2016 (6) TMI 588 - AT - Income Tax

Tribunal overturns penalty order under Income-tax Act, citing taxpayer's good faith and diligence.

Mitsui Prime Advanced Composites India Pvt. Ltd. Versus DCIT, Circle-6 (1), New Delhi.

Mitsui Prime Advanced Composites India Pvt. Ltd. Versus DCIT, Circle-6 (1), New Delhi. - TMI Issues Involved:1. Imposition of penalty under Section 271(1)(c) of the Income-tax Act, 1961.2. Determination of Arm's Length Price (ALP) for international transactions.3. Application of Transactional Net Margin Method (TNMM) vs. Comparable Uncontrolled Price (CUP) method.4. Proof of availing services and the benefit derived therefrom.5. Duplication of services.6. Good faith and due diligence in computation of ALP.Issue-wise Detailed Analysis:1. Imposition of Penalty under Section 271(1)(c):The appeal contests the penalty of Rs. 1,20,00,000/- imposed by the AO and confirmed by the CIT(A). The penalty was based on the addition of Rs. 3,31,89,364/- due to transfer pricing adjustments. The assessee argued that the penalty was unjustified as there was no concealment of income or furnishing of inaccurate particulars. The Tribunal examined whether the penalty could be imposed under Explanation 7 to Section 271(1), which deems any addition due to transfer pricing adjustments as concealed income unless the assessee proves compliance with Section 92C in good faith and with due diligence.2. Determination of ALP for International Transactions:The assessee, a subsidiary of Mitsui Chemicals Inc., reported six international transactions and applied the TNMM to demonstrate that these transactions were at ALP. The TPO accepted all transactions except for three: 'Availing of specified business and consultancy services,' 'Availing of engineering support services,' and 'Availing of management support services.' The TPO determined the ALP of these transactions at Nil under the CUP method, leading to the transfer pricing adjustment.3. Application of TNMM vs. CUP Method:The Tribunal noted that the assessee applied TNMM in accordance with Section 92C, which was rejected by the TPO in favor of the CUP method. The Tribunal found that the assessee's application of TNMM was in good faith and with due diligence. The TPO's application of the CUP method without bringing any comparable instances was deemed faulty.4. Proof of Availing Services and Benefit Derived:The TPO held that the assessee did not avail any services or that there was a duplication of services. The Tribunal found that the assessee did receive services and benefits, as evidenced by agreements and the setting up of a manufacturing facility. The Tribunal emphasized that the benefit test applied by the TPO was not determinative of ALP and that business decisions could result in losses without impacting the genuineness of the transactions.5. Duplication of Services:The TPO's assertion of duplication of services was rejected by the Tribunal. The assessee's agreements for consultancy, engineering support, and management support services were found to be genuine and necessary for its business operations. The Tribunal highlighted that the services were essential for the assessee's transition from trading to manufacturing.6. Good Faith and Due Diligence in Computation of ALP:The Tribunal concluded that the assessee computed the ALP in good faith and with due diligence. The TPO's determination of Nil ALP was found to be unsubstantiated and contrary to the material on record. The Tribunal held that the mere fact of transfer pricing adjustment does not automatically justify the imposition of penalty under Section 271(1)(c).Conclusion:The Tribunal allowed the appeal, setting aside the penalty order and deleting the penalty. It emphasized that penalty proceedings are distinct from assessment proceedings and that the imposition of penalty requires a thorough evaluation of the circumstances leading to the addition. The Tribunal found that the assessee acted in good faith and with due diligence in determining the ALP of the international transactions, and the TPO's actions were not in accordance with the law.