FUCHS LUBRICANTS (INDIA) P.LTD,MUMBAI vs. DCIT CIR 6(2), MUMBAI

The present appeal is directed against the order passed by the Commissioner of Income Tax (Appeals)-12, Mumbai, [for short CIT(A)], dated 07.09.2015 , which in itself arises from the order Fuchs Lubricants Pvt. Ltd. Vs. DCIT – ITA 5111/Mum/2015 2 A.Y. 2002-03 passed by the A.O imposing penalty under Sec. 271(1)(c) of the Income Tax, 1961 (for short „Act‟), dated 26.09.2013. The assessee had assailed the order of the CIT(A) by raising before us the following grounds of appeal: “The grounds stated hereunder are independent of, and without prejudice to one another:

Briefly stated, the facts of the case are that the assessee company which is engaged in the business of blending, manufacturing & trading of lubricating oils and greases had filed its return of income for A.Y. 2002-03 on 25.10.2002, declaring total loss of (Rs. 1,90,69,343/-) alongwith tax audit report under Sec. 44AB in Form 3CA and 3CB. The return of income was processed as such under Sec. 143(1) of the „Act‟. The case of the assessee was taken up for scrutiny assessment under Sec. 143(2). The A.O during the course of the assessment proceedings giving effect to the order of the Addl. CIT, Transfer Pricing-1, Mumbai, therein made an adjustment of Rs. 52,57,951/-, as under: S.No Particulars Amount 1. Transaction of receipt of Commission from Rs. 12,07,421/- M/s Fuchs Dea Schemierstoffe GMBH & Co 2. Transaction of payment of Management fees Rs. 40,50,530/- paid to M/s Fuchs Petolub AG. Total Rs. 52,57,951/- , and vide his order dated 15.02.2005 assessed the loss at (Rs. 96,99,870/-).

Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) vide his order dated. 21.03.2005 restricted the addition on account of receipt of commission to Rs. 70,561/-. However, the CIT(A) after deliberating on the contentions of the assessee in the backdrop of the facts of the case observed that as the payment of the management fees by the assessee to its AE and its consequent „benefit‟ had not been compared/benchmarked on Fuchs Lubricants Pvt. Ltd. Vs. DCIT – ITA 5111/Mum/2015 4 A.Y. 2002-03 transaction basis, therefore, it could safely be concluded that the assessee had failed to discharge the initial burden of proof of establishing the ALP of the transactions. Thus, the CIT(A) in the backdrop of his aforesaid observations upheld the action of the TPO in treating the ALP of management fees as Nil, leading to a consequential disallowance of allocation of management fees of Rs. 40,50,530/- by the TPO/A.O.

The revenue being aggrieved with the scaling down of the addition of Rs. 12,07,421/- made by the A.O/TPO on account of receipt of commission to Rs. 70,561/- by the CIT(A), therein carried the matter in appeal before the Tribunal. However, the Tribunal vide its order dated. 18.01.2013 in upheld the order of the CIT(A) and dismissed the appeal of the revenue. In this regard it would be relevant and pertinent to point out that though the assessee had assailed the order of the CIT(A) on certain other issues before the Tribunal, however, it did not challenge the order of the CIT(A) as regards the transfer pricing adjustment before the Tribunal, as a result whereof the order of the CIT(A) to the said extent attained finality.

That after the culmination of the proceedings before the Tribunal the A.O issued a Show cause notice (for short „SCN‟) dated. 19.08.2013 to the assessee, therein calling upon it to explain as to why penalty under Sec. 271(1)(c) may not be levied as regards the addition of Rs. 40,50,530/- (supra) which was made in its hands on account of disallowance of cost allocation of management fees in the order passed under Sec. 143(3). That as stands gathered from the penalty order, the A.O in the absence of any compliance by the assessee, thus, being of the view that the assessee had concealed its income and furnished inaccurate particulars of income, therein vide Fuchs Lubricants Pvt. Ltd. Vs. DCIT – ITA 5111/Mum/2015 5 A.Y. 2002-03 his order dated. 26.09.2013 imposed a penalty of Rs. 14,46,040/- in the hands of the assessee.

The assessee being aggrieved with the penalty imposed by the A.O under Sec. 271(1)(c) carried the matter in appeal before the CIT(A). The CIT(A) being of the view that as the assessee had not assailed the disallowance of cost allocation of management fees of Rs. 40,50,530/- before the Tribunal, therefore, concluded that the assessee had conceded and agreed to the concealment of income and furnishing of inaccurate particulars of income. The CIT(A) further being of the view that the A.O had very clearly and succinctly brought out in the penalty order as to how the assessee was liable to levy of penalty under Sec. 271(1)(c), therefore, on the basis of his aforesaid observations upheld the penalty imposed by the A.O under Sec. 271(1)(c) and dismissed the appeal of the assessee.

Aggrieved, the assessee had carried the order of the CIT(A) upholding the penalty imposed under Sec. 271(1)(c) in appeal before us. The ld. Authorised representative (for short „A.R‟) for the assessee at the very outset conceded that the order of the CIT(A) sustaining the quantum addition of Rs. 40,50,530/- (supra) in respect of the disallowance of cost allocation of management fees was not further carried in appeal before the Tribunal, and as such the order of the CIT(A) to the said extent had attained finality. The ld. A.R submitted that as the „Transfer pricing‟ provisions contemplated in Chapter X of the Income-tax act, 1961, were made available on the statute vide the Finance Act, 2001, w.e.f 01.04.2002, therefore, the year under consideration, viz. A.Y. 2002-03 was the first year of the applicability of the said provisions. It was in the backdrop of the aforesaid contentions submitted by the ld. A.R that as neither the assessee, nor his counsel were much conversant with the said new statutory Fuchs Lubricants Pvt. Ltd. Vs. DCIT – ITA 5111/Mum/2015 6 A.Y. 2002-03 provisions which were in their nascent stage, therefore, the assessee had inadvertently failed to maintain the requisite details and properly benchmark the aforesaid transaction in terms of the provisions contemplated in the statute. It was fairly submitted by the ld. A.R that the assessee realising its aforesaid mistake, had thus for the very said reason not carried the disallowance/addition of cost allocation of management fees of Rs. 40,50,530/- in further appeal before the Tribunal and had allowed the order of the CIT(A) upholding the said disallowance to attain finality. The ld. A.R assailed the validity of the assumption of jurisdiction by the A.O as regards penalty proceedings, on the ground that the latter had in the „Show Cause‟ notice, dated. 15.02.2005, failed to point out the nature of default as regards which the assessee was called upon to explain as to why no penalty under Sec. 271(1)(c) be imposed on it. The ld. A.R in order to drive home his aforesaid contention took us through the copy of the „SCN‟ at Page 126-127 of the „Paper book‟ (for short „APB‟). The ld. A.R in order to fortify his aforesaid contention relied on the order of the ITAT, “C” Bench, Mumbai in the case of P.K Joshua Vs. ITO-26(2)(3), Mumbai [ITA No. 4487 to 4491/Mum/2014; dated. 07.06.2017] and the order of the ITAT “B” Bench, Mumbai in the case of Meherjee Cassinath Holdings Private Limited Vs. ACIT, Circle -4(2), Mumbai [ITA No. 2555/Mum/2012; dated. 28.04.2017]. The ld. A.R further submitted that the order of the Transfer Pricing Officer (for short „TPO‟) was silent about the penalty proceedings. The ld. A.R averred that the order of the A.O imposing penalty under Sec. 271(1)(c) referred to both the defaults, i.e concealment of income and furnishing of inaccurate particulars of income. The ld. A.R to support his aforesaid contention, therein drew our attention to Page 2 – Para 2 of the penalty order. The ld. A.R further submitted that a perusal of the penalty order revealed that the A.O except for referring to the disallowance/addition of the Fuchs Lubricants Pvt. Ltd. Vs. DCIT – ITA 5111/Mum/2015 7 A.Y. 2002-03 amount of Rs. 40,50,530/- made in the assessment order, had however not even spelt out the reason as to why the penalty under Sec. 271(1)(c) was being imposed on the assessee. The ld. A.R adverting to the merits of the case submitted that as the details furnished by the assessee alongwith the return of income were not found to be factually incorrect, therefore, the assessee could not be held to be guilty of furnishing inaccurate particulars of income and be saddled with levy of penalty under Sec. 271(1)(c). It was submitted by the ld. A.R that only for the reason that the assessee had failed to substantiate the cost allocation of management expenses on the basis of records, which it had failed to maintain for bonafide reasons, it could not be subjected to levy of penalty under Sec. 271(1)(c). The ld. A.R in support of his aforesaid contention placed heavy reliance on the judgment of the Hon’ble Supreme Court in the case of CIT Vs. Reliance Petroproducts (P) Ltd. (2010) 322 ITR 158 (SC). Per Contra, the ld. D.R relied on the orders of the lower authorities. The ld. D.R vehemently submitted that from the non-filing of the appeal by the assessee on the issue under consideration before the Tribunal, it could safely be concluded that it had accepted the disallowance/addition, and as such the A.O had in the backdrop of the said fact rightly imposed the penalty under Sec. 271(1)(c) in the hands of the assessee, which thereafter had been upheld by the CIT(A). It was thus submitted by the ld. D.R that the appeal of the assessee being devoid of any merit may therein be dismissed.

We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record. We have given a thoughtful consideration to the facts of the case and are persuaded to be in agreement with the view of the ld. A.R that the A.O while saddling the assessee with penalty under Sec. 271(1)(c), had except for referring to the facts forming part Fuchs Lubricants Pvt. Ltd. Vs. DCIT – ITA 5111/Mum/2015 8 A.Y. 2002-03 of the assessment order or taking support of the fact that the assessee had not carried the disallowance of cost allocation of management expenses which was sustained by the CIT(A), in further appeal before the Tribunal, had however failed to independently justify as to why the said disallowance of expense would call for imposition of penalty in the hands of the assessee under Sec. 271(1)(c). We are not impressed by the general observations recorded by the A.O to fortify the imposition of penalty in the hands of the assessee. We though are not oblivious of the fact that the assessee had failed to place on the record of the A.O its explanation as to why no penalty under Sec. 271(1)(c) was liable to be imposed, but then, even if that be so, it was still obligatory on the part of the A.O to have justified imposition of penalty on the basis of certain reasonings recorded in the backdrop of the facts of the case. We are of the considered view that as held by the Hon’ble Supreme Court in its landmark judgment in the case of Hindustan Steel Ltd. Vs. State of Orissa (1972) 83 ITR 26 (S.C) that penalty proceedings under Sec. 271(1)(c) are quasi criminal proceedings, therefore, a very onus was cast upon the A.O to establish that the case of the assessee fell within the sweep of the said draconian penal provision. We though are in agreement with the observations of the A.O, viz. that the disclosure of the facts by an assessee should be in accordance with law and as per the statutory provisions contemplated in the Income- tax act, 1961; it is obligatory on the part of the assessee to furnish the correct picture of the accounts/books in accordance with law; as well as his observations as regards the circumstances that would entail levy of penalty under Sec. 271(1)(c), but are unable to comprehend from the penalty order as to what was the conviction that the A.O was holding in the backdrop of the facts of the case, which had prompted him to characterize the disallowance of cost allocation of management fees of Rs. 40,50,530/- as sufficient enough to impose penalty under Fuchs Lubricants Pvt. Ltd. Vs. DCIT – ITA 5111/Mum/2015 9 A.Y. 2002-03 Sec. 271(1)(c) in the hands of the assessee. We are further of the considered view that though the observations and findings recorded by the A.O while making an addition/disallowance in the hands of an assessee are relevant and cannot be lost sight of in the course of the penalty proceedings under Sec. 271(1)(c), however, the levy of penalty cannot solely be based by merely taking support of the same. That as the assessment and penalty proceedings are separate and distinct proceedings, therefore, despite an addition/disallowance having been made in the hands of the assessee, an onerous duty is cast upon the A.O to establish on the basis of a speaking and well reasoned order as to why penalty under Sec. 271(1)(c) is liable to be imposed in the hands of the assessee. We have deliberated at length on the observations recorded by the A.O while imposing penalty under Sec. 271(1)(c) in the hands of the assessee, and are afraid that the same is seriously falling short of the reasonings which could safely bring the assessee within the sweep of the defaults contemplated in the said statutory provision.

Be that as it may, we now advert to the merits of the case before us. We find that the disallowance of the cost allocation of management fees of Rs. 40,50,530/- had been made by the A.O not for the reason that the assessee was found to have booked any bogus expenses or any part of the said expenses was found to be false, but on the ground that the assessee had failed to substantiate the allocation of the said expenses on the basis of the Transfer pricing provisions available on the statute, as well as had failed to back the same on the basis of the requisite material and records which it was under an obligation to maintain. We find ourselves to be in agreement with the observations of the lower authorities that the assessee had neither furnished the backup details of cost pool composition, nor linked the cost pool to the accounting records or financial statements of the service provider. We Fuchs Lubricants Pvt. Ltd. Vs. DCIT – ITA 5111/Mum/2015 10 A.Y. 2002-03 are further of the view that the assessee had merely offered a broad and general explanation as regards the services availed under the cost contribution agreement with its AE, on the basis of which the lower authorities in the course of the quantum proceedings had rightly concluded that the basic threshold requirement for entertaining the claim of payment of cost allocation of management charges at arms length was not satisfied by the assessee. We are absolutely one with the observations recorded by the lower authorities that Transfer pricing is a systematic, logical and step by step analysis commencing with screening of data for choice of comparables through statistical tools and application of the most appropriate method deciphering the Arms length range and culminating in the determination of the ALP. We are further of the view that as the assessee in the present case had failed to properly benchmark the payment of management fees to its AE and the consequent benefit, therefore, it could safely be held that the assessee had failed to discharge the initial burden of establishing the ALP of the transactions.

We find that the assessee had in all fairness acknowledging his failure to properly benchmark the payment of management fees as per the settled position of law, had for the said reason not carried the order of the CIT(A) confirming the said disallowance in further appeal before the Tribunal and had allowed it to attain finality. We are of the considered view that though the disallowance of the cost allocation of management fees of Rs. 40,50,530/- was justified in the backdrop of the facts available on record, however, are unable to persuade ourselves to conclude that the same would call for levy of penalty under Sec. 271(1)(c) in the hands of the assessee. We have deliberated at length on the nature of disallowance so made by the A.O, and are of a strong conviction that the same had taken place for the reason that the assessee had failed to properly benchmark the payment of Fuchs Lubricants Pvt. Ltd. Vs. DCIT – ITA 5111/Mum/2015 11 A.Y. 2002-03 management fees to its AE and the consequent benefit, as a result whereof the ALP of the same was adopted by the TPO at Rs. Nil. We are of the considered view that it is not the case of the revenue that the assessee was found to have booked a bogus expense, but rather, it is a case of a simpliciter disallowance/addition, which finds its genesis in the failure on the part of the assessee to substantiate the same on the basis of the Transfer Pricing provisions contemplated in the statute. We further find substantial force in the contention of the ld. A.R that as the Transfer pricing provisions which were made available on the statute only vide the Finance Act, 2001, w.e.f 01.04.2002, and the year under consideration, viz. A.Y. 2002-03 was the very first year of the applicability of the same, therefore, the failure on the part of the assessee and his counsel to be conversant with the said statutory provisions, which in itself were in a nascent stage, stands justifiably explained. We further find that as no part of the expense claimed by the assessee were found to be false, therefore, the case before us squarely falls within the sweep of the judgment of the Hon’ble Supreme Court in the case of CIT Vs. Reliance Petroproducts (P) Ltd. (2010) 322 ITR 158 (SC), wherein the Hon’ble Apex Court had observed that merely because an assessee had claimed an expenditure, which claim was not accepted or was not acceptable to the revenue, that by itself would not attract penalty under s. 271(1)(c). The Hon‟ble Court observed that if the contention of the Revenue was to be accepted, then in case of every return where the claim made was not accepted by AO for any reason, the assessee would invite penalty under s. 271(1)(c), which was clearly not the intendment of the legislature. We find that the case of the present assessee before us falls within the all fours of the aforesaid judicial pronouncement. We thus, in the backdrop of our aforesaid observations are of a strong conviction that no penalty under Sec.

The appeal of the assessee is allowed in terms of our aforesaid observations. Order pronounced in the open court on 25/10/2017.