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TMI Blog2017 (5) TMI 1617X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances of the case. 3. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in levying penalty u/s 271(l)(c) on the following additions made in assessment order and more so when framing the such assessment order u/s 143(3)/144C dated 28-02-2011 is also contrary to law and facts. * On account of expenses of capital nature-Rs.5,00,000/- * On account of transfer price adjustment -Rs.63,85,158/- 4. That having regard to the facts and circumstances of the case, Ld. CIT (A) has erred in law and on facts in confirming the action of Ld. AO in levying penalty u/s 271(l)(c) which is bad in law being beyond jurisdiction and barred by limitation and contrary to the principles of natural justice and has been passed by recording incorrect facts and findings and without giving adequate opportunity to the assessee and the same is not sustainable on various legal and factual grounds. 5. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in imposing a penalty ofRs.20,79,453/- that too without recording mandatory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; Total 12,83,83,137 4. For computing its arm's length price of aforesaid international transactions, the assessee had adopted "Cost Plus Method" (CPM) and submitted that the AE charges the assessee company with markup of 10% of the total cost of purchase of the raw materials and capital goods, which meets the ALP requirement. The ld. TPO noted that the assessee while adopting CPM as MAM has not bench marked its ALP by carrying out any comparability analysis after identifying independent comparable. Therefore, in absence of assessee's failure to furnish suitable comparables, the ld. TPO held that CPM cannot be adopted as most appropriate method and held that TNMM should be taken as MAM for bench marking the ALP of the transaction. Since the assessee was incurring huge loses and sales have been made entirely to the AE, the TPO held that "tested party" should be foreign AE. After going through AE's financials, he noted that the operating margin of the AE has been stated to be 8.62% which has been worked out in the following manner:- Sr. Crores in terms of Thai Bhat 1. Sales 721.45 2. Cost 659.29 3. Operating profit 62.16 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port of raw material) : 66,06,5006 Less: Margin 14.73% : 97,31,375 Direct & Indirect Cost of production: 5,63,33,631 Add: Normal Markup @ 5.94% 33,46,218 Arm's Length Price 5,96,79,848 Total price charged by AE : 6,60,65,006 Transfer price adjustment : 63,85,158 7. The aforesaid transfer pricing adjustment was proposed by the TPO to the Assessing Officer, however the ld. Assessing Officer in his order, had made addition in respect of ALP adjustment on import/ purchase of capital goods and did not made any adjustment in respect of import/purchase of raw materials by the assessee. Apart from the one TP adjustment, the ld. Assessing Officer has further added a sum of Rs. 5 lakhs which has been disallowed by him as capital expenditure on the ground that such an expense has been incurred towards filing fees to ROC on enhanced capital. Some further additions like disallowance on personal user of vehicles and telephone expenses were also made, which are not the subject matter of penalty, before us. Accordingly, the addition on which penalty was initiated and levied by the Assessing Officer was only in respect of TP adjustment of Rs. 63,85,138/- and Rs. 5,00,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urbed either under the revisionary jurisdiction u/s 263; nor u/s 148; and nor u/s 154. Thus from the stage of the Learned CIT (Appeals), not only the quantum of penalty has been confirmed which was levied by the Assessing Officer but it has also been enhanced on an amount of addition which was not made in the assessment order. 10. Before us the ld. Counsel, Dr. Rakesh Gupta after explaining the entire facts submitted that Ld. CIT (A) has exceeded his appellate jurisdiction by levying the penalty on an addition which has not been made in the quantum proceedings. He can only levy or enhance the penalty only to the extent of additions which has been made in the quantum proceedings. Thus, penalty enhanced by the Learned CIT (Appeals) here in this case is without jurisdiction and same should be deleted. 11. As regards the levy of penalty on account of transfer pricing adjustment in respect of import/purchase of capital goods, he submitted that first of all, the Learned TPO could not have increase the operating profit of the A.E. by considering the element of "other income" as part of operating sales, because the "other income" mostly consists of dividend income which has nothing to do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here was a clear cut adjustment proposed by the TPO in respect of import of raw materials and import of capital goods. The Assessing Officer by mistake had taken only one item the TP adjustment and omitted to make an addition in respect of import of raw material which was proposed at Rs. 60,23,024/-. Since assessee had not preferred any appeal in the quantum proceedings, therefore, the Learned CIT (Appeals) in the penalty proceedings took note of this fact and also gave opportunity to the assessee as to why the penalty should not be levied on such an amount of addition. This addition was inadvertently left to be made by the Assessing Officer by mistake or through oversight, therefore, it has to be factored in for the purpose of penalty proceedings. Thus, the Ld. CIT (Appeals) is well within his power to levy penalty on such additions. He further submitted that the assessee is taking a new legal plea before this Tribunal by contesting that the Ld. CIT (Appeals) could not have made such an enhancement in penalty proceedings and therefore, either such a plea should not be entertained or the matter should be restored back to the file of the Learned CIT (Appeals). On the merits as regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finality as it has not been revised or rectified u/s 263 or u/s 154 or has been reopened u/s 147/148. Once the addition has been made/confirmed in the quantum proceedings, then subject matter of penalty proceedings u/s 271(1)(c) is strictly circumscribed to such addition only. The penalty cannot be levied on an addition which has not been made in the assessment or in quantum proceedings by any appellate authority and hence if no such addition has been made in assessment, then same cannot be roped in penalty proceedings either by the Assessing Officer or by Ld. CIT (Appeals) in terms of power enshrined under section 251. Here the Ld. CIT (Appeals) is absolutely unjustified in law and on facts to levy or enhance a penalty on an addition which is not arising out of assessment order or any appellate order in the quantum proceedings or from the penalty order passed by the Assessing Officer. Once the assessee had raised this issue before the Ld. CIT (Appeals), then the Ld. CIT (Appeals) should have given his elaborate reasons and justifications under the law as to how he can proceed to levy a penalty which was never a subject matter of addition by the Assessing Officer. If there was any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determining the ALP and not the comparables which are working under Indian economic and market conditions. The TPO cannot made foreign A.E. as a 'tested party' and compare it with the Indian comparables who are operating under different geographical, economical and market environment. Such an exercise by the TPO vitiates the entire exercise of determining the ALP of the transaction and transfer pricing adjustment made by him. Apart from that, it is also noted that the sales of the A.E. constitutes its manufacturing of auto parts and for this purpose it imports raw materials and capital goods which is part of its direct operating cost. In such circumstances, the operating profit is to be based on income derived from sales and direct costs incurred on such sales of goods. Other incomes like ''dividend income' cannot be reckoned as part of operating sales or operating profits. In this manner the tinkering of the PLI by including dividend income as part of operative income and operating profit by the TPO is again unjustified in law and facts. Thus, the PLI of 14.73% as determined by the TPO cannot be sustained on the facts of the present case. If the A.E. is operating profit is 8.62%, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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