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TMI Blog2024 (1) TMI 1399X X X X Extracts X X X X X X X X Extracts X X X X ..... ticulars of income or furnishing of inaccurate particulars of income. We direct the Assessing Officer to delete the penalty since, the notice issued under section 274 read with section 271(1)(c) was bad in law. - SHRI NARENDER KUMAR CHOUDHRY, JUDICIAL MEMBER SHRI AMARJIT SINGH, ACCOUNTANT MEMBER For the Appellant: Ketan Ved For the Respondent: Mahesh Jiwade ORDER Per Amarjit Singh (AM): Both these appeals filed by the assessee are directed against the different orders of ld. CIT(A)-15, Mumbai. Since both these appeals pertained to the Assessment year 2007-08 are interconnected therefore these appeals are adjudicated by this common order as follows: ITA No.2594/Mum/2012 1. The learned Commissioner of Income Tax (Appeals) erred in confirming the upward transfer pricing adjustment by Rs. 8,59,31,291 in relation to the international transactions entered into by the Appellant Company as done by the Transfer pricing Officer/Assessing Officer 2. The learned Commissioner of Income Tax (Appeals) erred in not granting the Appellant Company sufficient opportunity of being heard before making additions which is opposed to the principles of natural justice and hence is bad in law. 3. The lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference u/s 92CA(1) to the transfer pricing officer for computing the arm s length price. Thereupon the transfer pricing officer vide order dated 29.10.2010 passed u/s 92CA(3) has made an upward adjustment to the arm s length price by Rs. 8,59,31,291/- in relation to the international transactions entered into by the assessee company with its associate enterprises during the financial year 2006-07. 4. In pursuance of the order passed by the TPO u/s 92CA(3) the assessing officer prepared a draft order as per the provisions of Sec. 144C(1) of the Act and served upon the assessee vide letter dated 25.11.2020. The assessee was required to file its objection if any to the proposed variation made in its return of income on account of upward adjustment in arm s length price before the Dispute Resolution Panel as well as before the assessing officer within 30 days of receipt of the draft order in accordance with the provisions of Clause (b) of sub- section (2) of Sec. 144C of the Act. However, the assessee has not filed any objection within the period specified before the Dispute Resolution Panel, therefore, the assessing officer has finalized the assessment on the basis of the draft or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justment on estimated basis as per the annual report of the assessee company it had utilized 87% capacity in 2006 against its installed capacity and in the current year the position was 76%. He further stated that there was never 100% utilization of the capacity and the working was made only on estimated basis. Therefore, TPO proposed adjustment as under: Particulars Amount Sales 60,89,72,676 Total expenses (excluding interest) 66,82,96,637 Operating expenses (expenses relating to commission related expenses of 2,35,05,147) 63,97,91,490 AE expenses 11,42,13,843 Net Loss -3,08,18,814 Operating profit to sales ALP ratio 9.05% Operating profit 5,51,12,027 ALP Expenses 52,55,78,097 ALP of AE transaction 2,82,82,552 Adjustment to be made 8,59,31,291 The assessing officer has incorporated the aforesaid adjustment in Arm s Length Price in the assessment order passed u/s 143(3) dated 07.01.2011. 6. The assessee filed the appeal before the ld. CIT(A). The ld. CIT(A) has dismissed the appeal of the assessee. 7. During the course of appellate proceeding before us the ld. Counsel submitted that the manner in which the transfer pricing officer has computed the disallowance was incorrect. In thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that loss suffered by the assessee on account of difference is an item of expenditure allowable u/s 37(1) of the Act and the assessee s contention regarding allowability of the adjustment to its margin for the purpose of comparability is not acceptable. 9. Heard both the sides and perused the material on record. The assessee has benchmarked its international transactions following TNMM as most appropriate method. The TPO has not agreed with the assessee for making economic adjustment on account of excess depreciation, foreign exchange fluctuation and under utilized capacity as discussed above in this order therefore proposed upward adjustment in the arm s length price by Rs. 8,59,31,291/-. The detail of such adjustment claimed by the assessee are as under: Adjustments i. Depreciation on Tank 3 Furnace Rs. 4,94,64,366.00 ii. Costs in relation to under utilized capacity Rs. 5,91,46,5890.95 iii. Unrealized loss on foreign exchange Rs. 1,73,83,241.00 The assessee was relied on Rule 10B of the Income Tax Rules for accounting of economic adjustment for the purpose of determination of arm s length price. The assessee also referred Rule 10B(1)(e)(iii) of the Income Tax Rules in support of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcle 5(1)(2) Vs. M/s Novell Software Development India Pvt. Ltd. vide IT(TP)A. No. 1491/Bang/2014 dated 04.09.2019 in respect of adjustment on account of claim of depreciation. The relating operating part of the decision is as under: 11. Ground No.3 is in respect of disallowing depreciation as an adjustment in comparables. Ld.AR submitted that assessee has a policy of charging higher rate of depreciation as compared to companies selected by Ld.TPO. Assessee placed reliance on the accounting notes wherein policy of depreciation at page15 of paper book, Vol-1 has been encapsulated. She thus submitted that adjustment is to be made to eliminate difference between assessee and comparables. Placing reliance upon decision of this Tribunal as well as Pune Tribunal in Honeywell Technology solutions Lab Pvt. Ltd in ITA No. 1344/Bang/2011 and E-Gain Communications Pvt. Ltd vs ITO reported in (2008) 23 SOT 385, she submitted that Ld.CIT (A) rightly directed Ld.TPO to exclude depreciation from operating costs of assessee as well as comparables. Ld.CIT DR placed reliance upon orders passed by Ld.AO/TPO. 12. We have perused submissions advanced by both sides in the light of the records placed bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... doing a particular thing in a particular manner alone, it is not open to anyone to adopt a contrary or different approach As the authorities below have adopted a course of action in allowing adjustment, which is not in consonance with law, we cannot approve the same The impugned order is set aside and the matter is restored to the file of TPO/AO for giving effect to the amount of idle capacity adjustment in the operating profit of the comparable and not the assessee. We have also perused the decision of jurisdictional High Court in the case of CIT-8 Vs. Petro Araldite (P) Ltd. (2018) 93 taxmann.com 438 (Bomba) wherein it is held that capacity utilization of the comparable would be required to be made to the profit margin of the comparable on account of difference in capacity utilization in terms of Rule 10B(1)(e)(iii) of the I.T Rule. The relevant operating part of the decision is reproduced as under: (i) The impugned order of the Tribunal for purposes of arriving at the profit margin of comparable uncontrolled transactions to enable determination of the Arms Length Price (ALP) of the Respondent Assessee's transactions with its Associated Enterprises, had invoked Rule 10-B(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e above context, that the impugned order of the Tribunal held that difference in capacity utilization would materially affect the profit margin. Thus, if there is a difference in the level of capacity utilization of the assessee and the level of capacity utilization of the comparable, then adjustment would be required to be made to the profit margin of the comparable on account of difference in capacity utilization in terms of Rule 10-B (1) (e)(iii) of the Rules. (v) Revenue is not disputing before us that capacity utilization of a comparables manufacturing unit would impact the net profit margin of the comparable (v) In the above view, taking into account the capacity utilization of the comparable, in the present facts, as it materially affects the profit margin, the invocation of Rule 10-B (1) (c) (m) of the Rules, cannot be found fault with This is self evident position from the reading of the aforesaid provision that all aspects/difference between the international transactions and the comparable uncontrolled transactions which materially affects the net profit margin had to be taken into account so as to have the fair comparison while determining the ALP of the tested party ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating the submissions made by the appellant in correct perspective. 6. The LD CIT(A) has erred in setting aside the judicial precedents relied upon by the appellant in the submissions by stating that the judicial precedents quoted in the submissions are not applicable to the facts of the case based on his conjectures and surmises. 7. The Appellant submits that the impugned order levying penalty u/s. 271(1)(c) of the Income-tax Act, 1961 be struck down. 8. Each of the above ground is independent and without prejudice to one another. 9. The Appellant reserves the right to add alter or amend any of the above grounds of appeal. 13. Fact in brief is that in pursuance to TPO order u/s 92CA(3) dated 29.10.2010 the assessing officer has mad upward adjustment to the arm s length price by Rs. 859,31,291/- in relation to international transaction vide order passed u/s 143(3) of the Act on 07.01.2011. The assessing officer has also disallowed claim of deduction u/s 35D amounting to Rs. 456,959/- after relying on the earlier years orders in the assessee s own case. The assessing officer has also initiated penalty proceedings u/s 271(1)(c) of the Act for furnishing inaccurate particulars of inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1(1)(c), read with section 274 of the Income-tax Act, 1961 - Penalty - For concealment of income (Recording of satisfaction) - Whether where assessment order clearly records satisfaction for imposing penalty on one or other, or both grounds mentioned in section 271(1)(c), a mere defect in notice- not striking off irrelevant matter would vitiate penalty proceedings - Held, yes - Whether since penalty proceedings culminate under a different statutory scheme that remains distinct from assessment proceedings, therefore, assessee must be informed of grounds of penalty proceedings only through statutory notice - Held, yes - Whether even if notice contains no caveat that inapplicable portion be deleted, it is in interest of fairness and justice that notice must be precise, it should give no room for ambiguity - Held, yes [Paras 181 and 188][In favour of assessee] 17. Further, we have also perused the decision of coordinate Bench of the ITAT, Mumbai in the case of M/s Bhavya Shashank Shanbhag Vs. DCIT in ITA No. 4630Mum/2019 vide order dated 09.07.2021, wherein the co-ordinate Bench in identical issue and similar facts has deleted the penalty after following the decision of Hon ble Jurisdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss the aspect of prejudice. As we have already noted, Kaushalya noted that the assessment orders already contained the reasons why penalty should be initiated. So, the assessee, stresses Kaushalya, fully knew in detail the exact charge of the Revenue against him . For Kaushalya, the statutory notice suffered from neither non-application of mind nor any prejudice. According to it, the socalled ambiguous wording in the notice [has not] impaired or prejudiced the right of the assessee to a reasonable opportunity of being heard . It went onto observe that for sustaining the plea of natural justice on the ground of absence of opportunity, it has to be established that prejudice is caused to the concerned person by the procedure followed . Smt. Kaushalya case (supra) closes the discussion by observing that the notice issuing is an administrative device for informing the assessee about the proposal to levy penalty in order to enable him to explain as to why it should not be done . 185. No doubt, there can exist a case where vagueness and ambiguity in the notice can demonstrate non-application of mind by the authority and/or ultimate prejudice to the right of opportunity of hearing contemp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w which is conceived not only in individual interest but also in the public interest . 190. Here, section 271(1)(c) is one such provision. With calamitous, albeit commercial, consequences, the provision is mandatory and brooks no trifling with or dilution. For a further precedential prop, we may refer to Rajesh Kumar v. CIT [2007] 27 SCC 181, in which the Apex Court has quoted with approval its earlier judgment in State of Orissa v. Dr. Binapani Dei AIR 1967 SC 1269. According to it, when by reason of action on the part of a statutory authority, civil or evil consequences ensue, principles of natural justice must be followed. In such an event, although no express provision is laid down on this behalf, compliance with principles of natural justice would be implicit. If a statue contravenes the principles of natural justice, it may also be held ultra vires Article 14 of the Constitution. 191. As a result, we hold that Dilip N. Shroff Case (supra) treats omnibus show-cause notices as betraying non-application of mind and disapproves of the practice, to be particular, of issuing notices in printed form without deleting or striking off the inapplicable parts of that generic notice. 3.2. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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