TaxTMI 
TaxTMI 
2023 (10) TMI 1286
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....when assessee had made adequate disclosure of all material facts in Form 3CEB, TPSR and also during TP assessment and scrutiny assessment when substantial proceedings addition/adjustment was confirmed by ITAT? (c) Whether in the facts and circumstances of the case, the learned ITAT has erred in law and on facts in holding that Explanation 7 to Sec. 271(1)(c) of the Income Tax Act cannot be invoked while levying penalty in relation to the transfer pricing adjustment when the said explanation was neither referred to nor relied upon at the time of initiation of penalty proceedings under the Act? (d) Whether in the facts and circumstances of the case, the learned ITAT has erred in law and on facts in holding that "Base Erosion" is a debatable issue when Kolkata Special Bench of ITAT and Ahmedabad ITAT itself has already taken a view against the appellant on the same issue in assessee's own case? (e) Whether in the facts and circumstances of the case, the learned ITAT has erred in law and on facts in holding that reimbursement of expenses does not qualify as FTS and hence no penalty can be levied u/s. 271(1)(c) of the Act on such expenses?" 2. The respo....
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....ve resulted in the erosion of taxes payable in India to the extent of 24%. 4. Such an issue which was a subject matter of challenge before a special bench, the assessee had intervened and had failed, as a result of which, the Tribunal had held against the appellant on quantum. 5. The whole issue was therefore a debatable issue where views of various Tribunals were at variance and therefore it was not a concealment of income. In the penalty proceedings invoking Explanation 7 to Section 271(1)(C) to DCIT, International Taxation Division vide order dated 20.07.2017 held the assessee liable to penalty. The CIT(A) confirmed the order of penalty. The Tribunal, however, held that the additions on which penalty had been levied was a debatable issue in light of variance of legal issues and opinions of the Karnataka Bench and the Pune Bench and hence two views were possible and mere difference of opinion does not justify levy of penalty. The appeal was allowed. 6. The Revenue is in appeal before us. 7. Mr.Varun Patel learned Senior Standing Counsel for the department made the following submissions: 7.1 The appeal pertaining to quantum proceedings are pending and since admit....
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....ansfer Pricing Mechanism was made. Mr.Soparkar would take the Court through the Transfer Pricing Review where the Base Erosion Theory was explained. Clear comments were offered based on Circular No.14/2001. 8.6 That, there was a divergence of opinion between the Koltaka Bench and the Pune Bench of the Tribunal and the mechanism explained indicated that the income of the assessee was in the nature of fees for technical services and the assessee was a nonresidential. The receipts were chargeable to tax @ 10%. The AE being an Indian company is chargeable to tax at 33.99% and therefore if the assessee had charged higher rates, the AE, would have claimed deduction of higher expense claiming a larger deduction resulting in a lower tax percent at 23.99%. 8.7 With regard to Explanation 7 of Section 271(1)(C) reliance was also placed on a view of the Delhi High Court decision in the case of Pr. Commissioner of Income Tax-6 v. Mitsui Prime India Composites India Pvt Ltd. in ITA No.913 of 2016 dated 17.01.2017 and in the case of Pri. Commissioner of Income Tax v. Verizon India Pvt. Ltd. in ITA No.460 of 2016 dated 22.08.2016. On the submission of the Revenue that the appeal be kept pend....
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.... this regard, reliance is placed on the losses incurred by the Indian AEs of the Appellant and argument that since the payee companies are incurring losses there is no loss to the Indian government. Further, reliance is placed on various case laws to argue that in the cases where transfer pricing adjustment is proposed and if the Assessee is able to justify that entire analysis was bonafide, in good faith and was with due diligence, penalty cannot be imposed on the Assessee. 3. The Appellant has made adequate disclosures in Form No. 3CEB and TPSR and also during the course of transfer pricing assessment. 4. The case of the Appellant, case was decided by the decision of Hon'ble Kolkata Tribunal, Special Bench in the case of Instrumentarium. Further, Hon'ble Pune Tribunal in the case of Cummins Inc in the similar facts has decided in favour of the Assessee. In view of the same, it is a case where two views are possible and hence, penalty should be not levied on the Appellant. 5. Mere difference of opinion does not justify levy of penalty. 6. Further, reliance was placed on Taxation Ruling No. 2007/1 issued by the Austrian Taxation Office. ....
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....ation 7 to Section 271(1)(c) of the Act cannot apply when assessee is able to show that price charged or paid in respect of related international transaction was computed in accordance with the scheme of Section 92C of the Act, and in the manner prescribed therein, in good faith and due diligence. However, as clearly mentioned above that both Special bench and Ahmedabad ITAT has already taken a view against the Appellant and hence now it cannot be claimed that the Appellant has acted in good faith and with due diligence. Reliance is also placed on the various decisions to argue that penalty should not be levied when two views are possible, However, in the case of the Appellant, there is no difference of opinion as far as transfer pricing adjustment is concerned. Hence, all these decisions are of no help to the appellant. ... It is also pertinent to mention here the provision of Income Tax Act 1961 for reference: Section 271(1)(c)) Explanation 7.-Where in the case of an assessee who has entered into an international transaction defined in section 92B(, any amount is added or disallowed in computing the total income under sub-section (4) of section....
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....9." It can be seen from above finding of Hon'ble Apex Court that while passing the Assessment Order, AO is not at all required to record his satisfaction in writing or in specific manner for which he is initiating Penalty Proceedings. Thus, in present case, AO has categorically stated that he is satisfied that Penalty Proceedings is required to be initiated for additions made in Assessment Order which suffice the levy of penalty. The AO has given detailed findings why addition confirmed by first appeal and before the Hon'ble ITAT is subject to levy of penalty and also recorded the manner in which such penalty is required to be levied hence Penalty Order passed by AO is within the framework of law and cannot be held as invalid order on the ground that AO has not recorded his satisfaction in penalty notice or he has initiated penalty under one limb and levied penalty under the second limb. This Decision of Hon'ble Supreme Court has not been distinguished by High Courts hence ratio laid down by Hon'ble Apex Court is binding and AO is justified in levying penalty under Section 271(1)(c) of the Act." 12. Discussion of the ITAT reads as under: "11. We....
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....kata 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. 11.1 In view of the above, 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. 12. In the result, all grounds of appeal of the a....
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.... v. DCIT is also not applicable in the case of assessee. The matter of the discussion in the said order of Hon'ble Mumbai Tribunal is on base erosion. The matter of base erosion was also in the case of Instrumentarium Corporation Ltd Finland Vs ADIT. All these case laws are duly considered by the Hon'ble Ahmedabad Tribunal in combined order dated 17.11.2016 in assessee's own case and the appeal of the assessee was dismissed. Therefore the ease laws referred by the assessee have no relevance to the case of the assessee. The concept of 'base erosion' has been dealt in detail by the Tribunal and not found acceptable." 14. Therefore even if the deemed provision on the basis of Explanation 7 is pressed into service, then also there can be a case based on good faith and it cannot be termed as concealment. 15. What is evident is that the Assessing Officer has found that the view of the ITAT in Cummins Inc v. ADIT dated 29.07.2016 on facts may not apply. Even though, a Mumbai Bench decision in the case of Infotech Ltd. v. DCIT was on the subject of base erosion but the AO did not consider it appropriate as the Ahmedabad Bench had relied upon the Special Bench orde....
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....erned words. The words are plain and simple. In order to expose the assessee to the penalty unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing inaccurate particulars. In Commissioner of Income Tax, Delhi Vs. Atul Mohan Bindal [2009(9) SCC 589], where this Court was considering the same provision, the Court observed that the Assessing Officer has to be satisfied that a person has concealed the particulars of his income or furnished inaccurate particulars of such income. This Court referred to another decision of this Court in Union of India Vs. Dharamendra Textile Processors [2008(13) SCC 369], as also, the decision in Union of India Vs.Rajasthan Spg. & Wvg. Mills [2009(13) SCC 448] and reiterated in para 13 that:- "13. It goes without saying that for applicability of Section 271(1)(c), conditions stated therein must exist." 8. Therefore, it is obvious that it must be shown that the conditions under Section 271(1)(c) must exist before the penalty is imposed. There can be no dispute that everything would depend upon the Return f....
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....ul concealment is not an essential ingredient for attracting civil liability as was the case in the matter of prosecution under Section 276-C of the Act. The basic reason why decision in Dilip N. Shroff Vs. Joint Commissioner of Income Tax, Mumbai & Anr. (cited supra) was overruled by this Court in Union of India Vs. Dharamendra Textile Processors (cited supra), was that according to this Court the effect and difference between Section 271(1)(c) and Section 276-C of the Act was lost sight of in case of Dilip N. Shroff Vs. Joint Commissioner of Income Tax, Mumbai & Anr. (cited supra). However, it must be pointed out that in Union of India Vs. Dharamendra Textile Processors (cited supra), no fault was found with the reasoning in the decision in Dilip N. Shroff Vs. Joint Commissioner of Income Tax, Mumbai & Anr. (cited supra), where the Court explained the meaning of the terms "conceal" and inaccurate". It was only the ultimate inference in Dilip N. Shroff Vs. Joint Commissioner of Income Tax, Mumbai & Anr. (cited supra) to the effect that mens rea was an essential ingredient for the penalty under Section 271(1)(c) that the decision in Dilip N. Shroff Vs. Joint Commissioner of Income ....
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....t found to be inaccurate nor could be viewed as the concealment of income on its part. It was up to the authorities to accept its claim in the Return or not. Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the Revenue, that by itself would not, in our opinion, attract the penalty under Section 271(1) (c). If we accept the contention of the Revenue then in case of every Return where the claim made is not accepted by Assessing Officer for any reason, the assessee will invite penalty under Section 271(1)(c). That is clearly not the intendment of the Legislature. 11. In this behalf the observations of this Court made in Sree Krishna Electricals v. State of Tamil Nadu & Anr. [(2009) 23VST 249 (SC)] as regards the penalty are apposite. In the aforementioned decision which pertained to the penalty proceedings in Tamil Nadu General Sales Tax Act, the Court had found that the authorities below had found that there were some incorrect statements made in the Return. However, the said transactions were reflected in the accounts of the assessee. This Court, therefore, observed: "So far as the question of penalty is....
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....tax and amount of penalty. Also separate appeal is provided against order of imposition of penalty. Above all, normally, assessment proceedings must precede penalty proceedings. Assessee is entitled to submit fresh evidence in the course of penalty proceedings. It is because penalty proceedings are independent proceedings. The assessee cannot question the assessment jurisdiction in penalty proceedings. Jurisdiction under penalty proceedings can only be limited to the issue of penalty, so that validity of the assessment or reassessment in pursuance of which penalty is levied, cannot be the subject matter in penalty proceedings. It is not possible to give a finding that the re- assessment is invalid in such penalty proceedings. Clearly, there is no identity between the assessment proceedings and the penalty proceedings. The latter are separate proceedings that may, in some cases, follow as a consequence of the assessment proceedings. Though it is usual for the Assessing Officer to record in the assessment order that penalty proceedings are being initiated, this is more a matter of convenience than of legal requirement. All that the law requires, so far as the penalty proceedings are ....
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....ssment levying tax and interest and has paid tax and interest that by itself would not be sufficient for the authorities either to initiate penalty proceedings or impose penalty, unless it is discernible from the assessment order that, it is on account of such unearthing or enquiry concluded by authorities it has resulted in payment of such tax or such tax liability came to be admitted and if not it would have escaped from tax net and as opined by the assessing officer in the assessment order. l) Only when no explanation is offered or the explanation offered is found to be false or when the assessee fails to prove that the explanation offered is not bonafide, an order imposing penalty could be passed. m) If the explanation offered, even though not substantiated by the assessee, but is found to be bonafide and all facts relating to the same and material to the computation of his total income have been disclosed by him, no penalty could be imposed. n) The direction referred to in Explanation 1B to Section 271 of the Act should be clear and without any ambiguity. o) If the Assessing Officer has not recorded any satisfaction or has not issued any dir....
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....he Settlement Commission under Chapter XIXA, it shall also have all the powers which are vested in the income tax authority under the Act. In this connection, however, we need to keep in mind the difference between "procedure for assessment" under Chapter XIV and "procedure for settlement" under Chapter XIX-A (see section 245D). Under section 245F(4), it is clarified that nothing in Chapter XIX-A shall affect the operation of any other provision of the Act requiring the applicant to pay tax on the basis of self-assessment in relation to matters before the Settlement Commission." 26. It is thus held that the nature of the orders under Section 143 and 144 is different from the orders of the Settlement Commission under Section 245-D4 of the Act. 27. In K.C. Builders and Another supra, the Hon'ble Apex Court has observed that the condition precedent for imposing penalty under Section 271[1][c] would be that the assessee has made conscious concealment or furnished inaccurate particulars of his income, where the additions made in the assessment order, on the basis of which penalty for concealment was levied is finally annulled, or deleted, there remains no basis set....
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.... aspects of the proceedings. Merely alternative dispute resolution has been opted by the assesse, it would not invalidate the penalty proceedings unless it has been considered, analyzed and a decision is arrived at by the two sovereign States under the MAP. The order passed by the mechanism provided under Section 90 can be construed as an adjustment to the assessment order but not an annulment of the assessment order. If by such an adjustment, the assessment order is annulled in its entirety, setting aside the tax levied on income, then the arguments of the petitioners can hold good prohibiting the authorities to invoke the penal proceedings irrespective of any explicit finding regarding the penal consequences in the order of MAP. However, in the present set of facts, such a situation would not arise in view of the adjustment made to certain extent in the order passed under Rule 44H(5), implementing the order of MAP reducing the transfer pricing adjustment to Rs.91,80,00,000/- as against Rs.240,11,91,692/-. The onus lies on the assessee to establish that the said addition now finally decided by MAP is not due to concealment of income or furnishing of inaccurate particulars and more....
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....ered the merits of the appeal as well. The brief facts are that during the relevant period, i.e. AY 2007-08, the assessee had, in the course of its return, relied upon a transfer pricing report. The report inter alia sought benefit of six comparables, by applying the Transactional Net Margin Method (TNMM) under Section 92C of the Income Tax Act, 1961. The report had relied upon twelve comparables; the Transfer Pricing Officer (TPO) rejected nine of them and based upon the surviving data, determined the Arms Length Pricing (ALP) and made adjustments in the final return. The Assessing Officer (AO), while accepting TPO's determination, was of the opinion that as per Explanation 7 to Section 271(1)(c), the addition was to be deemed to represent income and was, therefore, liable, and consequently penalty was leviable. The AO's order was set-aside by the ITAT. We have considered the circumstances. The assessee in this case could not, in the opinion of this Court, visualize that out of the twelve comparables furnished, nine would be rejected and the matrix of calculations, as it worked, would radically undergo change. Pertinently, for the previous year 2006-07, the assessee's com....
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.... 4. During the year in question, the respondentassessee had entered into a third party independent or unrelated international transaction in which commission @ US$ 0.50 per DMT was paid. 5. The respondent-assessee had received commission of Rs. 1,58,12,470/- and after setting off expenses and permissible deductions, the respondent-assessee had declared a total income of Rs. 42,30,567/- in its return. 6. Details with regard to unrelated third-party transaction were duly disclosed and informed to the Assessing Officer and Transfer Pricing Officer. 7. Respondent-assessee had justified exclusion of internal unrelated comparable in view of the small volume of transaction. It was an isolated transaction, substantially lower in value in comparison to the volume of the transactions with the associated enterprises, which were enduring and to continue over a period of time. It was normal in business to charge lower commission on larger volumes from parties with long-term business relationship. 8. Transfer Pricing Officer, vide order dated 28th August, 2009, however, did not agree with the respondent-assessee. Arm's length price was computed by taking the ....
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....h when compared to internal comparable. Further, the respondent-assessee had not acted with due diligence. In view of Explanation 7 to Section 271 (1)(c) of the Act, penalty was rightly imposed on the deemed concealed income or income in respect of which inaccurate particulars were furnished. The Commissioner of Income Tax (Appeals), however, did observe that the respondent-assessee had filed fresh evidence in the penalty proceedings explaining and justifying lower rate for higher volume of transactions. This submission was rejected observing that fresh evidence was not part of the Transfer Pricing Report. It was stated that two opinions were not possible. 12. The Tribunal in the impugned order has held as under:- "3. We have perused the submissions advanced by both the sides in the light of the records placed before us. 3.1. On perusal of assessment order, we observe that assessee as well as Ld.TPO agreed upon CUP to be the most appropriate method for computing the arm's length price. Further in our view, under CUP, selection of comparables is within strict parameters and has to be accurately made on functional similarities. Admittedly there was lack of compa....
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.... proves to the satisfaction of the taxing authority that the price or charges are paid in international transactions was computed in accordance with the provisions of section 92C and in the manner prescribed under that section in good faith and with the due diligence. For ready reference, we quote Explanation 7 as under: "Where in the case of an assessee who has entered into an international transaction [or specified domestic transaction] defined in section 92B, any amount is added or disallowed in computing the total income under subsection( 4) of section 92C, then, the amount so added or disallowed shall, for the purposes of clause(c) of this subsection, be deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished, unless the assessee proves to the satisfaction of the Assessing Officer or the Commissioner (Appeals) for the Commissioner] that the price charged or paid in such transaction was computed in accordance with the provisions contained in section 92C and in the manner prescribed under that section, in good, faith and with due diligence." 3.4. The cases of addition/disallowance in computing the total inc....
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....n of internal comparable has been admitted by the High Court. This is an admitted position. 14. The reasoning given by the Assessing Officer to impose penalty for concealment has been quoted in entirety. It shows complete nonapplication of mind by the said officer on the relevant considerations. The Commissioner of Income Tax (Appeals), however, did go deeper and had rejected the stand of the respondentassessee on bona fides and due diligence. In spite of evidence placed by the respondentassessee on the question of difference in quantum or volume of transactions, etc., it was observed that this evidence was not part of the Transfer Pricing Study. 15. Per contra, the Tribunal after referring to the material, had taken an opposite view after examining the factual matrix of the present case. 16. Explanation 7 to Section 271(1)(c) of the Act reads:- "Explanation 7.-Where in the case of an assessee who has entered into an international transaction or specified domestic transaction defined in section 92B, any amount is added or disallowed in computing the total income under sub-section (4) of section 92C, then, the amount so added or disallowed shall, for the p....