INDIA PISTONS LTD,CHENNAI vs. ACIT, CORPORATE CIRCLE-2(3), CHENNAI

आदेश / O R D E R

PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER

Sections 271AA and 271G of the Income Tax Act, 1961 (in short ‘’the Act’’).

ITA Nos.2207 & 2208/17 :- 3 -: a) Brief note on the international transactions entered into by M/s. India Pistons Limited during A.Y. 2004-05. b) Nature of relationship with the Associate Company. c) Brief description on the nature of business carried out by the Associate Company. d) Details of exports made to Associate Company invoice wife/part no. wise with relevant Invoice Copies for the AY 2004-05. e) Details of imports made from Associate Companies with relevant purchase invoice copy of the Associate company which, in turn, has purchased from Non – associate company, for the A.Y. 2004-05. f) ) Details of Arm's length price port no. wise under Cost Plus method with relevant Cost workings under Cost plus method for all the part nos., wherever comparable prices are not available. g) Details of Arm’s Length Price part no. wise under Comparable uncontrolled price method wherever comparable prices of similar products with non -associate companies are available with relevant invoices- as per IT Rules 10D(g), and (h) Comparative statement of prices between Associate and Non –Associate Companies for similar Part Nos.

As per the assessee, all details and documents which were required under rule 10(D), for supporting its transfer pricing study were provided by it and therefore it was not exigible for any penalty under Sections 271AA or 271G of the Act. However, ld. Assessing Officer

ITA Nos.2207 & 2208/17 :- 4 -: was not impressed by the above reply. According to him, assessee had failed to maintain documents and information with reference to the uncontrolled transactions considered for Arms Length Price analysis in its transfer pricing study. As per the ld. Assessing Officer, assessee had violated requirement of Rule 10D of the Rules, and failed to furnish the information and records provided under the said Rule. Penalty of �1,84,808/- each was levied u/s.271AA and u/s.271G of the Act.

Aggrieved, assessee moved in appeal before the ld. 3.

Commissioner of Income Tax (Appeals). Argument of the assessee was that it had maintained all required documentation under Rule 10D of the Rules and furnished such documentations to the ld. TPO. As

per the assessee, it had followed cost plus method for its Arms Length pricing study and it was therefore not necessary to maintain records relating to transactions of uncontrolled comparables. Further, as per the assessee, ld. TPO had followed Transactional Net Margin Method (hereinafter referred to as ‘’TNMM’’) for which information was gathered through Prowess database. According to the assessee, there was no failure of the nature alleged by the ld. Assessing Officer.

Reliance was placed on the decision of Co-ordinate Bench in the case of DCIT vs. Magick Woods Exports Pvt. Ltd (2012) 53 SOT 293.

ITA Nos.2207 & 2208/17 :- 5 -:

Now before us, ld. Authorised Representative strongly 5. assailing the penalty order submitted that assessee having followed cost plus method, it had considered only internal comparables.

According to him, assessee had transactions similar to what were entered with its Associated Enterprise, during the relevant previous year, with unrelated parties in India. In other words, according to him, domestic transactions were considered by the assessee as good

ITA Nos.2207 & 2208/17 :- 6 -: comparables for its cost plus analysis. Contention of the ld. Authorised Representative was that all limbs of Rule 10D were not universally applicable, and cost plus method did not require maintenance of documents with regard to external comparables. According to him, substantial compliance with such rules were sufficient. As per the ld. Authorised Representative, levy of penalty Sections 271AA and 271G of the Act were not warranted.

Per contra, ld. Departmental Representative strongly 6.

supported the order of the ld. Commissioner of Income Tax (Appeals).

‘’Comparable uncontrolled price method.

Largely sale of goods made to Associated Enterprise have been at higher rates when compared with sale of similar products to third parties except for three supplies where the ITA Nos.2207 & 2208/17 :- 7 -: company has adopted lower rates due to the reasons stated below:-

1) Sales to third parties are occasional/ one time supply and the price charged includes element of risk which is not so in case of sale to associates. 2) The variation is also attributable to different currency and exchange rate.

In the absence of competitive international rates, we are unable to comment’’.

A reading of the above clearly indicate that assessee had adopted CUP method and comparison was attempted with sale of similar products to third parties. Associated Enterprises of the assessee, as it appear at page 2 of ld. TPO order were M/s. Federal Mogul Corporation, M/s. Federal Mogul Bursucheid GMBH, M/s. T & N Piston Product Group and M/s. Wallace Cartright & Co Ltd. Annexure A to the Audit report in form 3CEB gives the details of transactions with M/s.

Federal Mogul Corporation and Wallace Cartwright & Company both of which were Associated Enterprises of the assessee. No data whatsoever regarding the internal comparables considered by the assessee are available in such report. There is nothing on record to show the prices at which assessee sold products to unrelated parties, which products were similar to what it had sold to its Associated Enterprise. Or in other words, the data with regard to comparability

ITA Nos.2207 & 2208/17 :- 8 -: whether external or internal were not available on records nor made available by the assessee to ld. TPO.

1) Every person who has entered into an international transaction or specified domestic transaction shall keep and maintain such information and document in respect thereof, as may be prescribed. (2) Without prejudice to the provisions contained in sub- section (1), the Board may prescribe the period for which the information and document shall be kept and maintained under that sub-section. (3) The Assessing Officer or the Commissioner (Appeals) may, in the course of any proceeding under this Act, require any person who has entered into an international transaction or specified domestic transaction to furnish any information or document in respect thereof, as may be prescribed under sub-section (1), within a period of thirty days from the date of receipt of a notice issued in this regard : Provided that the Assessing Officer or the Commissioner (Appeals) may, on an application made by such person, extend the period of thirty days by a further period not exceeding thirty days.

Requirement of Sub Section (1) is that an assessee who has entered into international transaction necessarily has to keep and maintain information and documents prescribed in Rule 10D. Rule 10D is reproduced hereunder:-

(1) Every person who has entered into an the international transaction or the specified domestic transaction shall keep and maintain the following information and documents, namely :-

ITA Nos.2207 & 2208/17 :- 9 -:

(a) a description of the ownership structure of the assessee enterprise with details of shares or other ownership interest held therein by other enterprises ;

(b) a profile of the multinational group of which the assessee enterprise is a part along with the name, address, legal status and country of tax residence of each of the enterprises comprised in the group with whom international transactions or specified domestic transactions, as the case may be have been entered into by the assessee, and ownership linkages among them ;

(c) a broad description of the business of the assessee and the industry in which the assessee operates, and of the business of the associated enterprises with whom the assessee has transacted ;

(d) the nature and terms (including prices) of international transactions or specified domestic transactions entered into with each associated enterprise, details of property transferred or services provided and the quantum and the value of each such transaction or class of such transaction ;

(e) a description of the functions performed, risks assumed and assets employed or to be employed by the assessee and by the associated enterprises involved in the international transaction or the specified domestic transaction ;

(f) a record of the economic and market analyses, forecasts, budgets or any other financial estimates prepared by the assessee for the business as a whole and for each division or product separately, which may have a bearing on the international transactions or the specified domestic transactions entered into by the assessee ;

(g) a record of uncontrolled transactions taken into account for analysing their comparability with the international transactions or the specified domestic transactions entered into, including a record of the nature, terms and conditions relating to any uncontrolled transaction with third parties which may be of relevance to the pricing of the international transactions or specified domestic transactions, as the case may be;

(h) a record of the analysis performed to evaluate comparability of uncontrolled transactions with the relevant international transaction ;

(i) a description of the methods considered for determining the arm's length price in relation to each international transaction or specified domestic transaction or class of transaction, the method selected as the most appropriate method along with explanations as to why such method was so selected, and how such method was applied in each case ;

(j) a record of the actual working carried out for determining the arm's length price, including details of the comparable data and financial information used in applying the most appropriate method, and adjustments, if any, which were made to account for differences between the international transaction or the specified domestic

ITA Nos.2207 & 2208/17 :- 10 -: transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions ;

(k) the assumptions, policies and price negotiations, if any, which have critically affected the determination of the arm's length price ;

(l) details of the adjustments, if any, made to transfer prices to align them with arm's length prices determined under these rules and consequent adjustment made to the total income for tax purposes ;

(m) any other information, data or document, including information or data relating to the associated enterprise, which may be relevant for determination of the arm's length price.

(2) ..........................

(2A) .......................

(3) The information specified in sub-rules (1) and (2A) shall be supported by authentic documents, which may include the following :

(a) official publications, reports, studies and data bases from the Government of the country of residence of the associated enterprise, or of any other country ;

(b) reports of market research studies carried out and technical publications brought out by institutions of national or international repute ;

(c) price publications including stock exchange and commodity market quotations ;

(d) published accounts and financial statements relating to the business affairs of the associated enterprises ;

(e) agreements and contracts entered into with associated enterprises or with unrelated enterprises in respect of transactions similar to the international transactions or the specified domestic transactions, as the case may be;

(f) letters and other correspondence documenting any terms negotiated between the assessee and the associated enterprise ;

(g) documents normally issued in connection with various transactions under the accounting practices followed.

(4) The information and documents specified under sub-rules (1) and (2), should, as far as possible, be contemporaneous and should exist latest by the specified date referred to in clause (iv) of section 92F :

Provided that where an international transaction or a specified domestic transaction continues to have effect over more than one previous year, fresh documentation need not be maintained separately in respect of each previous year, unless there is any significant change in the nature or terms

ITA Nos.2207 & 2208/17 :- 11 -: of the international transaction or the specified domestic transaction, in the assumptions made, or in any other factor which could influence the transfer price, and in the case of such significant change, fresh documentation as may be necessary under sub-rules (1), (2) and (2A) shall be maintained bringing out the impact of the change on the pricing of the international transaction or the specified domestic transaction. (5) The information and documents specified in sub-rules (1), (2) and (2A) shall be kept and maintained for a period of eight years from the end of the relevant assessment year.

Sub clause (g) and (h) of rule 10D(1) require an assessee to keep a record of uncontrolled transaction which are relevant for analysing the pricing of its international transactions. Clause (3) of Rule 10D, require that information specified in relation to such uncontrolled transaction shall be authentic. Apart from this, assessee is required to keep a record of the analysis performed to evaluate comparability of uncontrolled transactions, with the international transactions with Associated Enterprises. Obviously, assessee here had not complied with the above requirements. Assessee also failed to furnish documents prescribed under Sub Section (1) of Section 92D within the period of thirty days from the date of receipt of notice issued in this regard.

Section 271AA of the Act:- Without prejudice to the provisions of section 271 or section 271BA, if any person in respect of an ITA Nos.2207 & 2208/17 :- 12 -: international transaction or specified domestic transaction,— (i) fails to keep and maintain any such information and document as required by sub-section (1) or sub- section (2) of section 92D ; (ii) fails to report such transaction which he is required to do so ; or (iii) maintains or furnishes an incorrect information or document, the Assessing Officer or Commissioner (Appeals) may direct that such person shall pay, by way of penalty, a sum equal to two per cent. of the value of each international transaction or specified domestic transaction entered into by such person (2) If any person fails to furnish the information and the document as required under sub-section (4) of section 92D, the prescribed income-tax authority referred to in the said sub-section may direct that such person shall pay, by way of penalty, a sum of five hundred thousand rupees. Section 271G of the Act:-

If any person who has entered into an international transaction or specified domestic transaction fails to furnish any such information or document as required by sub-section (3) of section 92D, the Assessing Officer “or the Transfer Pricing Officer as referred to in section 92CA” or the Commissioner (Appeals) may direct that such person shall pay, by way of penalty, a sum equal to two per cent. of the value of the international transaction or specified domestic transaction for each such failure These sections were enacted only for the purpose of penalizing the defaults of the nature committed by the assessee. No doubt Section 273B mandates that penalty under Sections 271AA and 271G of the Act are not imposable if ITA Nos.2207 & 2208/17 :- 13 -: the assessee proves that there was a reasonable cause for failure. However, assessee before us in our opinion has not been able to show any reasonable cause for not complying with Rules nor for its failure to produce information called for by the ld. TPO. In the circumstances, we are of the opinion that levy of penalty under Sections 271AA as well as 271G of the Act were justified. We do not find any reason to interfere with the orders of the lower authorities.

Order pronounced on Monday, the 18th day of June, 2018, at Chennai.