2014 (12) TMI 175 - AT - Income Tax

Computation of ALP of international transaction - Upward adjustment to purchase price of imported goods Held that - The reliance placed on the data available in the public domain at the time of the assessment proceedings which was not allowed by the AO and ultimately allowed at the Appellate stage cannot be faulted with there is no reason as to why the Revenue should insist upon ignoring the updated relevant data for the period under consideration - these companies taken in the TP study were comparable there can be no right vested in the Revenue to insist upon the incomplete data available at the time of TP study and refuse to look at the updated data available for the relevant period at the assessment stage - The CIT(A) in appeal has correctly taken the updated data the CIT(A) rightly was of the view that the transfer price of international transaction as declared by the appellant satisfy arm s length principle test and no upward adjustment is warranted - Decided against revenue. Deletion of penalty u/s 271(1)(c) Held that - The CIT(A) on facts qua the first addition has based his finding on the fact the sales tax debited to the P&L Account this finding of the fact has not been assailed by the Revenue - Regarding the other addition made by way of disallowance of 40% of the expenses debited to the P&L Account pertaining to staff welfare; communication expenses and business promotion expenses debited to the P&L account - the expenses have come down and the disallowance on facts is an adhoc disallowance assessee rightly relied upon COMMISSIONER OF INCOME-TAX Versus RELIANCE PETROPRODUCTS PVT. LTD. 2010 (3) TMI 80 - SUPREME COURT and CIT(A) was fully justified in quashing the penalty order - the explanation offered was a bonafide and it most definitely was not a false explanation Decided against revenue.

Summary

Issues Involved:
1. Deletion of upward adjustment to the purchase price of imported goods while computing the arm's length price of an international transaction.
2. Deletion of penalty imposed under Section 271(1)(c) of the Income Tax Act.

Issue 1: Deletion of Upward Adjustment to Purchase Price
The Revenue challenged the deletion of an upward adjustment of Rs. 42,66,611/- made by the Assessing Officer (AO) to the purchase price of imported goods while computing the arm's length price (ALP) of an international transaction. The assessee, a branch office of a foreign company, declared a loss of Rs. 17,82,913/- in its return, which was picked for scrutiny. The AO noted that the main cause of the loss was the increase in the import price of SIM cards. The AO compared the gross profit/sales ratio of the assessee with that of Compuage Infocom Ltd., determining that the normal gross profit margin should be 11.42%, leading to an adjustment of Rs. 42,66,611/-.

The assessee argued that the data of two other comparable companies was now available, showing a gross profit margin of 6.26%. The AO rejected this explanation, stating that the documentation should have been maintained as per Section 92D. The CIT(A) deleted the adjustment, considering the updated data of three comparable companies, which was available in the public domain during the assessment proceedings.

The Tribunal upheld the CIT(A)'s decision, stating that the reliance on updated data was justified and that the Revenue had no right to insist on incomplete data. The Tribunal found no reason to interfere with the CIT(A)'s finding, which correctly applied the updated data, resulting in no upward adjustment.

Issue 2: Deletion of Penalty Imposed Under Section 271(1)(c)
The Revenue also challenged the deletion of a penalty amounting to Rs. 3,12,890/- imposed under Section 271(1)(c) of the Income Tax Act. The penalty was based on two additions: Rs. 5,44,944/- on account of sales tax demand and Rs. 2,14,352/- due to disallowance of staff welfare, communication, and business promotion expenses.

The CIT(A) accepted the assessee's explanation that the sales tax demand was duly paid and evidenced by cheques and bank statements. Regarding the other expenses, the CIT(A) noted that the expenses were lower compared to the previous year and that the disallowance was ad hoc. The CIT(A) concluded that the explanation was bona fide and not false, quashing the penalty.

The Tribunal upheld the CIT(A)'s decision, agreeing that the explanation was bona fide and that the disallowance was ad hoc. The Tribunal found the CIT(A)'s reasoning and conclusion to be correct on facts, dismissing the Revenue's appeal.

Conclusion:
The Tribunal dismissed both appeals by the Revenue, upholding the CIT(A)'s decisions on both the deletion of the upward adjustment to the purchase price and the deletion of the penalty imposed under Section 271(1)(c). The order was pronounced in the open court on 28th November 2014.