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Income Tax Appellate Tribunal, AHMEDABAD “D” BENCH
Before: Shri Waseem Ahmed & Shri Siddhartha Nautiyal
आदेश/ORDER PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:-
These four appeals filed by assessee and four cross objections filed by revenue are against the order of the ld. Commissioner of Income Tax (Appeals)-13, u/s. 271(1)(c), vide order dated 25/07/2019 passed for the assessment years 2008-09 to 2011-12.
Since common facts and issues are involved for all years under consideration, all the appeals and Cross Objections are being disposed of by way of a common order. We shall start with assessment year 2007-08 as the lead year.
Assessment Year: 2007-08:
The assessee and the Department has filed appeal and cross objections respectively against the order of the ld. Commissioner of Income Tax (Appeals)-13, u/s. 271(1)(c), vide order dated 25/07/2019.
The assessee has taken the following grounds of appeal:-
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“Shell Global Solutions International B.V. ('Appellant') craves leave to prefer appeal against the order dated 25 July 2019 passed by the Commissioner of Income-tax (Appeals)-13, Ahmedabad ['the learned CIT(A)'] under Section 250 of the Income-tax Act, 1961 ('the Act'), in respect of order dated 20 July 2017 passed by the Deputy Commissioner of Income Tax, International Taxation -1, Ahmedabad ('the learned AO') under Section 271(l)(c) of the Act, on the grounds v. as set out herein:
The following grounds are independent and without prejudice to one another: “1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming levy of penalty under Section 271(l)(c) of the Act even in a situation wherein the learned AO in the notice issued under Section 274 r.w.s. 271(l)(c) did not specify under which limb of Section 271(l)(c) of the Act, penalty proceedings had been initiated. The Appellant, therefore, humbly submits that the said notice issued under Section 274 r.w.s. 271(l)(c) of the Act is bad in law and as such the entire penalty proceedings should be quashed.
On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming levy of penalty under Section 271(l)(c) of the Act on account of the transfer a pricing adjustment of Rs. 8,53,03,582 made in relation to the services rendered to Hazira LNG Private Limited and Hazira Port Private Ltd.
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On the facts and in the circumstances of the case and in law, in relation to the penalty levied on account of the transfer pricing adjustment, the learned CIT(A) has erred in confirming levy of penalty under Section 271(l)(c) of the Act even in a situation wherein the learned AO has neither referred nor relied upon Explanation 7 to Section 271(l)(c) at the time of initiation of the penalty proceedings under the Act.
On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming the levy of penalty under Section 271(l)(c) of the Act by holding that the Appellant has not acted in good faith and with due diligence and therefore would not get covered by the exception mentioned in Explanation 7 to Section 271(l)(c) of the Act.
On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming levy of penalty under Section 271(l)(c) of the Act on addition of Rs. 49,28,754 made on account of treating reimbursement of expenses as Fees for Technical Services under Article 12 of the India-Netherlands Tax Treaty.
The Appellant reserves the right to add, amend, alter or vary all or any of the above grounds of appeal as they or their representative may think fit.”
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The Department has taken the following cross objections:-
“a. On the facts and circumstances of the case and in law, whether the executed Power of Attorney notarized in The Netherlands is done in the presence of Diplomatic & Consular Officer authorized under Section 3 of the Diplomatic 85 Consular Officers (Oaths & Fees) Act, 1948 ; b. On the facts and circumstances of the case and in law, whether The Netherlands falls under the list of such nations which are authorized by the Central Government in Section 14 of the Notaries Act, 1952 ; c. On the facts and circumstances of the case and in law, whether the Power of Attorney has been stamped within 3 months after bringing it into India and if the same was done, whether done in the presence of Indian Diplomatic or Consular Officer ; d. On the facts and circumstances of the case and in law, whether the Power of Attorney has been executed in accordance with Section 26 of The Registration Act, 1908. e. On the facts and circumstances of the case and in law, whether the Power of Attorney has been executed in accordance with The Power of Attorney Act, 1882. f. On the facts and circumstances of the case and in law, whether the Power of Attorney is covered by the Hague Convention of 5 October, 1961 (Apostille Convention) g. On the facts and circumstances of the case and in law, whether the Power of Attorney falls within the definition of a Public document as
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defined in Section 74 of the Indian Evidence Act, 1872, in order to avail the benefit of the Hague Convention of 5 October, 1961 (Apostille Convention).”
The brief facts of case are that the assessee is a company incorporated as tax resident of Netherlands. The assessee is taxable on gross basis at the rate of 10% as per article 12 the India Netherlands Tax Treaty in India. During the year under consideration, the assessee rendered certain services to Hazira LNG Private Limited (HLPL) and Hazira Port Private Limited (HPPL) , which are the Associated Enterprises (AE’s) of the assessee in India. With respect to the services to the above Associated Enterprises, the assessee invoiced HLPL and HPPL at certain weighted average hourly rates, which are subject to tax at the rate of 10% of gross basis in the hands of the assessee as per the provisions of Article 12 of the India Netherlands Tax Treaty. The said receipts were benchmarked using comparable uncontrolled price (CUP) method. During assessment proceedings, AO observed that the assessee was charging higher price to third parties as compared to its Associated Enterprises for the same services. In this regard, it was submitted by the assessee before the Ld. Assessing Officer that income of the assessee qualifies as fee for technical services (FTS) under DTAA and the assessee being non-resident in India, the said receipts are chargeable to tax in India on gross basis at the rate of 10% under India Netherlands Tax Treaty. On the other hand, the Indian associated Enterprises being resident in India are chargeable at the rate of 32.66% including applicable surcharge and education cess. In view of the same, if the assessee would have charged a higher rate to the associated Enterprises, AE’s would have claimed
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deduction of higher expense and there would have been a reduction in the income tax of the AE’s and thereby resulting in loss of around 22.66% of tax to the Indian Revenue. Further, during the year under consideration, the assessee had incurred certain expenditure on behalf of its customers in course of rendering the contracted services, which have been recovered by the assessee at actual cost from its AE’s. These expenses are primarily direct and travel -related expenses. Total reimbursement of expenses received by the assessee amounted to � 49,28,754/- and hence not taxable in India.
The AO/TPO on consideration of the submissions filed by the assessee, proposed the following adjustments/addition to the draft assessment order:
(i) TP adjustment in relation to services rendered to HLPL and HPPL amounting to � 8,53,03,582/- (ii) Adjustment on account of the reimbursement of expenses � 49,28,754/-.
7.1 The AO also initiated proceedings against the assessee u/s 271(1)(c) of the Act in respect of the above adjustments. Aggrieved with the adjustment/addition made in the final assessment order, the assessee filed an appeal before the ITAT Ahmedabad. In the interim, on a similar issue a Special Bench was constituted before the Kolkata ITAT in the case of M/s Instrumentarium Corporation v. ADIT in ITA number 1549/Kol/2009, to
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consider this issue and the assessee also took part in the proceedings in the capacity of an intervener. However, the Kolkata ITAT Special Bench in the aforementioned case (reported in 71 Taxman.com 193 (Kolkata) decided the issue of “base erosion” against Instrumentarium and consequently also against the assessee. Subsequently, the ITAT Ahmedabad in the assessee’s own case, following the decision of Honourable Kolkata ITAT in the case of Instrumentarium case, rejected the argument of base erosion and dismissed the appeal of the assessee in quantum proceedings. Subsequent to order of ITAT Ahmedabad in the assessee’s own case, referred to above, the AO passed in order u/s 271(1)(c) of the Act levying penalty of � 89,90,233/- on the ground of furnishing inaccurate particulars of income.
In the appeal against the penalty order passed by the AO, the Ld. CIT(Appeals) dismissed the assessee’s appeal with the following observations:
Decision:
The contention of the Appellant is not accepted for tin following reasons. The argument of base erosion and reliance placed on Circular No. 14/2001 is of no help to the Appellant since the said arguments arc already considered and dealt in length by Hon'ble ITAT Kolkata Special Bench in the case of Instrumentarium (supra) and the same was further considered by the Hon'ble Ahmedabad ITAT in the case of the Appellant itself and it was held that arguments are of no help to the Appellant as there is no provision under the provisions of transfer
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pricing to give compensatory adjustment in the hands of the AE. In view of the same, even if the Appellant is charging lower fees for technical services to its Indian AEs and TP adjustment is proposed in the hands of the Appellant, no deduction can be claimed by the Indian AICs.
DRP has also rejected the argument of the Appellant on the ground that even if the principle of base erosion is accepted the same is of no help to the appellant as its Indian AEs i.e. both HLPL and HPPL are incurring huge losses. In response to the same, the Appellant has relied on the profits reported by the HLPL and HPPL in the subsequent years and on account of the said profits there would have been base erosion and Indian government would have suffered losses on account of higher deduction that would have been claimed by HLPL and HPPL. However, the said arguments of the Appellant will not be acceptable in light of the decision of the Hon’ble Special Bench and Ahmedabad ITAT mentioned supra that under Indian transfer pricing provisions, corresponding adjustment in the hands of the Indian AICs are not allowed. Reliance placed on the decision of Hon'ble Mumbai ITAT in the case of DCIT v RBS Equities India Ltd (141 TTJ 58) is of no help to the Appellant. In this case, Hon'ble ITAT has observed that the deeming fiction under Explanation 7 to Section 271(l)(c) of the Act cannot apply when assessee is able to show that price charged or paid in respect of related international transaction was computed in accordance with the scheme of Section 92C of the Act, and in the manner prescribed therein,
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in good faith and due diligence. However, as clearly mentioned above that both Special bench and Ahmedabad ITAT has already taken a view against the Appellant and hence now it cannot be claimed that the Appellant has acted in good faith and with due diligence.
Reliance is also placed on the various decisions to argue that penalty should not be levied when two views are possible. However, in the case of the Appellant, there is no difference of opinion as far as transfer pricing adjustment is concerned. Hence, all these decisions are of no help 10 the appellant.
Appellant has further submitted that it has reported all the transactions in Form No. 3CRB and provided detailed transfer pricing analysis and hence it has acted in good faith and with clue diligence is clearly not sustainable in law. Merely reporting of transaction in Form No. 3CKB but not giving effect to the transfer pricing analysis in the computation of income is of no help to the Appellant. Had case of the Appellant would not have been picked up for the transfer pricing assessment, returned income filed by the appellant would have been accepted and actual income at ALP would not have been brought under taxation. Hence, mere reliance placed by the Appellant on reporting with wrong treatment clearly proves that the Appellant has not acted in good faith and with due diligence.
In this regard the AO has rightly relied upon the following decisions: The Hon'ble Delhi High Court in the case of Commissioner of Income
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tax Vs. Zoom Communication (p). Ltd. (2010) 191TAXMAN 179 stated The Court cannot overtook the fact that only a small percentage of the income-tax returns are picked up for scrutiny. If the assessee makes a claim which is not only incorrect in law, but is also wholly without any basis and the explanation furnished by him for making such a claim is not found to be bona fide, it would be difficult to say that he would still nol be liable to penalty under section 271 (l)(c). If one takes the mew that a claim which is wholly untenable in law and has absolutely no foundation on which it could be made, the assessee would not be liable to imposition of penalty, even if he was not acting bona fide while making a claim of this nature, that would give a licence to the unscrupulous assessees to make wholly untenable and unsustainable claims without there being any basis for making them, in the hope that their return would not be picked up for scrutiny and they would be assessed on the basis of self assessment under section 143(1) and even if their case is selected for scrutiny, they can get away merely by paying the tax, which, in. any case, was payable by them. The consequence would be that the persons, who make claims of this nature, actuated by a mala fide intention to evade lax otherwise payable by them, would get away without paying the tax legally payable by them, if their cases are not picked up for scrutiny. This would take away the deterrent effect, which these penalty provisions in the Act have.
In the present case also, if the case of the Appellant would not have been selected for scrutiny, the concealed income would have escaped assessment.
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The appellant has submitted that since Hon'ble ITAT has decided this issue by placing reliance on the decision of Hon'ble Special Bench, therefore it is a clear case of two views and hence it is not a fit case for levy of penalty. However, the Appellant has not brought on record the conflicting decisions because of which the ease of the Appellant was referred to special bench. Cases can be referred to the Special Bench on account of special importance of the case. The Hon'ble Special bench heard this case on account of unique issue involved and impact of this issue on larger group of assessees. In view of the same, the said argument of the appellant is rejected.
…..
Thus, it is noted that the theory of base erosion has been dealt with by the special bench and rejected. Therefore, the said theory is not based on legal principles but on the effective result of transfer pricing adjustments on Indian and foreign entity which is not relevant while deciding an issue on legal principles as per the existing law.
…….
Further, mere admission of appeal by Hon'ble High Court does not justify that the issue involved was purely a question of law and hence penalty cannot be levied in such cases. This interpretation is just like putting an end to the penalty proceedings in each and every case where appeal is admitted before the High Court. That is never the intention of
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the law. Admission of any issue before Hon'ble High Court is just a fact that High Court has considered this issue to be dealt as per the provisions of the law. Hence, this argument is of no help to the Appellant.
……..
Appellant has further relied on the decisions of Mercer Consulting Consulting India Pvt. Ltd. v. DCIT |ITA No. 1085/Del/ 20 16 dalcd Cummins inc. v ADIT |1TA No. 2 181 /PN/20 I 3 - dated 29 July 2016 argue that in these cases, Hon'ble Tribunals have accepted the: principle of base erosion and hence this the ease where two views are possible and not a fit case for levy of penalty. However, both the decisions cannot come to the rescue of the appellant. In the case of the Mercer Consulting (supra), reduction in the income on account of application of arm's length principle was in the hands of the appellant. However, in the case of the- Appellant there is not reduction in the income in the hands of the appellant, income will reduce in the hands of the Indian AI.-C of the appellant. Hence, this decision is clearly distinguishable as compared to the facts of the appellant. In the ease of Pune Tribunal in the case of Cummins Ine (supra), was rendered post issue of order of Special Bench. However, hearing of Cummins Inc. was completed before issue of decisions of Special Bench. Hence, the AR of the Assessee and the department were not able to quote the decision of Special bench before Pune ITAT. Had this decision would have been quoted,
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decision of Hon'ble ITAT would have been different. In view of the same, the argument of the appellant that it's a case where two views arc possible, does not have any merits.
In view of the above, Ground No. 1, 4, 7 and 8 are dismissed.
Ground No. 3
I Ground No. 3 is dealing with taxability of reimbursement of expenses as Fees for Technical Services under Article 12 of the India-Netherlands tax treaty. As observed above that the appellant has not pressed this ground before ITAT on account of smallness of the amount. However, Hon'ble 1TAT has observed that mere not pressing this ground before Hon'ble ITAT should not be ground to confirm the penalty. However, in the absence of any substantial evidence for deletion of the penalty, order of the Act is confirmed. Since, there is specific observation of the ITAT, I would like to clarify that penalty is not sustained merely on account of not pressing the ground by the appellant before the ITAT. It is sustained on account of non submission of any satisfactory justification for non-levy of penalty.
12.2 In view of the above, Ground No. 3 is dismissed.
In the result, the appeal of the appellant is Dismissed.
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Before us, the counsel for the assessee primarily reiterated the submissions made before. Ld. CIT(Appeals), which can be summed up as below:
Reliance is placed on Circular No. 14/2001 read with section 92(3) of the Act to contend that the purpose of transfer pricing provisions is to be applied in the cases wherein there is overall reduction in the taxes in India. In the instant ease, if the Appellant would have charged higher amount of fees for technical services, MLPL and HPPL would have claimed equivalent amount of deduction. The appellant being a foreign company would have paid taxes at: the rate of 10 percent, and Indian company would have saved taxes at the rate of 30 percent, hence effectively Indian tax base would have eroded. 2. Computation of arm's length price of its international transaction is bonafide, in good faith and with due diligence. In this regard, reliance is placed on the losses incurred by the Indian AEs of the Appellant and argument that since the payee companies are incurring losses there is no loss to the Indian government. Further, reliance is placed on various case laws to argue that in the cases, where transfer pricing adjustment is proposed and if the Assessee is able to justify that entire analysis was bonafine, in good faith and was with due diligence, penalty cannot be imposed on the Assessee. 3. The Appellant has made adequate disclosures in Form No. 3CEB and TPSR and also during the course of transfer pricing assessment. 4. The case of the Appellant, case was decided by the decision of Hon’ble—Kolkata Tribunal, Special Bench in the case of
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Instrumentarium. Further, Hon'ble Pune Tribunal in the case of Cummins Inc. in the similar facts has decided in favour of the Assessee. In view of the same, it is a case where two views are possible and hence, penalty should be not levied on the Appellant.
Mere difference of opinion does not. justify levy of penalty. 6. Further, reliance was placed on Taxation Ruling No. 2007/ I issued by the Austrian Taxation Office. 7. The appeal of the Appellant against the order of Hon'ble Ahmedabad ITAT is already admitted before Hon'ble Gujarat High Court and hence penalty cannot be levied in such cases. Hence, this is the case of substantial question of law and penalty cannot be levied in such cases. 8. Explanation 7 to Section 271(l)(c) of the Act cannot be invoked while levying penalty in relation to the transfer pricing adjustment, when the said Explanation was neither referred in the notice issued under section 271(l)(c) of the Act nor relied upon at the time of initiation of the penalty proceedings under the Act.
In response, the Ld. DR placed reliance on the observations made by the CIT and AO in their respective orders while upholding levy of penalty.
We have heard the rival contentions and perused the material on record. During the course of arguments, the Bench called for further information with regard to the price being charged by the assessee to its Associated Enterprises for services rendered for the future assessment years
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in order to ascertain that the assessee was taking a consistent position, even for the years when the Indian Associated Enterprises of the assessee had started making profits that is to say that in the years when the Indian AE started making profits, the assessee continued to charge the AE’s at the same lower average weighted rate as compared to third parties (as was done in the impugned assessment year). The assessee, vide submission dated 3rd October 2022 confirmed that even in the years when the AE of the assessee had started making profits, the assessee was charging at the same weighted average rate for services rendered to them as in the earlier years when the AE’s were incurring losses. Accordingly, the assessee had taken a consistent position so far as the principal of base erosion is concerned, in instant set of facts. On the levy of penalty, we are in agreement with the arguments put forward by the counsel for the assessee to the effect that the assessee has consistently taken the position that the lower mark-up charged in respect of services rendered to associated enterprises, for the reason that transfer pricing provisions are not attracted in cases where there is no base erosion, so far as taxes are concerned. Further, we also observe that the assessee had made adequate disclosure of all the material facts in Form 3CEB, TPSR and also during the course of the transfer pricing assessment proceeding and scrutiny assessment proceedings. Therefore, there is no furnishing of any inaccurate particulars of income by the assessee. We also observe that it has been held by various Courts that Explanation 7 to Section 271(l)(c) of the Act cannot be invoked while levying penalty in relation to the transfer pricing adjustment, when the said Explanation was neither referred nor relied upon at the time of initiation of the penalty proceedings under the Act.
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Another noteworthy point is that in our view, the additions on which penalty has been levied is a debatable issue. This is evident from the fact that 'Base Erosion' issue was dealt by the Special Bench -Kolkata ITAT. Further, Pune ITAT has also upheld argument of Base Erosion and hence, two views are possible since at the time of hearing before Pune ITAT, it took an independent view since Kolkata SB decision was rendered after the Pune ITAT decision. The fact that Gujarat High Court has admitted the issue for consideration also supports the assessee’s contention that the issue involved is debatable. So far as penalty with regards to reimbursement of expenses is being treated as FTS is concerned, in our view, it is a debatable issue whether reimbursement of expenses qualifies as FTS and there are various decisions which have held that reimbursement of expenses does not qualify as FTS. Accordingly, we are of the considered view that no penalty can be levied u/s 271(1)(c) of the Act on account of treating reimbursement of expenses as FTS.
11.1 In view of the above, we are of the considered view, that in the instant set of facts, no penalty u/s 271(1)(c) of the Act is liable to be imposed on the assessee. Accordingly, we direct that the penalty u/s 271(1)(c) of the Act be deleted in the instant set of facts. 12. In the result, all grounds of appeal of the assessee are allowed.
Cross objections filed by the Department
In the cross objections filed by the Department, the Revenue has challenged the validity/veracity of power of authority notarised in the
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Netherlands and whether the same is valid and therefore, permits the counsel for the assessee to argue the case on merits.
At the outset, we note that the Cross objection is barred by 880 days. On being requisitioned, no substantial reason was given to account for the delay in filing of the Cross objection beyond the stipulated period. In fact, from the records we observe that no affidavit has been filed by the Department in support of the delay in filing the Cross objection by 880 days. In our considered view, in the instant facts, the Department has not brought on record any cogent reason for delay in filing of appeal. In the case of Tractors & Farm Equipments Ltd.[2007] 104 ITD 149 (Chennai) (TM), the ITAT held that where assessee justified delay of 310 days in filing appeal before Tribunal by stating that Commissioner (Appeals)’s order was misplaced and forgotten and when same was found while sorting out unwanted papers, steps were taken for preparation of appeal, the delay in filing of appeal before Tribunal could not be condoned as same was due to negligence and inaction on part of assessee and assessee could have very well avoided delay by exercise of due care and attention. While rejecting the assessee’s application for condonation of delay, the Tribunal made the following observations:
The delay cannot be condoned simply because the appellant’s case is hard and calls for sympathy or merely out of benevolence to the party seeking relief. In granting the indulgence and condoning the delay, it must be proved beyond the shadow of doubt that the appellant was diligent and was not guilty of negligence, whatsoever. The sufficient
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cause within the contemplation of the limitation provision must be a cause which is beyond the control of the party invoking the aid of the provisions. The cause for the delay in filing the appeal, which by due care and attention, could have been avoided, cannot be a sufficient cause within the meaning of the limitation provision. Where no negligence, or inaction, or want of bona fides can be imputed to the appellant, a liberal construction of the provisions has to be made in order to advance substantial justice. Seekers of justice must come with clean hands.
In the instant case, the assessee justified the delay only with reference to the affidavit of its director. In the said affidavit it was stated that the Commissioner (Appeal)’s order was misplaced and forgotten. It was found while sorting out the unwanted papers and thereafter steps were taken for the preparation of the appeal and consequently the delay was caused. That clearly showed that the delay was due to the negligence and inaction on the part of the assessee. The assessee could have very well avoided the delay by the exercise of due care and attention. There existed no sufficient and good reason for the delay of 310 days. Therefore, reasonings adduced by the Accountant Member were to be concurred with. [Para 8]
14.1 The ITAT Hyderabad in the case of T. Kishan[2012] 23 taxmann.com 383 (Hyderabad) held that in condoning delay in filing appeal, it must be proved beyond shadow of doubt that assessee was diligent and was not guilty of negligence whatsoever.
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14.2 In the instant facts, we note that the Department has adduced no reason for inordinate delay of 880 days in filing CO before the Tribunal. The assessee has not brought forth any persuasive reason for delay in filing the CO. No application for condonation of delay in filing of CO/ affidavit giving reasons for delay in filing CO have been furnished by the Department. In the result, we are not inclined to condone the delay of 880 days of the Department in filing CO before us. Accordingly, CO filed by the Department is hereby dismissed.
In the result, CO filed by the Department is hereby dismissed.
In the result, for assessment year 2007-08, appeal of the assessee is allowed and CO filed by the Department is dismissed.
Assessment Year: 2008-09:
The Assessee and the Department has filed appeal and cross objections respectively against the order of the order of the ld. Commissioner of Income Tax (Appeals)-13, u/s. 271(1)(c), vide order dated 25/07/2019.
The assessee has taken the following grounds of appeal
“Shell Global Solutions International B.V. ('Appellant') craves leave to prefer appeal against the order dated 25 July 2019 passed by the
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Commissioner of Income-tax (Appeals)-13, Ahmedabad ['the learned CIT(A)'] under Section 250 of the Income-tax Act, 1961 ('the Act'), in respect of order dated 20 July 2017 passed by the Deputy Commissioner of Income Tax, International Taxation -1, Ahmedabad ('the learned AO') under Section 271(l)(c) of the Act, on the grounds as set out herein: The following grounds are independent and without prejudice to one another: 1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming levy of penalty under Section 271(l)(c) of the Act even in a situation wherein the learned AO in the notice issued under Section 274 r.w.s. 271(l)(c) did not specify under which limb of Section 271(l)(c) of the Act, penalty proceedings had been initiated. The Appellant, therefore, humbly submits that the said notice issued under Section 274 r.w.s. 271(l)(c) of the Act is bad in law and as such the entire penalty proceedings should be quashed.
On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming levy of penalty under Section 271(l)(c) of the Act on account of the transfer / pricing adjustment of Rs. 29,43,61,998 made in relation to the services rendered to Hazira LNG Private Limited.
On the facts and in the circumstances of the case and in law, in relation to the penalty levied on account of the transfer pricing adjustment, the learned CIT(A) has erred in confirming levy of
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penalty under Section 271(l)(c) of the Act even in a situation wherein the learned AO has neither referred nor relied upon Explanation 7 to Section 271(l)(c) at the time of initiation of the penalty proceedings under the Act.
On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming the levy of penalty under Section 271(l)(c) of the Act by holding that the Appellant has not acted in good faith and with due diligence and therefore would not get covered by the exception mentioned in Explanation 7 to Section 271(1)(c) of the Act.
The Appellant reserves the right to add, amend, alter or vary all or any of the above grounds of appeal as they or their representative may think fit.”
The Department has taken the following cross objections
“a. On the facts and circumstances of the case and in law, whether the executed Power of Attorney notarized in The Netherlands is done in the presence of Diplomatic & Consular Officer authorized under Section 3 of the Diplomatic 85 Consular Officers (Oaths 85 Fees) Act, 1948 ; b. On the facts and circumstances of the case and in law, whether The Netherlands falls under the list of such nations which are
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authorized by the Central Government in Section 14 of the Notaries Act, 1952 ; c. On the facts and circumstances of the case and in law, whether the Power of Attorney has been stamped within 3 months after bringing it into India and if the same was done, whether done in the presence of Indian Diplomatic or Consular Officer ; d. On the facts and circumstances of the case and in law, whether the Power of Attorney has been executed in accordance with Section 26 of The Registration Act, 1908. e. On the facts and circumstances of the case and in law, whether the Power of Attorney has been executed in accordance with The Power of Attorney Act, 1882. f. On the facts and circumstances of the case and in law, whether the Power of Attorney is covered by the Hague Convention of 5 October, 1961 (Apostille Convention) g. On the facts and circumstances of the case and in law, whether the Power of Attorney falls within the definition of a Public document as defined in Section 74 of the Indian Evidence Act, 1872, in order to avail the benefit of the Hague Convention of 5 October, 1961 (Apostille Convention).”
Since, the facts and issues for consideration are same as that for assessment year 2007-08, the decision for assessment year 2007-08 would apply for assessment year 2008-09 as well.
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Accordingly, the appeal of the assessee is allowed and CO filed by the Department is being dismissed for assessment year 2008-09.
Assessment Year: 2009-10:
The assessee and the Department has filed appeal and cross objections respectively against the order of the order of the ld. Commissioner of Income Tax (Appeals)-13, u/s. 271(1)(c), vide order dated 25/07/2019.
The assessee has taken the following grounds of appeal
“Shell Global Solutions International B.V. ('Appellant') craves leave to prefer appeal against the order dated 25 July 2019 passed by the Commissioner of Income-tax (Appeals)-! 3, Ahmedabad ['the learned CIT(A)'] under Section 250 of the Income-tax Act, 1961 ('the Act'), in respect of order dated 20 July 2017 passed by the Deputy Commissioner of Income Tax, International Taxation - I, Ahmedabad ('the learned AO') under Section 271(l)(c) of the Act, on the grounds as set out herein:
The following grounds are independent and without prejudice to one another: 1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming levy of penalty under Section 271(l)(c) of the Act on account of the transfer pricing adjustment of
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Rs. 28,13,51,356 made in relation to the services rendered to Hazira LNG Private Limited and Hazira Port Private Ltd.
On the facts and in the circumstances of the case and in law, in relation to the penalty levied on account of the transfer pricing adjustment, the learned CIT(A) has erred in confirming levy of penalty under Section 271(l)(c) of the Act even in a situation wherein the learned AO has neither referred nor relied upon Explanation 7 to Section 271(l)(c) at the time of initiation of the penalty proceedings under the Act.
On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming the levy of penalty under Section 271(l)(c) of the Act by holding that the Appellant has not acted in good faith and with due diligence and therefore would not get covered by the exception mentioned in Explanation 7 to Section 271(l)(c) of the Act.
On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming levy of penalty under Section 271(l)(c) of the Act on addition of Rs. 45,80,841 made on account of higher profit attribution to the project office.
The Appellant reserves the right to add, amend, alter or vary all or any of the above grounds of appeal as they or their representative may think fit.”
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The Department has taken the following cross objections
“a. On the facts and circumstances of the case and in law, whether the executed Power of Attorney notarized in The Netherlands is done in the presence of Diplomatic & Consular Officer authorized under Section 3 of the Diplomatic 85 Consular Officers (Oaths 85 Fees) Act, 1948 ; b. On the facts and circumstances of the case and in law, whether The Netherlands falls under the list of such nations which are authorized by the Central Government in Section 14 of the Notaries Act, 1952 ; c. On the facts and circumstances of the case and in law, whether the Power of Attorney has been stamped within 3 months after bringing it into India and if the same was done, whether done in the presence of Indian Diplomatic or Consular Officer ; d. On the facts and circumstances of the case and in law, whether the Power of Attorney has been executed in accordance with Section 26 of The Registration Act, 1908. e. On the facts and circumstances of the case and in law, whether the Power of Attorney has been executed in accordance with The Power of Attorney Act, 1882. f. On the facts and circumstances of the case and in law, whether the Power of Attorney is covered by the Hague Convention of 5 October, 1961 (Apostille Convention)
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g. On the facts and circumstances of the case and in law, whether the Power of Attorney falls within the definition of a Public document as defined in Section 74 of the Indian Evidence Act, 1872, in order to avail the benefit of the Hague Convention of 5 October, 1961 (Apostille Convention).”
Since, the facts and issues for consideration are same as that for assessment year 2007-08, the decision for assessment year 2007-08 would apply for assessment year 2008-09 as well.
In the instant year, we note that there is an additional issue with regards to levy of penalty u/s 271(1)(c) of the Act on addition of � 45,80,841/- made on account of higher profit attributable to project office (PO). The brief facts in relation to this Grounds of Appeal are that during the year under consideration, the Appellant under its contract with Center for High Technology ('CHT') was required to render certain supervisory services. For the purpose of rendering these supervisory services, the Appellant had established a project office ('PO') in India. The assessee has prepared and maintained duly audited financial statements and obtained tax audit report for the CHT PO. Further, the assessee has offered the income attributable to the PO at an effective rate of 42.23% on net basis. In this regard, for determining the income attributable to the PO, the Appellant has obtained a profit attribution report from an independent consultant. Based on the same, the income attributable to the PO has been determined to be cost plus mark-up of 16.71%. The assessee submitted that the OECD authorized approach has been followed for attributing the profits to the PO and multiple
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year data has been used for undertaking a comparability analysis. Further, the Appellant had also submitted detailed reason as to why multiple year data has been considered for attribution of profit to PO, instead of a single year data. However, the learned AO did not accept various factual and legal submissions made by the assessee and proposed the following adjustment /addition in the draft assessment order: a) TP adjustment in relation to the services rendered to HLPL and HPPL; and b) Higher profit attribution to the PO
The assessee made the following submissions before Ld. CIT(Appeals) on this issue:
“3.5 The summary of the submission dated 15 February 2013 made by the Appellant is as under: a) The profit attribution report is a planning document prepared to determine the profitability of the transaction vis-a-vis a transfer pricing report which is prepared to determine whether the profitability meets the arm's length criteria or not. Hence, the profit attribution report should not be equated with a transfer pricing report/ analysis required to be prepared under section 92 of the Act. b) The profit attribution report is prepared by utilizing the OECD authorized approach for attributing profits to a permanent establishment. Arguably, while the approach has similarities to the transfer pricing guidelines, the whole exercise is not that of a transfer pricing analysis. Hence, the Indian transfer pricing regulations
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(including Rule 10B of the Rules) per se would not apply in the present case. c) In any case, where the OECD authorized approach has been adopted and found acceptable, the clarifications required, if any, on the practical implementation of the approach should be adopted from the OECD report on Attribution of Profits read with the OECD transfer pricing guidelines and not from the provisions relating to Indian transfer pricing regulations. d) Without prejudice to our contention that the provisions relating to the Indian transfer pricing regulations would not apply in the present case, utilizing the financial data of comparable companies for FY 2008-09 to determine the profit attributable to the PO, which were not available in public domain as on the date of preparation of profit attribution report would cause undue hardship to Appellant and require it to perform the impossible which would be against the intention of the legislature and hence, is inappropriate. 3.6 At this point, it is to be noted that while rejecting the contention raised in point d) above, the learned AO himself has observed as under: "4.3 It is also the contention of the assessee that it cannot be forced to determine ALP of its transactions on the basis of information that becomes available only subsequently. As already discussed above that it is a post facto exercise to determine the correct profits attributable, therefore it is proper to take the data available at the time of assessment. The assessee's argument maybe helpful defense at the time of penalty proceedings initiated
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for concealment of income for taking lesser margin because of data not available for comparables selected” (Emphasis added)
3.7 Thus, based on the above findings in the assessment order, the learned AO itself is of the view that penalty cannot be levied in the instant case.
3.8 It is further submitted that the claim of the Appellant was under a bonafide belief that attribution of profit to PO considering multiple year data is proper. It is pertinent to note that the Appellant had provided accurate particulars of income and explanations in its return of income, during the assessment proceedings. Accordingly, there has been no act, deliberate or otherwise, on part of the Appellant which will tantamount to furnishing of inaccurate particulars of income.
3.9 Based on the above, your Honors would appreciate that the Appellant had made adequate disclosures of all the material facts during the course of the scrutiny assessment proceedings for the captioned year.
3.10 In view of the above, the Appellant submits that it has not furnished any inaccurate particulars of income and thus, penalty levied under Section 271(l)(c) of the Act should be deleted in the interest of the justice. In this regard, the Appellant relies on the
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detailed legal submissions made in para 2.5 above. For the sake of brevity, the same is not reproduced again.
3.11 In relation to the higher profit attribution to PO, your Honors would appreciate that the issue of considering multiple year data vis-a-vis single year data was highly debatable at the time of filing return of income for the captioned year. In this regard, the Appellant relies on the detailed legal submissions made in para 2.6.17 and 2.6.18 above. For the sake of brevity, the same is not reproduced again. "
3.12 Apart from the above, the Appellant also relies on the following contentions in relation to levy of penalty for higher profit attribution to the PO:
• Mere difference of opinion does not justify the levy of penalty (Ground No. 9) - For this contention, the Appellant relies on the detailed legal submissions made in para 2.7 above. For the sake of brevity, the same is not reproduced again.
• Absence of Mens Rea - Penalty provisions are not attracted - For this contention, the Appellant relies on the detailed legal submissions made in para 2.8 above. For the sake of brevity, the same is not reproduced again.
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• Provisions dealing with Penalty must be strictly construed - For this contention, the Appellant relies on the detailed legal submissions made in para 2.13 above. For the sake of brevity, the same is not reproduced again. 4. CASE LAWS RELIED UPON BY THE APPELLANT INCORRECTLY DISTINGUISHED BY THE LEARNED AO
However, Ld. CIT(Appeals) dismissed the assessee’s appeal without giving any specific finding on this aspect in the appeal order. Before us, the Ld. Counsel for the assessee reiterated the aforesaid arguments placed earlier before Ld. CIT(Appeals). In response, the Ld. DR relied on the order passed by Ld. CIT(Appeals).
We have heard the rival contentions and perused the material on record. In the instant facts, we are of the considered view that this is not a fit case for levy of penalty u/s 271(1)(c) of the Act. In the instant case, the assessee entered into an integrated refinery business improvement contract with the CHT which was aimed at improving the performance of certain PSU oil refineries. The services under the said contract was predominantly performed from the assessee’s office outside of India. As per the contract, the assessee was to identify the performance gaps of the of the refineries and provide measures for improvement of the performance. The entire responsibility of implementation of such measures rested with CHT. To ensure that the measures for improvement are properly implemented by CHT and refineries, the assessee set up a Project Office (PO) in India. The PO was not required to render any services other than supervising the
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implementation work done by CHT and the refineries. To adequately compensate the PO for their supervisory activities performed by it, it was necessary to attribute appropriate profits on the costs incurred by the PO for rendering the supervisory services. Accordingly, to determine the profits which the assessee should attribute to the PO, the assessee obtained a profit attribution report from a third-party consultant. In the said attribution report prepared by the third-party consultant, a search was conducted for companies undertaking similar activities in similar industry. Based on the same, certain companies were identified as comparable companies and a markup of 16.7% was determined based on the average margins earned by such comparable companies during financial year 2006- 07, financial year 2007-08 and financial year 2008-09 to the extent available as of the date of preparation of the report. However, the AO was of the view that in terms of Rule 10B (4), the margins earned by such comparable companies for financial year 2008-09 alone could be used and therefore the AO determined the profits attributable at 24.81%. The assessee’s contention was the that profits were attributed basis the OECD authorised approach which is a complete method by itself specifying the manner in which the profit attributable is required to be undertaken and accordingly there is no need to place reliance on the Rules drafted under the Indian Transfer Pricing Regulations. Therefore, while preparing the profit attributable report by third-party consultant, view was taken that single year data would not adequately capture the market and business cycle of the broad range of comparables. Therefore, multiple year data for undertaking a compatibility analysis was taken since it would produce better results and therefore use of such data is more appropriate than using a single year approach. In the
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quantum proceedings, while making the addition, the AO himself made the following observations while confirming the addition:
“4.3 it is also the contention of the assessee that it cannot be forced to determine ELP office transactions on the basis of information that becomes available only subsequently. As already discussed above, that it is a post facto exercise to determine the correct profits attributable, therefore it is proper to take the data available at time of assessment. The assessee’s argument may be helpful in its defence at the time of penalty proceedings initiated for the concealment of income for taking lesser margin because of data not available for comparable selected. Also as the profits have already been earned by the HO and it is only post facto that profits of the PO are being determined, it is fair to take the comparable data for financial year 2008-09”
29.1 Therefore, we observe that in the instant set of facts, while determining the profits attributable to project office, the assessee placed reliance on profit attribution report prepared by third-party consultant. Further, the complete basis for determining the profits attributable to the PO were adequately documented and prepared by third-party consultant. Only because there was a difference of opinion between the approach adopted by the assessee and the Ld. Assessing Officer for determining the profits attributable to the PO, this would itself not a sufficient to impose penalty u/s 271(1)(c) of the Act. In fact, from the observations of the Ld. Assessing
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Officer, it is evident that this is not a fit case for imposing penalty u/s 271(1)(c) of the Act.
In the result, all grounds of the assessee’s appeal are allowed for assessment year 2009-10.
So far as the Cross objection filed by the Department is concerned, since the facts for assessment year 2009-10 are similar to that of assessment year 2007-08, the CO filed by the Department is dismissed for the same reasons cited for assessment of 2007-08.
Accordingly, the appeal of the assessee is allowed and CO filed by the Department is being dismissed for assessment year 2009-10.
Assessment year 2010-11:
The Assessee and the Department has filed appeal and cross objections respectively against the order of the order of the ld. Commissioner of Income Tax (Appeals)-13, u/s. 271(1)(c), vide order dated 25/07/2019.
The assessee has taken the following grounds of appeal:
“Shell Global Solutions International B.V. ('Appellant') craves leave to prefer appeal against the order dated 25 July 2019 passed by the Commissioner of Income-tax (Appeals)-13, Ahmedabad ['the learned
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CIT(A)'] under Section 250 of the Income-tax Act, 1961 ('the Act'), in respect of order dated 20 July 2017 passed by the Deputy Commissioner of Income Tax, International Taxation -1, Ahmedabad ('the learned AO') under Section 271(l)(c) of the Act, on the grounds as set out herein: The following grounds are independent and without prejudice to one another: 1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming levy of penalty under Section 271(l)(c) of the Act even in a situation wherein the learned AO in the notice issued under Section 274 r.w.s. 271(l)(c) did not specify under which limb of Section 271(l)(c) of the Act, penalty proceedings had been initiated. The Appellant, therefore, humbly submits that the said notice issued under Section 274 r.w.s. 271(l)(c) of the Act is bad in law and as such the entire penalty proceedings should be quashed.
On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming levy of penalty under Section 271(l)(c) of the Act on account of the transfer pricing adjustment of Rs. 33,93,20,979 made in relation to the services rendered to Hazira LNG Private Limited, Hazira Port Private Limited and Shell India Markets Private Limited.
On the facts and in the circumstances of the case and in law, in relation to the penalty levied on account of the transfer pricing adjustment, the learned CIT(A) has erred in confirming levy of
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penalty under Section 271(l)(c) of the Act even in a situation wherein the learned AO has neither referred nor relied upon Explanation 7 to Section 271(l)(c) at the time of initiation of the penalty proceedings under the Act.
On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming the levy of penalty under Section 271(l)(c) of the Act by holding that the Appellant has not acted in good faith and with due diligence and therefore would not get covered by the exception mentioned in Explanation 7 to Section 271(l)(c) of the Act. The Appellant reserves the right to add, amend, alter or vary all or any of the above grounds of appeal as they or their representative may think fit.”
The Department has taken the following cross objections:
“a. On the facts and circumstances of the case and in law, whether the executed Power of Attorney notarized in The Netherlands is done in the presence of Diplomatic & Consular Officer authorized under Section 3 of the Diplomatic 85 Consular Officers (Oaths 85 Fees) Act, 1948 ; b. On the facts and circumstances of the case and in law, whether The Netherlands falls under the list of such nations which are authorized by the Central Government in Section 14 of the Notaries Act, 1952 ;
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c. On the facts and circumstances of the case and in law, whether the Power of Attorney has been stamped within 3 months after bringing it into India and if the same was done, whether done in the presence of Indian Diplomatic or Consular Officer ; d. On the facts and circumstances of the case and in law, whether the Power of Attorney has been executed in accordance with Section 26 of The Registration Act, 1908. e. On the facts and circumstances of the case and in law, whether the Power of Attorney has been executed in accordance with The Power of Attorney Act, 1882. f. On the facts and circumstances of the case and in law, whether the Power of Attorney is covered by the Hague Convention of 5 October, 1961 (Apostille Convention) g. On the facts and circumstances of the case and in law, whether the Power of Attorney falls within the definition of a Public document as defined in Section 74 of the Indian Evidence Act, 1872, in order to avail the benefit of the Hague Convention of 5 October, 1961 (Apostille Convention).”
Since, the facts and issues for consideration are same as that for assessment year 2007-08, the decision for assessment year 2007-08 would apply for assessment year 2010-11 as well.
Accordingly, the appeal of the assessee is allowed and CO filed by the Department is being dismissed for assessment year 2010-11.
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In the combined result, appeals of the assessee are allowed and the COs filed by the Department are dismissed for all assessment years before us. Order pronounced in the open court on 13-10-2022
Sd/- Sd/- (WASEEM AHMED) (SIDDHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad : Dated 13/10/2022 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से,
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद