DENSO INDIA LIMITED vs.COMMISSIONER OF INCOME TAX

DENSO INDIA LIMITED vs.COMMISSIONER OF INCOME TAX

HIGH COURT OF DELHI

S. RAVINDRA BHAT & R.K. GAUBA, JJ.

ITA 443/2013, 451/2013

Feb 29, 2016

(2016) 95 CCH 0057 DelHC

Legislation Referred to

Section 92C(2), 143(1)

Case pertains to

Asst. Year 2002-03

Issue

Transfer Pricing Adjustments

Decision in favour of:

Revenue

Transfer Pricing—Computation of arm’s length price—Transfer Pricing adjustment—Most Appropriate method—Adoption of Transactional Net Margin Method—Assessee was engaged in manufacturing and sale of auto electrical products such as Starters, Alternators, Wiper Motors, CDI, Magnetos etc., for four wheel and two wheel vehicles—Promoters of assessee included two Japanese Companies—Those promoters share holding was to extent of 47.93% and 10.27% respectively—Assessee had filed its return for AY 2002-03, declaring total income of Rs.19,44,45,442/-—Transfer pricing adjustment made pursuant to ALP determination recommended by TPO and accepted by AO to extent of Rs.1,36,31,665—TPO had determined ALP at average margin of 6.92% after eliminating 7 out of 11 comparable companies since their turnover was less than Rs.100 crores—Assessee’s turnover was over Rs.250 crores—Profit Level Indicator (PLI) of assessee, in terms of documents furnished by it worked out to 4.36%—Adjustment was, therefore, arrived at Rs.5.86 crore—CIT(A) held that the adjustments were not justified. The CIT(A) followed his previous order and held that CUP method was not most appropriate one and that import prices were not comparable to prices paid to domestic vendors after indigenization—Adjustment of Rs.97,44,630/- was, therefore, deleted—ITAT held that transactional net margin method adopted by assessee was most appropriate method envisaged u/s 92C(2) read with Rule 10C of the Income Tax Rules, 1962—Held, assessee chose to import components not from manufacturer (which was an AE) but an intermediary—Normally, this would have been commercial decision, which revenue authorities would not question—However, interestingly, vendor of components (which constituted over 85% of raw materials imported and about 38% of total raw materials sourced) was also connected with both assessee and manufacturer—If realities emerged during TP exercise, compelling TPO to closely scrutinize value of such imports and seek further details from assessee, to justify its decision—Onus was clearly on latter to afford convincing and reasonable explanation—Such of explanations that were forthcoming, were apparently unconvincing—Now, there could be no dispute that AO would normally accept figures given, if they did not show features that call for his interference—Unusual features which remained unexplained by assessee, influenced TPO and AO to resort to transfer pricing adjustment and determine ALP by adopting CUP method for procurements from ‘’X’’—Assessee’s appeal dismissed

Held

The factual discussion in this case clearly reveals that the assessee chose to import components not from the manufacturer (which was an AE) but an intermediary. Normally, this would have been a commercial decision, which revenue authorities would not question. However, interestingly, the vendor of the components (which constituted over 85% of the raw materials imported and about 38% of the total raw materials sourced) was also connected with both the assessee and the manufacturer. If these realities emerged during the TP exercise, compelling the TPO to closely scrutinize the value of such imports and seek further details from the assessee, to justify its decision, the onus was clearly on the latter to afford a convincing and reasonable explanation. Such of the explanations that were forthcoming, were apparently unconvincing. What the assessee banks upon in its appeal to this Court is the unbending and inflexible acceptance of its TP exercise; according to its logic, a "bundled" or aggregated series or chain of transactions used in the TP report should remain undisturbed. Now, there can be no dispute that the AO would normally accept the figures given, if they do not show features that call for his interference. However, his job also extends to critically evaluating materials and in cases which do require scrutiny, go ahead and do so. In the process, at least in this case, the unusual features which remained unexplained by the assessee, influenced the TPO and the AO to resort to transfer pricing adjustment and determine ALP by adopting the CUP method for the procurements from Sumitomo Japan. High Court finds no infirmity in this approach. As a result, the first question framed is answered against the assessee and in favour of the revenue.

(Para16)

Conclusion

When the features adopted for determining transfer pricing adjustment remained unexplained by the assessee than the TPO and the AO justified to resort to transfer pricing adjustment and determine ALP by adopting the CUP method and not by TNMM method.

In favour of

ASSISTANT COMMISSIONER OF INCOME TAX vs.BOSTON SCIENTIFIC INDIA PVT. LTD.

ASSISTANT COMMISSIONER OF INCOME TAX vs.BOSTON SCIENTIFIC INDIA PVT. LTD.

AHMEDABAD TRIBUNAL

DIVA SINGH, JM & L. P. SAHU, AM.

ITA No. 1062 & 1063/Del/2013

Mar 1, 2016

(2016) 46 CCH 0210 DelTrib

Legislation Referred to

Section 68, 271(1)(c), 92C

Case pertains to

Asst. Year 2006-07 & 2007-08

Issue

Penalties

SubIssue

Section 271(1)(c)

Decision in favour of:

Assessee

Penalty u/s 271(1)(c )—Deletion of penalty—Assessee was company incorporated under the Indian Companies Act, 1956—Assessee stated to be primarily engaged in promotion, marketing, sales and distribution in India of wide range of cardio-vascular products and related medical instruments and equipments manufactured by ‘’x’ group—Assessee also stated to be providing post sales related support services— AO in both assessment years referred matter to Transfer Pricing Officer for determination of arm’s length price of international transactions— TPO proposed an addition of Rs.3,46,84,993—AO held that assessee concealed particulars of income— As a result of additions to income of assessee in respective years AO initiated penalty proceedings u/s 271(1)(c)— AO imposed penalty u/s 271(1) (c ) on assessee— CIT(A) deleted penalty imposed on assessee—Held , AO wrongly invoked Explanation 1 of section 271(1)(c) instead of Explanation 7 of section 271(1)(c)— In both years under consideration additions were based on comparables offered by assessee— Not even one comparable had been introduced by TPO—All comparables offered were not accepted by TPO in both years or alternatively TPO partially accepted comparables offered by assessee in both years were facts which supported due diligence and good faith standards—Addressing comparable excluded by TPO no case had been made by Revenue to show that by offering comparables excluded assessee was so careless, negligent or lacking in good faith that exercise was done with malafide to defraud Revenue—Comparables retained were offered by assessee and no comparable had been introduced by TPO itself lead to conclusion that due diligence had been exercised in good faith by assessee in selecting comparables—ITAT held that just because certain comparables were excluded by TPO, claim of exercise of due diligence and good faith in selecting comparables offered did not get eroded unless same was rebutted by Revenue by showing specific instances explicitly indicating that in selection of comparables assessee had acted malafide and exercise was lacking in good faith and due diligence— No such arguments in rebuttal had been made by Revenue before ITAT— No infirmity in Order of CIT(A)—Revenue’s Appeal dismissed.

Held

ITA No.1062/Del/2013-Revenue's Appeal

It is a matter of record that in both the years under consideration the additions are based on the comparables offered by the assessee. Not even one comparable has been introduced by the TPO. The fact that all the comparables offered were not accepted by the TPO in both the years or alternatively the TPO has partially accepted the comparables offered by the assessee in both the years are facts which support the due diligence and good faith standards. Addressing the comparable excluded by the TPO no case has been made by the Revenue to show that by offering the comparables excluded the assessee was so careless, negligent or lacking in good faith that the exercise was done with malafide to defraud the Revenue. The fact that the comparables retained were offered by the assessee and no comparable has been introduced by the TPO itself leads to the conclusion that due diligence has been exercised in good faith by the assessee in selecting the comparables. This argument has been accepted by the CIT(A). On examining this grievance of the Revenue, we find that just because certain comparables were excluded by the TPO, the claim of exercise of due diligence and good faith in selecting the comparables offered does not get eroded unless the same was rebutted by the Revenue by showing specific instances explicitly indicating that in the selection of comparables the assessee had acted malafide and the exercise was lacking in good faith and due diligence. No such arguments in rebuttal have been made by the Revenue before us. Accordingly for the reasons given herein above, ITAT find that on this ground too the Revenue has failed to upset the finding of the CIT(A).(Para13.9)

Conclusion

Merely because certain comparables were excluded by TPO, claim of exercise of due diligence and good faith in selecting comparables offered did not get eroded unless same was rebutted hence penalty levied u/s 271(1)(c ) was deleted

In favour of

Assessee

Transfer Pricing—Computation of Arms length Price—Transfer Pricing adjustment— Use of multiple year data in TP study— Lack of good faith and exercising due diligence—AO adopted multiple year data in TP study and same was rejected by TPO—Penalty levied on assessee for Using multiple year data in TP study—CIT(A) set aside Order of TPO—Revenue stated that there was lack of good faith and exercising due diligence in respect of use of multiple year data in TP study placed on record in 2006-07 and 2007-08 AYs by assessee—Held, phrase “good faith” and “with due diligence” used in Explanation 7 of section 271(1)(c) as hyphenated phrase which lost its essential meaning of individual words when considered separately as abstract phrases—Bonafide of assessee could not be doubted—It seen that at relevant point of time when TP Study was filed there was debate on issue of single year data and multiple year data— Considering change of method from RPM to TNMM, it found that assessee’s explanation that method was changed from TNMM from 2005-06 AY to RMP in 2006-07 & 2007-08 AY on ground that there was only one segment in year and accordingly most appropriate method selected was RPM-Notwithstanding fact that said approach was not approved by TPO, it did not detract from plausible claim that in view of only one segment i.e. distribution segment method selected in good faith and due diligence was RPM— Assessee at time of filing its TP study could not anticipate that despite there being only one segment, TPO would still insist on holding that TNMM would be most appropriate method relying on past position where change in facts was admitted position— Due diligence standards assiduously required to be adhered to in present case were standards of reasonable and ordinary diligence— But extraordinary and extreme measures of care, caution and prudence insomuch as to anticipate a vigilance to extent that despite plausible explanation on facts , most appropriate method selected by assessee would still be disturbed by TPO, was beyond all possible shades of due diligence expected from assessee at time of computing its transaction.

Held

Phrase “good faith” and “with due diligence” is used in Explanation 7 of section 271(1)(c) as a hyphenated phrase which looses its essential meaning of the individual words when considered separately as abstract phrases.In the facts of the present case, ITAT find that the bonafide of the assessee cannot be doubted. To sum up it is seen that at the relevant point of the time when the TP Study was filed there was a debate on the issue of single year data and multiple year data. Considering the change of method from RPM to TNMM, we find that the assessee’s explanation that the method was changed from TNMM from 2005-06 AY to RMP in 2006-07 & 2007-08 AY on the ground that there was only one segment in the year and accordingly the most appropriate method selected was the RPM. Notwithstanding the fact that the said approach was not approved by the TPO, it does not detract from the plausible claim that in view of only one segment i.e. the distribution segment the method selected in good faith and due diligence was RPM. Even otherwise we find that the assessee at the time of filing its TP study could not anticipate that despite there being only one segment, the TPO would still insist on holding that TNMM would be the most appropriate method relying on the past position where change in facts is an admitted position. The due diligence standards assiduously required to be adhered to in the present case are standards of reasonable and ordinary diligence. But extraordinary and extreme measures of care, caution and prudence insomuch as to anticipate a vigilance to the extent that despite a plausible explanation on facts the most appropriate method selected by the assessee would still be disturbed by the TPO, is beyond all the possible shades of due diligence expected from an assessee at the time of computing its transaction.(Para13.15)

Conclusion

Assessee at time of filing its TP study could not anticipate that despite there being only one segment, TPO would still insist on holding that TNMM would be most appropriate method relying on past position where change in facts is an admitted position and there was lack of good faith and exercising due diligence on TPO/AO’s part.

In favour of

Assessee

Transfer Pricing—Computation of Arms length Price—Transfer Pricing adjustment—Selection of comparables —Penalty u/s 271(1)( C)—Revenue submitted that inclusion or exclusion of comparables gave cause to hold that this was case of concealment or of filing of inaccurate particulars—Held, additions found to be made based on comparables offered by assessee in TP study in 2007-08 AY and in 2006-07 AY—Six comparables offered wherein three were rejected and three more were offered by assessee during assessment proceedings—Inclusion or exclusion of comparables in peculiar facts of case did not give cause to hold that this was case of concealment or of filing of inaccurate particulars, notwithstanding fact that as per judicial precedent cited selection of comparables had been to be a subjective exercise—When position was considered by applying TNMM or RPM , assessee was fully within arms length price in 2006-07 AY which factual position had not been disputed by Revenue and range of +/-5% in 2007-08 AY-.

Held

Reverting to the other issues ITAT further find that even when the additions are considered they are found based on the comparables offered by the assessee in the TP study in 2007-08 AY and in 2006-07 AY. The six comparables offered wherein three were rejected and three more were offered by the assessee during the assessment proceedings. Thus ITAT find that the inclusion or exclusion of comparables in the peculiar facts of the present case does not give cause to hold that this was a case of concealment or of filing of inaccurate particulars, notwithstanding the fact that as per judicial precedent cited selection of comparables has been to be a subjective exercise. ITAT further find that the specific tables reproduced by the CIT(A) and extracted in the earlier part of this order in para 5.1.1 of the impugned order, when the position is considered by the applying TNMM or RPM the assessee is fully within the arms length price in 2006-07 AY which factual position has not been disputed by the Revenue and range of +/-5% in 2007-08 AY.(Para 13.15.1)

Conclusion

Inclusion or exclusion of comparables does not give cause to hold that it was case of concealment or of filing of inaccurate particulars, notwithstanding the fact that as per judicial precedent cited selection of comparables has been to be a subjective exercise

In favour of

Assessee

Cases Referred to

G.C. Agarwal (1994) 186 ITR 571 (SC)
ACIT vs. Jeevan Lal Shah (1994) 205 ITR 244 (SC)
Aztek Software & Technology Services Ltd. vs. ACIT (2007) 294 ITR 1832 (Bangalore) (SB)
Mentor Graphics P. Ltd. (2007) 109 ITD 10 (Delhi)
K.P. Verghese vs. ITO 131 ITR 597 (SC)
ACIT vs. Firmenich Aromatics India Pvt. Ltd. [ITA No.4654/Mum/2009]

Counsel appeared:

K.M. Gupta, Adv. for the Appellant.: Anand Kumar Kedia, CIT DR for the Respondent

DIVA SINGH, JM.

1. By these two appeals filed by the Revenue the correctness of the consolidated order dated 20.12.2012 of CIT(A)-XX, New Delhi pertaining to 2006-07 and 2007-08 assessment years is assailed on the following grounds in the respective appeals:-

ITA No.1062/Del/2013

1. “On the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in holding that it is not a fit case for imposition of penalty u/s 271(1)(c) thereby deleting the penalty of Rs.1,16,74,768/- levied for assessment year 2006-07.

2. The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of the hearing.”