2022 (12) TMI 1275 - AT - Income Tax

Levy of penalty u/s. 271(1)(c) - transfer pricing adjustment that were initially suggested by TPO but were subsequently enhanced by Ld. CIT(A) - HELD THAT - We find that the enhancement to transfer pricing adjustments directed by Ld. CIT(A), was challenged by the assessee before the Tribunal. The co-ordinate Bench of Tribunal vide order 2019 (8) TMI 184 - ITAT DELHI had directed the inclusion/exclusion of certain comparables. Assessee has also made correspondence with the A.O. wherein assessee has inter alia requested him to carry out the appeal effect consequent to the directions of Tribunal, which is yet to be carried out by the A.O. It is the contention of the assessee that if the directions of the Tribunal for inclusion/exclusion of comparables are carried out by the A.O. then there would remain no basis for making any TPA. The aforesaid factual contention of the Ld.AR has not been controverted by the Revenue. In such a situation, considering the totality of the aforesaid facts we find force in the contentions of the Ld.AR that no adjustment on transfer pricing issue would subsist and therefore there is no question of penalty u/s. 271(1)(c) on such addition. We therefore direct the deletion of penalty u/s. 271(1)(c) - grounds of assessee are allowed.

Summary

Issues:
Levy of penalty under section 271(1)(c) for concealing income by furnishing inaccurate particulars, satisfaction recorded before initiating penalty proceedings, jurisdiction of AO in levying penalty, invoking Explanation 7 to section 271(1)(c) for not acting in good faith, and upholding penalty without considering bona fide differences in computing arm's length price.

Detailed Analysis:

1. Levy of Penalty under Section 271(1)(c):
The appeal was against the order of the Ld. CIT(A) upholding the penalty imposed by the AO under section 271(1)(c) for concealing income by furnishing inaccurate particulars. The AO had imposed a penalty of INR 16,42,625, which the CIT(A) affirmed. The grounds raised by the assessee challenged the validity of the penalty on various legal and factual bases.

2. Satisfaction Recorded Before Initiating Penalty Proceedings:
One of the grounds raised was that the CIT(A) erred in confirming the penalty without appreciating that satisfaction had not been recorded by the AO before initiating penalty proceedings. The absence of recorded satisfaction was argued to be a procedural flaw in the penalty imposition process.

3. Jurisdiction of AO in Levying Penalty:
The issue of the AO exceeding jurisdiction in levying penalty on the quantum of adjustment enhanced by the CIT(A) was also raised. It was contended that the CIT(A) had the sole jurisdiction to initiate and levy the penalty, and the AO's actions were beyond the scope of his authority.

4. Invoking Explanation 7 to Section 271(1)(c):
The CIT(A) was criticized for upholding the action of the AO in invoking Explanation 7 to section 271(1)(c), alleging that the appellant had not acted in good faith and with due diligence in computing the arm's length price of the international transaction. The appellant argued against the application of Explanation 7 in this context.

5. Bona Fide Differences in Computing Arm's Length Price:
Another ground challenged the penalty levied without appreciating the bona fide differences in computing the arm's length price related to the provision of marketing support services. It was emphasized that the computation was in accordance with the provisions of section 92C of the Act, indicating a good faith effort in the pricing methodology.

6. Judgment and Decision:
The Tribunal considered the arguments presented by both parties and reviewed the facts and submissions on record. It noted that the enhancement to transfer pricing adjustments directed by the CIT(A) had been challenged before the Tribunal, which had issued directions regarding the inclusion/exclusion of certain comparables. The Tribunal found merit in the contention that if the Tribunal's directions were implemented by the AO, no basis for transfer pricing adjustments would remain. As the Revenue did not contest this factual contention, the Tribunal concluded that there was no justification for imposing a penalty under section 271(1)(c) in the present case. Consequently, the Tribunal directed the deletion of the penalty.

7. Final Outcome:
In conclusion, the Tribunal allowed the appeal of the Assessee, pronouncing the order on 26.12.2022. The decision highlighted the importance of following legal procedures and ensuring that penalties are imposed based on valid grounds supported by evidence and compliance with statutory requirements.

This detailed analysis covers the various issues raised in the legal judgment, providing a comprehensive overview of the arguments, legal principles, and the final decision rendered by the Tribunal.