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TMI Blog2023 (10) TMI 1286X X X X Extracts X X X X X X X X Extracts X X X X ..... pt the arguments on base erosion since the arguments were considered and dealt with in length by the ITAT Kolkatta Special Bench in the case. According to the CIT(A) even if the assessee was charging lower fees for technical services to its Indian AEs and transfer pricing is proposed in the hands of the assessee, no deduction could be claimed by Indian AEs. Reading a particular paragraph of the observations of the AO s order reproduced by the CIT(A) itself would indicate that there were two views possible and that the issue was debatable. Therefore even if the deemed provision on the basis of Explanation 7 is pressed into service, then also there can be a case based on good faith and it cannot be termed as concealment. What is evident is that the AO has found that the view of the ITAT in Cummins Inc [ 2016 (7) TMI 1689 - ITAT PUNE] on facts may not apply. Even though, a Mumbai Bench decision in the case of 3I INFOTECH LTD. [ 2010 (7) TMI 843 - ITAT MUMBAI] was on the subject of base erosion but the AO did not consider it appropriate as the Ahmedabad Bench had relied upon the Special Bench order of Kolkatta. These findings itself suggest that there are in fact more than t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iny assessment when substantial proceedings addition/adjustment was confirmed by ITAT? (c) Whether in the facts and circumstances of the case, the learned ITAT has erred in law and on facts in holding that Explanation 7 to Sec. 271(1)(c) of the Income Tax Act cannot be invoked while levying penalty in relation to the transfer pricing adjustment when the said explanation was neither referred to nor relied upon at the time of initiation of penalty proceedings under the Act? (d) Whether in the facts and circumstances of the case, the learned ITAT has erred in law and on facts in holding that Base Erosion is a debatable issue when Kolkata Special Bench of ITAT and Ahmedabad ITAT itself has already taken a view against the appellant on the same issue in assessee's own case? (e) Whether in the facts and circumstances of the case, the learned ITAT has erred in law and on facts in holding that reimbursement of expenses does not qualify as FTS and hence no penalty can be levied u/s. 271(1)(c) of the Act on such expenses? 2. The respondent assessee company is a Foreign Company registered in Netherlands, deriving income from Royalties or fees for technical servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enge before a special bench, the assessee had intervened and had failed, as a result of which, the Tribunal had held against the appellant on quantum. 5. The whole issue was therefore a debatable issue where views of various Tribunals were at variance and therefore it was not a concealment of income. In the penalty proceedings invoking Explanation 7 to Section 271(1)(C) to DCIT, International Taxation Division vide order dated 20.07.2017 held the assessee liable to penalty. The CIT(A) confirmed the order of penalty. The Tribunal, however, held that the additions on which penalty had been levied was a debatable issue in light of variance of legal issues and opinions of the Karnataka Bench and the Pune Bench and hence two views were possible and mere difference of opinion does not justify levy of penalty. The appeal was allowed. 6. The Revenue is in appeal before us. 7. Mr.Varun Patel learned Senior Standing Counsel for the department made the following submissions: 7.1 The appeal pertaining to quantum proceedings are pending and since admitted where the Tribunal held in favour of the Revenue and the assessee is in appeal, the present appeals must be admitted and tagge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ory was explained. Clear comments were offered based on Circular No.14/2001. 8.6 That, there was a divergence of opinion between the Koltaka Bench and the Pune Bench of the Tribunal and the mechanism explained indicated that the income of the assessee was in the nature of fees for technical services and the assessee was a nonresidential. The receipts were chargeable to tax @ 10%. The AE being an Indian company is chargeable to tax at 33.99% and therefore if the assessee had charged higher rates, the AE, would have claimed deduction of higher expense claiming a larger deduction resulting in a lower tax percent at 23.99%. 8.7 With regard to Explanation 7 of Section 271(1)(C) reliance was also placed on a view of the Delhi High Court decision in the case of Pr. Commissioner of Income Tax-6 v. Mitsui Prime India Composites India Pvt Ltd. in ITA No.913 of 2016 dated 17.01.2017 and in the case of Pri. Commissioner of Income Tax v. Verizon India Pvt. Ltd. in ITA No.460 of 2016 dated 22.08.2016. On the submission of the Revenue that the appeal be kept pending as quantum appeal is pending, he would rely on a judgement in the case of Principal Commissioner of Income Tax-2 v. Sinosteel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losses there is no loss to the Indian government. Further, reliance is placed on various case laws to argue that in the cases where transfer pricing adjustment is proposed and if the Assessee is able to justify that entire analysis was bonafide, in good faith and was with due diligence, penalty cannot be imposed on the Assessee. 3. The Appellant has made adequate disclosures in Form No. 3CEB and TPSR and also during the course of transfer pricing assessment. 4. The case of the Appellant, case was decided by the decision of Hon'ble Kolkata Tribunal, Special Bench in the case of Instrumentarium. Further, Hon'ble Pune Tribunal in the case of Cummins Inc in the similar facts has decided in favour of the Assessee. In view of the same, it is a case where two views are possible and hence, penalty should be not levied on the Appellant. 5. Mere difference of opinion does not justify levy of penalty. 6. Further, reliance was placed on Taxation Ruling No. 2007/1 issued by the Austrian Taxation Office. 7. The appeal of the Appellant against the order of Hon'ble Ahmedabad ITAT is already admitted before Hon'ble Gujarat High Court and hence penalty c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdance with the scheme of Section 92C of the Act, and in the manner prescribed therein, in good faith and due diligence. However, as clearly mentioned above that both Special bench and Ahmedabad ITAT has already taken a view against the Appellant and hence now it cannot be claimed that the Appellant has acted in good faith and with due diligence. Reliance is also placed on the various decisions to argue that penalty should not be levied when two views are possible, However, in the case of the Appellant, there is no difference of opinion as far as transfer pricing adjustment is concerned. Hence, all these decisions are of no help to the appellant. ... It is also pertinent to mention here the provision of Income Tax Act 1961 for reference: Section 271(1)(c)) Explanation 7.-Where in the case of an assessee who has entered into an international transaction defined in section 92B(, any amount is added or disallowed in computing the total income under sub-section (4) of section 92C, then, the amount so added or disallowed shall, for the purposes of clause (c) of this subsection, be deemed to represent the income in respect of which particulars have been concealed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... initiating Penalty Proceedings. Thus, in present case, AO has categorically stated that he is satisfied that Penalty Proceedings is required to be initiated for additions made in Assessment Order which suffice the levy of penalty. The AO has given detailed findings why addition confirmed by first appeal and before the Hon'ble ITAT is subject to levy of penalty and also recorded the manner in which such penalty is required to be levied hence Penalty Order passed by AO is within the framework of law and cannot be held as invalid order on the ground that AO has not recorded his satisfaction in penalty notice or he has initiated penalty under one limb and levied penalty under the second limb. This Decision of Hon'ble Supreme Court has not been distinguished by High Courts hence ratio laid down by Hon'ble Apex Court is binding and AO is justified in levying penalty under Section 271(1)(c) of the Act. 12. Discussion of the ITAT reads as under: 11. We have heard the rival contentions and perused the material on record. During the course of arguments, the Bench called for further information with regard to the price being charged by the assessee to its Associated En ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter the Pune ITAT decision. The fact that Gujarat High Court has admitted the issue for consideration also supports the assessee's contention that the issue involved is debatable. So far as penalty with regards to reimbursement of expenses is being treated as FTS is concerned, in our view, it is a debatable issue whether reimbursement of expenses qualifies as FTS and there are various decisions which have held that reimbursement of expenses does not qualify as FTS. Accordingly, we are of the considered view that no penalty can be levied u/s 271(1)(c) of the Act on account of treating reimbursement of expenses as FTS. 11.1 In view of the above, we are of the considered view, that in the instant set of facts, no penalty u/s 271(1)(c) of the Act is liable to be imposed on the assessee. Accordingly, we direct that the penalty u/s 271(1)(c) of the Act be deleted in the instant set of facts. 12. In the result, all grounds of appeal of the assessee are allowed. 13. What is evident from the discussion herein above is that the CIT(A) did not accept the arguments on base erosion since the arguments were considered and dealt with in length by the ITAT Kolkatta Spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Vs ADIT. All these case laws are duly considered by the Hon'ble Ahmedabad Tribunal in combined order dated 17.11.2016 in assessee's own case and the appeal of the assessee was dismissed. Therefore the ease laws referred by the assessee have no relevance to the case of the assessee. The concept of 'base erosion' has been dealt in detail by the Tribunal and not found acceptable. 14. Therefore even if the deemed provision on the basis of Explanation 7 is pressed into service, then also there can be a case based on good faith and it cannot be termed as concealment. 15. What is evident is that the Assessing Officer has found that the view of the ITAT in Cummins Inc v. ADIT dated 29.07.2016 on facts may not apply. Even though, a Mumbai Bench decision in the case of Infotech Ltd. v. DCIT was on the subject of base erosion but the AO did not consider it appropriate as the Ahmedabad Bench had relied upon the Special Bench order of Kolkatta. These findings itself suggest that there are in fact more than two opinions on the subject of base erosion. 16. In the case of Reliance Petroproducts (supra), paras 7 to 11 read as under: 7. As against this, Learned Coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tantamount to furnishing inaccurate particulars. In Commissioner of Income Tax, Delhi Vs. Atul Mohan Bindal [2009(9) SCC 589], where this Court was considering the same provision, the Court observed that the Assessing Officer has to be satisfied that a person has concealed the particulars of his income or furnished inaccurate particulars of such income. This Court referred to another decision of this Court in Union of India Vs. Dharamendra Textile Processors [2008(13) SCC 369], as also, the decision in Union of India Vs.Rajasthan Spg. Wvg. Mills [2009(13) SCC 448] and reiterated in para 13 that:- 13. It goes without saying that for applicability of Section 271(1)(c), conditions stated therein must exist. 8. Therefore, it is obvious that it must be shown that the conditions under Section 271(1)(c) must exist before the penalty is imposed. There can be no dispute that everything would depend upon the Return filed because that is the only document, where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. In Dilip N. Shroff Vs. Joint Commissioner of Income Tax, Mumbai Anr. [2007(6) SCC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upra) was overruled by this Court in Union of India Vs. Dharamendra Textile Processors (cited supra), was that according to this Court the effect and difference between Section 271(1)(c) and Section 276-C of the Act was lost sight of in case of Dilip N. Shroff Vs. Joint Commissioner of Income Tax, Mumbai Anr. (cited supra). However, it must be pointed out that in Union of India Vs. Dharamendra Textile Processors (cited supra), no fault was found with the reasoning in the decision in Dilip N. Shroff Vs. Joint Commissioner of Income Tax, Mumbai Anr. (cited supra), where the Court explained the meaning of the terms conceal and inaccurate . It was only the ultimate inference in Dilip N. Shroff Vs. Joint Commissioner of Income Tax, Mumbai Anr. (cited supra) to the effect that mens rea was an essential ingredient for the penalty under Section 271(1)(c) that the decision in Dilip N. Shroff Vs. Joint Commissioner of Income Tax, Mumbai Anr. (cited supra) was overruled. 9. We are not concerned in the present case with the mens rea. However, we have to only see as to whether in this case, as a matter of fact, the assessee has given inaccurate particulars. In Webster's Dict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue, that by itself would not, in our opinion, attract the penalty under Section 271(1) (c). If we accept the contention of the Revenue then in case of every Return where the claim made is not accepted by Assessing Officer for any reason, the assessee will invite penalty under Section 271(1)(c). That is clearly not the intendment of the Legislature. 11. In this behalf the observations of this Court made in Sree Krishna Electricals v. State of Tamil Nadu Anr. [(2009) 23VST 249 (SC)] as regards the penalty are apposite. In the aforementioned decision which pertained to the penalty proceedings in Tamil Nadu General Sales Tax Act, the Court had found that the authorities below had found that there were some incorrect statements made in the Return. However, the said transactions were reflected in the accounts of the assessee. This Court, therefore, observed: So far as the question of penalty is concerned the items which were not included in the turnover were found incorporated in the appellant's account books. Where certain items which are not included in the turnover are disclosed in the dealer's own account books and the assessing authorities include these ite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs are independent proceedings. The assessee cannot question the assessment jurisdiction in penalty proceedings. Jurisdiction under penalty proceedings can only be limited to the issue of penalty, so that validity of the assessment or reassessment in pursuance of which penalty is levied, cannot be the subject matter in penalty proceedings. It is not possible to give a finding that the re- assessment is invalid in such penalty proceedings. Clearly, there is no identity between the assessment proceedings and the penalty proceedings. The latter are separate proceedings that may, in some cases, follow as a consequence of the assessment proceedings. Though it is usual for the Assessing Officer to record in the assessment order that penalty proceedings are being initiated, this is more a matter of convenience than of legal requirement. All that the law requires, so far as the penalty proceedings are concerned, is that they should be initiated in the course of the proceedings for assessment. It is sufficient, if there is some record somewhere, even apart from the assessment order itself, that the Assessing Officer has recorded his satisfaction that the assessee is guilty of concealment or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment of such tax or such tax liability came to be admitted and if not it would have escaped from tax net and as opined by the assessing officer in the assessment order. l) Only when no explanation is offered or the explanation offered is found to be false or when the assessee fails to prove that the explanation offered is not bonafide, an order imposing penalty could be passed. m) If the explanation offered, even though not substantiated by the assessee, but is found to be bonafide and all facts relating to the same and material to the computation of his total income have been disclosed by him, no penalty could be imposed. n) The direction referred to in Explanation 1B to Section 271 of the Act should be clear and without any ambiguity. o) If the Assessing Officer has not recorded any satisfaction or has not issued any direction to initiate penalty proceedings, in appeal, if the appellate authority records satisfaction, then the penalty proceedings have to be initiated by the appellate authority and not the Assessing Authority. (p) Notice under Section 274 of the Act should specifically state the grounds mentioned in Section 271(1)(c), i.e., whether i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied that nothing in Chapter XIX-A shall affect the operation of any other provision of the Act requiring the applicant to pay tax on the basis of self-assessment in relation to matters before the Settlement Commission. 26. It is thus held that the nature of the orders under Section 143 and 144 is different from the orders of the Settlement Commission under Section 245-D4 of the Act. 27. In K.C. Builders and Another supra, the Hon'ble Apex Court has observed that the condition precedent for imposing penalty under Section 271[1][c] would be that the assessee has made conscious concealment or furnished inaccurate particulars of his income, where the additions made in the assessment order, on the basis of which penalty for concealment was levied is finally annulled, or deleted, there remains no basis set out for levying the penalty for concealment, and, therefore in such a case no such penalty can survive and the same is liable to be cancelled. Thus, it is settled law that penalty cannot stand if the assessment is set aside. 28. In UNION OF INDIA VS. DHARMENDRA TEXTILES PROCESSORS OTHERS reported in (2008) 306 ITR 277 (SC), the Hon'ble Apex Court was deali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t an annulment of the assessment order. If by such an adjustment, the assessment order is annulled in its entirety, setting aside the tax levied on income, then the arguments of the petitioners can hold good prohibiting the authorities to invoke the penal proceedings irrespective of any explicit finding regarding the penal consequences in the order of MAP. However, in the present set of facts, such a situation would not arise in view of the adjustment made to certain extent in the order passed under Rule 44H(5), implementing the order of MAP reducing the transfer pricing adjustment to Rs.91,80,00,000/- as against Rs.240,11,91,692/-. The onus lies on the assessee to establish that the said addition now finally decided by MAP is not due to concealment of income or furnishing of inaccurate particulars and moreover, the computation was made under Section 92C in the manner prescribed under that Section, in good faith and with due diligence. At the same time, Explanation 7 would not empower the concerned authorities to levy penalty automatically for such transactions. A decision has to be taken by the authorities after application of mind. These aspects involving questions of fact requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Transfer Pricing Officer (TPO) rejected nine of them and based upon the surviving data, determined the Arms Length Pricing (ALP) and made adjustments in the final return. The Assessing Officer (AO), while accepting TPO s determination, was of the opinion that as per Explanation 7 to Section 271(1)(c), the addition was to be deemed to represent income and was, therefore, liable, and consequently penalty was leviable. The AO s order was set-aside by the ITAT. We have considered the circumstances. The assessee in this case could not, in the opinion of this Court, visualize that out of the twelve comparables furnished, nine would be rejected and the matrix of calculations, as it worked, would radically undergo change. Pertinently, for the previous year 2006-07, the assessee s comparables including some of those which were rejected in the present order, were in fact accepted when the matter reached finality. In these circumstances, the interpretation adopted by the AO was plainly erroneous. The Court is also of the opinion that in the absence of any overt act, which disclosed conscious and material suppression, invocation of Explanation 7 in a blanket manner could not only be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Details with regard to unrelated third-party transaction were duly disclosed and informed to the Assessing Officer and Transfer Pricing Officer. 7. Respondent-assessee had justified exclusion of internal unrelated comparable in view of the small volume of transaction. It was an isolated transaction, substantially lower in value in comparison to the volume of the transactions with the associated enterprises, which were enduring and to continue over a period of time. It was normal in business to charge lower commission on larger volumes from parties with long-term business relationship. 8. Transfer Pricing Officer, vide order dated 28th August, 2009, however, did not agree with the respondent-assessee. Arm s length price was computed by taking the independent unrelated party comparable into consideration. Dispute Resolution Panel vide order dated 25th November, 2011 also rejected the respondentassessee's challenge to include the internal comparable. By assessment order dated 9th September, 2010 income was assessed at Rs. 3,30,02,880/-. Penalty proceedings under Section 271(1)(c) of the Act were directed to be initiated. 9. In the present appeal, we are not con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xplaining and justifying lower rate for higher volume of transactions. This submission was rejected observing that fresh evidence was not part of the Transfer Pricing Report. It was stated that two opinions were not possible. 12. The Tribunal in the impugned order has held as under:- 3. We have perused the submissions advanced by both the sides in the light of the records placed before us. 3.1. On perusal of assessment order, we observe that assessee as well as Ld.TPO agreed upon CUP to be the most appropriate method for computing the arm's length price. Further in our view, under CUP, selection of comparables is within strict parameters and has to be accurately made on functional similarities. Admittedly there was lack of comparables internal/external for the type of services rendered by assessee to its AE. It is observed that the transfer pricing adjustment is because of the difference in the computation of ALP due to lack of comparables. 3.2. Ld. A.R. forcefully contended that the addition based on the difference in arm's length price is a debatable issue and, therefore, the claim of assessee, though not accepted, that by itself would not attract the penalty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fined in section 92B, any amount is added or disallowed in computing the total income under subsection( 4) of section 92C, then, the amount so added or disallowed shall, for the purposes of clause(c) of this subsection, be deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished, unless the assessee proves to the satisfaction of the Assessing Officer or the Commissioner (Appeals) for the Commissioner] that the price charged or paid in such transaction was computed in accordance with the provisions contained in section 92C and in the manner prescribed under that section, in good, faith and with due diligence. 3.4. The cases of addition/disallowance in computing the total income as per the provisions of section 92C does not fall under the general rule of bona fide explanation as per Explanation 1 to section 271(1)(c). The Explanation 7, itself has prescribed exceptions in the case whether the price has been computed in accordance with the provisions of section 92C and in the manner prescribed there under in good faith and with due diligence. Therefore, if the assessee proves to the satisfaction of the taxing aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence. In spite of evidence placed by the respondentassessee on the question of difference in quantum or volume of transactions, etc., it was observed that this evidence was not part of the Transfer Pricing Study. 15. Per contra, the Tribunal after referring to the material, had taken an opposite view after examining the factual matrix of the present case. 16. Explanation 7 to Section 271(1)(c) of the Act reads:- Explanation 7. Where in the case of an assessee who has entered into an international transaction or specified domestic transaction defined in section 92B, any amount is added or disallowed in computing the total income under sub-section (4) of section 92C, then, the amount so added or disallowed shall, for the purposes of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished, unless the assessee proves to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Principal Commissioner or Commissioner that the price charged or paid in such transaction was computed in accordance with the provisions contained in section 92C and in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edings for and ultimately imposed penalty was a highly debatable legal issue as can be seen from the Tribunal's following observations in the judgement considering the quantum additions: 7. We have considered the rival submissions and perused the material available on record and the paper book containing 1 to 149 pages filed by the assessee. From the facts of the case it is evidence that the grouse of the learned AO for denying exemption u/s. 54 of the Act was due to the following three reasons: (1) the asset which is the subject matter of transfer belonged to the assets of Late Shri Prabhashankar Patni which is separate assessable entity and not the assessee. (2) The asset which is the subject matter of transfer is predominantly is a case of transfer of land and the same cannot be treated as transfer of building with land appurtenant thereto as envisaged u/s. 54 of the Act. (3) The subject matter of assets being transferred was converted to commercial asset and no more remained as house property as defined u/s. 22 of the Act. 3. Thus, the Tribunal outlined three objections of the Revenue against granting the exemption to the assessee under section 54 of the Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X
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