2018 (8) TMI 1137 - HC - Income Tax

Levy of penalty 271(1)(c) - concealment of income - failure to correctly compute arm s length price of international transactions between the respondent-assessee and its holding company - question of bona fides of the explanation of the respondent-assessee and whether exclusion of the internal comparable was after due diligence. Held that - The Tribunal has duly applied its mind to the relevant aspect of good faith and due diligence. The Tribunal has held that the respondent-assessee had been able to discharge the onus placed upon them in terms of Explanation 7 to Section 271(1)(c) of the Act and show that their stand and stance in not taking into consideration the internal transaction was in good faith and they had acted with due diligence. These findings of the Tribunal in the present case are factual and clearly plausible and reasonable. No penalty - Decided against the revenue.

Issues Involved:
1. Imposition of penalty for concealment of income under Section 271(1)(c) of the Income Tax Act, 1961.
2. Computation of arm's length price (ALP) of international transactions.
3. Exclusion of internal comparable transactions in the application of the Comparable Uncontrolled Price (CUP) method.
4. Bona fides and due diligence of the respondent-assessee in excluding the internal comparable.

Issue-wise Detailed Analysis:

1. Imposition of Penalty for Concealment of Income:
The Revenue appealed against the order of the Income Tax Appellate Tribunal (Tribunal) which had deleted the penalty for concealment of income under Section 271(1)(c) of the Income Tax Act, 1961. The penalty was initially imposed by the Assessing Officer (AO) due to the respondent-assessee's failure to correctly compute the arm's length price (ALP) of international transactions with its holding company and associated enterprises. The AO referred to Explanation 7 of Section 271(1)(c) and concluded that the respondent-assessee had concealed particulars of its income. However, the Tribunal held that the issue of addition based on the difference in ALP was debatable and thus, the penalty under Section 271(1)(c) was not attracted.

2. Computation of Arm's Length Price (ALP) of International Transactions:
The respondent-assessee provided support and assistance to its holding company and associated enterprises in procuring and supplying metallurgical materials, for which it was paid a commission. During the relevant year, the respondent-assessee entered into a third-party independent transaction with a higher commission rate than that with its associated enterprises. The respondent-assessee disclosed this transaction to the AO and Transfer Pricing Officer (TPO) but justified excluding it as an internal comparable due to its small volume and isolated nature.

3. Exclusion of Internal Comparable Transactions in the Application of the CUP Method:
The TPO and the Dispute Resolution Panel (DRP) did not agree with the respondent-assessee’s exclusion of the internal comparable and computed the ALP by including the independent unrelated party transaction. The Tribunal noted that under the CUP method, the selection of comparables must be accurately made based on functional similarities. It observed that the transfer pricing adjustment arose due to a lack of reliable comparables and that the issue of addition was debatable.

4. Bona Fides and Due Diligence of the Respondent-Assessee:
The Tribunal examined whether the respondent-assessee acted in good faith and with due diligence in excluding the internal comparable. The Tribunal found that the respondent-assessee had justified its exclusion of the internal transaction due to its low value and isolated nature compared to the continuous and long-term transactions with associated enterprises. The Tribunal concluded that the respondent-assessee had acted in good faith and with due diligence, thus meeting the requirements of Explanation 7 to Section 271(1)(c).

Conclusion:
The Tribunal’s findings were based on the factual matrix and were deemed reasonable and plausible. The High Court upheld the Tribunal’s decision, noting that the respondent-assessee had been able to discharge the onus of proving its bona fides and due diligence. Consequently, the appeal by the Revenue was dismissed, with no costs awarded.

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