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Income Tax Appellate Tribunal, DELHI BENCH: ‘I’ NEW DELHI
Before: SHRI R. K. PANDA & MS SUCHITRA KAMBLE
PER SUCHITRA KAMBLE, JM
These appeals are filed by the assessee as well as by the Revenue against the orders dated 08/03/2010 & 02/07/2012 passed by CIT(A)-XX, New Delhi & CIT(A) LTU, New Delhi for Assessment Year 2003-04. 2. The grounds of appeal are as under:- (ITA NO. 2231/Del/2010)
That the Commissioner of Income-tax (Appeals) erred on facts and in law in sustaining addition the income of the appellant to the extent of Rs. 16,99,09,000 on account of adjustment to the arm’s length price of the ‘international transactions’ undertaken by the appellant during the relevant previous year. 1.1. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not appreciating that the international transactions during the relevant previous year were undertaken at arm’s length price and no adjustment to the price thereof was called for being made. 1.2. That the Commissioner of Income - tax (Appeals) erred on facts and in law in not appreciating that the Average Profitability in respect of the current financial year of the comparables companies initially selected in the TPO’s order and finally confirmed by die Ld. CIT- (A) is less than the current year profit earned by the appellant and as such, no adjustment is called for to the international transactions. 2. That the Commissioner of Income-tax (Appeals) erred on facts and in law in upholding the action of the Transfer Pricing Officer in applying Transactional Net Margin Method (TNMM) as the most appropriate method for determining the arm’s length price of the international transactions of import of finished goods instead of Resale Price Method (RPM) applied by the appellant. 3. That the Commissioner of Income-tax (Appeals) erred on facts and in law
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in upholding the action f the assessing officer in aggregating the international transactions involved in the manufacturing segment and international transaction relating to the trading segment applying TNMM as the most appropriate method at entity level 3.1 That the Commissioner of Income-tax (Appeals) erred on facts and in law in not appreciating that international transactions of import of finished goods (relating to trading segment) ought not be aggregated with the international transaction relating to manufacturing activity for undertaking the benchmarking analysis to determine the arm’s length price. 4. That the Commissioner of Income-tax (Appeals) erred on facts and in law in excluding Godrej Appliances Limited., Monica Electronics Ltd., FAL Industries Limited., and B.S. Refrigerators Ltd. From the set of comparable companies for applying TNMM. 4.1 That the Commissioner of Income-tax (Appeals) erred on facts and in law in not holding that Videocon International Limited was not a comparable company and hence was not required to be considered as part of the comparable companies. 5. That the Commissioner of Income-tax (Appeals) erred on facts and in law in restricting the adjustment on account of difference in working capital to 0.5% allegedly on the ground that the exact computation of difference in level of working capital deployed was extremely difficult. 6. Without prejudice, that the Commissioner of Income-tax (Appeals) erred on facts and in law in not allowing benefit +/(-) 5% as per proviso to section 92C(2) of the Income-tax Act, 196’ “the Act”) while computing the alleged difference in the arm’s length price of the international transactions.
(ITA NO. 2094/Del/2010) 1. That on the facts and circumstances of the case and in law, Ld. CIT (A) has erred in restricting adjustment on account of arms length operating profit margin to Rs 1699.00 lacs only when the T P O determined adjustment of Rs. 3628.14 lacs on the basis of comparables of the companies operating in the same segment of business in the same year. That on the facts and in the circumstances of the case the Ld CIT (A) erred 2. in deleting the disallowance of Rs. 1,12,17,081/- out of the lease rentals despite the fact that the assets, being computers are being continuously used by the assessee and there is no real transfer of asserts and the agreement to sell and lease back assets is only a ‘colorable device’ in order to inflate expenditure and claim higher depreciation. 3. That the appellate craves leave to add, emend or alter any of the grounds
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of appeal.
(ITA NO. 4788/Del/2012)
On the facts and the circumstances of the case and in law, the Ld.CIT(A) has erred in holding that penalty u/s 271(1)(c) is not leviable on addition of 36,28,14000/- made in respect of international transaction u/s 92C of the I.T. Act.
(C.O NO. 432/Del/2012) 1. On the facts and the circumstances of the case and in law, the Ld.CIT(A) erred on facts and law in confirming the levy of penalty with reference to the disallowance u/s 43A of the Act. 1.1 On the facts and the circumstances of the case and in law, the Ld.CIT(A) erred on facts and law in not appreciating that the appellant had inadvertently omitted to take into account an amendment in law that had come into force for the first time in the year under appeal and that there was no deliberate furnishing of inaccurate particulars of its income.
On the facts and the circumstances of the case and in law, the Ld.CIT(A) erred on facts and law in confirming the levy of penalty with reference to the disallowance out of expenses allegedly pertaining to earlier years.
The assessee is a public limited company engaged in the business of manufacturing and sale, export and import of consumer durable products such as refrigerators, washing machines, microwaves & AC etc. The assessment was completed u/s 143(3) of the Income Tax Act, 1961 on 29.03.2006 at income of Rs.31,96,41,924/- against the returned loss of Rs.26,85,58,370/- by making various additions and disallowance to the returned loss. These are: a) Addition of Rs. 36,28,14,000 in respect of international transactions under section 92C. b) Addition to the book profits u/s 115JB of the Act for Rs. 57,56,461. c) Sales Tax refunds admitted by the Authority but not refunded and accounted by the Assessee for Rs. 26,15,166.
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d) Addition of Rs. 3,26,81,022 which was disallowed as previous year expenses. e) Expenditure on clubs for Rs. 8,98,140/- f) PF and ESI deposits for Rs. 6,15,784/- g) Lease Rentals on computers for Rs.1,12,17,081/- h) Depreciation of fixed assets for Rs. 18,61,23,655/- i) Addition under Section 43A of the Income Tax Act, 1961 on account of depreciation amounting to Rs. 22,22,812 claimed on addition of fixed assets on account of foreign exchange fluctuation.
The assessee challenged the additions and disallowance made by the Assessing Officer before the CIT(A). The CIT(A) deleted the addition of Rs. 36,28,14,000 in respect of international transactions under Section 92 C of the Act, addition to the book profits u/s 115JB of the Act for Rs. 57,56,461, partly deleted addition of Rs. 3,26,81,022 which was disallowed as previous year expenses, Expenditure on clubs for Rs. 8,98,140/-, lease rentals on computers and confirmed the other additions.
In the meanwhile, the Assessing Officer initiated the penalty proceedings u/s 271(1)(c) of the Act under three additions: i. Addition under Section 43A of the Income Tax Act, 1961 on account of depreciation amounting to Rs. 22,22,812 claimed on addition of fixed assets on account of foreign exchange fluctuation. ii. Addition of Rs. 3,26,81,022 which was disallowed as previous year expenses. iii. Addition of Rs. 36,28,14,000 in respect of international transactions under section 92C. The Assessing Officer vide order dated 24.03.2011 held that the assessee concealed the particulars of income and also furnished inaccurate particulars of its income and imposed 100% penalty.
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The assessee filed appeal before the CIT(A) in respect of penalty order. The CIT(A) partly allowed the appeal of the assessee by deleting the penalty in respect of the additions made u/s 92C of the Act.
Being aggrieved by these orders the assessee as well as the revenue both are in appeal before us.
The Ld. AR submitted that as relates to Ground Nos. 1 to 6 of the assesse’s appeal and Ground No. 1 of Revenue’s appeal relating to quantum are concerned the issue involved is of transfer pricing adjustment. The Ld. AR further submitted that Transfer Pricing Officer made an adjustment amounting to 36,28,14,000 in respect of the international transactions undertaken by the assessee. The TPO computed the arm’s length operating margin on the basis of average operating margin of 7.58% earned by 5 comparable companies, as against the operating margin of 4.40% earned by the assessee. The CIT(A) after allowing comparability adjustment on account of excise duty and “working capital adjustment” computed the arm’s length operating margin at 14.95% as against the adjusted operating margin of 13.47% of the assessee. Accordingly, the CIT(A) restricted the adjustment to Rs 16.99 crore as against the adjustment of Rs 36.28 crore made by the TPO. The Ld. AR further submitted that while computing the adjustment the TPO and the CIT(A) did not allow the benefit of +/-5% in terms of proviso to section 92C(2) of the Act. Since the price charged/paid by the assessee falls within the +/-5% range of the arm’s length price, no adjustment is warranted in terms of the proviso to section 92C(2). The Ld. AR filed detailed computation in this regard as Annexure 1 at the time of hearing. The Ld. AR relied upon the following decisions wherein benefit of +/- 5% was allowed by the Hon’ble Courts and Benches of Tribunals:
> ACIT vs Kehin Panalfa Ltd (ITA No 3287/Del/2011) (Affirmed by the Hon’ble Delhi HighCourt in ITA No 11/2015) > DCIT vs Firestone International Pvt Ltd (4520/Mum/2011) (Confirmed by Hon’ble Bombay High Court in ITA No 1354/2013)
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> CIT vs Ratilal Becharlal & Sons (ITA No 1906/2013) > Liquid Controls India (P) Ltd. vs ACIT (ITA No 79/Ahd/2010) > SMCC Construction India Ltd. vs ACIT (ITA No 4333/Del/2009) In view of the aforesaid the Ld. AR submitted that since the price charged/paid by the assessee is within the +/-5% range of the arm’s length price, no transfer pricing adjustment would be warranted in terms of proviso to section 92C(2) of the Act.
The Ld. DR made detailed submissions as to the Transfer pricing adjustment. The Ld. DR submitted that rejection of RPM on import of finished goods from AE for trading RPM was correctly rejected by the TPO and aggregated with other transactions. The Assessee imports Washing Machines, Microwaves and Refrigerators from its AE for the purpose of trading but the assessee has nowhere clarified the items purchased locally for trading purchases. It is evident that the assessee cannot purchase the above items locally as it can sell the above products of its own brand. Thus, the above internal comparables have to be rejected on account of large variation in prices. The assessee has not submitted the details regarding the comparables from whom the assessee has purchased the traded goods and details regarding their financials. Thus, the benchmarking done by the assessee is unreliable. The above transaction and other transactions like import of raw materials, export of component and spares and export of finished goods are inextricably linked with each other as all the above transactions are part of manufacturing and sell of Whirlpool appliances like Washing Machine, Refrigerators, Microwaves etc. Thus, the Ld. DR submits that the TPO has given detailed reasons while rejecting the Resale Price Method (RPM).
The Ld. DR further submitted relating to rejection of comparables by the TPO as follows: a. Hitachi Home & Life Solutions (India) Ltd.: This has been correctly rejected as it is a persistent loss making company. The Hon'ble ITAT
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Delhi has held in the case of Navisite India (P.) Ltd. v. Assistant Commissioner of Income-tax, Circle-13 (1), New Delhi [2015] 53 taxmann.com 73 (Delhi - Trib.) that diminishing revenue/persistent losses are not in conformity with normal operational results and, thus, the companies incurring cannot be taken as comparable. Besides the above, the net worth of the company has become negative as on 30.09.2002. Its accounting period is also different (ending on 31.03.2004 for 18 months and ending on 30.09.2002) from the accounting period of the assessee (31.03.2003).The Ld. CIT(A) has merely discussed that the TPO has erroneously excluded it by relying on future data without appreciating that its net worth was also negative during the relevant financial year and its accounting period is of 18 months. Thus, it has been incorrectly held to be included by the Ld. CIT(A).
b. Godrej Appliances: This has been correctly rejected as it is a persistent loss making company. The Hon'ble ITAT Delhi has held in the case of Navisite India (P.) Ltd. v. Assistant Commissioner of Income-tax, Circle-13 (1), New Delhi [2015] 53 taxmann.com 73 (Delhi - Trib.) that diminishing revenue/persistent losses are not in conformity with normal operational results and, thus, the companies incurring cannot be taken as comparable. Besides the above, this cannot be taken as a comparable on account of occurrence of extraordinary event (merger/demerger as mentioned at pg no 9 at para 9.4 of the TPO order) during the relevant financial year.
c. FAL Industries: The turnover of the consumer segment (manufacture of vacuum cleaner) is only Rs.47.55 cr in comparison with the turnover of Rs. 1250 cr of assessee. Thus the turnover of assessee is 26 times. It has been held by the Hon'ble ITAT Bangalore in case of Acusis Software India (P.) Ltd. v. Income-tax Officer, Ward- 11 (1), Bangalore [2016] 75 taxmann.com 273 (Bangalore - Trib.) that companies having turnover in excess of 10 times of turnover of assessee could not be selected as comparable.
d. Monica Electronics: Its turnover is only Rs.62.80 cr and the assessee's turnover is 26 times its turnover. Its accounting period is different (ending on 31.12.2003) from the accounting period of the assessee (31.03.2003). e. Carrier: Its accounting period is different (ending on 31.12.2003) from
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the accounting period of the assessee (31.03.2003).
The Ld. DR further submitted relating to the objection of the assessee against inclusion of comparable Videocon Appliances and Videocon International Ltd. that the Hon'ble Delhi High Court in case of Chryscapital Investment Advisors (India) (P.)Ltd. [2015] 56 taxmann.com 417 (Delhi) held that mere fact that an entity makes high/extremely high profits/losses does not, ipso facto, lead to its exclusion from list of comparables for purposes of determination of ALP.
The Ld. DR further submits that exclusion of Excise Duty for computation of Operating Profit as directed by the CIT (A) on account of variation in payment of Excise Duty, all the payment of all indirect taxes are part of operating expenses and hence, either all indirect taxes like Customs Duty, Sales Tax, Excise Duty etc. should be excluded or all should be included.
We have heard both the parties and perused the material available on record. The CIT(A) after allowing comparability adjustment on account of excise duty and “working capital adjustment” computed the arm’s length operating margin at 14.95% as against the adjusted operating margin of 13.47% of the assessee. The CIT(A) held that operating profit margin during the relevant previous year of the assessee from the combined activities as compared by the Assessing Officer is 4.4% while that of the comparable companies are -2.61%. In view of this, the international transaction of import by the assessee, even adopting the comparable identified by the TPO, is to be considered at arm’s length applying TNMM. The CIT(A) accordingly deleted the addition made by the TPO. The CIT(A) further held that the excise duty should be excluded from the cost for the purpose of Operating Profit (OP) computation of the assessee and the comparable companies. The CIT(A) further held that lump sum adjustment of 0.5% of the average profit of the set of comparables (after exclusion of excise duty) would be sufficient to even out the said difference.
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Accordingly, the CIT(A) restricted the adjustment to Rs 16.99 crore as against the adjustment of Rs 36.28 crore made by the TPO. The CIT(A) held as under:
“ 16. Based on the above discussion, the arm’s length price of the international transactions undertaken by the appellant is determined as follows: • The OP/Sales of the appellant combining trading and manufacturing activity is determined by the TPO at 4.4%. • Considering the current year operating results, the average operating profit. margin( Excluding excise duty from cost) of the 6 comparable companies (Including Hitachi & Carrier Aircon and excluding B.S. Refrigeration from the five comparables selected by TPO) the profit is worked out as follows: S. NO. Comparables OP/Sales FY 2002-03 1 Videocon International Ltd. 16.71% 2 Symphony Comfort 6.17% 3 Videocon Appliances Ltd. 14.78% 4 Carrier Aircon Ltd. 23.25% 5 Videocon Communications Ltd. 11.36% 6 Hitachi 20.41% Average 15.45% Whirlpool 13.47%
From the above, the average profitability of the 6 comparable is worked out to be 15.45% and on allowing adjustment of 0.5% for the working capital adjustments as per the discussion in the foregoing paragraphs, the OP of the comparable companies came to 14.95% against 13.47% OP of the appellant company. Accordingly, the difference in the OP of 1.48% needs to be adjusted to the profit of the appellant for the difference in price charged from international transactions.
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Based on above, the adjustment for the prices of the internal transaction undertaken by the appellant is worked out as under:-
Total Revenue of the appellant Rs. 114803.19 lakhs Adjustment of Prices to be made @ 1.48% on above Rs. 1699.09 lakhs. Accordingly, the appellant gets a relief of Rs. 1,929.05 lakhs only.”
In our opinion, the CIT(A) has not given detailed findings as to how no adjustment is warranted on international transactions on account of difference in arm’s length price. The order of CIT(A) in our opinion is not elaborate and is very cryptic. The issue of Transfer Pricing Adjustment whether at Arm’s Length price or not, has to be thoroughly verified which in the instant case has not been done. Thus, it will be appropriate to remand back this issue to the file of the TPO/A.O. While computing the adjustment the TPO and the CIT(A) did not allow the benefit of +/-5% in terms of proviso to section 92C(2) of the Act. Since the price charged/paid by the assessee fall within the +/-5% range of the arm’s length price, no adjustment is warranted in terms of the proviso to section 92C(2). Since, there is a calculation error and thereby impacting the Transfer Pricing Adjustment, it will be appropriate to remand back this issue to the file of the TPO/A.O. Needless to say, all the contentions be kept open and the assessee be given proper opportunity of hearing as per due process of law.
In result, grounds relating to working capital adjustment in assessee’s quantum appeal and revenue’s quantum appeal relating to Transfer Pricing Adjustment are partly allowed for statistical purpose.
In respect of Ground No.2 of Revenue’s appeal. The same is related to lease rentals. The Ld. AR submitted that the same is covered by the assessee’s own case for Assessment Year 2002-03.
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The Ld. DR submitted that the assessee sold its entire block of fixed assets being computer in the A.Y. 2000-01 to L& Finance Ltd. and leased back the assets. From the bare perusal of the agreements it is evident that it is a finance lease as neither the individual computers were identified before the above sale nor were they physically handed over to L&T Finance. L&T Finance is also in the business of finance and obviously there could not be any requirement of Computers worth Rs.8,34,67,714 (sales consideration). The Ld. DR further submitted that various Courts have held in plethora of judgments that in such cases of sham transactions the lease rentals claimed have to be disallowed. The Ld. DR relied on the order of ITAT Mumbai in case of Hathway Investments (P.) Ltd. Vs. ACIT wherein it was held that in such cases of sham transaction claim of depreciation by the company buying and leasing back the assets should be disallowed. The Ld. DR could not refute the earlier year order passed by the ITAT in Assessee’s own case.
We have heard both the parties and perused the ITAT order in the assessee’s own case for Assessment Year 2002-03 being ITA Nos. 2285/Del/2009 & 1849/Del/2010 dated 20/02/2017, wherein the Tribunal has held as under:-
“28. We have heard both the parties. In the Remand Report, the A.O accepted the assessee’s contentions, that the assessee and L 8s T Finance were in no way related to each other, and the assessee would have been entitled to higher depreciation as contended in the assessee’s submission. The A.O. also accepted the assessee's contention that the assessee had indeed paid 15% interest on moneys borrowed through debentures. The CIT(A) held that the computers were sold to L 8s T Finance and that a lease agreement was entered into is not disputed by the A.O. The assessee clearly stated this transaction to be a means of arranging fiance at a relatively lower cost. If the entire transaction were to be ignored, then the taxable income of the assessee for both Assessment Year 2000-01 and 2001-02 would be
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significantly lower than what has been returned in these two years. Thus, CIT(A) disagreed with the A.O’s contention that the lease charges had to be restricted to the WDV of the assets as at 31/3/2000. The A.O did not take into account the accounting of the sale proceeds in the year ended 31/3/2000 and also the interest factor for the the existence of assets itself is in doubt or when an asset subject matter of transfer actually from a physical part of another larger asset or such sham transaction takes place that the revenue can rightly object to the arrangements, in the present case, there was no doubt about existence of the assets, the sale proceeds and consequent short term capital gains were duly assessed in Assessment Year ,2000-01, and the transaction entitled the assessee to the use of the sale proceeds at a cost lower than borrowing through debentures. The CIT(A) has rightly deleted the same. This ground is dismissed.”
Therefore, this issue is covered in favour of the assessee and Ground No. 2 of Revenue’s appeal is dismissed.
In result, Ground No. 2 of the Revenue’s appeal is dismissed.
As related to the penalty appeal of the Revenue, the issue of Transfer pricing adjustment on account of Arm’s Length Price is already remanded back to the file of the TPO/AO. Thus, the issue of penalty is not required to adjudicated at this juncture. However, the TPO/AO may initiate penalty proceedings after deciding the Transfer Pricing issue afresh. 19. In result, Revenue’s penalty appeal is dismissed.
As related to penalty on addition u/s 43(A) of the Act, and penalty on disallowance on previous year expenses which are challenged in Cross- Objection/Appeal by the Assessee whereby the CIT(A) confirmed the penalty levied by the Assessing Officer is concerned, in our opinion, there is no need to interfere with the detailed finding of the CIT(A). In fact, the assessee admitted that inadvertently the assessee claimed the depreciation at enhanced cost and
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overlooked the provisions of statutory law. The claim for depreciation is a technical claim based on interpretation of legal provision. Legal opinion, in such cases, is frequently given by Chartered Accountants to help the company to prepare its return of taxable income. In the present case, there is admission on part of the assessee that the quantum of depreciation claim was incorrectly computed at enhanced cost. It is well settled principle that ignorance of law is not excused and cannot be a ground to avoid tax liability. The Assessee in the instant case is renowned Limited Company and accounts of the company are duly audited by the qualified auditors. Before filing the returns of income, the same are verified by the Directors of the Company. Therefore, it cannot be considered as mere clerical error on part of the Assessee Company. In fact, the CIT(A) rightly observed that had the assessee’s case not been selected for scrutiny, the assessee would have got away with the excess claim of depreciation. As relates to expenses pertaining to earlier years, the assessee has not filed any documentary evidence and was unable to given the proper explanation. Here also if the assessee’s case was not selected for scrutiny, the assessee would have been allowed to claim the excess expenditure to the extent of Rs. 16,40,786/-. In view of the above and the findings given by the CIT(A), we do not find any infirmity in the same. Accordingly, the penalty in this respect is upheld and grounds raised by the Assessee in Cross objection on this issue is dismissed.
In result, Cross objection filed by the assessee is dismissed.
Order pronounced in the Open Court on 08th November , 2017.
Sd/- Sd/- (R. K. PANDA) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 08/11/2017 R. Naheed * Copy forwarded to:
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Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT
ASSISTANT REGISTRAR ITAT NEW DELHI
Date 1. Draft dictated on 4/08/2017 PS 2. Draft placed before author 4/08/2017 PS 3. Draft proposed & placed before .2017 JM/AM the second member 4. Draft discussed/approved by JM/AM Second Member. 5. Approved Draft comes to the PS/PS Sr.PS/PS 06.12.2017 6. Kept for pronouncement on PS 7. File sent to the Bench Clerk 06.12.2017 PS 8. Date on which file goes to the AR 9. Date on which file goes to the Head Clerk. 10. Date of dispatch of Order.
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