TaxTMI 
TaxTMI 
2018 (12) TMI 2041
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..... During the year under consideration, the assessee has provided loans to its Associated Enterprises (AEs) and the said transactions have been benchmarked using comparable uncontrolled price (CUP) as the most appropriate method and arrived at nil consideration as the arm's length price computed in terms of section 92C of the Income Tax Act. 3. During the course of assessment proceedings, the matter was referred by the Assessing officer to the Transfer Pricing Officer (TPO) and the TPO has adopted the CUP method for determination of arm's length price and has proposed an adjustment of Rs. 18,65,77,973/- determined as the value of interest receivable @ 14.88% (SBI PLR plus 300 basis points) on loans given to Associated Enterprises (AEs) during the year and which were outstanding at the year end. Subsequently, the matter was taken up by the assessee before the Dispute Resolution Penal (DRP) which has confirmed the adjustment so proposed by the TPO. Thereafter, the AO passed the final assessment order u/s 143(3) r/w 144C of the Act interalia making the transfer pricing adjustmemt/addition of Rs 18,68,02,513 to the returned income. 4. On appeal, the Coordinate Bench of thi....
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....transfer pricing adjustment but has restricted the adjustment and has directed to apply the average LIBOR rate of 0.79% as against the LIBOR plus 2% determined by the Coordinate Bench. The quantum proceedings, therefore, have attained finality wherein the adjustment has been finally determined @ 0.79% in respect of loans provided to the AEs during the year under consideration. 6. Now coming to the penalty proceedings, the same were initiated by the Assessing Officer while completing the assessment proceedings U/s 143(3) r.w.s. 144C of the I.T. Act wherein the AO has made transfer pricing adjustment/addition of Rs. 18,68,02,513/-and has stated that penalty U/s 271(1)(c) is leviable in accordance with explanation 7. Then, towards the end of assessment order, it has been stated that penalty proceedings U/s 271(1)(c) of the Act are initiated separately. 7. In the penalty order dated 30.03.2015, the AO has stated that after giving effect to the order of the Tribunal in quantum proceedings, the assessed loss is finally determined at Rs. 18,43,34,129/- against returned loss of Rs. 23,16,74,228/- and therefore, the reduction in loss of Rs. 4,68,40,099/- clearly comes under the ambit ....
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....I.T. Act, 1961. 13. The provisions of section 271(1)(c) of the Act read with explanation 1 clearly put the onus on the shoulders of the assessee to establish that there was no concealment and/or inaccurate furnishing of the particulars of income. However, in the submission the assessee has not brought any (new) evidence on record in support of its contention nor has the assessee put forth any argument whereby the onus cast upon it in respect of its innocence and righteous conduct is established. The assessee has merely reiterated the arguments put forth during the course of assessment proceedings. In other words, the assessee has been unable to discharge the onus cast upon it. 20. In view of the above, it is established beyond doubt that the assessee has furnished inaccurate and/or concealed particulars of its income to the extent of the addition confirmed by the Hon'ble ITAT, Jaipur Bench, Jaipur of Rs. 4,68,40,099/- relating to TP adjustment." 9. On appeal by the assessee, the ld. CIT(A) has stated that Explanation 7 to Section 271(1)(c) of the Act is applicable as the assessee has not been able to prove that good faith and due diligence has been followed....
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....tion of penalty i.e. concealing the particulars of income. The above act of the Ld. AO clearly shows that the entire exercise of initiation of penalty proceedings has been done without application of mind. 14. Our reference was drawn to the penalty show-cause notice and the relevant extract thereof reads as under: "Whereas in the course of proceedings before me for the A.Y. 2009-10 it appears to me that you have-271(1)(c) Concealed particulars of income or furnished inaccurate particulars of income." 15. Further, our reference was drawn to the penalty order u/s 271(1)(c) passed on 30-03-2015 wherein penalty was imposed on addition of income of Rs. 4,68,40,099/- by holding that the assessee had furnished inaccurate particulars of income and concealed his income. The relevant findings of Ld. AO in last para (No. 20) on page 14 of the penalty order is as under :- "20. In view of the above, it is established beyond doubt that the assessee has furnished inaccurate and/or concealed particulars of its income to the extent of the addition confirmed by the Hon'ble ITAT, Jaipur Bench, Jaipur of Rs. 4,68,40,099/- relating to TP adjustment." 16. It was submitted ....
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.... after referring to the decision of Hon'ble Supreme Court in the case of T. Ashok Pai (Supra) held as under: - "........ Concealment, furnishing inaccurate particulars of income are different. Thus the Assessing officer while issuing notice has to come to the conclusion that whether is it a case of concealment of income or is it a case of furnishing of inaccurate particulars. The Apex Court in the case of Ashok Pai reported in 292 ITR 11 at page 19 has held that concealment of income and furnishing inaccurate particulars of income carry different connotations. The Gujarat High Court in the case of MANU ENGINEERING reported in 122 ITR 306 and the Delhi High Court in the case of VIRGO MARKETING reported in 171 taxman 156, has held that levy of penalty has to be clear as to the limb for which it is levied and the position being unclear penalty is not sustainable. Therefore, when the Assessing officer proposes to invoke the first limb being concealment, then the notice has to be appropriately marked. Similar is the case for furnishing inaccurate particulars of income. The Standard proforma without striking of the relevant clauses will lead to an inference as to non applica....
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....ne whether assessment order and the penalty order comply with the provisions of section 271 (1) (c) of the Act. We find that on page 3 of the assessment order, the assessing officer, AO observed as under: - "As the assessee has concealed/furnished the inaccurate particulars of income therefore, penalty u/s 271 (1) (c) is also initiated." 3.3 As per section 271 (1) (c), the assessing officer is empowered to impose penalty if in the course of any proceedings under this Act is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income. From the above provision it is clear that there has to be a specific satisfaction by the Assessing officer that the assessee is guilty of concealing the particulars of his income or furnishing inaccurate particulars of such incomes. 3.4 From the above, it is clear that the assessing officer should give a specific finding. In the present case, in the assessment order as noted above the assessing officer has stated that the assessee has concealed / furnished the inaccurate particulars of income. Therefore, the penalty under Section 271 (1)(c) was also initiated from t....
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....elwal Vs. DCIT (ITA No. 878/JP/2013), Murari Lal Mittal (ITA No.334/JP/2015 order dated 9- 11-2016), and Mridula Agarwal (ITA No. 176/JP/2016), the Bench upheld the same view. c. In the case of Dilip Kumar Arora. v. ITO ITA No. 658/JP/2017, wherein the ITAT at Para 9 and 10 of its order held as under: - "9. Taking into consideration the decision of the Andhra Pradesh High Court which virtually considered the subsequent law and the law which was prevailing on the date the decision was rendered on 27.08.2012. In view of the observations made in the said judgment, we are of the opinion that the contention raised by the appellant is required to be accepted and in the finding of Assessing Officer in the assessment order it is held that the AO, has to give a notice as to whether he proposes to levy penalty for concealment of income or furnishing inaccurate particulars. He cannot have both the conditions and if it is so he has to say so in the notice and record a finding in the penalty order. 10. In that view of the matter, the issue is answered in favour of the assessee and against the Department. Accordingly, in view of the binding precedent we hold t....
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....: (2013) 92 DTR (Kar) 111: (2013) 359 ITR 565 (Kar) and CIT Vs. SSA's Emerald Meadows (SLP) No. 11485 of 2016 dt. 5th Augu. 2016) followed. Conclusion: Considering the fact that the ground mentioned in show cause notice would not satisfy the requirement of law, as notice was not specific, the Tribunal has rightly allowed the appeal of the assessee and set aside the order of penalty". 21. In view of the above submitted facts and settled law position, it was submitted by the ld AR that the penalty imposed u/s 271(1)(c) is wrong, unwarranted, bad in law as the concealment of income and furnishing inaccurate particulars of income, are different defaults and they cannot be intermixed. 22. Now, coming to the other contention of the ld AR. The ld. AR of the assessee has submitted that there is no concealment or reporting of inaccurate particulars of income as per Explanation 7 to section 271(1)(c). It was submitted that the assessee has computed ALP in accordance with the provisions contained in section 92C of IT Act and in the manner prescribed under the section, in good faith and with due diligence. It was submitted that Explanation 1 to section 271(1)(c) had been wro....
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....ng the ALP is neither indicated nor inferred by the Ld. AO, thus levying penalty is bad in law. 27. In support, reliance was placed on the following judicial precedents which have upheld that when conditions to Explanation 7 of section 271(1)(c) are not fulfilled and when the appellant has determined the ALP in good faith and with due diligence, penalty cannot be levied: ⮚ DCIT v. Mastek Ltd. (ITA No. 2785 & 2786/Ahd/2013) ⮚ Mastek Ltd v. DCIT [2012] 28 taxmann.com 292 ⮚ Mitsui Prime Advanced Composites India (P) Ltd v. DCIT 178 TTJ 490 ⮚ CIT v. RBS Equities India Ltd. 133 ITD 77 28. It was further submitted that the appellant has disclosed all material facts and provided required information in the Form 3CEB filed by it disclosing provision of loans as an international transaction. Further, the appellant in its transfer pricing study report has substantiated the arm's length price determined by it at NIL in accordance with transfer pricing regulations. Also, there is no finding that any details supplied by the appellant in its Form 3CEB are found to be incorrect or erroneous or false and thus there is no que....
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....h Court and the only relief which has been provided is regarding the interest rate which has to be applied whereas there is no dispute that interest was chargeable on loans granted to the AEs. It was submitted by ld CIT DR that concept of commercial expediency and real income are not relevant for Transfer pricing and the transaction which was required to be benchmarked in the assessee's case was the international transaction of extending interest free loans to AEs and not the factors like source of funds, reasons for advancing etc. This fact is established as all the appellate authorities have confirmed the same including the Jurisdictional High Court. It was accordingly held that the ingredients of due diligence and good faith are missing completely and as per the provisions of Section 92B, it is clear that lending or borrowing of money between two associated enterprises comes within the admit of international transaction and whether the same is at arm's length has to be considered. Further, the adjustment made by the AO was confirmed at various levels i.e. DRP, ITAT and even the Hon'ble High Court with slight variation in the rate of interest to be applied. In view of....
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.... to "Whether, in case where the satisfaction of the AO while initiating penalty proceedings u/s. 271(1)(c) of the Income-tax Act, 1961 is with regard to alleged concealment of income by the assessee, whereas the imposition of the penalty is for 'concealment/furnishing inaccurate particulars of income', the levy of penalty is not sustainable?". After analyzing catena of judicial pronouncements including the decisions which have been cited by the ld AR, the Coordinate Bench speaking through the Third Member has held as under: "9. On an analysis of the factual matrix narrated above, it is manifested that the AO recorded satisfaction qua the three items of disallowance/additions leading to penalty, as 'concealment of income' in all the assessment orders; initiated penalty in all the four cases by treating them as covered under the expression 'concealment of particulars of income'; and then finally passed penalty orders on the assessees finding them guilty of 'concealment of particulars of income/furnishing inaccurate particulars of such income'. As against that, the actual position is that all the three items of disallowance/additions f....
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....nd, the Department was contending that the satisfaction was properly recorded. Considering the magnitude of litigation on the point, the Finance Act, 2008, inserted sub-section (1B) to section 271, w.r.e.f. 1.4.1989, which runs as under: - 'Where any amount is added or disallowed in computing the total income or loss of an assessee in any order of assessment or reassessment and the said order contains a direction for initiation of penalty proceedings under clause (c) of sub-section (1), such an order of assessment or reassessment shall be deemed to constitute satisfaction of the Assessing Officer for initiation of the penalty proceedings under the said clause (c).' 13. The effect of this insertion is that when an amount is added or disallowed in an assessment and the order contains a direction for initiation of penalty proceedings u/s. 271(1)(c), it shall be deemed to constitute satisfaction of the AO for initiation of the penalty proceedings. Crux of the new provision is that a mere direction in the assessment order to initiate penalty proceedings under clause (c) is sufficient to conclude that the AO recorded proper satisfaction as to whether the additio....
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.... means of notice u/s. 274, is not eventually imposed by the AO on getting satisfied with the explanation tendered by the assessee in the penalty proceedings. In any case, confronting the assessee with the charge against him is sine qua non for any valid penalty proceedings. It is only when the assessee is made aware of such a charge against him that he can present his side. Thus prescribing the charge in the penalty notice and penalty order is must. Absence of a charge in the penalty notice or not finding the assessee guilty of a clear offence in the penalty order, vitiates the penalty order. 15. The moot question is that what should be the nature of specification of a charge by the AO at the stage of initiation of penalty proceedings and at the time of passing the penalty order. Is the AO required to specify in the penalty notice/order as to whether it is a case of 'concealment of particulars of income'; or 'furnishing of inaccurate particulars of income'; or both of them, which can be expressed by using the word 'and' between the two expressions. When the AO is satisfied that it is a clear-cut case of concealment of particulars of income, he must ....
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....n him as section 274 makes it clear that assessee has a right to contest such proceedings and should have full opportunity to meet the case of the Department and show that the conditions stipulated in section 271(1)(c) do not exist as such he is not liable to pay penalty. The Hon'ble High Court went on to hold that: 'Clause (c) deals with two specific offences, that is to say, concealing particulars of income or furnishing inaccurate particulars of income .... But drawing up penalty proceedings for one offence and finding the assessee guilty of another offence or finding him guilty for either the one or the other cannot be sustained in law ..... Thus once the proceedings are initiated on one ground, the penalty should also be imposed on the same ground. Where the basis of the initiation of penalty proceedings is not identical with the ground on which the penalty was imposed, the imposition of penalty is not valid'. 17. In Manu Engg. Works (supra) penalty was imposed by noting: 'that the assessee had concealed its income and/or that it had furnished inaccurate particulars of such income'. Striking down the penalty, the Hon'ble High Court hel....
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....nalty proceedings, he must get decisive, which should be reflected in the penalty order, as to whether the assessee is guilty of 'concealment of particulars of income' or 'furnishing of inaccurate particulars of such income'. Uncertain charge at the time of initiation of penalty, must necessarily be substituted with a conclusive default at the time of passing the penalty order. If the penalty is initiated with doubt and also concluded with a doubt as to the concealment of particulars of income or furnishing of inaccurate particulars of such income etc., the penalty order is vitiated. If on the other hand, if the penalty is initiated with an uncertain charge of 'concealment of particulars of income/furnishing of inaccurate particulars of income' etc., but the assessee is ultimately found to be guilty of a specific charge of either 'concealment of particulars of income' or 'furnishing of inaccurate particulars of income', then no fault can be found in the penalty order. 22. In Manu Engineering Works (supra), the Hon'ble Gujarat High Court noticed that the charge at the stage of initiation of penalty proceedings as well in the penal....
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....n is, clearly liable for penalty u/s 271(1)(c) of the Act is imposed upon him as per following computation :- Total undisclosed/concealed income liable to penalty u/s 271(1)(c) Rs. 1,34,025 Penalty imposable (100% of tax sought to evaded) Rs. 45,555/- Penalty imposable (300% of tax sought to evaded) Rs. 1,36,665/- Penalty levied (100% of the tax sought to evaded Rs. 45,555/- In view of the above, a penalty of Rs. 45,555/- is hereby levied u/s 271(1)(c) of the Income-tax Act, 1961. Issued demand notice." 4.5 It is thus a case where the AO has recorded the satisfaction in the assessment order stating that the assessee has concealed his particulars of income whereby the assessee has not disclosed his investment in construction of the house to the extent of expenditure incurred during the previous year relevant to impunged assessment year. Therefore, the notice initiating the penalty proceedings is uncertain where he uses the expression "concealment particulars of income or furnished inaccurate particulars of income". However, during the penalty proceedings, he has given a decisive finding as reflected in the penalty order that the assessee is ....
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....tions and if it is so he has to say so in the notice and record a finding in the penalty order." 37. In the instant case, we find that the notice initiating the penalty proceedings is uncertain where the AO uses the expression "concealment of particulars of income or furnished inaccurate particulars of income". Even, during the penalty proceedings, the AO has not given a decisive and clear finding as reflected in the penalty order where he says throughout the body of the order that it is a case of concealment and/or furnishing inaccurate particulars of income and provisions of explanation 7 to section 271(1)(c) are applicable. As we have stated above, even where the AO is invoking the deeming provisions of explanation 7, the AO has to get decisive at the time of passing the penalty order as to whether it is a case of deemed concealment of income or deemed furnishing inaccurate particulars of its income. However, in the instant case, even while concluding the penalty proceedings, in para 20 of the penalty order as reproduced below where the AO gave his conclusive findings, the said findings doesn't bring out a clear-cut charge against the assessee in terms of concealment or f....
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....ee's case are unique and therefore, are not comparable. Further, we have been given to understand that, the company has not provided any loans or interest free loans to non associate enterprises. Therefore, strictly speaking, the internal comparables are also not available for determining the arm's length nature of the loan transaction. It is pertinent to note that, the company has provided the loans to all four associated enterprises, free of interest and hence, this can to a limited extent be considered as internal comparable transaction. Therefore, based on the above, CUP method would be considered as most appropriate method. VGL is however, advised to keep all its records in place relating to loan transactions to justify forwarding of loans free of interest. In the present case, the loans that have been given to associated enterprises were out of the proceeds received by VGL in the previous years from GDR issue and private placement of shares. Thus, there is no cost associated to the funding of the said loans. Secondly the said loans have been provided to meet the long term working capital requirements, capacity expansion as well as starting of new business lines i.e., ....
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....basis points is being added to take into account the various factors/risks as already discussed above." 42. The ALP has thus been determined by the TPO @ 14.88% (SBI prime lending rate plus 300 basis point) which was found reasonable and applied by the TPO and as against that, the Coordinate Bench has upheld the ALP at LIBOR +2% and thereafter, the Hon'ble High Court has further restricted the ALP to average LIBOR rate which comes to 0.79%. Therefore, we find that at each appellate level, the reasonability of rate of interest has been debated and finally, the Hon'ble High Court has upheld rate of interest of 0.79% as against NIL ALP determined by the assessee. It is therefore an honest difference of opinion regarding what should be the reasonable rate of interest between the assessee and the Revenue and such minor ALP differences of even less than 1% can never be a basis for levy of penalty, and lack of good faith and due diligence therefore cannot be inferred on part of the assessee. 43. Further, mere fact that the addition has been confirmed in the quantum proceedings doesn't automatically lead to imposition of penalty and the said contentions of the Revenue can....
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....y u/s 271(1)(c). The proposition so propounded on behalf of the Revenue is too wide and clearly unacceptable inasmuch as the intention of the legislature is to impose penalty due to addition on account of transfer pricing adjustment only when good faith and due diligence are lacking and not because of a genuine and valid difference of opinion in the determination of ALP of an international transaction. In view of the foregoing discussion, the assessee has satisfied all the requisite conditions as stipulated in the exception crafted in Explan. 7 granting immunity and hence, it cannot be visited with penalty u/s 271(1)(c) of the Act. Ex consequenti, the impugned order is set aside and the penalty is deleted." 44. In the present case, the assessee has disclosed all material facts and provided requisite information in Form 3CEB disclosing the international transactions relating to advancing loans to its AEs and has submitted detailed transfer pricing study report prepared by external experts through which it has substantiated the arm's length price determined by it at NIL in accordance with transfer pricing regulations which again reiterates the bonafide and due diligence on par....