Tax Management India. Com
Law and Practice  :  Digital eBook
Research is most exciting & rewarding


  TMI - Tax Management India. Com
Follow us:
  Facebook   Twitter   Linkedin   Telegram

TMI Blog

Home

2016 (6) TMI 588

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... the AO despite the genuineness of the explanation, it will not call for imposition of penalty, notwithstanding such an addition having been confirmed in appeals. Further, an honest difference of opinion between the assessee and the Revenue can never be a cause for imposition of penalty. Under such circumstances, the contention of the ld. DR that the factum of the assessee not assailing the addition in quantum proceedings should be considered as fatal, in our considered opinion, is devoid of merits. The assessee’s case is covered by another decision of the Mumbai Bench of the Tribunal in DCIT vs. RBS Equities India Ltd. (2011 (8) TMI 459 - ITAT MUMBAI ) in which penalty u/s 271(1)(c) has been deleted in somewhat similar circumstances. If we accept the contention of the ld. DR that addition on account of transfer pricing adjustment invariably means absence of good faith and due diligence, then, each and every case involving transfer pricing adjustment would call for imposition of penalty u/s 271(1)(c). The proposition so propounded on behalf of the Revenue is too wide and clearly unacceptable inasmuch as the intention of the legislature is to impose penalty due to addition on acco .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... except Availing of specified business and consultancy services with transacted value of ₹ 3,14,94,387/-; Availing of engineering support services worth ₹ 13,03,786/-; and Availing of management support services with value of ₹ 3,91,181/-. The TPO observed that the assessee is a routine manufacturer and marketer of specialty chemicals and compounds used for manufacturing automotive parts. He proceeded to analyse the services availed by the assessee through these international transactions. 3. Qua the first international transaction of Availing of specified business and consultancy services , the TPO observed that the assessee entered into a contract of accession with its AE wherein the AE, namely, Grand Siam Composites Co. Ltd. (GSC) agreed to provide the assessee the consultancy services in relation to the project of supply of polypropylene compounds to Maruti Suzuki Ltd. The assessee justified the ALP of this transaction by submitting, as has been extracted on page 3 of the TPO s order, that payments made to GSC was for Business (i.e. sale of polypropylene compound business with Maruti Suzuki Ltd.) and consultancy services. It was explained that the .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... nd held that the assessee failed to give any evidence as to the benefit accruing to it by the supposed receipt of these services and even otherwise there was high possibility of duplication of such services. In this background of the factual matrix, the TPO held that no enterprise would enter into a blanket agreement with identified performance delivery promise by the service provider under uncontrolled situation. In the ultimate analysis, he separated these three international transactions of intra-group services from the other international transactions and determined their ALP under the Comparable Uncontrolled Price (CUP) method at Nil, which led to the recommendation of a transfer pricing adjustment amounting to ₹ 3,31,89,364/-. The AO passed the assessment order making such addition, thereby reducing the declared loss to ₹ 37.33 crore. The assessee did not challenge the addition in appeal. Thereafter, penalty proceedings were initiated by the AO. During the course of such penalty proceedings, the assessee urged for not imposing any penalty on the ground that it was not a case of concealment of income or furnishing of inaccurate particulars as the addition was not c .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ed in this provision itself states that no penalty will be imposed pursuant to the addition on account of transfer pricing adjustment, if the assessee proves to the satisfaction of the authority that the price charged or paid in such a transaction was in accordance with the provisions of section 92C and such price was computed as per the manner prescribed under that section in good faith and due diligence. This divulges that penalty u/s 271(1)(c) in respect of addition on account of transfer pricing adjustment is not imposable only when the assessee proves to the authority that the price paid by it was computed in terms of section 92C and in a manner prescribed under the section and this exercise was done in good faith and due diligence. 9. Section 92C of the Act deals with the Computation of arm s length price. Sub-section (1) provides that the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction etc., namely :- (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... a case of duplication of services. It is for the reason that the assessee was incorporated in the Financial year 2007-08 and its Annual accounts for the year under consideration show that the manufacturing activity was undertaken for the first time during this year, as against the only trading activity in the preceding year. Manufacturing activity was undertaken as a consequence of the assessee entering into Project consultancy and Business transfer agreement dated 1.8.2009 with GSC which is engaged in the business, inter alia , of manufacture and supply of poly propylene compounds and was hitherto an established supplier of poly propylene compounds to Maruti Suzuki India Ltd. Under this Agreement, the assessee acquired `Specified business and consultancy services from GSC for a consideration of ₹ 3.14 crore. The `Specified business of GSC with Maruti Suzuki Ltd. was transferred to the assessee with all business activities, transactions, contracts, orders, inquiries and the consultancy services in relation to the transition of such business. In addition to that, GSC also agreed to provide all technical information, know-how, data, formulae and knowledge relating to the p .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... available at page 569 of the paper book. The services provided under such Agreement have been set out in clause 1.2, which states that the AE shall assist in business operations of the assessee and in market development in India apart from rendering engineering and technical support services in India. A brief description of the above Agreements amply shows that the assessee paid under these international transactions for acquiring the `Business of supply to Maruti Suzuki Ltd. and availing engineering services for setting up of plant required for manufacturing of the products to be supplied to Maruti Suzuki. Since no manufacturing activity was done by the assessee in past as it was simply a trader, acquiring of `Business and availing of the services under these three Agreements cannot be characterized as duplication of services. 14. The second point of view of the TPO for determining Nil ALP that the assessee did not avail any services at all, is clearly not correct. We have noted the factum of the assessee actually acquiring `Business from GSC for supply of products to Maruti Suzuki Ltd. and then availing engineering services for setting up of plant for manufacturing the desi .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... e only question is whether the transaction was entered into bona fide or not or whether it was sham and only for the purpose of diverting the profits. Reverting to the facts of the extant case, we have found out above that the three international transactions entered in to by the assessee with its AEs were not only genuine and bona fide but were also given effect to. 16. It is manifest that the TPO applied CUP method for determining the ALP of these three international transactions. While applying the CUP method, it was obligatory upon him to bring on record some comparable uncontrolled instances availing similar services as per the mandate of rule 10B(1)(a)(i). Not even a single comparable instance has been brought on record to facilitate a comparison between the price for the services availed by the assessee vis- -vis that paid by other comparables in similar circumstances. 17. Even otherwise, we notice that the action of the TPO in determining Nil ALP of these three international transactions on the ground that no such services were required to be availed or it was a duplication of services and then the AO making addition simply on the basis of recommendation of the .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... P by holding that no benefit accrued to the assessee etc. and the AO made the addition without examining the applicability of section 37(1) of the Act, we find the actions of the AO/TPO running in contradiction to the ratio laid down in Cushman Wakefield (supra) . Following this decision, the matter in quantum, if appealed against, would have required a remit to the file of AO/TPO for deciding it in conformity with the law laid down by the Hon'ble jurisdictional High Court in this case. 19. Coming back to the Explanation 7 to section 271(1), we find that no doubt the addition of ₹ 3.31 crore has been made on account of transfer pricing adjustment in respect of these three international transactions, but, the same cannot be deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished because the assessee has proved that the price paid by it under such transactions was computed in accordance with the provisions of section 92C and in the manner prescribed under the TNMM in good faith and with due diligence. Further the action of the TPO in changing the most appropriate method from TNMM to CUP without b .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... der of income; acceptance or non-acceptance of addition; and confirmation or deletion of addition in quantum proceedings. In fact, it is the evaluation of the circumstances leading to the surrender/addition or confirmation of addition, which decide the fate of penalty. Where a surrender or an addition is made due to absence of bona fide in the conduct of the assessee, it may be a good case for imposition of penalty. On the other hand, if a surrender or an addition is made due to failure of the assessee to establish his case to the satisfaction of the AO despite the genuineness of the explanation, it will not call for imposition of penalty, notwithstanding such an addition having been confirmed in appeals. Further, an honest difference of opinion between the assessee and the Revenue can never be a cause for imposition of penalty. Under such circumstances, the contention of the ld. DR that the factum of the assessee not assailing the addition in quantum proceedings should be considered as fatal, in our considered opinion, is devoid of merits. 21. The ld. DR also placed reliance on the judgments of the Hon ble Supreme Court in the case of Mak Data P. Ltd. vs. CIT (2013) 358 ITR .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ss even after addition and the assessee opting not to contest addition to avoid protracted litigation. 22. In Dharmendra Textile Processors and Ors. (supra) , the Hon ble Supreme Court laid down that mens rea is not an essential ingredient of section 271(1)(c) and there is no discretion with the authority competent to impose penalty to levy penalty below the prescribed limit. It is pertinent to mention that the Hon ble Supreme Court in its later decision in Union of India vs. Rajasthan Spinning and Weaving Mills (2009) 224 CTR 1 (SC) has explained its earlier decision in Dharmendra Textile Processors and Ors (supra) by laying down that the earlier decision cannot be said to hold that penalty u/s 11AC of Central Excise Act would apply to every case. It has been mentioned that the decision in Dharmendra Textile Processors (supra) must be understood to mean that though the application of section 11AC would depend upon the existence or otherwise of the condition expressly stated in the section, but, once the section is applicable in a case, then, concerned authority would have no discretion in quantifying the amount of penalty. In so far as the reliance of the ld. DR on dec .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... applied the CUP method by treating such transaction with third parties as a benchmark. The addition so made by the TPO was accepted by that assessee, which led to the imposition of penalty u/s 271(1)(c). When the matter of penalty finally came up before the Tribunal, it was observed that the assessee did not adopt CUP method knowing very well that internally comparable uncontrolled transactions were available. The assessee s applying CPM in such circumstances was found to be an evidence of absence of due diligence and good faith. When we advert to the facts of the instant case, we find that even the TPO has not brought out any comparable transaction under the CUP method. His entire case is based on duplication of services and/or non-availment of any services by the assessee from its AEs, which has been found by us to be untenable. Thus, this decision of Mumbai Bench is distinguishable and does not support the Revenue s case. On the contrary, we find that the assessee s case is covered by another decision of the Mumbai Bench of the Tribunal in DCIT vs. RBS Equities India Ltd. (2011) 13 Taxmann.com 30 (Mum) in which penalty u/s 271(1)(c) has been deleted in somewhat similar circum .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

 

 

 

 

Quick Updates:Latest Updates