TaxTMI 
TaxTMI 
2016 (6) TMI 588
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....he assessee applied Transactional Net Margin Method (TNMM) with Profit level indicator (PLI) of Operating profit/Operating revenue (OP/OR) to demonstrate that its international transactions were at arm's length price (ALP). On a reference made by the AO to the Transfer Pricing Officer (TPO) for determining the ALP of the international transactions, the latter accepted all the international transactions at ALP save and except 'Availing of specified business and consultancy services' with transacted value of Rs. 3,14,94,387/-; 'Availing of engineering support services' worth Rs. 13,03,786/-; and 'Availing of management support services' with value of Rs. 3,91,181/-. The TPO observed that the assessee is a routine manufacturer and marketer of specialty chemicals and compounds used for manufacturing automotive parts. He proceeded to analyse the services availed by the assessee through these international transactions. 3. Qua the first international transaction of 'Availing of specified business and consultancy services', the TPO observed that the assessee entered into a contract of accession with its AE wherein the AE, namely, Grand Siam Composites Co. Ltd. (GSC) agreed to provide t....
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....he cost benefit analysis. After relying on certain decisions, the TPO came to hold that consideration paid for availing the above referred three services to different AEs was to be considered as separate class of transactions requiring separate benchmarking under the transfer pricing provisions. He went on to analyse the assessee's submissions given on the need for availing these services and held that the assessee failed to give any evidence as to the benefit accruing to it by the supposed receipt of these services and even otherwise there was high possibility of duplication of such services. In this background of the factual matrix, the TPO held that no enterprise would enter into a blanket agreement with identified performance delivery promise by the service provider under uncontrolled situation. In the ultimate analysis, he separated these three international transactions of intra-group services from the other international transactions and determined their ALP under the Comparable Uncontrolled Price (CUP) method at Nil, which led to the recommendation of a transfer pricing adjustment amounting to Rs. 3,31,89,364/-. The AO passed the assessment order making such addition, there....
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....e diligence." 8. A perusal of this Explanation transpires that any addition on account of transfer pricing adjustment shall be deemed to represent income in respect of which particulars have been concealed or inaccurate particulars have been furnished in terms of section 271(1)(c), thereby inviting penalty under this provision. However, the exception enshrined in this provision itself states that no penalty will be imposed pursuant to the addition on account of transfer pricing adjustment, if the assessee proves to the satisfaction of the authority that the price charged or paid in such a transaction was in accordance with the provisions of section 92C and such price was computed as per the manner prescribed under that section in good faith and due diligence. This divulges that penalty u/s 271(1)(c) in respect of addition on account of transfer pricing adjustment is not imposable only when the assessee proves to the authority that the price paid by it was computed in terms of section 92C and in a manner prescribed under the section and this exercise was done in good faith and due diligence. 9. Section 92C of the Act deals with the 'Computation of arm's length price.' Sub-sect....
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.... vital facts. The TPO has determined Nil ALP of the three international transactions by holding that the assessee did not avail any services for which the payment was made to its AEs as no benefit was shown to have been received, and, in any case, it was a case of duplication of services. 12. We do not find any force in the view point of the TPO that it was a case of duplication of services. It is for the reason that the assessee was incorporated in the Financial year 2007-08 and its Annual accounts for the year under consideration show that the manufacturing activity was undertaken for the first time during this year, as against the only trading activity in the preceding year. Manufacturing activity was undertaken as a consequence of the assessee entering into 'Project consultancy and Business transfer agreement' dated 1.8.2009 with GSC which is engaged in the business, inter alia, of manufacture and supply of poly propylene compounds and was hitherto an established supplier of poly propylene compounds to Maruti Suzuki India Ltd. Under this Agreement, the assessee acquired `Specified business' and consultancy services from GSC for a consideration of Rs. 3.14 crore. The `Specifi....
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.... paid for availing the engineering services in installing such plant and machinery. The third international transaction is payment of a small amount of Rs. 3.91 lac paid to AE for availing management support services. These services were received pursuant to an Agreement with Prime Polymer Co. Ltd., Japan, a copy of which is available at page 569 of the paper book. The services provided under such Agreement have been set out in clause 1.2, which states that the AE shall assist in business operations of the assessee and in market development in India apart from rendering engineering and technical support services in India. A brief description of the above Agreements amply shows that the assessee paid under these international transactions for acquiring the `Business' of supply to Maruti Suzuki Ltd. and availing engineering services for setting up of plant required for manufacturing of the products to be supplied to Maruti Suzuki. Since no manufacturing activity was done by the assessee in past as it was simply a trader, acquiring of `Business' and availing of the services under these three Agreements cannot be characterized as duplication of services. 14. The second point of view....
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....s of an assessee's claim, it is not determinative of the same. It went on to hold that business decisions are at times good and profitable and at times bad and unprofitable. Business decisions may and, in fact, often do result in a loss. The question whether the decision was commercially sound or not is not relevant. The only question is whether the transaction was entered into bona fide or not or whether it was sham and only for the purpose of diverting the profits. Reverting to the facts of the extant case, we have found out above that the three international transactions entered in to by the assessee with its AEs were not only genuine and bona fide but were also given effect to. 16. It is manifest that the TPO applied CUP method for determining the ALP of these three international transactions. While applying the CUP method, it was obligatory upon him to bring on record some comparable uncontrolled instances availing similar services as per the mandate of rule 10B(1)(a)(i). Not even a single comparable instance has been brought on record to facilitate a comparison between the price for the services availed by the assessee vis-à-vis that paid by other comparables in sim....
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.... TPO was required to simply determine the ALP of these three international transactions, unconcerned with the fact, if any benefit accrued to the assessee and thereafter, it was for the AO to decide the deductibility of this amount u/s 37(1) of the Act. As the TPO in the instant case initially determined Nil ALP by holding that no benefit accrued to the assessee etc. and the AO made the addition without examining the applicability of section 37(1) of the Act, we find the actions of the AO/TPO running in contradiction to the ratio laid down in Cushman & Wakefield (supra). Following this decision, the matter in quantum, if appealed against, would have required a remit to the file of AO/TPO for deciding it in conformity with the law laid down by the Hon'ble jurisdictional High Court in this case. 19. Coming back to the Explanation 7 to section 271(1), we find that no doubt the addition of Rs. 3.31 crore has been made on account of transfer pricing adjustment in respect of these three international transactions, but, the same cannot be deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished because the asse....
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....n be imposed only after giving opportunity to the assessee. Similar view has been taken in a catena of decisions which we are not referring to herein for the sake of brevity. In our considered opinion, the necessary criteria for imposition or non-imposition of penalty is not the surrender or nonsurrender of income; acceptance or non-acceptance of addition; and confirmation or deletion of addition in quantum proceedings. In fact, it is the evaluation of the circumstances leading to the surrender/addition or confirmation of addition, which decide the fate of penalty. Where a surrender or an addition is made due to absence of bona fide in the conduct of the assessee, it may be a good case for imposition of penalty. On the other hand, if a surrender or an addition is made due to failure of the assessee to establish his case to the satisfaction of the AO despite the genuineness of the explanation, it will not call for imposition of penalty, notwithstanding such an addition having been confirmed in appeals. Further, an honest difference of opinion between the assessee and the Revenue can never be a cause for imposition of penalty. Under such circumstances, the contention of the ld. DR th....
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....ase of the assessee that no penalty be levied due to returned and assessed loss. On the contrary, the assessee is trying to prove its bona fide in not assailing the addition in quantum proceedings on the ground that the addition was not challenged due to existence of loss even after addition and the assessee opting not to contest addition to avoid protracted litigation. 22. In Dharmendra Textile Processors and Ors. (supra), the Hon'ble Supreme Court laid down that mens rea is not an essential ingredient of section 271(1)(c) and there is no discretion with the authority competent to impose penalty to levy penalty below the prescribed limit. It is pertinent to mention that the Hon'ble Supreme Court in its later decision in Union of India vs. Rajasthan Spinning and Weaving Mills (2009) 224 CTR 1 (SC) has explained its earlier decision in Dharmendra Textile Processors and Ors (supra) by laying down that the earlier decision cannot be said to hold that penalty u/s 11AC of Central Excise Act would apply to every case. It has been mentioned that the decision in Dharmendra Textile Processors (supra) must be understood to mean that though the application of section 11AC would depend upon....
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....tional transactions by adopting the Cost plus method (CPM). During the course of proceedings, it was found by the TPO that AEs of the assessee were engaged in buying similar products for sale from unrelated parties as well. He, therefore, applied the CUP method by treating such transaction with third parties as a benchmark. The addition so made by the TPO was accepted by that assessee, which led to the imposition of penalty u/s 271(1)(c). When the matter of penalty finally came up before the Tribunal, it was observed that the assessee did not adopt CUP method knowing very well that internally comparable uncontrolled transactions were available. The assessee's applying CPM in such circumstances was found to be an evidence of absence of due diligence and good faith. When we advert to the facts of the instant case, we find that even the TPO has not brought out any comparable transaction under the CUP method. His entire case is based on duplication of services and/or non-availment of any services by the assessee from its AEs, which has been found by us to be untenable. Thus, this decision of Mumbai Bench is distinguishable and does not support the Revenue's case. On the contrary, we fi....