SEQUENCE DESIGN (INDIA) PRIVATE LIMITED,PUNE MAHARASHTRA vs. JOINT COMMISSIONER OF INCOME TAX CIRCLE 1(1) PUNE, PUNE

Penalty levied on incorrect amount:

At the outset, Ld. Counsel for the assessee did not press Ground of appeal No.1. Accordingly, the said ground is dismissed as ‘not pressed’.

Brief facts of the case are that the assessee filed its return of income for A.Y. 2015-16 on 28.11.2015 declaring income of Rs.2,60,50,160/- which was further revised on 16.12.2015 declaring income of Rs.2,69,48,770/-. After the return being processed u/s.143(1)(a) of the Act, case selected for scrutiny under CASS and reference was made to the Transfer Pricing Officer (TP) for determination of Arm’s Length Prices (ALP) in respect of international transaction entered into with the Associated Enterprises (AEs). Assessee company is a back end software centre developing some functions of the software products for its AEs. During the course of proceedings before the ld. TPO, assessee was asked to furnish the information as required to be kept and maintained u/s.92D of the Act read with Rule 10D. Though the TPO suggested Nil adjustment to the value of international transaction with regard to ALP vide its order u/s.92A(3) of the Act on 30.10.2018, however, ld. TPO had observed that the assessee failed to report the transaction in Form No.3CEB pertaining to the amount of Rs.4,07,42,345/- reimbursed by the AE to the assessee during the relevant Sequence Design (India) Pvt. Ltd. assessment year and in his view there is a violation on the part of assessee which leads to initiation of penalty u/s.271AA of the Act. Thereafter, proceedings u/s.271AA of the Act was carried out and the penalty is leviable if the assessee fails to keep and maintain any such information and document as required u/s.92D(1/2), fails to report such transaction which is required to do so or maintains or furnishes incorrect information or document. It was claimed by the assessee that the alleged sum of reimbursement was received by the assessee from its AE company in April, 2015 on account of six debit notes issued to its AE/holding company in March, 2015 consequent to Transfer Pricing adjustment made from A.Y. 2009-10 to A.Y. 2014-15 in pursuance to Dispute Resolute Panel (DRP). It was also submitted by the assessee that the amount represented the Transfer Pricing adjustment offered to tax in A.Y. 2009-10 to A.Y. 2014-15 and the said sum of Rs.4,07,42,345/- was excluded while computing the total income for A.Y. 2015-16 and therefore not reported as international transaction in Form No.3CEB. However, ld. TPO was not satisfied and he treating it to be a fit case for levy of penalty u/s.271AA of the Act carried out the proceeding and computed the same by applying 2% to the value of international transaction of Rs.13,29,97,947/- and levied penalty of Rs.26,59,958/-.

Aggrieved assessee preferred appeal before ld.CIT(A) but failed to succeed. Now the assessee in appeal before this Tribunal.

Ld. Counsel for the assessee apart from referring to the debit notes raised to the AE for reimbursement of the amount of Rs.4,07,42,345/-, also referred to the provisions of section 273B Sequence Design (India) Pvt. Ltd. of the Act which provides that penalty is not to be imposed in certain cases when for the failure referred in the said provisions mentioned in section 273B which also includes the penalty levied u/s.271AA of the Act, the assessee proves that there was reasonable cause for the said failure. It was submitted that the reimbursement amount received during the year is not part of any international transaction carried out but the amount has been reimbursed against the debit notes raised for the preceding assessment years namely A.Y. 2009-10 to A.Y. 2014-15 where the amount was calculated after applying the DRP directions adopting the Cost Plus Margin @20% in the spirit of Safe Harbour norms. These debit notes were issued in March, 2015 and the amount was received from AE in April. 2015. It is also submitted that the said amount of Rs.4,07,42,345/- was credited as income by the company in its profit and loss account for the year ended 31.03.2015 and since this amount represents Transfer Pricing adjustment already offered to tax in the A.Y. 2009-10 to A.Y. 2014-15, it was excluded while computing the total income for A.Y. 2014-15. On the strength of these facts, it was stated that assessee had reasonable cause not to report the said transaction in Form No.3CEB and therefore no penalty is leviable u/s.271AA of the Act.

On the other hand, ld. Departmental Representative vehemently argued supporting the orders of the lower authorities.

We have heard the rival contentions and perused the record placed before us. Assessee has been visited with penalty u/s.271AA of the Act at Rs.26,59,958/- for the alleged non- reporting of transaction of reimbursement amount of Sequence Design (India) Pvt. Ltd. Rs.4,07,42,345/- received from the AE. We note that the said sum of Rs.4,07,42,345/- is reimbursement from AE for which debit notes were issued by the assessee during the year under consideration to the AE and it has been contended before us that the said sum is not part of international transaction carried out during the year with AE. Documents filed in the paper book as well as observations of the lower authorities clearly indicate that for the A.Y. 2009-10 to A.Y. 2014-15 when the issue of ALP of international transaction with the AE for the respective years was under consideration before the ld. DRP, directions were given to adopt Cost Plus Margin of 20% in the spirit of Safe Harbour norms. Assessee duly honoured the DRP directions and paid appropriate taxes and interest on the adjustments made for relevant assessment years, i.e., A.Y. 2009-10 to A.Y. 2014-15. However, since the assessee was burdened with extra income and tax, assessee issued six debit notes each for the A.Y. 2009-10 to A.Y. 2014-15 to its AE totalling to USD 651906.06 equivalent to Rs.4,07,42,345/-. Debit notes were issued in March, 2015 and the amount was received from AE in April, 2015. These facts clearly indicates that the amount received from AE during April, 2015 against the six debit notes was not towards any new international transaction carried out during the year but it was the reimbursement of the amount which already stood offered to tax for the income in respective assessment years. We note that penalty u/s.271AA of the Act is levied if an assessee fails to keep and maintain any documents in respect of certain transactions and for the sake of convenience section 271AA of the Act is reproduced below :

We would also like to reproduce below the provisions of section 273B of the Act where penalty is not to be imposed in certain cases if there was a reasonable cause for the failure referred to the section in the provisions of section 273B of the Act :

Now examining the facts of the instant case in light of the above two provisions, we notice that firstly the assessee has maintained complete information and documents about the alleged transaction and the allegation on the assessee is that the said transaction is not reported in Form No.3CEB in its report prepared by the Auditor to be furnished under 92A of the Act relating to the international transaction. Now as per the discussion made above, we find that the alleged sum of Rs.4,07,42,345/- is basically in the nature of reimbursement of the amout received through debit notes for A.Y. 2009-10 to A.Y. 2014-15. In the given circumstances, it is quite possible that the Auditor did not treat it as an international transaction and has not mentioned in Form No.3CEB report. Further, 273B of the Act is clearly applicable in the instant case because for the alleged failure there was a reasonable cause on the part of assessee for not reporting the said transaction as it was not considered to be an international transaction. Under these given facts and circumstances where the transaction is alleged to have not been reported by the assessee in Form No.3CEB, we find the AO erred in visiting the assessee with penalty u/s.271AA of the Act without considering the fact that assessee has already offered the income in the preceding years and has excluded the same from the income declared during the year and the said amount was calculated on the directions of the DRP for A.Y. 2009-10 to A.Y. 2014-15 and therefore the said transaction is not in the nature of new international transaction which is Sequence Design (India) Pvt. Ltd. required to be reported in Form No.3CEB. Therefore, no penalty is leviable u/s.271AA of the Act and even the assessee deserves immunity from the levy of such penalty in view of section 273B of the Act. Impugned order is reversed and the grounds of appeal raised by the assessee are allowed.

In the result, appeal of the assessee is allowed.