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2016 (6) TMI 588 - ITAT DELHI

2016 (6) TMI 588 - ITAT DELHI - TMI - Penalty u/s 271(1)(c) - ALP determination - Rejecting the application of TNMM on entity level, the TPO proposed transfer pricing adjustment by determining Nil ALP of the three international transactions under the CUP method by basing his conclusion on the fact that the assessee did not avail any services inasmuch as no benefit was derived by it and, in any case, it amounted to duplication of services - Held that:- The necessary criteria for imposition or non .....

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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 th .....

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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 account of transfer pricing adjustment only when good faith and due diligence are lacking and not because of a genuine and valid difference of opinion in the determination of ALP of an in .....

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satisfied all the requisite conditions as stipulated in the exception crafted in Explanation 7 granting immunity and hence it cannot be visited with penalty u/s 271(1)(c) of the Act. Ex consequenti, the impugned order is set aside and the penalty is deleted. - Decided in favour of assessee - ITA No.550/Del/2016 - Dated:- 28-4-2016 - SHRI R.S. SYAL, AM AND SHRI C.M. GARG, JM For The Assessee : Shri Kanchan Kaushal, CA and Shri Ravi Sharma, Advocate For The Department : Shri Amrendra Kumar, CIT, D .....

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assessee came to be incorporated to carry on the business of manufacture and sale of all types of poly propylene and poly propylene compounds. It filed its return declaring loss of ₹ 40,65,21,868. Six international transactions were reported in Form no. 3CEB. The assessee applied Transactional Net Margin Method (TNMM) with Profit level indicator (PLI) of Operating profit/Operating revenue (OP/OR) to demonstrate that its international transactions were at arm s length price (ALP). On a ref .....

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acturer 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 se .....

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n agreement with GSC for transfer of its business with Maruti Suzuki Ltd. to it along with consultancy services, against payment of BAHT 22396805 (converted into Indian rupee at ₹ 3.14 crore). 4. As regards the international transaction of Availing of engineering support services with transacted value of ₹ 13,03,786/-, the TPO required the assessee to furnish information with regard to nature of such services availed by it. Such information was given stating, inter alia, that it ente .....

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ervices for construction of facility, such as, assistance in plant design, procurement of material and other relevant consultancy were provided by the AEs by sending experts/personnel with required skills and experience available with them. 5. For the third international transaction of Availing of management support services with value of ₹ 3,91,181/-, the assessee submitted that it entered into agreement with its AE, namely, Mitsui Chemicals Inc., for availing management support services .....

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eferred three services to different AEs was to be considered as separate class of transactions requiring separate benchmarking under the transfer pricing provisions. He went on to analyse the assessee s submissions given on the need for availing these services and 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 fact .....

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,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 challenged in quantum proceedings becau .....

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bmissions and perused the relevant material on record. Rejecting the application of TNMM on entity level, the TPO proposed transfer pricing adjustment amounting to ₹ 3.31 crore by determining Nil ALP of the three international transactions under the CUP method by basing his conclusion on the fact that the assessee did not avail any services inasmuch as no benefit was derived by it and, in any case, it amounted to duplication of services. Under such circumstances, a question arises as to wh .....

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ub-section, be deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished, unless the assessee proves to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Principal Commissioner or Commissioner that the price charged or paid in such transaction was computed in accordance with the provisions contained in section 92C and in the manner prescribed under that section, in good faith and with due diligenc .....

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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 .....

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ice method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. Sub-section (2) provides that the most appropriate method referred to in sub-section (1) shall be applied for determining ALP in the manner as may be prescribed. Thus, it can be noticed that there are five methods specifically mentioned in addition to clause (f) of section 92C(1) which refers to such other method as may be prescribed by the Boar .....

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use (a) of section 92C(1). Thus, it is clear that the assessee s application of TNMM in respect of the three international transactions under consideration is in accordance with the provisions contained in section 92C . Further, such determination is in the manner prescribed under that section because the TPO has nowhere held that the assessee calculated ALP of these transactions in a manner different from the one prescribed under rule 10B(1)(e), which contains mechanism for calculating the ALP .....

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To find an answer to this question, we need to briefly revisit the vital facts. The TPO has determined Nil ALP of the three international transactions by holding that the assessee did not avail any services for which the payment was made to its AEs as no benefit was shown to have been received, and, in any case, it was a case of duplication of services. 12. We do not find any force in the view point of the TPO that it was a case of duplication of services. It is for the reason that the assessee .....

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ene 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 t .....

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nd receipt of technical know-how, etc. for the manufacture of desired products to be sold to Maruti Suzuki Ltd. A crucial factor which ought to have been considered by the AO was if such payment falls in capital or revenue field. Since the AO has imposed penalty by considering the transfer pricing adjustment made by the TPO on the premise of non-availing of services , which position is contrary to the actual factual matrix of having also received the entire business with Maruti Suzuki Ltd. for t .....

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from GSC and technical know-how as a quid pro quo for the payment of ₹ 3.14 crore. 13. The second transaction of availing Engineering support services was entered into pursuant to Agreement dated 1.10.2007 with its AE, a copy of which is available at page 551 to 568 of the paper book. This Agreement divulges that the assessee was planning to build a new plant and desired to receive certain engineering services through the employees of its AE. This demonstrates that whereas consideration o .....

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which is 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 availi .....

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ed 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 designated products. It is pursuant to such setting up of new manufacturing facility that the assessee made sales of manufactured goods during the year amounting to ₹ 30.43 crore. This indicates that the benefit derived by the assessee from payments under these three international transactions ca .....

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d the need for services. We find that there is a sufficient elaboration of the nature of services availed by the assessee under these three international transactions, which have not been properly considered by the TPO in determining Nil ALP. He has simply brushed aside the assessee s contentions and determined Nil ALP of these three international transactions basically on the premise that either no services were received or in the alternate, the services, if any, received by the assessee amount .....

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profitability necessary for an assessee to establish that the transaction was at an arm s length price. A further question that may arise is whether the arm s length price is to be determined in proportion to the extent of profit. Thus, while profit may reflect upon the genuineness of an assessee s claim, it is not determinative of the same. It went on to hold that business decisions are at times good and profitable and at times bad and unprofitable. Business decisions may and, in fact, often do .....

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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-à-vis that paid by other comparables in similar circumstances. 17 .....

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rity of the TPO is limited to conducting transfer pricing analysis for determining the ALP of an international transaction and not to decide if such services exist or benefits did accrue to the assessee. Such later aspects have been held to be falling in the exclusive domain of the AO. In that case, it was observed that the e-mails considered by tribunal from Mr. Braganza and Mr. Choudhary dealt with specific interaction and related to benefits obtained by assessee, providing a sufficient basis .....

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the instant case, it turns out that the TPO proposed the transfer pricing adjustment equal to the stated value of three international transactions at ₹ 3.31 crore and odd by holding that no benefit was received by the assessee as a result of availing the services or these amounted to duplication of services and hence no payment on these scores was warranted. The AO in his draft order has taken ALP of these international transaction at Nil on the basis of recommendation of the TPO without .....

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if any benefit accrued to the assessee and thereafter, it was for the AO to decide the deductibility of this amount u/s 37(1) of the Act. As the TPO in the instant case initially determined Nil ALP 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 matte .....

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culars 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 bringing on record any comparable instance, is itself faulty. In any case, it was the AO who was to determ .....

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/s 271(1)(c) of the Act. 20. The ld. DR vehemently argued that penalty u/s 271(1)(c) should be confirmed because the assessee accepted the addition on account of transfer pricing adjustment without assailing it in quantum proceedings. It is not in dispute that the assessee accepted the addition without challenging it before the appellate forums. But in our considered opinion, the mere fact that an addition has been made or confirmed does not per se leads to imposition of penalty u/s 271(1)(c). I .....

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created separate penalty proceedings during which the assessee is given due opportunity to put forth his point of view for nonimposition of penalty notwithstanding the sustenance of addition, amply goes to show that penalty is not automatic of addition. The Hon ble Calcutta High Court in CIT vs. Bimal Kumar Damani (2003) 261 ITR 87 (Cal), has laid down that penalty is not automatic as it is an independent proceedings which is required to be initiated separately and such penalty can be imposed o .....

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nfirmation 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 appeal .....

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India vs. Dharmendra Textile Processors and Ors. (2008) 306 ITR 277 (SC) and CIT vs. Atul Mohan Bindal (2009) 317 ITR 1 (SC) to support the sustenance of the instant penalty. In our considered opinion, such a reliance is improper in so far as the facts under consideration are concerned. In Mak Data P. Ltd. (supra), there was a survey conducted in case of that assessee s sister concern which divulged the assessee s involvement. The assessee surrendered a particular amount which was brought to ta .....

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drawing wrong claim of deduction, was not accepted as a genuine reason for evading penalty when the concealment already stood detected by the AO. We find that these two judgments, namely, Mak Data P. Ltd. (supra) and Usha International Ltd. (supra) are not relevant in the background of the facts as are instantly prevailing. It is not a case where the assessee either surrendered any income or filed a revised return offering the income. Nor did the assessee come forward to surrender the amount of .....

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ed and assessed is a loss. We are in full agreement with this proposition. However, it is not the case of the assessee that no penalty be levied due to returned and assessed loss. On the contrary, the assessee is trying to prove its bona fide in not assailing the addition in quantum proceedings on the ground that the addition was not challenged due to existence of loss even after addition and the assessee opting not to contest addition to avoid protracted litigation. 22. In Dharmendra Textile Pr .....

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g 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 .....

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322 ITR 158 (SC) has held that a mere making of a claim which is not sustainable in law, by itself will not attract penalty u/s 271(1)(c) when the assessee furnishes all the relevant particulars in the return which are not found to be inaccurate. This shows that each and every addition does not lead to imposition of penalty as has been canvassed on behalf of the Revenue. 23. The reliance of the ld. DR on the judgments in CIT vs. Mussadi Lal Ram Bharose 165 ITR 14 (SC) and Calcutta Discount Compa .....

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the P&L a/c of the assessee. In upholding the penalty, the Hon ble High Court found that the claims besides being incorrect in law, were mala fide. We have noticed above that the assessee acted in a bona fide manner in determining the ALP of the international transaction. Rather, it is the action of the TPO in determining Nil ALP, which by no standard can be upheld in view of the discussion made hereinabove. 24. The ld. DR relied on an order passed by the Mumbai Bench of the Tribunal in Gen .....

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ies 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 .....

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