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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI G.S.PANNU & SHRI AMARJIT SINGH
The captioned appeal by the Revenue is directed against the order of the CIT(A)-16, Mumbai dated 05/10/2015 pertaining to the Assessment Year 2008-09, which in turn has arisen from an order dated 30/03/2014 passed under section 271(1)(c) of the Income Tax Act, 1961 (in short ‘the Act’) .
(Assessment Year : 2008-09 2. In this appeal, the solitary grievance of the assessee is against the action of the income tax authorities in imposing penalty under section 271(1)(c) of the Act amounting to Rs.60,72,210/-.
Briefly put, the relevant facts are that the appellant is a company incorporated under the provisions of the Companies Act, 1956 and is a wholly owned subsidiary of Cherokee International, LLC USA. The assessee company has a manufacturing facility at SEEPZ, Andheri (E), Mumbai, wherein it undertakes manufacturing of various magnetic components like Transformers, Inductors and Printed Circuit Boards Assemblies entirely for its parent company in USA, i.e. associated enterprise. Notably, assessee receives 95% of the raw material from its holding company on free of cost basis and after undertaking manufacturing activity, it exports back the entire production to its parent company in USA. In terms of arrangement with its associated enterprise in USA, assessee is remunerated on the basis of mark-up on cost of 6%. Pertinently, such mark-up cost on 6% is calculated with reference to the standard cost incurred for the operations carried out by the assessee company. With the aforesaid business model, the assessee company filed the return of income for assessment year 2008- 09 on 29/09/2008 declaring a loss of Rs.1,14,58,725/-, which was subject to a scrutiny assessment. In the course of the assessment proceedings, it was noticed that assessee had entered into an international transaction with the associated enterprise within the meaning of section 92B of the Act and accordingly, the matter relating to the determination of Arm’s Length Price (ALP) was referred to the Transfer Pricing Officer (TPO) under section 92CA(1) of the Act. The (Assessment Year : 2008-09 TPO passed an order under section 92CA(3) of the Act, whereby an upward adjustment was proposed to the stated value of the international transaction with the associated enterprise. The adjustment worked out by the Transfer Pricing Officer was to the extent of Rs.2,33,24,680/- and the Assessing Officer passed an order in conformity with the same. Subsequently, such an adjustment has been scaled down to Rs.1,78,64,680/- by the order of the CIT(Appeals), which has become final, as stated by the learned Representative before us. The Assessing Officer vide an order dated 30/03/2014(supra) held the assessee guilty of default under section 271(1)(c) of the Act r.w. Explanation–7 thereof, whereby he treated the assessee of having furnished inaccurate particulars of income qua the addition on account of transfer pricing adjustment of Rs.1,78,64,860/-. Accordingly, the Assessing Officer imposed penalty under section 271(1)(c) of the Act of Rs.60,72,210/-, which was equivalent to 100% of the tax sought to be evaded on the addition of Rs.1,78,64,680/- made to the returned income. This action of the Assessing Officer has since been affirmed by the CIT(Appeals) also and, therefore, the assessee is in further appeal before us.
Before us, the primary argument of the Ld. Representative for the assessee is that the lower authorities have erred in imposing a penalty under section 271(1)(c) of the Act because the transfer pricing adjustment was only as a result of a difference of opinion between assessee and the Revenue in the manner of calculation of arm’s length price of the international transaction and there was no occasion where assessee’s method of determining arm’s length price was found to be (Assessment Year : 2008-09 unacceptable. At the time of hearing, Ld. Representative for the assessee emphasized that the transfer pricing study undertaken by the assessee has not been found to be erroneous or unacceptable and, therefore, it is not a case where there was any concealment or furnishing of inaccurate particulars of income. The Ld. Representative for the assessee also referred to the fact that efficacy of imposition of penalty in the present case can be examined in terms of Explanation - 7 to section 271(1)(c) of the Act; therefore, reliance placed by the CIT(Appeals) on the provisions of Explanation -1 to section 271(1)(c) of the Act to justify the penalty is misplaced. Apart from the aforesaid, the Ld. Representative for the assessee pointed out that since the assessment year 2005-06, the determination of the arm’s length price of the impugned transactions have been finalized by the income tax authorities in the same manner as was done in the year under consideration, and that in the earlier assessment year of 2005-06 and 2007-08, no penalty under section 271(1)(c) of the Act has been levied. Therefore, according to him under identical circumstances, in this year the Assessing Officer erred in levying the penalty.
On the other hand, Ld. Departmental Representative has defended the orders of the lower authorities in levying penalty under section 271(1)(c) of the Act. In particular, the Ld. Departmental Representative pointed out that the transfer pricing adjustment made in this year is very much based on the method adopted in the earlier years, which the assessee has eventually accepted and, therefore, there is no reason for the assessee to justify non-incorporation of such adjustment in the return of income itself.
We have carefully considered the rival submissions. Section 271(1)(c) of the Act prescribes for levy of penalty in a case where it is found that assessee has concealed the particulars of his income or that assessee has furnished inaccurate particulars of such income. Coming to the specific case on hand, penalty under section 271(1)(c) has been imposed in the context of computing income arising from an international transaction, having regard to its arm’s length price, as mandated by Section 92(1) of the Act. In this context, Explanation – 7 to section 271(1)(c) is relevant, 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.] As per the aforesaid, it is prescribed that where an amount is 6.1 added or disallowed in computing the total income under section 92C(4) of the Act, then the amount so added or disallowed shall be deemed to represent an income in respect of which particulars have been concealed or that the inaccurate particulars of such income have been furnished for the purposes of clauses (c) of Section 271(1) of the Act. So, however, such a deeming import would not operate, if the assessee is able to prove that the price charged or paid in such an international transaction was computed in accordance with the provisions contained in section 92C of the Act and in the manner
(Assessment Year : 2008-09 prescribed in such section in good faith and with due diligence. In other words, the circumstances prescribed in clause (c) of section 271(1) of the Act, namely, concealment of income or furnishing of inaccurate particulars of income are deemed to be satisfied where an addition is made in the course of determining the arm’s length price of an international transaction while computing total income under section 92C(4) of the Act . So, however, the rigors of such a deeming fiction are mitigated, if, the assessee is able to prove that the price charged or price paid in such an international transaction was computed in accordance with and in the manner prescribed in section 92C of the Act in good faith and with due diligence. It is abundantly clear that the onus shall be on the assessee to demonstrate that the price charged or paid in such an international transaction was computed in the manner prescribed in Section 92C in good faith and with due diligence. Quite clearly, the facts and circumstances of each case would establish as to whether or not the assessee has been able to discharge the burden of proving that price charged or paid in an international transaction has been computed in terms of section 92C in good faith and with due diligence.
6.2 In this background, we may now briefly touch upon the manner in which the income tax authorities have arrived at an adjustment of Rs.1,78,64,680/- in order to arrive at the arm’s length price of assessee’s international transaction with associated enterprise. In this context, it is relevant to observe that the Transfer Pricing Officer examined assessee’s arrangement entered with associated enterprise abroad and found that the entire manufacturing activity was (Assessment Year : 2008-09 undertaken solely for its holding company abroad i.e. the associated enterprise in question. The assessee was being compensated on the basis of a mark-up of 6% of standard cost incurred for the operations carried out by it. The assessee had declared a loss for the year under consideration. In its T.P study, the assessee company had considered the Transaction Net Margin Method(TNMM) as most appropriate method, which has not been disputed by the Transfer Pricing Officer. The only area of difference between the assessee and the Transfer Pricing Officer was the nature of the mark-up of 6%, at which assessee was being compensated by its associated enterprise. The assessee calculated the mark-up of 6% on the standard cost of operations being carried out by it whereas, the Transfer Pricing Officer was of the view that though mark-up of 6% was an arm’s length rate but application of the 6% mark-up on the standard cost was not proper. According to the Transfer Pricing Officer, the mark-up of 6% ought to have been calculated with reference to the total costs incurred by the assessee on its operations rather than the standard cost of operations. This is the area of difference between the assessee and the Revenue, which has resulted in an addition of Rs.1,78,64,680/-.
6.3 Factually speaking, in the order of Transfer Pricing Officer or the Assessing Officer there is no adverse comment with regard to the application of the TNM method selected by the assessee for determination of arm's length price of its international transaction with its associated enterprise. In fact, in the course of hearing, Ld. Representative for the assessee explained that the aforesaid issue cropped up for the first time in the course of transfer pricing
(Assessment Year : 2008-09 proceedings for assessment year 2005-06, wherein the Transfer Pricing Officer disagreed with the assessee on the adoption of cost base for applying the 6% mark-up rate, and an addition was made to the returned income. Further, in assessment year 2007-08 also, similar addition was made by the income tax authorities but neither in assessment year 2005-06 and nor in assessment year 2007-08 penalty under section 271(1)(c) of the Act was imposed. While in assessment year 2005-06, penalty proceedings under section 271(1)(c) were not initiated at all, whereas in assessment year 2007-08 though the proceedings were initiated but were eventually dropped by the Assessing Officer himself. The aforesaid factual matrix is not in dispute and, in our view, the aforesaid itself renders the impugned action of the Assessing Officer suspect, because it is not open for the Assessing Officer to hold an assessee guilty under section271(1)(c) of the Act in one year and not in other preceding two years under identical circumstances.
6.4 On this aspect, the Ld. Departmental Representative echoed the stand of the CIT(Appeals) which is to the effect that for assessment years 2005-06 and 2007-08, the Assessing Officer gave benefit of doubt to the assessee in not levying penalty under section 271(1)(c) of the Act. It is further argued that so far as the instant assessment year is concerned, the assessee was aware about wrong determination of the arm's length price in relation to the international transaction with associated enterprise and, therefore, the Assessing Officer was justified in imposing penalty under section 271(1)(c)of the Act in this year. The aforesaid arguments of the Ld. Departmental Representative have (Assessment Year : 2008-09 been countered by the assessee by pointing out that at the time of filing return of income for instant assessment year i.e. on 29/09/2008, the assessee had not accepted the stand of the Transfer Pricing Officer taken for the first time in assessment year 2005-06, in as much as, it was only after passing of the order by the CIT(Appeals) for assessment year 2005-06 i.e. on 19/11/2009 that the assessee accepted the said position and no appeal was filed with the Tribunal. Therefore, according to the assessee the plea of the Ld. Departmental Representative was unfounded. In our considered opinion, the return of income filed by the assessee qua the determination of arm's length price of its international transaction with associated enterprise cannot be faulted for not being in good faith under the aforesaid factual matrix. Ostensibly, the methodology adopted by the Department in assessment year 2005-06 came to be accepted by the assessee only after the filing of return of income for the current assessment year, therefore, the return of income filed by the assessee cannot be considered as non-bonafide.
6.5 In fact, the orders of the authorities below in the quantum assessment proceedings reveal that all information and documents as required by Section 92C of the Act read with rule 10B of the Income Tax Rules, 1962 for the purpose of determination of arm’s length price were furnished by the assessee. Moreover, the addition determined by the income-tax authorities is not on account of any inaccuracy, discrepancy or concealment found in the information and documents furnished by the assessee for determining the arm’s length price of the international transaction with the associated enterprise. The addition is (Assessment Year : 2008-09 due to the difference in the pricing methodology adopted by the income-tax authorities for determining the expected profits from the associated enterprise. Therefore, in our view, the fact-situation in the present case does not suggest that the computation of price charged in the impugned international transaction done as per Section 92C of the Act is lacking in good faith or due diligence, so as to render the assessee liable for penalty under section 271(1)(c) of the Act r.w. Explanation-7 thereof.
6.6 As a consequence, we set-aside the order of CIT(Appeal) and direct the Assessing Officer to delete the penalty imposed under section 271(1)(c) of the Act of Rs. 60,72,210/-, having regard to the aforesaid discussion.
In the result, appeal of the assessee is allowed, as above.