CIT(A) has recorded the finding that they are in the business of manufacturing plastic bottles which cannot be compared with the business of the assessee which is manufacturing of home decorative. He, therefore, submitted that the order of learned CIT(A) should be sustained.

9. We have carefully considered the submissions of both the sides and perused the material placed before us. The first argument of the assessee was with regard to use of multi year data for determining the arm's length price. Rule 10B of the Income-tax Rules provides the procedure for determination of arm's length price under Section 92C. Sub-rule (4) thereof reads as under:-

"(4) The data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into :

Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared."

10. From the above, it is evident that as per Sub-rule (4), the data to be used in analyzing the comparability of an uncontrolled transaction shall be the data relating to FY in which the international transaction has been entered into. Admittedly, in the case of the assessee, the international transaction had taken place during the FY 2003-04 and, therefore, the data to be used should be the data relating to FY 2003-04 while the assessee has taken the data relating to FY 2001-02 & 2002-03. The proviso enables for the use of data of a period not being more than two years prior to the said financial year if such data reveals the fact which could have an influence on the determination of transfer prices in relation to the transaction being compared. In this case, the assessee was unable to point out how the data of two earlier years will influence the determination of transfer prices in relation to the transaction of FY 2003-04. In support of his contention, the learned counsel for the assessee has relied upon the decision of ITAT Bangalore Bench in the case of TNT India P.Ltd. (supra), wherein the ITAT held as under:-

"That the relevant financial year was 2001-02, while the assessee had used the data pertaining to the assessment years 1999-2000 and 2000-01. The assessee's argument that at the time of transfer pricing study, it did not have the data relating to relevant comparable, i.e., for the financial year 2001-02 was acceptable, but as held by the Commissioner (Appeals), the assessee had to adopt the data available for the transfer pricing study at the time of filing of the income-tax returns. It was not the case of the assessee that by the time of filing of the income-tax returns, the data relevant to the financial year 2001-02, was not available. Further, as pointed out by the Commissioner (Appeals), prior years' data was relevant only if, the assessee was able to prove that the pricing pattern of the assessee for the relevant financial year had been influenced by the market conditions/business cycle/product life cycle of the earlier years. The assessee being in the business of courier services, the fluctuation caused by business/economic/product life cycle would not in any way affect the pricing pattern of the services of the relevant financial year. In the absence of any cogent and reasonable reasons given by the assessee for justification of use of multiple years' data, except for placing reliance upon the OECD guidelines and also the proviso to rule 10B(4) of the Income-tax Rules, 1962, there was no reason to interfere with the order of the Commissioner (Appeals)."

11. From a reading of the above decision, it is evident that the said case supports the case of the Revenue rather than the assessee. In view of the above, we do not find any infirmity in the order of learned CIT(A) in rejecting the use of multi year data by the assessee in its TP study and considering the data of the financial year in which the international transaction took place.

12. The assessee has also disputed the rejection of two comparables viz., Hitkari China Ltd. and Innovative Tech Pack Ltd. In this regard, the finding of learned CIT(A) reads as under:-

"7.1.3 As regards rejection of Hitkari China Ltd. is concerned, I uphold the TPO's action because, as per provision of Rule 10B(4), only same year data is to be taken in which the International Transaction taken place. As we are doing the comparability analysis for A.Y. 2004-05 and since the data for this year was not available in the public domain hence, TPO is right in rejecting the appellant's action of using the Data for A.Y. 2002-03 for the purpose of comparability.

As regard Innovative Tech Pack Ltd., I uphold the TPO's action because the function performed by the appellant and by Innovative Tech Pack Ltd. are altogether different. Appellant has submitted that his main activity is manufacturing of handicrafts the item dealt in by the appellant are home decorative, not meant for daily use & involves lot of styling and artistic imagination (refer appellant's submission pg 5 of paper book under heading profit level indicator) whereas Innovative Tech Pack Ltd., is engaged in manufacturing of plastic bottles - which is a daily consumable item. Therefore by no stretch of imagination one can hold that both appellant and Innovative Tech Pack Ltd. perform same functions, utilize similar assets and operate in similar risk environment.

Further it is not out of place to mention here that Innovative Tech Pack Ltd. is a continuous loss making entity and has a negative net worth. As per "Prowess" database the profit and Net worth of Innovative Tech Pack for the last 4 years are as under:

The appellant claims that Innovative Tech Pack must be taken as comparable, as it is dealing in the Home Product, this claim of the appellant is not correct at all. As mentioned above appellant himself has stated that he deals in handicrafts not meant for daily use and it involves lot of styling and artistic imagination."

13. From the above, it is evident that in the case of Hitkari China Ltd., the data of the relevant financial year is not available in public domain. The assessee itself has used the data of FY 2001-02 which would be relevant for AY 2002-03. In the above circumstances, when the data of the relevant financial year of the sufficient number of other comparables is available, in our opinion, learned CIT(A) rightly rejected the use of data of FY 2001-02 in the case of Hitkari China Ltd. for considering the transaction of FY 2003-04. With regard to Innovative Tech Pack Ltd., learned CIT(A) has pointed out that Innovative Tech Pack Ltd. was in the business of manufacturing of plastic bottles while the assessee is in the business of manufacturing of handicrafts. Therefore, the function performed by the assessee is altogether different than by Innovative Tech Pack Ltd. The learned counsel for the assessee had argued that plastic bottles are also home appliances and the goods manufactured by the assessee are also home appliances and, therefore, they are comparable with each other. After considering the arguments of both the sides, we are unable to agree with the learned counsel. The assessee is manufacturing home decoratives with the use of brass, aluminium, stainless steel and iron etc. The manufacturing of plastic bottles cannot be compared with manufacturing of home decorative items. Moreover, learned CIT(A) has further pointed out that in the case of Innovative Tech Pack Ltd., its entire capital was eroded due to continuous losses and its net worth as on 1st April, 2003 was (-) Rs. 6.13 crores while as on 31st March, 2004, it was (-) Rs. 6.81 crores. Therefore, when Innovative Tech Pack Ltd. did not have sufficient funds to carry on the business, naturally, its performance cannot be compared with the other companies. It was contended by the learned counsel that Innovative Tech Pack Ltd. had sufficient funds through debt. However, when any entity had eroded its entire net worth and it is in negative, then naturally, its debt would be proportionately too high and, therefore, it cannot be considered as a company comparable to another company which has sufficient capital base. In any case, the product manufactured by the assessee is altogether different than the product manufactured by Innovative Tech Pack Ltd. In our opinion, the CIT(A) rightly rejected Innovative Tech Pack Ltd. as comparable. In view of the above, we do not find any infirmity in the order of learned CIT(A) with regard to ground Nos.1 to 4 of the assessee. The same are rejected.

14. Ground No.5 of the assessee's appeal reads as under:-
"The employees contribution to Provident Fund for the assessment year 2004-05 has been incorrectly disallowed on the grounds that the same were deposited by the assessee beyond the stipulated time period read with the Provident Fund Act and section 2(24)(X) of the Income Tax Act 1961. This is despite the fact that a decision contrary to the same has been upheld by the Honourable Mumbai Bench of Tribunal in the case of Fluid Air (India) Ltd. Vs. DCIT 63 ITD 182."
15. At the time of hearing before us, it is stated by the learned counsel that the payment of PF etc. was deposited during the financial year itself and, therefore, disallowance of Rs. 1,12,064/- was not justified. In support of this contention, he relied upon the decision of Hon'ble Jurisdictional High Court in the case of CIT Vs. Dharmendra Sharma - [2008] 297 ITR 320 (Delhi), of Hon'ble Supreme Court in the case of CIT Vs. Vinay Cement Ltd. - [2007] 213 CTR (SC) 268 and of ITAT, Mumbai Bench in the case of Fluid Air (India) Ltd. Vs. DCIT - [1997] 63 ITD 182.

16. Learned DR, on the other hand, relied upon the orders of authorities below.
17. We have heard the arguments of both the sides and perused the material placed before us. We find that learned CIT(A) sustained the disallowance with the following finding:-

"12. I have gone through the above submission of the appellant and also through the judgment of ITAT Mumbai bench in the case of Fluid Air (India) Ltd. In the case of Fluid Air India Ltd. the details of late payment were made available before the appellate authorities and since the delay was within 9 to 22 days hence tribunal stated that provisions of Sec. 36(1)(va) and 2(24)(x) should be interpreted liberally keeping in view principles of equity and legislative intent. I am afraid that this judgement doesn't come to the rescue of the appellant as no details of late payment etc. was made available hence, in the absence of such details I uphold the action of the AO in adding the sum of Rs. 1,12,064 under section 2(24)(x) read with 36(1)(va)."

18. Though at the time of hearing before us it is stated by the learned counsel that all the payments were made during the financial year, however, it seems that no such claim was made before the Assessing Officer. Before the CIT(A) also, the assessee did not furnish these details. The assessee has not relied upon these decisions before the Assessing Officer. Therefore, he had no occasion to examine the assessee's case in the light of the decision of Hon'ble Jurisdictional High Court or Hon'ble Supreme Court. We, therefore, set aside the order of the Assessing Officer on this point and restore the matter to the file of the Assessing Officer and direct him to examine this issue afresh in the light of the above pronouncements of Hon'ble Jurisdictional High Court as well as Hon'ble Apex Court.

ITA No.1055/Del/2013:
19. This appeal by the Revenue is against the cancellation of penalty of Rs. 31,19,450/- levied by the Assessing Officer under Section 271(1)(c) of the Income-tax Act, 1961.

20. The facts of the case are that the assessee has filed the return declaring loss of Rs. 47,63,670/- which was revised to Rs. 46,50,758/-. The Assessing Officer made the addition of Rs. 1,16,20,046/- on account of determination of arm's length price of the international transaction by the TPO. He also levied the penalty under Section 271(1)(c) of the Act amounting to Rs. 31,19,450/- on the above adjustment which was cancelled by the learned CIT(A). Hence, this appeal by the Revenue.

21. We have heard both the sides and perused the material placed before us. In this case, the Assessing Officer has made the addition of Rs. 1,16,20,046/- as per arm's length price determined by the TPO. However, after the order of the CIT(A), the addition is reduced to Rs. 85,83,266/-. The facts of the case have already been discussed in detail while deciding the assessee's appeal in quantum i.e. ITA No.736/Del/2009 wherein we have mentioned that the assessee company is manufacturing home decorative in India and selling to its associated enterprise viz., Michael Aram Inc., USA. As per TP study by the assessee, the sale price was at arm's length which was not accepted by the TPO and which is partly sustained by the CIT(A). However, there is no dispute that whatever sale consideration was received by the assessee from its associated enterprise has duly been accounted for. There is no concealment of any fact or furnishing of any incorrect facts. Merely because some addition has been made on account of determination of arm's length price by the TPO, it cannot be said that the assessee either furnished inaccurate particulars of its income or concealed its income. On these facts, the decision of Hon'ble Apex Court in the case of CIT Vs. Reliance Petroproducts Pvt.Ltd. - 322 ITR 158 would be squarely applicable, wherein their Lordships held as under:-

"Where there is no finding that any details supplied by the assessee in its return are found to be incorrect or erroneous or false there is no question of inviting the penalty under section 271(1)(c). A mere taking of a claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such a claim made in the return cannot amount to furnishing inaccurate particulars."

22. The learned DR, at the time of hearing before us, has relied upon the decision of Hon'ble Jurisdictional High Court in the case of Commissioner of Income-tax Vs. Zoom Communication P.Ltd. - 327 ITR 510.

23. We find that the Hon'ble Jurisdictional High Court in the case of Zoom Communication P.Ltd. (supra) relied upon by the learned DR considered the decision of Hon'ble Apex Court in the case of Reliance Petroproducts Pvt.Ltd. (supra) and held as under:-

"In the case of Reliance Petroproducts P.Ltd. [2010] 322 ITR 158 (SC), the addition made by the Assessing Officer in respect of the interest claimed as a deduction under section 36(1)(iii) of the Act was deleted by the Commissioner of Income-tax (Appeals) though it was later restored, by the Tribunal, to the Assessing Officer. The appeal filed by the assessee against the order of the Tribunal was admitted by the High Court. It was, in these circumstances, that the Tribunal came to the conclusion that the assessee had neither concealed the income nor filed inaccurate particulars thereof. In recording this finding, the Tribunal felt that if two views of the claim of the assessee were possible, the explanation offered by it could not be said to be false. This, however, is not the factual position in the case before us. The facts of the present case thus are clearly distinguishable.

It is true that mere submitting a claim which is incorrect in law would not amount to giving inaccurate particulars of the income of the assessee, but it cannot be disputed that the claim made by the assessee needs to be bona fide. If the claim besides being incorrect in law is mala fide, Explanation 1 to section 271(1)(c) would come into play and work to the disadvantage of the assessee. The court cannot overlook the fact that only a small percentage of the income-tax returns are picked up for scrutiny. If the assessee makes a claim which is not only incorrect in law but is also wholly without any basis and the explanation furnished by him for making such a claim is not found to be bona fide, it would be difficult to say that he would still not be liable to penalty under section 271(1)(c) of the Act. If we take the view that a claim which is wholly untenable in law and has absolutely no foundation on which it could be made, the assessee would not be liable to imposition of penalty, even if he was not acting bona fide while making a claim of this nature, that would give a licence to unscrupulous assessees to make wholly untenable and unsustainable claims without there being any basis for making them, in the hope that their return would not be picked up for scrutiny and they would be assessed on the basis of self-assessment under section 143(1) of the Act and even if their case is selected for scrutiny, they can get away merely by paying the tax, which in any case, was payable by them. The consequence would be that the persons who make claims of this nature, actuated by a mala fide intention to evade tax otherwise payable by them would get away without paying the tax legally payable by them, if their cases are not picked up for scrutiny. This would take away the deterrent effect, which these penalty provisions in the Act have.

We find that the assessee before us did not explain either to the income-tax authorities or to the Income-tax Appellate Tribunal as to in what circumstances and on account of whose mistake, the amounts claimed as deductions in this case were not added, while computing the income of the assessee-company. We cannot lose sight of the fact that the assessee is a company which must be having professional assistance in computation of its income, and its accounts are compulsorily subjected to audit. In the absence of any details from the assessee, we fail to appreciate how such deductions could have been left out while computing the income of the assessee-company and how it could also have escaped the attention of the auditors of the company."

24. Thus, after considering the decision in the case of Reliance Petroproducts Pvt.Ltd. (supra), it was stated by the Hon'ble Jurisdictional High Court that mere submitting a claim which is incorrect in law would not amount to giving inaccurate particulars of the income of the assessee but if the claim, besides being incorrect in law is mala fide, Explanation 1 to Section 271(1)(c) would come into play. However, the facts in the case of the assessee are altogether different. The assessee has not made any claim for deduction which is found to be not allowable by the Assessing Officer. As we have already noted earlier, the assessee is manufacturing home decorative items, cutlery, tableware etc. which are being supplied to its associated enterprise viz., Michael Aram Inc., USA. Since the transaction of sale between the assessee and associated enterprise was international transaction, the matter was referred to TPO for determining the arm's length price. The TPO determined the arm's length price at more than the sale consideration shown by the assessee which is partly modified by the CIT(A) and the order of CIT(A) is sustained by us while deciding the assessee's appeal in ITA No.736/Del/2009. However, there is no dispute that whatever sale consideration was received by the assessee from its associated enterprise was duly accounted for. It is also not in dispute that the assessee has furnished all the particulars with regard to sale made to associated enterprise. The details supplied by the assessee in its return of income are not found to be incorrect or erroneous or false. Merely because some adjustment is made by applying transfer pricing provisions, it cannot be said that there was any concealment of income or furnishing of inaccurate particulars. On these facts, the decision of Hon'ble Apex Court in the case of Reliance Petroproducts Pvt.Ltd. (supra) would be squarely applicable and the learned CIT(A) rightly cancelled the penalty levied under Section 271(1)(c) of the Act.

25. In the result, the appeal of the assessee in ITA No.736/Del/2009 is deemed to be partly allowed for statistical purposes and the appeal of the Revenue in ITA No.1055/Del/2013 is dismissed.

The order pronounced in the open court on 27th September, 2013.