ITAT Delhi Rules on Time-Barred Reassessment and Characterisation of AE Subsidy in Transfer Pricing

Background of the Dispute

The matter before the Delhi Bench of the Income Tax Appellate Tribunal involved Chanel (India) Private Limited Vs DCIT for Assessment Year 2012-13. The assessee, a distributor of premium fashion and beauty products in India, challenged:

  • The validity of reassessment under Section 147 read with Section 143(3) and Section 144C of the Income Tax Act 1961, and
  • A transfer pricing (TP) adjustment of ₹3,08,28,457, arising from the treatment of subsidy received from its Associated Enterprise (AE) as non-operating income.

The reassessment was framed after the original scrutiny assessment under Section 143(3) had already been completed and the Transfer Pricing Officer (TPO) had earlier accepted the international transactions, including the subsidy treatment, without proposing any adjustment.

The Tribunal ultimately:

  • Quashed the reassessment as being beyond jurisdiction, and
  • Deleted the TP adjustment by holding the subsidy to be operating in nature.

Facts in Brief

Business Profile and International Transactions

The assessee, Chanel India Private Limited, is a subsidiary of Chanel International BV and functions as a distributor of high-end fashion and beauty products in India under a distribution arrangement with its AEs.

For AY 2012-13, the assessee reported, among others, the following cross-border transactions with its AE:

  • Purchase of traded goods (High-end fashion products) – ₹13,36,70,645
  • Receipt of subsidy from AE – ₹3,11,24,885

The assessee:

  • Applied the Transactional Net Margin Method (TNMM) as the Most Appropriate Method,
  • Aggregated the purchase of goods and the subsidy, considering them as closely linked transactions arising from the same distribution arrangement, and
  • Treated the subsidy as operating income while computing its Profit Level Indicator (PLI).

In the original TP proceedings under Section 92CA(3), the TPO accepted:

  • The use of TNMM,
  • The aggregation approach, and
  • The treatment of subsidy as part of operating revenue.

The original assessment under Section 143(3) dated 29.03.2016 accepted the assessee’s returned income (Nil) without any TP adjustment.

Reopening of Assessment under Section 147

Initiation of Reassessment

A notice under Section 148 was issued for AY 2012-13 after the expiry of four years from the end of that assessment year. The reassessment was triggered on the basis that the subsidy from the AE had allegedly been wrongly treated as operating income, resulting in purported under-reporting of profits for TP purposes.

However:

  • The assessee’s return had been scrutinised under Section 143(3),
  • No fresh or new material was cited in the reasons for reopening, and
  • The reasons did not allege any failure on the part of the assessee to fully and truly disclose all material facts.

Disclosures Made in Original Proceedings

The assessee demonstrated that the subsidy transaction had been fully disclosed at multiple stages:

  1. In submissions before the TPO/AO during the original TP and assessment proceedings, including details of international transactions;
  2. In Form 3CEB, which clearly reported the international transaction of receipt of subsidy from Chanel Hongkong;
  3. In the Transfer Pricing Study Report, which:
    • Discussed the distribution model,
    • Explained the nature of subsidy, and
    • Benchmarked the aggregated transactions under TNMM;
  4. In the distribution agreement dated 01.01.2005 between the assessee and Chanel Hongkong, filed before the TPO;
  5. In the audited financial statements, wherein the subsidy was disclosed under the head “Other Operating Revenues”.

Thus, all primary and material facts regarding the subsidy were placed on record during the original assessment.

The assessee argued, and the Tribunal accepted, that in a case where:

  • An assessment has been completed under Section 143(3), and
  • Reopening is sought after four years,

the first proviso to Section 147 mandates that reassessment can only be initiated if:

  • Income has escaped assessment due to failure by the assessee to:
    • File a return under Section 139 or Section 148, or
    • Comply with notices under Section 142(1), or
  • The assessee has failed to disclose fully and truly all material facts necessary for its assessment.