2014 (11) TMI 643 - AT - Income Tax

Tribunal favors assessee on tax issues, deletes penalties under Section 271(1)(c)

M/s. Panasonic Consumer India Pvt. Ltd. (formerly known as Panasonic India Pvt. Ltd.) Versus Asstt. Commissioner of Income Tax

The Tribunal ruled in favor of the assessee on various issues, including the segregation of CPD and SPD divisions, treatment of advertisement expenses, ... Transfer pricing adjustment - Segregation of trading functions pertaining to the CPD and SPD divisions – segregation vs aggregation of the CPD and SPD divisions - Held that:- In Panasonic India Pvt. Ltd. Versus ITO [2010 (9) TMI 682 - ITAT, DELHI] the same matter had been decided wherein it has been held that the test for finding whether segregation is required is provided in the Rules themselves and as is borne out from the facts of the case, Rule 10B(2(b) clearly is in favour of the proposition that segregation should not be done - In addition, the comparables used are also the same for both the Divisions - It also lends weight to returning the finding that segregation was not called for. The segment-wise details of sales and purchase at GP level were also made available - no discrepancy is found in the figures as reported by the assessee - The segregation was totally artificial and uncalled for and the authorities below were not justified in segregating them - The trading functions having the same FAR and having closely linked transactions were to be taken as a whole and not separately, thereby creating artificial loss in one segment and profit in the other - the trading functions having the same FAR and having closely linked transactions were to be taken as a whole and not separately, therefore, creation of artificial loss in one segment and creation of artificial profit in the other segment is not permissible - both segments have to be taken as a whole and additions confirmed by the CIT(A) on the basis of segregation deserve to be set aside – Decided in favour of assessee. Reliance on Special Valuation Cell of the custom's department – Held that:- In Panasonic India Pvt. Ltd. Versus ITO [2010 (9) TMI 682 - ITAT, DELHI] the same matter had been decided wherein it has been held that where specific rules of law exist in the Statute on a particular subject, then they would hold the field - Chapter X and Rules made thereunder are a self- contained code and answers to all questions must be found in the written law contained in the Act and Statute - the Customs valuation is for different purposes and Chapter X of the Income Tax Act is for different purposes and different criteria are being used – Decided against assessee. Treatment of reimbursement of advertisement expenses – Non-operating revenue receipt or not – Held that:- In Panasonic India Pvt. Ltd. Versus ITO [2010 (9) TMI 682 - ITAT, DELHI] the same matter had been decided wherein it has been held that Rule 10B(2)(c) states that “the contractual terms (whether or not such terms are formal or in writing) of the transaction which lay down explicitly or implicitly how the responsibility, risks and benefits are to be divided between the respective parties to the transactions ” - the assessee has demonstrated by substantiating the fact that it was in reasonable expectation of reimbursement of expenditure by the past conduct of its mother companies i.e. AEs of receiving at least 2/3rd of its expenditure in reimbursement - the receipt of advertisement expenditure would form a part of operating profit either by way of adding to income or otherwise expenditure has to be reduced from total advertisement expenditure to the extent of reimbursement; either way we look at it, the result will be the same - it is having the same effect on operating profits up to this extent, the TPO and the CIT(A) were not justified in excluding the advertisement expenditure while calculating the PLI of the assessee. Huge advertisement cost incurred by the assessee – Held that:- If the TPO and the CIT(A) were of the opinion that these two divisions viz. CPD and SPD were separate divisions and required a different criteria for determining the ALP, then they could not have compared both the divisions results, as has been done by them, with the same set of comparable; there is obviously a contradiction between the two - it is accepted that the two divisions have separate characteristics, then obviously, different comparables should have been used - If in the situation where two divisions are to be treated separately, the department ought not to be used the same set of comparables which were used by the TPO and the CIT(A) for both the divisions, then the PLI of comparables for the CPD Division would have to be adjusted as per provisions of Rule 10B(1)(e)(iii) of the Income Tax Rules, 1962 - as the PLI of the assessee is higher of the two (here it is 8.43% which is more than 3.58%), international trading transactions entered into by the assessee are held to be ALP as per transfer pricing regulations in India – Decided in favour of assessee. Validity of unallocated expenses and income to the ISD division of the assessee – Held that:- In Panasonic India Pvt. Ltd. Versus ITO [2010 (9) TMI 682 - ITAT, DELHI] the same matter had been decided wherein it has been held that there is substance in the submissions of the assessee that out of a total business of ₹ 361 cores, the ISD service and commission income is only ₹ 12,28,831/-. It is unreasonable to allocate ₹ 20,59,669/- as expenditure on such a meager gross receipt - three years average is being taken on the ISD Division on the basic facts of the case following the Proviso to Rule 10B(a) even if it is taken to the basis of ISD Division, it will not make any difference - the addition cannot be made in the overall facts and circumstances on the issue of allocation of unallocated expenses and income to the ISD Division following the proviso to Rule 10B(a) of Income Tax Rules 1962 – Decided in favour of assessee. Computation of the Arm’s Length Price – Held that:- In Panasonic India Pvt. Ltd. Versus ITO [2010 (9) TMI 682 - ITAT, DELHI] the same matter had been decided wherein it has been held that the CIT(A) is right in holding that the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be, the data relating to the relevant year in which the international transaction has been entered into - only the current year data for the relevant financial year pertaining to respective assessment year deserve to be used for computation of ALP an international transaction with the uncontrolled transaction of the assessee – Decided against revenue. Levy of penalty u/s 271(1)(c) – Held that:- The AO has imposed penalty on the issue of addition to the extent of ₹ 1,15,03,254 on account of ALP and on the addition to the extent of ₹ 8,15,01,718 - the additions made by the TPO and confirmed by the CIT(A) by segregating the CPD and SPD divisions are not sustainable - once addition has been deleted, the act of imposition of penalty is rudimentary because there cannot be any tax sought to be evaded on which penalty could be computed and levied, therefore, no penalty on the assessee is imposable in both the assessment years on account of additions made by the AO to the extent of ₹ 1,15,03,265/- in AY 2003-04 and to the extent of ₹ 8,15,01,718/- in AY 2004-05 – Decided in favour of assessee. Issues Involved:1. Segregation vs. Aggregation of CPD and SPD divisions.2. Valuation by the Special Valuation Cell of the Customs Department.3. Treatment of reimbursement of advertisement expenses.4. Allocation of unallocated expenses to the ISD division.5. Use of current year data for computation of Arm's Length Price (ALP).6. Penalty under Section 271(1)(c) of the Income Tax Act.Issue-wise Detailed Analysis:1. Segregation vs. Aggregation of CPD and SPD divisions:The Tribunal examined whether the segregation of the CPD and SPD divisions by the Transfer Pricing Officer (TPO) was justified. The assessee argued that the functions performed, risks assumed, and assets employed by both divisions were identical, and the Tribunal had previously ruled in favor of the assessee on similar grounds for AY 2002-03. The Tribunal reiterated that the segregation was artificial and uncalled for, confirming that both divisions should be treated as a whole for transfer pricing purposes. Consequently, the additions made by the TPO and confirmed by the CIT(A) were deleted.2. Valuation by the Special Valuation Cell of the Customs Department:The assessee contended that the Customs Department's valuation should guide the TPO's adjustments. The Tribunal dismissed this argument, stating that customs valuation serves different purposes than transfer pricing regulations under Chapter X of the Income Tax Act. Thus, the Tribunal upheld the CIT(A)'s decision, ruling against the assessee on this issue.3. Treatment of reimbursement of advertisement expenses:The Tribunal addressed whether the reimbursement of advertisement expenses by the assessee's associated enterprises (AEs) should be considered as non-operating revenue. The Tribunal, following its earlier decision for AY 2002-03, held that such reimbursements should form part of the operating profit, either by adding to income or reducing the expenditure. The Tribunal concluded that the TPO and CIT(A) were wrong in excluding these reimbursements while calculating the Profit Level Indicator (PLI).4. Allocation of unallocated expenses to the ISD division:The Tribunal considered whether the allocation of unallocated expenses to the ISD division was justified. Referring to its previous decision for AY 2002-03, the Tribunal held that the allocation was unreasonable and not supported by the facts. The Tribunal ruled in favor of the assessee, stating that the expenses should not be allocated to the ISD division.5. Use of current year data for computation of Arm's Length Price (ALP):The Tribunal examined whether only the current year data should be used for computing ALP. The CIT(A) had held that data from the relevant financial year should be used, a position supported by the Tribunal in its earlier decision for AY 2002-03. The Tribunal upheld this view, dismissing the revenue's appeal and confirming that only the current year data should be used for ALP computation.6. Penalty under Section 271(1)(c) of the Income Tax Act:The Tribunal addressed the imposition of penalties for AY 2003-04 and 2004-05. The assessee argued that since the quantum appeals were decided in its favor, the penalties were not sustainable. The Tribunal agreed, noting that once the additions were deleted, there could be no tax sought to be evaded, and thus, no basis for imposing penalties. The Tribunal allowed the assessee's appeals, directing the AO to delete the penalties.Conclusion:The Tribunal's consolidated order favored the assessee on most issues, particularly on the segregation of CPD and SPD divisions, reimbursement of advertisement expenses, and allocation of unallocated expenses. The Tribunal upheld the CIT(A)'s decision on using current year data for ALP computation and dismissed the revenue's appeals. Finally, the Tribunal directed the deletion of penalties imposed under Section 271(1)(c) of the Income Tax Act.