2016 (6) TMI 588 - AT - Income Tax

Penalty u/s 271(1)(c) - ALP determination - Rejecting the application of TNMM on entity level, the TPO proposed transfer pricing adjustment by determining Nil ALP of the three international transactions under the CUP method by basing his conclusion on the fact that the assessee did not avail any services inasmuch as no benefit was derived by it and, in any case, it amounted to duplication of services - Held that - The necessary criteria for imposition or non-imposition of penalty is not the surrender or nonsurrender of income; acceptance or non-acceptance of addition; and confirmation or deletion of addition in quantum proceedings. In fact, it is the evaluation of the circumstances leading to the surrender/addition or confirmation of addition, which decide the fate of penalty. Where a surrender or an addition is made due to absence of bona fide in the conduct of the assessee, it may be a good case for imposition of penalty. On the other hand, if a surrender or an addition is made due to failure of the assessee to establish his case to the satisfaction of the AO despite the genuineness of the explanation, it will not call for imposition of penalty, notwithstanding such an addition having been confirmed in appeals. Further, an honest difference of opinion between the assessee and the Revenue can never be a cause for imposition of penalty. Under such circumstances, the contention of the ld. DR that the factum of the assessee not assailing the addition in quantum proceedings should be considered as fatal, in our considered opinion, is devoid of merits. The assessee s case is covered by another decision of the Mumbai Bench of the Tribunal in DCIT vs. RBS Equities India Ltd. (2011 (8) TMI 459 - ITAT MUMBAI ) in which penalty u/s 271(1)(c) has been deleted in somewhat similar circumstances. If we accept the contention of the ld. DR that addition on account of transfer pricing adjustment invariably means absence of good faith and due diligence, then, each and every case involving transfer pricing adjustment would call for imposition of penalty u/s 271(1)(c). The proposition so propounded on behalf of the Revenue is too wide and clearly unacceptable inasmuch as the intention of the legislature is to impose penalty due to addition on account of transfer pricing adjustment only when good faith and due diligence are lacking and not because of a genuine and valid difference of opinion in the determination of ALP of an international transaction. The exercise done by the TPO in determining Nil ALP on the premise that either no services were availed by the assessee or in any case it was a case of duplication of services, is not only unsubstantiated but contrary to the material on record. The mere fact that the TPO determined Nil ALP of the international transactions cannot be a reason to impose penalty u/s 271(1)(c) of the Act. In view of the foregoing discussion, we are satisfied that the assessee has satisfied all the requisite conditions as stipulated in the exception crafted in Explanation 7 granting immunity and hence it cannot be visited with penalty u/s 271(1)(c) of the Act. Ex consequenti, the impugned order is set aside and the penalty is deleted. - Decided in favour of assessee

Issues Involved:
1. Imposition of penalty under Section 271(1)(c) of the Income-tax Act, 1961.
2. Determination of Arm's Length Price (ALP) for international transactions.
3. Application of Transactional Net Margin Method (TNMM) vs. Comparable Uncontrolled Price (CUP) method.
4. Proof of availing services and the benefit derived therefrom.
5. Duplication of services.
6. Good faith and due diligence in computation of ALP.

Issue-wise Detailed Analysis:

1. Imposition of Penalty under Section 271(1)(c):
The appeal contests the penalty of ?1,20,00,000/- imposed by the AO and confirmed by the CIT(A). The penalty was based on the addition of ?3,31,89,364/- due to transfer pricing adjustments. The assessee argued that the penalty was unjustified as there was no concealment of income or furnishing of inaccurate particulars. The Tribunal examined whether the penalty could be imposed under Explanation 7 to Section 271(1), which deems any addition due to transfer pricing adjustments as concealed income unless the assessee proves compliance with Section 92C in good faith and with due diligence.

2. Determination of ALP for International Transactions:
The assessee, a subsidiary of Mitsui Chemicals Inc., reported six international transactions and applied the TNMM to demonstrate that these transactions were at ALP. The TPO accepted all transactions except for three: 'Availing of specified business and consultancy services,' 'Availing of engineering support services,' and 'Availing of management support services.' The TPO determined the ALP of these transactions at Nil under the CUP method, leading to the transfer pricing adjustment.

3. Application of TNMM vs. CUP Method:
The Tribunal noted that the assessee applied TNMM in accordance with Section 92C, which was rejected by the TPO in favor of the CUP method. The Tribunal found that the assessee's application of TNMM was in good faith and with due diligence. The TPO's application of the CUP method without bringing any comparable instances was deemed faulty.

4. Proof of Availing Services and Benefit Derived:
The TPO held that the assessee did not avail any services or that there was a duplication of services. The Tribunal found that the assessee did receive services and benefits, as evidenced by agreements and the setting up of a manufacturing facility. The Tribunal emphasized that the benefit test applied by the TPO was not determinative of ALP and that business decisions could result in losses without impacting the genuineness of the transactions.

5. Duplication of Services:
The TPO's assertion of duplication of services was rejected by the Tribunal. The assessee's agreements for consultancy, engineering support, and management support services were found to be genuine and necessary for its business operations. The Tribunal highlighted that the services were essential for the assessee's transition from trading to manufacturing.

6. Good Faith and Due Diligence in Computation of ALP:
The Tribunal concluded that the assessee computed the ALP in good faith and with due diligence. The TPO's determination of Nil ALP was found to be unsubstantiated and contrary to the material on record. The Tribunal held that the mere fact of transfer pricing adjustment does not automatically justify the imposition of penalty under Section 271(1)(c).

Conclusion:
The Tribunal allowed the appeal, setting aside the penalty order and deleting the penalty. It emphasized that penalty proceedings are distinct from assessment proceedings and that the imposition of penalty requires a thorough evaluation of the circumstances leading to the addition. The Tribunal found that the assessee acted in good faith and with due diligence in determining the ALP of the international transactions, and the TPO's actions were not in accordance with the law.

← Previous Next →