IT Appeal No. 1491 (Hyd.) of 2012
[ASSESSMENT YEAR 2004-05]

B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SAKTIJIT DEY, JUDICIAL MEMBER

M.H. Naik for the Appellant.
Deepak Chopra for the Respondent.

ORDER

Saktijit Dey, Judicial Member - This appeal by the department is directed against the order dated 19-7-2012 of CIT (A)-II, Hyderabad pertaining to the assessment year 2004-05.

2. The grievance of the department in the present appeal is with regard to the action of the CIT (A) in deleting penalty imposed u/s 271(1)(c) of the Act of an amount of Rs.89,89,172/-.

3. Briefly the facts are the assessee a private limited company filed its return for the impugned assessment year declaring nil income after claiming deduction u/s 10A of the Act. During the scrutiny assessment proceedings, the Assessing Officer noticing that the assessee had entered into International Transaction with its AE referred the matter to the TPO for determining the ALP of International Transaction. The TPO after considering the TP study made by the assessee and other materials gathered by him determined the ALP of the International Transaction at Rs.41,54,91,785/- as against Rs.39,04,34,858/- disclosed by the assessee. The TPO while determining the ALP of International Transaction rejected the TP study report of the assessee basically on the ground that the assessee had used multiple year data instead of using the current year data. Further, out of 14 companies selected as comparables by the assessee in his TP study report, the TPO accepted only four companies and rejected the balance 10 companies. On the basis of the ALP determined by the TPO, the Assessing Officer completed the assessment u/s 143(3) of the Act by making an addition of Rs.2,50,56,927/- being the transfer pricing adjustment on account of difference in ALP determined by the TPO. The assessee being aggrieved of the addition made, preferred an appeal before the CIT (A).

4. The CIT (A) while upholding the finding of the TPO with regard to the use of current year data and rejection of comparables however allowed marginal relief by allowing +/-5% deduction u/s 92CA(2) of the Act. Against the order passed by the CIT (A), both the assessee as well as department carried appeals before the Income-tax Appellate Tribunal.

5. The Tribunal while dismissing the appeal of the assessee allowed the appeal of the department by holding that the CIT (A) was not correct in allowing +/- 5% deduction from the ALP determined by the TPO. Thus, in effect the addition made by the Assessing Officer was confirmed. It is stated by the assessee that against the order passed by the Income-tax Appellate Tribunal, the assessee has preferred an appeal before the High Court of Andhra Pradesh which is still pending. Be that as it may, the Assessing Officer issued a show cause notice to the assessee for imposition of penalty u/s 271(1)( c) of the Act. In response to the aforesaid notice issued by the Assessing Officer, the assessee submitted its explanation stating therein that penalty u/s 271(1)(c ) of the Act cannot be imposed as a claim made based on legal interpretation when disallowed cannot lead to concealment of income or furnishing of inaccurate particulars of income. It was submitted that unless there is culpable negligence or wilful omission on the part of the assessee, penalty cannot be imposed. It was further contended that if the default arose from a bonafide belief and is not a deliberate act of defiance of law, no penalty can be leviable. An addition made to the income returned will not necessarily mean that there is a concealment of income or furnishing inaccurate particulars so as to attract the provisions of section 271(1)(c ) of the Act. It was submitted that the assessee has neither concealed its income nor furnished any inaccurate particulars of income. The assessee had undertaken the economic analysis for determination of ALP in accordance with the provisions of the statute and based on the transfer pricing study undertaken by an independent external consultant. It was concluded that the price received by the assessee in respect of International Transaction with its AE is within the ALP. Therefore, the assessee cannot be attributed with the intention of concealing of income or furnishing of inaccurate particulars of income for attracting the provisions of section 271(1)(c) of the Act. In support of such contention, the assessee relied upon various judicial precedents including the decision of Hon'ble supreme Court in case of CIT v. Reliance Petroproducts (P.) Ltd. [2010] 322 ITR 158/189 Taxman 322. The Assessing Officer however was not convinced with the explanation submitted by the assessee and proceeded to pass an order imposing penalty u/s 271(1)(c) of the Act of an amount of Rs.89,89,172/-. Being aggrieved of the penalty order, the assessee went in appeal before the CIT (A).

6. In course of hearing of appeal before the CIT (A), the assessee contended that since it has made full and complete disclosure of all relevant particulars in its return of income, it cannot be accused of either concealment particulars of income or furnishing inaccurate particulars of income. It was submitted that all necessary details and documentary evidence were produced before the Assessing Officer/TPO which clearly establishes the bonafide intention of the assessee. It was submitted that the additions based on which the penalty was levied are themselves based on the information furnished by the assessee and arise purely on account of a difference of interpretation of law and facts between the Assessing Officer and the assessee, with regard to the interpretation of statutory provisions and their applicability.

7. In support of such contention, the assessee relied upon various judicial precedents. The CIT (A) after considering the submission of the assessee in the light of the orders passed by the TPO/Assessing Officer and other materials on record held that there is no case for imposition of penalty u/s 271(1)(c ) as neither there is any concealment of income or furnishing of inaccurate particulars of income by the assessee. The CIT (A) observed that so far as methodology adopted by the assessee for determining the ALP of International Transaction is concerned, the same has been accepted by the TPO. The TPO has only not accepted certain variables due to application of different filters which resulted in re-working of the ALP. The CIT (A) felt that the determination of the ALP has been arrived at on the basis of estimation by the assessee as well as the TPO which may be due to a difference of opinion. She therefore concluded that when there is difference of opinion in respect of interpretation of statutory provisions, there cannot be concealment of income. The CIT (A) relying upon the decision of Hon'ble Supreme Court in the case of Reliance Petroproducts (P.) Ltd. (supra) and the decision of Income-tax Appellate Tribunal in case of Dy. CIT v. RBS Equities India Ltd. [2011] 133 ITD 77/13 taxmann.com 30 (Mum.) allowed the appeal of the assessee by deleting the penalty imposed u/s 271(1) (c) of the Act. Being aggrieved of the aforesaid order of the CIT (A), the department is in appeal before us.

8. The learned Departmental Representative strongly arguing for imposition of penalty u/s 271(1)(c ) of the Act contended that the adjustment to ALP determined by the TPO having been confirmed by the Income-tax Appellate Tribunal, concealment of income and or furnishing of inaccurate particulars of income to the extent by the assessee is true. Hence imposition of penalty u/s 271(1)(c ) of the Act is justified.

9. The learned authorised representative for the assessee while strongly supporting the order of the CIT (A) submitted that the rejection of the TP report by the TPO is merely on the basis of difference of opinion being entertained by the assessing officer and not due to any conscious attempt on the part of the assessee to mislead or misdirect correct computation of income by furnishing inaccurate particulars or not furnishing adequate information. It was submitted that the TPO has rejected the TP report of the assessee basically on the issue of use of multiple year data and by applying certain additional filters for rejecting some of the comparables selected by the assessee. Hence, it cannot be said that there is either concealment of income or furnishing inaccurate particulars on the part of the assessee when TP report has been obtained from an outside expert and the methodology adopted in the TP report for determining the ALP has not been disputed by the TPO. It was therefore submitted that in the given circumstances the imposition of penalty u/s 271(1) (c) of the Act is not called for in support of such contention, the learned authorised representative for the assessee relied upon the following decisions:—

10. We have considered submissions of the parties and perused the material on record. We have also carefully applied our mind to the decisions placed before us. It is an admitted fact that the penalty u/s 271(1)(c ) has been sought to be imposed on the basis of addition made on account of difference between the ALP determined by the TPO and shown by the assessee. The CIT (A) has deleted the penalty imposed, accepting the contention of the assessee by observing as under:—

'5.1 The CIT (A) only allowed marginal relief by giving benefit u/s. 92C(2) of the Act to consider the ALP at 5% variance to the average margin of comparable companies. The Hon'ble Tribunal has set aside the relief granted by the CIT(A) and the appeal of the appellant is pending before the High Court. In the present case, the appellant and the TPO have followed the same method to determine the ALP i.e. (TNMM). It is not the case of TPO rejecting the methodology adopted by the assessee as being not applicable but the rejection of some variables as not acceptable for various reasons. It is an estimate on the basis of different variables by both the appellant and the AO and the difference in the value of ALP arrived at by the AO was due to the re-working of the ALP by using different filters. This in my opinion is an estimate made by both and there is a difference of opinion and where there is a difference of opinion in respect of interpretation of the statute there cannot be concealment of income. It may be noted that in the case of CIT v. Reliance Petro products (P.) Ltd. [2010] 322 ITR 158, the Hon'ble Supreme Court held that the mere making of a claim which is not sustainable in law by itself, will not amount to furnishing of inaccurate particulars regarding the income of the assessee. Such a claim made in the return cannot amount to furnishing inaccurate particulars. To attract penalty the details supplied in the return must not be accurate, not exact nor correct or according to the truth or erroneous; where there is no finding that no details supplied by the assessee in its return or found to be incorrect or erroneous or false, there is no question of inviting the penalty u/s. 271(1)(c).

5.2 On the issue of penalty u/s. 271(1)(c) Explanation-7, the Hon'ble Mumbai Tribunal after analyzing the provisions held that :

"10…… The grounds on which the ALP determination by the assessee has been rejected are thus reasonably debatable. Lack of good faith and due diligence cannot be inferred when the grounds on which ALP determined by the assessee has been rejected are reasonably debatable, even If correct. The assessee has obtained a transfer pricing study from an oats/de expert, and this transfer pricing study, objectivity of which is neither called into question or seems to be, upon perusal of this TP study, questionable to us anyway, approves TNMM for determination of ALP- a proposition which has not been specifically rejected by the revenue authorities. On these facts, lack of 'due diligence in determining the ALP is neither indicated nor can be inferred In such a situation it cannot be said that the assessee has not determined the ALP in accordance with the scheme of Section 92C in good faith and with due diligence. In our considered viel1j therefore, the conditions pre3cedent for invoking Explanation 7 to section 271(l)(c) did not exist on the facts of this case. Neither the case of the assessee is covered by the main section 271(1)©, nor Explanation 7 thereto can be invoked on the facts of this case. Explanation 1 to Section 271(1)(c), as we have seen earlier in our discussions has no application in respect of additions or disallowances in respect of ALP adjustments anyway not any other deeming fictions come into play here. Accordingly, the facts of the present case did not warrant or justify the imposition of penalty under section 271(1)(c)"

5.3 It may be noted that the appellant had undertaken transfer pricing study carried out by an independent external consultant, in accordance with the provisions of the Act, read with the Income-tax Rules, and it has made full disclosure in its return of income with financial statement and TP documentation. The AO has not rejected the methodology (TMNN) adopted by the appellant. He has only rejected some of the comparables taken by the appellant. In that sense it cannot be stated that the appellant has concealed income or filed inaccurate particulars as pointed out by the Hon'ble Tribunal in the above case who have opined that lack of good faith and due diligence cannot be inferred when the grounds on which the ALP determined by the assessee has been rejected are reasonably debatable, even if correct and in such a situation it cannot be said that the appellant has concealed income or filed inaccurate particulars to attract the penalty proceedings u/s. 271(1)(c). Accordingly, the penalty u/s 271(1)(c) is hereby cancelled.'

11. As would be evident from the elaborately discussed and well as reasoned order of the CIT (A), the TPO has not rejected the methodology adopted in the TP report submitted by the assessee obtained from an external expert. The difference in ALP arose only on account of difference of opinion between the assessee and TPO with regard to the use of multiple year data and selection of certain companies as comparables. Therefore, in our view the CIT (A) is correct in holding that the difference in the value of ALP was due to difference of opinion with regard to certain issues in the context of interpretation of statutory provisions and not due to lack of good faith and due diligence. The issues on the basis of which the ALP shown by the assessee has been rejected are debatable, hence cannot be said to be leading to concealment of income or furnishing inaccurate particulars of income when the assessee has obtained the TP report from an external expert. In these circumstances, in our view the CIT (A) was justified in deleting the penalty u/s 271(1)(c) of the Act. The ratio laid down by the Income-tax Appellate Tribunal, Mumbai Bench in case of RBS Equities India Limited (supra) squarely applies to the facts of the present case. The same view has also been expressed in case of Vertex Customer Services India (P.) Ltd., Verizon Communication India (P.) Ltd., and Lexmark International (supra). In aforesaid view of the matter, we do not find any infirmity in the order of the CIT (A) in deleting the penalty imposed u/s 271(1)(c ) of the Act and accordingly we uphold the same by dismissing the ground raised by the department.

12. In the result, appeal filed by the department stands dismissed.