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Facts
The Revenue appealed against the CIT(A)'s deletion of a penalty levied under section 271(1)(c) for alleged inaccurate particulars of income. The penalty originated from a Transfer Pricing (TP) adjustment of Rs. 2.26 Cr. (later enhanced to Rs. 2.46 Cr. by CIT(A)) made by the AO/TPO concerning sales and marketing support services provided by HTC India Pvt. Ltd. The assessee had used TNMM for ALP determination, but the TPO substituted comparables, leading to the adjustment.
Held
The Tribunal affirmed the CIT(A)'s decision to delete the penalty. It held that Explanation 7 to section 271(1)(c) provides an exception if the assessee proves good faith and due diligence in computing the Arm's Length Price (ALP) according to section 92C. Citing various High Court judgments, the Tribunal found that the AO failed to demonstrate any lack of good faith or due diligence by the assessee, and mere differences in opinion regarding comparables or methodology do not warrant penalty.
Key Issues
Whether penalty under section 271(1)(c) is leviable for transfer pricing adjustments when the assessee computed the Arm's Length Price in good faith and with due diligence, despite a difference of opinion with the TPO on comparables or methodology.
Sections Cited
271(1)(c), 92CA, 92C, 92B, 37(1)
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Income Tax Appellate Tribunal, DELHI BENCH ‘B’, NEW DELHI
Before: Sh. Kul BharatDr. B. R. R. Kumar
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the Revenue against the order of ld. CIT(A)-44, New Delhi dated 27.07.2020. 2. Following grounds have been raised by the Revenue:
1. Whether the ld. CIT(A) was correct in law on facts and circumstances of the case in deleting the penalty amounting to Rs.81,82,693/- levied by AO on account of furnishing inaccurate particulars of its income?
3. The TPO made addition on account of TP adjustment of Rs.2.26 Cr.
The assessee is engaged in the business of Marketing and sales support of HTC brand Mobile phone & accessories. HTC Corporation, Taiwan is the owner of HTC brand mobile phone & accessories. HTC India does advertisement, sales support, and 2 HTC India Pvt. Ltd. support to HTC distributors in India on behalf of HTC Corporation, Taiwan. The assessee filed return of income on 14.09.2011 declaring income of Rs.73,81,430/-. The case was selected for scrutiny and the Assessing Officer made adjustment of Rs. 02.26 Cr. u/s 92CA of the Income Tax Act, 1961 on account of provisions for sales & marketing support services. The undisputed facts arising from the analysis of these are that the appellant furnished a TP Report justifying the ALP in respect of its transactions with its AE. The MAM as well as the PLI adopted by the appellant in its TP study were also not disputed by the AO/TPO. The TPO has also noted that the appellant has used the current year data in its TP study and accepted the same as the correct approach. However, the AO/TPO did not agree with the appellant in respect of the choice of comparables as adopted by the appellant in its TP study. Accordingly, the TPO replaced / substituted some of the comparables used by the appellant and used / introduced a fresh set of comparable on the basis of which he proceeded on to compute the ALP and recommend adjustments under section 92CA of the Act.
Aggrieved, the assessee filed appeal before the ld. CIT(A). On appeal, the Ld. CIT(A) directed for the adoption of a fresh set of comparables and determination of ALP. Accordingly, the said addition has been enhanced by the ld. CIT(A) to Rs.2.46 Cr. and consequently penalty has been levied u/s 271(1)(c).
To put it straight, penalty u/s 271(1)(c) has been levied on the amount of adjustment made u/s 92CA. Hence, the question before us is “whether the penalty levied u/s 271(1)(c) on the adjustment made u/s 92CA is legally valid or not?”
3 HTC India Pvt. Ltd. 7. On this issue, we are guided by the various judgments. Applicability of the provisions of section 271(1)(c) of the Act to the TP adjustments also came up for consideration before the ITAT Delhi. In the case of Mitsui Prime Advanced Composite India Pvt. Ltd. [2016-TII-234-ITAT- DEL-TP], after considering the facts of the case, the Co- ordinate Bench of Tribunal deleted the penalty holding as under:
“7. We have heard the rival submissions and perused the relevant material on record. Rejecting the application of TNMM on entity level, the TPO proposed transfer pricing adjustment amounting to Rs.3.31 crore by determining Nil ALP of the three international transactions under the CUP method by basing his conclusion on the fact that the assessee did not avail any services inasmuch as no benefit was derived by it and, in any case, it amounted to duplication of services. Under such circumstances, a question arises as to whether penalty u/s 271(1)(c) can be imposed. In this regard, we find that the relevant provision is Explanation 7 to section 271(1), which reads as under:-
Explanation 7.—Where in the case of an assessee who has entered into an international transaction or specified domestic transaction defined in section 92B, any amount is added or disallowed in computing the total income under sub-section (4) of section 92C, then, the amount so added or disallowed shall, for the purposes of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished, unless the assessee proves to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Principal Commissioner or Commissioner that the price charged or paid in such transaction was computed in accordance with the provisions contained in section 92C and in the manner prescribed under that section, in good faith and with due diligence.
4 HTC India Pvt. Ltd.
A perusal of this Explanation transpires that, any addition on account of transfer pricing adjustment shall be deemed to represent income in respect of which particulars have been concealed or inaccurate particulars have been furnished in terms of section 271(l)(c), thereby inviting penalty under this provision. However, the exception enshrined in this provision itself states that no penalty will be imposed pursuant to the addition on account of transfer pricing adjustment, if the assessee proves to the satisfaction of the authority that the price charged or paid in such a transaction was in accordance with the provisions of section 92C and such price was computed as per the manner prescribed under that section in good faith and due diligence. This divulges that penalty u/s 271(1)(c) in respect of addition on account of transfer pricing adjustment is not imposable only when the assessee proves to the authority that the price paid by it was computed in terms of section 92C and in a manner prescribed under the section and this exercise was done in good faith and due diligence.
Section 92C of the Act deals with the 'Computation of arm's length price.' Sub-section (1) provides that the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction etc., namely (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. Sub-section (2) provides that the most appropriate method referred to in sub-section (1) shall be applied for determining ALP in the manner as may be prescribed. Thus, it can be noticed that there are five methods specifically mentioned in addition to clause (f) of section 92C(1)which refers to 'such other method as may be prescribed by the Board.' The 'other method' has been prescribed by the Board in terms of Rule 10AB with retrospective effect from 01.4.2012 applicable to assessment year 2012-13 and subsequent years. We are dealing with assessment year 2010-11. As such, the ALP for the year under consideration could 5 HTC India Pvt. Ltd. have been determined only by applying any of the five specified methods. The assessee applied TNMM as per clause (e) of section 92C(1), which was rejected by the TPO, who applied CUP as the most appropriate method as per clause (a) of section 92C(1). Thus, it is clear that the assessee's application of TNMM in respect of the three international transactions under consideration is 'in accordance with the provisions contained in section 92C. Further, such determination is 'in the manner prescribed under that section’ because the TPO has nowhere held that the assessee calculated ALP of these transactions in a manner different from the one prescribed under rule 10B(1)(e), which contains mechanism for calculating the ALP under the TNMM.
10. The next ingredient which is crucial for evading penalty u/s 271(1)(c) is that the application by the assessee of most appropriate method for determining ALP should be ’in good faith and with due diligence.' Now, the moot question is whether the assessee’s application of the TNMM on entity level can be considered as done in good faith and with due diligence and whether the TPO was lawfully justified in departing from the assessee’s method and in making the extant addition.
Coming back to the Explanation 7 to section 271(1), we find that no doubt the addition of Rs.3.31 crore has been made on account of transfer pricing adjustment in respect of these three international transactions, but, the same cannot be deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished because the assessee has proved that the price paid by it under such transactions was computed in accordance with the provisions of section 92C and in the manner prescribed under the TNMM in good faith and with due diligence. Further the action of the TPO in changing the most appropriate method from TNMM to CUP without bringing on record any comparable instance, is itself faulty. In any case, it was the AO who was to determine whether or not such expenses were deductible in terms of section 37(1) and not the TPO, as has been done. We have noticed above that the exercise done by the TPO in determining 6 HTC India Pvt. Ltd. Nil ALP on the premise that either no services were availed by the assessee or in any case it was a case of duplication of services, is not only unsubstantiated but contrary to the material on record. The mere fact that the TPO determined Nil ALP of the international transactions cannot be a reason to impose penalty u/s 271(1)(c) of the Act.
24…………If we accept the contention of the Id. DR that addition on account of transfer pricing adjustment invariably means absence of good faith and due diligence, then, each and every case involving transfer pricing adjustment would call for imposition of penalty u/s 271(1)(c). The proposition so propounded on behalf of the Revenue is too wide and clearly unacceptable inasmuch as the intention of the legislature is to impose penalty due to addition on account of transfer pricing adjustment only when good faith and due diligence are lacking and not because of a genuine and valid difference of opinion in the determination of ALP of an international transaction.”
The Hon’ble Delhi High Court in the case of Sinosteel India Pvt. Ltd. [2018-TII- 191-HC-DEL-TP] concurred with the Tribunal that- “3.4 The cases of addition/disallowance in computing the total income as per the provisions of section 92C does not fall under the general rule of bonafide explanation as per Explanation 1 to section 271(1)(c). The Explanation 7, itself has prescribed exceptions in the case whether the price has been computed in accordance with the provisions of section 92C and in the manner prescribed there under in good faith and with due diligence. Therefore, if the assessee proves to the satisfaction of the taxing authority that the price charged or paid has been computed as per the provision and manner prescribed under section 92C, in good faith and with due diligence then the addition made under section 94C(4) would not attract the penalty. Once the exclusion from attracting the provisions u/s 271(1)(c) has been provided in the Explanation-7 itself then the first requirement for escaping from the levy of penalty u/s 271(1)(c), 7 HTC India Pvt. Ltd. against the addition made as per the provisions of section 92C is that the decision of the assessee in computation of the price in respect of international transactions is as per the provisions and manner prescribed under section 92C and further the said decision is taken in good faith and with due diligence.”
……….. "16. Thus, addition or disallowance made while computing the income under Section 92C of the Act, is deemed to be concealed income or income of which inaccurate particulars have been furnished. Explanation 7 however states that penalty is not to be imposed where the assessee establishes that the price charged or paid was computed as per provisions of Section 92C and the assessee.had acted in good faith and with due diligence. Conduct of the assessee is the distinguishing and relevant factor to be adjudicated in the penalty proceedings. Onus to establish bonafide and exercise of due diligence is on the assessee. Explanation of the assessee on the computation of arms length price may be the same, but appreciation and consideration is from a different point of view, i.e. bona fides and due diligence.
Respondent-assessee had applied CUP method to compute the arms length price of the international transactions with the associated enterprises. Revenue has not disputed that the CUP method was the preferred or appropriate method to be applied. Revenue no doubt states that there was lack of reliable data for application of the CUP method, but the method adopted and applied by the respondent- assessee was not rejected.
As noticed above, the respondent-assessee had justified and explained why the independent transaction was disregarded as an internal comparable, for two reasons. Firstly, the transaction was of low value in comparison with transactions with associated entities. Secondly, it was a single transaction, whereas transactions with associated enterprises were continuous and based upon long-term business relationship. This factual position and distinction is undisputed. In view of the factual matrix, the explanation of the 8 HTC India Pvt. Ltd. respondent/assessee was accepted as bona fide and that the assessee had exercised due diligence in selection of the method and comparables. It is in this context, we find that the Tribunal has taken a reasonable and considered view of the matter. The said findings on the question of explanation, bonafides and due diligence is a finding of fact.”
The Hon'ble Delhi High Court in the case of PCIT Vs. Verizon India Ltd. [2016-TII-69- HC-DEL-TP] held that “in absence of any overt act, which indicates conscious and material suppression, invocation of Explanation 7 in a blanket manner could not only be injurious to the aissessee but ultimately would be contrary to the purpose for which it was engrafted in the statute.”
The Hon’ble Delhi High Court in the case of PCIT vs. Giesecke and Devrient India Pvt. Ltd. [2019-TII-86-HC- DEL-TP] held that “adoption of multiple year data for arriving at ALP was a bonafide exercise, and therefore, differences in ALP arising on account of differences of opinion between the TPO & Assessee with regard to use of multiple year data could not form basis for levy of penalty u/s 271 (1)(c) of the Act.”
8. On going through the above judgments, the ld. CIT(A), Sh. G. K. Dhall rightly deleted the addition holding that “the Assessing Officer, while imposing the penalty, simply relied on the addition/adjustment made by the TPO and did not examine in detail as to whether penalty was imposable on such adjustments or not. The scheme of Explanation 7 to section 271(1 )(c) of the Act makes it clear that the onus on the assessee is only to show that the ALP was computed by the assessee in accordance with the scheme of section 92C of the Act in good faith and with due diligence. It is not in dispute here that the ALP was computed in accordance with the scheme of section 92C in as much as there was no dispute over the MAM, PLI or timescale of data used. The AO/TPO only adopted a different set of comparables to determine ALP. There is no allegation by the AO in the penalty order that the actions of 9 HTC India Pvt. Ltd. the appellant lack good faith and due diligence. The AO has not been able to demonstrate any specific act, fact or conduct of the affairs of the appellant which proves that it was lacking in good faith and was done without due diligence. No such argument has been raised nor suggested otherwise. Therefore, lack of due diligence in determining the ALP is neither indicated nor can be inferred. In such a situation, it cannot be said that the appellant had not determined the ALP in accordance with the scheme of section 92C of the Act in good faith and with due diligence and accordingly, the conditions precedent for invoking Explanation 7 to section 271(1)(c) did not exist on the facts of the instant case.”
9. Since, the order of the ld. CIT(A) is rightly based on the analysis of the provisions of Section 271(1)(c) and based on the orders of the ITAT and the judgments of Hon’ble High Court, we hereby affirm the order of the ld. CIT(A).
In the result, the appeal of the Revenue is dismissed. Order Pronounced in the Open Court on 30/05/2024.