ASSISTANT COMMISSIONER OF INCOME TAX,, PUNE vs. HONEYWELL AUTOMATION INDIA LIMITED,, PUNE

PER R.S.SYAL, VP : This appeal by the Revenue is directed against the order passed by the ld. CIT(A) on 23-01-2017 deleting penalty of Rs.1,48,40,838/- imposed by the Assessing Officer (AO) by invoking Explanation 7 to section 271 (1)(c) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) in relation to the assessment year 2005-06. 2. Briefly, the facts of the case are that the assessee has been carrying the business in the automation and control industry.

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Certain international transactions were reported in Form No.3CEB.

On a reference made by the AO, the Transfer Pricing Officer

(TPO) determined the Arm’s Length Price (ALP) and accordingly

proposed transfer pricing adjustment of Rs.36,47,76,500/-. The

first appeal had the effect of reducing the transfer pricing

adjustment to Rs.4,13,68,191/-. On the basis of the sustained

amount of transfer pricing addition, the AO imposed penalty

u/s.271(1)(c) of the Act amounting to Rs.1,48,40,838/-. The ld.

CIT(A) deleted the same. The Revenue has come up in appeal

against such deletion.

through the relevant material on record. The penalty has been

imposed u/s 271(1)(c) with reference to Explanation 7, 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

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in section 92C and in the manner prescribed under that section, in good faith and with due diligence.

every transfer pricing addition is deemed to represent concealed

income etc. warranting imposition of penalty unless the assessee

cumulatively satisfies the following three conditions, viz.,

i) that the ALP was computed as per one of the prescribed

methods u/s 92C;

ii) such ALP determination was in the manner prescribed

under the relevant rule; and

iii) such ALP determination was done in good faith and with

due diligence.

Explanation 7 is concerned inasmuch as the assessee computed the

ALP in accordance with the provisions contained in Section 92C

by applying the Transactional Net Margin Method (TNMM),

which is one of the recognized methods. Thus the first condition is

not violated.

violated as the assessee determined the ALP in the manner

prescribed under Rule 10B(1)(e) of the Income-tax Rules, 1962,

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which provides mechanism for determining the ALP under the

TNMM.

should have been done by the assessee in good faith and with due

diligence. Two expressions have been used herein: `good faith’ and

`due diligence’, both of which have not been defined under the

Act. Section 3(22) of the General Clauses Act, 1897 defines

`good faith’ as: `a thing shall be deemed to be done in “good faith”

where it is in fact done honestly, whether it is done negligently or

not’. As per this definition, the doing of an act honestly is a

requisite condition of good faith. An act done honestly does not

cease to be done in `good faith’, even if it was done negligently.

The second expression used herein is `due diligence’, which is not

defined even under the General Clauses Act. In the absence of its

any specific definition, we revert to its connotation in common

parlance. Ordinarily, the term `diligence’ means `carefulness’ and

`due’ means `adequate’. The expression `due diligence’, on a

whole, means doing of a thing with adequate care. In one sense,

`diligence’ is an antonym of `negligence’. When we read both the

expressions `good faith’ and `due diligence’ used in juxtaposition

to each other in the provision, contextually, they would mean

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determining the ALP honestly and with due care and not

negligently.

addition made by the AO for ascertaining if the assessee’s ALP

computation lacked either good faith or due diligence or both so to

warrant the imposition of penalty. In computing the `Operating

costs’ base under the TNMM, the assessee treated Bad debts and

Provision of bad debts as non-operating costs. The TPO albeit

accepted the application of the TNMM as the most appropriate

method along with the PLI, but treated Bad debts and Provision

for bad debts as operating costs and further went on to exclude

certain companies from the list of comparables by introducing a

bad debt filter. While upholding bad debts as operating cost, the

Tribunal approved the contention of the assessee for treating

Provision for bad debts as non-operating as the same was suo motu

disallowed by the assessee in the computation of its total income.

The Tribunal also rejected the Departmental point of view of

applying a bad debt filter for excluding certain companies from the

list of comparables. On an overview of the above factual scenario,

it is palpable that the stand of the assessee on the issues raised by

the TPO in the ALP determination cannot be construed as lacking

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either good faith or due diligence. It was a genuine difference of

opinion between the assessee and the TPO, which got resolved by

the Tribunal substantially in favour of the assessee. Thus it is

overt that the assessee did not violate even the third condition.

three necessary ingredients for non-imposition of penalty in terms

of Explanation 7 to section 271(1)(c) are satisfied in the extant

case. We, therefore, accord our imprimatur to the impugned order

deleting the penalty.

Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; �दनांक Dated : 18th June , 2021 Satish आदेश क� क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to: अ�ेिषत आदेश आदेश आदेश अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. 3. The CIT(A)-13, Pune 4. The Pr.CIT-5, Pune िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे 5. “C” / DR ‘C’, ITAT, Pune गाड� फाईल / Guard file 6. आदेशानुसार आदेशानुसार आदेशानुसार/ BY ORDER, आदेशानुसार // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

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Date 1. Draft dictated on 17-06-2021 Sr.PS 2. Draft placed before author 18-06-2021 Sr.PS 3. Draft proposed & placed before the JM second member 4. Draft discussed/approved by Second JM Member. 5. Approved Draft comes to the Sr.PS/PS Sr.PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order.

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