ITO 10(1)(1), MUMBAI vs. HILTI MANUFACTURING INDIA P.LTD, MUMBAI

The issue raised is that learned CIT(A) erred in deleting the penalty u/s. 271(1)(c) of the Act amounting to Rs. 8,15,83,320/-.

Brief facts of the case are as under :- Hilti Manufacturing India Pvt. Ltd. (earlier known as Bhukhanwala Diamond Systems Pvt. Ltd.) is a company primarily engaged in manufacture of diamond saws blades, segments, grinding tools and core drills. These products are used in industrial and construction related products. For the period

The return of income for A.Y. 2009-10 was taken up for scrutiny and also referred to the TPO for an evaluation of the international transactions of the assessee in that year. The TPO recommended a transfer pricing adjustment of Rs.5,03,96,524 that was incorporated in the assessment order passed on 12.03.2013. Losses on account of embezzlement and on account of foreign exchange fluctuation loss, that were offered to tax suo-moto by the assessee .were also disallowed in the scrutiny assessment order. The assessee accepted the disallowances and additions to the returned income made in the, assessment-order so passed and did not prefer any further appeal. In pursuance of the penalty proceedings u/s. 271(1)(c) that had been initiated in the course of the assessment proceedings, the AO provided an opportunity of hearing to the assessee and vide his order dated 27.09.2013, a concealment penalty of Rs. 24,00)21, 523 on account of transfer pricing adjustment (Rs.5, 03, 96,523) and also on account of foreign exchange fluctuation loss (Rs. 18, 96,25, 000) was imposed on the assessee. Though penalty proceedings on account of losses on embezzlement claimed in the return filed had also been 3 M/s. Hilti Manufacturing India Pvt. Ltd. initiated, the AO found the explanation of the assessee to be acceptable and no levy of penalty on such loss was considered necessary

Aggrieved with the imposition of concealment penalty on the transfer pricing adjustment and also on the loss disallowed on foreign exchange fluctuation, the assessee filed appeal before learned CIT(A).

As regards levy of penalty with regard to transfer pricing adjustment by the TPO by ignoring the assessee’s method cost plus (CPM) and substituting the same with transaction net margin method (TNMM) as most appropriate method (MAM), learned CIT(A) deleted the penalty holding the same to be a matter of two opinions and there was no concealment.

We may gainfully referred to the order of learned CIT(A) as under :- “7. From the records available before the undersigned, it is seen that the TPO had treated the benchmarking analysis of the assessee as unscientific largely for the reason that the assessee had followed an approach of carrying out the benchmarking with respect to only the top 50 products and not by taking into account the entire quantum of the concerned international transactions. Further, the assessee had carried out its benchmarking using the .standard cost of each product to determine the gross comparable margins under the CPM, While the observations of the TPO on both these accounts were broadly justified as far as the TP Study Report carried out by the assessee was concerned, the assessee vide further submissions filed on 25.10.2012 before the TPO had provided a CPM working on the actual basis for the entire 100% of its international transactions wherein the transactions with its AEs were found to yield a better gross margin than comparable transactions with the non AEs. Through the same submissions filed on 25.10.2012, the assessee had also given an internal TNMM analysis showing that profit margins of the transactions with the AEs was better than the similar transactions carried out with non AEs. It was only with respect to the TNMM analysis made using external comparables that the transaction with the AEs showed a lesser margin than the arithmetic mean of the margins earned by such external comparables, leading to the TP adjustment quantified. The assessee in its submissions had also voluntarily offered to tax such TP adjustment primarily on account of its huge-business losses for the year, such TP adjustment would have no financial implications to it and also to buy peace with the Department and to avoid protracted litigation.

The contemporaneous TP Study Report may have been inadequate or even unscientific but such short comings had been removed in the fresh CPM working filed before the TPO in the course of the transfer pricing assessment proceedings. The shortcomings pointed out by the TPO had been removed. Such CPM analysis would be required to be considered as prepared in a 4 M/s. Hilti Manufacturing India Pvt. Ltd. manner prescribed u/s.92C of the Act in good faith and with due diligence. The TPO may have in the end preferred to use the TNMM analysis based on external comparables but such dispute over the most appropriate method could be classified as being on account of a difference of opinion between the assessee and the TPO. Such difference of opinion would not bring into question the good faith- or due diligence of the assessee in its benchmarking analysis. In the same context, it is also seen that a transfer pricing study report prepared by the assessee in the very same manner for the immediately succeeding A.Y. 2010-11 had been accepted by the TPO in that year and that no TP adjustment was found necessary. In view of these facts and keeping in mind the provisions of Explanation-7 to section 271(1)(c) of the Act, it is hereby held that no penalty would be leviable on the assessee on this transfer pricing adjustment computed by the assessee itself on the request of the TPO and also offered to tax. The AO is hereby directed to delete the penalty imposed on this ground”.

We have heard both the counsel and perused the records. Learned Departmental Representative relied upon the order of the Assessing Officer.

Per contra, learned Counsel of the assessee supported the order of the learned CIT(A). As regards addition on account of transfer pricing adjustment by change of method from assessee’s method of CPM to TNMM, learned Counsel of the assessee submitted that in the subsequent year the TPO himself has allowed CPM. That in the present year the assessee has not challenged the TPO’s change of method from CPM to TNMM as the assessee has huge amount of carried forward loss and it did not want to engage into unnecessary litigation. Moreover, learned Counsel of the assessee submitted that all facts were available on record and the TPO’s change of method from CPM to TNMM cannot lead to inference that the assessee was guilty of furnishing of inaccurate particulars of income.

As regards foreign exchange loss, learned Counsel of the assessee submitted that it was an inadvertent mistaken claim and the same was withdrawn before issue of notice and detection thereof by the Assessing Officer. Hence, learned counsel submitted that the assessee cannot be visited with rigours of penalty u/s. 271(1)(c) of the Act. He further submitted that in subsequent year, the Revenue itself has treated foreign exchange loss to be ‘revenue expenses’.

Upon careful consideration, we find that as regard levy of penalty with regard to transfer pricing adjustment by change of method from CUP to TNMM as MAM we note that the TPO in subsequent year himself has accepted CUP as most appropriate method. In these circumstances, we find ourselves in agreement with the findings of learned CIT(A). There is no case of concealment or furnishing of inaccurate particulars in this case. All the particulars were available. Assessee was of the opinion that most appropriate method would be CUP. However, the TPO substituted the same to TNMM. Furthermore in 6 M/s. Hilti Manufacturing India Pvt. Ltd. subsequent year, the TPO himself has accepted CUP is the most appropriate method. In these circumstances in our considered opinion deletion of penalty on this account need not be interfere with.

As regards deletion of levy of penalty with regard to foreign exchange fluctuation loss to be a revenue loss, we note that the same was withdrawn by the assessee itself before detection by the Assessing Officer or issue of any notice in this regard. In this view of the matter, assessee’s claim that it was inadvertent error is sustainable in this case.

We refer to Hon'ble Apex Court decision in the case of Price Waterhouse Coopers Pvt. Ltd. Vs. CIT (Civil Appeal No. 6924 of 2012 dt. 18.12.2008) for the proposition that inadvertent error need not be visited with penalty u/s. 271(1)(c) of the Act. Moreover, we also note that it is undisputed that the claim was withdrawn before detection or issue of notice by the Assessing Officer, hence, assessee’s conduct cannot be said to be contumacious warranting of levy of penalty u/s. 271(1)(c). This proposition supported by the Hon'ble Apex Court decision in the case of Hindustan Steel Ltd. Vs. State of Orissa (1972) 83 ITR 26(SC). In this case a larger Bench of Hon'ble Apex Court held that penalty need not be levied if the conduct of the assessee is not contumacious. Moreover, we also note that the issue is not free from debate as detailed in learned CIT(A)’s order as above. In this view of the matter, in our considered opinion there is no infirmity in the order of learned CIT(A) deleting levy of penalty. In the result, we uphold the order of learned CIT(A).

In the result, appeal filed by the Revenue stands dismissed. Order has been pronounced in the Court on 2.8.2019.