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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
Before: SHRI PRAMOD KUMAR & SHRI SANDEEP SINGH KARHAIL
PER SANDEEP SINGH KARHAIL, J.M.
The present appeal has been filed by the assessee challenging the impugned order dated 04/08/2014, passed under section 250, of the Income Tax Act, 1961 (‘the Act’) by the learned Commissioner of Income Tax (Appeals)–15, Mumbai, [‘learned CIT(A)’], for the assessment year 2007–08.
In this appeal, assessee has raised following grounds:
M/s. Sitel India Limited ITA no. 6875/Mum./2014
“1. That on the facts and circumstances of the case and in law, the Commissioner of Income tax (Appeals) [CIT(A)"] erred in confirming the order of the Assessing Officer ("AO") in levying penalty under Section 271(1)(c) of the Income tax Act, 1961 (the "Act") in respect of additions/disallowances made by the AO in the assessment proceedings completed under Section 143(3) of the Act. Transfer Pricing Adjustment 2. That the CIT(A) erred on facts and in law in confirming the penalty levied by the AO in respect of addition of Rs.6,03,37,613/- made by the transfer pricing officer (TPO) in connection with provision of ITeS Services without appreciating that neither the TPO nor the AO recorded any satisfaction for initiation of the penalty proceedings nor was such satisfaction discernable from the record warranting exercise of jurisdiction under Section 271(1)(c) of the Act. 3. That the CIT(A) erred on facts and in law in confirming the penalty levied by the AO in respect of the transfer pricing adjustment in complete disregard of the order of C*Pi(A) for AY 2005-06 wherein penalty was deleted by the predecessor CIT(A) on similar facts. 4. That the CT(A) erred on facts and in law in confirming the penalty levied by the AO in respect of the transfer pricing adjustment without appreciating that penalty under Section 271(1)(c) of the Act is leviable with reference to the facts and law on the date of filing of return and any addition/disallowance made due to facts and law not obtaining on the date of filing the return cannot form basis for levying penalty under that Section. 5. The CIT(A) erred on facts and in law in confirming the penalty levied by the AO in respect of the transfer pricing adjustment without appreciating that the transfer pricing report prepared by the Appellant at the time of filing of the return was contemporaneous at that time and, therefore, merely because an adjustment is made to the arm's length price disclosed by the Appellant, the same will not warrant imposition of penalty under Section 271(1)(c) of the Act. 6. That the CITA(A) erred on facts and in law in confirming the penalty levied by the AO in respect of the transfer pricing adjustment without appreciating that the entire profits of the Appellant were exempt under Section 10A of the Act and, therefore, there was no cause for the Appellant to conceal income or furnish inaccurate particulars of income. Deduction under Section 10A 7. That the CITA(A) erred on facts and in law in confirming the penalty levied by the AO in respect of denial of deduction under Section 10A of the Act without appreciating that the denial of deduction under Section 10A on interest Income was on account of bonafide difference of opinion between the Appellant and the AO and, therefore, no penalty was leviable in this regard. Page | 2
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Disallowance under Section 40(a) 8. That the CITA(A) erred on facts and in law in confirming the penalty levied by the AO in respect of disallowance under Section 40(a)(i) of the Act without appreciating that the payments made by the Appellant communication line and legal professional services were reimbursement of actual expenses incurred by the associated enterprises of the Appellant, which fact was also accepted by the TPO, and, therefore, no tax was deductible in respect thereof under Section 195 of the Act and consequently no disallowance under Section 40(a)(0) was called for. 9. That the CITA(A) erred on facts and in law in confirming the penalty levied by the AO in respect of disallowance under Section 40(a)0) of the Act without appreciating that the payments made by the Appellant to Sitel USA and Sitel UK were not in the nature of 'fees for included services' under the applicable Double Tax Avoidance Agreements and, therefore, no tax was deductible in respect thereof under Section 195 of the Act and consequently no disallowance under Section 40(a)(i) was called for. 10. Without prejudice, the CITA(A) erred on facts and in law in confirming the penalty levied by the AO in respect of disallowance under Section 40(a)(1) of the Act without appreciating that the disallowance under Section 40(a)(1) of the Act was on account of bonafide difference of opinion between the Appellant and the AO and, therefore, no penalty was leviable in this regard.”
The assessee is engaged in business of call centre and IT enabled services. For the year under consideration, assessee e-filed its return of income on 31/10/2007 declaring total income at Rs. Nil, after claiming exemption under section 10A of the Act. Pursuant to the order passed by the Transfer Pricing Officer (‘TPO’), Assessing Officer vide order dated 05/01/2011 passed under section 143(3) of the Act, inter-alia, computed the total income of the assessee at Rs.19,58,10,770. Simultaneously, notice under section 274 read with section 271(1)(c) of the Act was issued to the assessee. Vide order dated 22/03/2013 passed under section 271(1)(c) of the Act, the Assessing Officer levied penalty of Rs. 6,73,85,460. In appeal, learned CIT(A) vide impugned order dated Page | 3
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04/08/2014 upheld the penalty, levied by the Assessing Officer under section 271(1)(c), in respect of the following issues:
i) Transfer pricing adjustment made by the TPO; ii) Taxation of interest income as income from other sources; and iii) Disallowance of expenditure under section 40 (a)(i) of the Act.
Being aggrieved by the impugned order passed by the learned CIT(A), assessee is in appeal before us. Each of the issue in respect of which levy of penalty has been upheld by the learned CIT(A) are dealt, hereunder, in detail.
The issue arising in grounds No. 2 to 6, raised in assessee’s appeal, is pertaining to levy of penalty on account of transfer pricing adjustment.
The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is 50:50 joint venture between Systems Integrated Telemarketing, Netherlands and the TATA group. During the year under consideration, the assessee entered into following international transactions with its associated enterprises:
Sl. Amount (Rs.) Nature of Transaction No. Provision of customer contact services 127,63,39,851 1. Payment of service charges 1,19,27,329 2. Payment of lease charges 42,17,295 3. Reimbursement of expenses 3,47,08,197 4.
M/s. Sitel India Limited ITA no. 6875/Mum./2014
In respect of international transaction pertaining to ‘Provision of Contact Centre Services’, the assessee provides Contact Centre Services i.e. email, web based chat solutions and voice responses to the customers of SITEL Corp, USA and SITEL UK Ltd. (i.e. its AEs), as it is not capable of directly marketing its services. For benchmarking this transaction, the assessee adopted the Transactional Net Margin Method (‘TNMM’) as the most appropriate method with Profit Level Indicator (‘PLI’) of operating profit on cost. The assessee adopted certain adjustment for unutilised capacity and on such adjustments it has submitted that its net cost plus margin was 14.2%. The assessee selected 22 comparable companies and adopted the weighted average of their operating profit on cost for 3 years and the average mean was submitted as 12.51%. Accordingly, it was claimed that the international transaction of ‘Provision of Contact Centre Services’ is at arm’s length price (‘ALP’).
The Assessing Officer made reference to TPO for determination of ALP of the aforesaid international transaction. During the transfer pricing assessment proceedings, the assessee was asked to show cause as to why the list of 25 companies selected by the TPO be not considered as comparables in respect of the international transaction of ‘Provision of Contact Centre Services’. Assessee filed its reply in response of each comparable proposed by the TPO. Vide order dated 29/10/2010 passed under section 92CA(3) of the Act, the TPO finally selected set of 20 companies as comparable having average mean margin of 20.62%. By
M/s. Sitel India Limited ITA no. 6875/Mum./2014
applying the arm’s length margin, the TPO, proposed an upward adjustment of Rs. 14,01,94,740, in respect of international transaction of ‘Provision of Contact Centre Services’. In conformity, the Assessing Officer, inter-alia, passed the order under section 143(3) of the Act. In the penalty proceedings, Assessing Officer vide order under section 271(1)(c) of the Act levied penalty, inter-alia, on account of transfer pricing adjustment.
In appeal before the learned CIT(A) against the penalty order, assessee submitted that the price charged and paid in respect of the international transaction was computed in accordance with provisions of the Act and in the manner prescribed therein. The assessee further submitted that it had conducted and maintained contemporaneous transfer pricing documentation as per the provisions of the Act read with relevant Rules, and accordingly benchmarked its international transaction in good faith and with due diligence. Accordingly, assessee submitted that no penalty be levied in respect of transfer pricing adjustment. The learned CIT(A) vide impugned order dismissed the appeal filed by the assessee and upheld the penalty imposed with reference to transfer pricing adjustment. Being aggrieved, assessee is in appeal before us.
During the course of hearing, learned Authorised Representative (‘learned AR’) reiterated the submissions made before the learned CIT(A). On the other hand, learned Departmental Representative (‘learned DR’) vehemently relied upon the order passed by the lower authorities. Page | 6
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We have considered the rival submissions and perused the material available on record. From the record, it is evident that during the transfer pricing assessment proceedings, the TPO neither questioned the selection of the most appropriate method nor disputed the PLI adopted by the assessee. The TPO proposed a set of 25 companies as comparable to the assessee and sought assessee’s reply, there to. In reply, assessee objected to the comparables proposed by the TPO, which is evident from para 7.1.5 and 7.1.6 of TPO’s order, on the basis that the same are either not functionally comparable or relevant segmental information is not available in public domain. The assessee also objected to computation of margin of the comparables proposed by the TPO. Vide order dated 29/10/2010, passed under section 92CA(3) of the Act, TPO finally selected set of 20 companies as comparable to the assessee having average mean margin at 20.62%. Further, the TPO took the operating profit on cost margin of the assessee at 8.8% and did not take into consideration the capacity utilisation adjustment claimed by the assessee. By applying the arm’s length margin, the TPO, proposed an upward adjustment of Rs. 14,01,94,740 in respect of the aforesaid international transaction. In quantum appeal, the learned CIT(A) agreed with the submission of the assessee and partly allowed the appeal of the assessee, in respect of grounds pertaining to transfer pricing adjustment, and directed exclusion of Infosys BPO Ltd., selected as comparable by the TPO, for benchmarking the aforesaid international transaction.
M/s. Sitel India Limited ITA no. 6875/Mum./2014
Under section 271(1)(c) of the Act, penalty is levied for concealing the particulars of income or furnishing inaccurate particulars of income by the assessee. It is also pertinent to note the provisions of Explanation 7 to section 271(1)(c) of the Act, which deals with penalty levied in respect of transfer pricing adjustment and the same reads as under:
“Explanation 7.—Where in the case of an assessee who has entered into an international transaction, 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 manner prescribed under that section, in good faith and with due diligence.”
Thus, as per the provision of this Explanation, any addition on account of transfer pricing adjustment shall be deemed to represent income in respect of which particulars have been concealed or inaccurate particulars have been furnished by the assessee as per section 271(1)(c) of the Act, which will result in imposition of penalty under the said section. The Explanation further provides an exception, where no penalty will be imposed pursuant to aforesaid addition, if assessee proves to the satisfaction of the authority that the price charged or paid in such a transaction was computed in accordance with provisions contained in section 92C and such price was computed as per the manner prescribed under that section in good faith and with due diligence.
M/s. Sitel India Limited ITA no. 6875/Mum./2014
The term ‘good faith’ and ‘due diligence’ in Explanation 7 to section 271(1)(c) of the Act were analysed by the coordinate bench of Tribunal in DCIT vs RBS equities India Ltd, [2011] 133 ITD 77 (Mum.), wherein the Co–ordinate bench observed as under:
“9. ........ As to the scope of connotations of expression in good faith appearing in Explanation 7, we find guidance from section 3(22) of General Clauses Act which states that "a thing shall be deemed to be done in 'good faith' where it is in fact done honesty, whether it is done negligently or not. A thing done in good faith is a thing done honestly, and, therefore, it is not even necessary whether in doing that thing the assessee has been negligent or not. There is no way that an 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 Hon'ble Supreme Court has observed in the case of KP Varghese v. ITO 119811 131 ITR 597/7 Taxman 13, is almost impossible. However, as the expression good faith is used alongwith 'due diligence, which refers to 'proper care, it is also essential that not only the action of the assessee should be in good faith, i.e., honestly, but also with proper care. An act done with due diligence, in our humble understanding, would mean an act done with as much as care as a prudent person would take in such circumstances. In view of these discussions, in our considered view, as long as no dishonesty is found in the conduct of the assessee and 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 cannot be invoked.”
Section 92C of the Act deals with computation of ALP and enlists the methods to be followed for same. In the present case, assessee applied TNMM as the most appropriate method, which is also prescribed under section 92C of the Act. As noted above, there is no dispute regarding the selection of most appropriate method in the present case. During the transfer pricing assessment proceedings, the TPO proposed its own set of companies as comparable and considered margin of the assessee without taking into account idle capacity adjustment as claimed by the assessee in Page | 9
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its transfer pricing study report. In the impugned order, learned CIT(A) has upheld the penalty levied on transfer pricing adjustment on the basis that assessee has taken multiple year data of the companies selected as comparables, which is against the provisions of Rule 10B(4). The learned CIT(A) vide impugned order also find fault with idle capacity adjustment claimed by the assessee. It is pertinent to note that there are no findings, whatsoever, in the TPO’s order as regards the basis of selection of comparables for benchmarking the international transaction undertaken by the assessee. The TPO’s order is also silent on basis of rejection of idle capacity adjustment adopted by the assessee. In the impugned order, the learned CIT(A) has sought to justify the action of the TPO in making the transfer pricing adjustment in the present case. However, in absence of any reasons in TPO’s order, the findings in the impugned order appear to be mere pretext to somehow upheld the levy of penalty in the present case. Even if, learned CIT(A) reasons are treated as the basis of transfer pricing adjustment, the addition, in the present case, arose only on account of difference of opinion between the TPO and the assessee. Further, it is true that the data available at the time of assessment is to be used for determining the ALP but the assessee on such facts cannot be visited with penal consequences for not using data that was not available in the public domain at the time of its statutory mandated transfer pricing study. It is settled that in exercise of making ALP adjustment on the basis of comparables is nothing but a matter of estimate of broad and fair guesswork of authorities based on factual relevant material brought Page | 10
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before the authorities. Further, in the present case, the assessee has conducted and maintained contemporaneous transfer pricing documentation as per the provisions of section 92D of the Act read with Rule 10D of the Income Tax Rules. The assessee, in its transfer pricing report had conducted a detailed function, assets and risk analysis of its international transaction. It is also not the case, wherein, the transfer pricing documentations filed by the assessee were rejected by the TPO. Thus, applying the analysis of the term ‘good faith’ and ‘due diligence’ as laid down by the coordinate bench of the Tribunal in the aforesaid decision, we are of the considered view that in the present case the assessee has computed the ALP in respect of the international transaction in good faith and with due diligence. Accordingly, we direct the Assessing Officer to delete the penalty levied on account of transfer pricing adjustment. As a result, grounds No. 2 to 6 raised in assessee’s appeal are allowed.
The issue arising on ground No. 7, raised in assessee’s appeal, is pertaining to levy of penalty on account of taxation of interest income as income from other sources.
The brief facts of the case pertaining to this issue, as emanating from the record, are: During the assessment proceedings, upon perusal of profit and loss account for the year under consideration, it was observed that the assessee company has credited a sum of Rs. 22,52,149 on account of interest earned on term deposit during the year. Vide order Page | 11
M/s. Sitel India Limited ITA no. 6875/Mum./2014
passed under section 143(3) of the Act, Assessing Officer excluded the interest income of appeal Rs. 22,52,149, while computing the deduction under section 10A of the Act, by considering the same as ‘income from other sources’. Accordingly, vide order passed under section 271(1)(c) of the Act, inter-alia, penalty on account of taxation of interest income as ‘income from other sources’ was levied. In appeal, learned CIT(A) vide impugned order upheld the penalty imposed by the Assessing Officer on account of interest on term deposits. Being aggrieved, assessee is in appeal before us.
During the course of hearing, learned A.R. submitted that issue whether interest on term deposit is qualified for deduction under section 10A is a debatable issue and thus penalty has been wrongly levied by the lower authorities. On the other hand, learned DR vehemently relied upon the orders passed by the lower authorities.
We have considered the rival submissions and perused the material available on record. In the present case, assessee treated the interest on term deposit as income from business and accordingly claimed deduction under section 10A of the Act. However, the lower authorities denied the claim of deduction under section 10A, in respect of interest on term deposit by treating the same as ‘income from other sources’. The issue whether interest on deposits is entitled to deduction under section 10A has been subject matter of litigation in various cases. In Riviera Home Furnishing vs ACIT, [2016] 237 Taxman 520 (Del.), Hon’ble Delhi High Page | 12
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Court has held that interest on FDRs which were under lien with Bank for facilitating letter of credit and bank guarantee facilities would qualify for deduction under section 10B of the Act. Similarly, Full Bench of Hon’ble Karnataka High Court in CIT v/s Hewlett Packard Global Soft Ltd., [2018] 403 ITR 453 (Kar.) (FB), after considering the decisions relied upon by the learned CIT(A) in the impugned order, has held that all profits and gains of 100 percent EOU including incidental income by way of interest on bank deposits or staff loans would be entitled to 100% exemption or deduction under sections 10-A or 10-B of the Act. Thus, in view of the above, it is clear beyond doubt that issue whether interest on term deposit is qualified for deduction under section 10A of the Act, is a debatable issue. Therefore, we are of the considered view that Assessing Officer was not justified in levying of penalty under section 271(1)(c) of the Act on this issue. As a result, ground No. 7 raised in assessee’s appeal is allowed.
The issue arising in grounds no. 8 to 10, raised in assessee’s appeal, is pertaining to levy of penalty on account of disallowance of expenditure under section 40(a)(i) of the Act.
The brief facts of the case pertaining to this issue as emanating from record are: During the course of assessment proceedings it was observed that the assessee has made foreign exchange payments amounting to Rs. 3,31,61,399, on account of communication line expenses and Rs. 1,19,27,329, on account of legal and professional Page | 13
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expenses to various non-residents. Accordingly, the assessee was asked to furnish explanation with regard to applicability of provision of section 40(a)(i) of the Act for non-compliance of the provisions of the Act relating to TDS, while making such payments to non-residents. In reply, assessee submitted that the above payments are in the nature reimbursement of expenses incurred by its associated enterprises on behalf of the assessee company. The Assessing Officer vide order passed under section 143(3) of the Act did not agree with the submissions of the assessee and treated the payments as fees for technical services rendered by the non-residents in India. Accordingly, the Assessing Officer disallowed the aforesaid payment under section 40(a)(i) of the Act for non-deduction of TDS. As a result, penalty was also imposed under section 271(1)(c) of the Act. In appeal, learned CIT(A) dismissed the appeal filed by the assessee on this issue. Being aggrieved, assessee is in appeal before us.
During the course of hearing, learned A.R. submitted that penalty in respect of disallowance under section 40(a)(i) of the Act on this issue is on account of difference of opinion between the assessee and the Revenue. On the other hand, learned DR vehemently relied upon the order passed by the lower authorities.
We have considered the rival submissions and perused the material available on record. In the present case, learned CIT(A) has relied upon the decision of Hon’ble Delhi High Court in CIT v/s Zoom Communication
M/s. Sitel India Limited ITA no. 6875/Mum./2014
Private Ltd., [2010] 327 ITR 510 (Del.), wherein the Hon’ble High Court held that if assessee makes a claim which is not only incorrect in law, but is also wholly without any basis and explanation furnished by him for making such a claim is not found to be bona fide, Explanation 1 to section 271(1)(c) would come into play and assessee will be liable to penalty. In the present case, assessee treated the aforesaid expenditure as reimbursement to its associated enterprises for the cost incurred by them, in making payment to the service provider, on behalf of the assessee. Accordingly, assessee did not deduct the tax at source while making the aforesaid payment. On the other hand, the lower authorities did not agree with the submissions of the assessee and treated such payment to be fees for technical services rendered by the non-resident in India. The Hon’ble Supreme Court in CIT vs Reliance Petroproducts (P.) Ltd. [2010] 322 ITR 158 (SC) has held that merely because assessee had claimed expenditure, which claim was not accepted or was not acceptable to revenue, that by itself would not attract penalty under section 271(1)(c) of the Act. Thus, respectfully following the aforesaid decision of Hon’ble Supreme Court, we direct the Assessing Officer to delete the penalty levied on account of disallowance of expenditure under section 40(a)(i) of the Act. Accordingly, grounds no. 8 to 10, raised in assessee’s appeal are allowed.
Ground no.1 is general in nature and need no separate adjudication, in view of our aforesaid findings.
M/s. Sitel India Limited ITA no. 6875/Mum./2014
In the result, appeal by the assessee is allowed. Order pronounced in the open court on 19/07/2022
Sd/- Sd/- PRAMOD KUMAR SANDEEP SINGH KARHAIL VICE PRESIDENT JUDICIAL MEMBER
MUMBAI, DATED: 19/07/2022 Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary Assistant Registrar ITAT, Mumbai