2012 (11) TMI 1348 - AT - Income Tax

Penalty under s.271AA deleted where reasonable cause under s.273B and s.92A/92D inapplicable after AO confined to s.40A(2)

ITAT Mumbai allowed the assessee's appeal and directed deletion of the penalty under section 271AA. The Tribunal held that the deeming clauses of s.92A ... Imposition of penalty u/s 271AA - international transaction between the associated enterprises - failure to keep and maintain information and document under section 92D - associated enterprises within the meaning of section 92A - effect of deeming clauses - Whether the assessee and M/s. Poly Diam NV are associated enterprises or not - HELD THAT:- Once the case is covered under any of the clause (a to m) it would be considered that the two enterprises are associated enterprises. The use of the words “deemed to be” in sub-section (2) of section 92A, as per the learned D.R., clearly suggests that there is no need to go to sub-section (1) of section 92A and such deeming provision should be read in isolation. It is relevant to note that section 271AA is subject to section 273B. Section 273B, in turn, provides that notwithstanding anything contained in the provisions of the relevant sections including section 271AA, no penalty shall be imposed if one proves that there was a reasonable cause for the failure as prescribed in the concerned section. The assessee was consistently harping on the view that M/s. Poly Diam NV is not its associated enterprise and such opinion about the two enterprises as non AEs is supported by an article. In such a situation it can be considered as a good ground for believing that both were not the associated enterprises and as such there was no need to maintain the records/documents as per section 92D of the Act. Suffice to say, there is a reasonable cause for the assessee to entertain a view that both are not the associated enterprises. In our considered opinion the assessee is covered under the shelter of section 273B, requiring non-imposition of any penalty under section 271AA. Another interesting aspect of this matter. When the AO, in the instant case, proceeded with section 40A(2) ignoring section 92, he impliedly restricted his scope to section 40A(2) alone. If he has not considered it as an international transaction between two associated enterprises, the provisions of section 92D requiring maintenance of information and documents in respect of an international transaction, cannot apply. Naturally, if section 92D cannot apply, the only corollary which can follow is that section 271AA also cannot apply. We, therefore, set aside the order of the learned CIT (A) and direct to delete the penalty. In the result, appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the assessee and the foreign entity constitute 'associated enterprises' within the meaning of section 92A so as to attract the transfer-pricing documentation obligation under section 92D and the consequential penalty under section 271AA. 2. Whether subsection (2) of section 92A (the deeming clauses) can be read in isolation of subsection (1), i.e., whether satisfaction of any clause in section 92A(2) alone suffices to treat two enterprises as associated enterprises without regard to the conditions in section 92A(1). 3. Whether failure to maintain information/documents required under section 92D attracts penalty under section 271AA where the assessee entertained a bona fide/arguable view that the entities were not associated enterprises (application of section 273B - reasonable cause). 4. Whether the Assessing Officer's treatment of the transactions under section 40A(2)(b) (and not under Chapter X/section 92) precludes invocation of section 92D and, consequently, penalty under section 271AA. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether the enterprises are 'associated enterprises' for purposes of section 92A and applicability of section 92D/271AA Legal framework: Section 92A defines 'associated enterprises'; section 92B defines 'international transaction' as a transaction between two or more associated enterprises; section 92D mandates maintenance of prescribed information/documents in respect of international transactions; section 271AA imposes penalty for failure to keep/maintain such documents. Precedent Treatment: The authorities below treated the entities as associated enterprises by classifying the relationship under clause (j) of section 92A(2), thereby invoking section 92D and imposing penalty under section 271AA. Interpretation and reasoning: The Tribunal observed that section 92D applies only when there is an international transaction, and an international transaction exists only between associated enterprises as defined in section 92A. Thus, determination of associated enterprise status is a pre-condition to invoking section 92D and section 271AA. The Tribunal declined to finally decide the pure question whether subsection (2) operates independently of subsection (1), and instead based its decision on alternative grounds (reasonable cause and AO's treatment under section 40A(2)(b)). Ratio vs. Obiter: The proposition that section 92D is inapplicable unless the enterprises are associated enterprises (as a threshold) is ratio. Any definitive pronouncement on whether s.92A(2) can be read independently was explicitly eschewed and thus is obiter. Conclusion: As a threshold matter, penalty under section 271AA can be levied only if the transaction qualifies as an international transaction between associated enterprises; absent such characterisation, section 92D and 271AA do not apply. Issue 2 - Whether section 92A(2) (deeming clauses) can be read independently of section 92A(1) Legal framework: Section 92A(1) describes situations of participation in management/control/capital; section 92A(2) contains clauses (a)-(m) with the words 'shall be deemed to be associated enterprises'. Precedent Treatment: The Department argued that the deeming language in sub-section (2) obviates the need to consider sub-section (1); the assessee and lower authorities adopted the contrary view that both sub-sections must be read together. Interpretation and reasoning: The Tribunal acknowledged the controversy and explicated the competing contentions. However, the Tribunal deliberately refrained from laying down a binding rule on the interpretative relationship between sub-sections (1) and (2), stating that it would not express a final view on whether the two sub-sections are to be read conjunctively or disjunctively in law. Ratio vs. Obiter: The Tribunal's refusal to decide the interpretative conflict is not a ratio on that point; it is an intentional non-decision (obiter/not decided). Conclusion: The question whether s.92A(2) is to be read independently of s.92A(1) remains unresolved by this decision; the Tribunal did not decide the point. Issue 3 - Application of section 273B (reasonable cause) to penalty under section 271AA Legal framework: Section 273B provides that no penalty shall be imposed under the relevant penalty provisions if the assessee proves reasonable cause for failure to comply with the provision attracting penalty. Precedent Treatment: The assessee consistently maintained that it honestly believed the foreign entity was not an associated enterprise and relied on an article/opinion to support that arguable position. Interpretation and reasoning: The Tribunal held that where the assessee had an arguable and bona fide view (supported by a published article and consistently maintained before authorities) that the entities were not associated enterprises, that constituted reasonable cause under section 273B. The Tribunal expressly refrained from adjudicating the ultimate legal correctness of the view; rather it treated the existence of a genuine, arguable belief as sufficient to negate imposition of penalty under section 271AA. Ratio vs. Obiter: The finding that a genuinely held, arguable/legal view as to non-association may constitute reasonable cause under s.273B is part of the decision's ratio insofar as it disposed of the penalty question in this case. Conclusion: The assessee's bona fide and arguable belief that the entities were not associated enterprises amounted to reasonable cause under section 273B, precluding penalty under section 271AA. Issue 4 - Effect of the Assessing Officer applying section 40A(2)(b) (and not Chapter X/section 92) on the applicability of section 92D/271AA Legal framework: Section 40A(2)(b) deals with disallowance of excess payment to specified related persons for computing allowable expenses; Chapter X (sections 92 et seq.) deals specifically with international transactions between associated enterprises and prescribes documentation obligations (section 92D). Precedent Treatment: In assessment, the AO made addition under section 40A(2)(b) for alleged excess payments and did not invoke transfer-pricing provisions of Chapter X when computing income; the CIT(A) had deleted the addition in quantum proceedings but sustained the penalty. Interpretation and reasoning: The Tribunal reasoned that the scope and trigger of section 40A(2)(b) differ from the transfer-pricing provisions: section 40A(2)(b) applies to payments in relation to specified persons generally, whereas Chapter X requires the specific threshold of associated enterprises and international transaction. Because the AO proceeded under section 40A(2)(b) and did not treat the matter as an international transaction between associated enterprises, the requirements of section 92D (and thus the penalty under section 271AA) were not properly engaged. The Tribunal held that if the AO did not consider the transaction as an international transaction between associated enterprises in the assessment, section 92D could not be applied retrospectively to justify penalty under section 271AA. Ratio vs. Obiter: The Tribunal's conclusion that invoking section 40A(2)(b) (without invoking Chapter X) precludes application of section 92D/271AA in the assessment context is part of the operative ratio disposing of the penalty appeal. Conclusion: The AO's treatment of the transactions under section 40A(2)(b), rather than as international transactions under Chapter X, meant section 92D was not applicable in the assessment as conducted; accordingly, section 271AA could not be sustained on that basis. Overall Disposition On the combined grounds that (a) the assessee had a bona fide, arguable belief that the foreign entity was not an associated enterprise amounting to reasonable cause under section 273B, and (b) the AO proceeded under section 40A(2)(b) (not under Chapter X/section 92), the Tribunal set aside the order upholding penalty under section 271AA and deleted the penalty.