DCIT, CENTRAL CIRCLE- 28, NEW DELHI vs. ALCHEM INTERNATIONAL PVT. LTD., NEW DELHI

O R D E R

Per Dr. B.R.R. Kumar, Accountant Member:

1. Whether on the facts and in the circumstances of the case, the Id. CIT(A) is right in deleting the addition of Rs.22,47,16,299/- made by the AO on the ground that M/s Alchem International (HK) Ltd. which is a 100% subsidiary of the assessee company, without appreciating the fact that a legal facade was created by the assessee by forming the above company at Hongkong, which is a tax heaven, with the purpose of diversion of its profit to its 100% subsidiary at Hongkong.

2. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) is right in deleting the additional of Rs.22,47,16,29/- without appreciating the detailed evidences and reasoning discussed in the assessment order for holding that the effective management and control of M/s Alchem International (HK) Ltd. Which is a 100% subsidiary of the assessee company, was in India.”

3. The issue involved in the departmental appeal for AY 2011-12 relates to addition of Rs. 22,47,16,299/- which was made by the assessing officer. The addition made was on account of the profit earned by Hongkong Subsidiary of the assessee based on the presumption of the Assessing Officer that this legal facade was created by the assessee and effective management and control of the subsidiary company was in India.

4. Relevant extract of the order of CIT (A) as per Para 8.4 on page No 23 of order of CIT(A) vide Appeal No. 158/15-16/CIT(A)-29 AY 2011-12 is reproduced hereunder for ready reference:

8.4 Accordingly, based on the same reasoning as mentioned in the appellate orders for earlier assessment years and looking to the facts and circumstances of this case and in law, the addition made under section 6(3)(ii) of the Act with respect to clubbing of income of the appellant from its subsidiary at Hongkong i.e. AIHK is held to be not called for and accordingly the addition made amounting to Rs.22,47,16,299/- is directed to be deleted. These grounds of appeal (5 and 6) are allowed.

"5. It is evident that Hongkong entity was a separate legal entity and was registered in Hong Kong. There are enough evidences which show that the Hongkong entity was doing the business and was subject to Hongkong laws. Transfer Pricing Officer has found the transactions between the assessee-company and Hongkong entity at arms-length which also establish that the transactions between the assessee company and Hongkong entity were genuine business transactions. There is no evidence brought on record to prove that the control and management of Hongkong entity was being done wholly from India. In any case, even if control and management of Hongkong entity had been found situated wholly in India, though this is not the proved case of Revenue, yet the profit of Hongkong entity could not be clubbed with the profits of the assessee company. There is no evidence brought on record by the revenue to prove that the transactions undertaken by Hongkong entity were sham transactions and were transactions of the assessee company. Hongkong entity was registered in Hongkong on 20.9.2002 and was working since then, independently. Revenue itself has accepted that the assessee company has made exports to Hongkong entity. Transactions between the assessee company and its Hongkong Subsidiary have taken place at arms length as found out by TPO also. Payments have been made & received by the assessee and Hongkong entity through banking channels only. All the factual matrix of the case have been captured and finding have been recorded by the first appellate authority. Merely because Hongkong may be a tax free or low tax jurisdiction, that alone does not prove that the Hong Kong entity was legal facade of the assessee company. CIT(A) has exhaustively discussed the issue at hand and has recorded his findings which are based on the material. It is the assessing officer who himself has accepted in para 4 of the assessment order that exports were made by the assessee company to Hong Kong entity. Reading of the assessment order para 9.1 suggests that it was the finding of DDI that Hong Kong entity was not doing any actual activity which unfortunately has been followed by the assessing officer without adverting to the facts available on record which prove that exports were made by the assessee company to Hong Kong entity. Even the finding of Transfer Pricing Officer in AY 2010-11 cannot be ignored when he records that exports executed by the assessee company to its associated enterprise was short of arms length price by Rs. 3,64,43,842/-. Had there been no activity done by Hong Kong Entity, how could such finding be arrived at by TPO in the first place? Exports were Page | 3 made under the government policies and as per Import Export regulations and this cannot be ignored. There is nothing on record to suggest that the statement of Ms. Chanchal Bhutani was given to the assessee even. Thus, there is nothing before us to take a view different from the view taken by Commissioner of Income Tax (Appeal) and thus we dismiss all these grounds raised by Revenue in this regard."