TMI Blog2017 (5) TMI 1617X X X X Extracts X X X X X X X X Extracts X X X X ..... nd demand by taking into account the aforesaid adjustment. In absence of such rectification or revision of the assessment order, we are of the opinion that the penalty levied u/s 271(1)(c) on addition of ₹ 60,23,024/- as done by the Ld. CIT (Appeals), is beyond his jurisdiction and the same is directed to be quashed. Levy of penalty of transfer pricing adjustment - Held that:- TPO cannot made foreign A.E. as a ‘tested party’ and compare it with the Indian comparables who are operating under different geographical, economical and market environment. Such an exercise by the TPO vitiates the entire exercise of determining the ALP of the transaction and transfer pricing adjustment made by him. Other incomes like 'dividend income’ cannot be reckoned as part of operating sales or operating profits. In this manner the tinkering of the PLI by including dividend income as part of operative income and operating profit by the TPO is again unjustified in law and facts. PLI of 14.73% as determined by the TPO cannot be sustained on the facts of the present case. If the A.E. is operating profit is 8.62%, then in that case even if we take arithmetic profit margin of 5.92 % of the compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... additions made in assessment order and more so when framing the such assessment order u/s 143(3)/144C dated 28-02-2011 is also contrary to law and facts. On account of expenses of capital nature-Rs.5,00,000/- On account of transfer price adjustment -Rs.63,85,158/- 4. That having regard to the facts and circumstances of the case, Ld. CIT (A) has erred in law and on facts in confirming the action of Ld. AO in levying penalty u/s 271(l)(c) which is bad in law being beyond jurisdiction and barred by limitation and contrary to the principles of natural justice and has been passed by recording incorrect facts and findings and without giving adequate opportunity to the assessee and the same is not sustainable on various legal and factual grounds. 5. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in imposing a penalty ofRs.20,79,453/- that too without recording mandatory satisfaction as per law. 6. That having regard to the facts and circumstances of the case, Ld. CIT (A) has erred in law and on facts in directing the assessing officer to revise/enhancing the quantum of penalty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Plus Method 6,60,65,006 Total 12,83,83,137 4. For computing its arm s length price of aforesaid international transactions, the assessee had adopted Cost Plus Method (CPM) and submitted that the AE charges the assessee company with markup of 10% of the total cost of purchase of the raw materials and capital goods, which meets the ALP requirement. The ld. TPO noted that the assessee while adopting CPM as MAM has not bench marked its ALP by carrying out any comparability analysis after identifying independent comparable. Therefore, in absence of assessee s failure to furnish suitable comparables, the ld. TPO held that CPM cannot be adopted as most appropriate method and held that TNMM should be taken as MAM for bench marking the ALP of the transaction. Since the assessee was incurring huge loses and sales have been made entirely to the AE, the TPO held that tested party should be foreign AE. After going through AE s financials, he noted that the operating margin of the AE has been stated to be 8.62% which has been worked out in the following manner:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... After taking into account the enhanced operating margin of the A.E. vis- -vis the average margin of comparables, (i.e.,14.73% - 5.94% =8.79%), TPO held that A.E. has earned excessive margin of 8.79% on the total sales made to the assessee. Thereafter, he computed the ALP of international transactions of purchase of raw materials in the following manner:- Total Sales to Indian party [ In Rs.] (Import of raw material) : 6,23,18,131 Less: Margin 14.73% : 91,79,461 Direct Indirect Cost of production: 5,31,38,670 Add: Normal Markup @ 5.94% 31,56,437 Arm s Length Price 5,62,95,107 Total price charged by AE : 6,23,18,131 Transfer price adjustment : 60,23,024 6. As regards the computation of ALP in respect of purchase of capital goods, he made the ALP adjustment in the following manner:- Total Sales to Indian party: [In Rs.] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment: Rs.63,85,158/- In the penalty proceedings, in response to the show cause notice, assessee made its elaborate submissions as to why penalty cannot be levied on such additions, however the Ld. Assessing Officer has rejected the assessee s contention and levied the penalty at ₹ 23,20,000/- after observing and holding as under:- On the facts of the case as discussed above, it is held that assessee has furnished inaccurate particulars of income and thereby concealed true particulars of such income to the extent of ₹ 68,85,158/- and is liable for penalty u/s 271 (1)( c) of the Act. The minimum and maximum penalty in respect of which the inaccurate particulars of income have been furnished comes to ₹ 23,17,545/- being 100% and ₹ 69,52,635/- being 300% respectively. Considering the facts and circumstances of the case, I hereby impose penalty of ₹ 23,20,000/- u/s 271(1)( c) of the Act and direct the assessee to pay the same. 9. However the ld. CIT (Appeals) apart from confirming the penalty on the additions made by the Assessing Officer in the assessment order has further enhanced the penalty in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s again levied the penalty on both the counts without specifying the charge. The Learned CIT (Appeals) too has confirmed the penalty under both the charges which cannot be sustained in law, because, the charge for initiating the penalty proceedings and levy u/s 271(1)(c) should be very specific. In support, he relied upon the decision of Karnataka High Court in the cases of CIT vs. Manjunatha Cotton and Ginning Factory others (2013) 359 ITR 565 (Karnataka); New Sorathia Engineering Co. Vs. CIT 282 ITR 642 (Gujarat). Apart from that, he submitted that the assessee has been incurring huge loses and there could not have been any benefit for evading any tax and therefore, in such circumstances also penalty cannot be confirmed. In support of this proposition also he has filed certain Tribunal decisions before us. 12. Regarding the addition of ₹ 5 lakhs fee paid to ROC, he submitted that the same was paid for increase of authorized capital which is not for any enduring benefit accrued to the assessee and it was claimed as revenue expenses, which has been charged to the profit of loss account. In any case all the particulars and facts in this regard were disclosed in the books ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egards the element of other income as a part of operating profit, he submitted that the overall income has to be taken into consideration for determining the PLI. Thus, he strongly relied upon the order of the Learned CIT (Appeals). 14. In rejoinder the ld. counsel submitted that the assessee has taken a specific ground before this Tribunal challenging the validity of the enhancement of the Ld. CIT (Appeals) and after passing of the order of the Learned CIT (Appeals), only forum in which the assessee can raise this issue is before this Tribunal. Apart from that, he pointed out from the order of the Ld. CIT (Appeals) that this issue was specifically raised before the Ld. CIT (Appeals). Thus, he could not have made any enhancement of penalty on the addition which has not been made by the Assessing Officer. 15. We have heard the rival submissions and perused the relevant findings given in the impugned order as well as the material placed before us. We will first address the issue of enhancement of penalty made by the Ld. CIT (Appeals) on an addition which has not been made in the quantum proceedings. As discussed above, the ld TPO has proposed two TP adjustment; first, for sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ark we would like to add that, the CIT (Appeals) as a first appellate authority though has vast powers under section 251, but he should not transgress his jurisdiction or exercise power beyond the mandate of law and if any such action is being done then the same should be justified within the ambit of the law or by taking any support from any judicial precedence. Here no judicial precedence or any statutory provision has been brought to our notice that, Ld. CIT(A) can levy or enhance penalty u/s 271(1)(c) whence there is no addition in the quantum/assessment proceedings. Accordingly, we hold that penalty on addition of ₹ 60,23,024/- cannot be levied and the same is directed to be deleted. 16. Now coming to the levy of penalty of transfer pricing adjustment of ₹ 63,85,154/- as discussed in the earlier part of order, the same has been made in respect of purchase/import of capital goods by the assessee from its A.E. From the perusal of the TPO s order it is seen that he has rejected CPM method of the assessee on the ground that there is no proper bench marking exercise done by the assessee by comparing it from uncontrolled transaction with the third parties. Though such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here from the records is it borne out that, whether such authorized capital was for either running of business or for any expansion of business or for setting up of new business. The treatment of such an expense whether it is for capital or revenue largely depends on the facts of the case and there is often very thin line demarcation between the expense which can be reckoned as capital or revenue. if the assessee had claimed to be a revenue expenditure stating that it the authorized capital was for the purpose of its running of business, then, it cannot be held that the assessee has filed any inaccurate particulars of income, if such an expense is treated as capital expenditure for the purpose of levy of penalty u/s 271(1)(c). In any case whether the expenditure is revenue or capital is quite debatable issue and on such a claim, penalty u/s 271(1)(c) for furnishing of inaccurate particulars cannot be levied. Thus, we hold that on this addition also no penalty can be levied by the Assessing Officer or can be confirmed by the Ld. CIT (Appeals) and therefore, same is directed to be deleted. 18. In the result, the appeal of the assessee is allowed. Order pronounced in the open co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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