2024 (6) TMI 420 - AT - Income Tax

Penalty u/s 271(1)(C) - defective notice - TP Adjustment/addition - AO determined the arm's length OP/OC at 13.87% and made the net addition as computed being difference between figures as shown by assessee and as finally computed - HELD THAT - Notice does not mention as to which limb of section 271 of the Act has been invoked as the assessee was called upon to show cause for have concealed the particulars of your income or have furnished inaccurate particulars of such income. The law in this regard stands settled that such an ambiguous notice is not sustainable in law. Reliance can be placed on Hon ble Supreme Court judgement in the case of CIT vs. Reliance Petro Products Pvt. Ltd 2010 (3) TMI 80 - SUPREME COURT and CIT vs. SSA s Emerald Meadows 2016 (8) TMI 1145 - SC ORDER - There should be categorical communication as to under which limb the assessee is show caused. The AO had concluded that there was the furnishing of inaccurate information, thus, relates to furnishing of factually incorrect details and information about income. As considered the provisions of Explanation-7 to section 271(1)(c) of the Act, as the Revenue authorities contend that it is a deeming provision and the assessee is deemed to have concealed income or income of which inaccurate particulars have been furnished and the onus is on the assessee to establish bona fide and due diligence, then, what is required is that the notice should be specific and there should not be any ambiguity of any sort, rather, the notice should specifically provide that the penalty is being invoked in the light of the Explanation-7 of section 271(1)(c) of the Act, as the presumption of the deeming provision is called to be rebutted by the assessee. Thus on ground of ambiguity in the notice too the penalty order cannot be sustained. Decided in favour of assessee.

Issues Involved:
1. Legality of the penalty order under section 271(1)(c) of the Income Tax Act, 1961.
2. Adequacy of satisfaction recorded by the Assessing Officer (AO) for levying penalty.
3. Appropriateness of invoking Explanation 7 to section 271(1)(c) for transfer pricing adjustments.
4. Good faith and due diligence in computing transfer pricing.
5. Difference of opinion regarding selection/rejection of comparable companies.
6. Penalty on addition due to international transaction of interest on receivables.
7. Consistency with previous years' penalty decisions.

Detailed Analysis:

1. Legality of the Penalty Order:
The assessee argued that the penalty order under section 271(1)(c) was bad in law and void ab initio. The Tribunal noted that the notice issued to the assessee was ambiguous, failing to specify whether the penalty was for "concealment of income" or "furnishing inaccurate particulars." This ambiguity rendered the notice unsustainable in law, as established by the Supreme Court in CIT vs. Reliance Petro Products Pvt. Ltd. and CIT vs. SSA's Emerald Meadows.

2. Adequacy of Satisfaction Recorded by AO:
The assessee contended that the AO did not record adequate satisfaction before levying the penalty. The Tribunal observed that the AO's notice was ambiguous and did not clearly communicate the specific limb under section 271(1)(c) being invoked. This lack of specificity undermined the validity of the penalty order.

3. Appropriateness of Invoking Explanation 7 to Section 271(1)(c):
The assessee argued that Explanation 7 to section 271(1)(c) was not appropriately invoked. The Tribunal noted that the TPO relied on Rule 10B(4), which was inserted after the relevant assessment year, to allege that the assessee deliberately did not use current year data. The Tribunal found that there was a legal debate on whether current year data or multiple year data should be used, and the assessee's bona fides could not be questioned based on this debate alone.

4. Good Faith and Due Diligence in Computing Transfer Pricing:
The Tribunal emphasized that there was no allegation of inaccuracy, discrepancy, or concealment in the information furnished by the assessee. The Tribunal referred to the Mumbai Bench's decision in Cherokee India (P) Ltd., which held that if the addition is due to a difference in pricing methodology and not due to inaccuracy or concealment, the assessee's claim of good faith and due diligence is considerable. The Tribunal concluded that the assessee acted in good faith and with due diligence.

5. Difference of Opinion Regarding Selection/Rejection of Comparable Companies:
The assessee argued that the penalty was unjustified as there was only a difference of opinion regarding the selection/rejection of comparable companies. The Tribunal noted that the TPO's adjustments were based on a different interpretation of the data, and the assessee could not have anticipated the rejection of nine out of twelve comparables. The Tribunal found that the AO's interpretation was erroneous and that the assessee's actions did not warrant penalty.

6. Penalty on Addition Due to International Transaction of Interest on Receivables:
The assessee contended that the penalty on the addition related to interest on receivables was based on guesswork and conjectures. The Tribunal found that the AO did not substantiate the rate of interest considered, and there was no material suppression by the assessee. The Tribunal held that the penalty could not be sustained on this ground.

7. Consistency with Previous Years' Penalty Decisions:
The assessee highlighted that for AY 2012-13 and AY 2014-15, the CIT(A) had deleted the penalty imposed under similar facts. The Tribunal considered this consistency and found that the penalty for the relevant assessment year should also be quashed.

Conclusion:
The Tribunal allowed the assessee's appeal, quashing the impugned penalty. The Tribunal emphasized that the notice was ambiguous, the assessee acted in good faith and with due diligence, and there was no material suppression or inaccuracy in the information furnished. The Tribunal's decision was based on the principles established in previous judicial precedents and the specific facts of the case.

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