2017 (5) TMI 1617 - AT - Income Tax

Penalty proceedings u/s 271(1)(c) - TP adjustment addition - addition not been made in the quantum proceedings - Held that - Once the addition has been made/confirmed in the quantum proceedings, then subject matter of penalty proceedings u/s 271(1)(c) is strictly circumscribed to such addition only. The penalty cannot be levied on an addition which has not been made in the assessment or in quantum proceedings by any appellate authority and hence if no such addition has been made in assessment, then same cannot be roped in penalty proceedings either by the Assessing Officer or by Ld. CIT (Appeals) in terms of power enshrined under section 251. CIT (Appeals) is absolutely unjustified in law and on facts to levy or enhance a penalty on an addition which is not arising out of assessment order or any appellate order in the quantum proceedings or from the penalty order passed by the Assessing Officer. As not been brought on record that Assessing Officer has rectified his mistake and has revised his assessment and 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 comparables which has been taken by the by the TPO, then such a margin will fall within the plus/minus range of 5%. On this count also, the transfer pricing assessment made by the TPO is unjustified - no penalty can be levied on such TP adjustment made on account of purchase/import of capital goods. Fee paid to ROC to increase the authorized capital which has been claimed as revenue - Held that - 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 - Appeal decided in favour of assessee

Issues Involved:
1. Legality and validity of penalty levied under section 271(1)(c) of the Income Tax Act.
2. Jurisdiction and authority of CIT (Appeals) to enhance penalty.
3. Justification of transfer pricing adjustments.
4. Classification of expenses as capital or revenue for penalty purposes.

Issue-wise Detailed Analysis:

1. Legality and Validity of Penalty Levied under Section 271(1)(c):
The assessee challenged the penalty of ?23,20,000/- levied by the Assessing Officer (AO) under section 271(1)(c) on additions aggregating to ?68,85,158/-. The additions were based on transfer pricing adjustments of ?63,85,158/- and disallowance of ?5,00,000/- as ROC fees treated as capital expenditure. The AO contended that the assessee furnished inaccurate particulars of income, thereby concealing true particulars of such income. The penalty was levied on both counts of furnishing inaccurate particulars and concealment of income.

2. Jurisdiction and Authority of CIT (Appeals) to Enhance Penalty:
The CIT (Appeals) not only confirmed the penalty imposed by the AO but also enhanced it based on a further addition of ?60,23,024/- for transfer pricing adjustment on raw material import, which was proposed by the TPO but not made by the AO. The Tribunal held that the CIT (Appeals) exceeded his appellate jurisdiction by enhancing the penalty on an addition not made in the quantum proceedings. The Tribunal emphasized that penalty proceedings under section 271(1)(c) are strictly circumscribed to additions made in the assessment or quantum proceedings. The CIT (Appeals) cannot levy or enhance penalty on an addition not arising from the assessment order or any appellate order in the quantum proceedings.

3. Justification of Transfer Pricing Adjustments:
The Tribunal scrutinized the transfer pricing adjustments made by the TPO. The TPO rejected the Cost Plus Method (CPM) adopted by the assessee due to the absence of comparability analysis and instead used the Transactional Net Margin Method (TNMM). The TPO's determination of the AE's operating margin at 14.73% by including "other income" was found unjustified. The Tribunal noted that the AE's operating profit margin of 8.62% should be considered, and the arithmetic mean of comparables at 5.94% falls within the permissible range, negating the need for TP adjustments. Consequently, the penalty on the TP adjustment of ?63,85,158/- was deleted.

4. Classification of Expenses as Capital or Revenue for Penalty Purposes:
The Tribunal examined the disallowance of ?5,00,000/- paid as ROC fees for increasing authorized capital. It was observed that whether such an expense is capital or revenue is a debatable issue. The assessee's claim of it being a revenue expense for running the business was not found to be furnishing inaccurate particulars. The Tribunal held that on such debatable issues, penalty under section 271(1)(c) cannot be levied, and thus, the penalty on this addition was also deleted.

Conclusion:
The Tribunal allowed the appeal of the assessee, quashing the penalty levied by the AO and enhanced by the CIT (Appeals). The decision emphasized the importance of jurisdictional limits and the necessity of clear and justified grounds for imposing penalties under section 271(1)(c). The Tribunal's detailed analysis provided clarity on the treatment of transfer pricing adjustments and the classification of expenses for penalty purposes. The order was pronounced in the open court on 31.05.2017.

← Previous Next →