DCIT 11(2)(1), MUMBAI vs. S B & INTERNAITONAL LTD, MUMBAI

This appeal filed by Revenue is directed against the order of the CIT(A)-18, Mumbai dated 28.11.2015 and it relates to A.Y. 2009-10.

The brief facts of the case are that the assessee has e-filed the return of income declaring total income of `1,45,19,215/- on 29.09.2009. The company had entered into international transactions with the Associated Enterprise. Hence, the case was referred to Transfer Pricing Officer to compute the Arm's Length Price after obtaining necessary approval for reference to the TPO from the CIT-8, Mumbai. Thereupon, the Transfer Pricing Officer-II(8), Mumbai passed order under Section 92CA(3) Income Tax Act, 1961 (hereinafter "the Act") of the on 31.12.2012 making an adjustment to the Arm's Length Price by `1,82,13,599/- in relation to the international transactions entered into by the assessee company with its AE during the financial year 2008-09 relevant to A.Y. 2009-10. The D C I T - 11(2)(1)/M/s. SB & t International Ltd. Transfer Pricing Officer rejected the plea of the assessee to adopt LIBOR method for calculating interest rate in respect of its international transactions with its AE. It was noticed that the assessee had purchased foreign currency for the purpose of extending the said loan to its AE and hence application of LIBOR was not acceptable. The Transfer Pricing Officer further observed that since the assessee had extended the said loan in Indian National Rupee from the assessee's domestic bank account, the appropriate method for determination of average rate of borrowings was to identify the assessee's cost of borrowings. Accordingly, the average rate of borrowing was worked out to 11.92% and a further additional rate for risks coverage was determined at 3%. Thus, the aggregate average interest rate .worked out to 14.92% which was applied to the loan extended to the AE, the same being `1,82,13,599/-. On receipt of the order under Section 92CA(3) of the Income-tax Act, 1961 from the Transfer pricing Officer, a Draft Assessment Order was passed under Section 143(3) r.ws. 144C(1) of the Act on 06.03.2012 adding the upward adjustment of `1,82,13,599/- to the total income of the assessee. The assessee preferred to file appeal with the Dispute Resolution Panel, Mumbai against the said order. The DRP, vide its order passed under Section144C(5) of the Act dated 13.12.2013, directed that the PLR rate of State Bank of India during the relevant period be adopted to work out the adjustment in respect of the average interest rate on loan extended. However, the DRP has deleted the additional risk estimation of 3% determined by the TPO. Accordingly, on receipt of the order of the DRP, an order was passed under Section143(3) r.w.s. 144C(5) of the Act dated 30.12.2013 whereby the ALP adjustment was revised to `1,56,25,607/- keeping in view the direction of the DRP. Penalty proceedings under Section 271(l)(c) of the Act was initiated on this specific issue and notice under Section 274 of the Act was issued and served on the assessee. However, the decision of the DRP was not acceptable and hence a further appeal was preferred before the ITAT, Mumbai against the relief granted to the assessee. The ITAT, vide its order dated 11.03.2015,

Thereafter show cause notice regarding levy of penalty was issued to the assessee on the ground of loan lent by the assessee to it AE in Mauritius without any charge of interest. Consequently the DCIT, vide order dated 28.10.2015 levied penalty of `20,20,000/-. Against this the assessee preferred appeal before the CIT(A) and the CIT(A), after considering the case of both parties allowed the appeal and set aside the penalty. Aggrieved, Revenue is in appeal before us.

Ground Nos. 1 & 2 raised by the Revenue relate to challenging the order of the CIT(A) in deleting the penalty of `20,20,000/-. Therefore, we think it fit to dispose of these grounds by this common order.

We have heard the rival contentions, perused the material available on record and the orders of the Authorities below. Before we decide the merits of the case it is necessary to evaluate the orders of the Authorities below. The learned CIT(A) dealt with this ground in para 4 of his order, which is extracted below: - “4. I have carefully considered the penalty order, submissions of the appellant and the facts of the case. It is a case of estimation and no penalty can be levied on estimated basis. I agree with the contention the appellant that addition sustained have been made due to difference in the pricing methodology adopted by the Assessing Officer for determining the expected profits from the international transaction and not on account of any inaccuracy, discrepancy or concealment found in the information and documents furnished by the appellant for determining the ALP of the international transaction. It cannot be held that the computation of the price charged in the international transaction made as per Section 92C lacked in good faith or due diligence and therefore, appellant is not liable for penalty u/s. 271(1)(c) of the Act. Therefore, respectfully following the decision of the Hon'ble TAT, Mumbai in the case of Cherokee India (P) Ltd. Vs. DCIT (2016) 136 DTR 353, I direct the Assessing Officer to delete the D C I T - 11(2)(1)/M/s. SB & t International Ltd. penalty levied u/s. 271(1)(c) of the Act. This ground of appeal

In the result, the appeal filed by the Revenue is dismissed.