2016 (8) TMI 1287 - HC - Income Tax

High Court Upholds ITAT Decision on Income Tax Appeal Despite Revenue's Delay

The High Court dismissed the appeal against the Income Tax Appellate Tribunal's order due to a 550-day delay in refiling by the revenue. The dispute ... Penalty u/s 271(1)(c) - transfer pricing adjustment - TPO rejected nine comparables - Held that:- The assessee in this case could not, in the opinion of this Court, visualize that out of the twelve comparables furnished, nine would be rejected and the matrix of calculations, as it worked, would radically undergo change. Pertinently, for the previous year 2006-07, the assessee’s comparables – including some of those which were rejected in the present order, were in fact accepted when the matter reached finality. In these circumstances, the interpretation adopted by the AO was plainly erroneous. The Court is also of the opinion that in the absence of any overt act, which disclosed conscious and material suppression, invocation of Explanation 7 in a blanket manner could not only be injurious to the assessee but ultimately would be contrary to the purpose for which it was engrafted in the statute. It might lead to a rather peculiar situation where the assessees who might otherwise accept such determination may be forced to litigate further to escape the clutches of Explanation 7. No substantial question of law. Issues:- Appeal against the order of Income Tax Appellate Tribunal barred due to delay of 550 days.- Dispute regarding transfer pricing report for AY 2007-08.- Rejection of comparables by Transfer Pricing Officer (TPO) and determination of Arms Length Pricing (ALP).- Assessment of penalty under Explanation 7 to Section 271(1)(c).- Interpretation of AO's decision and invocation of Explanation 7.- Consideration of circumstances and rejection of appeal.Issue 1: Appeal Barred Due to DelayThe High Court found that the appeal against the Income Tax Appellate Tribunal's order was barred due to a delay of 550 days in refiling by the revenue. Consequently, solely on this ground, the appeal was deemed liable for rejection.Issue 2: Dispute Over Transfer Pricing ReportDuring the relevant period of Assessment Year 2007-08, the assessee had relied on a transfer pricing report for tax purposes. The report utilized the Transactional Net Margin Method (TNMM) under Section 92C of the Income Tax Act, 1961, seeking the benefit of six comparables. However, the TPO rejected nine out of twelve comparables, leading to a determination of Arms Length Pricing (ALP) and adjustments in the final return by the Assessing Officer (AO).Issue 3: Assessment of Penalty Under Explanation 7The AO, in line with the TPO's determination, believed that the addition should be deemed as income under Explanation 7 to Section 271(1)(c), making the assessee liable for penalty. However, the ITAT set aside the AO's order, leading to a dispute over the interpretation and application of Explanation 7.Issue 4: Interpretation of AO's Decision and Explanation 7The High Court analyzed the circumstances and found that the AO's interpretation, invoking Explanation 7 without evidence of conscious and material suppression, was erroneous. The Court highlighted the potential adverse impact on the assessee and the purpose of Explanation 7, emphasizing that such blanket application could lead to unnecessary litigation and contradict the statute's intent.Issue 5: Rejection of AppealConsidering the facts and legal principles, the Court dismissed the appeal, concluding that no substantial question of law arose. The Court expressed satisfaction that the invocation of Explanation 7 in this case was unwarranted, leading to the rejection of the appeal and the pending application.This comprehensive analysis of the judgment covers the issues involved in the case, detailing the legal aspects and reasoning behind the High Court's decision.