2019 (6) TMI 932 - HC - Income Tax

Penalty u/s 271(1)(c) - amounts determined pursuant to Convention for avoidance of Double Taxation between Union of India and other sovereign countries which is enforced in Indian territory by Section 90 - Price charged or paid in such international transaction was computed in accordance with the provisions contained in Section 92C - HELD THAT - Penalty proceedings are distinct from assessment proceedings and independent there from. The proceedings for imposition of penalty though emanating from proceedings of assessment are independent and separate aspects of the proceedings. Merely alternative dispute resolution has been opted by the assessee, it would not invalidate the penalty proceedings unless it has been considered, analyzed and a decision is arrived at by the two sovereign States under the MAP. The order passed by the mechanism provided under Section 90 can be construed as an adjustment to the assessment order but not an annulment of the assessment order. If by such an adjustment, the assessment order is annulled in its entirety, setting aside the tax levied on income, then the arguments of the petitioners can hold good prohibiting the authorities to invoke the penal proceedings irrespective of any explicit finding regarding the penal consequences in the order of MAP. However, in the present set of facts, such a situation would not arise in view of the adjustment made to certain extent in the order passed under Rule 44H(5), implementing the order of MAP reducing the transfer pricing adjustment to ₹ 91,80,00,000/- as against ₹ 240,11,91,692/-. The onus lies on the assessee to establish that the said addition now finally decided by MAP is not due to concealment of income or furnishing of inaccurate particulars and moreover, the computation was made under Section 92C in the manner prescribed under that Section, in good faith and with due diligence. At the same time, Explanation 7 would not empower the concerned authorities to levy penalty automatically for such transactions. A decision has to be taken by the authorities after application of mind. These aspects involving questions of fact requires to be considered by the Authorities concerned and rightly the petitioner has preferred an appeal against the penalty proceedings ORDER i) Section 271(1)(C) of the Income Tax Act, 1961 is held intra vires the constitution in so far as imposing of penalty on amounts determined pursuant to Convention for avoidance of Double Taxation between Union of India and other sovereign countries which is enforced in Indian territory by Section 90 of the Income Tax Act, 1961 and the Rules made thereunder. ii) Appellate Authority shall consider the appeal preferred by the petitioner against the order of penalty on merits and shall take a decision in accordance with law in an expedite manner.

Issues Involved:
1. Constitutional validity of Section 271(1)(c) of the Income Tax Act, 1961.
2. Applicability of Section 271(1)(c) concerning amounts determined pursuant to the Double Taxation Avoidance Agreement (DTAA).
3. Imposition of penalty under Section 271(1)(c) in light of the Mutual Agreement Procedure (MAP) resolution.
4. Refund of penalty amount withheld.
5. Consideration of appeals and objections related to penalty notices.

Detailed Analysis:

1. Constitutional Validity of Section 271(1)(c) of the Income Tax Act, 1961:
The petitioner challenged the constitutional validity of Section 271(1)(c) of the Income Tax Act, 1961, arguing that the imposition of penalties on amounts determined under the DTAA is unconstitutional. The court upheld the constitutionality of Section 271(1)(c), stating that the provision is intra vires the Constitution. The court emphasized that the legislative competence to levy penalties under Section 271(1)(c) cannot be disputed, as it is a self-contained code distinct from assessment provisions.

2. Applicability of Section 271(1)(c) Concerning Amounts Determined Pursuant to the DTAA:
The petitioner contended that Section 271(1)(c) should not apply to amounts determined under the DTAA, as such determinations are the result of mutual agreements between sovereign states. The court clarified that unless a specific provision in the DTAA explicitly waives the penalty, the provisions of Section 271(1)(c) shall continue to apply. The court stated that the DTAA provisions prevail over the Income Tax Act only when they are more beneficial to the assessee.

3. Imposition of Penalty Under Section 271(1)(c) in Light of the MAP Resolution:
The petitioner argued that the imposition of penalties under Section 271(1)(c) is invalid since the MAP resolution did not contemplate penalties. The court noted that the MAP resolution is silent on penalties and emphasized that penalty proceedings are distinct and independent from assessment proceedings. The court held that the onus lies on the assessee to prove that the addition determined by MAP is not due to concealment of income or furnishing inaccurate particulars. The court also highlighted that Explanation 7 to Section 271(1)(c) does not automatically empower authorities to levy penalties; a decision must be taken after applying due diligence.

4. Refund of Penalty Amount Withheld:
The petitioner sought a refund of the penalty amount withheld, arguing that the imposition of the penalty was illegal and unconstitutional. The court did not grant an immediate refund but directed the appellate authority to consider the appeal on merits and take a decision in accordance with the law expeditiously.

5. Consideration of Appeals and Objections Related to Penalty Notices:
The court directed the appellate authority to consider the appeal against the penalty order dated 22.09.2015 on merits. Additionally, the petitioner was allowed to file objections to the notice dated 27.10.2015 within two weeks. The assessing officer was instructed to consider these objections and take a decision expeditiously.

Conclusion:
The court upheld the constitutional validity of Section 271(1)(c) and its applicability to amounts determined under the DTAA. The court emphasized the distinct nature of penalty proceedings and the necessity for due diligence in imposing penalties. The appellate authority and assessing officer were directed to consider the appeals and objections expeditiously. The writ petition was dismissed with these observations.

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