2016 (12) TMI 935
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....rores. 2. The CIT(A) erred in invoking the provisions of Explanation 7 of section 271(1)(c) of the Act in confirming the aforesaid levy of penalty by holding that the Appellant had failed to prove before the AO and CIT(A) that the TP adjustment with reference to which the penalty had been levied, as referred to in Ground No.1 above, did not arise due to any absence of good faith and due diligence on the part of the Appellant in computing the price of its international transactions with the foreign associated enterprises (AEs) in accordance with the provisions of section 92C of the Act." 2. It was a common stand of the parties before the Bench that the arguments advanced in identical appeal in ITA No.6742/Del/2013 for 2006-07 AY would address the issues in the present appeal also as facts, circumstances, arguments and position of law for the respective parties would continue to remain the same. 3. We have heard the rival submissions and perused the material available on record. The record shows that the assessee selected TNMM as the most appropriate method wherein describing itself as a low-risk provider in its FAR analysis carried out in the TP study claimed that for the servi....
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....s entered into an international transaction [or specified domestic 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) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished, unless the assessee proved 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 diligence]." 6. The substantial question that arises for consideration is whether in the facts of the case the acceptance of enhanced mark-up as decided by the ITAT leading to the addition can it be claimed in view of the deeming provision of Explanation 7 of section 271(1)(c), that the computation of price charged or paid by the assessee in the international transaction as defined in section 92B was compu....
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....without due diligence with a willful attempt to defraud the Revenue and not because addition is sustained or accepted. Hence reverting to the basic issue which devolves for consideration, we are of the view that we are first required to examine whether there is any primary evidence to show that by any deliberate act of suppressio veri or suggestio falsi the assessee has tried to conceal any income or furnish inaccurate particulars. Examining the facts of the present case, we find that the TPO has accepted TNMM as the most appropriate method selected and has also not interfered with, the comparables selected. The re-characterization of the assessee as significant risk service provider by the TPO we find has not found favour by the Co-ordinate Bench in the Quantum proceedings in its order dated 18.09.2013 in ITA No.5147/Del/2011 and ITA No.225/Del/2012. The relevant extracts from the order in the quantum proceedings is extracted hereunder:- 9.2. "Characterization of Assessee and its Associated Enterprises through Function, Assets and Risk (FAR) analysis of international transactions. The FAR analysis gives the basis of broad characterization for e.g. Manufacturer, Service Provider....
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.... 6.1. We find that the conduct of the assessee vis-a-vis its claim of "good faith" and "due diligence" is further brought out from the aforesaid following extracts from the order of the Co-ordinate Bench passed in the quantum proceedings:- 9.4. Li & Fung Case and TPO / DRP Stand i. ............................. ii. ............................ iii. The department has heavily relied on the Li & Fung India's case (supra). In this case, the Delhi Tribunal held that on the facts of the said case, the procurement company in India was entitled to a revenue linked remuneration. The decision in the case of Li & Fung proceeded on the specific findings of the TPO that the assessee was not able to establish that the foreign principal in Hong Kong had any substance, which the assessee was also not able to substantiate before the Tribunal. In these peculiar facts Tribunal accepted the factual position that the Indian assessee had actually carried out all the significant functions relating to procurement in India; and that very little or virtually nil functions were carried out at the level of Hong Kong. iv. However, the facts in the appellant's case are different in as much as all the....
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....um proceedings the facts leading to how the mark-up of 32% came up for consideration:- "7.10 Ld. Counsel at the end of his arguments summarized the arguments as under: * Given the functional, asset and risk profile of the appellant, it is entitled to a remuneration model of a mark up or profit on only its operating expenses or VAR; and not on the value of goods sourced by GAP US from third party vendors in India. * Incidentally, on identical facts, the Dutch Supreme Court had also approved a cost plus remuneration model for a similar procurement company; and not a commission linked to volume of goods procured, as the latter option would have resulted in exorbitant profit margin accruing to the procurements company, namely in excess of 600%. * The appellant's mark up of 15% on operating costs have not been controverted by the TPO, who in fact, committed a grave error in taking the same comparables, as chosen by the appellant, but merely changing the PLI, without even appreciating that the intensity of functions of such comparables were more than 25 times than that of the appellant for, a applying a turnover linked remuneration model. * In the extreme situation, even without....
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....sessee case cannot be stretched beyond 32% looking from Li Fung case or any other angle. (ii) It is trite that Income tax assessments and appellate proceedings are non adversarial in nature, held to be an exercise of fair determination of tax liability payable by the assesse. Looking at the sweeping observations of the TPO and DRP which are neither based on any cogent reasoning nor factual reliability, the assessments as framed give an impression of being work of adversarial approach in tax liability determination. Hon'ble Finance Minister generally and recently in particular gave a clarion call that the income tax proceedings should be fair and non adversarial in nature. This is rightly so as it is a sine qua none of a tax administration which usher into a rule a rule of law which is predictable and based on sound reasoning and is not fraught with the perils of uncertainties and adversities for the taxpayers. (iii) In view of the foregoing we have no hesitation to accept a candid proposal given by the assessee and hold that assessee TP adjustments be made by adopting the 32% cost plus mark up of the assessee for AY 2006-07 and 2007-08. The mark-up proposal of assessee is highe....
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.... the unavoidable conclusion that the choice of accepting the enhanced mark-up was visited upon the assessee in view of the precedent followed by the ITAT. Thus beyond arguing that the standard laid down therein cannot be applied to it, the assessee had the choice either to accept the enhanced mark-up or litigate further. With handsight, it is evident that had the assessee exercised the choice to litigate then in view of the decision of the Hon'ble High Court in the case of Li & Fung case there can be no doubt that the assessee had an arguable case in its favour in the quantum proceedings. However the fact remains that the assessee chose to concede but this decision to concede and accept a partial addition by no stretch of imagination can be said to be guided or motivated by any mala fide intent in order to cover its duplicity and to defraud the Revenue. The decisions to concede and/or withdraw or litigate further apart from being guided by factors like the quantum involved for the assessee and various other consideration is also dictated by circumstances which determine the appetite to litigate of the tax apyer. There may be very many reasons where the litigant may lack the appetit....
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..... No such argument has been raised nor any fact has been brought to our notice to suggest otherwise. The view taken appears to be that simply because the addition is accepted the penalty is to be levied. 4.11. We find considering the judicial precedent and the peculiar facts of the present case the said argument does not lend any help to the Revenue. Though the terms 'good faith' and 'due diligence' have not been defined under the Act accordingly the definition of the term 'in good faith' as defined under the General Clauses Act may be taken into consideration. The term "in good faith" has been defined in The Black's Law Dictionary; Sixth Edition which defines the term as Good faith is an intangible and abstract quality with no technical meaning or statutory definition, and it encompasses, among other things, an honest belief, the absence of malice and the absence of design to defraud or to seek an unconscionable advantage, and an individual's personal good faith is concept of his own mind and inner spirit and, therefore, may not conclusively be determined by his protestations alone. (Doyle vs. Gordon, 158 N.Y. S.2d 248, 259, 260]. In common usage this term is ordinarily used to ....
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....dy report made available by the assessee to the tax authorities the assessee operates as a procurement support service company for its foreign AE. The foreign AE directly sources the goods from third-party vendors in India and in respect of these the assessee renders sourcing support services. For the said exercise the assessee is remunerated at total operating costs +15% markup. It is a fact that the TPO did not accept the remuneration model of the assessee and changed the characterization from limited risk bearing source single support service provider to a commission agent. The said issue in the quantum proceedings reached the ITAT and it is a fact that the ITAT upheld the remuneration model of the assessee that is a markup on total operating costs. It is a fact that the markup of 15% as claimed by the assessee was not accepted by the ITAT and as per the arguments of the assessee, a markup of 32% was accepted in order to achieve a closure on the issue where the energy and costs devoted towards litigation were considered to be not sufficient to agitate for the further relief of about 2% of the relief which was withheld by virtue of this concession made by the assessee that the ma....