2016 (4) TMI 214 - AT - Income Tax

Penalty under section 271(1)(c) - adjustment to the arm s length price - Held that - Assessee has furnished all relevant information in respect of international transaction with A.E. in the audit report as well as transfer pricing study. In fact the Transfer Pricing Officer himself admits that the assessee furnished the updated margins of the comparables. The Transfer Pricing Officer has not found any of the information submitted by the assessee misleading or unreliable. Therefore in our view a case of furnishing of inaccurate particulars of income has not been made out to justify imposition of penalty under section 271(1)(c). Addition made under section 40(a)(ia) - Held that - On a perusal of the provisions contained under section 144C it is to be noted that the as per sub section 3 if the assessee intimates the Assessing Officer the acceptance of variation made in the draft assessment order or no objections are received within the period prescribed under sub section (2) Assessing Officer shall complete the assessment on the basis of draft order. However in case the assessee raises objection against the draft assessment order as per sub section (13) of section 144C the Assessing Officer shall pass the final assessment order in conformity with the direction of the DRP without providing any further opportunity of being heard to the assessee. Thus the final assessment order as contemplated under section 144C(13) is only to implement the directions of the DRP. Therefore in our view if the Assessing Officer has not initiated penalty proceedings under section 271(1)(c) in respect of a particular item of addition in the draft assessment order he cannot do so in the final assessment order. Thus in such a situation if at the stage of final assessment the Assessing Officer initiates penalty proceedings under section 271(1)(c) against additions not objected / contested before DRP assessee would be put to a very precarious position because in terms of section 144C(13) final assessment order has to be passed without affording any further opportunity of being heard to assessee. Therefore on a harmonious construction of relevant statutory provisions we are of the view if the Assessing Officer did not initiate proceeding for imposition of penalty under section 271(1)(c) in respect of a particular addition in the draft assessment order he cannot do so in the final assessment order.

Issues Involved:
1. Imposition of penalty under section 271(1)(c) of the Income Tax Act, 1961 for transfer pricing adjustments.
2. Imposition of penalty under section 271(1)(c) for disallowance under section 40(a)(ia).

Detailed Analysis:

1. Imposition of Penalty under Section 271(1)(c) for Transfer Pricing Adjustments:

The Department appealed against the order of the Commissioner (Appeals) which deleted the penalty imposed under section 271(1)(c) for the assessment year 2006-07. The assessee, an Indian company, engaged in providing marketing support services to its Associate Enterprise (A.E), had adopted the Transaction Net Margin Method (TNMM) for benchmarking its international transactions. The assessee selected 12 comparables with an average margin of 19.70%, while its margin was 0.87%. The assessee voluntarily made an adjustment of Rs. 92,15,556 to the arm's length price. The Transfer Pricing Officer (TPO) computed the margin of comparables based on current year data, resulting in an upward adjustment of Rs. 2,54,27,043. The Assessing Officer (AO) incorporated this adjustment in the draft assessment order and initiated penalty proceedings under section 271(1)(c).

The Commissioner (Appeals) observed that the difference in arm's length price was due to the use of multiple year data by the assessee and current year data by the TPO. The assessee could not have used current year data as it was not available in the public domain at the time of filing the return. The Commissioner (Appeals) held that the computation by the assessee was in good faith and with due diligence, hence no penalty was imposable under Explanation 7 to section 271(1)(c).

The Department contended that the assessee's adjustment proved the price was not at arm's length and argued that the margin should be computed based on current year data as per rule 10B(4). The assessee countered that current year data was not available at the time of filing the return, and the penalty could not be imposed for furnishing inaccurate particulars of income.

The Tribunal noted that the TPO accepted the method and comparables selected by the assessee, and the only dispute was the data used for computing margins. The Tribunal found that the assessee acted in good faith and with due diligence, and all relevant information was provided. The Tribunal also considered that the High Court admitted a substantial question of law on the transfer pricing adjustment, indicating the issue was debatable. Following the jurisdictional High Court's decision in Nayan Builders and Developers Pvt. Ltd., the Tribunal upheld the deletion of the penalty.

2. Imposition of Penalty under Section 271(1)(c) for Disallowance under Section 40(a)(ia):

The Commissioner (Appeals) found that the AO did not initiate penalty proceedings for the disallowance under section 40(a)(ia) in the draft assessment order. The AO initiated the penalty only in the final assessment order after the DRP's directions. The Tribunal held that as per section 144C, the final assessment order should conform to the draft assessment order and the DRP's directions. If the AO did not initiate penalty proceedings in the draft assessment order, he could not do so in the final assessment order.

The Tribunal emphasized that the final assessment order is to implement the DRP's directions without further hearing the assessee. Initiating penalty proceedings at the final assessment stage would put the assessee in a precarious position, as they might not contest the addition before the DRP, believing no penalty would be imposed. The Tribunal upheld the Commissioner (Appeals)'s decision, finding no infirmity in it.

Conclusion:

The Tribunal dismissed the Revenue's appeal, confirming that no penalty under section 271(1)(c) was imposable for the transfer pricing adjustments and the disallowance under section 40(a)(ia). The Tribunal's decision was based on the good faith and due diligence of the assessee, the debatable nature of the transfer pricing issue, and procedural fairness in penalty initiation.

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