ALP determined in good faith and with due diligence by assessee was not liable to penalty u/s 271(1)(c)
ABCAUS Case Law Citation:
ABCAUS 3310 (2020) (05) ITAT
Important case law relied upon by the parties:
Dharmendra Textile Processors 295 ITR 244
Zoom Communication Pvt. Ltd. 327 ITR 510
MAK Data Pvt. Ltd. 358 ITR 59
In the instant case, the appeal has been filed by the revenue against the orders of the CIT(A).
The assessee was one of the group companies of foreign based Group of Companies. The business of the assessee was Trading/Distribution of Food Supplements and Health Care Equipments.
The products dealt with by the Company were basically products manufactured at China or other places by Group concerns. Another group entity incorporated at China had established a Foreign Branch Office in India.
This was a Foreign Company with Non-Resident Status falling under the category of an “Associate Enterprise” (AE) of the assessee, while the Indian Branch Office of this company specifically fall under the category of “Permanent Establishment” (PE).
The assessee had made purchases from the Indian Branch Office of the said PE. The Assessing Officer (AO) made a reference to the TPO for determination of Arm’s Length Price (ALP) u/s 92CA(3) of the Income Tax Act, 1961 (the Act) in respect of this Purchase transactions and the TPO determined an upward TP adjustment.
CIT(A) observed that the wording used in the statute require at least two tax jurisdictions of different countries with emphasis on “Profits should not be unduly transferred out of India”.
The CIT(A) held that in the instant case both the above element were absent.” Accordingly, he deleted the quantum addition.
However, the ITAT held that the CIT(A) erred in observing that since no cross border transaction was involved, the transfer provisions were not attracted.
ALP determined in good faith & with due diligence by assessee not liable to penalty u/s 271(1)(c)
The Tribunal held that once the transactions involved were international transactions within the meaning of section 92B(1) of the Act, the Transfer Pricing Provisions had rightly been involved. There is no requirement to prove any motive to shift profits outside India or to evade taxes in India in the related party transactions.
Owing to the direction of the ITAT, Transfer Pricing Adjustment were made. Subsequently, the AO imposed a penalty u/s 271(1)(c).
The CIT(A) deleted the penalty and held that the assessee was under belief that the purchase from the PE of the foreign AE would not attract the transfer pricing provisions. The CIT(A) held that the provisions of Explanation 7 to Section 271(1)(c) was not attracted in this case and deleted the penalty.
The Tribunal observed the facts and found that the core issue was of adjustment of ALP. The assessee had applied TNMM as the most appropriate method and used NP/TC as PLI. Its margins in the food supplements and health equipment were 4.2% and 4.2% respectively. In the first segment the assessee has selected 18 comparables whose average NP/TC margin is 4.1% and in the second segment, the assessee has selected 5 comparables whose average margin is 4.45%.
Further, in the TP study, the assessee, had used multiple year data for computing the average margin of the comparables while the TPO has used the current year data for calculating the average margin of the comparables. In the TP study the assessee had used NP/TC as PLI while the TPO had used OP/Sales as PLI. Accordingly, the TPO had computed the adjustment in the Health Equipment segment. In the Food Supplement Segment, the assessee has selected 18 comparables and computed the average margin (NP/TC) of these comparables at 4.1. The TPO had chosen only 2 comparables out of 18 comparables from the list of assessee and computed the average margin (OP/Sales) at 17% based on current year data. Accordingly, the TPO had computed the adjustment of in the Food Supplement Segment and subsequently levied penalty.
The Tribunal observed that the Explanation 7 of Section 271(1)(c) provides that where the assessee proves to the satisfaction of the AO or CIT(A) that the price charged or paid in the internal transaction was computed in accordance with the provisions contained in section 92C and in the manner prescribed under that section, in good faith and with due diligence, no penalty is leviable.
The Tribunal noted that the adjustment arose due to exclusion of some comparables and the use of current year data by the revenue instead of multiple year data by the assessee and also taking OP/sales instead of NP/TC as PLI. The issue of applicability of current year data or multiple year data had not been attained finality at that point of time.
The Tribunal stated that all the facts had been submitted before the revenue authorities while the assessee used NP/TC, the revenue used OP/Sales. This amounted to determination of ALP from a different angle, at most from the angle of the revenue.
The Tribunal opined that it could not be said that there was any surreptitious mechanism embarked upon by the assessee nor it could be said that the assessee failed to exercise their transactions with all the due diligence. The assessee had prepared its TP report in good faith and with due care. There was nothing on record to disprove the good faith and the due diligence discharged by the assessee in determining the ALP of transactions in the TP report submitted by the assessee.
Hence, the Tribunal held that Explanation 7 to section 271(1)(c) was not attracted in the present case, and hence, it was not a fit case for levying the penalty u/s 271(1)(c). Accordingly, the penalty imposed u/s 271(1)(c) was deleted.
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