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Facts
The assessee, a Singapore-incorporated company, was found to have a Permanent Establishment (PE) in India. The dispute initially involved the attribution of profits to this PE, which was eventually resolved through a Mutual Agreement Procedure (MAP) between India and Singapore. However, the Assessing Officer (AO) initiated penalty proceedings under Section 271(1)(c) of the Income Tax Act, 1961, for furnishing inaccurate particulars.
Held
The Tribunal held that the assessee had not furnished inaccurate particulars of income. It was noted that the existence of the PE was a debatable issue, and the assessee acted under a bonafide belief. The MAP resolution, being a compromise based on an estimate, did not automatically imply inaccurate reporting, and therefore, the penalty was not sustainable.
Key Issues
Whether the penalty levied under Section 271(1)(c) is sustainable when the addition was a result of a MAP settlement and the underlying issue was debatable, with the assessee acting on a bonafide belief?
Sections Cited
271(1)(c), 148, 144C, 143(3), 14A, 271(1)(c), 28(v), 271(1)(c)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘B’ BENCH: CHENNAI
Before: SHRI ABY T. VARKEY & SHRI JAGADISH
आदेश / O R D E R PER ABY T. VARKEY, JM: These are appeals preferred by the assessee against the orders of the Learned Commissioner of Income Tax (Appeals), (hereinafter referred to as ‘Ld.CIT(A)‘), Chennai-16, dated 31.01.2025 for the Assessment Years (hereinafter referred to as ‘AY‘) 2011-12 to 2016-17.
At the outset, both the parties agreed that the issues permeating in all the appeals are against the penalty levied u/s 271(1)(c) of the Income to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. :: 2 ::
Tax Act, 1961 (hereinafter referred to as ‘the Act‘) on the common addition(s) made on account of the profits of the assessee attributed to be taxed in India. With the consent of both the parties, we take up the appeal for AY 2011-12 as the lead case, result of which will apply mutatis- mutandis for all the other five (5) appeals.
The brief facts are that, the assessee, M/s. Redington Distribution Pte Ltd ('RDPL'), is a foreign company incorporated in Singapore and a wholly owned subsidiary of M/s. Redington Limited (formerly known as 'Redington (India) Limited') ('RIL'). For AY 2011-12, the assessee had not filed any tax return in India as it did not earn any income in India. From AY 2012-13 and onwards, the assessee had derived royalty income in India which was offered to tax under the head ‘Income from Other Sources’. Later on, a tax survey was conducted at the premises of their parent company, RIL, in India in the month of December, 2017. In the course of survey, the survey team identified a team of employees termed as ‘Dollar Business’ which were managing the USD business of Indian customers. It was noticed by the survey authorities that, for this ‘Dollar Business’, the Indian employees were overseeing the import requirements of the Indian customers who wanted the billings to be done in USD instead of INR so as to avail the import duty benefits. According to the survey team, the employees of the ‘Dollar Team’ were actually identifying the customers, negotiating and fixing the prices, undertaking the sales to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. and also collecting the receivables and that, the assessee was only raising the invoices from Singapore to meet the import requirements (USD billing) of the Indian customers. Based on these documents and details gathered in the course of survey inter alia including e-mails and correspondences between the employees of RIL in India and the assessee, and also the statements obtained from the employees of the ‘Dollar Team’, the survey team was of the view that the assessee had a permanent establishment (in short ‘PE’) in India. On the basis of the findings of the survey team, the income-tax assessments of the assessee were reopened u/s 148 of the Act for AYs 2011-12 to 2016-17. The AO after making necessary enquiries concluded that, the assessee had both a fixed place PE and a dependent agent PE in India. The AO thereafter attributed the profits to this PE on the basis of the total employee cost of RIL and the assessee, and also the asset base. For AY 2011-12, the AO is noted to have attributed 89.65% of the profits of the assessee to the Indian operations and accordingly, computed the income taxable in India at Rs.19,64,44,881/-. Aggrieved by the order of the AO, the assessee filed objections before the DRP. It is noticed that, the DRP in principle upheld the AO’s finding that regarding existence of PE in India, but, as regards the attribution of profits, the DRP found certain infirmities in the calculation for which, necessary directions were issued to the AO. to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. :: 4 ::
Consequent thereto, the AO made an addition of Rs.17,61,12,836/- in the final assessment order passed u/s 144C / 143(3) of the Act.
4. Being aggrieved, the assessee carried the matter in appeal before this Tribunal. It was brought to our notice that the Tribunal vide their order in IT(TP) No. 14/Chny/2020 dated 16.11.2022 confirmed the findings of the lower authorities that the assessee had a PE in India. The Tribunal however is noted to have disregarded the manner of attribution of profits to the PE and remitted back the issue to the file of the AO to redo the attribution in light of the decisions of the Hon’ble Madras High Court in the cases of Anamallais Timber Trust Ltd (18 ITR 333) and the Special Bench of this Tribunal at Delhi in the case of Motora Inc (95 ITD 269). The Tribunal further directed that, the audited financial statements and the profit margin of the assessee be used as the starting point for attribution.
5. The assessee is noted to have preferred a Miscellaneous Application (‘MA’) before the Tribunal against the appellate order on 14.02.2023.
During the pendency of the MA, the AO passed the draft assessment order pursuant to the directions of the Tribunal on 28.02.2023. In the meanwhile, the assessee is noted to have filed an appeal before the Hon’ble Madras High Court against the order of the Tribunal and also inter alia sought interim stay against the draft assessment order dated to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. :: 5 ::
28.02.2023 passed by the AO. It is observed that the Hon’ble Madras High Court granted interim stay by observing as under:
“2. The impugned order is a draft order under Section 144C (1) of the Income Tax Act, 1961 (in short 'Act). This order has been passed consequent upon a remand by the Income Tax Appellate Tribunal (in short "Tribunal/ITAT) on 16.11.2022. The Tribunal has, therein, confirmed the findings of the Assessing Officer to the effect that the petitioner has a Permanent Establishment (PE) in India. However, the question of attribution of profits to the PE has been remanded for fresh consideration.
3. The petitioner has received a notice on 10.01.2023 to which a reply has been filed on 18.01.2023. Immediately thereafter, the petitioner appears to have been of the view that certain clarifications were required from the Tribunal in respect of order dated 16.11.2022 and has filed a Miscellaneous Petition before the Tribunal on 14.02.2023.
This fact was brought to the notice of the authority on 27.02.2023. However, the impugned order has come to be passed the next day, i.e., 28.02.2023 without hearing the petitioner. The intimation that the Miscellaneous Petition has been filed has not escaped the attention of the officer, since he refers to the same at paragraph 3, but proceeds any ways, stating that the ITAT had not issued any directions to his office.
Interim stay, effective till the next date of hearing.”
6. The Hon’ble High Court was also pleased to admit the substantial question of law framed by the assessee by their order dated 28.03.2023 in TCA No. 166 of 2023 wherein their Lordships observed as under:
“3.This tax case appeal is admitted on the following substantial questions of law:
1. Whether in the facts and circumstances of the case, the Hon'ble ITAT was right in law in holding that the Appellant has a fixed place Permanent Establishment ("PE") in India under Article 5(1) of the India-Singapore DTAA and thus, the income of the Appellant is liable to tax in India for the subject Assessment Year?
2. Whether in the facts and circumstances of the case, the Hon'ble ITAT was right in law in holding that the Appellant has a dependant agent Permanent Establishment ("DAPE") in India under Article 5(8) of the India-Singapore DTAA and thus, the income of the Appellant is liable to tax in India for the subject Assessment Year?"
to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. :: 6 ::
It was pointed out to us by the Ld. Senior counsel appearing for the assessee Shri Percy Pardiwala that, the above admission of appeal on the issue as to whether the assessee, in the given facts, could be said to have a PE in India, indicated that the matter was complex debatable issue and a subject matter of legal interpretation. It was also brought to our notice that, during the pendency of this entire dispute, the assessee had simultaneously made an e-mail application dated 19.01.2022 for resolution of the impugned dispute in terms of the Mutual Agreement Procedure (in short ‘MAP’) under Article 27 of the India-Singapore DTAA to the Competent Authority of Singapore. It was brought to our notice that, the Competent Authority (CA) of Singapore accepted their application vide their communication dated 18.02.2022 and also requested the Competent Authority of India to resolve the dispute. The Ld. AR pointed out to us that, the Competent Authority at India had accepted this request and pursuant to the negotiations, mutual agreement was arrived at between the two Competent Authorities, which read as follows:
“2. Agreed Terms
The CAs have agreed to disagree on the question of existence of a permanent establishment of RDPL in India, and further agreed to set aside the same to arrive at the following terms of resolution:
(i) The adjustment to RDPL's income in India shall be reduced to 25% of the profits derived from the turnover of RDPL in India from channel partner sales and direct sales made in India. A downward corresponding to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. adjustment to RDPL to the extent of 15% of such profits shall be provided in Singapore.
(ii) The profits on such turnover shall be derived by using RDPL's profit margin on total sales for the relevant financial year, based on its audited financial statements.
(iii) Such profits shall be taxed in India as business profits under provisions of India's domestic law and the India-Singapore DTAA.
Financial Original Adjustment to Adjustment Corresponding Year adjustment in be withdrawn to be adjustment to India (INR) in India (INR) sustained in be provided in India (INR) Singapore (USD) 2010-11 17,61,12,836 15,42,93,858 2,18,18,978 287,327 2011-12 8,92,01,621 5,59,28,041 3,32,73,580 416,589 2012-13 4,85,68,988 85,99,964 3,99,69,024 440,755 2013-14 49,10,65,170 43,73,89,604 5,37,75,566 533,295 2014-15 90,05,08,224 81,37,54,883 8,67,53,341 851,308 2015-16 99,23,27,286 86,03,36,759 13,19,90,527 1,209,655 Total 2,69,77,84,125 2,33,02,03,109 36,75,81,016 9,738,929
*As on the date of signing of this MA, the assessment order in India for financial year 2010-11 stands stayed by a domestic court in India. However, the CAs agree that whenever the said stay is revoked and the original order becomes operational, the terms as agreed above would apply to financial year 2010-11 also.
3. Implementation The outcome of the MA was arrived at as a compromise in the interest of settling the case. Therefore, both the outcome and the method applied do not establish any precedent for RDPL or any other taxpayer.”
It was brought to our notice that, the Competent Authorities categorically agreed to disagree on the question of existence of a permanent establishment of the assessee in India and further agreed to set aside the same on the terms agreed in the resolution. It is noticed that, the Competent Authority at India agreed to a downward adjustment to the addition made by the AO in India. Out of the total addition of to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. :: 8 ::
Rs.269.77 crores made across AYs 2011-12 to 2016-17, it was agreed that adjustment only to the extent of Rs.36.75 crores would be sustained, which was lesser than 15% of the original addition made by the AO. The Ld. Sr Counsel submitted that, pursuant to the MAP resolution, the pending appeal before the Hon’ble High Court became academic. The AO also passed an order giving effect to the MAP resolution wherein he brought down the original adjustment of Rs.17,61,12,836/- made in AY 2011-12 to Rs. 2,18,18,978/-.
9. The AO thereafter initiated and levied penalty u/s 271(1)(c) in relation to the addition finally confirmed under the MAP resolution on the premise that the assessee did not offer the said income in its original return of income. The AO was of the view that, the MAP resolution did not reduce the adjustment to NIL which shows that, the assessee had furnished inaccurate particulars of income in India. Relying upon the decision of the Hon’ble Karnataka High Court in the case of Toyota Kirloskar Motor (P) Ltd vs. Union of India (422 ITR 138), the AO levied penalty of 100% of the tax arising on the income added pursuant to the MAP resolution being Rs.92,14,154/-.
Being aggrieved by the above penalty order of the AO, the assessee carried the matter in appeal before the Ld. CIT(A) who confirmed the penalty by observing as follows: to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. :: 9 ::
“5.5.6 It is relevant to note that the Honourable ITAT in IT (TP) A No.14/Chny/2020 for AY 2011-12 held based on the facts, that the Dollar Team of the Indian Holding Company assisted the Singapore Subsidiary le the appellant in seeking orders, giving quotes to customers, vendor negotiations, and concluding the terms of sales Only documents like the packing list, the airway bill, etc., were prepared by the Singapore company. The premises of the Indian Holding Company were at the disposal of the appellant, and the Dollar Team carried out their functions from the premises of the Indian Holding Company. Given that the services rendered by the Dollar Team were neither preparatory nor auxiliary services but main functions of a group business, it was held that the appellant had a fixed place PE in India. As the Dollar Team of the Indian Holding Company concluded contracts on behalf of the appellant, the activities undertaken by the Dollar Team also constituted an agency PE of the Singapore company in India. In relation to tax on the profits attributable to the PE, the matter was set aside to the assessing officer for re-examination, based on available audited financial statements of the Singapore Subsidiary, the appellant. It is to be noted that the ITAT is the final fact finding authority. The Honourable ITAT has upheld the AO's finding based on TDS survey that the appellant has a PE in India. It can safely be understood that but for the TDS survey and the incontrovertible evidence unearthed therein, the appellant would not have come forward for a MAP resolution. Thus the case law relied on by the appellant namely Raytheon Company supra is distinguishable from the facts of the present appeal.
5.5.7 Further, as has been clarified in the MAP guidance, where Hon'ble ITAT has passed a final order, the CAs of India shall not deviate from such order and MAP in such cases shall be closed as resolved under domestic remedy. Thus the contentions of the appellant that PE was only presumed to exist are rejected.
5.5.8 To sum up, the appellant had a PE in India as was detected during the course of survey and upheld by the Honourable ITAT The MAP resolution was in respect of the profits attributable to the PE in India. Such profits were not declared in the return of income if any filed by the appellant and hence not disclosed to the AO. Thus the AO was right in initiating penalty u/s 271(1)(c) for furnishing inaccurate particulars in the facts and circumstances of the case. There is no bar as per the DTAA or the ITA in imposing penalty even when the dispute is settled under MAP resolution as held by the Honourable High Court of Karnataka in Toyota Kirloskar Motor Private Limited(supra). Order passed under MAP does not bar the levy of penalty if it is liveable otherwise. In view of these discussions, ground no’s 3, 4, 8 and 10 are dismissed.
5.6 Ground No 5: to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. :: 10 ::
As per this ground, the appellant states that the question of law on the existence of PE was admitted by the Honourable High Court of Madras. It is pertinent to note that as per Rule 44G (8), the assessee's acceptance of the resolution shall be accompanied by proof of withdrawal of appeal, if any, pending on the issues that were the subject matter of the resolution arrived at under sub-rule (4). Thus ground no 5 has become infructuous and is accordingly dismissed.
5.7 Ground Nos 6 and 7:
As per these grounds, the appellant contends that the existence of PE was only a change of opinion and that all facts relevant to the dispute were provided during the assessment proceedings. As discussed in the preceding paras, the existence of PE in India was brought to light in the wake of a TDS survey that unearthed documentary evidence that the appellant was operating in India through the Dollar Team and the premises of the Indian Holding Company. This was upheld by the Honourable Tribunal. The existence of PE was never admitted by the appellant in its return of income nor was corresponding taxes on the Indian profits of the appellant being paid in India. There was no disclosure whatsoever of these facts in its return or before the AO in the subsequent proceedings. The financials of the appellant were not made available to the AO and the assessment as a PE in India materialised only because of the survey. The factum of the existence of PE has now become final for the assessment year concerned. In the absence of any material whatsoever in the knowledge of the AO regarding these facts prior to the survey, it cannot be contended that the finding regarding existence of PE was a change of opinion. For want of adequate disclosures by the appellant, the AD did not have occasion to consider the same. It is also to be noted that the assessment was completed on the basis of the documentary evidence collected as a result of survey. In view of these discussions, it is held that the AO had rightly held that the appellant had furnished inaccurate particulars warranting the imposition of penalty u/s 271 (1) (c). Accordingly, ground no’s 6 and 7 are dismissed.”
Now, the assessee is in appeal before us.
Assailing the action of the Ld. CIT(A), the Ld. Senior Counsel Shri.
Percy Pardiwala pointed out that, the impugned issue under dispute was not settled on merits through an appeal route but rather through an to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. alternate dispute resolution by way of negotiations between the competent authorities of both the countries. He pointed out that, the question whether there existed a PE in India or not, had not been settled in as much as this very question was admitted by the Hon’ble High Court by way of substantial question of law. According to him, the fact that the impugned issue was admitted as a subject matter before the Hon’ble High Court showed that, it was a debatable issue involving complexities of law.
He relied on the following decisions in which, it was inter alia held that, when the issue on which penalty is being sought to be levied, had been admitted as a substantial question of law by the Hon’ble High Court shows that the issue is debatable in nature and therefore, penalty on such issue cannot be levied.
− CIT v. Liquid Investment & Trading Co. (ITA No. 240 of 2009) (Del HC) − Nayan Builders & Developer [2014]368 ITR 722 (Bom HC) − Harsh International (P.) Ltd.,[2021] 431 ITR 118(Delhi HC) − Thomson Press India Ltd.,2014 (3) TMI 1174,(Delhi HC); − Dr. Harsha N. Biliangady (379 ITR 529) (Kar HC) − Perot Systems TSI (India) (P.) Ltd. [(2018) 94 taxmann.com 625] (Delhi ITAT) − TTK Healthcare Limited (ITA No. 2028/Mds/2011) (Chennai ITAT) − Smt. Hemalatha Rajan (ITA No. 2/Mds/2016) (Chennai ITAT) 13. The Ld. Sr Counsel further submitted that, it was not a case that the assessee had furnished any inaccurate particulars of income. Rather, according to him, the assessee was under a bonafide belief that the to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. ancilliary support services received from the employees of RIL in India did not result in any fixed place or dependent agent PE in India. The Ld. Counsel took us through the decisions of the Hon’ble Supreme Court in the cases of E-Funds IT Solution Inc (399 ITR 34) & Morgan Stanley & Co (292 ITR 416), basis which the assessee had formed a view that it did not have a PE in India. Narrating the facts involved in the assessee’s case, the Ld. Sr Counsel argued that, the view entertained by the assessee that it did not have a PE in India was a plausible one and thus the assessee cannot be held to be guilty for furnishing inaccurate particulars of income. To substantiate the bonafides of the assessee, he pointed out that the assessee had been offering the royalty income to tax in India even though two views were possible at the material time when the returns of income were filed, and that later on, the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P.)
Ltd (432 ITR 471) had held that such royalty income is not subject to tax in India. This contemporaneous fact, according to the Ld. Senior Counsel demonstrated the bonafide of the assessee while offering income to tax in India, which it believed was subject to be taxed in India and which was not.
The Ld. Sr Counsel further pointed out to us that, the assessee had furnished the complete details and all material facts in the course of assessment, basis which, the AO took one of the possible views favouring to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. the Revenue and held that the assessee had a PE in India. Shri. Percy Pardiwala argued that, only because the view taken by the assessee was not found to be acceptable by the Revenue cannot tantamount to furnishing of inaccurate particulars of income. The Ld. Counsel in support, relied upon the decision of the Hon’ble Supreme Court in the case of CIT v. Reliance Petroproducts (P.) Ltd (322 ITR 158). He further submitted that even the Competent Authority of India had agreed to disagree on the question of existence of PE in India which, in his view, showed that, there was no finality to the impugned issue. He further pointed out that, the fact that the Competent Authority also agreed to a much lower value of addition, which was based on an estimate having no scientific basis, but a consequence of mutual settlement, showed that, the final addition retained by the AO was nothing but an estimate. He argued that penalty cannot be levied where an addition is made on the basis of an estimate or as a result of difference of opinion. The Ld. Counsel further relied on the decisions of this Tribunal at Pune & Delhi in the cases of Yazaki India Private Limited (ITA 163/Pun/2013) & DCIT v.
Raytheon Company (ITA Nos. 1383 to 1392 / Del / 2023), wherein according to him, on similar facts, this Tribunal had deleted the penalty levied on the addition agreed and retained under MAP resolution. The Ld. Senior Counsel also filed written submissions in support of his arguments which has been taken on record. to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. :: 14 ::
Per contra, the Ld. CIT, DR Shri Shiva Srinivas, vehemently supported the order of the lower authorities. According to him, only because the dispute was finally resolved through a MAP resolution will not absolve the assessee from penal consequence. He pointed out that the Hon’ble Karnataka High Court in the case of Toyota Kirloskar (supra) had held that, penal action can be invoked in relation to the additions made under MAP resolution. He contended that, this Tribunal had confirmed the existence of PE of the assessee in India, which showed that the assessee had furnished inaccurate particulars while filing their return of income in India. According to him, the fact that the Competent Authority of Singapore had agreed to attribution of profits in India, though lower than what was computed by the AO, shows that they also agreed that the assessee had a PE in India and for that reason it had agreed to pay tax thereon. He therefore urged us not to interfere with the order of the lower authorities and confirm the levy of penalty.
We have heard both the parties and perused the material placed before us. It is well settled in law that, the penalty proceedings are separate and independent from the assessment proceedings. Only because an addition or a disallowance which was made in the assessment has attained finality may not ispo facto warrant levy of penalty. The levy of penalty is not automatic and it also cannot be levied solely on a presumption. The provisions of Section 271(1)(c) of the Act provides that to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. only where the AO is satisfied that, the assessee has either concealed the particulars of his income or furnished inaccurate particulars of income that, the AO may direct levy of penalty. In the present case, the AO has sought to levy penalty by holding the assessee to be guilty of furnishing inaccurate particulars of income. In our considered view, in order to do so, it is necessary for the AO to show with material that, there was inaccurate reporting of the particulars of income by the assessee. In the present case, we find that, it is not in dispute between the parties that, the employees of RIL also known as ‘RIL Dollar Team’ was providing certain business support services to the assessee. It is noticed that, the assessee had disclosed all material facts relating to this aspect in the course of assessment. According to the assessee, the support services rendered by the ‘RIL Dollar Team’ did not give rise to any fixed place PE or dependent agency PE in India. This bonafide belief of the assessee is found to have emanated from their interpretation of the decisions of E- Funds IT Solution Inc. (supra) & Morgan Stanley & Co (supra) amongst several other decisions, which were also cited before us. The Revenue however was of the view that the nature of services rendered by the ‘RIL Dollar Team’ was not back office or auxiliary or preparatory services, as claimed by the assessee, but it constituted the back bone of the business model of the assessee and therefore the Revenue was of the view that the ‘RIL Dollar Team’ constituted both fixed place PE and also a to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. dependent agent PE of the assessee in India. We find that, the coordinate bench of this Tribunal upheld the Revenue’s finding that there did exist a PE of the assessee in India, and answered the question against the assessee. However, we note that, the Hon’ble High Court has admitted the appeal of the assessee on the issue of existence of a PE in India as and by way of a substantial question of law, which, for the sake of convenience, is again reproduced below:-
“1. Whether in the facts and circumstances of the case, the Hon'ble ITAT was right in law in holding that the Appellant has a fixed place Permanent Establishment ("PE") in India under Article 5(1) of the India- Singapore DTAA and thus, the income of the Appellant is liable to tax in India for the subject Assessment Year?
2. Whether in the facts and circumstances of the case, the Hon'ble ITAT was right in law in holding that the Appellant has a dependant agent Permanent Establishment ("DAPE") in India under Article 5(8) of the India-Singapore DTAA and thus, the income of the Appellant is liable to tax in India for the subject Assessment Year?"
We find force in the contention of the Ld. Senior counsel Shri Percy Pardiwala, that, when the impugned issue has been admitted by way of a substantial question of law by the Hon’ble High Court, it does suggest that, the issue as to whether the assessee can be said to have a PE in India or not, is debatable on which two views are possible. Therefore, there is merit in the assessee’s plea that, it had acted on a bonafide belief that, it didn’t have any PE in India; and only because, their interpretation of the definition of PE was not acceded to by the coordinate bench of this Tribunal, it cannot lead to a presumption that, the assessee had furnished to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. inaccurate particulars of income, which would warrant levy of penalty. The Ld. Senior Counsel has rightly relied on the decision of the Hon’ble Delhi High Court in the case of CIT v. Liquid Investment and Trading Co.
(supra) wherein the Hon’ble High Court deleted the penalty levied by the AO by observing that the substantive appeal against the addition made in the quantum proceedings had been admitted by the Hon’ble High Court, which itself showed that the issue is debatable. The relevant portion of the judgment is as follows:
"Both the CIT(A) as well as the ITAT have set aside the penalty imposed by the Assessing Officer under section 271(1)(c) of the Income-tax Act. 1961 on the ground that the issue of deduction under section 14A of the Act was a debatable issue. We may also note that against the quantum assessment whereunder deduction under section 14A of the Act was prescribed to the appellant. The appellant has preferred an appeal in this Court under section 260A of the Act which has also been admitted and substantial question of law framed. This itself shows that the issue is debatable. For these reasons. we are of the opinion that no question of law arises in the present case. This appeal is accordingly dismissed.”
We find that similar view was expressed by the coordinate bench of this Tribunal in the case of Smt. Hemalatha Rajan (ITA No. 2/Mds/2016) dated 30.11.2016. In the decided case, the assessee had received certain payments from a foreign company upon agreeing to withdraw the legal proceedings instituted against them. The amount so received was claimed to be capital receipt and therefore it was not offered to tax. The AO however observed that the impugned receipt was revenue in nature which arose from cancellation of a business contract and was to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. therefore taxable u/s 28(v) of the Act. The impugned addition was confirmed by the Ld. CIT(A) as well as this Tribunal. Later on, the AO levied penalty u/s 271(1)(c) of the Act on the ground that the assessee had furnished inaccurate particulars of income. On appeal, it was brought to the notice of the Tribunal that, though the quantum was confirmed by the coordinate bench of the Tribunal, but subsequently, the Hon’ble High Court had admitted the main issue by way of a substantial question of law. Taking note of the same, and referring to the above decision of the Hon’ble Delhi High Court (supra), this Tribunal held that the admission of the appeal by the High Court evidenced that the issue was debatable and therefore, the question of levy of penalty would not arise. The Tribunal accordingly deleted the penalty, having regard to the complexity and issue being debatable
In light of the above decisions (supra), we again revert back to the given facts of the present case before us. It is noted that, the Ld. CIT(A) while confirming the penalty had emphasized on the TDS survey which was conducted upon RIL, which according to him, led to discovery of evidence that the assessee had a PE in India. The Ld. CIT(A) was of the view that the analysis of evidences unearthed in the course of survey had revealed that the assessee was having a PE in India, which was also affirmed by this Tribunal. According to him, had the survey not been conducted, the impugned addition would not have been made and thus it to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. was a case of furnishing of inaccurate particulars by the assessee. We however are unable to countenance these findings of the Ld. CIT(A) in light of the facts placed before us. It is noticed that, the assessee had never claimed that RIL or its employees were not rendering support services to it. Instead, it was the assessee’s case that the services rendered by RIL did not lead to formation of a PE in India. The assessee is noted to have co-operated with the AO in the course of assessment and had disclosed all material facts relating to the impugned issue. It is observed that, there was a difference of opinion between the assessee and the Revenue regarding the existence of a PE in India, having regard to the nature of services rendered by the ‘RIL Dollar Team’. The assessee has been able to demonstrate before us that, it was under a bonafide belief that it did not have a PE in India and therefore, as a corollary, it did not disclose any income in India. Hence, only because the impugned addition finally retained, was not declared in the return of income cannot be viewed as an inaccurate reporting by the assessee. We find that, the matter of existence of PE in India was being all along agitated by the assessee and the same was pending adjudication before the Hon’ble High Court. It is also observed that, having regard to the prima facie case made out by the assessee, not only had the Hon’ble High Court granted interim stay on the operation of assessment order passed by the AO, pursuant to the directions of the Tribunal, but it had admitted this very to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. precise issue regarding the question of PE in India by way of substantial question of law. In the meanwhile, as the assessee had also simultaneously opted for an alternate dispute resolution mechanism by way of a MAP under Article 27 of the DTAA between India and Singapore and mutual agreement was reached between the parties, the appeal before the Hon’ble High Court stood rendered academic. However, the fact that the Hon’ble High Court had admitted the appeal on a substantial question of law being involved did show that the issue was debatable.
The Ld. CIT(A) is noted to have also relied upon the MAP resolution to justify the levy of penalty by observing that, the assessee had entered into MAP resolution only because evidences against it had been gathered by the Revenue which suggested that it had a PE in India. We find these observations to be based on suspicion and surmise. Rather, according to us, the MAP resolution and the agreed terms supports the case of the assessee that the impugned issue was a debatable one. It is noticed that, under the MAP resolution, the Competent Authorities of both the countries had mutually arrived at a settlement, in terms of which, both the parties agreed to disagree on the question of existence of a PE of the assessee in India. This particular agreement between the parties reveals that even though the coordinate bench of this Tribunal had confirmed the Revenue’s view that, the assessee had a PE in India, and the Competent Authority of India having agreed to disagree on its existence proceeded solely on an to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. assumption to make adjustment to the assessee’s total income in India. It is found that, in fact a substantial downward adjustment to the addition confirmed in the assessment / appeal of the assessee was made, which as noted earlier, is not even 15% of the original addition. The Ld. Senior Counsel also pointed out that, the Singapore tax authority also made equivalent downward adjustment to the assessee’s taxable income in Singapore to ensure avoidance of double taxation in Singapore on the income being brought to tax in India. We thus observe that, the alternate remedy was availed by the assessee only for settling the issue, without admitting that PE existed in India; and the final settlement agreed upon not only ensured a substantially low estimated adjustment to their taxable income in India, but the assessee was also allowed corresponding adjustment to their income in Singapore which resulted in lower tax liability in that State. Thus, according to us therefore, the agreed terms of MAP resolution doesn’t in any manner suggest that, the assessee had acceded to existence of a PE in India.
Also, as rightly pointed out by the Ld. Senior Counsel, the agreed downward adjustment under MAP is found to be based on an ad-hoc estimate arrived at pursuant to mutual settlement and it didn’t have any cogent basis. The downward adjustment, which was finally retained, was not based on any cost base or asset base or employee count etc. Rather, to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. it is noted to be an ad-hoc percentage of profits mutually agreed upon between the Competent Authorities.
The above material facts as noted from the MAP Resolution coupled with the admission of the assessee’s appeal by way of substantial question of law by the Hon’ble High Court, does lend credence to the Ld. Sr Counsel’s submission that, the impugned addition confirmed in the quantum proceedings was based on estimate, which has inherent subjectivity involved; and the issue was debatable in nature; and in light of the complexities of the facts and divergent jurisprudence available on this subject, we thus are of the considered view that, the quantum addition confirmed by the AO pursuant to MAP resolution, on the given facts, cannot be said to be a case of inaccurate reporting by the assessee and thus does not warrant levy of penalty.
The Ld. CIT, DR had stressed on the decision of Toyota Kirloskar (supra) relied upon by the lower authorities to justify the levy of penalty.
Having perused the said judgment, it is noted that, in the decided case, the assessee had filed a writ petition against the validity of initiation of penalty by the AO on the addition which was confirmed under a MAP resolution. The Hon’ble High Court is noted to have dismissed the writ petition challenging the constitutional validity of Section 271(1)(c) in so far as it related to imposition of penalty on the amount determined to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. pursuant to mutual agreement in terms of the DTAA. The Hon’ble High Court only held that, the AO is not prohibited from initiating penalty in relation to amount adjusted after incorporating the decision under MAP resolution. The Hon’ble High Court at the same time is noted to have clarified that, the penalty proceedings are distinct and independent from the assessment proceedings and it remained open for the assessee to show that the addition confirmed in MAP resolution was not due to concealment of income or furnishing of inaccurate particulars and therefore, it was not liable to penalty. In our considered view, on the given facts before us, this decision is of no assistance to the Revenue.
Rather, it supports the case of the assessee, as the Hon’ble High Court had observed that, only because an adjustment is made pursuant to MAP resolution, will not automatically lead to penalty. As noted by us above, the assessee has made out a case that, there was no inaccurate reporting of particulars qua the adjustment made pursuant to MAP resolution, and for that reason, we hold the imposition of penalty to be unjustified.
Before parting, we also find the reliance placed by the assessee on the decision of DCIT v. Raytheon Company (supra) to be relevant and applicable to their case. In the decided case also, the assessee, a foreign company had filed NIL return of income in India. The AO in the course of assessment was of the view that the assessee had a PE in India and that the royalty income was liable to tax in India. The assessee agitated the to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. matter in appeal, which was deleted by the Ld. CIT(A) who held that the assessee did not have a PE in India. The Revenue preferred appeal against the same before the Tribunal. The assessee, in order to buy peace of mind, approached the Competent Authorities for settling the issue under MAP. Under the terms of the settlement, it was assumed that, the assessee had a PE in India and 30% of their profits was subjected to tax in India. The AO levied penalty on such addition. The Tribunal still observed that, it was not a case of concealment of any particulars of income and at best, it was a difference of opinion on the existence of a PE in India. It was held that, the PE was simply assumed by the Competent Authorities and that there was no corroborative material brought on record for supporting such an assumption. The Tribunal therefore found deleted the penalty by holding as under:
“5. We observe that the assessee in all these assessment years filed returns declaring NIL income. The assessments were completed by the AO treating the amounts received by the assessee for report maintenance support services, supply of spares, supply of hardware software and installation and training services, repair support, software maintenance support, etc. as royalty on the ground that the assessee has existence of PE in India. However, the Ld.CIT(A) deleted the additions made in all these assessment years holding that there is no existence of PE in India for the assessee. Assessee under MAP approached the authorities to settle the issues. Meanwhile the Hon’ble Supreme Court in the case of Engineering Analysis Center of Excellence (P) Ltd. Vs. CIT (supra) held that supply of software and documentation did not constitute.
We find that the authorities for the purpose of settling the cases under MAP proceeded on assumption that the assessee has PE in India and the business profits earned from those contracts are deemed to be attributed to the assumed PE and taxed in India at 30% of the profits arrived. We observe that even in the MAP proceedings it is only by way of an assumption that the authorities have concluded that the assessee has PE and on such assumption of PE the business profits were attributed to the PE for the purpose of settling the issues. No to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. :: 25 ::
corroborative evidence is brought on record by the Revenue Authorities to suggest that the assessee has PE in India. Further the Ld.CIT(A) in all these assessment years in fact deleted the additions holding that Assessee does not have a PE in India.
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8. The Ld.CIT(A) has considered all the aspects of the material and concluded that the assessee has disclosed all material facts during the assessment as well as MAP proceedings and has not concealed any particulars of income. We see no infirmity in the order passed. We further observe that at best it is only a difference of opinion as to whether there exists PE in India for Assessee or not. There is no conclusive proof that the assessee has PE in India. In the penalty proceedings the AO simply relied on the MAP proceedings in holding that the assessee has PE in India which in fact is not correct. As we said earlier it is only on assumption that the assessee has PE in India and by way of deeming fiction the profits were attributed for such assumed PE by the authorities in the MAP proceedings.
The case law relied on by the Ld. DR in the case of Toyota Kirloskar Motor Private Limited Vs. Union of India (supra), we observe that in that case the assessee has challenged the constitution validity of section 271(1)(c) in so far as it relates to imposition of penalty on amounts determined pursuant to convention for Avoidance of Double Taxation between India and Japan. The Hon’ble High Court held that section 271(1)(c) of the I.T. Act is intra vires the constitution in so far as the imposition of penalty on amounts determined pursuant to convention for Avoidance of Double Taxation between Union of India and other sovereign countries. We further observe that the Hon’ble High Court held that the Explanation 7 would not empower the authorities to levy penalty automatically for the transactions where MAP proceedings are applied. It was also held that the onus lies on the assessee to establish that the addition finally decide by the MAP is not due to concealment of income or furnishing all inaccurate particulars. Therefore, this decision of the Hon’ble Karnataka High Court will not come to the rescue of the Revenue as canvassed by the Ld. DR.
10. In the circumstances, we hold that there is no concealment of income or furnishing inaccurate particulars of such income by the assessee in any of these assessment years and thus, we sustain the order of the Ld.CIT(A) for the assessment years 2004-05 to 2011-12 and 2014-15 to 2016-17.”
In the circumstances discussed supra, we are of the considered view that the assessee in the facts and circumstance of the case cannot be held to have furnished inaccurate particulars of income and thus, we direct the AO to delete the penalty levied in AY 2011-12. Our decision in the lead case would apply to remaining AYs 2012-13 to 2016-17 as well to 894/Chny/2025 (AYs 2011-12 to 2016-17) M/s. Redington Distribution Pte Ltd. and thus the AO is directed to delete the penalty imposed in these AYs as well.
In the result, all the appeals filed by the assessee stands allowed.