As per Rule 46A of IT power of CIT to admit additional evidence not only in situation where not produced to lower authority due to lack of opportunity but also in fresh case to dispose the appeal

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI ‘B’ BENCH

BEFORE SHRI R.P. TOLANI, JM & SHRI A.N. PAHUJA, AM

ITA no.31/Del/2011

Assessment year: 2005-06

A.C. I .T. ,

Circle 10(1),

New Delhi

(Appellant)

V/s.

M/s Dentsply India Pvt .

Ltd., Plot No.358, FIES

Patparganj Industr ial Area,

Delhi-92

(Respondent)

[PAN: AAACD 3171E)

Assessee by: Shri S.M. Mathur, AR

Revenue by: Shri Pradeep Kumar,DR

Date of hearing: 23-02-2012

Date of pronouncement: 02-03-2012

O R D E R

A.N.Pahuja:-

This appeal filed on 04.01.2011 by the Revenue against an order dated 29.10.2010 of the learned CIT(A)-XX, New Delhi, raises the following ground:-

1.“On the facts and circumstances of the case and in law, the order of the CIT (A) is wrong, perverse, illegal and against the provisions of law which is liable to be set aside.

2. On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in deleting the addition on a/c of difference of Arm’s Length Price.

3. On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in not affording any opportunity to the TPO before proceeding to compute the margins of the comparables and the assessee.

4. On the facts and circumstances of the case and in law, the Ld.CIT (A) has erred in not considering service income & commission income as operating income specially when entity level margins of the comparable companies are being considered.

5. On the facts and circumstances of the case and in law, the Ld.CIT (A) has erred in not considering segmental accounts of healthcare division in Advanced Micronics Device Ltd., more so when the margin were recomputed afresh.

6. On the facts and circumstances of the case and in law, the order of the CIT (A) has erred in quashing the applicability of penalty u/s 271(1)(c)/271G of the Act.

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

2. Adverting first to ground no.3 in the appeal, facts, in brief, as per relevant orders are that return declaring loss of Rs.28,17,554/- filed on 31.10.2005 by the assessee, trading in dental material & equipments, after being processed on 30.08.2006 u/s 143(1) of the Income-tax Act, 1961 (hereinafter referred to as the Act), was selected for scrutiny with the service of notice u/s 143(2) of the Act. Subsequently, the Assessing Officer (A.O. in short) noticed that the assessee company, a wholly owned subsidiary of Dentsply Industries, USA, entered into following international transactions with its AE:-

2.1 The assessee followed TNMM method on aggregation approach in order to establish Arm’s Length Price (ALP in short) of the aforesaid transactions.

On reference by the AO, the TPO in his report suggested adjustment of Rs.2,28,21,754/- in the following terms:-

“It is seen that in the case of the assessee, the operating profit earned on total cost is calculated as under from the audited financials. As the assessee could not justify its operating profits deduced in Appendix B of the Transfer Pricing Report, figures from audited financials have been taken and other income has been considered as non- operating income.

[In Rs.]

Total Op. Income: 18,67,82,237

Materials and related expenses: 14,23,21,068

Personnel expenses: 1,65,98,619

Selling & Distribution expenses: 1,12,58,859

Administration & other expenses: 2,43,85,453

Depreciation: 11,26,404

Total Operating expenses: 19,56,90,403

Operating profit: -89,09,166

OP/TC percentage: -4.55%

2.2 In order to arrive at arm’s length price of International Transactions the assessee must earn an operating margin of 7.11% of its total cost which is Rs.19,56,90,403/- as per audited financials.

Total cost of the assessee (TC): 19,56,90,403

Operating Margins: @7.11% of TC 1,39,1,588

Operating Profit/loss as above: -89,09,166

Difference: 2,28,21,754

It can therefore, be concluded that the international transactions of the assessee in respect of import of finished goods and raw material entered with its associated enterprises are not at arm’s length. The assessee in arm’s length circumstances would earn a profit of Rs.1,39,13,588/- whereas a loss of Rs.89,08,166/- is being posted. The difference between loss reported by the assessee and arm’s length profit calculated on the basis of comparables as above would be Rs.2,28,21,754/-. The Arm’s Length Value of the international transaction in respect of import of finished goods, raw material and payment of interest on External Commercial Borrowing is as above is accordingly determined as under:-

The Assessing officer shall increase the income of the assessee company by Rs. 2,28,21,754/-.”

2.3 After receipt of report of the TPO, the AO allowed an opportunity of hearing to the assessee. In response, the assessee merely submitted a letter dated 8th September, 2008 filed before the TPO. Since the said reply had already been considered by the TPO, the AO added an amount of Rs.2,28,21,754/- in terms of order dated 25th September, 2008 u/s 92CA(3) of the Act of the TPO.

3. On appeal, the ld. CIT(A) adjudicated the issues in the following terms:-

“7. From the above grounds following issues emerges which require adjudication:

i) Whether TPO was justified in considering the current year data for the purposes of determining Arm’s Length Price of International Transaction.

ii) Whether TPO’s action of excluding comparable selected by appellant was justified and whether any adjustment is to be made for computing operating margins.

iii) Whether the benefit of +5% is available.

iv) Whether NPM of the appellant computed correctly.

v) Whether penalty u/s 271(1)(c) and 271G could be imposed.”

3.1 The ld. CIT(A) while upholding the findings of the TPO in considering current year’s data and selection of comparables viz. Ashco Industries Limited and Advanced Micronic Devices Limited and rejecting the claim of the assessee for benefit of +/-5% in terms of proviso to sec. 92C(2) of the Act, deleted the addition, indisputably after admitting additional evidence without allowing any opportunity to the TPO, in the following terms:

10. “I have carefully gone through the order passed by Assessing Officer/TPO and also the submission made by the applicant, both in writing as well as oral arguments advanced during the course of proceedings. I have also examined the search process carried out by the assessee as contained in TP Study. Assessee has selected TNMM as the most appropriate method as the net margin are less affected the transactional differences than are the prices of the product. The search criteria based on functions performed, assets employed and risk assumed based of two comparable which were initially selected by the TPO has been retained as final comparable.

11. On the basis of the final selection of two comparables, the mean of their operating profit earned on total operating cost based on data for the financial year 2004-05 will be compared with that of the assessee company to determine the arm’s length price in regards to international transactions undertaken by the assessee for the assessment year 2005-06.

During the course of appellate proceedings, it was also found that, the TPO has calculated the net profit margin by taking OP/TC as the profit level indicator by accepting TNMM as the most appropriate method. Since neither TPO nor the appellant had any grounds of disputes, regarding PLI for the trading function and the use of the appellant as the tested party, therefore, I hold that, OP/TC should be used as the appropriate PLI and TNMM as the most appropriate method.

12. Accordingly the appellant was called to provide the OP/TC reliable figures for the current year of the comparables accepted by the TPO, to determining the value of the arm’s length transaction. The appellant submitted the audited OP/TC figures of two comparables as obtained from the official web site of Ministry of Corporate Affairs “MCA 21’ for the financial year 2004-05 relevant to the assessment year 2005- 6 on 21.09.2010.

As per the FAR analysis, the various issues related to the adjustment in operating profit and total costs of both the comparable companies were discussed and necessary adjustments as per the Act, on account of commission income, service charges, interest payments and other incomes were made. Similar adjustments were also considered to evaluate the operating profit and cost of the appellant company. From the above discussion and findings the Arm’s length value of the transaction is determined which is as under:-

The appellant operating margin to total cost after adjustment is at –3.83% as seen in page No.9 By computing the adjustments to the income as provided in the proviso to section 92C(2) of the Act, he appellant fully satisfy the arm’s length principle envisaged under the Act. Hence, the arm length price (ALP) worked out by appellant has been accepted and no adjustment is required. The impugned disallowances of Rs.2,28,21,754/- is deleted.

13. Whether penalty u/s 271(1)(c) and 271G could be impugned:

As the assessee has already furnished all the details and information’s of its expenditures and as well as income in its return, and in form number 3CEB, and further transfer price study report which details and information’s in themselves, were not found to be inaccurate nor could be viewed by the Assessing Officer as the concealment of income on its part. It was up to the authorities to accept its claim in the return or not. Merely because the assessee has claimed the expenditure, which claim was not accepted or was not acceptable to the revenue, on account of difference in opinion, that by itself would not, attract the penalty u/s 271(1)(c) and 271G, hence, the question of mens rea does not arises. The Assessing Officer has mechanically applied the penalty proceedings with any reasoning. The same views were taken in the judgment of Hon’ble Supreme Court in (Reliance Petroproducts Private Ltd.) Considering the facts of case as stated in proceeding paragraphs and as stated above there is no case for penalty.”

4. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. DR while inviting our attention to ground no.3 in the appeal, contended that the ld. CIT(A) was not justified in admitting additional evidence in contravention of Rule 46A of the IT Rules,1962 ,without allowing any opportunity to the TPO/AO in respect of data relating to comparables and that of the assessee ,considered by the ld. CIT(A). The ld. DR vehemently argued that without allowing any opportunity to the TPO/AO, the ld. CIT(A) was not justified in

deleting the addition. The ld. AR on behalf of the assessee did not oppose these submissions of the ld. DR and to a query by the Bench, the ld. AR admitted that the ld. CIT(A) considered the additional material without allowing any opportunity to the Assessing Officer/TPO .After discussion, both the parties agreed that matter may be restored to the file of the ld. CIT(A) for readjudiaction after allowing sufficient opportunity to the TPO/AO .

5. We have heard both the parties and gone through the facts of the case. Indisputably, the ld. CIT(A) considered additional material in relation to two comparables and that of the assessee, which was not available before the TPO/AO. Apparently, the ld. CIT(A) did not follow the procedure laid down under Rule 46A of the IT Rules,1962 nor allowed any opportunity to the AO. The powers of the CIT(A) to admit additional evidence are not only in situations where the evidence could not be produced before lower authorities owing to lack of adequate opportunity but also in situations where the fresh evidence would enable the CIT(A) to dispose of the appeal or for any other substantial cause. Of course, the power is to be exercised judiciously and for reasons to be recorded. Moreover, the rules of natural justice are not codified nor are they unvarying in all situations, rather they are flexible. They may, however, be summarized in one word: fairness. In other words, what they require is fairness by the authority concerned. Of course, what is fair would depend on the situation and the context. Lord Esher M.R. in Voinet vs. Barrett (1885) 55 L.J. QB 39, observed:

"Natural justice is the natural sense of what is right and wrong."

In view of the foregoing and in the interest of natural justice, especially when the ld. CIT(A) have not confronted the additional material placed before him by the assessee, to the AO nor allowed any opportunity to the TPO , we have no alternative but to vacate the findings of the ld. CIT(A) and restore the matter to his file with the directions to readjudicate the issues in accordance with law after allowing sufficient opportunity to both the parties. Subject to these directions, ground nos.2 to 6 in the appeal are disposed of.

6. Ground No.1 in the appeal of the Revenue being general in nature, does not require any separate adjudication while no additional ground having been raised before us in terms of residuary ground no.7 in the appeal, accordingly, both these grounds are dismissed.

7. No other plea or argument was made before us.

8. In result, appeal is allowed but for statistical purposes.

Order pronounced in open Court

                                                           Sd/-                       Sd/-

                                               (R.P. TOLANI)      (A.N. PAHUJA)

                                             (Judicial Member) (Accountant Member)

NS

Copy of the Order forwarded to:-

1. ACIT, Circle 10(1), New Delhi.

2. M/s Dentsply India Pvt. Ltd., Plot No.358, FIES Patparganj Industrial Area, Delhi-92

3. CIT concerned.

4. CIT (A)-XX, New Delhi

5. DR, ITAT,’B’ Bench, New Delhi

6. Guard File.

BY ORDER,

Deputy/Asstt.Registrar

ITAT, Delhi