TaxTMI 
TaxTMI 
2016 (4) TMI 209
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....case for imposition of penalty u/s 271(1)(c) thereby deleting the penalty of Rs. 51,47,940/- levied for assessment year 2007-08. 2. The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of the hearing." 2. The relevant facts of the case relatable to the issue are that the assessee i.e. Boston Scientific India Pvt. Ltd. (previously known as Guidant India Private Limited) is a company incorporated under the Indian Companies Act, 1956 in July 2003. It is stated to be primarily engaged in promotion, marketing, sales and distribution in India of a wide range of cardio-vascular products and related medical instruments and equipments manufactured by the Boston group. The assessee is also stated to be providing post sales related support services. The AO in both the assessment years referred the matter to the Transfer Pricing Officer (hereinafter referred to as "TPO") for determination of arm's length price of the international transactions. 3. The record shows that in the AY 2006-07, the assessee had only one business segment, namely, distribution of medical equipments which were imported from the related parties. This was the only internat....
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....oposed an addition of Rs. 1,52,93,937/- by way of adjustment in the international transaction of the assessee. 3.3. In both the years, the assessee did not go in appeal against the additions made by the AO pursuant to the TPO's order. 4. As a result of the additions to the income of the assessee in the respective years the AO initiated penalty proceedings u/s 271(1)(c) and required the assessee to explain why penalty u/s 271(1)(c) should not be imposed for the years in consideration. 4.1. The assessee in the course of the penalty proceedings for the A.Y.2006-07 vide letter dated 10.06.2010 (copy at page 47 of the paper book) submitted that the addition was accepted as the company wanted to do away with unnecessary litigation. 4.1.1. It was also pleaded that due taxes on the additions were promptly paid proved it's bona fide. 5. Similar submissions were offered in the penalty proceedings in A.Y.2007-08 through letter dated 19.07.2011 before the AO (copy at page no.114 of the paper book). 6. Not convinced with the explanation offered, the AO held that the assessee's explanation could not be accepted on the following grounds:- (i) "The change of most appropriate method; (ii....
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....eport and the financial of the assessee were examined. As per details furnished in transfer pricing report, the assessee i.e. Guidant India has been classified as a distributor which carries out marketing, promotion, sales and distribution of Guidant products in India. The assessee is a 100% subsidiary distributor of its AE. The financials of the assessee including P&L account were examined. It was found that the assessee in the current year had incurred a loss of Rs. 79.05 lacs on a turnover of Rs. 37.61 Crs. As compared to this, the assessee had shown a profit of Rs. 3.72 Crs on a turnover of Rs. 28.27 Crs in the previous year i.e FY 2004-05. 5.1.2. Show cause notice to the assessee: Vide order sheet entry dated 03.08.2009, the assessee was asked to state the reasons for incurring of losses at the net level. The assessee was also asked to state as to whether there were international transaction below the Gross Profit Margin and how they were impacting the profitability of the assessee. The assessee was further asked to state that why it has changed the method of benchmark international transactions from TNMM used last year to Resale Price Method (RPM). The assessee was a....
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....ld applying the correct provision. Accordingly, placing heavy reliance upon the said explanation, it was his submission that when considered in the light of Explanation 7 of section 271(1)(c), the impugned order deserves to be set aside and the penalty order should be upheld. In the facts of the present case it was re-iterated that the additions made have been accepted by the assessee. Accordingly relying upon the decision of G.C.Agarwal (1994)186 ITR 571 (SC) and ACIT vs Jeevan Lal Shah (1994) 205 ITR 244 (SC), it was his submission that penalty imposed deserved to be upheld in both the years. 11. The Ld. AR heavily relying upon the impugned order invited specific attention to the facts recorded by the CIT(A) in paras 4.1 to 4.4 of his order. Since it is a consolidated order for both the years under consideration, heavy reliance was placed thereon. It was his submission that in both the years the assessee vide letters dated 10.06.2010 and 19.07.2011 in the two years under consideration (copies placed at Paper Book pages 47 and 114 respectively) has made it clear that the additions had been accepted only because the assessee did not want to enter into unnecessary litigation. It wa....
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.... evident from the table 2 in para 5.1.5 of the impugned order. 11.7. Similarly in 2007-08 AY it was submitted if Table 3 in the same para of the CIT(A)'s order is considered it would show that whatever method is considered the margin would be within +/- 5%. 11.8. It was also his submission that the arguments of the Ld.CIT DR that the assessee had marketing intangibles is of no relevance. Inviting attention to TPO's order internal page 3 of Paper Book page 9 in the context of page 41 internal page 3 of the Transfer Pricing Study Report, it was submitted that the assessee had shown the following international transactions in 2006-07 AY:- Nature of International Transaction Most Appropriate Method Profit Level Indicator Guidant India's Price/Gross Profit Margin Comparables Price/Gross Profit Margin (Arithmetic Mean) Purchase of finished products/equipments Purchase of promotional units Recharges from/to Group Cos. Resale Price Method ('RPM') Gross Profit/Sales ('GP/Sales') 39% 21% Receipt of IT Services Comparable Uncontrolled Price Method (CUP) N.A. Refer Paras 1.4.1 to 1.4.3 below Refer paras 1.4.1 to 1.4.3 below Reimbursement of expenses CUP ....
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....rt of chapter X of the Income Tax Act, 1961" and in the facts of the present case this was not even the case of the AO. 13. We have heard the rival submissions and perused the material available on record. In the facts of the present case admittedly the AO wrongly invoked Explanation 1 of section 271(1)(c) instead of Explanation 7 of section 271(1)(c). Thus noting that the request was not opposed on behalf of the assessee, we allow the prayer of the Ld.CIT DR in the peculiar facts and circumstances of the case that the issues be considered in the light of Explanation 7 to section 271(1)(c) instead of Explanation 1 of section 271(1)(c). 13.1. The relevant provisions of section 271(1)(c) are set out hereunder for ready-reference:- 271(1). "If the [Assessing] Officer or the [Commissioner (Appeals) [or the [Principal Commissioner or] Commissioner] in the course of any proceedings under this Act, is satisfied that any person- (a) ************** (b) ************** (c) Has concealed the particulars of his income or furnished inaccurate particulars of [such income, or] (d) ************* Explanation 7:- Where in the case of an assessee who has entered into an internationa....
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....perations are carried out on by Guidant India, a wholly owned indirect subsidiary. 2.2. Group companies own significant valuable intellectual property rights and other commercial or marketing intangibles and are involved in complex product development, manufacturing and brand development of the products. Group Companies also bear significant business and entrepreneurial risks of products acceptability and performance in the market. 2.3.Guidant India is primarily engaged in the promotion, sales, marketing and distribution of the cardiovascular medical products and equipments of the Guidant Group and related post sale support services. While carrying out such business operations, Guidant India undertakes comparatively lower risks than GroupCos and utilize routine tangible assets." 13.5. On consideration of facts which have been addressed in the earlier part of this order elaborately it is evident that it is undisputed that the most appropriate method selected by the assessee was varied by the TPO after giving the assessee a reasonable opportunity of being heard. It is seen that the assessee had raised various arguments opposing the change of method and defended unsuccessfully....
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....5% -28.13% 5. Duchem Laboratories Limited -9.57% -23.01% 6. Fulford (India) Limited 45.37% 16.25% Average 24.13% -2.71% Company Margins 38.86% -1.47% In the same way for the AY 2007-08 it is contended that the margin of the appellant will fall within +/- 5% by using the same set of 9 comparables used in the TP study with current year data in both the methods:- For AY 2007-08 TNMM RPM S. No. Name of the Comparable OP/Sales (%) GP/Sales (%) 1. Abott India Ltd. 13.50 32.81 2. Advanced Micronic Devices Ltd. 10.15 47.62 3. BA & Brothers (Eastern) Limited 2.64 9.67 4. Bijoy Hans Limited -68.89 6.25 5. Hemant Surgical Inds Ltd. 3,73 10.24 6. Mark remedies Ltd. Date Not available Data Not available 7. Remi Sales & engg. Ltd. Average 3,77 18.52 8. Sharon Bio-Medicine Ltd. 14.98 14.36 9. Vivo Bio Tech Ltd. -212.12 17.50 Arithmetic Mean -29.03% 19.62%" 13.7. When considering the requirements of the statutory provision it is seen that a deeming fiction is created by Explanation 7 which is a special provision with regard to the arm's length price made by the AO u/s 92C(4). The deemin....
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....s found to be correct. Whether the said fact can be said to be so persuasive as to lead only to the inference that the exercise was in good faith following the due diligence standards set out by the statute and thus warrants on conclusion in favour of the assessee or not is a matter for consideration. 13.8.2. Good faith presupposes honesty and fairness at its core. However, good faith does not cover the sins of omission or negligence. Due diligence on the other hand does not tolerate negligence and may be defined as prudent, responsible care and attention required to be exercised by a reasonable and prudent person in a given situation. Thus, as observed in acts of "good faith" it may not be possible to question negligence where due diligence standards are required to be met negligence cannot be tolerated. Similarly due diligence standards may not necessarily be embedded with good faith. 13.8.3. Thus the law requires that the standards to be met by a taxpayer pleading that penalty is not leviable in situations where Explanation 7 is attracted has been kept very high. The twin requirements of the Act may be capable of being summed up in the term "best efforts" which not only presup....
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....d any argument on fact or law to the contrary. 13.9. The assessee's conduct which further needs to be considered is whether in offering the comparables the "best efforts" practices were followed by it, as the due diligence standards and good faith standards requirement qua the said issue also needs to be met. It is a matter of record that in both the years under consideration the additions are based on the comparables offered by the assessee. Not even one comparable has been introduced by the TPO. The fact that all the comparables offered were not accepted by the TPO in both the years or alternatively the TPO has partially accepted the comparables offered by the assessee in both the years are facts which support the due diligence and good faith standards. Addressing the comparable excluded by the TPO no case has been made by the Revenue to show that by offering the comparables excluded the assessee was so careless, negligent or lacking in good faith that the exercise was done with malafide to defraud the Revenue. The fact that the comparables retained were offered by the assessee and no comparable has been introduced by the TPO itself leads to the conclusion that due diligence has....
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....ind that one of the years under consideration is 2006-07 AY and the other is 2007-08 AY. The Transfer Pricing Study for these two years has been finalised in 2006 and 2007. Thus it can be safely concluded that the issue was then debatable. Once it is seen that on the issue of single year data or multiple year data there was a debate till 2007, the transfer pricing study having been prepared using multiple year data in 2006-07 and 2006-07 AYs cannot be held to be a malafide exercise computed in gross carelessness in order to defraud the Revenue. As single year data at the behest of the TPO was provided and due taxes on the adjustments made were paid promptly the only conclusion that could be drawn in the peculiar facts and circumstances of the case is that the use of multiple year data was done with due diligence and in good faith as till 2007 the issue was debatable. 13.11. It is even otherwise evident from the record that even before the CIT(A) the assessee has argued in support of its claim of good faith and due diligence in selecting the method and the comparables originally offered by way of comparable charts extracted in the impugned order demonstrating that whatever method i....
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....e the assessee to penalty, unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By no stretch of imagination can making an incorrect claim tantamount to furnishing inaccurate particulars. There can be no dispute that everything would depend upon the return filed by the assessee, because that is the only document where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. To attract penalty, the details supplied in the return must not be accurate, not exact or correct, not according to the truth or erroneous. Where there is no finding that any details supplied by the assessee in its return are found to be incorrect or erroneous or false there is no question of inviting the penalty under section 271(1)(c). A mere making of a claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such a claim made in the return cannot amount to furnishing inaccurate particulars." 13.14. No doubt when there is a difference between the assessed income and the returned income, a presumption of c....
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....mic and financial reporting the twin requirements of good faith alongwith due diligence is ultimately a matter of bonafide conjecture based upon the standards of the financial and economic disclosure of the assessee. In the present case it is found that given the clear indication of compliances required by law, there is in fact a clear evidence that disclosures made by the assessee were in good faith and with due diligence and there is absence of wilful or malafide effort to conceal and defraud the Revenue. Due diligence presupposes making all possible efforts/endeavours which a prudent man would have done in the given circumstances or a process whereby one gathers facts to make an informed choice on a matter. Good faith on the other hand is an abstract and comprehensive term. It requires that the action should be honest and encompasses a sincere belief or motive without any malice or the desire to defraud others. It is drawn from the Latin term bonafide and Courts use the term interchangeably. However, in the present case the twin requirements of conjoint compliances presuppose that the two terms due diligence and good faith cannot be used interchangeably or independent of one ano....