2016 (8) TMI 1143 - AT - Income Tax

Penalty under section 271(1)(c) - inaccurate particulars of income with respect to the transfer pricing (TP) adjustment - Held that - We have no reason to disbelieve the claim that in the facts the present case that the decision not to agitate the issue beyond the ITAT was guided by prudence in order to buy peace and avoid protracted litigation where the amount at stake for the assessee was not sufficient to consider the option of further litigation. It is a fact that as a result of the additions made by the TPO wherein addition of Rs. 236.22 crores was proposed and pursuant to the order of the DRP had been made by the Assessing Officer which stood reduced to Rs. 4.92 crore with the resultant relief of deletion of addition of Rs. 231, 31 crore. The consequent addition sustained of Rs. 4.92 crores was considered to be not so big an amount that in the face of the prevalent view of the ITAT in Li & Fung 2011 (9) TMI 204 - ITAT New Delhi wherein the assessee understood that the ITAT was not willing to accept the argument that 15% was correct and true. The decision so made in the peculiar facts and circumstances does not make out a case that the decision not to litigate and accept was malafide. Considering the facts arguments legal precedent relevant provision and the material available on record we hold that the penalty order deserves to be quashed as no case has been made out by the Revenue to show that the assessee conducted its affairs without good faith and due diligence. On the contrary we find that at every step the assessee has been able to demonstrate that the notwithstanding the addition accepted by way of an estimate the claim that the arms length price has been computed in accordance with the provisions of section 92C of the Act stands unrebutted on record. The mere fact that addition has been partially sustained by itself in the facts and circumstances of the present case does not warrant the penal action. - Decided in favour of assessee

Issues Involved:
1. Penalty under section 271(1)(c) of the Income-tax Act, 1961.
2. Invocation of Explanation 7 of section 271(1)(c).
3. Transfer Pricing (TP) adjustment and computation of the arm’s length price.
4. Alleged concession or admission by the appellant regarding the arm’s length mark-up.
5. Remuneration policy and its determination.
6. The role of derived mark-up on operational cost.
7. Computation of arm’s length price in good faith and due diligence.
8. Impact of the Mutual Agreement Procedure (MAP) under the India-US tax treaty.
9. The relevance of subsequent judicial precedents and decisions.

Detailed Analysis:

1. Penalty under section 271(1)(c) of the Income-tax Act, 1961:
The CIT(A) confirmed a penalty of Rs. 1.65 crores under section 271(1)(c) for alleged concealment of income and furnishing inaccurate particulars of income concerning a TP adjustment of Rs. 4.92 crores. The penalty was levied by the AO after the ITAT granted relief for the balance of the original TP adjustment of Rs. 236.23 crores, reducing it to Rs. 4.92 crores.

2. Invocation of Explanation 7 of section 271(1)(c):
The CIT(A) invoked Explanation 7 of section 271(1)(c) to confirm the penalty, holding that the appellant failed to prove that the TP adjustment did not arise due to a lack of good faith and due diligence in computing the price of its international transactions with foreign associated enterprises (AEs) as per section 92C of the Act.

3. Transfer Pricing (TP) adjustment and computation of the arm’s length price:
The TP adjustment initially made by the AO was Rs. 236.23 crores, which was later reduced to Rs. 4.92 crores by the ITAT. The adjustment was based on a mark-up of 32% on the operational cost of the appellant, which was contested by the appellant. The appellant argued that the 32% mark-up was derived from a private company, M/s Li & Fung (India) Private Limited, and not applicable to its case.

4. Alleged concession or admission by the appellant regarding the arm’s length mark-up:
The CIT(A) held that the 32% mark-up was a result of a concession or admission by the appellant before the ITAT. However, the appellant contended that it never conceded that the 32% mark-up was the arm’s length mark-up for its international transactions.

5. Remuneration policy and its determination:
The appellant's remuneration policy was to be determined as a mark-up on its operational cost, not as a commission on the value of goods procured by overseas AEs from third-party vendors in India. This was supported by the ITAT's decision, which rejected the DRP and AO's assertion of a commission-based remuneration model.

6. The role of derived mark-up on operational cost:
The 32% mark-up on operational cost was never proposed by the TPO, DRP, or AO during the original assessment proceedings. It surfaced during the quantum proceedings before the ITAT. The appellant argued that there was no occasion to compute the arm’s length price with reference to this derived figure of 32%.

7. Computation of arm’s length price in good faith and due diligence:
The appellant contended that it conducted its TP study in good faith and with due diligence. The ITAT accepted the remuneration model of the appellant and the selection of the most appropriate method (TNMM) and comparables. The acceptance of the 32% mark-up was a decision to avoid protracted litigation and achieve peace of mind.

8. Impact of the Mutual Agreement Procedure (MAP) under the India-US tax treaty:
The appellant invoked MAP under Article 27 of the India-US tax treaty concerning the TP adjustment of Rs. 236.22 crores. The appellant argued that, per the MOU between India and the US, any assessment and collection related to the penalty should be kept in abeyance until the resolution of MAP proceedings.

9. The relevance of subsequent judicial precedents and decisions:
The ITAT in the appellant's own case for subsequent years (2009-10 and 2010-11) accepted the 15% mark-up on operational costs, deleting the entire addition. The ITAT's decision to accept the 32% mark-up in the present case was influenced by the decision in Li & Fung India Pvt. Ltd., which was later overturned by the Hon’ble High Court.

Conclusion:
The ITAT quashed the penalty order, holding that the appellant conducted its TP study in good faith and with due diligence. The acceptance of the 32% mark-up was a decision to avoid protracted litigation and did not reflect a lack of good faith or due diligence. The penalty was not justified merely because the addition was partially sustained. The appeal of the assessee was allowed, and the penalty order was set aside.

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