M/S HCL PEROT SYSTEMS LTD.,BENGALORE vs. ACIT, NEW DELHI

PER A.T. VARKEY, JUDICIAL MEMBER :

“1. On the facts and circumstances of the case and in law, the order under section 250(6) passed by the Commissioner of Income-tax (Appeals), XVII ["CIT(A)"], is bad in law and void-ab-initio. 2. On the facts and circumstances of the case and in law, the CIT(A) has erred in confirming the penalty levied by Assistant Commissioner of Income-tax, Circle 14(1), New Delhi ("AO") under section 271(1)(c) of the Act without recording adequate satisfaction during the course of assessment proceedings.

3. On the facts and circumstances of the case and in law, the CIT(A) / AO erred in levying penalty under section 271(1)(c) in relation to transfer pricing additions made in the assessment order.

4. On the facts and circumstances of the case and in law, the learned CIT(A) / AO has erred in holding that the appellant has not acted in good faith and has not exercised due-diligence.

5. On the facts and circumstances of the case and in law, the CIT(A) / AO erred in not appreciating that the appellant had disclosed all material facts relating to the adjustment and hence no penalty ought to be levied.

6. On the facts and circumstances of the case and in law, the CIT(A) / AO erred in levying penalty in relation to mere difference of opinion as regards arm's length nature of a particular transaction under Section 92 of the Income Tax Act, 1961, especially when the subject assessment year was an initial year for applicability of Transfer Pricing regulations in India.

7. On the facts and circumstances of the case and in law, the learned CIT(A) / AO erred in not accepting the fact that the appellant had a bonafide belief in stating that the transactions with respect to interest free loan was at arm's length.”

"……The assessee has advances two foreign currency loans to its associate enterprises (AEs) in January/February, 2001. The interest free loans have been utilized to make investment in other group companies. The Transfer Pricing Officer after considering the issue in detail determined the arm's length interest at loans given by the assessee to its AEs namely HPS Global Systems (Bermuda) Ltd. US$ 1.5. million and HPS Global Systems Hungray Liquidity Management Ltd. US$ 4.6. million at Rs.35,29,552 and Rs.1,08,23,960/- in place of nil interest declared by the assessee. Thus, he made and adjustment of Rs.1,43,53,512/- to the income of the assessee. On the basis of TPO order the Assessing Officer made addition of this amount to the assessee's total income. In appeal the CIT(A) confirmed the addition to the extent of Rs.1,38,94,980/- and allowed a relief of Rs.4,58,532/- to the assessee. The AO initiated penalty proceedings during the assessment proceedings. The assessee filed replies and explanation in respect of penalty proceedings on 22.02.2006, 18.3.2010 and 23.3.2010. The assessee’s explanations were duly considered and found unacceptable. The assessee contended that penalty for concealment of income cannot be imposed if the assessee proves that the price charged or paid in international transactions has been determined in accordance with section 92C in good faith and with due diligence. The assessee further submitted the penalty proceedings and assessment proceedings are independent proceedings and findings in assessment proceedings alone are not material and may not justify the imposition of penalty in a given case. The assessee contended that it neither failed to offer explanation nor the explanation given by the assessee was found to be false. The assessee submitted that since in terms of Explanation 1 to Sec. 271(1)(c) of the Act the claim of assessee being bonafide duly supported by judicial pronouncement and having being appropriately disclosed, the presumption u/s 271(1)(c) stands rebutted. The assessee also relied upon various judicial pronouncements/decisions.

The assessee's contentions are duly considered. The assessee's arguments in respect of loan transaction were not found acceptable by the TPO and the same were held as debt and not equity. In appeal also the assessee's contentions were not found acceptable and CIT(A) confirmed the addition in respect of arm's length price to the extent of Rs.1,38,94,980/-. The assessee failed to substantiate its claim in assessment as well appellate proceedings. Even in present penalty proceedings, assessee could not adduce any such evidence which may prove that the price charged or paid in such transactions 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 as is the requirement of the Explanation 7 to section 271(1)(c) of the Act. From the very reading of the Explanation, it is clear that unless assessee proves so, any amount added or disallowed in computing the total income u/s 92C shall, for the purposes of clause (c) of Section 271 (1)(c), be deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished. In view of the judgments of the Hon'ble Supreme Court in the case of K. P. Madhusudan vs. CIT 2511TR 99 and in the case of Union of India vs. Dharmendra Textile Processors (2008) 174 Taxman 571, it is on assessee to prove that he has not concealed or furnished inaccurate particulars of his income. In the case of Union of India vs. Dharmendra Textile Processors(Supra) the Hon'ble Court held that the Explanation appended to section 271(1)(c) entirely indicate the element of strict liability on the assessee for concealment or for giving inaccurate particulars of income while filling return. The Hon'ble Court held that "the penalty in that section is a civil liability. Willful concealment is not an essential ingredient for attracting civil liability, as is the case in the matter of prosecution under section 276C." In view of this, it was assessee's burden to prove that he was not guilty of concealment or giving inaccurate particulars of income, in which he failed. In view of the above discussion it is a fit case for imposition of penalty u/s 271(1)(c) of the I.T. Act, 1961 for furnishing inaccurate particulars of its income to the extent of Rs.1,38,94,980/-.”

“(1) Whether the Income Tax Appellate Tribunal erred in law in sustaining the adjustment on account of arm’s length price in respect of interest free loans provided by the appellant to its wholly owned foreign subsidiaries? (2) If the answer to question No.1 is in the negative, whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal erred in law in not holding that +/-5% variation from the arm’s length interest should have been allowed to the applicant in terms of the provisions of Section 92C (2) of the Income Tax Act, 1961?

So, according to the ld. AR, since the Hon’ble High Court has admitted the aforesaid questions of law, that itself shows that the subject matter in issue was debatable and accordingly, no penalty can be levied on the assessee.

8.1 According to ld. AR, it is well settled that penalty cannot be imposed on debatable issues and relied on the decision of the Hon’ble High Court of Delhi in CIT vs. Electrolux Kelvenator Ltd. 357 ITR 665 (Del) and CIT vs. Jaswinder Singh Ahuja 351ITR262(Del.)

10.2 We also take note that the Hon’ble jurisdictional High Court has held that when an issue is admitted by the High Court on the ground that the same involves substantial question of law then penalty cannot be levied on that issue against the assessee.

10.3 We take note that the Hon’ble High Court has admitted the following substantial question of law, which is precisely on the issue on which the addition has been made in the appeals and on which the penalty is levied on the assessee, which is reproduced below :-

“ITA 683/2010, ITA 684/2010 & ITA 685/2010 We have heard the counsel for the parties. Admit.

The following substantial questions of law arise for the consideration of this Court :-

“(1) Whether the Income Tax Appellate Tribunal erred in law in sustaining the adjustment on account of arm’s length price in respect of interest free loans provided by the appellant to its wholly owned foreign subsidiaries?

(2) If the answer to question No.1 is in the negative, whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal erred in law in not holding that +/-5% variation from the arm’s length interest should have been allowed to the applicant in terms of the provisions of Section 92C (2) of the Income Tax Act, 1961?”

10.4 We take note that in the case of Liquid Investment: ITA 240 of 2009, the Hon'ble jurisdictional Delhi High Court deleted the penalty levied by the assessing officer on the ground that the substantive appeal (being appeal under section 260A of the Act against the disallowance made in quantum proceedings) had been admitted by the High Court.

"Both the CIT(A) as well as the ITAT have set aside the penalty imposed by the Assessing Officer under Section 271(1)(c) of the Income Tax Act. 1961 on the ground that the issue of deduction under Section 14A of the Act was a debatable issue. We may also note that against the quantum assessment whereunder deduction under Section 14A of the Act was prescribed to the appellant. The appellant has preferred an appeal in this Court under Section 260A of the Act which has also been admitted and substantial question of law framed. This itself shows that the issue is debatable. For these reasons. we are of the opinion that no question of law arises in the present case. This appeal is accordingly dismissed... (Emphasis supplied)”

10.5 A useful reference may also be made to the decision of Apex Court in the case of CIT v. Reliance Petro products Private Limited: 322 ITR 158, where the decision of Bombay High Court deleting the penalty imposed by the assessing officer on the ground that quantum appeal was admitted by the High Court on the ground of involving question of law, was affirmed by the Apex Court. 10.6 In the light of the above, we find that the adjustment made and confirmed by the Tribunal on account of arm’s length price in respect of interest free loan provided by the appellant to its wholly owned subsidiaries has been admitted by the Hon’ble High Court, so is clearly a debatable issue and so penalty levied cannot be sustained, so we order deletion of it.