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Income Tax Appellate Tribunal, AHMEDABAD – BENCH ‘D’
Before: SHRI RAJPAL YADAV & SHRI PRADIPKUMAR KEDIA
and 2 Others 2 आदेश/O R D E R PER RAJPAL YADAV, JUDICIAL MEMBER: and 1312/Ahd/2012 are cross appeals against order of the ld.CIT(A) dated 29.3.2012 and 30.3.2012 [seems to be an incorrect date on any one order annexed with respective appeal, because otherwise it is one order only] passed for the Asstt.Year 2005-06. These appeals have arisen from an assessment order passed under section 143(3) on 30.12.2008. is directed at the instance of the assessee against order of the ld.CIT(A) dated 28.1.2016 passed for the Asstt.Year 2005-06. This appeal is arisen from the proceedings initiated under section 271(1)(c) of the Income Tax Act.
2. First we take quantum appeal i.e. ITA No.1312/Ahd/2012. This appeal is directed at the instance of the Revenue. Though it has taken three grounds, but its grievance revolves around a single issue, viz. the ld.CIT(A) has erred in allowing the deduction of Rs.1,18,82,273/- out of Rs.1,83,82,531/- claimed by the assessee under section 10B of the Income Tax Act.
At the very outset, the ld.counsel for the assessee submitted that the amount mentioned in the ground by the Revenue is incorrect. Basically, the assessee has claimed deduction of Rs.1,83,82,531/-. This deduction has been allowed by the ld.CIT(A). The Revenue has wrongly pleaded that such claim has been restricted to Rs.1,18,82,273/-.
ITA No.1309/Ahd/2012 and 2 Others 3 4. With the assistance of the ld.representatives, we have gone through the record. It emerges out from the record that the assessee has filed its return of income on 22.6.2006 declaring total income at Rs.14,39,11,680/-. The case of the assessee was selected for scrutiny assessment and notice under section 143(2) was issued and served upon the assessee. The assessee at the relevant time was engaged in the business of manufacturing and selling of valves, vales parts, actuators, components and accessories etc. It has two manufacturing facilities viz. Baroda unit and Chennai Unit. Chennai unit is 100% export oriented unit and export components to its associated enterprise. On scrutiny of the accounts, it revealed to the AO that the assessee has claimed a deduction of Rs.1,83,82,531/- under section 10B of the Act. The ld.AO issued a show cause notice, inviting explanation of the assessee as to why this deduction be not disallowed. The assessee filed a reply and contended therein that that deduction under section 10B was allowed to it in earlier years, and on the basis of decision of ITAT as well as Hon’ble High Court, the same is admissible. Somehow, the ld.AO was not satisfied with the explanation of the assessee and rejected the same, accordingly he made the disallowance. On appeal, the ld.CIT(A) has allowed deduction to the assessee on the ground that similar deduction has been allowed to the assessee in earlier years. The ld.CIT(A) has followed the decision of his predecessor in the immediately preceding year. The ld.counsel for the assessee contended that in the Asstt.Year 2003-04, the Tribunal has decided this issue in favour of the assessee in and CO NO.246/Ahd/2008 and this Tribunal’s order dated 4.2.2011 was challenged before the Hon’ble High Court in Tax Appeal No.1048
ITA No.1309/Ahd/2012 and 2 Others 4 of 2011. Hon’ble High Court has upheld this order vide its order dated 30.8.2012. Copy of the Hon’ble High Court’s decision as well as ITAT’s order are placed on page no.996 to 1009 of the paper book. He also placed on record copy of the ITAT’s order dated 2.11.2012 in and CO NO.44/Ahd/2009 for the Asstt.Year 2004-05. The ld.CIT-DR did not dispute with regard to the above facts. Therefore, as far as deduction admissible to the assessee under section 10B is concerned, the issue is squarely covered in favour of the assessee by the decision of Hon’ble jurisdictional High Court in assessee’s own case in Asstt.Year 2003-04 as well as by ITAT’s order in the Asstt.Year 2004-05 also. It is also pertinent to mention that the Department has mentioned incorrect amount in its ground of appeal. The deduction has been granted by the ld.CIT(A) at Rs.1,83,82,531/- and not at Rs.1,18,82,273/-. The assessee has claimed deduction of Rs.1,83,82,531/-. Apart from this amount, it has first time claimed deduction of Rs.65,00,258/- which is interest income. This deduction was claimed vide letter dated 29.12.2008 submitted during the assessment proceedings, this deduction was not granted to the assessee, and the CIT(A) has also rejected the claim of the assessee. The Revenue has wrongly construed that this amount be excluded from the eligible claim of Rs.1,83,82,531/- in its grounds of appeal. It is a separate amount. Therefore, we do not find any merit in this appeal of the Revenue. It is dismissed.
Now we take the appeal of the assessee i.e ITA No.1309/Ahd/2002. The grounds of appeal
taken by the assessee are not in consonance with Rule 8 of the Income-tax (Appellate Tribunal) Rules, 1963 – they are descriptive and argumentative in and 2. Others 5 nature. The assessee has pleaded that the ld. CIT(A) has erred in confirming the addition of Rs.2,05,96,920/- out of total addition of Rs.2,91,71,038/- made by the AO on the recommendation of TPO to the Arm’s Length Price (ALP) in relation to international transaction. In other sub-grounds, the assessee has taken peripheral arguments. Apart from this fold of grievance, the assessee has raised additional ground of appeal which reads as under: “Appellant craves leave to raise this additional ground of appeal before the Hon'ble ITAT. This is a legal ground and therefore as per the decision of Hon'ble Supreme Court in the case of National Thermal Power (229ITR 383) it can be raised before the Hon'ble ITAT. i. Without prejudice to the other grounds in appeal, it is respectfully submitted to exclude the amount of management fee while computing margins of Chennai unit, as inclusion of management fee in profit level indicator of Chennai unit is resulting into double taxation of management fee.
The Appellant further craves leave to add, amend, alter, change, delete and edit the above ground of appeal before or at the time of the hearing of the appeal.”
On scrutiny of the return and TP study report, the ld.AO found that the assessee had international transaction with its AE, and therefore, reference under section 92CA(1) of the Act is required to be made to the ld.TPO. Accordingly, he made reference to the TPO. In order to give logical end to the proceedings, the ld.TPO has issued notice under section 92CA(2) of the Act and questionnaire to the assessee. He noticed the following international transactions:
Description of the transactions Amt. paid (in INR) Sr. Amt. recd NO. (in INR)
1 Import of raw materials, parts etc 1,40,703,162 - 2 Import of finished goods for resale 57,198,135 - 3 Export of valves components - 18,11,38,364 4 3,80,11,428 Export of finished goods for resale 5 Agency Commission _ 1,16,58,594 6 _ 2,10,70,872 Provision of design related services 7 81,21,072 - Payment of management fee and professional charges 8 Reimbursement of other expenses 79,37,020 - ' 9 - 27,96,663 Recovery of capital purchases and advance to employees Reimbursement of Management Fees expenses of Rs.81,21,072/- The assessee was asked to submit details of management reimbursement expenses of Rs.81,21,072/-. In response to the same, the assessee has submitted following details: SI. No. Description Amount Invoice No. Date 1. DHQ5/007108 27/10/04 Brussels Management Fees (being S$ 19583 April, 2003 to Sept. 2003) (INR640712) 2. DHQ011514 17/9/04 Asia Management Fees (being April, US$ 50390.84 (INR 2217197) 2004 to Sept. 2004) 3. 1800000225 30/3/05 Asia Management Fees (being Oct., US$ 53650.44 (INR 2799697) 2004 to Feb.2005) 4. 1800000367 27/9/05 Asia Management Fees (being US$44123.38 (INR 2482733) March, 2005 to June 2005)
As far as adjustment made in the management fee expenses are concerned, we will take up this issue in the later part of this order.
A perusal of the TPO’s order would reveal that ld.TPO has identified nine international transactions from the TP study report. and 2 Others 7 Out of these nine, four transactions pertained to incurrence of expenditure or payments made by the assessee to its AE. The ld.TPO evaluated transaction at serial no.3, 6, 7 and 9. He first observed that the assessee has determined ALP of these transactions after applying TNMM method. He first examined the transaction pertained to engineering design services of Rs.2,10,70,872/- and capital recovery of capital purchase and advances to employees amounting to Rs.27,96,663/-. In these transactions, he has recommended upward adjustment in design services of Rs.1,33,704/-. This amount has not been disputed by the parties before us. Therefore, we need not to examine this aspect of the TPO’s order.
The next item which has been considered by the ld.TPO is with regard to value of export of valve components of Chennai unit. We deem it appropriate to take note of relevant discussion made by him on this issue. It reads as under:
“7.2 The above issues are being discussed as under: i) The assessee has contended that Chennai Unit manufactures and sales bare shaft valves whereas Baroda Unit sales high value added valves. In view of the above, margins are more in Baroda Unit. But, assessee has not shown how and why higher margins will be earned by adding an additional component at Baroda unit. The assessee has not submitted any computation showing higher margins due to above. As both the units are carrying out manufacturing activities, they should earn manufacturing margins which should be comparable, which assessee has itself done while comparing itself, performance with external comparables under TNMM. ii) The assessee argues that Chennai unit assumes no credit and market risk in respect of its export to its AEs whereas the Baroda Unit assumes credit and market risk in respect of and 2 Others 8 its sales to third parties. I fully agree with the assessee's contention and a downward adjustment is to be made for this risk to the Baroda unit's results. iii) The assessee argues about different geographical location to which these units cater, as Baroda unit caters to the local market and Chennai Unit caters to the export market. I have seen from the record that Chennai Unit is exporting its product to the developed countries mainly and more specifically to USA. And as such command premium in price as compared to local market. It is a well-known fact that prices of manufactured products command higher price in developed countries more specifically in USA and Europe as compared to Indian market by at least 10%. In view of the above, results of Chennai Unit should be adjusted downward by 10% margin due to geographical location or of Baroda unit upward margin of 10%. It may be worthwhile to mention here that Hon'ble ITAT, Bangalore and Delhi have stated that Transfer Pricing is not an exact science and adjustment are to be made on approximate basis and assessee's contention in this regard of accurate adjustment is not correct and adjustment should have been done on the basis of market realities. iv) The assessee has objected for using results of Baroda and Chennai units as they are impacted by related parties. In support, it has relied on the decision in the case of M/s. Philips Software Pvt Ltd-ITA No. 218/BNG/08 AY 2003-04 where it was observed by the Tribunal that for the purpose of comparability, companies with even a single rupee of transactions with AE, cannot be said to be a comparables. The Delhi ITAT in the case of Sony India held that related party transaction should not exceed at the most 10-15% of total revenue so that they can be used for comparison purpose. None of these decisions have given reason for taking zero percent or 10% to 15% to related party transactions as criteria for comparison purpose. In fact, even if related party transactions are 25% it will not affect net margin profits much, as if one considers that an assessee may have marked up or marked down its transaction price by 20%, the impact of net profit vis-a-vis gross sales will be only 5% (25% of 20%) and that is safe harbor limit provided by the Act where adjustment' are not to be made. In the present case, if distribution activity of the Baroda Unit are and 2 Others 9 taken out then total related party transaction on purchase side will be less than 25% and as the result of Chennai Unit are to be compared which is having substantial related party transaction will not be an issue in this regard. After taking out trading transaction results, operating profit ratio of the Baroda Unit comes to 16.8% which is similar external comparable as submitted by the assessee with mean operating profit to the sales ratio of 16.62%.
7.3 This mean external comparable results along with Baroda unit results are now being compared with Chennai unit after making adjustment which assessee has claimed and discussed above. It can be seen from the above that comparables are to be adjusted downward for credit and finance risk and to be adjusted upward for geographical difference. Thus, upward and downward adjustment is considered as neutralizing to each other.
7.4 As sales of the assessee is to related party, these ratios are converted from OP/TS to OP/TC, OP/TC for comparable companies which will be 19.93% and OP/TC for Chennai Unit will be 9.71%. The computation of operational profit will be as under:
OP/TC = 19.93% OP =TCX 19.93% = 18,33,91,692 X 19.93% = 3,65,49,964 Whereas profit shown by Chennai Unit is Rs.1,81,89,936/-, so sales prices are adjusted upward by Rs. 1,83,60,028/- to compare with operating profit of Rs.3,65,49,964/-.
(Upward adjustment of sale price by Rs.1,83,60,028/-)
7.5 Total adjustment Rs.2,21,04,742/- (Rs.1,83,60,028/-+Rs.1,33,704/- + Rs. 36,11,010/-)”
Before adverting to the submissions made by the ld.counsel for the assessee, we deem it appropriate to take note of the finding of the ld.CIT(A) on this aspect, which reads as under:
6.3.2 Vide third part of ground no.3, the appellant has stated that the TPO had rejected certain comparables selected by the appellant on the ground that the finished goods profile of the appellant does not match with that of the comparable and many comparables selected by the appellant mainly deal in pumps and other products as against only valves. But, neither the TPO has mentioned as what are the comparable companies taken by him for the purpose of determining this ratio, neither the appellant has given details as to which comparables are being taken by the TPO and which are being rejected. The appellant has only provided the extracts of Annual Report of comparables selected by the TPO. But no such information has been provided for the comparables selected by the appellant but rejected by the TPO. When the companies which make products comparables with the main product of the appellant, are available, then the appellant's contentions that other companies who are working in other flow control technology field should also be selected for comparison is not correct. Moreover, in the submission made by the appellant, it has not furnished details of the companies which have been ignored by the TPO and has not explained as to how the products of these companies are broadly similar with those of the appellant so that the results of these companies should also be compared with the results of Chennai Unit, In the absence of any such explanation and details, it is to be held that the TPO's action of comparing the results of the appellant with the comparables selected by him is well founded and hence, this ground of appeal is also dismissed.
At the time of hearing, the ld.counsel for the assessee submitted details compiled in tabular form and on the basis of such details he appraised us the issue in dispute in this ground of appeal
. We deem it appropriate to take note of these details which reads as under:
1. Assessee’s Margin Key Particulars Amount in INR Assessee’s Margin, after application of +/-% range A Operating Income 201,581,629 211,660,710 E Total Cost 183,391,692 183,391,692 C-A-B Operating Profit (OP) 18,189,936 28,269,018 D=C/B OP/TC* 9-92% 15.41% *taken as 9.71 by TPO (page 11)
TP Study Sr.No. Name of Comparable Multiple year Single Year Margin Margin* (OP/Sales) (OP/Sales)
1 Cenlub Industries Ltd. 8.37% - 2 DHPIndiaLtd. 17.27% 17.56% 3 Fisher Sanmar Ltd. 23.62% 20.01% 4 Johnson Pump (India) Ltd. 11.10% - 5 Orson Holdings Co. Ltd. 6.62% 3.26% 6 Xomox Sanmar Ltd. 12.04% 14.58% 7 Asco (India) Ltd. 25.70% 29.99% 8 Triton Valves Ltd. 18.63% 14.32% 9 Shakti Pumps (India) Ltd 7.79% - 10 Shroffs Engineering Ltd 10.07% -
Average 14-12% 16.62%
*to the extent available 3 TP Order
Name of Comparable OP/Sales Remarks 1 DHP India Ltd. 17.56% 2 Fisher Sanmar Ltd. 20.01% 3 Orson Holdings Co. Ltd. 3.26% 4 Xomox Sanmar Ltd. 14.58% 5 Asco (India) Ltd. 29-99% .
6 Triton Valves Ltd. 14-32% Average (OP/Sales) 16.62% Average (OP/TC) i.e. 19-93% TPO (16.627(100-16.62)) considered OP/TC
CIT(A) Order Sr.No. Name of Comparable OP/Sales Remarks for request before ITAT I D H P India Ltd. 17.56% 2 Fisher Sanmar Ltd. 20.01% RPT is 39.56%. Reject as high RPT 3 Orson Holdings Co. Ltd. 3.26% 4 Xomox Sanmar Ltd. 14.58% 5 Asco (India) Ltd. 29.99% » Spare Sales is 28.5%. Reject on ground of high proportion of Spare sales 6 Triton Valves Ltd. 14.32%
Average 16.62%
Average (OP/TC) 19-93% 5 Request before ITAT Sr. No. Name OP/Sales OP/TC i DHPIndiaLtd. 17.56% 21.30% 2 Orson Holdings Co. Ltd. 3.26% 3-37% 3 Xomox Sanmar Ltd. 14.58% 17.07% 4 Triton Valves Ltd. 14.32% 16.71% and 2 Others 13 Average 12.43% 14.61%
The ld.counsel for the assessee while explaining the above details submitted that the assessee has worked out operating profit at Rs.1,81,89,936/- by dividing operating income with total cost. In terms of percentage it is 9.92% and if the range of +/- 5% is being applied, then no adjustment could be made unless mean profit of the comparable according to some method of computation exceeds 15.41%. He further contended that in table no.2, the assessee has highlighted comparable selected by it in the TP study report and if multi-year margin are being taken by dividing operating income/sales then the average was 14.12%. The assessee has submitted that its profit is within the margin and no adjustment is required. The ld.TPO did not accept the comparable selected by the assessee. He scaled down the comparable to 6 by adopting various filters. The assessee has objected on the selection of these comparables on the basis of filters applied by the TPO itself. One of the filters which has been applied is that comparable who have related party transaction deserves to be excluded. The ld.CIT(A) observed that the comparable who have related party transaction of less than 20% could be accepted as comparable, both the parties have lost sight that Fisher Sanmar Ltd. has related party transaction of 39.56%; similarly, Asco (India) Ltd. has a spare sales around 28.5%. If both these comparables are excluded then again profit margin of the assessee would be below the range carved out for any adjustment. He has prepared the comparables after exclusion on the above principle which has been adopted by the ld.CIT(A). and 2 Others 14 13. The ld.counsel for the assessee apart from this preliminary objection has contended that the assessee has raised various other issues as to how profits of Vadodara unit cannot be compared with Chennai unit; and how both these units are engaged in different line of products. On the other hand, the ld.CIT-DR relied upon the orders of the Revenue authorities and contended that the ld.CIT(A) has taken into consideration these aspects.
We have duly considered rival contentions and gone through the record carefully. For determining ALP of international transaction, the ld.TPO is required to first select tested party, then the method on whose application ALP is to be determined. He has observed that for export of Chennai unit, profits are to be determined after applying TNMM method. This has not been disputed by the parties before us. The next step which was required by the TPO to identify comparables from the TP study report or from his independent investigation. He has to finalise the filters required to be applied on the results of the comparables selected by him in order to zero down the most comparable assessees. We have extracted complete finding of the TPO. He has nowhere mentioned the details of comparable in his order. He has nowhere mentioned how these are comparable to the assessee. He has no where taken objection of the assessee as to how a particular comparable selected by the TPO is comparable or not comparable. In other words, a perusal of his order would suggest that there is no coherence between his inquiry and conclusion. It appears that certain pages are missing from the impugned order. We have specifically extracted the finding of the ld.CIT(A) also where the assessee has raised these objections. At and 2 Others 15 the cost of repetition, we would like to take note of these following line of observation of the ld.CIT(A) that “moreover, in the submission made by the appellant, it has not furnished details of the companies which have been ignored by the TPO and has not explained as to how the products of these companies are broadly similar with those of the appellant so that result of these companies should also be compared with the result of Chennai Unit. In the absence of any such explanation/details, it is to be held that TPO’s action of comparing the result of appellant that the comparables selected by him is well founded”. It is pertinent to note that the assessee has submitted details of comparable; also raised objection as to how two comparables are required to be excluded whereas the TPO has applied related party transaction filter. He cannot retain certain comparables, who has higher margin and simultaneously exclude certain comparables who have lower margin under the same filter. The related party transaction if adopted as a filter, then it is to be applied uniformly on the comparables giving higher margin as well as lower margin. There is no such analysis in the order of the TPO extracted (supra). Therefore, considering the above aspect, we deem it appropriate to set aside the findings of both the authorities on this issue and remit determination of ALP with regard to exports made by the assessee from Chennai units to its AE afresh. The ld.AO shall call for fresh TP report in the set aside assessment proceedings and the TPO shall provide due opportunity of hearing to the assessee on the selection of comparable as well as he will invite objection, if any, on those comparables.
Now we take up the adjustments made in the management fees.
Brief facts of the case are that the assessee has entered into an agreement with Tyco Flow P.Ltd., Singapore for receipt of services with respect to management and financial matters. The assessee has claimed management fees expenses of Rs.81,21,072/-. We have extracted details of management fee paid by the assessee. At the cost of repetition, we take note of such details again: SI. No. Date Description Amount Invoice No. 1. DHQ5/007108 27/10/04 Brussels Management Fees (being S$ 19583 April, 2003 to Sept. 2003) (INR640712) 2. DHQ011514 17/9/04 Asia Management Fees (being April, US$ 50390.84 (INR 2217197) 2004 to Sept. 2004) 3. 1800000225 30/3/05 Asia Management Fees (being Oct., US$ 53650.44 (INR 2799697) 2004 to Feb.2005) 4. 1800000367 27/9/05 US$44123.38 Asia Management Fees (being (INR 2482733) March, 2005 to June 2005)
The ld.TPO has made an analysis of the above payments made by the assessee. He observed that as far as first invoice for a sum of Rs.6,40,712/- is concerned, it pertained to preceding year, hence not allowable as an expenditure for the year under consideration. Accordingly, he took ALP of this payment at NIL. Similarly, with regard to last invoice i.e. Asia Management Fee amounting to Rs.24,82,733/-, the ld.TPO has observed that invoice payment expenses relating to this year are only for the period of March, 2005 and rest pertained to subsequent assessment years. On an analysis of the details, he observed that a sum of Rs.5,23,342/- is the expenses meant for March, 2005 on which TDS of Rs.93,342/- was deducted. Accordingly, he allowed Rs.6,20,640/- and treated Rs.18,62,049/- pertaining to subsequent years. The ld.AO thereafter observed that type of and 2 Others 17 support services availed by the assessee are not essential for Indian operations. He observed that some of the services were provided by the AE related to implementation of certain US laws and these were not required as such for an Indian entity. Therefore, he disallowed. He worked out 20% of the management fees for disallowance. He disallowed in this way, a sum of Rs.11,27,56/- which is 20% of Rs.56,37,578/-.
Dissatisfied with this action of the TPO, the assessee went in appeal before the ld.CIT(A). The ld.CIT(A) has confirmed the disallowance of management fees of Rs.6,40,712/- being not pertaining to this year. With regard to invoice bearing no.1800000367, the ld.CIT(A) has observed that a sum of Rs.24,84,733/- was alleged to have been paid by the assessee, but in fact the assessee has booked a sum of Rs.6,20,684/- only in F.Y.2004-05. Remaining amount i.e. Rs.18,62,049/- was not booked by the assessee, therefore, it could not be disallowed. The ld.CIT(A) has deleted this disallowance made by the TPO. As far as 20% of the balance management fee disallowed by the TPO is concerned, the ld.CIT(A) has confirmed the action of the TPO. Before us, the ld.counsel for the assessee contended that as far as expenditure of Rs.6,40,712/- is concerned, it pertains to support services received for F.Y.2003-04. Therefore, the expenditure has been crystallized as liability which has been claimed in this assessment year. With regard to disallowance of 20% of the balance management fee is concerned the ld.counsel for the assessee contended that in A.Y.2009-10, DRP accepted its contentions and directed the TPO not to make any adjustment on such adhoc basis because he has not made any analysis on its ALP. He emphasised that there is no such mechanism provided in and 2 Others 18 the Act for adhoc disallowance. He also relied upon the order of the Chennai Bench in the case of DCIT Vs. Flakt India Ltd., ITA No.1032/MDS/2014.
The ld.cousnel for the assessee further contended that in additional ground of appeal, the assessee has pleaded that if at all any adjustment is made on the management fees then corresponding adjustment should be made while computing the operative margin (OP divided by TC) of Chennai unit. On the other hand, the ld.DR relied upon the order of the CIT(A).
20. On due consideration of the above facts and circumstances, we find that as far as taking ALP at NIL with regard to the fees paid towards invoice no.DHQ007108 viz. Brussel Manaement fees is concerned, this expenditure does not pertain to this assessment year. Therefore, the ld.Revenue authorities have rightly held that it is not allowable in this year. The assessee has been following mercantile system of accountancy. It should have made a provision in the earlier year. Finding of the CIT(A) on this aspect is upheld. As far as 20% of the balance management fee is concerned, in the assessee’s own case, DRP has given direction for deleting such adhoc adjustment of management fees because, the TPO was required to determine ALP of the international transaction with its AE. There is no such mechanism to make disallowance on adhoc basis at 20% of the value of transaction. Either transaction is at ALP or it is to be re-determined after taking into consideration method of accountancy and other comparable cases. It is also important to note that Revenue has not filed appeal against the direction of DRP in the Asstt.Year 2009-10. and 2 Others 19 Therefore, we delete the adhoc disallowance at 20% out of the balance management fees.
Since we have accepted the stand of the assessee with regard to its claim on management fees except a part amount of Rs.6,40,712/- we have remitted back the determination of ALP of exports made by the Chennai Unit. The ld.TPO shall keep in mind the impact of adjustment of Rs.6,40,716/- in the management fees while determining the operative profit/total cost in the Chennai unit.
Grievance of the assessee in this appeal relates to confirmation of penalty levied under section 271(1)(c) of the Act. The ld.AO has observed that in the assessment order dated 30.12.2008, there were three additions made to the total income of the assessee for which he initiated penalty proceedings. These additions are - i) Upward adjustment of Arm Length Price Rs.2,21,04,72/- ii) Deduction u/s.10B Rs.1,83,82,531/- iii) Bad debts Rs. 44,74,000/- He observed that after initiation of the penalty in the assessment order, the ld.CIT(A) has reduced these additions and deleted the disallowance of deduction claimed under section 10B. In other words, the ld.CIT(A) has granted relief of Rs.1,83,82,531/-. The AO thereafter initiated penalty for two items viz. i) Arm Length price : Rs.2,06,30,624/- ii) Deduction u/s.10B : Rs. 65,00,258/- and 2 Others 20 24. With the assistance of the ld.representatives, we have gone through the record carefully. As far as first item is concerned, i.e. adjustment made in the ALP of international transaction, we have remitted this issue to the file of the AO fresh adjudication. We find that sub-clause (iii) of section 271(1)(c) provides mechanism for quantification of penalty. It contemplates that the assessee would be directed to pay a sum in addition to taxes, if any, payable him, which shall not be less than but which shall not exceed three times the amount of tax sought to be evaded by reason of concealment of income and furnishing of inaccurate particulars of income. In other words, the quantification of the penalty is depended upon the addition made to the income of the assessee. Since in the present case, issue of addition qua ALP price on which impugned penalty has been made set aside to the file of the lower authorities for fresh adjudication, imposition of penalty is also set aside to their files to be decided afresh on the basis of outcome in set aside proceedings basis. After the outcome of the set proceedings, it is open to the ld.Revenue authorities whether to initiate penalty or not under section 271(1)(c). Thus, this ground of appeal of the assessee is allowed for statistical purpose.
25. As far as second item is concerned, we have discussed this issue in the quantum order. The assessee has claimed deduction under section 10B of the Act at Rs.1,83,52,531/-. However, during the course of assessment proceedings, it filed a letter dated 29.12.2008 vide which it has claimed deduction under section 10B on the interest income of Rs.65,00,258/-. This deduction was not allowed to the assessee. The assessee carried the matter in appeal before the ld.CIT(A) and the CIT(A) has upheld disallowance of this deduction. The AO has initiated penalty for this claim and ultimately imposed the penalty. and 2 Others 21 26. It is pertinent to note that this was a claim made by the assessee during the course of assessment proceedings by way of a letter. The assessee was under the impression that interest income would also be eligible for grant of deduction under section 10B which ultimately not accepted. It has disclosed all the relevant facts and not made this claim in the return of income. The AO has erred in observing that the assessee has furnished inaccurate particulars of income by claiming interest income as exempt. It is pertinent to point out that this was a claim made during the course of assessment proceedings by way of a letter and it is to be examined by the AO. Therefore, the disallowance does not call for visiting the assessee with penalty under section 271(1)(c) of the Act. We cancel the penalty qua claim of deduction under section 10B.
In the result, is dismissed. Rest of the appeals i.e. ITA No.1309/ahd/2012 and 1003/Ahd/2016 are partly allowed for statistical purpose.
Order pronounced in the Court on 18th July, 2019.