WESTCOAST JEWELLERY IMPEX P. LATD,RAJKOT vs. ITO WD 8(3)(3), MUMBAI

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ITA 7315/MUM/2011Status: DisposedITAT Mumbai29 July 2016AY 2005-0610 pages
AI SummaryRemanded

What did the Tribunal hold?

The Tribunal condoned the delay in filing the appeal, finding reasonable cause for the delay. Regarding the transfer pricing adjustment, the Tribunal noted that the AO did not disclose the comparables used to the assessee before completing the assessment, which amounts to a denial of a fair opportunity and a violation of natural justice. The assessee's objections to the comparables being in the diamond jewellery export business were also not properly considered. Even at the appellate stage, the assessee's objections were not adequately dealt with. Therefore, the Tribunal set aside the order of the Commissioner (Appeals) and restored the matter to the file of the Assessing Officer for fresh adjudication. The AO was directed to consider the assessee's objections regarding the most appropriate method and comparables, afford a reasonable opportunity of hearing, and pass a reasoned order. Consequently, the penalty imposed under Section 271(1)(c) was also set aside and restored to the file of the Assessing Officer, as it was based on the transfer pricing addition that was no longer surviving. The AO may initiate penalty proceedings afresh after the assessment is completed.

What were the facts?

The assessee, Westcoast Jewellery Impex Pvt. Ltd., an Indian company engaged in manufacturing and exporting gold ornaments, is in appeal against orders of the Commissioner (Appeals) for Assessment Year 2005-06. The Assessing Officer (AO) made a transfer pricing adjustment of ₹33,01,682, which was confirmed by the Commissioner (Appeals). The assessee had used the Cost Plus Method (CPM) to benchmark its international transactions with its overseas Associated Enterprise (AE), claiming a gross mark-up of 14.05%. The AO, however, rejected CPM and applied the Transactional Net Margin Method (TNMM) with OP/TC as the Profit Level Indicator (PLI), selecting five comparable companies with an average margin of 10.64%. This resulted in an addition to the assessee's income. The assessee also appealed a penalty of ₹10,35,572 imposed under Section 271(1)(c) based on this addition.

What were the issues?

1. Whether the Tribunal should condone the delay of twelve days in filing the assessee's appeal (ITA no.7315/Mum./2011)? - Assessee's argument: The delay was unintentional, caused by courier issues and procedural forwarding between ITAT benches, and should be condoned. - Revenue's argument: Not recorded. 2. Whether the transfer pricing adjustment of ₹33,01,682 made by the AO and confirmed by the CIT(A) is valid, considering the assessee's claim of using CPM and objections to the AO's selection of TNMM and comparables? - Assessee's argument: The AO did not provide adequate opportunity to raise objections regarding the most appropriate method (TNMM) and the selection of comparables. The comparables selected by the AO were in the business of exporting diamond jewellery, not gold ornaments, and were not disclosed during assessment proceedings. The matter should be restored to the AO for fresh adjudication. - Revenue's argument: The AO granted repeated opportunities, but the assessee did not avail them. For natural justice, the matter may be restored to the AO for fresh decision after providing adequate opportunity. 3. Whether the penalty of ₹10,35,572 imposed under Section 271(1)(c) is sustainable, given that the underlying transfer pricing addition is under dispute? - Assessee's argument: Not recorded, but implied by the appeal against the penalty. - Revenue's argument: Not recorded, but implied by the appeal against the penalty.

Which sections of the Income-tax Act were involved?

Section 143(3),Section 271(1)(c)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “K” BENCH, MUMBAI

Before: SHRI SAKTIJIT DEYAND

Date of Hearing – 26.07.2016 Date of Order – 29.07.2016

2 Westcoast Jewellery Impex Pvt. Ltd.

O R D E R PER SAKTIJIT DEY, J.M. Aforesaid appeals of the assessee are directed against two separate orders of the learned Commissioner (Appeals)–15, Mumbai, pertaining to the same assessment year 2005–06.

ITA no.7315/Mum./2011

2.

In this appeal, assessee has challenged the additions made by the Assessing Officer in the assessment order passed under section 143(3) of the Income Tax Act, 1961 (for short "the Act") and confirmed by the learned Commissioner (Appeals).

3.

Registry has pointed out delay of twelve days in filing the present appeal. Assessee has filed a petition seeking condonation of delay. It has been explained by the assessee that the appeal papers were sent by courier to ITAT, Mumbai Bench, on 18th October 2011, however, the courier company returned back the parcel to the assessee with a comment “not accepted”. It is submitted, on the advise of Assistant Registrar, ITAT, Mumbai, assessee thereafter filed the appeal in ITAT, Rajkot Bench, which in turn, forwarded the appeal papers to ITAT, Mumbai Bench. However, in the process, delay of twelve days occurred.

3 Westcoast Jewellery Impex Pvt. Ltd.

4.

Learned Authorised Representative submitted, the delay being totally unintentional should be condoned.

5.

Having considered the submissions of the assessee, we are of the view that there is a reasonable cause for not filing the appeal in time. Accordingly, condoning the delay, we admit the appeal for hearing on merits.

6.

Though, assessee has raised in total nine grounds but all of them are in relation to transfer pricing adjustment of ` 31,63,083.

7.

Brief facts are, assessee an Indian company is engaged in manufacture and export sale of gold ornaments. For the purpose of its business, the assessee has been permitted to purchase 24 carat standard gold from Reserve Bank of India approved agencies like MMTC Ltd. and State Bank of India without payment of import duty as per the export schemes formulated under the foreign trade policy. During the relevant previous year, assessee purchased 24 carat standard gold bar from MMTC Ltd. and State Bank of India and after manufacturing gold ornaments worth ` 4,31,66,750 exported them to its overseas A.E. and declared net profit of ` 5,76,460. In the course of proceedings before the Assessing Officer when the assessee was called upon to furnish transfer pricing study with necessary details to justify the arm's length price of international transactions with A.E. it was 4 Westcoast Jewellery Impex Pvt. Ltd.

submitted by the assessee that it has applied cost plus method (CPM). He submitted, as per foreign trade policy of the Government, the minimum value addition of 7% is allowed while manufacturing gold ornament. Assessee submitted, the gross mark–up of the assessee on the cost price works out to 14.05%, therefore, the price charged to A.E. is at arm's length. The Assessing Officer, however, was not satisfied with the explanation of the assessee. He issued a show cause notice to the assessee proposing to adopt transactional net margin method (TNMM) as most appropriate method of determining the arm's length price and called upon the assessee to have his say on the issue. Though, the assessee objected to the rejection of arm's length price computed by it and application of TNMM but the Assessing Officer rejecting the contention of the assessee proceeded to determine the arm's length price by applying TNMM as the most appropriate method with OP/TC as PLI. He selected five companies as comparable with average margin of 10.64% and applying the average margin to the total cost, he determined the arm's length price at ` 4,64,68,432 as against ` 4,31,66,750 shown by the assessee. The resultant short fall of ` 33,01,682 was added back to the income of the assessee on account of transfer pricing adjustment. Being aggrieved of assessment order so passed, assessee preferred appeal before the learned Commissioner (Appeals).

5 Westcoast Jewellery Impex Pvt. Ltd.

8.

Before the learned Commissioner (Appeals), assessee made elaborate submissions challenging the determination of arm's length price by the Assessing Officer and submitted additional evidence. On the basis of submissions made and evidences filed, the learned Commissioner (Appeals) called for a remand report. However, considering the report of the assessee learned Commissioner (Appeals) finally sustained the addition by dismissing the grounds raised by the assessee in relation to transfer pricing adjustment.

9.

Learned Authorised Representative submitted, the assessee computed its arm's length price by applying CPM, which is the most appropriate method under the given circumstances. He submitted, the Assessing Officer while applying TNMM and selecting comparables did not give adequate opportunity to the assessee to raise his objections with regard to selection of the most appropriate method and comparables. In this context, he referred to the show cause notice issued by the Assessing Officer dated 24th December 2007 to point out that in the said show cause notice the Assessing Officer did not provide the list of comparables selected by him. He submitted, even during the assessment proceedings, the Assessing Officer did not disclose any information relating to use of comparable. He submitted, only after completion of assessment, the assessee could know about the 6 Westcoast Jewellery Impex Pvt. Ltd.

comparables used by the Assessing Officer. He submitted, even before the learned Commissioner (Appeals), though the assessee had contested / objected the comparables selected by the Assessing Officer by stating that all those comparables are in the business of export of diamond jewellery, ignoring the objections of the assessee learned Commissioner (Appeals) confirmed the transfer pricing adjustment. Learned Authorised Representative submitted, as the assessee was not given proper opportunity by the Assessing Officer and the learned Commissioner (Appeals) also did not properly consider his contentions / objections, the matter may be restored back to the file of the Assessing Officer for deciding the issue relating to applicability of most appropriate method as well as selection of comparables.

10.

Learned Departmental Representative submitted, though, the Assessing Officer granted repeated opportunities to the assessee to make his submissions but the assessee did not avail of the same before the Assessing Officer. He submitted, even before the learned Commissioner (Appeals), assessee has not properly justified its claim. Therefore, it cannot have any grievance against the orders passed by the Departmental Authorities. However, learned Departmental Representative submitted, for the sake of natural justice, the issue relating to most appropriate method applicable to the assessee and selection of comparables may be restored back to the file of the 7 Westcoast Jewellery Impex Pvt. Ltd.

Assessing Officer for deciding afresh after providing adequate opportunity of hearing to the assessee.

11.

We have considered the submissions of the parties and perused the material available on record. As per the claim of the assessee, it has bench marked the price charged to its A.E. by applying CPM on the basis of foreign trade policy. The bench mark done by the assessee was rejected by the Assessing Officer on the allegation that it is not in terms of any prescribed method. The Assessing Officer has proceeded to determine the arm's length price by selecting TNMM as the most appropriate method and has thereafter selected five companies as comparables for comparability analysis. It is the specific allegation of the assessee that the comparables selected by the Assessing Officer were never brought to the notice of the assessee. On perusal of the show cause notice issued by the Assessing Officer, the assessment order and other materials on record it is not forthcoming whether the Assessing Officer before completing the assessment has brought to the notice of the assessee the comparables proposed to be utilised by him to bench mark the price charged. It is further evident, though before the learned Commissioner (Appeals) the assessee has specifically objected to selection of TNMM as the most appropriate method and also raised objection with regard to the comparable companies selected by the Assessing Officer on the ground that they are engaged

8 Westcoast Jewellery Impex Pvt. Ltd. in export sales of diamond jewellery, as it appears, assessee’s objection have been not properly considered / appreciated. In fact, on a perusal of the remand report submitted before us, we have noted that there is no reference to the specific objections raised by the assessee with regard to selection of most appropriate methods as well as comparables. In our view, non–disclosure of vital information to the assessee with regard to comparables amounts to denial of fair opportunity to the assessee, hence, is in violation of rules of natural justice. Further, even at the appellate stage, assessee’s objections with regard to selection of comparables have not been properly dealt with. In the aforesaid view of the matter, we consider it appropriate to restore the matter back to the file of the Assessing Officer for deciding afresh after considering assessee’s objections with regard to the most appropriate method which can be used for bench marking the international transaction with A.E. and also the selection of comparables. The Assessing Officer must afford reasonable opportunity of hearing to the assessee to put forward his objections / submissions on all the issues and thereafter pass a reasoned order. With the aforesaid observations, the impugned order of the learned Commissioner (Appeals) is set aside and the matter is restored back to the file of the Assessing Officer.

12.

In the result, appeal is allowed for statistical purposes.

9 Westcoast Jewellery Impex Pvt. Ltd.

ITA no.6672/Mum./2014

13.

In this appeal, assessee has challenged confirmation of penalty imposed under section 271(1)(c).

14.

Brief facts are, while completing the assessment in the case of assessee for the impugned assessment year, the Assessing Officer made addition of an amount of ` 33,01,682 on account of transfer pricing adjustment which was also confirmed by the learned Commissioner (Appeals). On the basis of the addition made as aforesaid, the Assessing Officer initiated proceedings for imposition of penalty under section 271(1)(c) and ultimately passed an order imposing penalty under section 271(1)(c) for an amount of ` 10,35,572. Being aggrieved of the penalty order so passed assessee preferred appeal before the learned Commissioner (Appeals) who also confirmed imposition of penalty. Being aggrieved, assessee is in appeal before the Tribunal.

15.

We have considered the submissions of the parties and perused the material available on record. While deciding assessee’s appeal in ITA no.7315/Mum./2011, the issue arising out of addition made on account of transfer pricing adjustment has been restored back to the file of the Assessing Officer for fresh adjudication. That being the case, as the addition no longer survives as of now, the penalty imposed

10 Westcoast Jewellery Impex Pvt. Ltd. under section 271(1)(c) on the basis of such addition also cannot survive. In the aforesaid view of the matter, we set aside the impugned order passed by the learned CIT(A) and restore the matter back to the file of the Assessing Officer. The Assessing Officer, if warranted, may initiate proceeding under section 271(1)(c) after completion of the assessment in terms of the directions of the Tribunal.

16.

In the result, appeal is allowed for statistical purposes.

17.

To sum up, both the appeals of the assessee are allowed for statistical purposes. Order pronounced in the open Court on 29.07.2016

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