2016 (12) TMI 935 - AT - Income Tax

Penalty u/s 271(1)(c) - addition of TP adjustment - whether 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 computed in accordance with the provisions contained in section 92C in good faith and with due diligence? Held that - In the absence of any argument on facts demonstrating that the computation in the TP study placed on record is in violation of the requirements of Section 92C of the Act and the said exercise was neither done in good faith nor with due diligence, the departmental action fails Nothing has been placed on record by the Revenue to show that the choice so exercised by the tax payer to accept the enhanced mark-up in the peculiar facts and circumstances of the case can constitute acts of suppressio veri or suppressio falsi lacking good faith and in violation of due diligence requirement. We find that all primary facts required to be disclosed have been found to be correctly made available in regard to the international transaction and the international transaction disclosed has been computed as per the provisions of section 92C in good faith and with due diligence. In view of the above detailed reasons on facts and law the impugned order is set aside and the penalty order is quashed. - Decided in favour of assessee

Issues Involved:

1. Confirmation of penalty under section 271(1)(c) of the Income Tax Act, 1961 for alleged concealment of income and furnishing inaccurate particulars of income regarding transfer pricing adjustment.
2. Invocation of Explanation 7 of section 271(1)(c) by CIT(A) in confirming the penalty.

Issue-Wise Detailed Analysis:

1. Confirmation of Penalty under Section 271(1)(c):

The assessee challenged the correctness of the order confirming the penalty of ?2.31 crores levied by the AO for alleged concealment of income and furnishing inaccurate particulars of income related to a transfer pricing (TP) adjustment of ?6.93 crores. Initially, the AO had proposed a TP adjustment of ?262.90 crores, but the Tribunal granted relief for ?255.97 crores, leaving the disputed amount at ?6.93 crores.

The Tribunal noted that the assessee had selected the Transactional Net Margin Method (TNMM) as the most appropriate method in its TP study, describing itself as a low-risk provider with a 15% mark-up on total operating costs. The TPO, however, recharacterized the assessee as a "significant risk bearing" entity and changed the remuneration model to a 5.22% commission on the value of goods procured, leading to a proposed adjustment of ?255.97 crores. The ITAT in the quantum proceedings partially accepted the assessee's remuneration model but substituted the 15% mark-up with an estimated 32% mark-up, reducing the adjustment to ?6.92 crores.

The acceptance of the enhanced mark-up led to the penalty order by the AO, invoking Explanation 7 to Section 271(1)(c), which was confirmed by the CIT(A). The Tribunal examined whether the acceptance of the enhanced mark-up could be considered as concealment of income or furnishing inaccurate particulars under the deeming provision of Explanation 7.

2. Invocation of Explanation 7 of Section 271(1)(c):

The Tribunal highlighted that Explanation 7 to section 271(1)(c) shifts the burden to the assessee to prove that the price charged or paid in the international transaction was computed in accordance with section 92C in good faith and with due diligence. The Tribunal noted that the primary facts related to the issue had been thoroughly examined in the quantum proceedings, and the explanation offered in the penalty proceedings needed to be considered afresh.

The Tribunal found that the TPO had accepted TNMM as the most appropriate method and had not interfered with the comparables selected. The re-characterization of the assessee as a significant risk service provider by the TPO was not accepted by the Co-ordinate Bench in the quantum proceedings. The Tribunal emphasized that the penalty could only be imposed if the explanation offered was shown to be lacking in good faith and due diligence, with a willful attempt to defraud the Revenue.

The Tribunal concluded that there was no primary evidence to show that the assessee had deliberately tried to conceal any income or furnish inaccurate particulars. The conduct of the assessee vis-a-vis its claim of "good faith" and "due diligence" was further supported by the extracts from the quantum proceedings, which criticized the TPO's approach as "flawed" and "sweeping."

The Tribunal also noted that the enhanced mark-up of 32% was accepted by the assessee in light of the prevalent view held by the Co-ordinate Bench in the Li & Fung case. The decision to accept the enhanced mark-up was not motivated by any mala fide intent but was a prudent decision to avoid protracted litigation.

The Tribunal held that the choice to accept the enhanced mark-up did not reflect negatively on the assessee's claim of good faith and due diligence. The Tribunal quashed the penalty order, concluding that the Revenue had not demonstrated that the TP study was carried out in violation of section 92C or that it was not done in good faith and with due diligence.

Conclusion:

The Tribunal set aside the impugned order and quashed the penalty order, allowing the appeal of the assessee. The order was pronounced in the open court on 16th August 2016.

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