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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI G. MANJUNATHA & SHRI RAVISH SOOD
IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, MUMBAI
BEFORE SHRI G. MANJUNATHA, ACCOUNTANT MEMBER & SHRI RAVISH SOOD, JUDICIAL MEMBER
Sl. ITA / CO No. A.Y Appellant Respondent No. 1 6267/Mum/2018 2009-10 DCIT – (LTU) -1 Reliance Industries World Trade Centre, Ltd, 3rd Floor, Maker Centre No -1, 2 6268/Mum/2018 2008-09 29th Floor, Cufee Chamber IV, Parade, Mumbai – Nariman point, 400 005. Mumbai – 400 021. 3 6269/Mum/2018 2007-08
4 CO.243/Mum/2019 2007-08 Reliance Industries DCIT – (LTU) -1 (In ITA No. Ltd, World Trade 3rd Floor, Maker 6269/Mum/2018) Centre, 5 CO.244/Mum/2019 2008-09 Chamber IV, Centre No -1, 29th Floor, Cufee (In ITA No. Nariman point, 6268/Mum/2018) Mumbai – 400 021. Parade, Mumbai – 400 005. 6 CO.245/Mum/2019 2009-10 (In ITA No. 6267/Mum/2018) �थायी लेखा सं./जीआइआर सं./PAN/GIR No. : AAACR5055K अपीलाथ� ओर से / Appellant by : Shri Jitendra Yadav & Shri Jitendra Jain ��यथ� क� ओर से/Respondent by : Shri H.N. Singh (CIT-DR)
सुनवाई क� तारीख / Date of Hearing 11/12/2019 घोषणा क� तारीख /Date of Pronouncement 04/03 /2020 आदेश / O R D E R PER G. MANJUNATHA- AM:
These three appeals filed by the Revenue and three Cross Objections filed by the assessee are directed against
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- 2 - separate, but identical orders of the Ld. CIT(A) -57, Mumbai, all dated 20.08.2018 and they pertains to the A.Ys 2007-08-, 2008-09 and 2009-10. Since, the facts are identical and issues are common, for the sake of convenience, these appeals were heard together and are disposed of by this consolidated order.
The revenue, has more or less raised common grounds of appeal for all assessment years. Therefore, for the sake of brevity, grounds of appeal filed for A.Y 2008-09 in ITA No.6268/Mum/2018 are reproduced as under:
“1. Whether, on the facts and in the circumstance of the case and in law, the Ld. CIT(A) erred in applying the CBDT Circular 25/2015 dated 31.12.2015 even though the assessee was assessed to pay tax under the normal provisions of the Act in original assessment order?. 2. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is right in deleting the penalty levied u/s 271(1)(c) of the Act on account of disallowance of depreciation on steel purchase even though the AO, in assessment order, held already capitalized assets to be non- genuine? 3. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is right in deleting the penalty levied u/s 271(1)(c) of the Act on account of disallowance of professional fees paid to Shri S.K. Gupta Group of Companies, even though the documentary evidence regarding rendering of
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- 3 - services seized during search operation manifested that professional fees paid by the appellant was bogus, as no relevant services were rendered by such companies? 4. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is right in deleting the penalty levied u/s 271(1)(c) of the Act, on account of addition made u/s 92C of the Act even though assessee furnished inaccurate particulars of income and concealed the particulars of income, and did not submit any new facts / material to substantiate its claim for non- levy of penalty. 5. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the penalty u/s 271(1)(c) of the Act even though the A.O duly substantiated that assessee had knowingly and deliberately made false claims and furnished inaccurate particulars of his income?
The assessee, has more or less raised common grounds of cross objection for all assessment years. Therefore, for the sake of brevity grounds of cross objections filed for the A.Y 2008-09 in cross objection No. 244/Mum/2019 are reproduced as under:
“1. Whether, on the facts and in the circumstance of the case and in law, the Ld. CIT(A) erred in applying the CBDT Circular 25/2015 dated 31.12.2015 even though the assessee was assessed to pay tax under the normal provisions of the Act in original assessment order?. 2. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is right in deleting the penalty levied u/s 271(1)(c) of the Act on account of disallowance of
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- 4 - depreciation on steel purchase even though the AO, in assessment order, held already capitalized assets to be non- genuine? 3. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is right in deleting the penalty levied u/s 271(1)(c) of the Act on account of disallowance of professional fees paid to Shri S.K. Gupta Group of Companies, even though the documentary evidence regarding rendering of services seized during search operation manifested that professional fees paid by the appellant was bogus, as no relevant services were rendered by such companies?
Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is right in deleting the penalty levied u/s 271(1)(c) of the Act, on account of addition made u/s 92C of the Act even though assessee furnished inaccurate particulars of income and concealed the particulars of income, and did not submit any new facts / material to substantiate its claim for non- levy of penalty.
Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the penalty u/s 271(1)(c) of the Act even though the A.O duly substantiated that assessee had knowingly and deliberately made false claims and furnished inaccurate particulars of his income?
The brief facts of the case extracted from ITA No. 6268/Mum/2018 for the A.Y 2008-09 are that, the assessee is a public limited company, engaged in the business of oil exploration, manufacturing and trading of petro chemicals, polyester, fiber intermediate textiles, generation and distribution of power and operation of jetties
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- 5 - and related infrastructure and investment activities. The assessee has filed its return of income for the A.Y 2008-09 on 30.09.2008 declaring total income at Rs. 7846,22,57,374/- under normal provisions of the Income Tax Act, 1961, and Rs. 22944,76,85,176/- under the provisions of Sec. 115JB of the Act. The assessment has been completed u/s 143(3) of the Act, on 31.08.2010 determining the total income at Rs. 9033,85,80,777/- under normal provisions of the Act, and Rs. 23069,36,91,462/- under the provisions of Sec. 115JB of the Act, by making various additions, including additions towards disallowance of depreciation on steel purchases, disallowance out of professional fees paid to various parties and additions towards transfer pricing adjustment u/s 92C of the Act, towards interest on loan to subsidiaries.
Thereafter, the A.O has initiated penalty proceedings u/s 271(1)(c) of the Act, with reference to additions / disallowance made in the assessment order, and called upon the assessee to explain as to why penalty shall not be levied for concealment of particulars of income and for furnishing inaccurate particulars of income. In response, the assessee vide letter dated 14.03.2014 has filed a
ITA Nos. 6267 to 6269/Mum/2018 & CO Nos. 243 to 245/Mum/2019
- 6 - detailed written submissions and explained that concealment of penalty provided u/s 271(1)(c) is not attracted in respect of additions made towards disallowance of depreciation on steel purchase, additions towards disallowance out of professional charges paid to various parities and additions towards transfer pricing adjustment u/s 92C of the Act, in respect of interest on loan to subsidiaries. The Ld. A.O did not find merit in the submissions of the assessee and by following various judicial precedents, including the decision of Hon’ble Supreme Court in the case of Union of India Vs. Dharmendra Textile Pvt Ltd. and others (306 ITR 277) has held that the assessee company has filed inaccurate particulars of its income and concealed the particulars of its income within the meaning the Sec. 271(1)(c) read with explanation (1) thereto of the Act, in respect of additions made towards disallowance of depreciation on steel purchase, disallowance out of professional fees paid to various parties and additions towards transfer pricing adjustment on account of interest on loans to subsidiaries. Therefore, he opined that it is a pit case for levy of penalty u/s 271(1)(c) read with explanation (1) of the Act thereto and accordingly levied penalty of Rs. 5,48,58,500/- which is
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- 7 - equal to 100% of tax sought to be evaded for furnishing inaccurate particulars of income.
Aggrieved by the penalty order, the assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee has challenged levy of penalty u/s 271(1)(c) of the Act, on the ground that the A.O has levied penalty u/s 271(1)(c) read with explanation (1) thereto which is applicable for concealment of particulars of income, whereas, while concluding penalty proceedings, he had levied penalty for furnishing inaccurate particulars of income. On merits, the assessee has submitted that it has neither concealed particulars of income nor furnished inaccurate particulars of income, but the additions made during assessment proceedings in respect of disallowance of depreciation on steel purchases was only on account of different view taken on same set of facts which could be at best be termed as difference of opinion and certainly not furnishing of inaccurate particulars of such income. The assessee, further, submitted that in respect of other additions made by the A.O towards disallowance of professional fees, the Ld. CIT(A) has set said the issue to the file of the A.O to decide the matter afresh after hearing the assessee,
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- 8 - therefore, once the issue has been set aside, the penalty thereto cannot be levied for furnishing inaccurate particulars of income. In so far as, additions towards transfer pricing adjustment u/s 92C of the Act, towards interest on loan to subsidiaries, the assessee submitted that the issue is debatable, because there are divergent views where, some courts and tribunals have held in favoure of the assessee that said transactions are not an international transactions, consequently transfer pricing adjustment cannot be made on loans to subsidiaries, whereas, in some cases the issue has been decided in favoure of the revenue and held that transaction requires transfer pricing adjustment in respect of loans to subsidiaries. Therefore, from the above it is very clear that, the matter is debatable and always two views are possible, therefore, on such issues penalty cannot be levied u/s 271(1)(c) of the Act, when the assessee has declared necessary facts for computation of income in the return filed for the relevant assessment years.
Ld. CIT(A) after considering the submissions of the assessee and also taken note of the fact that the ITAT has deleted penalty levied on disallowance of depreciation on
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- 9 - steel purchase for A.Y 2003-04 to 2006-07 in ITA No. 7219 to 7221/Mum/2011, vide order dated 11.12.2013, has deleted penalty levied on additions towards depreciation on steel purchases. In so far as, additions towards disallowance of professional fees, the Ld. CIT(A) has deleted penalty on the ground that once the issue has been restored back to the file of the A.O for deciding the issue afresh, the penalty on such additions cannot be survived in view of the decision of Hon’ble Gujarat High Court in the case of Ranchhodbhai Haribhai Jadav Vs ACIT (238 ITR 949), accordingly deleted penalty levied by the A.O. As regards, penalty levied on transfer pricing adjustment in respect of interest on loans to subsidiaries, the Ld. CIT(A) by following various judicial precedents including the decision of ITAT Delhi in the case of HCL Perot Systems Ltd., Vs. ACIT (supra) held that once the issue is debatable, the assessee contention cannot be shut down that it has disclosed necessary facts in respect of loans in the return of income, simply because in assessment transfer pricing adjustment made by the A.O has been upheld by the Tribunal. He, further, noted that, finding in assessment proceedings cannot be the sole basis to justify imposition of penalty and also observed that in the instant case where assessee acts
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- 10 - in a bonafide manner / in good faith and exercise do diligence, no penalty can be levied even transfer pricing adjustment has been sustained by the appellate authorities. Accordingly, deleted penalty levied by the A.O. Aggrieved by the CIT(A) order, the Revenue is in appeal before us.
The Ld. DR submitted that, the Ld. CIT(A) has erred in deleting the penalty levied u/s 271(1)(c) of the Act, in respect of disallowance of depreciation on steel purchases, even though the A.O has brought out clear facts to the effect that steel purchase has been capitalized into fixed asset with a non-genuine transactions and the said additions has been finally confirmed by the Tribunal. The Ld. DR further submitted that, the Ld. CIT(A) has erred in deleting penalty in respect of disallowance of professional fees paid to Shri S.K. Gupta Group of Companies, even though the documentary evidence regarding rendering of services seized during the search operation manifested that the professional fees paid by the assessee was bogus, as no relevant services were rendered by such companies. He further submitted that, as regards additions towards transfer pricing adjustments, the Ld. CIT(A) has failed to appreciate the facts in right perspective of provisions of Sec.
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- 11 - 92C of the Act, even though the assessee has furnished inaccurate particulars of income and concealed the particulars of income and also did not submit any new facts / materials to substantiate its claim for non levy of penalty. Therefore, he submitted that the Ld. CIT(A) has deleted penalty without considering relevant facts and hence the penalty levied by the A.O should be upheld.
The Ld. AR for the assessee, on the other hand, strongly supporting the order of the Ld. CIT(A), submitted that, in so far as, penalty levied on additions towards depreciation on steel purchases, the issue has been covered in favoure of the assessee by the decision of the ITAT in assessee’s own case for A.Y 2003-04 to 2006-07 in ITA Nos. 7219 to 7221/Mum/2011, where under identical set of facts the penalty levied has been deleted. In so far as, additions towards disallowance of professional fees paid to Shri S.K Gupta Group of Companies, the ITAT has deleted quantum disallowances made by the A.O in ITA No. 4361/Mum/2012, vide order dated 12.04.2017 and once additions has been deleted, penalty levied on said addition cannot survive in the eyes of law. As regards penalty levied towards transfer pricing adjustment on loans to
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- 12 - subsidiaries, the Ld. AR of the assessee submitted that the issue involved is a highly debatable which is evident from the fact that the Hon’ble Bombay High Court vide its order dated 02.11.2019 in the case of Piramal Glass Ltd., Vs. DCIT in income tax appeal No. 1255 of 2017 has admitted the question of law on whether transfer pricing adjustment is required to be made on loans given to the AE to increase and expand the business of the assessee. He, further, submitted that admission of this appeal indicates that the question is an arguable point in law on which two views are possible and therefore, it is not a case of penalty u/s 271(1)(c) of the Act. In this regard, he relied upon the decision of Delhi Tribunal in the case of HCL Perot Systems Ltd., Vs. ACIT in ITA No. 2200/Del/2011. He, further submitted that the Hon’ble Bombay High Court in the case of PCIT Vs. Dhariwal Industries Ltd., in income tax appeal No. 1133 of 2016 held that, when question of law is admitted there is no question of levying penalty. In this case, on perusal of details, it is noted that there are divergent views in respect of transfer pricing adjustment on loans to subsidiaries, where in some cases the issue has been decided in favoure of the assessee and in some cases the issue has been decided in favoure of the revenue. But,
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- 13 - the fact remains that the substantial question of law has been admitted by Hon’ble Jurisdictional High Court and hence, from the above it is very clear that the matter is highly debatable and always two views are possible. Once the matter is debatable and two views are possible, then on such issues penalty provided u/s 271(1)(c) of the Act for concealment of income or furnishing inaccurate particulars of income cannot be levied. In this regard, he has filed a detailed written submissions which has been reproduced as under:
“7. Our submissions, in the alternative and without prejudice to each other, on why the penalty deleted by CIT(A) should not be reinstated are as under: a) It is respectfully submitted that the Hon'ble Bombay High Court vide its latest order dated 8th November 2019 in the case of Piramal Glass Limited vs The Deputy Commissioner of Income Tax (INCOME TAX APPEAL NO. 1255 OF 2017) has admitted the question of law on whether transfer pricing adjustment is required to be made on loans given to the AE to increase and expand the business of the Assessee. It is submitted that as narrated in our case, the Assessee had also lent money to its AE on account of business expediency. It is further submitted that admission of this appeal indicates that the question is an arguable point in law on which two views are possible and therefore it is not a case of penalty u/s 271(1)(c) of the Act. On similar lines, the Delhi Tribunal in the case of Perot Systems TSI (India) Pvt Ltd v/s ACIT [ITA No. 2200 and
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2201/De1/2011] has deleted the penalty and held that since the TP adjustment on the issue of interest free loan is admitted as substantial question of law no penalty can be levied. That is further fortified by the jurisdictional High Court in the case of The Pr. Commissioner of Income Tax vs. Dhariwal Industries Ltd. [INCOME TAX APPEAL NO. 1133/1136/1129 OF 2016] that when question of law is admitted, there is no question of levying penalty.
c) It is submitted that the return of income u/s 139(1) for A.Y. 2008- 09 was filed on 30-09-2008. The issue whether TP adjustment can be made in respect of interest free loan to a subsidiary is a subject matter which falls into debatable issue. This is evident from the fact that the ITAT had to constitute a Special Bench of 3 members to adjudicate the said issue. The Special Bench, after deliberating in depth various arguments, in the case of Instrumentarium Corporation Ltd. v. ADIT reported in [2016] 71 taxmann.com 193 (Kolkata - Trib.) (SB) on 15th July 2016 held that _ Such a transaction requires TP adjustment. The Hon'ble Bombay High Court in the case of Tooltech Global Engineering (P) Ltd. vs. ACIT reported in (2018) 254 TAXMAN 0241 (Bombay) on 5th March 2018 has also held that such a transaction requires TP adjustment.
b) It is settled position of law as held by the Hon'ble Supreme Court in Brij Mohan v. CIT reported in 120 ITR 1 and CIT v. Onkar Saran & Sons reported in 195 ITR I that law on the date of filing the return should be seen for adjudicating whether penalty should be levied. It is, therefore, respectfully submitted that at the point of filing of return of income, the issue was a debatable one and has achieved finality much later. Further the TP provisions were first introduced in the statute in the current format in FY 01-02 and the law was in an incipient stage at the point of filing return of income for FY 06-07 when the issues first arose. In fact the first assessment cycle under the TP provisions for AY 2002-03 was completed by 31St
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March 2005 and hence by the time of filing the return of income for AY 2008-09, there was not much judicial clarity available. Further no guidelines were issued by the CBDT on this issue. It is therefore submitted that as the issue is a debatable issue, penalty u/s 271(1)(c) should not be levied.
d) The assessee had advanced interest free loan to RIME DMCC for expanding itself in the international market through acquisition of majority stake in GAPCO Group which was engaged in marketing of petroleum products in African countries. (Refer pgs 230-231 of the paper book.) The said explanation has not been disputed by the Revenue authorities. This transaction amounts to capital financing and the said capital financing was brought within the definition of "international transaction" by inserting Explanation to section 92B by the Finance Act, 2012 w.r.e.f. 01-04-2002. It is submitted that no penalty should be levied on account of retrospective amendment which amendment was not available at the time of filing the return and the assessment order. Reliance is placed on the decision of the Hon'ble Supreme Court in the case of CIT v. Hindustan Electro Graphites Ltd., reported in 243 ITR 48. d) It is further submitted that even post retrospective amendment, the Hon'ble Tribunal in the case of Siro Clinpharm Pvt. Ltd., ITA 2618/M12014 has held that the retrospective amendment to the definition of "international transaction" by the Finance Act, 2012 would be applicable only post 2012 and not prior thereto. This also shows that even after the retrospective amendment the issue is highly debatable. e) It is submitted that the Petitioner had Dusiiic5.5 rciationchip with its AE, RIME DMCC since the Petitioner had sold high-speed diesel, aviation turbine fuel and motor spirit as evident from pgs 203, 204, 214, 216 and 218. It is submitted that if an interest free loan is given to its
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subsidiary with whom the assessee has business relationship then the parameters relevant for making adjustment on account of pure lending would not be applicable because even in case of business relationship with non-related parties, a businessman would give interest free loan looking at his business interests. Therefore, no TP adjustment could be made as held by the Ahmadabad Bench of the Tribunal in the case of Micro Inks Ltd. V. ACIT reported in 157 TTJ 289 and the discussion is at paras 10 to 17 where on an identical situation no adjustment was made on account of interest free loan because of business transactions. Similar view is also taken in the following decisions
• Ucal Fuel Systems Ltd vs The Asst. Commissioner of Income-tax [I.T.A.No.688/Mds/2014, 723, 724 &725/Mds/2015] • The Bombay Dyeing & Mfg. Co. Limited vs Dy. Commissioner o f I n c o m e T a x , R a n g e 2 ( 1 ) ( 1 ) , M u m b a i [ I T A N o . 1716/Mum/2017] • DLF Hotel Holdings Ltd. vs DCIT, Circle-10(1), New Delhi [I.T.A .No.-6336/DeI/2012]
g) It is submitted that the AO has wrongly levied penalty under Explanation 1 to section 271(1)(c) for TP adjustment. In fact Explanation 7 to section 271(1)(c) provides for penalty on TP adjustment. Both the Explanations operate in two different fields and separate parameters are required to be tested for levying penalty under these 2 Explanations. Explanation 7 is a special provision dealing with penalty on transfer pricing adjustment whereas Explanation 1 is a general provision dealing with penalty on all types of additions/disallowances. Since Explanation 7 has been introduced for covering special circumstances, the general provision of Explanation 1 cannot be made applicable in case
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of TP adjustments. Special provisions will prevail over general provisions. Therefore, the penalty on this account is bad in law. It is submitted that on a true and proper construction and harmonious reading of section 271(1)(c) and section 92C, the penalty u/s section 271(1)(c) can be levied only if the exercise of transfer pricing adjustment is done by the AO and not when the said exercise is done by the TPO u/s 92CA, and the AO under the scheme of the Act has merely adopted what is stated by the TPO in his order. This is also fortified by Explanation 7 to section 271(1)(c) where the reference is to section 92C(4) which provides for adjustment to be made by the AO whereas the TPO makes adjustment u/s 92CA. It is submitted that it is the TPO who has done the exercise of TP adjustment, who can form a satisfaction on the ingredients of penalty. In the instant case, the exercise of TP adjustment is made by the TPO, and on a reading of the TPO's order the ingredients of satisfaction cannot be ascertained. However the AO, who has not done the exercise of TP adjustment, has initiated penalty. It is, therefore, submitted that in such a scenario penalty cannot be levied by the AO when the adjustment is made by the TPO and no satisfaction is recorded by the TPO. The AG will have power to levy penalty, if he himself does the exercise of TP adjustment u/s 92G. Reliance is placed on the decision of the Hon'ble Gujarat High Court in the case of Pankajbhai Shah v. ACIT reported in 110 taxmann.com 51 where the reassessment notice was issued by an officer who did not record the reasons but the reasons were recorded by another officer, and the Hon1ble Gujarat High Court quashed the reassessment proceedings on the ground that the person recording the reasons for escapement of income should be the same person who can issue
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reassessment notice. Further the legislature itself has provided for levy of penalty by the TPO under section 271G when the TP reference to the TPO is made by the AO and the Assessee fails to furnish information/documentation under section 92D(3).
i) It is further submitted that in the assessment order at pg 51 of the paper book no satisfaction can be said to have been recorded merely because the officer has written that penalty is to be initiated. The Hon'ble Delhi High Court in the case of Ms. Madhushree Gupta v. UQI reported in 317 ITR 107 at para 19 has held that even after insertion of section 271(1B) of the Act, the AG has to record prima facie satisfaction for initiating penalty. However on reading of the assessment order it is seen that no such prima facie satisfaction is recorded and therefore even on this account the penalty order is bad in law. Further the decision in the case of Zoom relied upon by the AO is not applicable to the facts of the present appeal. The Bombay High Court in the case of CIT v. Dalmia Dyechem Industries Ltd. reported in 377 ITR 133 has also negatived the contention of the Revenue that merely because less number of cases are selected for scrutiny and had it not been for scrutiny assessment the addition would have gone unnoticed. It is further submitted that the case of the Petitioner is assessed u/s 143(3) every year on its being an assessee falling under LTU. The case laws relied by the AG in the penalty
order are distinguishable on facts inasmuch as there is no suppression or concealment or furnishing of inaccurate particulars or making a wrong claim which is found to be false. There is no suppression, concealment or furnishing of
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inaccurate particulars nor the AG has stated as to what is the suppression, concealment or furnishing of inaccurate particulars and therefore even on this account the penalty is bad in law.
k. In any case, the TPG adopted 7.5% and benchmarked the transaction whereas the same was rejected by the ITAT and the has adopted LIBOR plus 150 to benchmark the transaction. It is submitted that on such an issue where there is a difference of opinion no penalty can be levied under section 271(1)(c) of the Act. It is further submitted that there has been a complete disclosure in the course of the assessment proceedings of the reasons for non-charging of interest and therefore the allegation of suppression, concealment or furnishing of inaccurate particulars does not arise. The initiation if at all was on the basis of ALP adjustment of 7.5% made by the TPO which has totally been rejected by the Tribunal who adopted LIBOR plus 150 bps. It is submitted that the AO/TPO have not recorded any satisfaction on LIBOR plus 150 bps and therefore penalty is bad in law. Even otherwise the approach of 7.5% is incorrect because the said interest rate of 7.5% is adopted by the TPO by taking the controlled transaction as a comparable.
i. It is further submitted that based on the above submissions, the assessee has discharged its onus cast by Explanation 7 to section 271(1)(c) of the Act which states that if the assessee acted in good faith and with due diligence then no penalty should be levied. m) In any view of the matter and without prejudice to above, it is submitted that the AG was not justified in levying penalty on TP adjustment of Rs. 9.22 cr. since the
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adjustment sustained after the Tribunal's order was Rs. 7.64 Cr. only.
n. Reliance is placed on following decisions where the penalty u/s Explanation 7 r/w 271(1)(c) was deleted on similar grounds as stated above: I. Giesecke and Devrient (I) Pvt. Ltd. v. DCIT reported in 53 CCH 240 (Del). ii. Harlcrow Consulting India Pvt. Ltd. vs. DCIT reported in 51 CCH 644 (Del). iii. Verizon Communication India P. Ltd. vs. DCIT reported in 33 CCH 277 (Del).
o) The show cause notice at page 6 of the paperbook shows that the AO has not struck off either of the limbs of Section 271(1)(c). Hence on this ground itself penalty under section 271(1)(c) cannot be levied. Reliance is placed in the following decisions - • CIT vs SSA's Emerald Meadows (SC). ITA No 380 of 2015 • CIT vs Samson Perinchery (SLP)(392 ITR 4) (BOM) • CIT vs Manjunatha Cotton & Ginning Factory (359 ITR 565) (Kar)
p) The final penalty is imposed by invoking Explanation 1 for furnishing inaccurate particulars of income. It is submitted that Explanation 1 does not apply for charging penalty for furnishing inaccurate particulars of income but same applies for concealment of particulars of income and therefore penalty is bad in law. Reliance is placed in the decision by the Kolkata Tribunal in the case of Chandra Prakash Bubna vs. Income Tax Officer, ward 27(3), Kolkata [ITA Appeal No. 289 (KOL.) of 2012].
In view of above, it is respectfully submitted that no
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- 21 - penalty can be confirmed on the TP adjustment made with respect to transaction of interest free loan given by the assessee to its AE, RIME DMCC.
We have heard both the parties, perused the material available on record and gone through orders of the authorities below. We find that, as regards, penalty levied on disallowance of depression on steel purchases, the issue has been considered by the Coordinate Bench of the ITAT in assessee’s own case for the A.Y 2003-04 to 2006-07 in ITA No. 7219 to 7221/Mum/2011, where under identical set of facts the penalty levied on additions towards depreciation on steel purchases has been deleted. This fact has not been disputed by the Ld. DR. Therefore, by following the decision of Coordinate Bench, in assessee’s own case for earlier years, we are of the considered view that the Ld. CIT(A) was right in deleting penalty on additions towards disallowance of depreciation on steel purchases and hence, we are inclined to uphold the finding and reject the ground taken by the Revenue.
10.1 In so far as, penalty levied on additions towards disallowance of professional fees, we find that the additions made by the A.O towards disallowance of professional fees
ITA Nos. 6267 to 6269/Mum/2018 & CO Nos. 243 to 245/Mum/2019
- 22 - to S.K Gupta Group of Companies has been finally deleted by the ITAT in quantum proceedings in ITA No. 4361/Mum/2012 vide order dated 12.04.2017, where the additions made by the A.O towards disallowance of profession fees has been deleted. Once the addition on which the penalty levied has been deleted by the appellate authorities, then penalty levied on said addition cannot survive. Therefore, we are of the considered view that there is no error in findings recorded by the Ld. CIT(A) while deleting penalty levied in respect of disallowance of professional fees and hence, we reject the ground taken by the Revenue.
10.2 As regards, the penalty levied on additions towards transfer pricing adjustment u/s 92C of the Act, towards interest on loans to subsidiaries, we find that although the A.O has levied penalty for furnishing inaccurate particulars of income, but fact remains that the assessee has disclosed necessary facts required for computation of total income in the return of income filed for the year which is evident from the fact that detailed note has been annexed to statement of total income filed for the year and explained the facts with regard to loans to subsidiaries. We further noted that
ITA Nos. 6267 to 6269/Mum/2018 & CO Nos. 243 to 245/Mum/2019
- 23 - whether transfer pricing adjustments can be made in respect of loans to subsidiaries when such loan has been given to the AE to increase and expand the business of the assessee is a debatable issue, which is evident from the fact that the Jurisdictional High Court of Bombay in the case of Piramal Glass Limited Vs. DCIT in income tax appeal No. 1255 of 2017 vide order dated 08.09.2018 has admitted the question of law on whether transfer pricing adjustment is required to be made on loans given to AE to increase and expand the business of the assessee. In this case, on perusal of facts, it is noted that the assessee had also lend monies to its AE on account of business expediency. Further, admission of appeal by the Hon’ble High Court indicates that the question is an arguable point in law, on which two views are possible and therefore, we are of the considered view that it is not a case for penalty u/s 271(1)(c) of the Act, for furnishing inaccurate particulars of income. In this regard, we took support from the decision of ITAT Delhi Bench in the case of HCL Perot Systems Ltd., Vs. ACIT (supra), where it has been held that since the transfer pricing adjustment on the issue of interest free loan is admitted as substantial question of law by the Hon’ble High Court, no penalty can be levied. This is further
ITA Nos. 6267 to 6269/Mum/2018 & CO Nos. 243 to 245/Mum/2019
- 24 - fortified by the decision of Jurisdictional High Court of Bombay in the case of PCIT VS. Dhariwal Industries Pvt Ltd., in Income Tax appeal No. 1133/1136/1129 of 2016, where it was held that when the question of law is admitted there is no question of levying penalty. We further noted that the issue whether transfer pricing adjustment can be made in respect of interest free loan to a subsidiary is a subject matter which falls into debatable issue. This is evident from the fact that the ITAT had constituted a Special Bench of three Members to adjudicate this addition. The Special Bench after deliberating in depth various arguments in the case of Instrumentarium Corp. Ltd., Vs. ADIT reported in (2016) 71 taxman.com 193 (Kol Trib) (SB), held that such a transition requires transfer pricing adjustment. Further, the Hon’ble Bombay High Court in the case of Tooltech Global Engineering Pvt Ltd., Vs. ACIT reported in [2018] 254 taxman 241 (Bombay) also held that such a transaction requires transfer pricing adjustment. Further, the ITAT, in the case of Siro Clinpharma Pvt. Ltd., in ITA No. 2618/Mum/2014 has held that the retrospective amendment to the definition of international transaction by the Finance Act 2012 would be applicable only post 2012 and not prior thereto. This is also shows that even after
ITA Nos. 6267 to 6269/Mum/2018 & CO Nos. 243 to 245/Mum/2019
- 25 - retrospective amendment the issue is highly debatable. Therefore, we are of the considered view that, once there are divergent views on the issue by various Courts and Tribunals, then it clearly shows that the said issue is debatable issue and always two views are possible. When the issue is debatable and always two views are possible, then on such issues the penalty provided u/s 271(1)(c) of the Act cannot be invited for furnishing inaccurate particulars of income.
10.3 It is settled position of law, has held by the Hon’ble Supreme Court in CIT Vs. Onkar Saran and Sons reported in 120 ITR 01 (SC) and CIT Vs. Onkar Saran & Sons reported 195 ITR 01 (SC) that law on the date of filing the return should be seen for adjudicating whether penalty should be levied. It is therefore, necessary to examine the position of law as prevailed at the time of filing of return of income to decide the issue whether said adjustment is required to be made and also it comes under the purview of the provisions of Sec. 271(1)(c) of the Act to levy of penalty for furnishing inaccurate particulars of income. It is an admitted fact that, at the time of filing of return of income the issue is debatable and which has attained finality
ITA Nos. 6267 to 6269/Mum/2018 & CO Nos. 243 to 245/Mum/2019
- 26 - much later. Further, the transfer pricing provisions were first introduced in the statue in the FY 2001-02 and the law was in an incipient stage at the point of filing return of income, when the issues first arose. In fact, the first assessment cycle under the transfer pricing provisions for A.Y 2002-03 was completed by 31.03.2005 and hence by the time, filing of return of income for A.Y 2008-09, there was not much judicial clarity on the issue. Further, no guidelines were also issued by the CBDT on this issue. From the above, it is very clear that the issue of transfer pricing adjustment u/s 92C of the Act, in respect of loans to subsidiaries is a debatable issue and on such issue penalty u/s 271(1)(c) of the Act should not be levied.
10.4 We further noted that the assessee had advanced interest free loan to its subsidiary for expanding itself in the international market for acquisition of majority stake in Gapco Group which was engaged in marketing of petroleum products in African countries. The said explanation has not been disputed by the revenue authorities and the transaction amounts to capital financing and the said capital financing was brought within the definition of international transaction by inserting explanation to Sec.
ITA Nos. 6267 to 6269/Mum/2018 & CO Nos. 243 to 245/Mum/2019
- 27 - 92B by the finance Act 2012 with retrospective effect from 01.04.2002. Until the retrospective amendment was brought to the provisions of Sec. 92B of the Act, there was no clarity on the issue whether it construeds an international transaction or not. Even after amendment there are certain judicial precedents which says that the amendment brought into the statue by the Financial Act 2012 with retrospective effect from 01.04.2002 is applicable only post 2012 and not prior thereto. Therefore, we are of the considered view that the matter involved in the present case i.e transfer pricing adjustment towards loan to subsidiaries is a debatable issue and there is always two views are possible. Once the issue is debatable and two views are possible and also said issue has been admitted by the Hon’ble High Court for deciding the question of law, then the same cannot be considered for the purpose of levying penalty u/s 271(1)(c) of the Act, for furnishing inaccurate particulars of income. We, further, noted that in any case the TPO adopted 7.5% rate of interest for bench marking the transaction, whereas the same was rejected by the ITAT and the ITAT has adopted LIBOR+150 basis to bench mark the transaction. Therefore, on this issue when there is a difference of opinion, no penalty can be levied u/s
ITA Nos. 6267 to 6269/Mum/2018 & CO Nos. 243 to 245/Mum/2019
- 28 - 271(1)(c) of the Act. We further noted that the assessee has disclosed complete details in respect of loans to subsidiaries and reasons for non-charging of interest on said loans. Therefore, the allegation of the A.O that the assessee has concealed particulars of income or furnished inaccurate particulars of income in respect of loans to subsidiaries is incorrect. Therefore, we are of the considered view that the assessee has discharged its onus cast upon by explanation 271(1)(c) of the Act, which states that, if the assessee acts with good faith and due diligence then no penalty should be levied. Hence, we are of the considered view that the A.O was erred in levied penalty u/s 271(1)(c) of the Act, in respect of transfer pricing adjustment made u/s 92C of the Act, towards interest on loan to subsidiaries. The Ld. CIT(A) after considering the relevant facts has rightly deleted penalty levied by the A.O, and hence, we are inclined to uphold the findings of the Ld. CIT(A) and reject ground taken by the Revenue.
In the result, the appeal filed by the Revenue is dismissed.
ITA Nos. 6267 to 6269/Mum/2018 & CO Nos. 243 to 245/Mum/2019
- 29 - ITA Nos. 6269 & 6267/Mum/2018
In these two appeals, facts are exactly identical to the facts and issues which we had already considered in ITA No. 6268/Mum/2018, except to the limited extent of determination of income for the year under the provisions of Section115JB of the Act. Therefore, the Ld. AR for the assessee has made an argument in light of CBDT Circular No. 25/2015 dated 31.12.2015 that if income tax payable on the total income as computed under normal provisions of the Act, is less than the tax payable on the book profits u/s 115JB of the Act, then the penalty u/s 271(1)(c) of the Act is not attracted with reference to additions / disallowances made under normal provisions of the Income Tax Act, 1961. The Ld. AR further submitted that in this case as per the latest order issued u/s 154 dated 20.07.2017, the assessee was assessed to tax under MAT provisions of 115JB of the Act and in view of Circular of CBDT No. 25/2015, no penalty can be levied in respect of additions made to the total income computed under normal provisions of the Income Tax Act, 1961.
Ld. DR on the other hand, fairly accepted that for these two years penalty levied by the A.O u/s 271(1)(c) of
ITA Nos. 6267 to 6269/Mum/2018 & CO Nos. 243 to 245/Mum/2019
- 30 - the Act, cannot be survived, because the income tax payable on the total income as computed under the normal provisions of the Act, is less than the tax payable on the book profits computed u/s 115JB of the Act.
We have heard both the parties, perused the material available on record and gone through orders of the authorities below. We find that the Hon’ble Delhi High Court in the case of CIT Vs. Nalwa Investments Ltd., [2010] 327 ITR 543 (Del) had considered on identical issue and after considering the relevant provisions of the Act, held that when tax payable on income computed under normal provisions of the Act is less than tax payable under the provisions of Sec. 115JB of the Act, then penalty u/s 271(1)(c) of the Act could not be imposed with reference to additions / disallowances made under normal provisions of the Income Tax Act 1961. The CBDT had issued a circular No. 25/2015 dated 31.12.2015, where it has accepted the judgment of Hon’ble Delhi High Court and accordingly issued a circular explaining the position of law before insertion of explanation 4 to sub Sec. (1) of Sec. 271(1)(c) of the Income Tax Act, 1961 by the Finance Act 2015, which provides for method of calculation of amount of tax sought
ITA Nos. 6267 to 6269/Mum/2018 & CO Nos. 243 to 245/Mum/2019
- 31 - to be evaded for situations, where the income determined under the normal provision is less than the income declared for the purpose of MAT provision u/s 115JB of the Act. Accordingly, it has clarified that where the income tax payable on the total income as computed under the normal provisions is less than the tax payable on the book profits computed u/s 115JB of the Act, then penalty u/s 271(1)(c) of the Act is not attracted with reference to additions / disallowances made under normal provisions of the Income Tax Act, 1961. In this case, it is an admitted fact that, as per the order of the A.O u/s 154 of the Act, dated 20.07.2016 the assessee was assessed to tax under provisions of 115JB of the Income Tax, 1961, although the A.O has made various additions towards total income computed under normal provisions of the Income Tax Act, 1961. Therefore, We are of the considered view that penalty u/s 271(1)(c) of the Act cannot be levied with reference to additions / disallowances made to income computed under normal provisions of the Income Tax Act, 1961.
We further noted that an identical issue has been considered by the coordinate Bench of the ITAT Mumbai in the case of Kapil Rayon India Pvt Ltd., Vs. ITO in ITA No.
ITA Nos. 6267 to 6269/Mum/2018 & CO Nos. 243 to 245/Mum/2019
5946/Mum/2018, where under identical set of facts it has been held that when income is computed under the provisions of Sec. 115JB of the Act, then penalty u/s 271(1)(c) of the Act cannot be levied in respect of additions made towards total income computed under the normal provisions of Income Tax Act, 1961. The relevant findings of the Tribunal are as under:
“7. We have heard both the parties, perused the material available on record and gone through orders of the authorities below. We find that the Hon’ble Delhi High Court, in the case of Nalwa sons Investments Ltd. Vs CIT (supra) held that when, the tax payable on income computed under normal provisions of the Act is less than, the tax payable under the deeming provisions of section 115JB of the Act, then penalty u/s 271(1)(c) of the I.T.Act, 1961 could not be imposed with reference to additions/disallowances made under normal provisions of the Act. The CBDT had issued a circular No. 25/2015, dated 31/12/2015, where it has accepted the judgment of Hon’ble Delhi High Court and accordingly, issued a circular explaining the position of law before insertion of Explanation 4 to sub section (1) of section 271(1)(c) of the I.T.Act, 1961 by the Finance, Act, 2015, which provide for method of calculating the amount of tax sought to be evaded for situations, where the income determined under the normal provision is less than the income declared for the purpose of MAT provisions u/s 115JB of the Act. Accordingly, it has clarified that where the income tax payable on the total income as computed under the normal provisions of the Act is less than the tax
ITA Nos. 6267 to 6269/Mum/2018 & CO Nos. 243 to 245/Mum/2019
- 33 - payable on the book profits u/s 115JB of the Act, then penalty u/s 271(1)(c) of the Act is not attracted with reference to additions/disallowances made under normal provisions of the Act. In this case, it is an admitted fact that the Ld. AO has made additions towards unexplained cash credit u/s 68 of the Act to income computed under normal provisions of the Act. Further, even after additions, the tax payable under normal provisions of the Act is less than, the tax payable under the provisions of section 115JB of the I.T.Act, 1961. Therefore, we are of the considered view that penalty u/s 271(1)(c) of the Act, cannot be levied with reference to additions/ disallowances made to total income computed under normal provisions of the Act. Hence, we direct the Ld. AO to delete penalty levied u/s 271(1)(c) of the I.T.Act, 1961
In this view of the matter and by following the decision of Coordinate Bench at ITAT, Mumbai in the case of Kapil Royan India Pvt Ltd., Vs ITO (Supra), we are of the considered view that the Ld. CIT(A) was right in deleting penalty levied u/s 271(1)(c) of the Act for A.Ys 2007-08 & 2009-10. Hence, we are inclined to uphold the findings of the Ld. CIT(A) and dismissed appeal filed by the Revenue for both assessment years.
As a result, appeal filed by the revenue for A.Y 2007- 08, 2008-09 and 2009-10 are dismissed.
ITA Nos. 6267 to 6269/Mum/2018 & CO Nos. 243 to 245/Mum/2019
- 34 - CO Nos. 243, 244 & 245/Mum/2018
The assessee has filed these cross objections in support of order of the Ld. CIT(A). Although, the assessee has filed one more ground challenging validity of penalty proceedings initiated u/s 271(1)(c) of the Act, in light of show cause notice issued by the A.O u/s 274 r.w.s 271 of the Act, but fact remains that the penalty levied by the A.O u/s 271(1)(c) has been deleted for all assessment years. Therefore, we are of the considered view that the Cross Objections filed by the assessee for all assessment years becomes infructuous and hence, the same were dismissed as not maintainable.
In the result, the appeals filed by the Revenue and Cross Objections filed by the assessee are dismissed.
This Order pronounced in Open Court on 04/03/2020
Sd/- Sd/- (RAVISH SOOD) ( G. MANJUNATHA ) JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, Dated 04/03/2020