9911796707
TMI Blog2014 (5) TMI 746X X X X Extracts X X X X X X X X Extracts X X X X ..... of having made a claim per its return, being in fact made year after year, for which it is unable to state, much less establish, any basis - In any case of the matter, the revision is outside the purview of section 139(5) for A.Y. 2005-06 in-as-much as the return is filed outside the time limit prescribed there for under law, which expires on 31.03.2007, while the second return was filed on 14.12.2007. Denail of claim of deduction u/s 10A of the Act – Held that:- The ‘revised return’ is non-est in law and the only valid return by the assessee is its original return/s, whereby claim for marketing expenses has been made - notwithstanding a claim to revision, the enhancement of its income is only in consequence of its adjustment to the returned income u/s.92C(4) r/w.s. 92CA(4) - The rigor of section 92C(4) is thus attracted, and despite the assessee’s income bearing the same quality or character, would stand disqualified to that extent for being allowed deduction u/s.10A in its respect. The disclosure for both the years as not voluntary - The assessee has in fact been claiming the expenditure, stated to be by way of reimbursement to its Associate Enterprise (AE), year after ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ri P. J. Pardiwala, Shri Madhur Agarwal Shri K. K. Ved For the Respondent : Shri Sanjeev Jain ORDER Per Sanjay Arora, A. M. This is a set of two appeals by the assessee, i.e., for two consecutive years, being assessment years 2004-05 2005-06, arising out of the separate orders by the Commissioner of Income Tax (Appeals)-5, Mumbai (CIT (A) for short) of even date, i.e., 29.11.2013, confirming the levy of penalty u/s. 271(1) (c) of the Income Tax Act ( the Act herein after) for the relevant years. The issues arising in both the appeals being the same, the appeals were heard together, and are being disposed of vide a common, consolidated order. 2. At the very outset it was brought to our notice by the ld. Authorized Representative (AR), the assessee s counsel, that the hon ble jurisdictional High Court has since modified the stay order as passed by the Tribunal, and which would thus obtain, even as the certified copy of its order is as yet neither available from the Registry nor available on line. The hearing in the case was accordingly proceeded with on that basis. The order by the hon ble court stood subsequently, i.e., vide its letter dated 18/2/2014, bro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2004-05 (PB pgs. 30-31). 4.2 The assessee was found to have during the relevant years, as indeed in the past, entered into four categories of international transactions with DC - from whom its entire revenue came to be realized, as under: (a) Software and IT services provided to AEs; (b) Software and IT services availed from AEs; (c) Reimbursement of market services availed; and (d) Reimbursement of support services availed Reference was made for both the years, as for the immediately preceding years, i.e., AY 2002 -03 and AY 2003 -04, by the Assessing Officer (AO) to the Transfer Pricing Officer (TPO) for determining the arm s length price (ALP) of the said transactions, who accepted the valuation as booked for all save one, i.e., the third category of the transactions, as for the said two preceding years, determining the arm s length price thereof at nil. The assessee had valued the same at the amount/s as booked and claimed, i.e., on actuals, at Rs. 5.86 crores and Rs. 6.61 crores for the two consecutive years under reference respectively. The assessee, apart from its reply on merits, had also informed the TPO that it had revised its returns for the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for grants of which are also not complied with. The findings by the Tribunal are at paras 33 to 53 of its order, whereby it endorses the finding by the Revenue for the relevant years, which it found the assessee as failing to controvert. 4.3 Penalty proceedings for furnishing inaccurate particulars of income, satisfaction for which stood recorded at the time of framing the assessment, were initiated, as it appears, subsequent to the confirmation in quantum proceedings at the first appellate stage. The assessee explained that it had considered prudent to, from a commercial perspective, incur the cost of marketing personnel (5) of DC who were specifically engaged in marketing the assessee s offshore capabilities. Further, no adjustment u/s.92C(4) shall arise in view of the suo motu revision of its returns disallowing the relevant expenditure, leading though to no enhancement in income due to a corresponding increase in the deduction u/s.10A. However, no material to support its case on facts, which stood considered by the Transfer Pricing Officer (TPO) in framing his order u/s.92CA(3), being adduced, the assessee s contention did not pass muster. Even the revision was considered as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterprises assumes importance and plays its role to ensure that profits are not diverted to those associate enterprises by paying them more than what would normally be done to any third party. On reference to the TPO indeed found that the assessee was not required to take any marketing function in terms of the master service agreement with its associate enterprise Deloitte USA; that both the parties had clearly demarcated role to play for which they were compensated; and there was no valid reason for Deloitte USA to allocate any part of the cost incurred by it to perform the role agreed by it. Accordingly the TPO determined the arm s length price of marketing expenses so claimed by the assessee as NIL. The assessee in fact, had simply accepted such findings of the TPO by filing its revised return before the order was passed by the TPO. It is noted that reference was already made to the TPO and the proceedings were in progress when the assessee filed his revised return. So admission/disclosure of additional income was not voluntary, more so when similar view was already taken in its earlier years (AY 2002 -03 2003-04). The deduction thereon was not admissible u/s. 10A by the virtu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gned any marketing function per the Master Service Agreement (MSA). The question of it being allocated marketing cost, or a part thereof, therefore, does not arise. In fact, neither has the assessee similarly allocated any development cost to Deloitte, nor partook any profit in respect of the marketing services being carried on by DC, i.e., on account of cost allocation; c) the rendering of any services or its benefits to the assessee could also not be exhibited by it; d) there was no separate documentation qua the cost allocation as made on and incurred by the assessee; and e) though stated in terms of costs allocation, the same is only a manner of incurring the cost for marketing services stated to be availed by the assessee. The only evidence adduced was qua accounts receivable, risk and responsibility qua which stands specifically assigned under the agreement to DC. There has been no rendering of any marketing services to the assessee, while the DC stands adequately compensated for undertaking the marketing function. The cost of the said services stood, accordingly, determined by him at Nil; there being in fact no revision by the assessee of the auditor s report/s u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quence, result as it does in like increase in the deduction u/s.10A, it may be clarified, as by the ld. Departmental Representative (DR) during hearing, that for both the preceding years of its existence, i.e., the previous years relevant to A.Ys 2002-03 and 2003-04, there was no claim for deduction u/s.10A, so that the adjustment had no tax impact, excluding penalty. 5.2 The foregoing discussion and emphasis on the factual aspects of the case, even as the assessee does not pursue its case, in view of, and only understandably, the admission of a mistake of a wrong claim qua the marketing expense, with any force, is made for one more reason. That is, whether, the revision by the assessee of its return/s is valid. We do not consider it as so. True, a wrong statement could be discovered by an assessee at any time, and the TPO s report for the preceding years are independent of that may follow for the current year/s, so that nothing turns on the TPO s reports for those years. However, reference to the TPO for the current year/s, which for both the years, being on 01.09.2005 and 23.01.2006 for the two years respectively, is much prior to the date of revision , is without doubt relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but only on its quantum, so that where entitled to deduction, would continue to be so qua the increased income in consequence of the disallowance. The same, rather, can be said to be a pure matter of fact rather than of a law, i.e., unless of course there is a bar or any other statutory impediment, as indeed attends the instant case per section 92C(4), which reads as under: Computation of arm s length prince. 92C. (1) The arm s length prince in relation to an international transaction shall be determined (2) . (3) . (4) Where an arm s length price is determined by the Assessing Officer under sub-section (3), the Assessing Officer may compute the total income of the assessee having regard to the arm s length price so determined: Provided that no deduction under section 10A or section 10AA or section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section. We have already opined as to why the revision by the assessee in the instant case cannot be considered as a valid revision under law. That being the case, the revised return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of the country. This aspect stands explained by CBDT vide its Circular No. 14, reference, quoting a part thereof (point 55.12) - to the same effect as stands emphasized by us, has been referred to and highlighted in the assessment order for A.Y. 2005-06. In the facts of the case, the payment to the extent of the expenditure claimed has already been paid (ostensibly by way of reimbursement), while no services have been found as a fact to have been rendered or availed (resulting in their being valued at nil). In other words, the foreign exchange to that extent stands lost to the country, warranting a denial of deduction to which the amount may otherwise be eligible. The assessee, in fact, pleads of the same as being construed as discount to DC, the AE under reference, from whom it s income arises (refer para 25 of the tribunal s order (supra)). Reference in this regard may also be made to section 92(2) of the Act. Surely, the disallowance or, more precisely, the TP adjustment of the marketing expenses would not have resulted but for the reference being made to the TPO to determine the ALP of the relevant international transaction. It is in this view of the matter, and the incide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riously wanted by the Revenue. Contrast and juxtapose this with the fact that it has been found that no services have in fact been rendered or availed of in the instant case, with the assessee being unable to prove the truth of the transaction, stating it to be considered as a discount to its principal buyer, an AE. This fact, which is in contradiction to its own TP report u/s.92E (per Form 3CEB), stands admitted by the assessee, claiming, by its suo motu disallowance, to have been wrongly claimed. How, it does not explain? That is, the very same report that the assessee is under law obliged to defend and prove as representing a true and fair account of its international transaction/s, i.e., as being undertaken following the arm s length principle, stands disowned by it. It is not surprising, therefore, that no revised report u/s.92E accompanies the revised returns . Though the assessee seeks to justify the same on the basis that there is no provision for revision of the said report, we find the same specious and per se unacceptable. Anything which is wrong, or discovered as so, is not valid. The same therefore has to be necessarily withdrawn, admitting the same as not correc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the withdrawal of the expenditure could under the circumstances exclude penalty, while we have already observed the said withdrawal to be not so, but guided the by consideration of being unable to prove its claim, as indeed by all concerned in both in the quantum and the penal proceedings. Explanation 1 to section 271(1)(c), thus, gets attracted in full rigor; the assessee s case being, as afore-stated, sans any explanation, much less supported and bona fide. The assessee in fact can be said to have under the circumstances made a bogus claim per its original return/s. Further, the adjustment to income in assessment arising on account of a TP adjustment, so that money to that extent has already either not been received in or, as the case may be, gone out of the country, corresponding deduction u/s.10A, to which it may otherwise be entitled to in law, shall per force law be not available to it. This is precisely why the law, per Explanation 7 to section 271(1)(c) requires the assessee to justify its international transaction on the basis of bona fides an essential attribute saving penalty, so that no penalty, despite enhancement in income due to denial of deduction u/s.10A on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The said argument in fact assumes validity in circumstances such as of debatable legal issues where the given facts, truly disclosed, could yet lead to the view being adopted or canvassed by the assessee. The argument, thus, is invalid and of no moment. 5.6 The plea of revision as being motivated by the consideration to avoid litigation qua the admissibility of its claim is equally without basis in facts and, in the clear and proven facts of the case, only needs to be stated to be rejected, being false (also refer para 5.1 of this order). Reference in this context may also be made to the decision in the case of CIT v. Mak Data Ltd. [2013] 352 ITR 1 (Del), referred to by the ld. DR, which stands since upheld by the apex court. As such, looked at from any angle there has been both concealment as well as furnishing inaccurate particulars of income in the present case, even as there may be areas of overlap and, further, the Revenue has clearly made out a case for the latter. That a plausible explanation, the onus to substantiate which is on the assessee, saves penalty, represents trite law, expounded by the apex court over decades (refer: CIT v. Atul Mohan Bindal [2009] 317 ITR 1 ..... 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