TMI Blog2016 (8) TMI 1143X X X X Extracts X X X X X X X X Extracts X X X X ..... nd true. The decision so made in the peculiar facts and circumstances does not make out a case that the decision not to litigate and accept was malafide. Considering the facts, arguments, legal precedent, relevant provision and the material available on record, we hold that the penalty order deserves to be quashed as no case has been made out by the Revenue to show that the assessee conducted its affairs without good faith and due diligence. On the contrary we find that at every step the assessee has been able to demonstrate that the notwithstanding the addition accepted by way of an estimate the claim that the arms length price has been computed in accordance with the provisions of section 92C of the Act stands unrebutted on record. The mere fact that addition has been partially sustained by itself in the facts and circumstances of the present case does not warrant the penal action. - Decided in favour of assessee - I.T.A .No.-6742 /Del/2013 - - - Dated:- 10-8-2016 - SMT DIVA SINGH, JUDICIAL MEMBER AND SH.PRASHANT MAHARISHI, ACCOUNTANT MEMBER Appellant by Sh.Rahul K.Mitra, AR Respondent by Sh.Sanjay Kumar, Sr.DR O R D E R PER DIVA SINGH, JUDICIAL MEM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon ble Tribunal that the said figure of 32% was the arm s length mark up of the international transactions entered into with the foreign AEs, as referred to in Ground No. 3 above. 5. The said figure of 32% was a derived mark up on the operating cost earned by a private company, namely M/s Li Fung (India) Private Limited, with respect to its global profits; and not limited to the profits made by it in India, where the Hon ble Dispute Resolution Panel ( DRP ) and accordingly the AO had relied upon the said company in the context of a judgement of the Hon ble Delhi Tribunal rendered in the case of the said company for the proposition that the remuneration policy of the Appellant was to be computed with reference to commission of the value of the goods procured by the overseas AEs of the Appellant from India, an assertion which was outright rejected by the Hon ble Tribunal in the Appellant s own case for the relevant assessment year by holding that the remuneration policy of the Appellant was to be determined as a mark up on only its operational cost and not a commission on the value of goods procured by the overseas AEs from third party vendors in India. 6. The said figur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost, the said mark up could, under no circumstances, exceed the derived mark up on operating cost in the case of Li Fung, representing its global profits; and not just the profits derived by such company in India, as opposed to the exorbitant mark up on operating cost amounting to 830.95%, which was imputed by the DRP and the AO, by wrongly applying a commission based model in the case of Appellant; and thus the authorised representative of the Appellant had never conceded before the Hon ble Tribunal that the said figure of 32% was the arm s length mark up of the relevant international transaction entered into by the Appellant with overseas AEs. 9. The CIT(A) erred in appreciating the fact that the Appellant placed the said figure of 32% as being one of the several data points which could have been taken for computing the arm s length mark up on the operational cost of the Appellant, the other data points being 15.13%, 19% and 26%, as evident from the order of the Hon ble Tribunal passed in the Appellant s case for the relevant assessment year; and as also reproduced by the CIT(A) in its own order while confirming the penalty, with a further submission that arithmetic mean of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dings for the relevant assessment year and ; in such premises the CIT(A) erred in confirming the levy of penalty amounting to ₹ 1.65 crores in the case of the Appellant. 12. Without further prejudice to any of the grounds as mentioned above, the AO and the CIT(A) erred in levying and confirming the penalty respectively by ignoring the fact that the Appellant had invoked Mutual Agreement Procedure (MAP) under Article 27 of the India - US tax treaty inter-alia with respect to the TP adjustment of ₹ 236.22 originally made by the TPO, which includes the sum of ₹ 4.92 crores which was ultimately confirmed by the Hon ble Tribunal under the circumstances as above, which as per Clause 5 of MOU entered between India and United States with reference to such MAP, any assessment and collection in relation, to penalty need to be kept in abeyance till the resolution of said MAP proceedings and therefore the order passed by the said AO in imposing the said penalty need to be cancelled and held void ab-initio. The Appellant craves leave to alter, amend or withdraw all or any of the grounds herein or add any further grounds as may be considered necessary either before or dur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee on a commission on the value of goods was not approved by the ITAT. This addition which has been accepted by the assessee it was submitted has formed the basis for levying penalty u/s 271(1)(c) by invoking Explanation 7 of the Income tax Act, 1961. It was submitted that despite offering detailed explanations in waiting before the AO in the penalty proceedings vide two specific letters the receipt of which is accepted but the AO he has held that the assessee has remained silent. 2.3. It was submitted that though the submissions advanced on behalf of the assessee before the CIT(A) on facts and law are extracted in para 5 from pages 14 to 18. However, these did not meet with any success. The Ld.AR carrying us through them submitted that by and large the assessee relies on these arguments and prays that penalty in the facts on record was not leviable. 2.4. Carrying us through the finding of the CIT(A) it was submitted that the penalty has been confirmed mechanically on the reasoning that due to variation in the mark-up from the TP study to the enhanced mark-up ignoring the detailed arguments on facts and law it was held that the assessee did not carry out its TP study wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the total adjustment of ₹ 236.22 crores made by the AO and the adjustment was thus restricted to only ₹ 4.92 crores. As a result of this decision it was submitted the assessee received relief of more than 98%. The said decision it was submitted was accepted by the assessee and no appeal against the same was filed. The decision to give up and settle the issue it was submitted was guided by wanting to buy peace and avoid protracted litigation. Inviting attention to the high handedness of the Revenue it was submitted that the AO in the penalty proceedings in para 3 duly acknowledged that in response to show cause notice requiring the assessee to explain why the penalty under section 271(1)(c) of the Act should not be levied the assessee responded by two specific letters. However, in subsequent paras i.e. para 4 and 6 of the order, the AO noted that the assessee has been silent in response to the show cause notice for imposing penalty and has failed to rebut the allegations. 2.6. Apart from relying upon the submission before the AO and the CIT(A) at pages 2 to 20 of the Paper Book it was reiterated that that it is merely a change in the mark-up being adopted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... through the findings of the respective authorities, it was his argument that there is no doubt that the TP Study of the assessee has not been accepted by the TPO and even if the remuneration model of the assessee has ultimately been accepted in the quantum proceedings by the ITAT the fact remains that the mark-up of 15% has not been accepted and enhanced mark-up has been conceded by the assessee and the issue not having been agitated further demonstrates that there was concealment. The decision in subsequent years and the decision overturning the decision of the ITAT by the Hon ble High Court in Li and Fung it was submitted are subsequent facts and not relevant. 4. We have heard the rival submissions and perused the material available on record. Before we address the facts, we first extract the relevant provision which has been invoked by the Revenue in the facts the present case:- 13.1. The relevant provisions of section 271(1)(c) are set out hereunder for ready-reference:- 271(1). If the [Assessing] Officer or the [Commissioner (Appeals) [or the [Principal Commissioner or] Commissioner] in the course of any proceedings under this Act, is satisfied that any person- ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fered in the penalty proceedings is required to be considered afresh in the light of the requirements of the relevant provision and simply 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. 4.2. 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. The fact that that the addition is contested or given up per se would not be determinative of the issue. It is the evaluation of the facts and circumstances as borne out from record which would throw light whether the decision not to contest was bona fide or mala fide arising out of a failure of the assessee. It is necessary to establish what were the guiding factors which contributed to the decision. It is a settled legal position that the mere fact that an addition is accepted per se does not mandate that penalty is leviable it is the explanation offered by the assessee in the penalty proceedings addressing the facts why surrender is made which is required to be considered. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the arm s length price of international transactions. i. Authorities below have proceeded on premise that assessee is a risk bearing AE and its functions are not in the nature of a service provider only. The FAR attributable to assessee are far greater than what are claimed. Assessee has developed substantial intangibles in the form of human resources and supply chain. Besides location advantages available to assessee have not been factored in the ALP. ii. On these observations, and by putting reliance on the case of Li Fung India, it has been held that assessee performs the functions 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es which are placed on record and have not been controverted by the department. It emerges that assessee follows and executes them as a service provider. For such preordained support services, the assessee cannot be held to be entitled to remuneration in terms of Li Fung case on FOB value of goods procured by GAP US from third party vendors in India. In the case of Li Fung India, assessee actually carried out significantly value added functions in India, which is not the case before us. v. Even if we overlook the factual dissimilarities between 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 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... study with due diligence and good faith is evident from the fact that in two consecutive subsequent years for the same activity the Co-ordinate Benches of the ITAT have accepted the mark-up of 15%. The fact that the Co-ordinate Benches took the view not only relying on the documentation in the TP study and the Agreements which were made available to the TPO even in the present proceedings. The decision of the Jurisdictional High Court dated 16.12.2013 in the case of Li Fung wherein the Hon ble Court had been taken into consideration by the Co-ordinate Benches noting that the Court had approved the remuneration model of mark-up of 5% on the operation cost of Li Fung India, without considering the value of goods procured by the foreign AE of Li Fung directly from third party vendors in India. It is not relevant here to address in detail the severe castigation of the approach of the Revenue noted and pointed out by the Hon ble Court which has observed that tax authorities should base their conclusions on specific facts and not on vague generalities such as significant risk functional risk enterprise risk etc. without any material on record to establish such findings. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee faces a wall of obstruction, the assessee either had a choice to accept a modicum of addition by way of an estimate or go the full circle of legal battle right up to the top. The exercise of choice to close an issue with the addition in order to achieve peace of mind cannot be said to be so fatal, in the absence of malafide, that the assessee must necessarily be visited by a penalty of concealment or of filing inaccurate particulars. The claim of TP study having been prepared and claim of transaction being at arms length mode in good faith and due diligence cannot be said to have been eroded by accepting an enhanced mark-up in these peculiar facts. 4.8. No doubt Explanation 7 to Section 271(1)(c) is a deeming provision and postulates that any addition on account of transfer pricing adjustment shall be deemed to represent income in respect of which particulars have been concealed or inaccurate particulars have been furnished in terms of section 271(1)(c). However, the Legislature has not intended the penalty to be automatically invoked and has carved out an exception by setting out in clear unambiguous language that no penalty will be imposed as a result of the addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich 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 describe that state of mind denoting honesty of purpose, freedom from intention to defraud, and, generally speaking, means being faithful to one s duty or obligation. [Efrone vs. Kahnanovitz, 249 Cal. App. 187s 57 Cal. Rptr. 248, 251]. It may not be out of place to quote from the order dated 01.03.2016 of the ITAT in ITA No.1062 1063/Del/2013 in the case of ACIT vs Boston Scientific India Pvt. Ltd. Wherein it has been observed:- 13.8.2. Good faith presupposes honesty and fairness at its core. However, good faith does not cover the sins of omission or negligence. Due diligence on the other hand does not tolerate negligence and may be defined as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the concession made by the assessee that the markup of 32% is acceptable. We have no reason to disbelieve the claim that in the facts the present case that the decision not to agitate the issue beyond the ITAT was guided by prudence in order to buy peace and avoid protracted litigation where the amount at stake for the assessee was not sufficient to consider the option of further litigation. It is a fact that as a result of the additions made by the TPO wherein addition of ₹ 236.22 crores was proposed and pursuant to the order of the DRP had been made by the Assessing Officer, which stood reduced to ₹ 4.92 crore with the resultant relief of deletion of addition of ₹ 231,31 crore. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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