2019 (5) TMI 319 - HC - Income Tax

Penalty u/s 271(1)(c) - TP adjustment - arithmetic mean of the profit margin of the comparable was at 13.41% only. However, the assessee offered the amount lower than that, on the basis of its actual income to the profit margin - ITAT set aside the penalty imposed - Revenue emphasised that Explanation (7) was for the purpose of international transactions undergoing transfer pricing and u/s 92CA, if a larger amount was determined by the TPO, the difference between what is offered and what ought to have been offered becomes not only taxable but subject to penalty - HELD THAT - This Court is of the opinion that in the given facts of this case, the issue at best is debatable. It is also important to notice that during the proceedings, it became evident that the assessee had wound up the operations. What the TPO and later the AO desired the assessee to do, was to include in hindsight, the income amounts which it had not received and offer a higher rate of return or profit. The Court is of the opinion that the setting aside of the penalty amount cannot be characterised as unreasonable. No substantial question of law arises.

Issues:
1. Penalty under Section 271(1)(c) read with Explanation (7) for underutilization of capacity by the assessee.
2. Application of Transfer Pricing Regulations and adjustments made by the TPO.
3. Allowance of deduction under section 10A for transfer pricing adjustments.
4. Legality of penalty imposition under Section 271(1)(c) for alleged inaccurate particulars of income or concealment of income.

Issue 1: Penalty under Section 271(1)(c) read with Explanation (7) for underutilization of capacity by the assessee:
The Revenue appealed against the ITAT's decision to set aside the penalty imposed under Section 271(1)(c) concerning the underutilization of capacity by the assessee. The TPO had rejected the assessee's profit margin calculation based on its actual income, leading to the imposition of the penalty. The Tribunal held that the TPO's reasoning for making the adjustment was erroneous as it did not conduct an independent analysis with comparable uncontrolled transactions. The Tribunal found the TPO's approach unsustainable in law, as the basis for the TP adjustment lacked factual and legal support. The Tribunal also highlighted that the AO's computation, including a deduction under section 10A for transfer pricing adjustments, was against the law. Consequently, the Tribunal deemed the penalty unsustainable and directed its deletion.

Issue 2: Application of Transfer Pricing Regulations and adjustments made by the TPO:
The Tribunal criticized the TPO's methodology for determining the arm's length price, emphasizing that the TPO failed to conduct benchmarking under the prescribed method and functional analysis with uncontrolled transactions. The TPO's assumption that underutilization of capacity was solely due to the control exercised by the AE was deemed flawed and not supported by the law. The Tribunal highlighted that the TPO's approach lacked a proper analysis of comparable uncontrolled transactions, rendering the TP adjustment invalid. The Tribunal concluded that the TP adjustment made by the TPO was unsustainable under the law.

Issue 3: Allowance of deduction under section 10A for transfer pricing adjustments:
The Tribunal noted that the AO had allowed a deduction under section 10A for transfer pricing adjustments, which was contrary to the law. The Tribunal emphasized that no deduction under section 10A is allowable for transfer pricing adjustments made under section 92C. The Tribunal found the AO's computation, including the deduction, to be in violation of the law, further supporting the decision to set aside the penalty.

Issue 4: Legality of penalty imposition under Section 271(1)(c) for alleged inaccurate particulars of income or concealment of income:
The Court observed that the issue of penalty imposition under Section 271(1)(c) was debatable in the given circumstances. It was noted that the assessee had wound up operations, and the TPO and AO sought to include income amounts not received by the assessee in hindsight. The Court opined that setting aside the penalty was not unreasonable in this case, and no substantial question of law arose. Consequently, the Court dismissed the appeal.

In conclusion, the judgment addressed the penalty imposition under Section 271(1)(c) concerning underutilization of capacity, criticized the TPO's methodology for TP adjustments, highlighted the incorrect allowance of deduction under section 10A, and deemed the penalty unsustainable due to lack of legal and factual basis.

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