2018 (9) TMI 2162 - AT - Income Tax

Penalty levied u/s. 271(1)(c) - international transactions/addition made in proceedings u/s. 92C - Effect of non specification of clear charge - ambiguity in the order of levying penalty with respect to charge - as argued by assessee Explanation-7 to section 271(1)(c) were not invoked as AO has also not specified the charge for levying penalty in the penalty order - CIT(A) deleted penalty levy - HELD THAT - We observe that neither at the time of recording satisfaction for initiating penalty proceedings nor at the time of levy of penalty the AO has made any reference to Explanation-7 . Also in the penalty order AO has not specified the charge for which penalty is being levied i.e. concealment of income Or furnishing inaccurate particulars of income . Apart from provisions of section 271(1)(c) Explanation-7 also mandates that for levying penalty in respect of any addition or disallowance to international transactions penalty can be levied for either of the two defaults i.e. concealment or furnishing inaccurate particulars of income. The order levying penalty suffers from incurable defect of ambiguity. No infirmity in the order of Commissioner of Income Tax (Appeals). Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal were:

• Whether penalty under section 271(1)(c) of the Income Tax Act, 1961 can be validly levied in respect of international transactions without invoking Explanation 7 to section 271(1)(c).
• Whether the penalty order dated 26.03.2015 was legally valid and not vitiated by ambiguity, particularly regarding the specification of the charge-whether penalty was for concealment of income or furnishing inaccurate particulars of income.
• Whether the Assessing Officer complied with the mandatory procedural and substantive requirements while initiating and levying penalty under section 271(1)(c) in the context of transfer pricing adjustments under section 92C.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Applicability of Explanation 7 to Section 271(1)(c) in Penalty Proceedings for Transfer Pricing Adjustments

Relevant legal framework and precedents: Section 271(1)(c) empowers the Assessing Officer to levy penalty for concealment of income or furnishing inaccurate particulars of income. Explanation 7 to this section specifically addresses penalty cases arising from transfer pricing adjustments under section 92C, stating that any addition or disallowance made under section 92C shall be deemed to represent income in respect of which particulars have been concealed or inaccurately furnished unless the assessee proves the price was computed in good faith and with due diligence according to section 92C.

Court's interpretation and reasoning: The Tribunal emphasized that Explanation 7 is a statutory provision that must be invoked when penalty proceedings arise from adjustments under section 92C related to international transactions. It is not optional but mandatory to consider Explanation 7 in such cases. The Tribunal noted that neither at the stage of recording satisfaction for initiating penalty proceedings nor in the penalty order itself did the Assessing Officer refer to Explanation 7.

Key evidence and findings: The record showed that the Assessing Officer initiated penalty proceedings under section 271(1)(c) for furnishing inaccurate particulars of income but failed to mention Explanation 7. The penalty order did not discuss or apply Explanation 7's presumption or the opportunity for the assessee to prove good faith and due diligence in pricing.

Application of law to facts: Given the statutory mandate of Explanation 7, the absence of its invocation rendered the penalty proceedings procedurally defective. The penalty could not be validly levied without considering Explanation 7 as it directly governs penalty in transfer pricing cases.

Treatment of competing arguments: The Revenue argued that non-mention of Explanation 7 does not invalidate the penalty proceedings. The Tribunal rejected this, holding that Explanation 7 is integral to penalty proceedings under section 271(1)(c) for international transactions and cannot be ignored.

Conclusions: The penalty proceedings were invalid for failure to invoke Explanation 7, a mandatory provision in transfer pricing penalty cases.

Issue 2: Ambiguity in the Penalty Order Regarding the Charge for Penalty

Relevant legal framework and precedents: Section 271(1)(c) contemplates penalty for two distinct defaults: concealment of income or furnishing inaccurate particulars of income. The penalty order must clearly specify the charge to ensure fairness and clarity.

Court's interpretation and reasoning: The Tribunal found that the penalty order dated 26.03.2015 did not specify whether the penalty was for concealment of income or furnishing inaccurate particulars. This ambiguity was considered an incurable defect. The Tribunal observed that Explanation 7 requires that penalty can be levied for either default, but the penalty order must clearly state the charge.

Key evidence and findings: The penalty order lacked clarity on the nature of the charge. The Assessing Officer mentioned initiation of penalty proceedings under section 271(1)(c) but did not articulate the precise charge. The ambiguity created uncertainty about the basis of penalty.

Application of law to facts: The absence of clear specification of the charge in the penalty order rendered it defective and unfair. This procedural lapse justified deletion of penalty.

Treatment of competing arguments: The Revenue contended that the satisfaction recorded in the assessment order sufficed to specify the charge. The Tribunal rejected this, holding that the penalty order itself must specify the charge to avoid ambiguity.

Conclusions: The penalty order was invalid due to ambiguity in specifying the charge, warranting deletion of penalty.

Issue 3: Validity of Penalty Proceedings and Compliance with Procedural Requirements

Relevant legal framework and precedents: Penalty proceedings under section 271(1)(c) require satisfaction of certain pre-conditions and clear communication of charges. The principles of natural justice and statutory mandates require that penalty orders be free from ambiguity and comply with Explanation 7 when applicable.

Court's interpretation and reasoning: The Tribunal observed that the Assessing Officer failed to fulfill these procedural requirements: no reference to Explanation 7, no clear charge specification, and no proper satisfaction recorded in the penalty order. These lapses rendered the penalty order defective.

Key evidence and findings: The Assessing Officer's penalty order mentioned pre-conditions generally but did not satisfy the specific requirements related to international transactions and Explanation 7. The satisfaction recorded in the assessment order was insufficient to cure defects in the penalty order.

Application of law to facts: The procedural lapses amounted to incurable defects in the penalty proceedings, justifying deletion of penalty.

Treatment of competing arguments: The Revenue argued that the penalty proceedings were valid despite these lapses. The Tribunal disagreed, emphasizing strict compliance with Explanation 7 and clarity in penalty orders.

Conclusions: The penalty proceedings were invalid due to procedural non-compliance and ambiguity.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"It is an undisputed fact that penalty proceedings u/s. 271(1)(c) were initiated in respect of adjustment proposed by the TPO in proceedings u/s. 92C of the Act. For initiating any penalty proceedings u/s. 271(1)(c) in respect of addition made in proceedings u/s. 92C, we find that 'Explanation-7' to section 271(1)(c) comes into play."

"Neither at the time of recording satisfaction for initiating penalty proceedings nor at the time of levy of penalty, the Assessing Officer has made any reference to 'Explanation-7'."

"In the penalty order dated 26.03.2015, the Assessing Officer has not specified the charge for which penalty is being levied i.e. 'concealment of income' Or 'furnishing inaccurate particulars of income'. Apart from provisions of section 271(1)(c), 'Explanation-7' also mandates that for levying penalty in respect of any addition or disallowance to international transactions, penalty can be levied for either of the two defaults i.e. 'concealment' or 'furnishing inaccurate particulars' of income. The order levying penalty suffers from incurable defect of ambiguity."

"We do not find any infirmity in the order of Commissioner of Income Tax (Appeals). Hence, the grounds of appeal raised by Revenue are dismissed being devoid of any merit."

Core principles established include:

• Explanation 7 to section 271(1)(c) is mandatory and must be invoked in penalty proceedings arising from transfer pricing adjustments under section 92C.
• Penalty orders must clearly specify the nature of the charge-whether concealment of income or furnishing inaccurate particulars-to avoid ambiguity and ensure fairness.
• Failure to comply with Explanation 7 and ambiguity in penalty orders constitute incurable defects invalidating penalty proceedings.

Final determination was dismissal of the Revenue's appeal and deletion of penalty levied under section 271(1)(c) due to procedural defects and non-compliance with Explanation 7 in the context of transfer pricing adjustments.