ITAT CHANDIGARH BENCH 'A'

IT Appeal No. 532 (Chd.) of 2010
[ASSESSMENT YEAR 2006-07]

T.R. SOOD, ACCOUNTANT MEMBER AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER

N.K. Saini for the Appellant.
 Tej Mohan Singh for the Respondent.

Ms. Sushma Chowla, Judicial Member - The appeal filed by the Revenue is against the order of the Commissioner of Income-tax (Appeals), Chandigarh, dated 26.2.2010 relating to assessment year 2006-07 against the penalty levied under section 271AA of the Income-tax Act, 1961.

2. The Revenue has raised the following grounds of appeal :

3. The issue raised in the appeal filed by the Revenue is against the deletion of penalty levied u/s 271AA of the Income Tax Act amounting to Rs. 8,06,932/-.

4. The brief facts of the case are that the assessee had furnished return of income declaring total income of Rs. 55887/-. The case of the assessee was picked up for scrutiny. The assessee was engaged in the business of testing of software for its associate enterprise Raicolnc aba QASource based in USA. The assessee had earned total receipts of Rs. 4,03,06,611/- from its associate enterprise. The said amount received by the assessee as per the Assessing Officer was on account of international transaction as defined in section 92B of the Income Tax Act. The Assessing Officer noticed that the assessee alongwith its audit report had furnished in Form No. 3CEB the details of international transactions and transactional net marginal method was declared to have been used to determine the arms length price u/s 92C(1) of the Act. The Assessing Officer noted that in view of the assessee entering into international transaction, as per section 92D of the Act, the assessee had to maintain and keep information and documents as prescribed under Rule 10D of the Income Tax Rules. During the course of assessment proceedings vide order-sheet entry, dated 10.10.2008, the assessee was asked to furnish complete working of arms length price for transaction with associate enterprise alongwith the documents as per Rule 10D of the Income Tax Rules. On the next date of hearing i.e. 21.10.2008 the assessee filed written reply but did not produce the documents as per Rule 10D of the Income Tax Rules. The Assessing Officer show caused the assessee vide letter dated 7.11.2008 to produce all the records prescribed under Rule 10D of the Income Tax Rules by 14.11.2008. The extract of the letter is reproduced at page 2 of the penalty order. The assessee was also informed that the failure to produce the said information would attract penalty u/s 271AA of the Act. None attended on behalf of the assessee on 14.11.2008. The Assessing Officer deputed the Inspector for verification of documents maintained as per Rule 10D of the Income Tax Rules. The Inspector carried out the inspection on 14.11.2008 and submitted the report in which as per the Assessing Officer he had reported that the company had not maintained any record as per clauses (g), (h) and (l) of Rule 10D of the Income Tax Rules. Another opportunity was given to the assessee to produce the documents on 17.11.2008, on which date no details were filed. The Assessing Officer in view thereof held the assessee liable to penalty u/s 271AA of the Act and levied penalty @ 2% of the value of international transaction of Rs. 4.03 crore and imposed penalty of Rs. 8,06,932/-. The order levying penalty u/s 271AA of the Act was passed after approval of JCIT, Range-6, Mohali vide letter No.5390 dated 5.12.2008. The said penalty was levied vide order dated 21.11.2008/12.12.2008.

5. During the appellate proceedings before the CIT (Appeals), the assessee filed written submissions, which are incorporated under para 6 at pages 3 to 8 of the appellate order in which the assessee explained the proceedings before the Assessing Officer from date to date and also pointed out that the counsel for the assessee had appeared on 24.11.2008 and submitted the requisite documents on record which have not been considered by the Assessing Officer. Specific report on the objections highlighted by the learned counsel for the assessee were called for from the Assessing Officer by the CIT (Appeals) vide office letter dated 17.12.2009 and the contents of the said letter are reproduced under para 7 at page 5 of the appellate order. In reply the Assessing Officer vide letter dated 4.1.2010 made submissions which are incorporated under para 8 at pages 5 and 6 of the appellate order. Further opportunity was sought by the Assessing Officer to explain the case and the matter was fixed on 17.2.2010 on which date both the learned A.R. for the assessee and the Assessing Officer were present and as per the CIT (Appeals) the technical issues were discussed. The Assessing Officer was confronted that minimum period of 30 days was prescribed u/s 92D(3) of the Act and the same was not given to the assessee and the order was passed in undue haste. In reply the Assessing Officer argued that 30 days time was given since the assessee was asked as per order-sheet entry dated 31.10.2008, 3.11.2008 and 5.11.2008 to give working of arms length price and the order levying penalty was passed on 12.12.2008, the assessee had got more than one month. The Assessing Officer further stated that even if the period was considered from 7.11.2008, on which date the show-cause notice was actually given and the order was passed on 12.12.2008. The CIT (Appeals) on perusal of the record held that some vital facts emerge, which are as follows :

6. The CIT (Appeals) vide para 12 held as under :

"12. The Assessing Officer's contention that since the notice was served on 8.11.08 and penalty imposed on 12.12.08, the assessee got the requisite time and opportunity is not tenable since firstly the notice required him to produce the books and documents within 5 days instead of 30 days extendable to 60 as provided u/s 92-D of the Act and secondly as already detailed, the draft penalty order was prepared on 21.11.08 which was approved by the JCIT on 5.12.08. Furthermore, the assessee was not given reasonable opportunity of being heard before imposition of penalty."

7. In view thereof, the CIT (Appeals) held that "neither mandatory timelines have been adhered to while imposing penalty in this case, nor was any opportunity granted to the assessee before imposition of the same. This is strongly indicative of the fact that the issue was prejudged and imposition of penalty was pre-decided".

8. The Revenue is in appeal against the order deleting penalty u/s 271AA of the Act. The learned D.R. for the Revenue placed on record the copy of the order-sheet entries passed in the case. It was pointed out by the learned D.R. for the Revenue that under the provisions of section 92D r.w.s.10D of the Act the period is prescribed. The learned D.R. for the Revenue pointed out that the Assessing Officer allowed one and half month's time to the assessee to furnish the requisite details and the assessee failed to produce the documents on various occasions. Further the assessee failed to maintain details as per clauses (g), (h) and (l) of Rule 10D of Income Tax Rules. The learned D.R. for the Revenue further drew our attention to the findings of the CIT (Appeals) at page 6 of the appellate order.

9. The learned A.R. for the assessee pointed out that section 92D of the Income Tax Act talks of show-cause notice and mere writing in order-sheet does not tantamount to issue of notice. It was stressed by the learned A.R. for the assessee that first notice was issued for 7.11.2008. The learned A.R. for the assessee pointed that assessment proceedings in the case were still pending but the order levying penalty was passed before the close of the assessment proceedings. The learned A.R. for the assessee further submitted that the reply filed by the assessee on 8.12.2008 was not considered by the Assessing Officer. It was further pointed out that the report in Form No. 3CEB is dated 5.7.2006 and transactional net marginal method was followed in the report of transfer pricing. The learned A.R. for the assessee stressed that no details as per clauses (g), (h) and (l) of Rule 10D of Income Tax Rules were to be kept as there were no uncontrolled transactions. An alternate plea was raised by the learned A.R. for the assessee that penalty levied in the present case was only in connection with the technicalities and no revenue loss was caused in the case. Reliance was placed on the decision of the Hon'ble Supreme Court in Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26 for the proposition that in the absence of any revenue loss, no penalty was leviable. Further reliance was placed on undermentioned decisions:

10. We have heard the rival contentions and perused the record. The perusal of the order levying penalty under section 271AA of the Act passed by the Assessing Officer and the photocopy of order-sheet entries reflect the undermentioned position :

11. The photocopies of the order-sheet entries have been furnished on record by the learned D.R. for the Revenue.

12. The assessee has also furnished Paper Book in which it has annexed Form No.3CEB alongwith annexures 1 to 12 of the Paper Book, copies of the replies dated 7.11.2008, 12.11.2008, 14.11.2008, 17.11.2008, 24.11.2008 along with copies of transfer pricing report are annexed at pages 13 to 19 of the Paper Book. Thereafter the copies of the written submissions furnished before the CIT (Appeals) are annexed. The learned A.R. for the assessee pointed out that the Tribunal in ITA No.1115/Chd./2008 and ITA No.116/2009, vide order dated 29.4.2011 had held that in the captioned assessment year the international transaction between the assessee and its associated enterprise was at arm's length price. The copy of the said order of the Tribunal is placed at pages 108 to 151 of the Paper Book.

13. Now coming to the relevant provisions section 92D of the Act, we find that under section 92D of the Act it is provided that where a person, who had entered into an international transaction, is bound to keep and maintain such information and documents in respect thereof as may be prescribed. The said prescription of documents is as per Rule 10D of the Income Tax Rules. Under section 92D (3) of the Income Tax Act, the Assessing Officer or the CIT (Appeals), during the course of any proceedings under the Act, may require such person who had entered into international transaction, to furnish information or documents in respect thereof, as may be prescribed under sub-section (1), within the period of 30 days from the date of receipt of notice issued in this regard. The proviso entails extension of the period of 30 days by a further period not exceeding 30 days. The information and the documents requisitioned u/s 92D of the Act are prescribed under Rule 10D of the Income Tax Rules. The said information and/documents are to be maintained by the person entering into an international transaction, where the aggregate value of the said transaction exceeds Rs. 1 crore. The proviso provides that the assessee is required to substantiate its claim of the income arising from international transaction to have been computed in accordance with section 92 of the Act. The information and documents are to be kept and maintained for a period of 8 years from the end of the relevant assessment year. Any person who enters into international transaction is to obtain a report from the Accountant and furnish the said report before the specified date in the prescribed form and verified in the prescribed manner by such Accountant. Under Rule 10E of the Income Tax Rules it is provided that the report of the Accountant is required to be furnished under section 92E of the Act in Form No. 3CEB. Where the assessee has failed to keep and maintain the information and documents as required u/s 92D(1) or (2) of the Act, the Assessing Officer or the CIT (Appeals) may direct levy of penalty u/s 271AA of the Act being equal to 2% of the value on each international transaction entered into by such persons. Section 271AA of the Act reads as under:

"271AA. Penalty for failure to keep and maintain information and document, etc., in respect of certain transactions.—Without prejudice to the provisions of section 271, if any person fails to keep and maintain any such information and document as required by sub-section (1) or sub-section (2) of section 92D, the Assessing Officer or Commissioner (Appeals) may direct that such person shall pay, by way of penalty, a sum equal to two per cent of the value of each international transaction entered into by such person."

14. In the facts of the present case, admittedly, the assessee had entered into international transactions with associate concern. In view of the such international transaction, the assessee was to keep and maintain the information and documents as prescribed under Rule 10D of the Income Tax Rules, which in turn is authorized by section 92D(1) of the Act. From the perusal of the documents furnished by the assessee in the Paper Book filed before us we find that the assessee had furnished audit report in Form No. 3CEB which is dated 5.7.2006 and is placed at pages 1 to 12 of the Paper Book. In the annexure to the said audit report, the particulars relating to international transactions were furnished. The assessee had also furnished the information in respect of its transaction with Raicolnc aba QASource, the associate concern in Annexure-A. The name and address of the associate enterprise along with brief description of the business carried out is furnished. In Annexure-B of Form No.3CEB, the assessee had detailed international transaction carried out by the assessee for the financial year 2005-06 which totalled to Rs. 4.03 crores. The said transaction has been found to be at arms' length price and no adjustment is required to be made as held by the Tribunal (supra) in assessee's own case vide order dated 29.4.2011. Once the transaction between associate concerns has been accepted to be at arms' length price, first of all, there is no merit in the levy of penalty under section 271AA of the Act.

15. The provisions of section 271AA of the Act require giving of show-cause notice to the assessee and period of show-cause is prescribed as 30 days. As referred by us in the paras hereinabove, the show-cause notice given by the Assessing Officer suffers from infirmity as the stipulated show-cause period of 30 days has not been given to the assessee. Further under the provisions of the Act, extension of 30 days can also be provided to the assessee, which again has not been given. Even if we accept the contention of the learned D.R. for the Revenue that show-cause notice could be given by way of order sheet entries and there was no requirement of giving separate show-cause notice in writing, we find that first query was raised by order-sheet entry dated 10.10.2008. The order levying penalty under section 271AA of the Act is dated 21.11.2008/12.12.2008. If the period prescribed under the Act for replying to the show-cause notice was to be considered i.e. 30 days extendable to 60 days, the order proposed by the Assessing Officer on 21.11.2008 is passed in a hurry and is bad in law. Further the Assessing Officer had made enquiries through the Inspector, who vide Report dated 14.11.2008, admitted that the assessee was maintaining records, which were inspected by him at the premises of the assessee. The Assessing Officer refers to another report of Inspector, which is contrary to the first report, but the same cannot be relied upon, as it was not confronted to the assessee during the assessment proceedings or thereafter. Another plea raised by the learned A.R. for the assessee was that it was not the case of the Assessing Officer that the assessee had not kept the records. Only objection was that the assessee had not maintained particulars as per clauses (g),(h) & (l) of Rule 10D of Income Tax Rules, which as per the learned A.R. for the assessee, were not prescribed documents vis-à-vis the assessee, as there was no uncontrolled transactions. The perusal of Rule 10D of Income Tax Rules reflects that documents and information prescribed under Rule 10D of Income Tax Rules are voluminous and various clauses are prescribed under Sub-Rule(1) thereof, and all such clauses are not applicable to a given case.

16. The Delhi Bench of the Tribunal in Cargill India (P) Ltd. (supra) held as under:

"The documents and information prescribed under rule 10D is voluminous and it would only be in rarest cases, that all the clauses of sub-rules would be attracted. It is not possible to casually ask for information under all the clauses. It is likely that in some cases, the assessee need not carry any analysis of functions performed, risk assumed and assets employed; there may be an exactly similar uncontrolled transaction with independent unconnected party to establish that transaction was an arm's length transaction. In such a case, clause (e) of rule 10D(1) would have no application and no information under this clause need be maintained or produced before the tax authorities. Likewise, there might be no necessity to carry economic analysis, take forecasts, budgets or other financial estimates of business. International transaction involved may be of such a nature, that analysis and forecasts, etc., mentioned above have no connection or relevance for the determination of ALP. Depending upon the nature of the transaction, question of application of assumptions, policies or price negotiations and, therefore, of clause (k) of sub-rule (1) would arise. This is itself indicated in the said clause by use of word 'if any'. It is, therefore, clear that one or more clauses of sub-rule (1) are applicable and not all clauses of the rule in a given case. It would all depend upon the facts and circumstances of the case, more particularly the nature of international transactions carried or services involved. Likewise, supporting documents, official publications, reports, market research studies, technical publications of the Government or other institute of national or international repute, and all the documents mentioned in rule 10D(3) may not be needed in case of every assessee. Stock exchange, price publication or commodity, market quotations would only be relevant in cases of international transactions involving stock or commodities. Such information would be totally irrelevant in cases of transactions, say for example relating to 'intangibles'. Application of one or more clauses of sub-rule (3) would depend upon facts involved in the international transactions. Further, if official publications are needed in the case, other documents like report, studies, and data from the Government agencies mentioned in the same clause might not be required. Information even in the same clause may be alternative in some cases. It is evident from the information/documents prescribed in sub-rules of rule 10D that the assessee and the tax authorities are to see what information and documents and from which particular clause is relevant and, therefore, needed for determining ALP. The consideration of this aspect is material before issuing notice under section 92D(3), if it is to serve its purpose."

17. The perusal of the information and documents required to be kept and maintained under section 92D of the Act as per Rule 10D of Income Tax Rules reflects voluminous documents and information are prescribed thereunder and only in rare cases all the clauses of Sub-Rule to Rule 10D would be applicable. The facts and circumstances of each case would determine the requisite documents/information to be maintained in relation to the international transactions carried on by the assessee. The requirement of law is not to maintain each and every document but maintain such documents as depending upon the facts and circumstances of the international transactions carried on by the assessee. Consequently, the application of all or more clauses of Sub Rules would not be attracted. In view thereof where the Assessing Officer has show caused the assessee to file details/documents maintained as per Rule 10D of Income Tax Rules without specifying any particulars itself, we find no merit in the order of the Assessing Officer levying penalty under section 271AA of the Act, holding the assessee not to have maintained certain documents. Further the Assessing Officer has levied the said penalty under section 271AA of the Act as the assessee had defaulted in not maintaining details as per clauses (g),(h) & (l) of Form No.10D, which as explained by the learned A.R. for the assessee, were not to be maintained by the assessee.

18. Another aspect of the proceedings before the Assessing Officer levying penalty under section 271AA of the Act reflect that the penalty proceedings were initiated by another officer, who proposed the order on 21.11.2008. Though on 24.11.2008 during the assessment proceedings, there was discussion on transfer pricing, as noted by the CIT (Appeals). On 27.11.2008, another officer was posted, who did not conduct any penalty proceedings, but signed the order levying penalty under section 271AA of the Act and dispatched the same on 12.12.2008 itself, after receiving approval from JCIT, Range 6, Chandigarh dated 5.12.2008. It reflects no opportunity of hearing was afforded by the Officer imposing penalty under section 271AA of the Act.

19. In view of the abovesaid facts and circumstances, we are in conformity with the findings of CIT (Appeals) that the order levying penalty under section 271AA of the Act was passed in perfunctory manner without giving requisite show-cause notice and without affording proper opportunity to the assessee. Further there is no merit in the levy of penalty under section 271AA of the Act even on the merits of the case as the Inspector deputed to inspect the record of the assessee had given a report that the assessee had maintained requisite documents. No reliance can be placed on the second report of the Inspector as the same was not confronted to the assessee. Even otherwise there is no merit in the levy of penalty under section 271AA of the Act for the default of not maintaining details as per clauses (a), (h) and (l) of Form No.10D, which were not maintainable by the assessee. The international transaction entered upon by the assessee with its associate concern has been held to be at arms' length and as such there is no merit in the levy of penalty under section 271AA of the Act. Upholding the order of the CIT (Appeals) we dismiss the grounds of appeal raised by the Revenue.