TMI Blog2016 (12) TMI 935X X X X Extracts X X X X X X X X Extracts X X X X ..... d that all primary facts required to be disclosed have been found to be correctly made available in regard to the international transaction and the international transaction disclosed has been computed as per the provisions of section 92C in good faith and with due diligence. In view of the above detailed reasons on facts and law the impugned order is set aside and the penalty order is quashed. - Decided in favour of assessee - I.T.A .No.-6743/Del/2013 - - - Dated:- 16-8-2016 - SMT DIVA SINGH, JUDICIAL MEMBER AND SH.PRASHANT MAHARISHI, ACCOUNTANT MEMBER For The Appellant : Sh.Rahul K.Mitra, AR For The Respondent : Sh.Sanjay Kumar, Sr.DR ORDER PER DIVA SINGH, JUDICIAL MEMBER The present appeal has been filed by the assessee assailing the correctness of the order dated 12.11.2013 of CIT(A)-XX, New Delhi pertaining to 2007 08 assessment year on the following grounds:- 1. The CIT(A) erred in confirming the penalty under section 271(1)(c) of the Income Tax Act, 1961 ( the Act ) amounting to ₹ 2.31 crores, which was levied by the assessing officer (AO) for alleged concealment of income and also furnishing inaccurate particulars of income with re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... model was also changed to commission on value of total goods procured by the foreign AE at 5.22% commission instead of mark-up of 15% on total costs. The TPO applied 5.22% on the value of goods sourced directly from third party vendor by the foreign AE and proposed an adjustment of ₹ 255.97 crore. The issue when carried to the ITAT in the quantum proceedings resulted in partial success to the assessee to the extent that the remuneration model of the assessee was accepted. However, the mark-up of 15% documented in the TP study was not accepted and instead substituted for the estimated mark up of 32%. The addition of ₹ 255.97 crore was restricted to ₹ 6.92 crore by way of this concession. 4. This acceptance of the enhanced mark-up of 32% as opposed to 15% originally claimed lead to the passing of the penalty order by the AO invoking Explanation 7 to Section 271(1)(c). The said order was confirmed in appeal by the CIT(A). Aggrieved by which the assessee is in appeal before the ITAT. 5. The relevant provision of the Act invoked by the Revenue is extracted hereunder:- 271(1). If the [Assessing] Officer or the [Commissioner (Appeals) [or the [Principal Commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid in such transaction was computed in accordance with the provisions of section 92C in the prescribed manner in good faith with due diligence. Thus, it has been concluded that in order to consider whether the said requirements of Explanation 7 have been met or not, it is necessary to consider the facts and circumstances leading to the addition. We have noted that the facts related to the issue have been thrashed out in the quantum proceedings and are a matter of record. We have held that the explanation offered in the penalty proceedings is required to be considered afresh in the light of the requirements of the relevant provision. It has been duly noted that the onus upon the taxpayer is only to show whether the arm s length price has been computed in accordance with the provisions of section 92C of the Act in good faith and due diligence and nothing more. We have held that merely because the addition has been sustained in a contested issue or accepted without a contest cannot be the criteria to mechanically levy or uphold the penalty levied as it is the evaluation of the facts and circumstances as borne out from record which would show whether the addition was accepted on accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a risk bearing agent and therefore, cost plus PLI adopted by the assessee for ALP determination is not the most appropriate. Thereby the cost plus PLI has been substituted by 5% on FOB value of goods outsourced by the entities of foreign enterprises which has been considered to be the TP value. iii. In our considered view, no supporting material has been brought on record that assessee; GIS India has borne any business risks arising from its activities with GAP USA. There are no adverse facts, material or evidence on the basis whereof Ld. TPO has made arrived at such a conclusion. The Ld. TPO has not given any examples or comparables whatsoever to demonstrate which major business risks much less any risk are borne by GIS India and how. In a sweeping manner it has been held that as functions follow risks, and since, in his wisdom GIS India undertakes key functions, therefore it must also be bearing the consequent risks. The observation is flawed as from the handbook and guidelines it clearly emerges that assessee had no wisdom or discretion in these terms. iv. .. v. .. vi. .. viii. In view of all these facts we are una ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the Li Fung India and assessee s case, the transactional profitability earned by Li Fung India supports the case of assessee. The department has heavily relied on the fact that Li Fung Hong remuneration of 5% of value of goods procured should be used as benchmark rate by the assessee. The department overlooked the other extremely important fact of the profitability earned by Li Fung through 5% procurement service model. The total remuneration earned by Li Fung Hong Kong was ₹ 60.15 crores against cost incurred by Indian company of ₹ 45.42 crores and some minor costs incurred in Hong Kong. The ITAT bench held that considering the facts of the case, 80% of commission (Rs. 48.12 crores) earned by Li Fung Hong Kong should be attributed to Indian company. This attribution resulted in profitability of ₹ 2.72 crores (Rs. 48.12 crores ₹ 45.42 crores) for the Indian Company resulting in the net profit / total cost of 6%. Department overlooked these important facts which must be taken into consideration using this example as benchmark for determining arm s length price of international transactions for taxpayers. (emphasis provided) 6.2. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r AY 2006-07. Thus, there are several data points available by now for comparable margins around the PLI of OP/ VAE, namely- (a) 3 comparables in the appellant s initial search for distributors, yielding 15.13% (b) 6 comparables in the appellant s subsequent search for service providers, yielding 19%; (c) 7 comparables chosen by the TPO in its search for commission agents during the TP assessment for AY 2008-09, as updated with the results relating to AY 2006-07, yielding 26.01%. and (d) Li Fung s results of32.43% The arithmetic mean of all the above results yield an OP/ VAE of [(3x 15.13) +{6x 19) +(7x26.01)+32.43]/[3+6+7+l]=21.99% or 22% Thus, the maximum margin on operating costs would still hover around 32% in the case of the appellant, with 22% as the centre of all the data points, without prejudice to the primary contention that the appellant s original margin of 15% on operating costs remains uncontroverted by the TPO DRP. 6.4. The following extract from the aforesaid order in the quantum proceedings further brings out the facts and the background how the enhanced mark-up of 32% was finally selected:- 9.5. Determination of Cost Plus remun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commented upon. The TPO s action of re-characterizing the assessee as a significant risk bearing service provider operating on commission on the value of goods procured by the foreign AE has not been accepted by the Co-ordinate Bench of the ITAT in the quantum proceedings and the assessee s claim that it is a limited risk bearing support service provider as claimed in its TP study has found acceptance by the ITAT. Thus, admittedly considering the explanation of the assessee within the requirements of the Explanation 7 to section 271(1)(c) we find that the claim that the TP study having been carried out in good faith and with due diligence adhering to the requirements of section 92C stands established. The enhanced mark-up, we find was a situation where in the face of the prevalent view held by the Co-ordinate Bench in Li Fung s case the assessee despite pleading that 15% mark-up based on Agreements considered in the TP study should be accepted finally conceded in the face of the prevalent view and agreed to accept the estimated enhanced mark-up. The assessee as per record agreed that even applying the standard laid down in the case of Li Fung i.e. of 32% the resultant relief f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Accordingly considering the peculiar facts and circumstances of the present case and considering the specific provision invoked, we find that in the absence of any argument on facts demonstrating that the computation in the TP study placed on record is in violation of the requirements of Section 92C of the Act and the said exercise was neither done in good faith nor with due diligence, the departmental action fails. We find that the following conclusion as arrived at in ITA No.6742/Del/2013 fully applies to the facts of the present case:- 4.9. In the facts of the present case it is seen that the requirements of section 92C have been met as the selection of TNMM is one of the methods provided and addressing the ingredients of section 271(1)(c) the selection of method by the TPO has not been upset. 4.10. Considering the overall factual matrix wherein the facts have been revisited by us in great detail, we find ourselves unable to agree with the view taken by the tax authorities. No doubt the onus is placed by the Statute upon the assessee to demonstrate that its computation of price paid or charged was within the four corners of the manner prescribed u/s 92C and notwiths ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hus, as observed in acts of good faith it may not be possible to question negligence where due diligence standards are required to be met negligence cannot be tolerated. Similarly due diligence standards may not necessarily be embedded with good faith. 13.8.3. Thus the law requires that the standards to be met by a taxpayer pleading that penalty is not leviable in situations where Explanation 7 is attracted has been kept very high. The twin requirements of the Act may be capable of being summed up in the term best efforts which not only presuppose due diligence but also good faith as best efforts may incorporate not only a diligent standard but can also subsume a good faith standard . 4.12. The Allahabad High Court in the case of Kedar Nath v. State [AIR 1965 ALL 233] (at p. 236) while opining on the meaning of the said term, held Good faith imports the exercise of due care and attention. A person can be excused for having committed an error of judgment only if he exercised due care and attention and his conduct makes it clear that there was no negligence according to reasonable standards. The standard of care required is that of a reasonably prudent man wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of the prevalent view of the ITAT in Li Fung and the assessee understood that the ITAT was not willing to accept the argument that 15% was correct and true. This decision made in the peculiar facts and circumstances does not make out a case that the decision not to litigate and accept was malafide. 4.14. Thus the decision to accept a partial addition in the facts of the present case no where reflects negatively on either the claim of good faith nor the claim of due diligence and instead only addressed the sheer helplessness of the assessee. It is necessary to consider the claims realistically and an assessee after relying upon the correctness of its TP study in the face of then prevalent view as per judicial precedent either has a choice to accept a modicum of addition by way of an estimate or go the full circle of litigation right upto the top. The exercise of choice to close an issue by accepting a paltrey addition wherein admittedly relief to the extent of 98% of the addition was granted and only 2% of the addition stood sustained is a personal choice depending on a persons appetite to litigate. The choice to maintain peace of mind and avoid protracted litigation does ..... X X X X Extracts X X X X X X X X Extracts X X X X
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