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Income Tax Appellate Tribunal, “C” BENCH MUMBAI
Before: SHRI AMIT SHUKLA & SHRI GIRISH AGRAWAL
O R D E R
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
This appeal filed by the assessee is against the order of Ld. CIT(A)- 56, Mumbai, vide order no. ITBA/APL/S/250/2025- 26/1075621948(1), dated 15/04/2025 passed against the penalty order by National Faceless Assessment Centre, Delhi, u/s. 271(1)(c) of the Income-tax Act (hereinafter referred to as the “Act”), dated 29.01.2022 for Assessment Year 2012-13.
International Specialty Products (India) Pvt. Ltd. AY 2012-13 2. Grounds taken by the assessee are reproduced as under: " The impugned order passed by the Commissioner of Income Tax (Appeals) (Ld. CIT) is bad in law and contrary to the facts and circumstances of the appellant's case.
The order passed by the Ld. CIT(A) is legally unsustainable as the conclusion drawn in his order does not relate with the facts of the appellant and thereby factually incorrect.
3. On the facts and the circumstances of the case, the Ld. CIT (A) erred in upholding the imposition of penalty by Ld. AO of INR 21,56,858/- u/s. 271 (1) (c) of the Income Тах Act, 1961 (Act) for concealment/furnishing of inappropriate particulars of income in respect of transfer pricing adjustment.
4. The Ld. CIT(A) has erred in law and on facts by erroneously treating the addition made on account of transfer pricing adjustment as concealment or furnishing of inaccurate particulars of income u/s. 271 (1) (c) of the Act, though appellant's case is squarely covered by exception carved out in Explanation 7 to 271(1)(C).
Any other ground that may be urged at the time of hearing with the prior approval of the Hon'ble Tribunal.
The only issue involved in the present appeal is in respect of imposition of penalty of Rs.21,56,858/- on account of transfer pricing adjustment, which according to the assessee is squarely covered by exception carved out in explanation 7 to section 271(1)(c) of the Act.
Brief facts of the case are that assessee is engaged in the business of trading, R & D and Corporate Support Services. In the trading division, it is engaged in distribution of specialty chemicals (including agrochemicals, biocides, food ingredients, beverages, performance enhancing products, advance materials and industrial products). Assessee filed its return of income on 28.09.2012, reporting total income at Rs. 2,91,15,520/-. Subsequently, case was selected for scrutiny assessment. A reference u/s 92CA(1) of the Act was made for determination of arm's length price (ALP) in respect of international transactions undertaken by the assessee. Ld. TPO made the following adjustments in the Transfer Pricing Order:
S. No. International Transaction Adjustment in Rs. 1 Provision of ITES 1,20,93,662/- 2 Contract R&D 72,32,832/- Total TP Adjustments 1,93,26,494/- 4.1. The comparables proposed by the assessee and ld. TPO for the R&D segment are given in the table below: Comparables selected by the Comparables selected by the TPΟ Assessee 1. Choksi Laboratories Ltd 1. Oxygen Bio Research 2. Cyber Media Research Ltd 2. TCG Lifesciences Ltd 3. Gem & Jewellery Export 3. Syngene International Ltd Promotion Council 4. Primary Pharmaceutical Devp.
4. Vimta Labs Ltd Services Pvt Ltd 5. Syngene International Ltd 5. Choksi Laboratories Ltd 6. TCG Lifesciences Ltd 7. Vivo Bio Tech Ltd 8. Trijal Industries Ltd 9. Saamya Biotech (India) Ltd 4.2. Ld. TPO rejected the TP study report stating that the filters applied by the assessee are not fit for R&D segment and made an adjustment of Rs. 72,32,382/- by conducting an independent analysis applying TNMM method.
4.3. Ld. Assessing Officer after considering the Transfer Pricing Order, passed the Draft Assessment Order. Assessee filed objections against the draft assessment order before the Ld. Dispute Resolution Panel International Specialty Products (India) Pvt. Ltd. AY 2012-13 (DRP). Ld. DRP reduced the proposed adjustment to Rs.143.59 Lakhs, details tabulated below: S. No. International Transaction Adjustment in Rs. 1 Provision of ITES 93,06,381/- 2 Contract R&D 50,52,665/- Total TP Adjustments 1,43,59,046/- 4.4. Aggrieved by the directions of Hon'ble DRP, assessee filed an appeal before the Tribunal which passed an order on 06.06.2019, granting substantial relief. Giving effect to the order passed by the Tribunal, ld. TPO deleted the adjustment made in relation to provision of ITES services. Further, in relation to the Contract R&D services, ld. TPO revised the TP adjustment at Rs. 66,47,735/- while giving effect to the order of the Tribunal.
5. Penalty proceedings were initiated u/s.271(1)(c) on the transfer pricing adjustments after giving effect to the order passed by the Coordinate Bench. Claim of the assessee is that it had selected certain comparables based on reasonable analysis which were rejected by the ld. TPO on account of difference in Functions, Assets and Risks (FAR). Ld. TPO had selected different set of comparables. Thus, both assessee and ld. TPO had their reasonings for accepting and rejecting the comparables. Assessee emphasised that ALP adjustment arose only on account of difference of opinion between it and the ld. TPO in the inclusion and exclusion of comparables for benchmarking the international transaction entered by the assessee. This difference in opinion with regard to selection of certain companies as comparable constitutes a bonafide difference of opinion and does not tantamount to concealment of particulars of income or furnishing of inaccurate 5.1. In this respect, the content of explanation 7 to section 271(1)(c) is extracted below” Explanation 7.-Where in the case of an assessee who has entered into an international transaction or specified domestic transaction defined in section 928, any amount is added or disallowed in computing the total income under sub- section (4) of section 920, 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 Joint Commissioner (Appeals) 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 920 and in the manner prescribed under that section, in good faith and with due diligence.
5.2. On the above, it was submitted that the amount added or disallowed in computing the total income u/s.92C(4) is deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished. However, there is carve out given within the same explanation that such deeming fiction shall not apply if it is proved to the satisfaction of the Assessing Officer 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 which was in good faith and with due diligence.
5.3. Assessee thus, asserted that intention of legislature to impose penalty due to addition on account of TPA only when good faith and due diligence are lacking and not because of genuine and valid difference of opinion in the determination of ALP of an international transaction. Assessee had duly filled Form No.3CEB as required u/s.92E disclosing all the international transactions entered into with its AEs and provided International Specialty Products (India) Pvt. Ltd. AY 2012-13 each and every information along with corroborative documentary evidences as and when called for in the proceedings. The adjustment made by the ld. TPO is merely a result of difference of opinion regarding selection of comparables. The manner prescribed for arriving at the ALP has been followed and duly complied with by the assessee as per section 92C. Thus, the difference in opinion of ld. TPO and assessee regarding selection of comparables does not tantamount to concealment of particulars or furnishing of inaccurate particulars to warrant penalty u/s.271(1)(c).
5.4. Ld. Sr. DR placed reliance on the order of ld. Assessing Officer and the explanation 7 to section 271(1)(c) which mandates imposition of penalty on account of TPAs added to the total income of the assessee.
The Coordinate Bench in the quantum appeal while dealing with the issue on the TPA dealt with two comparables of Oxygen Bio Research and Syngene International Limited. This resulted into addition in the hands of the assessee while order giving effect passed by the ld. Assessing Officer consequent to the directions so given by the Coordinate Bench, ultimately resulting into imposition of the impugned penalty. Relevant observations and findings of the Coordinate Bench on the two comparable is reproduced for ready reference: “4.3.1 Oxygen Bio Research The Ld. AR has submitted that complete set of Annual Report for this year was not available in public domain and therefore, comparison would not be feasible. Another argument is that the said entity has been acquired by another entity during the impugned AY. Lastly, there was change in method of depreciation policy during FY 2010-11 which has affected its profitability and therefore, the same would not be a comparable entity. Reliance has been placed on the decision of Hyderabad Tribunal rendered in Capital IQ Information Systems India Pvt. Ltd. V/s DCIT [2013 32 Taxmann.com 21]. However, upon perusal, we find that all these arguments have already been dealt with by Ld. DRP which remained uncontroverted before us. Therefore, the stand of Ld. DRP, in this regard, would not require any interference on our part. Regarding issue of change in depreciation policy. Ld. DRP has already directed the Ld.AO to compare the International Specialty Products (India) Pvt. Ltd. AY 2012-13 margins of the tested party and the comparable before charging depreciation. The Ld. AR has placed on record the working of the same. Therefore, endorsing the same, we direct Ld. TPO/Ld. AO to consider Profit Before Depreciation for the purpose of benchmarking analysis. 4.3.2 Syngene International Ltd This company was originally selected by the assessee in its benchmarking analysis but the same was rejected by Ld. TPO on the ground of functional dissimilarity and the same was stated to be wrongly included. However, Ld. DRP did not agree with assessee's submissions. The Ld. AR, reiterating the same, submitted that this company was found functionally non-comparable and wrongly included in the final list of comparable. It has been submitted that RPT of this entity is greater than 25% and therefore, the same would not be a good comparable. It has further been submitted that operating income of this entity is more than 52 times than that of the assessee. Upon perusal, we find that the assessee's submissions would require verification and therefore, we deem it fit to restore the matter of this comparable to the file of Ld. TPO/Ld. AO for re-adjudication in the light of submissions made by Ld. AR. The assessee, in turn, is directed to substantiate the same.”
We have heard both the parties and perused the material on record and given our thoughtful considerations to the submissions so made. Admittedly, the TPA which was sustained arose on account of selection/rejection of certain comparable companies arising out of difference in opinion between the comparable selected by the assessee and that by the ld. TPO. It is not a case where explanations and documentary evidences along with relevant information were withheld by the assessee for the purpose of arriving at ALP in compliance to section 92C. All the necessary details and explanations were furnished in the course of assessment proceedings and are placed on record, for which nothing has been brought on record to controvert the said factual position. Both, assessee and ld. TPO had their reasonings for rejection/inclusion of comparables which has undergone the scrutiny of the Coordinate Bench while deciding the issue on this aspect. Having regard to the carve out contained in explanation 7 to section 271(1)(c), we find that there is only a difference of opinion on the inclusion/exclusion of comparables between the assessee and ld. TPO, International Specialty Products (India) Pvt. Ltd. AY 2012-13 without there being any concealment of particulars or furnishing of inaccurate particulars. Assessee had diligently exercised its compliance requirement in good faith and has furnished all the details and documents as and when called for, all of which placed on record. Thus, the assessee finds its place in the carve out given in explanation 7 and therefore, no case is made out for the imposition of penalty u/s.271(1)(c) for the TPA sustained in the hands of assessee. Our observations are fortified by the decision of Coordinate Bench of ITAT, Mumbai in the case of QUA India Pvt. Ltd. vs. ACIT [2019] 102 taxmann.com 489 (Mum), which held that: “Where assessee had some reasoning for rejecting comparables and same stands ratified / strengthened by subsequent decisions of instant Tribunal from which it can be safely concluded that there is only difference of opinion on inclusion and exclusion of comparables between assessee and TPO and there cannot be any concealment of income or filing of inaccurate particulars of income that could be alleged-on part of assessee thus, it is not fit case for levying penalty under section 271(1)(c).”
7.1. Similar view is taken by ITAT Delhi in the case of DCIT vs. Hondo Trading Corporation India Pvt. Ltd., in dated 20.02.2020. Observation and findings in para-16 is extracted below: “16. Having gone through the record and the arguments, we are totally in agreement with the observation of the Ld.CIT (A) who held that on perusal of the provisions of Explanation 7 to Section 271(1)(c) shows that penalty would be leviable unless the assessee proves that transactions were reported as per the provisions contained in section 92C in good faith and with due diligence. It is an undoubted fact that assessee had reported the transactions of purchase & sale at the actual price at which the transaction was undertaken. The assessee had bonafide belief that lower margin obtained by it was on account of adverse fluctuations which were of an abnormal character and after eliminating the effect thereof, its transactions would reflect an arm's length price. In fact, the discussion above & after considering the directions of ITAT, it is observed that transactions were indeed at an arm's length and no addition on account of any transfer pricing adjustments, are required to be retained. The case of the assessee, therefore, does not fall within Explanation 7 to section 271(1)(c). Even otherwise, the assessee had not concealed any income or filed any inaccurate particulars of income. The addition arose only on account of difference of opinion between the Assessing Officer and the assessee regarding the comparables and also the PLI of the assessee. Just because the assessee has not filed an appeal against the appeal effect order of the Assessing Officer, it does not tantamount to agreeing with the adjustment made by the TPO and furthermore to entail any penalty under section 271(1)(c). Therefore, we hereby direct that the penalty levied on
Considering the facts on record and the judicial precedents referred above, penalty so imposed u/s. 271(1)(c) is deleted. Accordingly, grounds raised by the assessee in this respect are all allowed.
In the result, appeal of the assessee is allowed.