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Income Tax Appellate Tribunal, MUMBAI BENCHES “K”, MUMBAI
Before: Shri Shamim Yaha & Shri Amarjit Singh
O R D E R
Per Amarjit Singh, Judicial Member
The assessee has filed the present appeal against the order dated 10/03/2015 passed by the Ld. Commissioner of Income-Tax (Appeals)-24 hereinafter called [CIT(A)], Mumbai, relevant to the A.Y 2009-10 in which the penalty levied by the Assessing Officer has been order to the confirmed.
The assessee has raised the following grounds: -
1. Ground No.1 On the facts and circumstances of the case, the Learned CIT(A) has erred in law and in facts in confirming the action of the Income tax Officer -10(3)(1) (‘AO’) of levying the penalty under section 271 (1)(c) of the Act in respect of the addition amounting to Rs.2,06,24,199/- based on the findings of the transfer pricing officer in its order dated 22 November 2012 issued under section 92CA(3) of the Act;
2. Ground No.2 India Pvt.Ltd On the facts and circumstances of the case, the Learned CIT(A) has erred in holding that the addition of Rs.2,06,24,199/- made to the income of the Appellant, based on findings of the Transfer Pricing Officer, would be deemed to represent income in respect of which inaccurate particulars have been filed, thereby resulting in concealment of income; 3. Ground No.3 On the facts and circumstances of the case, the Learned CIT(A) has also erred in holding that since the Appellant did not dispute the addition made by the transfer pricing officer for administrative/economic reasons, the adjustment made by the transfer pricing officer had been accepted as undisputed by the Appellant, without appreciating the fact that the penalty proceedings under section 271(1)(c) of the Act are separate and independent from the assessment proceedings; 4. Ground No.4 On the facts and circumstances of the case, the Ld. CIT(A) has erred in holding that since the Appellant did not dispute the additions made by the transfer pricing officer for administrative/economic reasons, the entire TP study report prepared by the Appellant was inaccurate and the Appellant in fact can be said to have made a bogus claim as per its original return, without appreciating the fact that the penalty proceedings under section 271(1)(c) of the Act are separate and independent from the assessment proceedings and basis of preparing the TP study report for earlier years has been accepted by the Learned Assessing Officer and the Transfer Pricing Officer; 5. Ground No.5 On the facts and circumstances of the case, the Ld. CIT(A) has erred in failing to appreciate that the Appellant had acted in good faith and exercised due diligence while conducting the transfer pricing study and determining the arm’s length price of international transactions under section 92C of the Act and hence no penalty could be levied as provided in Explanation 7 to Section 271 (1)(c) of the Act.
6. Ground No.6 On the facts and circumstances of the case, the Ld. CIT(A) has erred in failing to appreciate that the determination of the arm’s length price is a subjective exercise and not an exact science and hence, no penalty can be levied merely on acceptance/rejection of certain comparables, which would be a debatable issue; 7. Ground No.7 On the facts and circumstances of the case, the Ld. CIT(A) has erred in holding that Explanation 1 to section 271(1)(c) of the Act would apply since the Appellant had made a bogus claim as per its original return and failed to provided an explanation for its claim or substantiate is explanation or prove its claim as bona fide.
India Pvt.Ltd 3. The brief facts of the case are that the assessee filed its return of income 29.09.2009 under Section 139(1) declaring total income to the tune of Rs. Nil and computing business income of Rs.1,84,10,164/- and income from other sources of Rs. 41,03,179/- and due to setting off brought forward business losses/ unabsorbed depreciations, the returned income was assessed as Nil. The case of the assessee was reopened, therefore, notices under Section 143(2) & 142(1) were issued and served on the assessee. The assessee is engaged in the business of providing marketing support services to its clients who are in the business of operating online market places. The assessee has filed audited profit and loss account, balance sheet and 3CD etc. The total turnover credited to the P&L account was of Rs 24,06,12,049/- and the net profit was computed of Rs. 2,45,63,973/-. The Arm Length Price (ALP) with respect to international transactions of the assessee was assessed by the TPO under Section 92CA(3) vide order dated 22/11/2012 u/s 92CA(3) of the Act has made an adjustment of Rs. 20,624,199/-. The assessee’s claim of the depreciation was disallowed and the penal suit expenses was also disallowed and restructuring cost in sum of Rs.43,07,959/- was treated as capital expenses. However, the income of the assessee was assessed as Nil. Since the TPO has made the adjustment of Rs.2,06,24,199/- to the ALP with respect to the international transactions of the assessee. Therefore, the penalty was initiated and the Assessing Officer levied the penalty in sum of Rs. 2,06,24,199/-. Feeling aggrieved, the assessee filed an appeal before the CIT(A), who confirm the penalty, therefore, the assessee has filed present appeal before us. All the issues are in connection with confirmation of the penalty in sum of Rs.2,06,24,199/- based upon the finding of the TPO by virtue of order dated 22/11/2012 under Section 92CA(3) of the Act.
At the very outset the Ld. Representative of the assessee has argued that the assessee has under taken a transfer pricing study and applied TNMM as India Pvt.Ltd most appropriate method and identified ‘14’ comparables and worked out weighted average of the operating margin using multiplying year data (data of 3 years) at 8.69% . but the TPO has wrongly set aside the comparable and adopted ‘10’ companies in which ‘4’ companies i.e Apitco Ltd, Rites Ltd, Vapi Waste & Effluent Mgmt Co. Ltd and WAPCOS Ltd (Seg) are the Government Companies which cannot be treated as good comparable and if the same may deleted then the margin would be 9.82% which is almost near to the margin assessed by the assessee . It is argued that Aptico Ltd is not a good comparable in view of the decision of the Hon'ble’ ITAT in case of Philip Morris Services India S.A. v. Deputy Director of Income-tax, circle 2(1), New Delhi (ITA No. 827/Del/2014) (Delhi-Trib.) dated 21 June, 2018, Nokia Siemens Networks (P.) Ltd. v. ACIT, Circle 13(1), New Delhi (ITA No. 332/Del/2013) (Delhi-Trib.) dated 1 October, 2018. Rites Ltd is also not a good comparable as held by the Mumbai Tribunal in case of ACIT, Range 10(3) v. Chemtex Global Engineers (P.) Ltd. (ITA No. 3590/Mum/2010) dated 12 June, 2013, Shel India Markets (P.) Ltd. v. ACIT, Large Taxpayer Unit, Mumbai (ITA No. 193/Mum/2013) dated 10 December 2014, Novartis Healthcare (P.) Ltd. v. Addl. CIT, Range 7(1), Mumbai (ITA No. 7643/ Mum/ 2012) dated 30 April, 2015. Vapi Waste & Effluent Mgmt Co. Ltd is also not a good comparable in view of the decision of the Novartis Healthcare (P.) Ltd. v. Addl. CIT, Range 7(1), Mumbai (ITA No. 7643/Mum/2012) dated 30 April 2015, Shell India Markets (P.) Ltd.v. Assessment. CIT, Large Tax Payer Unit, Mumbai (ITA No. 193/Mum/2013) dated 10 December 2014. After excluding the above said 4 companies, the margin would be approximate the margin assessed by the assessee in view of the 14 companies working of which has been given by the assessee to the TPO, therefore, in the said circumstances there is no any concealment of income nor furnishing inaccurate particulars if any hence the penalty is not leviable in accordance with the law. It is also specifically argued that the legal fees was not allowed whereas Hon'ble ITAT in the assessee’s own case for AY 2007-08 India Pvt.Ltd in and CO. No.37/Mum/2012 has allowed the expenses of legal fee and if the same has been allowed then in the said circumstances the margin of ALP is almost similar as assessed by the assessee @ 9%. Therefore, in the said circumstances the penalty is not justifiable. It is also specifically argued that no penalty is leaviable on account of assessing the Transfer Pricing adjustment where assessee has acted in good faith and with due diligence in view law settled in Pr. CIT-04 v. Gap International Sourcing India Pvt. Ltd. (ITA No. 697/M/2017) (Delhi-High court)dated 21 August, 2017, Pr. CIT-6 v. Mitsui Prime Advanced Composites India (P.) Ltd. (ITA No. 913/Del/2016 and CM Application. No46519 of 2016) (Delhi-High court) dated 17 January, 2017, Cherokee India (P.) Ltd. Vs. DCIT-(OSD), Range 8(1), Mumbai (ITA No. 45/Mum/2016) (Mumbai-Trib.) dated 16 march, 2016, UHDE India (P.) Ltd v. ACIT-Range 10(3), Mumbai (ITA No. 2641/Mum/2012) (Mumbai-Trib.) dated 18 November, 2015 etc., however, on the other hand the Ld. DR has relied upon the order passed by the CIT(A) in question. Taking into account of all these facts and circumstances, we noticed that the assessee has undertaken a TP study and applied TNMM as most appropriate method. The assessee has identified ‘14’ comparables whose names has been discussed in the TPO’s order dated 22/11/2012. The margin was identified @ 8.69%. In the said margin the legal fee has been disallowed.
Undoubtedly the TPO rejected the working of the assessee and selected ‘10’ comparables whose names are hereby mentioned below: S.No. Name of the company OP/TC % (AY 2009-10) 3 Choksi Laboratories Ltd 22.77 % 4 ICRA management Consulting -2.78 % Services ltd 5 I D C (India) Ltd 9.99 % 6 Indus Technical & Financial 7.95 % Consultants Ltd 7 Rites Ltd (Seg) 29.27 % India Pvt.Ltd 8 Technicom-Chemie (India) Ltd 2.51% 9 Vapi Waste & Effluent Mgmt Co 26.89% Ltd 10 WAPCOS Ltd (Seg) 25.87% 16.85% Arithmetic Mean And the TPO assessed the Arithmetic Mean @ 16.85%. It is now well settled that the government companies are not good comparables to the private companies and In this regard we also find support of law settled in the case of CIT,3 v. ThyssenKrupp Industries India (P.) Ltd. (ITA No. 2218 of 2013) (Mumbai- High Court) dated 28 March, 2016, Pr. CIT-4 v. International SOS Services India (P) Ltd (ITA No. 454/2016) (Delhi- High Court) dated 30 May ,2017, International SOS Sevices India (P.) Ltd. v. DCIT, Circle 11(1), New Delhi (ITA No. 1631/ Del/2014) Delhi- Trib.) Dated 8 December, 2015. In these ‘10’ comparables there are ‘4’ companies which has been compared by the TPO. Whose names are Apitco Ltd, Rites Ltd, Vapi Waste & Effluent Mgmt Co. Ltd, WAPCOS Ltd (Seg). If the ratio of these companies be not included for comparisons then the Arithmetic mean would be 8.32% and e-bay India Margin would be 9.82%, if the legal fee be adjusted by the TPO then the margin would be approximate 9% whereas the assessee has already given the Arithmetic Mean @ 8.69%.
After concluding all the facts mentioned above when the Arithmetic mean is approximate to the working of the assessee we are of the view that it is not a case of concealment of income or furnishing of the inaccurate particulars. Moreover the assessee has acted in good faith and with due diligence so no penalty is leviable in view of the law settling in case tiled as Pr. CIT-04 v. Gap International Sourcing India Pvt. Ltd. (ITA No. 697/M/2017) (Delhi-High court)dated 21 August, 2017, Pr. CIT-6 v. Mitsui Prime Advanced Composites India (P.) Ltd. (ITA No. 913/Del/2016 and CM Application. No46519 of 2016)
India Pvt.Ltd (Delhi-High court) dated 17 January, 2017, Cherokee India (P.) Ltd. Vs. DCIT- (OSD), Range 8(1), Mumbai (ITA No. 45/Mum/2016) (Mumbai-Trib.) dated 16 march, 2016, UHDE India (P.) Ltd v. ACIT-Range 10(3), Mumbai (ITA No. 2641/Mum/2012) (Mumbai-Trib.) dated 18 November, 2015 etc. Taking into account of all the facts and circumstances, we are of the view that the finding of the CIT(A) is not justifiable and is not liable to be sustainable in the eyes of law, therefore, we set aside the finding of the- CIT(A) in question and delete the penalty 7. In the result, the appeal filed by the assessee is hereby ordered to be allowed. Order pronounced in the open court on this day of 26th June,2019 Sd/- Sd/- (Shamim Yahya) (Amarjit Singh) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated : 26/06/2019 * Thirumalesh, Sr.PS Copy of the Order forwarded to :