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TMI Blog2016 (4) TMI 209X X X X Extracts X X X X X X X X Extracts X X X X ..... ms due diligence and good faith cannot be used interchangeably or independent of one another. Thus the acceptable standards laid down by the statute are that due and diligence efforts made by a prudent man in a given situation have also to be in good faith as all due diligent efforts per se may not be in good faith. Conversely an act done in good faith with honesty and sincerity per se is not sufficient as acts done in good faith protects acts of negligence. However, the act of computing a transaction is to be done with due diligence i.e. strictly in accordance with the provisions contained in section 92C and in the rules framed there under and thus necessarily in the manner prescribed therein while so computing no negligence even in good faith is legally acceptable. Hence the statute has mandated that not only the assessee is required to act in due diligence but it must also act in good faith. The requirements are very stringent and required to be met scrupulously. In the facts of the present case, we find that the bonafide of the assessee cannot be doubted. To sum up it is seen that at the relevant point of the time when the TP Study was filed there was a debate on the issue of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he facts and circumstances of the case and in law, the Ld.CIT(A) has erred in holding that it is not a fit case for imposition of penalty u/s 271(1)(c) thereby deleting the penalty of ₹ 51,47,940/- levied for assessment year 2007-08. 2. The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of the hearing. 2. The relevant facts of the case relatable to the issue are that the assessee i.e. Boston Scientific India Pvt. Ltd. (previously known as Guidant India Private Limited) is a company incorporated under the Indian Companies Act, 1956 in July 2003. It is stated to be primarily engaged in promotion, marketing, sales and distribution in India of a wide range of cardio-vascular products and related medical instruments and equipments manufactured by the Boston group. The assessee is also stated to be providing post sales related support services. The AO in both the assessment years referred the matter to the Transfer Pricing Officer (hereinafter referred to as TPO ) for determination of arm s length price of the international transactions. 3. The record shows that in the AY 2006-07, the assessee had only one business segme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red by the assessee. 3.2.2. He further also rejected the multiple year data and using single year data for the 6 comparables retained proposed an addition of ₹ 1,52,93,937/- by way of adjustment in the international transaction of the assessee. 3.3. In both the years, the assessee did not go in appeal against the additions made by the AO pursuant to the TPO s order. 4. As a result of the additions to the income of the assessee in the respective years the AO initiated penalty proceedings u/s 271(1)(c) and required the assessee to explain why penalty u/s 271(1)(c) should not be imposed for the years in consideration. 4.1. The assessee in the course of the penalty proceedings for the A.Y.2006-07 vide letter dated 10.06.2010 (copy at page 47 of the paper book) submitted that the addition was accepted as the company wanted to do away with unnecessary litigation. 4.1.1. It was also pleaded that due taxes on the additions were promptly paid proved it s bona fide. 5. Similar submissions were offered in the penalty proceedings in A.Y.2007-08 through letter dated 19.07.2011 before the AO (copy at page no.114 of the paper book). 6. Not convinced with the explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the assessee are extracted hereunder:- 5.1. Selection of Method: 5.1.1. Assessee had selected RPM as the most appropriate method in its TP report. The transfer pricing report and the financial of the assessee were examined. As per details furnished in transfer pricing report, the assessee i.e. Guidant India has been classified as a distributor which carries out marketing, promotion, sales and distribution of Guidant products in India. The assessee is a 100% subsidiary distributor of its AE. The financials of the assessee including P L account were examined. It was found that the assessee in the current year had incurred a loss of ₹ 79.05 lacs on a turnover of ₹ 37.61 Crs. As compared to this, the assessee had shown a profit of ₹ 3.72 Crs on a turnover of ₹ 28.27 Crs in the previous year i.e FY 2004-05. 5.1.2. Show cause notice to the assessee: Vide order sheet entry dated 03.08.2009, the assessee was asked to state the reasons for incurring of losses at the net level. The assessee was also asked to state as to whether there were international transaction below the Gross Profit Margin and how they were impacting the profitabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that where the AO has wrongly invoked section 68 in place of sections 69, 69A, 69B or 69C etc. the order does not become bad merely because a wrong section has been quoted and the issue can still be considered and the action upheld applying the correct provision. Accordingly, placing heavy reliance upon the said explanation, it was his submission that when considered in the light of Explanation 7 of section 271(1)(c), the impugned order deserves to be set aside and the penalty order should be upheld. In the facts of the present case it was re-iterated that the additions made have been accepted by the assessee. Accordingly relying upon the decision of G.C.Agarwal (1994)186 ITR 571 (SC) and ACIT vs Jeevan Lal Shah (1994) 205 ITR 244 (SC), it was his submission that penalty imposed deserved to be upheld in both the years. 11. The Ld. AR heavily relying upon the impugned order invited specific attention to the facts recorded by the CIT(A) in paras 4.1 to 4.4 of his order. Since it is a consolidated order for both the years under consideration, heavy reliance was placed thereon. It was his submission that in both the years the assessee vide letters dated 10.06.2010 and 19.07.2011 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... international transactions were at arms length. 11.6. Referring to the record it was claimed that whatever method is applied in 2006-07 AY, considering the six comparables offered no adjustment would be warranted. This fact it was submitted is evident from the table 2 in para 5.1.5 of the impugned order. 11.7. Similarly in 2007-08 AY it was submitted if Table 3 in the same para of the CIT(A) s order is considered it would show that whatever method is considered the margin would be within +/- 5%. 11.8. It was also his submission that the arguments of the Ld.CIT DR that the assessee had marketing intangibles is of no relevance. Inviting attention to TPO s order internal page 3 of Paper Book page 9 in the context of page 41 internal page 3 of the Transfer Pricing Study Report, it was submitted that the assessee had shown the following international transactions in 2006-07 AY:- Nature of International Transaction Most Appropriate Method Profit Level Indicator Guidant India's Price/Gross Profit Margin Comparables Price/Gross Profit Margin (Arithmetic Mean) Purch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee s Transfer Pricing Report and has merely changed the most appropriate method and reduced certain comparables offered by the assessee and accepted the further introduction of three more comparables in one year again offered by the assessee it was submitted that now the CIT DR cannot make out a new case. It was also his argument that even otherwise the Hon ble Delhi High Court in the case of Sony Ericson which is a case of distributor and in the case of Maruti Suzuki which is a case of a manufacturer it has been categorically held that the AMP issue per se cannot be forming part of chapter X of the Income Tax Act, 1961 and in the facts of the present case this was not even the case of the AO. 13. We have heard the rival submissions and perused the material available on record. In the facts of the present case admittedly the AO wrongly invoked Explanation 1 of section 271(1)(c) instead of Explanation 7 of section 271(1)(c). Thus noting that the request was not opposed on behalf of the assessee, we allow the prayer of the Ld.CIT DR in the peculiar facts and circumstances of the case that the issues be considered in the light of Explanation 7 to section 271(1)(c) instead of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction which is already a matter of record. 13.4. It is seen that the assessee has described it business profile in its transfer pricing study which has been considered by the TPO in his internal page 2 in the following manner:- 2. Business description as submitted by assessee:- 2.1.Guidant corporation was incorporated in 1994 and is headquartered in Indianapolis, USA. It is the ultimate parent of all Guidant group companies across the world. It is primarily engaged in the development, manufacturing and marketing of a broad array of products and service for cardiac and vascular patients. Its Indian operations are carried out on by Guidant India, a wholly owned indirect subsidiary. 2.2. Group companies own significant valuable intellectual property rights and other commercial or marketing intangibles and are involved in complex product development, manufacturing and brand development of the products. Group Companies also bear significant business and entrepreneurial risks of products acceptability and performance in the market. 2.3.Guidant India is primarily engaged in the promotion, sales, marketing and distribution of the cardiovascular medical product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.1.5 . In order to prove the good faith and due diligence , the appellant had pleaded that even if the same original 6 comparables are taken with a single year data in the AY 2006-07, the appellant s international transaction is at arm s length in either of the methods i.e. RPM or TNMM. The same is demonstrated by the appellant in the following table:- Table-2 For AY 2006-07 RPM TNMM S.No. Name of the Comparable GP/Sales OP/Sales 1. Advanced Micronic Devices limited 47.62% 5.85% 2. Ashco Industries Limited 45.46% 11.38% 3. BA Brothers (Eastern) Limited 9.67% 1.41% 4. Bijoy Hans Limited 6.25% -28.13% 5. Duchem Laboratories Limited -9.57% -23.01% 6. Fulford (India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch transaction was computed in accordance with the provision contained in section 92C and in the manner prescribed under that section in good faith and with due diligence (emphasis provided) . 13.7.1. Thus, we find that the law as it stands on the statute the deeming fiction cannot apply in such a situation where the assessee is able to demonstrate that the price charged or paid in respect of the said international transaction was computed in accordance with the requirements of section 92C and the exercise was done in good faith and due diligence. 13.8. Thus in the facts of the present case when the conduct of the assessee is taken into consideration, it is seen that in regard to change of methodology the assessee has consistently maintained that the change was effected in view of the fact a particular segment was discontinued in the year under consideration and for the distribution segment, RPM was considered to be the most appropriate method. Notwithstanding the fact that the explanation was not accepted and the issue was given up by the assessee for the stated reasons of avoiding litigation the fact remains that the merits of the explanation in the penalty proceedings has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t no hierarchy for selecting the most appropriate method has been prescribed under the Rules or the Statute. Sub-Rule (b) of Rule 10B specifically lays down that RPM is one of the prescribed methods to be followed in certain circumstances. Thus when the conduct of the assessee in using this method in the year under consideration is considered alongwith the justification for selecting this method namely having only one segment i.e. the distribution segment in the year consideration as opposed to the earlier factual position the explanation is plausible and acceptable and unless rebutted by some fact or argument to the contrary. The assessee is presumed to have discharged his burden of having acted in good faith with due diligence. No malafide has been alleged by the Revenue in the facts of the present case to show that the selection of the said method was with a deliberate attempt to defraud the Revenue and the said method could never have been selected in good faith with due diligence in the given facts. We are of the considered view that mere change of method by the TPO by itself is not enough. Once the tax payer has given sufficient and cogent reasons, relying on facts and law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d unless the same was rebutted by the Revenue by showing specific instances explicitly indicating that in the selection of comparables the assessee had acted malafide and the exercise was lacking in good faith and due diligence. No such arguments in rebuttal have been made by the Revenue before us. Accordingly for the reasons given herein above, we find that on this ground too the Revenue has failed to upset the finding of the CIT(A). 13.10. The next issue taken by the Revenue to prove lack of good faith and exercising due diligence is the use of multiple year data in the TP study placed on record in 2006-07 and 2007-08 AYs by the assessee. On a consideration of the jurisprudence available thereon, we find that even on this ground the claims of exercise of due diligence and good faith by the assessee in computing the TP study in accordance with the provision of section 92C is not eroded. The conclusion is supported by the decision of the Co-ordinate Bench dated 17.09.2012 in ITA No.5566/Del/2011 in the case of M/s Verizon Communication India P. Ltd. vs DCIT wherein the Coordinate Bench had an occasion to consider multiple year data furnished by the assessee. Before the ITAT the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that considering the facts of the present case that the CIT(A) has himself examined the legal position. The CIT(A) has examined the issue in the light of Explanation 7 to Section 271(1)(c) of the Act. Reliance has been placed upon the order of the ITAT in the case of CIT(A) vs RBS Equities India Ltd. in ITA No.4654/Mum/2009 order dated 26.08.2011 considering the facts of that case, where the said assessee i.e. RBS Equities India Ltd. had entered into International transaction with its AE s and computed the arm s length price by applying TNMM method which was changed by the TPO to CUP method where the Co-ordinate Bench considering the Explanation 7 to section 271(1)(c) relying upon K.P.Verghese vs ITO 131 ITR 597 (SC) held that penalty was not leviable. 13.13. The view taken is further supported by the order dated 17.05.2010 of the Co-ordinate Bench sitting at Mumbai in ACIT vs Firmenich Aromatics India Pvt. Ltd. [ITA No.4654/Mum/2009] wherein on near identical issues i.e. change of method herein from RPM to TNMM and therein from CUP to TNMM it has been held to be a bonafide difference of opinion. Relying upon the following extract of the decisions of the Apex Court in the Relian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous tests and propositions laid down by the Courts to levy of penalty and only on consideration of the legal position on the facts the AO is required to decide whether to levy or drop the proceedings. The penalty cannot be imposed simply because the addition is accepted. In the present case we are of the view it can be imposed only when the explanation offered is shown to be lacking in good faith and the transaction can be shown to be computed without due diligence with wilful attempt to defraud the Revenue. It is also a settled legal position that wherever there is a debate on the issue and two views are possible the bonafide of an explanation in having followed one of the views cannot be a ground for levying penalty.. 13.15. As we have already individually addressed each of three issues arising in the present facts of the case it is found that in the event of an addition or disallowance by the TPO in Explanation 7 of section 271(1)(c) postulates further examination of the conduct of the assessee to be adjudged on the touchstones of due diligence and good faith in the preparation and documentation of its Transfer Pricing study. On consideration of the burden cast upon the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in good faith protects acts of negligence. However, the act of computing a transaction is to be done with due diligence i.e. strictly in accordance with the provisions contained in section 92C and in the rules framed there under and thus necessarily in the manner prescribed therein while so computing no negligence even in good faith is legally acceptable. Hence the statute has mandated that not only the assessee is required to act in due diligence but it must also act in good faith. The requirements are very stringent and required to be met scrupulously. In the facts of the present case, we find that the bonafide of the assessee cannot be doubted. To sum up it is seen that at the relevant point of the time when the TP Study was filed there was a debate on the issue of single year data and multiple year data. Considering the change of method from RPM to TNMM, we find that the assessee s explanation that the method was changed from TNMM from 2005-06 AY to RMP in 2006-07 2007-08 AY on the ground that there was only one segment in the year and accordingly the most appropriate method selected was the RPM. Notwithstanding the fact that the said approach was not approved by the TPO, i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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