TMI Blog2012 (4) TMI 114X X X X Extracts X X X X X X X X Extracts X X X X ..... the following grounds:- I.T.A. no.5164/D/2011 1. "Whether Ld. CIT(A) was correct on facts and circumstances of the case and in law in deleting the penalty of Rs. 22,58,827/- levied by the AO u/s 271G of the Act. 2. That appellant craves leave to add, alter or amend any ground of appeal raised above at the time of the hearing. I.T.A. No.5165/D/2011 (1) "Whether Ld. CIT(A) was correct on facts and circumstances of the case and in law in deleting the penalty of Rs. 22,58,827/- levied by the Assessing Officer u/s 271AA of the Act. (2) That appellant craves leave to add, alter or amend any ground of appeal raised at the time of hearing." 2. Facts, in brief, as per relevant orders are that return declaring loss of Rs. 36,03,300/- filed on 27.10.2005 by the assessee, providing telecommunication network services within India for Global contracts entered by the Indian customers with EGN BV, the parent company formed and registered under the laws of the Netherlands, besides providing international bandwidth and international telecommunication facilities, after being processed u/s 143 (1) of the Income-tax Act, 1961 (hereafter referred to as the Act) was selected for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p and maintain information and document in respect of international transaction as required by sub-section (1) or sub section (2) of Section 92D of the I.T. Act, 1961 during the course of assessment of 'international transactions' before the TPO. Therefore, it is clear that it is a deliberate default of the assessee. Further, the case laws relied upon by the assessee company is distinguishable from the facts of the present case. Therefore, I am convinced that the assessee had committed default for imposition of penalty u/s 271AA of the Act for failure to keep and maintain information and document in respect of international transaction. Hence, penalty u/s 271AA of the Act, 1961 leviable in this case is Rs. 22,58,827/-. Therefore, penalty of Rs. 22,58,827/- is hereby imposed." 3. Similarly, the AO imposed a penalty of Rs. 22,58,827/- u/s 271G of the Act, holding as under:- "The submission of the assessee has been considered and found to be unacceptable and rejected as the assessee fails to keep and maintain information and document in respect of international transaction as required by sub-section (1) or sub section (3) of Section 92D of the I.T. Act, 1961 during the course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... knowledge on the part of the accountant of the appellant company, who was at the relevant time more than 65 years old and due to health reasons he had ultimately left the organization. Hon'ble ITAT Calcutta Bench has decided the case in favor of the appellant and against the revenue by holding that this was a reasonable cause and therefore levy of penalty was deleted. 5.3 Compliance before the TPO clearly shows that the appellant had maintained the documentation u/s 92D of the IT Act and the same was produced before the TPO. Secondly, order of the AO has not established that the appellant had no reasonable cause as mandated u/s 273B of the IT Act. In view of the above, levy of penalty u/s 271G is not justified. The AO is directed to delete the penalty." 5. Likewise, the ld. CIT(A) cancelled the penalty levied u/s 271G of the Act in the following terms:- "5. The appellant had submitted chronology of events before the TPO. On 16 different occasions the appellant either presented the case before the TPO or submitted details as asked for. As can be clearly seen from the submission of the appellant, documents maintained by the company was furnished to the TPO. Even the remand re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y. 2005-06 was filed on 27/10/2005 . The due date for filing return of income was 31/10/2005. Therefore, the prescribed TP documentation should have existed latest by 31/10/2005, in terms of Rule 10D (4). In the course of Assessment proceedings, a reference to TPO was made, with prior approval of CIT, to determine the ALP of international transactions. TPO issued notice under Section 92CA(3) read with Section 92D (3) of the Income Tax Act on 05/12/2007, requiring the assessee to file the TP documentation. On 25/01/2008, a sketchy TP report was submitted, indicating margins of the comparable companies. The margins and financials of the tested party were not submitted with this TP report. On 01/02/2008, Authorized Representative submitted before the TPO that financials of the company had not yet been finalized. The Authorized Representative was asked to explain as to how the ALP could be computed in absence of complete financials for the year under consideration. It is reiterated here that the requisite TP documentation should have existed latest by the due date of filing return, i.e 31/10/2005, but the same was not ready even after lapse of ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasons:- (1) There could be no reasonable cause for not finalizing the company's accounts even lapse of 2 years and 11 months after the close of relevant financial year under consideration. (2) The penalty has been levied for not maintaining the TP documentation by the specified date. i.e by 31/10/2005 and for not furnishing the TP documentation and other information requisitioned by the TPO vide notice dated 05/12/2007. In other words, since no penalty has been levied for delay in furnishing the report in Form No. 3CEB, the explanation offered for the delay is not at all relevant for the case. (3) The TP documentation was required to have existed by 31/10/2005 but the same was not ready even by February 2008. Thus, the delay in finalizing the TP documentation is nearly 2 years 3 months. By no stretch of imagination, the explanation offered for delay in finalization of accounts, can be treated as a reasonable cause, having regard to facts and circumstances of the case." 7. On the other hand, the ld. AR on behalf of the assessee supported the findings of learned CIT(A) while relying upon decision dated 09.11.2011 of the Mumbai Bench in the case of ACIT v. Smith a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same ( c ) a broad description of the business of the assessee and the industry in which the assessee operates, and of the business of the associated enterprises with whom the assessee has transacted; ( c ) same - ( d ) the nature and terms (including prices) of international transactions entered into with each associated enterprise, details of property transferred or services provided and the quantum and the value of each such transaction or class of such transaction; ( d ) In Form 3CEB in the audit report or u/s 92D(3) or u/s 92CA(2) ( e ) a description of the functions performed, risks assumed and assets employed or to be employed by the assessee and by the associated enterprises involved in the international transaction; ( e ) same - ( f ) a record of the economic and market analyses, forecasts, budgets or any other financial estimates prepared by the assessee for the business as a whole and for each division or product separately, which may have a bearing on the international transactions entered into by the assessee; ( f ) same ( g ) a record of uncontrolled transactions taken into account for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hentic documents, which may include the following : ( a ) official publications, reports, studies and data bases from the Government of the country of residence of the associated enterprise, or of any other country; ( b ) reports of market research studies carried out and technical publications brought out by institutions of national or international repute; ( c ) price publications including stock exchange and commodity market quotations; ( d ) published accounts and financial statements relating to the business affairs of the associated enterprises; ( e ) agreements and contracts entered into with associated enterprises or with unrelated enterprises in respect of transactions similar to the international transactions; ( f ) letters and other correspondence documenting any terms negotiated between the assessee and the associated enterprise; ( g ) documents normally issued in connection with various transactions under the accounting practices followed. (4) The information and documents specified under sub-rules (1) and (2), should, as far as possible, be contemporaneous and should exist latest by the specified date referred to in clause (iv) of section 92F: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... escribed limits, the AO has to refer the matter to the TPO. Since the information prescribed under Rule 10D in different columns is voluminous alternative, it has to be examined as to what information, from which clause, is required on the facts of the given case. Armed with the prescribed initial information and in the light of details of international transactions undertaken by the assessee and the method employed to determine the ALP of transactions, further proceedings are conducted towards determination of ALP in terms of provisions of sec. 92C, 92CA 92D of the Act. Sec. 271AA stipulates penalty for failure to keep and maintain information and document in respect of international transaction while sec. 271G provides for penalty for failure to furnish information or document under section 92D of the Act. However, sec. 273B of the Act provides that penalty under these provisions shall not be imposable if the assessee establishes reasonable cause. 8.2 In the instant case, we are concerned with levy of penalty u/s 271AA for failure to keep and maintain information and documents as stipulated under sec. 92D(1) 92D(2) of the Act without any reasonable cause u/s 271G of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee to support its ALP, as observed in Cargil India Private Ltd., 300 ITR (AT) 223 (Del.). Moreover, having regard to purpose of the regulations, the notice u/s 92D(3) must require specific information or documents which the assessee failed to furnish u/s 92CA(2) of the Act but which according to the TPO are necessary for determination of ALP of international transactions. Therefore, notice u/s 92D(3) cannot be vague but must require specific information and has to be confined to the furnishing of information or document as may be "prescribed". Further, there is no restriction of furnishing prescribed information in response to a notice u/s 92CA(2) of the Act to support the computation of ALP by the assessee. However, there is no authority u/s 92D(3) with the T.P.O. to require the assessee to furnish non-specified information or such information or document already filed by the assessee or use of the provision, without asking the assessee to support first its ALP of International transactions. In nutshell, application of mind to ascertain and consideration of material on record and to see what further information on specific points is required, is essential before issuing n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing the global profit split method, thereby indicating maintenance and availability of this information with the appellant. ( e ) Description of functions performed, risks assumed and assets employed or to be employed or to be employed by .the assessee and by the associated enterprises involved in the international transaction. The appellant has provided this as a part of its Functional Analysis on pages 17-28 of the TP Report for financial year 2004-05 ( f ) Record of the economic and market analyses, forecasts, budgets or any other financial estimates prepared by the assessee for the business as a whole and for each division or product separately, which may have a bearing on the international transactions entered into by the assessee. Since, the appellant is just one of the participants of the profit split method applied to the group globally, such financial estimates/budgets etc. (if any) at the group/global level are prepared/ maintained by the overseas group companies. The audited financial statements of the appellant were submitted to the Ld. TPO. ( g ) Record of uncontrolled transactions taken into account for analysing their comparabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TP Report for FY 2004-05. It is pertinent to note that the arm's length price has been defined under section 92F as the "price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions". In the instant case, the quantum/value of international transactions is determined using the principles and computation mechanism set out and explained in detail in the transfer pricing report. Moreover, with respect to the routine administrative/support activities undertaken by the Company, by computing the net margins achieved by comparable uncontrolled companies, the appellant has complied with this requirement of determining the arm's length price for such activities in India. ( k ) The assumptions, policies and price negotiations, if any, which have critically affected the determination of the ALP. The detailed methodology of arriving at the arm's length price of international transactions for the appellant is discussed and provided in the transfer pricing report. The TP Report is a summary of the prescribed information and any details required thereof would be timely provided by the appellant. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional transactions , the TPO further observed 4. "The Transfer Pricing documentation which contains the functional and economic analysis of comparables and of assessee, has been examined and placed on record. 5. In view of the functional and economic analysis of the assessee comparables, no adverse inference is drawn of the international transactions undertaken by the assessee during the FY 2004-05" 9. In the light of aforesaid findings of the TPO, the ld. CIT(A) concluded that the assessee had maintained the documentation u/s 92D of the Act and also produced before the TPO. Accordingly, the ld. CIT(A) cancelled the penalty levied u/s 271AA 271G of the Act. In the penalty orders passed by the AO, there is nothing to suggest as to which particular information or document was not submitted by the assessee nor the exact nature of default has been brought out. In these circumstances, especially when the Revenue have not placed before us any material, controverting the aforesaid findings of the ld. CIT(A) so as to enable us to take a different view in the matter, we are not inclined to interfere. Therefore, ground no.1 these appeals is dismissed. 10. No additional ground ..... 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