TMI Blog2008 (2) TMI 453X X X X Extracts X X X X X X X X Extracts X X X X ..... trading in edible oils, fertilizers, grains, oil seeds and other food products including processed food. The taxpayer was also engaged in the business of processing crude oil. The taxpayer had carried various transactions with its foreign associate enterprises ('AEs' in short) of value of Rs. 20,23,20,68,761 and filed audit report in Form 3CEB along with the return. The summary of the transactions carried and the method applied by the taxpayer to show that transactions with AE were carried at arm's length is reproduced from para 2.1 of TPO's order dated22-3-2006and is as under: 2.1 During the year, the assessee has undertaken the following international transactions: S. No. Description of transaction Method Value (in Rs.) 1. Purchase of oil CUP 27,99,48,918 2. Contract cancellation penalty/charges CUP 5,27,796 3. Purchase of fertilizers CUP 1,38,26,80,957 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20,23,20,68,761 As total value of international transaction with AE exceeded Rs. 5 crores, the Assessing Officer (A.O.) made reference to the Transfer Pricing Officer ('TPO' in short) for determining the Arm's Length Price ('ALP' in short) of those transactions. The TPO in above order did not accept book value of various transactions shown by the taxpayer and proposed an addition of Rs. 50,17,08,483, to be made in the assessment of the taxpayer. The above order was incorporated and addition on account of adjustments for transfer pricing was made in the assessment order. However, above addition on merit is subject-matter of a different appeal and not the issue before us. 3. It is claimed by the revenue that taxpayer failed to comply with directions of the TPO and did not submit documents sought from the taxpayer in time and, therefore, committed a default under section 271G of the Income-tax Act. The Assessing Officer imposed penalty of Rs. 40,46,41,376 on the taxpayer under the above provision. 4. The learned CIT (A) while confirming levy of penalty and in the concluding paras has held as under: (vii) On consideration of arguments a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the said Cost Plus Method was applied. It has also not furnished any comparable data of similar transactions undertaken by comparables in a similar industry and to this extent the CPM was not justified by the assessee. Hence, the documentation filed was incomplete. (C) Assessing Officer's observation at Page 11, Para 24: During the year under reference there are major international transactions termed as Export of Wheat and Merchanting trade and the functional analysis of which is mentioned at page 25 and selection of Transactional Net Margin Method as method for transfer pricing at page 39 of document-I dated16-11-2005. The assessee has taken itself as the tested party and has stated its transactions to be at arm's length by selection of comparables from the Capitaline database. What the assessee has mentioned is merely a search process through which it has attempted to identify a set of comparables. In the conclusion at page 46 of document-I, the assessee has merely intimated that profit level indicator used for benchmarking international transactions is OPM which means operating margin over sales/turnover. It is concluded in this paragraph that O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasonable cause being grey area in new provision of section 92D read with rule 10D of the Income-tax Rules. However, I do not agree with the ld. AR as the assessee was required to furnish necessary documents/information as prescribed under rule 10D of the Income-tax Rules within due date but it failed to furnish the vital documents/information. I further find that the appellant is well supported by the CA legal Advisors. Hence, the plea of grey areas and ignorance of law is not sustainable in the appellant's case. (x) The ld. AR with an alternative argument pleaded that the penalty should not be levied on the total turnover but it should be levied on international transaction of Rs. 2,023.20 crore. For the sake of convenience, the relevant portion of written submission at page 54 is reproduced below: Without prejudice, it is submitted that assuming for the sake of an argument, but without admitting, that there was an alleged default committed by the assessee and penalty was rightly leviable, it could have been imposed only in respect of those international transactions forming part of the value of international transactions of Rs. 2,023.20 crore, in respect of wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ruction No. 3, dated20-5-2003has directed all its Officers to refer all cases for determination of ALP to TPO in which value of international transaction exceeds Rs. 5 crores. Accordingly, this case was also referred to the TPO for the above purposes. Vide order dated31-3-2006the TPO determined the ALP and suggested adjustment to be made in the assessment. The Assessing Officer added the suggested amount of the adjustment in the assessment. The TPO in his order also observed that taxpayer had failed to comply with provisions of section 92D read with rule 10D of Income- tax Rules by not furnishing information in time and, therefore, action under sections 271AA and 271G should be taken by the Assessing Officer. Accordingly, penalty proceedings under section 271G were taken and after hearing the taxpayer and after obtaining report from the TPO, penalty in question was imposed and upheld by the ld. CIT(Appeals). 6. It is the claim of the tax authorities that TPO had called for certain information and documents under section 92D(3) which the taxpayer failed to submit within the specified period of 30 days as extended by another 30 days under proviso to the above section. The TPO, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted8-10-2003along with report on Form 3CD dated28-8-2003which are running into 61 pages. Copies of the same are available at page Nos. 153 to 214 of the paper book of the taxpayer. 7. On a reference for the determination of transfer price to him, the TPO issued notice dated22-9-2005requesting the assessee to furnish some information and documents. The said notice/letter is referred to hereunder to appreciate the contention that it was a notice under section 92D(3) of the Act: A reference has been received under section 92CA(1) of the Income-tax Act from Cir. 3(1), New Delhi, the Assessing Officer, to determine under section 92CA(3) the arm's length price in respect of 'international transactions' entered into by you during the financial year 2002-03. You are, hereby required to attend my office on 10-10-2005 at 1.00 p.m. either in person or by a representative duly authorized in writing in this behalf or produce or cause thereby to be produced at the same time, any evidence and/or material, which has been relied upon by you in support of computation of arm's length price of the aforesaid international transactions. Further, in accordance with rule 10D(2) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 005 requested you to submit documentation as prescribed under Rule 10D of the Income Tax Rules by 10th October 2005. However, your company submitted no documentation on that date. 3. Another letter dated 13.10.2005 was issued requesting to submit the desired documentation by 7th November 2005. 4. On 7th November 2005, RSM and Co. filed a letter requesting for yet another date, it may be mentioned that as per the provisions of Section 92D maximum permitted period is 30 days and relevant section is reproduced below for ready reference: Maintenance and keeping of information and document by persons entering into an international transaction. 92D. (1) Every person who has entered into an international transaction shall keep and maintain such information and document in respect thereof, as may be prescribed: (2) Without prejudice to the provisions contained in Sub-section (1), the Board may prescribe the period for which the information and document shall be kept and maintained under that Sub-section. (3) The Assessing Officer or the Commissioner (Appeals) may, in the course of any proceeding under this Act, require any person who has entered into an intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above, your goodself has also called upon the assessee to furnish the following: 1. Balance sheet and Profit and Loss account for FY 2002-03 along with copy of Audit Report and Tax Audit report filed with the return of income (ROI) for A Y 2003-04, 2. Statement of computation of income filed with the ROI for AY 2003-04. 3. Information and documents maintained as prescribed Under Section 92D of the Act read with Rule WD of the Rules. In connection with the above, under instructions from, and for and on behalf of the assessee, we submit as under: 1. In respect of item (I) above, as required by your goodself we have attached herewith the copies of the Balance sheet, Profit and Loss account, Audit Report and Tax Audit report filed with the ROI for the captioned AY (refer Annexure I). 2. In respect of item (2) above, as required by your goodself, we have attached herewith the statement of computation of income filed with the ROI for captioned AY (refer Annexure 2) 3. In respect of item (3) above, as required by your goodself, we have attached herewith our submissions (refer Annexure 3). We trust the above fully meets with your goodself s requi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd for each divisionor product separately, which may have a bearing on theinternational transactions entered into by the assessee. Not relevant (g) Record of uncontrolled transactions taken into accountfor analyzing their comparability with the internationaltransactions entered into, including a record of thenature, terms and conditions relating to any uncontrolledtransaction with third parties which may be of relevanceto the pricing of the international transactions. Refer Annexure 3.6 (h) Record of the analysis performed to evaluatecomparability of uncontrolled transactions with therelevant international transaction. Refer Annexure 3.6 (i) Description of the methods considered for determiningthe ALP in relation to each international transaction orclass of transaction, the method selected as the mostappropriate method along with explanations as to whysuch method was so selected and how such method wasapplied in each case. Refer Annexure 3.6 (j) Record of the actual working carried out fordetermining the ALP, including details of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and is requested that the same be furnished according to the rules. 12.3 The taxpayer filed further information on December 20/23.12.2005 with a covering letter which had the following references: With reference to the personal hearing before your goodself today, we, under instructions from, and for and on behalf of the assessee, attach herewith the working of application of TNMM in respect of the following international transactions: - Export of wheat - Refer Annexures 1 to 7, - Merchanting trade - Refer Annexures 8 to 15 - Provision of support - services - Refer Annexures 16 to 28. - Provision of support agency services - Refer Annexures 29 to 39. - Provision of distribution services - Refer Annexures 29 to 39. We crave leave to furnish the remaining information/documents sought by your goodself on the next date of hearing i.e. December 23, 2005. 12.4 In response to above show cause notice, the taxpayer submitted further documents in December, 2005. In doing so, the taxpayer, according to the TPO, committed a default which he recorded as under: 3.3 In response to above show cause, no reply was submitted on merits, instead on 20th Dece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y documentation was maintained. Moreover, even in the documentation on 16.11.2005 nothing except that Comparable Uncontrolled Price method is most appropriate method to benchmark this international transaction was mentioned by CIPL. The total documentation submitted in respect of this international transaction is just one paragraph at page 41 of Document-I and one page in Document-Ill submitted on 23.12.2005. This page is a list of discounting contracts entered into by the assessee during the year along with rate of interest charged. The documentation is totally insufficient and qualifies to be characterized as no documentation. Hence it is a case where action both under Section 271AA and 271G of Income Tax Act can be considered by the Assessing Officer. 13. It appears that on the basis of above order, the Assessing Officer initiated penalty proceedings Under Section 271G by issuing show cause notice to the taxpayer on 13.4.2006 to explain why penalty be not imposed under the above provision. The taxpayer raised objection to the show cause notice vide its reply dated 18.5.2006 claiming that penalty proceedings were not initiated during the course of assessment proceedings and, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed by the taxpayer by 16.11.2005 were quite inadequate and did not satisfy the statutory requirement as envisaged in Rule 10D. The Assessing Officer has thereafter noted value of transactions of various description and method applied for evaluating their ALP. He noted that the taxpayer had applied CUP and TNMM methods to evaluate international transactions with associated enterprises (AE). He noted steps to be taken under comparable uncontrolled price method (CUP) under Rule 10B(1)(a) of Income-tax Rules. He further noted requirement of Clauses (g) to (j) of Rule 10D(1) of Income-tax Rules. Thereafter he referred to documentations filed by the taxpayer with TPO on 16.11.2005 (wrongly recorded as 16.11.2006 by the A.O.). 13.4 After taking note of the submissions made by the taxpayer before the TPO, the Assessing Officer concluded that taxpayer, has not furnished any comparable data with respect to the international transactions where 'CUP' method is used to determine the arm's length price. The actual working, details of the comparable data and financial information used in applying the CUP method was not furnished. Hence the documentation filed by the taxpayer o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions and justification of their adherence to the arm's length principle. These were basic documents. 13.8 In respect of certain other international transactions, the Assessing Officer observed as under: 26. In case of other international transactions relating to Ocean Freight Savings, Cost Sharing Arrangements, Reimbursement of expenses paid, Contact extension/penalty charges and provision of support agency services, no method was adopted by the assessee to justify their arm's length nature. Even if. the assessee considered that these transactions were outside the purview of any benchmarking on any method prescribed under the act, reasonable and attributable justifications ought to have been brought out bv it in the Transfer Pricing report. No such analysis was made and again, the documentation maintained under Rule 10D in respect of these transactions was found incomplete. 13.9 No penalty for payment of discount charges was imposed Under Section 271G, with the following observations: 28. Though the assessee has not furnished the required documentation as prescribed under the Rule 10D, this issue ( Payment of discounting charges ) was not considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls) reached the conclusion that documents furnished beyond due date i.e. after 21.11.2005 were not supporting documents . These were vital in determination of ALP in international transaction. These documents are prescribed under Sub-rule (g), (h), (i) and (j) of Rule 10D of Income-tax Rules. The appellant had failed to furnish the prescribed documents/information within the due date and, therefore, penalty was rightly levied and worked out. The penalty order was accordingly confirmed. 15. In these appellate proceedings, Shri C.S.Agarwal, learned counsel for the taxpayer appellant vehemently contended that there was no default in maintaining Information and documents prescribed as per Rule 10D. Auditor's report on Form 3CEB was also furnished in time. He further contended that provisions of Sub-section (3) of Section 92D are directory and not mandatory. In the present case, no valid proceedings Under Section 271G of Income-tax Act were initiated. The penalty proceedings could have been initiated during the course of assessment proceedings. It was further necessary for the Assessing Officer to record, during the course of assessment proceedings and in the assessment order, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to highlight is the alleged connection between the various concerns. That is not. sufficient to proceed against the respondents unless it is shown that they were parties to the arrangements, if any. As no sufficient material much less any material has been placed on record to substantiate the stand of the appellant, the conclusions of the Commissioner as affirmed by the CEGATcannot be faulted. 15.2 Shri Agarwal also relied upon decision of Supreme Court in the case of Hindustan Polymers Co. Ltd. v. Collector of Central Excise, Guntur 1999 (106) E.L.T. 12. 15.3 Shri Agarwal also contended that penalty in the present case was levied on a different footing than what assessee was asked to respond as per show cause. Principles of natural justice were also vitiated in this case. Shri Agarwal also submitted that as per settled proposition of law, penalty provisions are required to be strictly construed. 15.4 In support of contention that penalty proceedings are to be initiated during the course of assessment proceedings, Shri Agarwal relied upon decision of jurisdictional High Court in the case of CIT v. Sardar Amarjit Singh 132 ITR 365 (Del), wherein it has been held as unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under: The revenue has preferred an appeal from the order of the Tribunal setting aside the imposition of penalty under Rule 173Q of the Central Excise Rules, 1944. The Tribunal has set aside the order of the Commissioner on the ground that neither the show cause notice nor the order of the Commissioner specified which particular clause of Rule 173Q had been allegedly contravened by the appellant. We are of the view that the finding of the Tribunal is correct. Rule 173Q contains six clauses the contents of which are not same. It was, therefore, necessary for the assessee to be put on notice as to the exact nature of contravention for which the assessee was liable under the provisions of the 173Q. This not having been done the Tribunal's finding cannot be faulted. The appeal is, accordingly, dismissed with no order as to costs. He also relied upon decision of Hon'ble Madras High Court in the case of B. Lakshmichand v. Government of India wherein it was held that no penalty could be validly imposed unless specific clause is quoted and show cause notice must contain specific allegations and the amount of duty payable. He also relied upon decision of Hon'ble Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was quite inadequate..... It is clear from record that Assessing Officer was totally unspecific besides being unclear in respect of the default allegedly committed by the taxpayer. This is evident from Assessing Officer's observations which are different and changing in different parts of order Under Section 271G. 16.1 Shri Agarwal further submitted that it is well settled law that an opportunity of being heard must be real, effective and not illusionary. In the instant case, it is apparent that show cause notices were vague, unspecific, contradictory and general in nature. Therefore, levy of penalty was totally vitiated, so was its initiation. When objection on above account was raised before the learned CIT (Appeals), he failed to address the above contention regarding validity of the show cause notice. Shri Agarwal thus emphasized contradiction in the penalty order and the show cause notice where it was time and again stated that documents filed by the taxpayer by 16.11.2005 were inadequate (para 14 of penalty order Under Section 271G) whereas in para 29 of the same order, it is stated as under: As seen from the above paragraphs, the assessee company had not furni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f documents under Rule 10D of Income-tax Rules in respect of international transactions with AE's in respect of which TPO did not make any adverse observations on maintenance or production of documents. Shri Agarwal further submitted that,In respect of certain international transactions such as Ocean Freight Savings, Cost sharing arrangements, reimbursement of expenses paid, contract extension, provision of support agency seivices, etc., no observations on deficiency on filing of documentation have been made by the TPO. On the other hand, the A.O. has not only commented upon maintenance of documentation even in respect of such transactions but has also levied penalty on the same, which in any case should not have been levied. Shri Agarwal further submitted, that the TPO while computing the Arm's length price in respect of the international transactions entered into by the appellant has not considered any fresh evidence but has merely relied upon the documents/records furnished by the appellant during the course of transfer pricing proceedings. This fact is conclusive enough to indicate that proper documentation, including supporting documentation, were maintained by the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16.6 Shri Agarwal further submitted that CIT (Appeals) failed to appreciate that no penalty Under Section 271G was leviable as all information and documentation, as per the provision of Rule 10D, were furnished. Shri Agarwal also provided us a chart regarding happening on each date of hearing before the TPO from 22nd September, 2005 to 23rd December, 2005. Shri Agarwal referred to reply letter dated 16.11.2005 filed before TPO to show that there was a bonafide attempt to comply with provision of Section92D read with Rule 10D of the Income-tax Act. It was accordingly contended that all information/documents prescribed by Section 92D of Income-tax Act read with Rule 10D were duly furnished vide letter dated 16.11.2005 and only additional information and voluminous back up documents were furnished to TPO vide letters dated December 12, 2005 and December 23, 2005. The taxpayer from time to time cooperated with the TPO. 16.7 Shri Agarwal in the alternative and without prejudice to above submissions, submitted that the implementation of transfer pricing policy is at initial stage and the CBDT itself has stated that it would not put taxpayers to avoidable hardships in the implementatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute . In the case of Woodward Governor India Pvt. Ltd. v. CIT and Ors. 253 ITR 745 (Del) wherein, in the context of Section 271C (penalty for failure to deduct tax at source), the Hon'ble Court held as under: Levy of penalty under Section 271C...is not automatic. In order to bring in application of Section 271C, in the backdrop of the overriding non obstinate clause in Section 273B, absence of reasonable cause, existence of which has to be established, is a sine qua non. Before levying penalty, the concerned officer is required to find out that even if there was any failure to deduct tax at source, the same was without reasonable cause ... the cause shown has to be considered and only if it is found to be frivolous, without substance or foundation, would the prescribed consequences follow. In Azadi Bachao Andolan v. Union of India [2001] 252 ITR 471 (Del), it is explained that reasonable cause can be reasonably said to be a cause which prevents a man of average intelligence and ordinary prudence, acting under normal circumstances, without negligence or inaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The delay too was rectified within 10 days of intimation of the same from the TPO. 17.1 As such the appellant humbly submits that, it has extended its full cooperation in the Transfer Pricing assessment proceedings initiated in its case under Section 92CA of the Income-tax Act, by way of furnishing all the information/documents/clarifications to the TPO, (inspite of the fact that there was significant movement of key finance personnel responsible for maintaining these records), as and when called for, and thus, there was total absence of mens rea in this case. 18. The submissions of counsel for the assessee were opposed by Shri L.M. Pandey, learned Departmental Representative appearing for the Revenue. It was contended that taxpayer's submission that notice issued Under Section 271G was without jurisdiction, is without any substance. In this connection, Shri Pandey drew our attention to provisions of Section 271G of the Income-tax Act. He argued that Assessing Officer is within his jurisdiction to issue notice under the above provision as assessment proceedings were finalized by him and assessment was made by him. He argued that legislative provision on the above aspect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shri Pandey, the specific documents and default attached thereto were explicitly explained to the taxpayer which is clear from the penalty order. Accordingly, it was submitted that there was no defect in the show cause notice. 8.4 Shri Pandey further submitted that it is not correct on the part of the taxpayer to contend that default in question was merely a technical or venial default. The taxpayer failed to comply with statutory provision and file documents within the specified time and thus committed a default Under Section 271G of the Income-tax Act. The taxpayer deliberately and in defiance of statutory provisions refused to file information and documents sought from the taxpayer to show the basis of its claim that international transactions were at arm's length. Thus from act and conduct of the taxpayer mens rea on the part of the taxpayer is clearly established. 18.5 Shri Pandey also refuted the claim of the taxpayer that as documents were furnished before culmination of proceedings before the TPO, no default was committed. It was stated that documents and information was to be furnished within the time limit as fixed under the Statute and, therefore, penal provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ein he has pointed out that under the provisions of Section 274(2) of the Act, no responsibility is cast on the Assessing Officer to provide opportunity of being heard to the taxpayer before making a reference to the TPO. Likewise, such opportunity is not to be provided to the taxpayer before approval for levy of penalty is granted. The arguments advanced on behalf of the taxpayer were devoid of any substance, Shri Pandey added. 19.1 Shri Pandey further argued that it was wrong on the part of the taxpayer to contend that principles of natural justice were violated in this case. Here material relied upon by the Assessing Officer for invoking provisions of Section 271G was quoted from the order and record of the TPO. This material was duly put to the taxpayer before levy of penalty. No material against the taxpayer was used without reference to the taxpayer. Thus all the principles of natural justice were followed and fully satisfied. Shri Pandey relied upon Circular No. 12 dated 23.08.2001 of the Central Board of Direct Taxes specifying 31st August,2001 as cut out date up to which leverage could be provided for formalities relating to transfer pricing. The default in the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efault is not clear to the taxpayer, he may make necessary correspondence with the Assessing Officer to clarify any issue. In this case, copy of order of Assessing Officer and of TPO as also report of the TPO was duly furnished to the taxpayer. There is no material on record to show that taxpayer was unaware of the nature of default he was required to meet. The taxpayer raised plethora of arguments to support its contention on purported default. The taxpayer was allowed personal hearings and after considering arguments and material on record, penalty was imposed. Therefore, technical objection of the taxpayer was devoid of merit. 20. Shri Pandey also challenged taxpayer's submissions that findings of the Assessing Officer were beyond jurisdiction. As stated earlier, the Transfer Pricing Officer and the Assessing Officer had found that statutory documentation were not filed in time and, therefore, taxpayer committed default Under Section 271G in respect of international transactions carried by the taxpayer with its AEs. It was wrong on the part of the taxpayer to contend that some international transactions such as ocean freight savings, cost sharing arrangements, reimburseme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LP. In such a situation, burden of proof on tax authorities is much reduced. 133. Having regard to the statutory provisions, particularly the mandate of Section 92(1) and 92D read with relevant rules, we hold that it is obligatory on the part of the taxpayer to furnish information relating to controlled international transactions, select a suitable method for determination and furnish ALP of such international transactions carried by it and give basis and supporting authentic evidence of ALP and adjustments made. The Taxpayer has further to cooperate in the determination of the ALP by the tax authorities by furnishing all relevant information. The tax authorities in cases where they are of the opinion that ALP has not been correctly determined by the taxpayer, can substitute their own ALP on the basis of material or information furnished by the assessee or collected by them. However, such ALP has to be determined having in mind provisions of Sections 92 and 92C and other Rules and regulations. While determining ALP, tax authorities are bound to follow principles of natural justice and be fair and reasonable to the taxpayer. Any material collected to be used against the taxpaye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one ALPs determined on the application of most appropriate method then arithmetical mean of such prices or price at option of the assessee within 5% variation is to be adopted (Proviso to Section 92C(2)). 22. As in the present case, question of validity of levy of penalty of Rs 40,46,41,376/- imposed Under Section 271G for not furnishing information and documents within the time specified in notice Under Section 92D(3) is under challenge, we will examine the Scheme relating to maintenance of information and documents and their furnishing before the revenue authorities for determining the ALP. The Assessing Officer/TPO needs information and documents on controlled and uncontrolled international transactions and other relevant evidence. The taxpayer, under the legislation, is rightly thought to be the best person to supply the relevant information being a party to the international transaction. The information and documents are prescribed as per Rule 10D of Income-tax Rules, quoted hereafter. In the column No. 2 on the right are the form/stage where particular information under specific clauses is required to be given. Rule 10D. Information and documents to be kept and maint ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties which may be of relevance to the pricing of the international transactions ; (g) same (h) a record of the analysis performed to evaluate comparability of uncontrolled transactions with the relevant international transaction ; (h) same (i) a description of the methods considered for determining the arm s length price in relation to each international transaction or class of transactions, the method selected as the most appropriate method along with explanations as to why such method was so selected, and how such method was applied in each case ; (i) same (j) a record of the actual working carried out for determining the arm s length price, including details of the comparable data and financial information used in applying the most appropriate method, and adjustments, if any, which were made to account for differences between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions ; (j) same (k) the assumptions, policies and price negotiations, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have effect over more than one previous year, fresh documentation need not be maintained separately in respect of each previous year, unless there is any significant change in the nature or terms of the international transaction, in the assumptions made, or in any other factor which could influence the transfer price, and in the case of such significant change, fresh documentation as may be necessary under Sub-rules (1) and (2) shall be maintained bringing out the impact of the change on the pricing of the international transaction. (5) The information and documents specified in Sub-rules (1) and (2) shall be kept and maintained for a period of eight years from the end of the relevant assessment year. 22.1 Sub-rule (2) of Rule 10D provides that no record in books may be maintained in case international transactions entered into by the taxpayer did not exceed one crore rupees. Proviso to above sub-rule requires the assessee to substantiate on the basis of material available with him that international transactions entered into by him have been computed in accordance with Section 92. 22.2 Sub-rule (3) of Rule 10D prescribe the documents which would be needed to support t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the said clause by use of word 'if any'. It is, therefore, clear that one or more clauses of Sub-rule (1) are applicable and not all clauses of the Rule in a given case. It would all depend upon the facts and circumstances of the case more particularly the nature of international transactions carried or services involved. Likewise supporting documents, official publications, reports, market research studies, technical publications of Government or other institute of national or international repute, and all the documents mentioned in Rule 10D(3) may not be needed in case of every taxpayer. Stock exchange, price publication or commodity, market quotations would only be relevant in cases of international transactions involving stock or commodities. Such information would be totally irrelevant in cases of transactions, say for example relating to intangibles . Application of one or more clauses of Sub-rule (3) would depend upon facts involved in the international transactions. Further, if official publications are needed in the case, other documents like report, studies, and data from Government agencies mentioned in the same clause might not be required. Information eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... *Signed Name.... Address.... Membership No.... Place : ..... Date : ..... Notes : 1. *Delete whichever is not applicable. 2. **This report has to be signed by- (i) a chartered accountant within the meaning of the Chartered Accountants Act, 1949 (38 of 1949); or (ii) any person who, in relation to any State, is, by virtue of the provisions in subsection (2) of Section 226 of the Companies Act, 1956 (1 of 1956), entitled to be appointed to act as an auditor of companies registered in that State. ANNEXURE TO FRORM NO. 3CEB Particulars relating to international transactions required to be furnished under Section 92E of the Income-tax Act, 1961 Part A 1. Name of the assessee : 2. Address : 3. Permanent account number : 4. Status : 5. Previous year ended : 6. Assessment year : Part B 7. List of associated enterprises with whom the assessee has entered into international transactions, with the following details: (a) Name of the associated enterprise. (b) Nature of the relationship with the associated enterprise as referred to in Section 92A(2). (c) Brief description of the bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, or lease rent paid/received or payable/receivable in respect of each lease provided/entered into- (i) as per books of account. (ii) as computed by the assessee having regard to the arm's length price, (e) Method used for determining the arm's length price [see Section 92C(1)] 9. Particulars in respect of transactions in intangible property: Has the assessee entered into any international transaction(s) Yes/No in respect of purchase/sale/use of intangible property such as know-how, patents; copyrights, licensees, etc.? If 'yes' provide the following details in respect of each associated enterprise and each category of intangible property: (a) Name and address of the associated enterprise with whom the international transaction has been entered into. (b) Description of intangible property and nature of transaction. (c) Amount paid/received or payable/receivable for purchase/sale/use of each category of intangible property- (i) as per books of account. (ii) as computed by the assessee having regard to the arm's length price. (d) Method used for determining the arm's length price [see Section 92C(1)] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntered into. (b) Description of such mutual agreement or arrangement. (c) Amount paid/received or payable/receivable in each such transaction - (i) as per books of account. (ii) as computed by the assessee having regard to the arm's length price. (d) Method used for determining the arm's length price [see Section 92C(1)] 13. Particulars in respect of any other transaction : Has the assessee entered into any other international transaction Yes/No Yes/No not specifically referred to above, with associated enterprise ? If 'yes' provide the following details in respect of each associated enterprise and each transaction: (a) Name and address of the associated enterprise with whom the international transaction has been entered into. (b) Description of the transaction. (c) Amount paid/received or payable/receivable in the transaction - (i) as per books of account. (ii) as computed by the assessee having regard to the arm's length price. (d) Method used for determining the arm's length price [see Section 92C(1)] **Signed Name.... Address.... Place : .... Date : .... N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings are carried towards determination of ALP. The relevant provisions of the scheme of assessment are as under: Computation of arm's length price 92C. (1) x x x (2) x x x (3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that- (a)the price charged or paid in an international transaction has not been determined in accordance with Sub-Sections (1) and (2); or (b)any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in Sub-section (1) of Section 92D and the rules made in this behalf; or (c)the information or data used in computation of the arm's length price is not reliable or correct; or (d)the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under Sub-section (3) of Section 92D, the Assessing Officer may proceed to determine the arm's length price in relation to the said international tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect thereof, as may be prescribed-. (2) Without prejudice to the provisions contained in Sub-section (1), the Board may prescribe the period for which the information and document shall be kept and maintained under that Sub-section. (3) The Assessing Officer or the Commissioner (Appeals) may, in the course of any proceeding under this Act, require any person who has entered into an international transaction to furnish any information or document in respect thereof, as may be prescribed under Sub-section (1), within a period of thirty days from the date of receipt of a notice issued in this regard: Provided that the Assessing Officer or the Commissioner (Appeals) may, on an application made by such person, extend the period of thirty days by a further period not exceeding thirty days. Penalty for failure to keep and maintain information and document in respect of international transaction. 271AA. Without prejudice to the provisions of Section 271, if any person fails to keep and maintain any such information and document as required by Sub-section (1) or Sub-section (2) of Section 92D, the Assessing Officer or Commissioner (Appeals) may direct that such per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9; information or document cannot ordinarily mean 'all' the documents prescribed under Rule 10D. The word 'required' is important as it rules out option with the taxpayer and make it obligatory to furnish the requisite information. It is clear from above that power under above section can be used in the course of assessment proceedings i.e. in proceedings for determination of ALP and only for requiring to furnish prescribed information or documents under Rule 10D. It being a provision connected with procedure to help an assessment must be purposefully construed. But regulation does not provide any time or stage when power to issue notice is to be exercised. However, scheme of assessment do indicate the stage at which it is to be issued and the purpose, which is required to be achieved through the issuance of such a notice. We have already noted what are the implications and effect of prescribed Rule 10D on the powers to be exercised under Section 92D(3). We have also noted that taxpayer has filed preliminary or initial information of its ALP of international transaction when reference is received by the TPO Under Section 92CA(1). 24.7 The TPO is thereafter req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation, documents from the taxpayer first under Section 92D(3) and thereafter provide opportunity to the taxpayer to support its ALP. Further having regard to purpose of the regulations, the notice Under Section 92D(3) must require specific information (or document) which the taxpayer failed to furnish Under Section 92CA(2) but which according to the TPO are necessary for determination of ALP of international transactions. Above view is fully supported by Sub-section (3) of Section 92CA of the act providing for the determination of the ALP by the TPO. Besides evidence/material referred to in the above Sub-section, the TPO is further required to consider such evidence as TPO may require on specified points . Thus requirement of evidence on specific points is clearly stated. Therefore, notice Under Section 92D(3) can not be vague but must require specific information. This is established from clear language and scheme of the regulation. 26. In the case of The Barium Chemicals Ltd. and Anr. v. Sh. A.J. Rana and Ors., their Lordship of Supreme Court considered notice issued by the competent authority Under Section 19(2) of Foreign Exchange Regulation Act, 1992, which is as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... information, book or other document in the order. Above decision is fully applicable to the case in hand. Slight difference in the language of Section 19(2) considered by their Lordship and Section 92D(3) does not make any material difference. A corporate body like the taxpayer cannot be imprisoned but only fined which may be as heavy as more than Rs 40 crores imposed in this case. Consequences provided in Section 271G are quite severe. 27. Thus notice Under Section 92D(3) is different from other statutory notices. Here the Assessing Officer or CIT (Appeals) are empowered to require from the taxpayer or any person who has entered into an international transaction to furnish any prescribed information or document. Notice Under Section 92D(3) has to be confined to the furnishing of information or document as may be prescribed . It is unauthorized to require the noticee to furnish non-prescribed information. If in the notice non-prescribed information is also called for, it would not be treated as notice under Section 92D(3) but under Section 92CA(3) or some other provision of the Act irrespective of the title or label given to such a notice. Relevant information can be sough ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 71G and 273B of the Income-tax Act quoted above. 29.1 It is evident from the above provisions that penalty Under Section 271G can be imposed on any person who has entered into an international transaction but fails to furnish information or document as required under Sub-section (3) of Section 92D. On account of above default (failure), the defaulter is liable to pay penalty for a sum equal to 2% of value of international transactions for each such default. Provisions of Section 273B overrides Section 271G. In other words no penalty can be imposed for above failure of the person to furnish documents in time if such failure is proved to be due to a reasonable cause . 30. With the above legal background, we proceed to consider facts and circumstances of the case. The TPO in this case issued first notice on September 22, 2005 which has been reproduced in the earlier part of this order. In para 1 of the notice, he asked the assessee to support and substantiate the computation of ALP in international transactions. This is required by Section 92CA(2). As per para No. 2 the T.P.O. further required to furnish information including the balance sheet, profit and loss account, statemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r CIT (Appeals) is authorized to require prescribed information but here both prescribed and un-prescribed information like balance sheet, profit and loss account, computation of income etc was also required to be furnished from the taxpayer before the taxpayer could file evidence under Section 92CA(2). Not only primary documents necessary to support the computation of ALP of taxpayer, but also supporting documents detailed in Sub-rule (3) of Rule 10D were required to be furnished without considering which supporting documents out of several mentioned in various clauses of the said sub-rule were available with the taxpayer. The burden of selection/relevancy of clauses applicable was shifted to the taxpayer. The notice only increased burden of the taxpayer and confused the notice. Above notices issued without application of mind and without considering relevancy and requirement of all the prescribed information and documents under Rule 10D vitiated the legality of the notices. Above notices could not be treated as proper and legal notices in terms of Section 92D(3) of the act. The failure, therefore, of the taxpayer to comply such notices in time can not justify levy of penalty of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only notices as above were vague, non-specific and showed lack of application of mind, even the show cause notice issued Under Section 271G suffered from the same defect. No specific clause of the rule or detail of the international transaction relating to which default was committed, were stated in the show cause notice issued by the A.O. The notices issued were prima facie illegal and bad in law. He relied upon the decision in the case of Reckitt Colman of India Ltd. (supra) and on the case of Hindustan Polymers Co. Ltd. (supra). In the case of Amrit Foods v. Commissioner of Central Excise UP 2005 (190) ELT 433, wherein their Lordship observed as under: The revenue has preferred an appeal from the order of the Tribunal setting aside the imposition of penalty under Rule 173Q of the Central Excise Rules, 1944. The Tribunal has set aside the order of the Commissioner on the ground that neither the show cause notice nor the order of the Commissioner specified which particular clause of Rule 1730 had been allegedly contravened by the appellant. We are of the view that the finding of the Tribunal is correct. Rule 1730 contains six clauses the contents of which are not same. It w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lty was exigible. The taxpayer had filed information bonafidely according to its understanding of regulations and legal guidance received by it. The A.O. failed to refute any of the claim and recorded no finding on the reasonable cause pleaded by the taxpayer. In other words it was not held that the delay was without a reasonable cause. The same position continue unaltered in appellate proceedings before the learned CIT (Appeals). The case pleaded by the taxpayer was neither examined nor refuted before upholding the levy of penalty. The learned Departmental Representative tried to challenge above argument of Shri Agarwal. However, on facts we are of view that arguments of Shri Agarwal arewell taken. 39. As already discussed, provision of Section 271G is to be read alongwith provision of Section 273B of the Income-tax Act. The penalty Under Section 271G can be imposed only if the default is held to be proved to be without reasonable cause. Once a reasonable cause for delay is pleaded then it has to be examined in accordance with law. In the present case, no attempt has been made by the Revenue to look into, examine or refute the claim of reasonable cause put forth by the taxpay ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
