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Income Tax Appellate Tribunal, DELHI BENCH, ‘B’: NEW DELHI
Before: SHRI SHAMIM YAHYA & SHRI YOGESH KUMAR US
ORDER PER SHAMIM YAHYA, AM, This appeal by the Revenue is directed against the order of the Ld. CIT(A)-3, New Delhi, dated 05.07.2019 pertaining to Assessment Year 2011-12.
The ground raised reads as under:-
“1. On the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in not appreciating the fact that the assessee failed to adduce any evidence controverting the facts and the findings of the Assessing Officer that assessee has furnished inaccurate particulars of income and thereby concealing particulars of such income. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in reducing the penalty from Rs.827,29,070/- to Rs.2,95,723/- providing relief of Rs.84,33,347/- which was imposed u/s 271(1)(c) on the basis of order of Ld. CIT(A) who confirmed the addition of Rs.2,61,49,913/- while adjudicating quantum ” 3. Brief facts of the case are that the assessment u/s 143(3) of the Act was completed on 21.04.2015 at a total income of Rs.2,76,59,264/- against the returned income of Rs.(-)54,72,199/- after making the following additions:- i. Addition of Rs.2,61,49,913/- on account of transfer pricing adjustment related to purchase of finished goods; ii. Addition of Rs.9,16,965/- on account of interest income.
The assessee had filed an appeal before the Ld. CIT(A) against the assessment order and the same was dismissed. Further appeal filed by the assessee before ITAT is stated to be pending. The Assessing Officer had initiated penalty proceedings u/s 271(1)(c) of the Act with regard to the additions made in the assessment order. The Assessing Officer issued a show-cause notice to the appellant with respect to the penalty proceedings and as no reply was filed by the assessee, the Assessing Officer has levied a penalty of Rs.87,29,070/- with respect to the additions made to the returned total income in the assessment order.
Upon assessee appeal, the Ld. CIT(A) reproduced the assessee’s submission. He agreed that the Assessing Officer has not brought on record anything to show that there was concealment of income or furnishing of inaccurate particulars of income. That the method adopted for determining the Arm’s Length Price was duly disclosed. That all international transactions were given in form 3CEB, proper transfer pricing documentation were filed. He referred to the decision of Delhi Bench ITAT in the case of M/s Halcrow Consulting India Pvt. Ltd. vs DCIT in and concluded as under:-
4.2.1. In the present case, it is observed that the TP adjustment has been made on account of different method adopted by the Assessing Officer and it cannot be said that the appellant by following one particular method did not act in good faith and with due diligence. In view of these facts and the legal position as discussed in the above referred case, the penalty levied by the Assessing Officer in respect of the TP adjustment is hereby deleted.
Further, Ld. CIT(A) confirmed the penalty levied with respect to interest income of Rs.91,695/-.
Against the above order Revenue has filed appeal before us.
We have heard the Ld. DR and perused the records. None appeared on behalf of the assessee despite notice. Upon careful consideration, we find that penalty has been levied in this case on account of transfer pricing adjustment which was done by the Transfer Pricing Officer. The transfer pricing adjustment was done by the T.P.O. with regard to the transaction relating to import. The assessee had adopted CUP method.
But the T.P.O. had adopted resale price method. The T.P.O. also rejected the claim of assessee on account of economic differences in the comparable companies vis-a-vis the assessee.
In this background, we find that the assessee has duly disclosed the international transaction. There is no concealment or furnishing of inaccurate particulars of income. The method selected was also duly disclosed. It is also not the case that the method adopted is not one permitted by the act or it is an ex-facie bogus claim. The denial of adjustment on account of assessee’s claim for economic difference between it and the comparable, cannot lead to the conclusion that ipso- facto there is furnishing of inaccurate particulars of income or concealment of income. The case laws from Delhi ITAT in the case of M/s Halcrow Consulting India Pvt. Ltd. Vs DCIT (supra) is dully applicable on the facts here. We may refer to the said decision as under:-
“5.1 It is seen that the Assessing Officer, while imposing the penalty, simply relied on the addition/adjustment made by the TPO and did not examine in detail as to whether penalty was imposable on such adjustments or not. On appeal, the Ld. CIT (A) also noted that the assessee had not acted in good faith while computing the ALP. The Ld. CIT (A) also took note of the fact that the assessee had not preferred any appeal against the ALP adjustment and, therefore, the assessee had accepted that the ALP had not been computed correctly by him and as such, the penalty was imposable. 5.2 The main argument of the Ld. AR against the levy of penalty on the difference in determination of ALP is that it is a debatable issue and, therefore, the penalty cannot be sustained. The scheme of Explanation 7 to section 271(1)( c) of the Act makes it clear that the onus on the assessee is only to show that the ALP was computed by the assessee in accordance with the scheme of section 92 C of the Act in good faith and due diligence. It is not in dispute here that the ALP was computed in accordance with the scheme of section 92C inasmuch as Cost Plus Method was used. The TPO only substituted Cost Plus Method with TNMM and also computed the ALP of intra group services by taking the ALP as nil by applying the CUP Method. Whatever may be the merits in the action of the TPO changing the method of computation of ALP, the same cannot be a fit case for imposition of penalty inasmuch as it cannot be said that the ALP had not been computed by the assessee under the scheme of section 92C. The scope of connotations of expressed ‘in good faith’ and appearing in Explanation 7 can be found from section 3(22) of the General Clauses Act which states that “a thing shall be deemed to be done in ‘good faith’ where it is in fact done honestly. Therefore, it is not even necessary whether in doing that thing the assessee has been negligent or not. Thus, there is no way that the assessee can prove his honesty, because honesty, in practical terms, only implies lack of dishonesty, and proving not being dishonest is essentially proving a negative, which as the Hon’ble Supreme Court has observed in the case of K.P. Verghese vs ITO reported in 131 ITR 597 is almost impossible. However, as the expression ‘good faith’ is used along with ‘due diligence’ which refers to ‘proper care’. It is also essential that not only the action of the assessee should be in good faith but also with proper care. An act done with due diligence would mean the act done with as much as care as a prudent person would take in such circumstances. Thus, as long as no dishonesty is found in the conduct of the assessee, as long as he has done what a reasonable man would have done in his circumstances, to ensure that the ALP was determined in accordance with the scheme of section 92C, deeming fiction under Explanation 7 to section 271(1)(c) cannot be invoked. 5.3 It is seen that the grounds on which the ALP determined by the assessee has been rejected are reasonably debatable. The assessee had obtained a transfer pricing study from an outside expert and the objectivity of the same was not called into question. Therefore, lack of due diligence in determining the ALP is neither indicated nor can be inferred. In such a situation, it cannot be said that the assessee had not determined the ALP in accordance with the scheme of section 92C in good faith and with due diligence and accordingly, the conditions precedent for invoking Explanation 7 to section 271(1)(c) did not exist on the facts of the instant case. We also find that the assessee’s case is covered by the order of the ITAT Mumbai Bench in the case of DCIT vs RBS Equities India Ltd. in in which the penalty u/s 271(1)(c) had been deleted in a somewhat similar circumstance. If we accept the contentions of the department that addition on account of transfer pricing adjustment invariably means absence of good faith and due diligence, then each and every case involving transfer pricing adjustment would call for imposition of penalty us/ 271(1)(c) of the Act. ITAT Delhi had also taken a similar view on identical facts in case of Mitsui Prime Advanced Composites India Pvt. Ltd. in ITA No. 550/Del/2016 and had deleted the penalty imposed u/s 271(1)(c) of the Act. The Hon'ble High Court of Delhi has also upheld this order of the ITAT on the appeal of the department in ITA No. 913/2016 vide order dated 17.01.2017. Further, the Hon'ble High Court of Delhi has held in the case of Principal Commissioner of Income Tax vs Verizon India Ltd. in ITA No. 4602/2016 that in absence of any overt act, which indicates conscious and material suppression, invocation of Explanation 7 in a blanket manner could not only be injurious to the assessee but ultimately would be contrary to the purpose for which it was engrafted in the statute. The Hon’ble Delhi High Court further observed that it might lead to a rather peculiar situation where the assessee who might otherwise accept such determination may be forced to litigate further to escape the clutches of Explanation 7. Therefore, in view of the factual circumstances and respectfully following the ratio of the decisions of the various judicial authorities, we are of the opinion that the assessee cannot be visited with penalty u/s 271(1)(c) of the Act on this issue and accordingly, the impugned order is set aside and penalty is deleted.”
We find that the ratio from above case laws is dully applicable here. The ration from Hon’ble Apex Court decision in the case of Reliance Petroproducts (2010) 322 ITR 158 (SC) is also applicable here as in our considered opinion, the assessee’s claim is not ex-facie bogus. Further, we do not find conduct of the assessee contumacious warranting the rigours of penalty u/s 271(1)(c). For this proposition, we draw support from Hon’ble Supreme Court decision in the case of State of Orissa vs Commissioner of Sales tax 82 ITR 126(SC). We uphold the order of the Ld. CIT(A).
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 13/07/2022.