TaxTMI 
TaxTMI 
2011 (8) TMI 459
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....ociated enterprises, namely, ABN Amro Asia (Mauritius) Limited, Mauritius, ABN Amro Assets Management (Asia) Limited, Hong Kong; ABM Amro Asia Equities (UK) Limited, UK, and ABN Amro Bank NV, the Netherlands. While computing arm's length price, the assessee's transfer pricing study had adopted the transactional net margin method. The CUP method was rejected for the reason that to compare similarity of transactions, one would need to establish the closeness of all material factors affecting the pricing of transactions, but there are various factors that affect the brokerage rates viz., volumes traded, types of trade and nature of services included therein, client relationship, client type, market forces at the point of time when transactions were entered into, brokerage offered by the competition, business referrals by the clients and other related factors, and the differences on account of these factors may not be quantifiable at all. The assessee took the stand that Indian transfer pricing regulations prescribe application of CUP method, in determining arm's length price, only in cases wherein reliable adjustments can be made for differing factors, which would affect t....
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....o section 271(1)(c) clearly apply to the facts of this case. The Assessing Officer also observed that "in a recent judgment, Hon'ble Supreme Court, in the case of Union of India v. Dharamedra Textile Processors [2008] 174 Taxman 571, have held that element of mens rea is not an essential ingredient for levy of penalty" and thus penalty is to be levied in all cases of concealment of income or filing of inaccurate particulars. On the basis of this reasoning, the Assessing Officer imposed a penalty equivalent to 100 per cent tax sought to be thus evaded, which worked out to Rs. 39,56,921. Aggrieved, assessee carried the matter in appeal before the CIT(A). 5. It was submitted before the CIT(A) that based on FAR (functions, assets and risk) analysis undertaken by the assessee, and taking into consideration the provisions of section 92C of the Income-tax Act read with rule 10B and 10C of the Income-tax Rules, the assessee had considered TNMM as the most appropriate method with Net Profit Margin (NPM) as the profit level indicator to benchmark its stock broking transactions with its AEs. It was also submitted that the transfer pricing study, which examined all the factors in detail, ....
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.... shall pay by way of penalty, (i), to (iii)** ** ** Explanation 1.-Where in respect of any facts material to the computation of the total income of any person under this Act, (A) Such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the CIT to be false, or (B) Such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed. Explanations 2 to 6** ** ** 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 92C then, the amount so added or disallowed shall, for the purposes of clause (c) o....
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....s' thus, a deeming fiction is also implicit in the scheme of penalty provisions. One deeming fiction, by way of Explanation 1 to section 271(1)(c) envisages two situations - (a) first, where in respect of any facts material to the computation of total income under the provisions of the Act, the assessee fails to offers an explanation or the explanation offered by the assessee is found to be false by the Assessing Officer or the CIT(A); and, (b) second, where in respect of any facts material to the computation of total income under the provisions of this Act, the assessee is not able to substantiate the explanation and the assessee fails to prove that such explanation is bona fide and that the assessee had disclosed all the facts relating to the same and material to the computation of total income. There is, however, another deeming fiction, which is a special provision with regard to the arm's length price adjustments made by the Assessing Officer under section 92C(4).This deeming fiction provides that where any ALP adjustments are made under section 92C(4), the amount so disallowed or added back is deemed to represent the income in respect of which particulars have been co....
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....whether, on the facts of the present case, penalty could have been imposed in the light of legal position under Explanation 7 to section 271(1)(c). 9. The scheme of Explanation 7 to section 271(1)(c) makes it clear that the onus on the assessee is only to show that the ALP was computed by the assessee in accordance with the scheme of section 92C in good faith and with due diligence. It is not even in dispute in the present case that the ALP was computed in accordance with the scheme of section 92C inasmuch as Transactional Net Margin Method (TNMM), which is followed by the assessee, is one of the prescribed method under section 92C(1) and the Assessing Officer has not found any faults in computation of ALP in accordance with transaction net margin method. In fact, he has rejected the TNMM on the ground that CUP method could be applied to the facts of this case. Whatever be the legal merits of this approach and the judicial precedents by the coordinate Benches on this issue, it is certainly a highly contentious issue whether a priority in the methods of determining ALPs can be said to exist, even implicitly, giving an edge to CUP over other methods. In a situation, therefore, when ....
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....estioned the former, he has rejected latter only on the grounds that (a) it is incorrect to proceed on the basis that no marketing efforts are required in the case of the AEs, and (b) the onus was on the assessee to demonstrate that no research inputs were given by the AEs. Both of these reasons, to say the least, are highly questionable. The very foundation of transfer pricing exercise is that whereas when independent enterprise deal with each other, their financial and commercial terms are dictated by the dynamics of market forces, it is not exactly the case vis-à-vis dealings with intra associated enterprises transactions and that associated enterprises are able to influence commercial decisions of each other. The plea that when intra associated enterprises transactions are inherently treated as not really based on the dynamics of market forces, it is unrealistic to expect that marketing efforts are also required for securing intra AE business, cannot be dismissed as worthy of outright rejection. It is also well settled in law that nobody can be expected to prove the impossible of proving a negative. Therefore, to expect the assessee to establish that the assessee did not....