SCHAEFFLER INDIA LTD. (FORMERLY KNOWN AS INA BEARING INDIA PVT. LTD.),VADODARA vs. THE ACIT, CICLE-1(1)(2) NOW DCIT, CIRCLE-1(1)(1), VADODARA

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3. The brief facts of the case are that the assessee filed its return of income at a loss of Rs. (-)19,80,74,542/-. The case was selected for scrutiny, and assessment under section 143(3) read with section 144C(3) of the Income Tax Act, 1961 (Act), was finalized on 29.05.2013, determining the assessed loss at Rs. (-)2,00,59,396/-. The assessee is engaged in manufacturing and trading in needle roller bearings and engine components. During the course of assessment proceedings, two main disallowances were made in the assessment order: a Transfer Pricing adjustment amounting to Rs. 17,15,40,000/- and a disallowance of additional depreciation on second-hand machinery valued at Rs. 64,75,146/-. As a result, penalty proceedings under section 271(1)(c) were initiated on the assessee. In appeal before CIT(A), since the assessee did not contest the disallowance of additional depreciation on second-hand machinery, penalty of Rs. 22,00,950/- under section 271(1)(c) was levied vide order dated 25.03.2015. In relation to the Transfer Pricing adjustment, Schaeffler India Ltd. vs. DCIT Asst.Year –2009-10 - 4– the assessee had entered into international transactions with associated enterprises amounting to Rs. 1,61,33,11,882/-. In the Transfer Pricing proceedings, the Transfer Pricing Officer (TPO), made an upward adjustment of Rs. 17,15,40,000/-. This included Rs. 12,45,49,000/- relating to manufacturing business and Rs. 4,69,91,000/- to the distribution segment. Based on the TPO’s order, the same amount was added to the assessee's returned income, and penalty proceedings under section 271(1)(c) were again initiated for furnishing inaccurate particulars. The assessee challenged the CIT(A)’s decision before the Hon'ble ITAT, which remanded the case back to the CIT(A) with directions to provide the assessee a proper opportunity of hearing. Following this, the CIT(A) passed an order dated 15.11.2016 directing the Assessing Officer to recompute the arm’s length price (ALP). Based on this, the DCIT, Pune, vide order dated 16.01.2017, revised the TP adjustment to Rs. 8,13,00,000/- for the manufacturing segment and deleted the Rs. 4,69,91,000/- adjustment for the trading segment. The assessee contended that the penalty of Rs. 22,00,950/- had already been deleted by the ITAT; however, this argument was not accepted by the Tax Authorities. The Assessing Officer held that the penalty imposed on the disallowance of depreciation was levied through a separate order dated 25.03.2015, and the assessee had not offered any explanation regarding the TP adjustment of Rs. 8,13,00,000/- . Therefore, the Assessing Officer held that this was a fit case for imposition of penalty under section 271(1)(c) for furnishing inaccurate particulars of income.

Schaeffler India Ltd. vs. DCIT Asst.Year –2009-10 - 5– 4. In appeal before the Commissioner (Appeals), the assessee contended that it had determined the Arm’s Length Price of its international transactions with Associated Enterprises using the Transactional Net Margin Method (TNMM), which was the most appropriate method under section 92C of the Act. For the purpose of benchmarking, the Assessee selected comparables by applying specific search filters, which were clearly specified in its transfer pricing study report. The Profit Level Indicator (PLI) was calculated using the Profit Before Depreciation, Interest, and Tax to Sales (PBDIT/Sales) ratio, primarily due to higher depreciation rates charged by the Assessee and underutilization of fixed assets compared to comparables. This computation yielded an average PLI of 5.38% for comparable companies, whereas the Assessee’s own PLI stood at 12.60%, indicating that the international transactions under the manufacturing segment were at arm’s length. The assessee submitted all relevant documents and justifications for its method and comparables during assessment. However, the Transfer Pricing Officer (TPO) disagreed with the assessee’s approach, thereby changing the comparable set by relying on data from the preceding year and rejecting certain filters, particularly the ones relating to manufacturing revenue percentage and turnover multiples. The TPO also rejected the use of PBDIT as the PLI and instead used Profit Before Interest and Tax (PBIT) to Sales, thus computing a lower PLI of -6.58% for the assessee and 4.11% for the comparable set, which led to an upward adjustment of Rs. 12.46 crore. The Assessee submitted before CIT(Appeals) that such rejection of its methodology and adjustments was not based on any Schaeffler India Ltd. vs. DCIT Asst.Year –2009-10 - 6– identified defects in the documentation or reasoning but reflected merely a difference in opinion. It was further pointed out that the assessee had made certain adjustments—such as excluding foreign exchange loss, bad debts, and provisions for obsolete inventory-on the grounds that these were already disallowed in the return of income and had been accepted in prior years. However, the TPO disallowed these adjustments in the relevant assessment year without justifying the inconsistency with past practice. The assessee argued that under Explanation 7 to section 271(1)(c), penalty for transfer pricing adjustments can be levied only if it is proven that the price charged was not determined in accordance with section 92C of the Act and not done in good faith and with due diligence. In this case, the AO failed to make any reference to Explanation 7 in the penalty order or record any findings suggesting non-compliance with these conditions. There was no claim by the AO or the TPO that the assessee’s selection of TNMM was inappropriate or that its method of determining ALP was not in accordance with section 92C of the Act. On the contrary, both the TPO and the ITAT, in the quantum proceedings, had accepted TNMM as the most appropriate method. Further, the Assessee contended before CIT(Appeals) that the search filters applied in selecting comparables by the assessee were consistent with judicial precedents and were applied in good faith. The filter for 90% minimum manufacturing revenue was based on the fact that 100% of the Assessee’s revenue in the relevant segment came from manufacturing. Although the Department chose to apply a 75% threshold, this was merely a difference in opinion rather than a finding of fault or inaccuracy in the assessee’s approach. In support of its decision to use Schaeffler India Ltd. vs. DCIT Asst.Year –2009-10 - 7– PBDIT/Sales as the PLI, the assessee supported this position on various grounds such as the charging of depreciation at higher-than-standard rates, substantial recent expansion, and underutilization of capacity—all of which distorted the depreciation figures relative to comparable companies. The assessee also submitted that section 271(1)(c) does not authorize the imposition of penalty merely because the explanations offered by the assessee are not accepted by the AO. There was no concealment of income or furnishing of inaccurate particulars; all material facts and explanations were duly submitted and no part of the information was found to be false or misleading. The assessment itself was concluded after considering the submissions and documents provided by the Assessee. Therefore, while the AO might have valid grounds for making additions during regular assessment, the imposition of penalty required a higher threshold-namely, proof of concealment or lack of bona fides-which was absent in this case. The Assessee relied on judicial pronouncements in support of the contention that even if the claim is ultimately rejected or found not in accordance with the law, no penalty can be levied if the assessee has disclosed all facts and provided a bona fide explanation. Therefore, the assessee submitted that the penalty imposed by the AO was unwarranted and deserved to be deleted.

Schaeffler India Ltd. vs. DCIT Asst.Year –2009-10 - 8– “1. Section 271(1)(c) states: 271. (1) If the Assessing Officer or the33-34 [Joint Commissioner (Appeals) or the] Commissioner (Appeals) or the Principal Commissioner or Commissioner in the course of any proceedings under this Act, is satisfied that any person— (a) [***] (b) has failed to comply with a notice under sub-section (2) of section 115WD or under sub-section (2) of section 115WE or under sub-section (1) of section 142 or subsection (2) of section 143 or fails to comply with a direction issued under subsection (2A) of section 142, or (c) has concealed the particulars of his income or furnished inaccurate particulars of such income, or Sections clearly states that If the Assessing Officer or the33-34 [Joint Commissioner (Appeals) or the] Commissioner (Appeals) or the Principal Commissioner or Commissioner in the course of any proceedings under this Act, is satisfied that any person) has concealed the particulars of his income or furnished inaccurate particulars of such income, shall be liable for penalty u/s 271(1)(c) of the Income Tax Act 1961 and in the present case the assessee has furnished inaccurate particulars as the addition has also been confirmed by the Hon'ble ITAT. In the light of the above facts and discussions, this appellate authority upheld the penalty levied by the assessing officer amounting to Rs 2,76,33,870/- under section 271(1)(c) of the IT Act for furnishing inaccurate particular of income.

6. The assessee is in appeal before us against the aforesaid order passed by CIT(Appeals) confirming the levy of penalty u/s 271(1)(c) of the Act. Before us, the Counsel for the assessee primarily reiterated the arguments taken before CIT(Appeals). In response, the Ld. DR placed reliance on the observations made by the Assessing Officer and Ld. CIT(Appeals) in their respective orders.

Schaeffler India Ltd. vs. DCIT Asst.Year –2009-10 - 9– of the Act. The penalty in question was imposed in connection with a Transfer Pricing adjustment of Rs. 17.15 crore made in respect of the manufacturing and trading segments, which was based on (i) the TPO’s decision to use PBIT/Sales as the Profit Level Indicator (PLI) instead of PBDIT/Sales as adopted by the Assessee, (ii) changes in the filters and comparables used for benchmarking, and (iii) adjustments made to the operating profit computation by excluding items such as liabilities written back, bad debts written off, and provisions for doubtful debts. The penalty was levied only on the ground that the adjustments made by the TPO were upheld by the CIT(A) and partly confirmed by the ITAT. However, we note that the assessee had furnished relevant details in the return of income, the transfer pricing study report, and during the course of assessment and penalty proceedings, none of which were found to be inaccurate or false. The TNMM was accepted by the TPO as the most appropriate method, and the adjustments arose on account of differences in interpretation, such as the use of PBIT versus PBDIT as the PLI, and in the treatment of certain operating items-issues which in our view are debatable. We note that several judicial precedents, including CIT vs. Reliance Petroproducts (P) Ltd (2010) 189 Taxman 322 (SC), Mastek Ltd vs. DCIT (2012) 28 taxmann.com 292 (ITAT Ahd), and PCIT vs. Global Vantedge (P) Ltd (2018) 95 taxmann.com 377 (Delhi HC) have held that mere differences in opinion or debatable issues should not attract penalty. In the instant case penalty was levied for furnishing inaccurate particulars of income, despite there being no specific finding by the Tax Authorities that the ALP was not computed in good faith or without due diligence. Moreover, Schaeffler India Ltd. vs. DCIT Asst.Year –2009-10 - 10– Explanation 7 to section 271(1)(c), which specifically governs penalty in transfer pricing cases, was neither invoked during the initiation nor discussed while levying the penalty. In the case of Chegg India (P) Ltd vs. ACIT (2021) 126 taxmann.com 272 (ITAT Delhi) and ITO vs. Carraro Technologies India (P) Ltd (2019) 102 taxmann.com 541 (ITAT Pune), it has been held that non-invocation of Explanation 7 makes the penalty unsustainable in transfer pricing matters. In the case of Principal Commissioner of Income Tax-2 vs. Sinosteel India (P.) Ltd. [2019] 102 taxmann.com 610 (Delhi)[03-08-2018], the High Court held that Explanation 7 to section 271(1)(c) states that penalty is not to be imposed where assessee establishes that price charged or paid was computed as per provisions of section 92C and assessee had acted in good faith and with due diligence and conduct of assessee is distinguishing and relevant factor to be adjudicated in penalty proceedings thus, as in present case assessee acted in good faith no penalty under section 271(1)(c) should be imposed. While passing the order, Hon'ble High Court made the following observations:

16. Explanation 7 to section 271(1)(c) of the Act reads:- "Explanation 7.—Where in the case of an assessee who has entered into an international transaction or specified domestic transaction defined in section 92B, 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, addition or disallowance made while computing the income under section 92C of the Act, is deemed to be concealed income or income of which inaccurate particulars have been furnished. Explanation 7 however states that penalty is not to be imposed where the assessee establishes that the price charged or paid was computed as per provisions of Section 92C and the assessee had acted in good faith and with due diligence. Conduct of the assessee is the distinguishing and relevant factor to be adjudicated in the penalty proceedings. Onus to establish bona fides and exercise of due diligence is on the assessee. Explanation of the assessee on the computation of arms length price may be the same, but appreciation and consideration is from a different point of view, i.e. bona fides and due diligence.

Schaeffler India Ltd. vs. DCIT Asst.Year –2009-10 - 12– 8. In the instant case, the assessee had used a prescribed method (TNMM) under section 92C of the Act and disclosed the selection of filters, comparables, and operating margin computation in the transfer pricing study report. Neither the TPO nor CIT(A) ever held that the ALP was computed outside the statutory provisions, or that the study report lacked diligence or was not prepared in good faith. In view of these facts and the settled legal position, in our view the necessary conditions under Explanation 7 for imposing penalty are not satisfied. Accordingly, we hold that the penalty levied by the AO is unsustainable in law and is hereby deleted. Since, we have given our findings on merits of the case, the other technical grounds raised by the assessee on jurisdiction are not being separately adjudicated.