2022 (10) TMI 602 - AT - Income Tax

Assessee's Appeals Allowed, Penalties Deleted, Department's Objections Dismissed

The Tribunal allowed the appeals of the assessee, directing the deletion of penalties under Section 271(1)(c) for all assessment years. The Department's ... Penalty u/s 271(1)(c) - TP Adjustment - price being charged by the assessee to its Associated Enterprises for services rendered for the future assessment years - HELD THAT:- On the levy of penalty, we are in agreement with the arguments put forward by the counsel for the assessee to the effect that the assessee has consistently taken the position that the lower mark-up charged in respect of services rendered to associated enterprises, for the reason that transfer pricing provisions are not attracted in cases where there is no base erosion, so far as taxes are concerned. Assessee had made adequate disclosure of all the material facts in Form 3CEB, TPSR and also during the course of the transfer pricing assessment proceeding and scrutiny assessment proceedings. Therefore, there is no furnishing of any inaccurate particulars of income by the assessee. We also observe that it has been held by various Courts that Explanation 7 to Section 271(l)(c) of the Act cannot be invoked while levying penalty in relation to the transfer pricing adjustment, when the said Explanation was neither referred nor relied upon at the time of initiation of the penalty proceedings under the Act. Another noteworthy point is that in our view, the additions on which penalty has been levied is a debatable issue. This is evident from the fact that 'Base Erosion' [2016 (7) TMI 760 - ITAT KOLKATA] issue was dealt by the Special Bench -Kolkata ITAT. Further, Pune ITAT has also upheld argument of Base Erosion and hence, two views are possible since at the time of hearing before Pune ITAT, it took an independent view since Kolkata SB decision was rendered after the Pune ITAT decision. The fact that Gujarat High Court has admitted the issue for consideration also supports the assessee’s contention that the issue involved is debatable. So far as penalty with regards to reimbursement of expenses is being treated as FTS is concerned, in our view, it is a debatable issue whether reimbursement of expenses qualifies as FTS and there are various decisions which have held that reimbursement of expenses does not qualify as FTS. Accordingly, we are of the considered view that no penalty can be levied u/s 271(1)(c) of the Act on account of treating reimbursement of expenses as FTS. We are of the considered view, that in the instant set of facts, no penalty u/s 271(1)(c) of the Act is liable to be imposed on the assessee. Accordingly, we direct that the penalty u/s 271(1)(c) of the Act be deleted in the instant set of facts. Levy of penalty u/s 271(1)(c) - addition made on account of higher profit attributable to project office (PO) - HELD THAT:- While preparing the profit attributable report by third-party consultant, view was taken that single year data would not adequately capture the market and business cycle of the broad range of comparables. Therefore, multiple year data for undertaking a compatibility analysis was taken since it would produce better results and therefore use of such data is more appropriate than using a single year approach. As in the instant set of facts, while determining the profits attributable to project office, the assessee placed reliance on profit attribution report prepared by third-party consultant. Further, the complete basis for determining the profits attributable to the PO were adequately documented and prepared by third-party consultant. Only because there was a difference of opinion between the approach adopted by the assessee and the Ld. Assessing Officer for determining the profits attributable to the PO, this would itself not a sufficient to impose penalty u/s 271(1)(c) of the Act. In fact, from the observations of the Ld. Assessing Officer, it is evident that this is not a fit case for imposing penalty u/s 271(1)(c) of the Act. Issues Involved:1. Levy of penalty under Section 271(1)(c) of the Income-tax Act, 1961.2. Validity of the Power of Attorney notarized in the Netherlands.3. Treatment of reimbursement of expenses as Fees for Technical Services (FTS).4. Transfer pricing adjustments and the principle of base erosion.5. Attribution of higher profits to the project office.Detailed Analysis:1. Levy of Penalty under Section 271(1)(c) of the Income-tax Act, 1961:The primary issue in these appeals is the levy of penalty under Section 271(1)(c) of the Income-tax Act, 1961, for alleged concealment of income and furnishing inaccurate particulars. The assessee argued that the penalty should not be levied because the notice issued under Section 274 r.w.s. 271(1)(c) did not specify the exact limb under which the penalty proceedings were initiated. The Tribunal observed that the assessee had consistently taken a position that transfer pricing provisions were not attracted in cases where there was no base erosion. The assessee had made adequate disclosures in Form 3CEB, TPSR, and during the course of assessment proceedings. The Tribunal held that no penalty could be levied as the issue was debatable, and there was no furnishing of inaccurate particulars of income.2. Validity of the Power of Attorney Notarized in the Netherlands:The Department raised cross objections challenging the validity of the Power of Attorney notarized in the Netherlands. The Tribunal noted that the cross objections were barred by 880 days, and the Department did not provide any substantial reason for the delay. Consequently, the Tribunal dismissed the cross objections filed by the Department due to the inordinate delay and lack of cogent reasons.3. Treatment of Reimbursement of Expenses as Fees for Technical Services (FTS):The assessee contested the levy of penalty on the addition made by treating reimbursement of expenses as FTS under Article 12 of the India-Netherlands Tax Treaty. The Tribunal observed that it was a debatable issue whether reimbursement of expenses qualifies as FTS, and various decisions have held that it does not. Therefore, the Tribunal concluded that no penalty could be levied on this account.4. Transfer Pricing Adjustments and the Principle of Base Erosion:The assessee argued that the transfer pricing adjustments should not lead to the levy of penalty as the principle of base erosion was not applicable. The Tribunal noted that the issue of base erosion was dealt with by the Special Bench of Kolkata ITAT in the case of Instrumentarium Corporation, which was decided against the assessee. However, the Tribunal observed that the assessee had consistently charged lower rates to its Associated Enterprises (AEs) even when the AEs started making profits, indicating a consistent position on base erosion. The Tribunal held that the issue was debatable and that the penalty under Section 271(1)(c) could not be imposed.5. Attribution of Higher Profits to the Project Office:For the assessment year 2009-10, an additional issue was the levy of penalty on the addition made on account of higher profit attribution to the project office. The assessee argued that the profit attribution report was prepared using the OECD authorized approach, and multiple year data was considered to capture the market and business cycle adequately. The Tribunal observed that the difference of opinion between the approach adopted by the assessee and the AO for determining the profits attributable to the project office did not warrant the imposition of penalty. The Tribunal concluded that the penalty under Section 271(1)(c) could not be imposed in this case.Conclusion:The Tribunal allowed the appeals of the assessee and directed that the penalty under Section 271(1)(c) be deleted for all assessment years under consideration. The cross objections filed by the Department were dismissed due to the inordinate delay in filing. The Tribunal emphasized that the issues involved were debatable, and the assessee had made adequate disclosures, thereby negating the grounds for imposing penalties.