2023 (10) TMI 1286 - HC - Income Tax

Penalty u/s. 271(1)(c) - Reference to Explanation no. 7 while initiating penalty were made or not - application of arm s length principles which resulted in the erosion of taxes payable in India to the extent of 24% - Base Erosion Theory was adopted and the application of arm s length principles for making TP adjustment was not proper - Divergence of opinion between the Koltaka Bench and the Pune Bench of the Tribunal - Assessee had charged additional fees from its Indian AES in order to comply with Arm s Length Standards, the additional fees would have been taxed in India in the hands of the appellant @ 10% on gross basis, while at the same time, the said additional fees would have been allowed or deducted in the hands of the payers - HELD THAT - What is evident from the discussion herein above is that the CIT(A) did not accept the arguments on base erosion since the arguments were considered and dealt with in length by the ITAT Kolkatta Special Bench in the case. According to the CIT(A) even if the assessee was charging lower fees for technical services to its Indian AEs and transfer pricing is proposed in the hands of the assessee, no deduction could be claimed by Indian AEs. Reading a particular paragraph of the observations of the AO s order reproduced by the CIT(A) itself would indicate that there were two views possible and that the issue was debatable. Therefore even if the deemed provision on the basis of Explanation 7 is pressed into service, then also there can be a case based on good faith and it cannot be termed as concealment. What is evident is that the AO has found that the view of the ITAT in Cummins Inc 2016 (7) TMI 1689 - ITAT PUNE on facts may not apply. Even though, a Mumbai Bench decision in the case of 3I INFOTECH LTD. 2010 (7) TMI 843 - ITAT MUMBAI was on the subject of base erosion but the AO did not consider it appropriate as the Ahmedabad Bench had relied upon the Special Bench order of Kolkatta. These findings itself suggest that there are in fact more than two opinions on the subject of base erosion. In the case of Toyota Kirloskar Motor (P) Ltd. V. Union of India 2019 (6) TMI 932 - KARNATAKA HIGH COURT relied upon by Shri Soparkar, Explanation 7 of Section 271(1)(C) was under consideration where the Court held that the Explanation cannot be applied blindly in a routine manner to levy penalty on the additions made in the absence of any material to establish the concealing of income or furnishing inaccurate particulars. Moreover, they are independent and distinct from the assessment proceedings. Also decided in VERIZON INDIA PVT. LTD. 2016 (8) TMI 1287 - DELHI HIGH COURT in the absence of any overt act, which disclosed conscious and material suppression, invocation of Explanation 7 in a blanket manner could not only be injurious to the assessee but ultimately would be contrary to the purpose for which it was engrafted in the statute. It might lead to a rather peculiar situation where the assessees who might otherwise accept such determination may be forced to litigate further to escape the clutches of Explanation 7. What is therefore evident from the above is that provisions of Section 271(1)(C) and Explanation 7 is clearly not applicable. Also merely because the appeal of the assessee was admitted on the issue of quantum, the fact that the Revenue s appeal ipso-facto requires to be admitted, is not necessary. Penalty need to be deleted - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the ITAT erred in directing the deletion of penalty under Section 271(1)(c) of the Income Tax Act.
2. Whether the ITAT erred in concluding that the assessee did not furnish inaccurate particulars of income.
3. Whether Explanation 7 to Section 271(1)(c) can be invoked for transfer pricing adjustments.
4. Whether "Base Erosion" is a debatable issue.
5. Whether reimbursement of expenses qualifies as Fees for Technical Services (FTS) for penalty purposes.

Summary:

1. Deletion of Penalty under Section 271(1)(c):
The High Court examined whether the ITAT erred in directing the Assessing Officer to delete the penalty under Section 271(1)(c). The ITAT had found that the additions on which the penalty was levied were debatable issues, with varying opinions from different tribunals, thus not justifying the levy of penalty.

2. Furnishing Inaccurate Particulars of Income:
The ITAT concluded that the assessee did not furnish inaccurate particulars of income. The assessee had made adequate disclosures in Form 3CEB, TPSR, and during the transfer pricing (TP) assessment and scrutiny assessment. The Tribunal noted that the issue of "Base Erosion" was a debatable one, and mere differences of opinion do not justify the levy of penalty.

3. Invocation of Explanation 7 to Section 271(1)(c):
The ITAT held that Explanation 7 to Section 271(1)(c) could not be invoked for levying penalties related to transfer pricing adjustments, as this explanation was neither referred to nor relied upon at the time of initiating penalty proceedings. The Tribunal found that the assessee had computed the price in accordance with Section 92C in good faith and with due diligence.

4. "Base Erosion" as a Debatable Issue:
The Tribunal found that "Base Erosion" was a debatable issue, with varying opinions from the Kolkata Special Bench and Pune ITAT. The Tribunal noted that the Gujarat High Court had admitted the issue for consideration, supporting the view that the issue was debatable.

5. Reimbursement of Expenses as FTS:
The ITAT held that reimbursement of expenses does not qualify as Fees for Technical Services (FTS) and hence no penalty can be levied under Section 271(1)(c) on such expenses. The Tribunal noted that various decisions have held that reimbursement of expenses does not qualify as FTS.

Conclusion:
The High Court dismissed the Revenue's appeal, agreeing with the ITAT's findings that the issues were debatable and did not justify the levy of penalty under Section 271(1)(c). The court emphasized that making an incorrect claim in law does not amount to furnishing inaccurate particulars of income, and the penalty provisions cannot be invoked unless the case strictly falls within the provision.