FL SMIDTH MINERALS PRIVATE LIMITED,CHENNAI vs. DCIT, CHENNAI

This appeal by the assessee is directed against the order passed by the Ld. Commissioner of Income Tax (Appeals)-II, Chennai dated 16.01.2014 in for the assessment year 2007-08 passed U/s.250(6) r.w.s. 143(3) & 271AA of the Act.

The assessee has raised several grounds in its appeal, however the crux of the issue is that the Ld.CIT(A) has erred in enhancing the levy of penalty amounting to Rs.95,77,305/- U/s.271AA of the Act, when the order of the Ld.AO itself is erroneous with respect to levy of penalty U/s.271AA of the Act.

The brief facts of the case are that the assessee is a private limited company engaged in the business of supply, design, supervision, erection and commissioning of plant & equipment for minerals processing industries, filed its return of income for the assessment year 2007-08 electronically on 26.10.2007 admitting income of Rs.48,10,86,260/-. Initially the return was processed U/s.143(1) of the Act and subsequently the case was selected for scrutiny and finally assessment order was passed U/s.143(3) of the Act on 31.12.2010, wherein the Ld.AO made certain additions. Further in the order U/s.92CA(4) of the Act, the Ld.TPO observed that the assessee had failed to disclose transactions worth Rs.15,82,65,883/- in Form 3CEB with respect to the assessee’s transaction with its Associate Enterprises. The Ld.TPO had further mentioned in the order that the assessee had not complied with the provisions of Section 10B(4) of the Act by not furnishing the comparables for the current year. In view of the same, the Ld.TPO had recommended penalty U/s.271AA of the Act @ 2% on the value of total international transaction (2% on Rs.50,20,12,346/-). Accordingly the Ld.AO initiated penalty proceedings U/s.271AA of the Act. Thereafter the Ld.DCIT levied penalty of Rs.95,77,305/- being 2% of the total value of international transaction of Rs.47,88,65,270/- invoking the provisions of Section 271AA of the Act by observing as under:- “9. As per Rule 100(4), the information and documents to be kept and maintained should as far as possible, be contemporaneous and should exist latest by the specified date referred in clause (iv) of Section 92F. Accordingly, the specified date as per Sec.92F(iv) is 30th September 2007 in this case. But as the assessee has conducted the search of companies existing as on Feb. 15, 2007, ever\i5~fore the completion of the relevant financial year i.e., before 31.03.2007, it has specifically excluded the companies which would have been otherwise available for comparison in the databases between 1.4.2007 to 30.9.2007. By this act of the assessee company, it has failed to comply with Rule 10D(4).

The assessee argues that as per Rule 10B(4) of the IT Rules, it is not mandatory to use the current year data for the purpose of determination of ALP. This contention is not fully correct. As per Rule 108(4), it is mandatorily required on the part of the assessee company to use the current year data for analyzing the comparability of an uncontrolled transaction with the international transaction. The current transaction has been entered into. The proviso to Rule 10B(4) of the I.T Rules contemplates that prior year data could also be used as long as such data has influence on the international transaction. However, as pointed out by the TPO. the assessee company has failed to bring out on record the influence of the prior year data on its international transactions for determination of the arms length price of its international transactions based on prior year data.

In view of the above discussion. it becomes clear that the assessee's case is a fit one for levy of penalty u/s 271AA of the Act. As per the decision of the Gawahati High Court in the case of CIT vs Satyanaran Sikaria {238 ITR 855), the statute is not to be interpreted to blunt the edge of the legislative device. According to the Hon'ble Supreme Court ( in the case of K.P.Varghese vs ITO and another - 131 ITR 597), the task of interpretations of statutory enactment is not a mechanical task; it is more than a mere reading of mathematical formula. If a big omission to comply with Sec.920 is ignored and penalty is not levied, then the sanctity of Section 92D will lose its teeth.

Further, the facts of the case law relied on by the assessee, viz., Hindustan Steels Limited are different from the facts of the assessee's case. In the cited case, the Supreme Court had actually asked the ITAT to submit a supplementary statement on the case and no conclusive finding was given in the cited order. In the present case, the omission on the part of the assessee to comply with the provisions of Sec.92D has been clearly brought out as discussed in previous paragraphs. Accordingly, penalty of Rs.95,77,305/- (Rupees Ninety Five Lakh Seventy Seven Thousand Three hundred and five Only) being 2% of the total value of international transaction of Rs.47,88,65,270 is levied u/s 271AA of the Income Tax Act.” 4. On appeal, the Ld.CIT(A) enhanced the penalty levied U/s.271AA of the Act by observing as under:- “4.10 Whereas, in the instant case, the TP analysis followed by the assessee is totally wrong and against the procedure laid down in the rules. It had deliberately conducted the TP analysis before the end of the financial year itself which is totally against the procedure laid down under Rule 1 OD. Hence the above case laws are distinguishable on facts and hence not applicable to the instant case.

At the outset, the Ld.AR submitted before us that the Ld.CIT(A) had enhanced the penalty without issuing notice to the assessee for making such enhancement and thereby deprived the assessee the opportunity of being heard with respect to such enhancement of penalty. It was therefore argued that the order of the Ld.CIT(A) may be quashed. The Ld.DR on the other hand opposed to the submission of the Ld.AR and pleaded for confirming the order of the Ld.CIT(A).

In the result, the appeal of the assessee is allowed for statistical purposes as indicated herein above.