Gujarat High Court
The Commissioner Of Income Tax ... vs M/S. Shell Global Solutions ... on 26 October, 2023
Author: Biren Vaishnav
Bench: Biren Vaishnav
NEUTRAL CITATION
C/TAXAP/483/2023 CAV JUDGMENT DATED: 26/10/2023
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 483 of 2023
With
R/TAX APPEAL NO. 485 of 2023
With
R/TAX APPEAL NO. 486 of 2023
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE BIREN VAISHNAV
and
HONOURABLE MRS. JUSTICE MAUNA M. BHATT
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1 Whether Reporters of Local Papers may be allowed
to see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy
of the judgment ?
4 Whether this case involves a substantial question
of law as to the interpretation of the Constitution
of India or any order made thereunder ?
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THE COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION
AND TRANSFER PRICING)
Versus
M/S. SHELL GLOBAL SOLUTIONS INTERNATIONAL B.V.
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Appearance:
MR.VARUN K.PATEL(3802) for the Appellant(s) No. 1
MR.S.N.SOPARKAR, LD. SENIOR ADVOCATE for MR B S
SOPARKAR(6851) for the Opponent(s) No. 1
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CORAM:HONOURABLE MR. JUSTICE BIREN VAISHNAV
and
HONOURABLE MRS. JUSTICE MAUNA M. BHATT
Date : 26/10/2023
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COMMON CAV JUDGMENT
(PER : HONOURABLE MR. JUSTICE BIREN VAISHNAV)
1. Following substantial questions of law are
framed:
(a) Whether in the facts and circumstances of
the case, the learned ITAT has erred in setting
aside the findings of the CIT(A) and directing the
Assessing Officer to delete the penalty u/s.
271(1)(c) of the Income Tax Ac, 1961 levied by
him?
(b) Whether in the facts and circumstances of
the case, the learned ITAT has erred in law and
on facts in taking view that there is no furnishing
of any inaccurate particulars of income by
assessee when assessee had made adequate
disclosure of all material facts in Form 3CEB,
TPSR and also during TP assessment and
scrutiny assessment when substantial
proceedings addition/adjustment was confirmed
by ITAT?
(c) Whether in the facts and circumstances of the
case, the learned ITAT has erred in law and on
facts in holding that Explanation 7 to Sec.
271(1)(c) of the Income Tax Act cannot be
invoked while levying penalty in relation to the
transfer pricing adjustment when the said
explanation was neither referred to nor relied
upon at the time of initiation of penalty
proceedings under the Act?
(d) Whether in the facts and circumstances of
the case, the learned ITAT has erred in law and
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on facts in holding that "Base Erosion" is a
debatable issue when Kolkata Special Bench of
ITAT and Ahmedabad ITAT itself has already
taken a view against the appellant on the same
issue in assessee's own case?
(e) Whether in the facts and circumstances of the
case, the learned ITAT has erred in law and on
facts in holding that reimbursement of expenses
does not qualify as FTS and hence no penalty can
be levied u/s. 271(1)(c) of the Act on such
expenses?"
2. The respondent assessee company is a Foreign
Company registered in Netherlands, deriving income
from Royalties or fees for technical services. A return
of income of Rs.9,19,53,530/- was filed. Audit Report
under Section 92E relating to international
transactions for 3CEB was filed. The case was
selected for scrutiny and a notice under Section
143(2) of the Act was issued on 22.09.2010. On
verification of Form 3CEB, it was noticed that the
assessee company had entered into international
transactions. The case of the assessee was referred
to the Transfer Pricing Officer vide letter dated
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15.11.2010 for determination of Arm's length price of
the international transactions. A draft order was
passed under Section 144C(1) and the assessee made
objections before the Dispute Resolution Panel. The
DRP vide order dated 31.08.2012 issued directions
under Section 144C(5) of the Act. A reference was
made under Section 92CA(1) of the Income Tax Act to
the Transfer Pricing Officer who passed an order on
10.10.2011 making an upward adjustment of
Rs.29,43,61,998/- on account of variations in service
charges. The upward total adjustment by way of an
order under Section 92CA(3) of Rs.29,43,61,998/- was
made as above. By assessment order dated
25.10.2012 penalty proceedings were also proposed
to be initiated under Section 271(1)(C) for furnishing
inaccurate particulars of income and thereby
concealing income. The assessment order was under
challenge before the ITAT which dismissed the appeal
and the assessee is in appeal before the High Court in
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Tax Appeals on quantum which are admitted and
pending for final hearing.
3. In the penalty proceedings it was the case of the
respondent assessee that the whole mechanism
known as the Base Erosion Theory was adopted and
the application of arm's length principles for making
TP adjustment was not proper. Since the assessee
had charged additional fees from its Indian AES in
order to comply with Arm's Length Standards, the
additional fees would have been taxed in India in the
hands of the appellant @ 10% on gross basis, while at
the same time, the said additional fees would have
been allowed or deducted in the hands of the payers
HLPL for the purposes of computing their business
profits where such allowances or deductions would
have obtained tax shields @ 33.99% in the hands of
the tax payers. Thus, application of arm's length
principles would have resulted in the erosion of taxes
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payable in India to the extent of 24%.
4. Such an issue which was a subject matter of
challenge before a special bench, the assessee had
intervened and had failed, as a result of which, the
Tribunal had held against the appellant on quantum.
5. The whole issue was therefore a debatable issue
where views of various Tribunals were at variance
and therefore it was not a concealment of income. In
the penalty proceedings invoking Explanation 7 to
Section 271(1)(C) to DCIT, International Taxation
Division vide order dated 20.07.2017 held the
assessee liable to penalty. The CIT(A) confirmed the
order of penalty. The Tribunal, however, held that
the additions on which penalty had been levied was a
debatable issue in light of variance of legal issues and
opinions of the Karnataka Bench and the Pune Bench
and hence two views were possible and mere
difference of opinion does not justify levy of penalty.
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The appeal was allowed.
6. The Revenue is in appeal before us.
7. Mr.Varun Patel learned Senior Standing Counsel
for the department made the following submissions:
7.1 The appeal pertaining to quantum proceedings
are pending and since admitted where the Tribunal
held in favour of the Revenue and the assessee is in
appeal, the present appeals must be admitted and
tagged to be heard with those appeals.
7.2 Even the case of the assessee before the CIT(A)
was that the penalty proceedings be kept in abeyance
till the quantum proceedings are adjudicated and
therefore the assessee cannot now suggest otherwise
and oppose the admission of these appeals.
7.3 Reiterating the legal position, Mr.Patel would
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submit that reading Explanation 7 to Section
271(1)(c) indicated there was a deemed concealment
or giving of inaccurate particulars in reference to
Section 92 and hence the question of whether the
issue was debatable etc was not available to the
assessee.
7.4 Even otherwise the issue was no longer a
debatable issue as the Tribunal after considering the
order of the Special Bench where the assessee had
intervened, on interpretation of Section 92(3), not
accepted the Base Erosion Theory. Mr.Patel would
rely on the findings of the CIT(A) where the CIT(A)
had observed that these arguments would be of no
help as there is no provision under the Transfer
Pricing to give compensatory adjustment in the hands
of the AE. There is no difference of opinion and
hence, penalty proceedings were appropriate.
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8. Mr.S.N.Soparkar learned Senior Counsel
appearing with Mr.B.S.Soparkar learned advocate for
the assessee in the appeals, would make the following
submissions:
8.1 That no substantial question of law is involved in
the appeals. Merely because the quantum appeals
are admitted and pending, that by itself, would not be
a consideration of admission of appeals.
8.2 Independent examination in the penalty
proceedings would indicate that the Tribunal has
found that in the facts of the case no penalty
proceedings would have been initiated. This was not
even a case deserving invoking of Explanation 7 when
the assessee had proved that the price changed or
paid in such transaction was in accordance with
provisions contained in Section 92C.
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8.3 The finding of the Tribunal cannot be held to be
perverse.
8.4 Mr.Soparkar would submit that as held by the
Supreme Court, in the decision of Commissioner of
Income Tax, Ahmedabad v. Reliance
Petroproducts (P.) Ltd. reported in (2010) 189
Taxmann 332 making an incorrect claim in law
would not tantamount to concealment.
8.5 Full and complete disclosure of the Transfer
Pricing Mechanism was made. Mr.Soparkar would
take the Court through the Transfer Pricing Review
where the Base Erosion Theory was explained. Clear
comments were offered based on Circular
No.14/2001.
8.6 That, there was a divergence of opinion between
the Koltaka Bench and the Pune Bench of the
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Tribunal and the mechanism explained indicated that
the income of the assessee was in the nature of fees
for technical services and the assessee was a non-
residential. The receipts were chargeable to tax @
10%. The AE being an Indian company is chargeable
to tax at 33.99% and therefore if the assessee had
charged higher rates, the AE, would have claimed
deduction of higher expense claiming a larger
deduction resulting in a lower tax percent at 23.99%.
8.7 With regard to Explanation 7 of
Section 271(1)(C) reliance was also placed on a view
of the Delhi High Court decision in the case of Pr.
Commissioner of Income Tax-6 v. Mitsui Prime
India Composites India Pvt Ltd. in ITA No.913 of
2016 dated 17.01.2017 and in the case of Pri.
Commissioner of Income Tax v. Verizon India
Pvt. Ltd. in ITA No.460 of 2016 dated 22.08.2016.
On the submission of the Revenue that the appeal be
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kept pending as quantum appeal is pending, he would
rely on a judgement in the case of Principal
Commissioner of Income Tax-2 v. Sinosteel India
(P) Ltd. reported in (2019) 102 taxmann.com 610
(Delhi). Reliance was also placed on a Division Bench
order dated 11.09.2017 of this Court in Tax Appeal
No.659 of 2017.
9. Having considered the submissions made by the
respective parties, we need to consider whether
merely because quantum appeals at the hands of the
assessee are admitted, would itself entitle the
Revenue to press for admission of the appeals and
secondly, whether even independently do the appeals
involve a substantial question of law to consider a
case fit for admission of the appeals.
10. Facts need not be reiterated but shortly stated,
the Transfer Pricing Mechanism adopted by the
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assessee and the 'Base Erosion' theory was a
debatable issue and therefore on two opinions being
available could not be a case of penalty under Section
271(1)(C) read with Explanation 7.
11. In this backdrop, it would be apt to reproduce
the relevant discussion of the CIT(A) and that of the
Tribunal. Discussions of the CIT(A) read as under:
"7. I have gone through the penalty order
and duly considered the submissions filed by
appellant. On careful consideration of the
issue as brought out in the penalty order,
the grounds of appeal and the submissions
of appellant, the ground raised by the
appellant is decided hereunder:
8. Ground No. 2 being general in nature
does not require any specific adjudication.
9. Ground No. 1, 5, 6, 7, 8, 9 and 10 dealing
with transfer pricing adjustment are dealt
with together.
...
1. Reliance is placed on Circular No.
14/2001 read with section 92(3) of the Act
to contend that the purpose of transfer
pricing provisions is to be applied in the
cases wherein there is over all reduction in
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the taxes in India. In the instant case, if the
Appellant would have charged higher
amount of fees for technical services, HLPL
and HPPL would have claimed equivalent
amount of deduction. The appellant being a
foreign company would have paid taxes at
the rate of 10 percent and Indian company
would have saved taxes at the rate of 30
percent, hence effectively Indian tax base
would have eroded.
2. Computation of arm's length price of its
international transaction is bonafide, in
good faith and with due diligence. In this
regard, reliance is placed on the losses
incurred by the Indian AEs of the Appellant
and argument that since the payee
companies are incurring losses there is no
loss to the Indian government.
Further, reliance is placed on various case
laws to argue that in the cases where
transfer pricing adjustment is proposed and
if the Assessee is able to justify that entire
analysis was bonafide, in good faith and was
with due diligence, penalty cannot be
imposed on the Assessee.
3. The Appellant has made adequate
disclosures in Form No. 3CEB and TPSR
and also during the course of transfer
pricing assessment.
4. The case of the Appellant, case was
decided by the decision of Hon'ble Kolkata
Tribunal, Special Bench in the case of
Instrumentarium. Further, Hon'ble Pune
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Tribunal in the case of Cummins Inc in the
similar facts has decided in favour of the
Assessee. In view of the same, it is a case
where two views are possible and hence,
penalty should be not levied on the
Appellant.
5. Mere difference of opinion does not
justify levy of penalty.
6. Further, reliance was placed on Taxation
Ruling No. 2007/1 issued by the Austrian
Taxation Office.
7. The appeal of the Appellant against the
order of Hon'ble Ahmedabad ITAT is already
admitted before Hon'ble Gujarat High Court
and hence penalty cannot be levied in such
cases. Hence, this is the case of substantial
question of law and penalty cannot be levied
in such cases.
8. Explanation 7 to Section 271(1)(c) of the
Act cannot be invoked while levying penalty
in relation to the transfer pricing
adjustment, when the said Explanation was
neither referred in the notice issued under
section 271(1)(c) of the Act nor relied upon
at the time of initiation of the penalty
proceedings under the Act.
The contention of the Appellant is not
accepted for the following reasons.
The argument of base erosion and reliance
placed on Circular No. 14/2001 is of no help
to the Appellant since the said arguments
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are already considered and dealt in length
by Hon'ble ITAT Kolkata Special Bench in
the case of Instrumentarium (supra) and the
same was further considered by the Hon'ble
Ahmedabad ITAT in the case of the
Appellant itself and it was held that
arguments are of no help to the Appellant as
there is no provision under the provisions of
transfer pricing to give compensatory
adjustment in the hands of the AE. In view
of the same, even if the Appellant is
charging lower fees for technical services to
its Indian AES and TP adjustment is
proposed in the hands of the Appellant, no
deduction can be claimed by the Indian
AES.
DRP has also rejected the argument of the
Appellant on the ground that even if the
principle of base erosion is accepted the
same is of no help to the appellant as its
Indian AEs i.e. both HLPL and HPPL are
incurring huge losses. In response to the
same, the Appellant has relied on the profits
reported by the HLPL and HPPL in the
subsequent years and on account of the said
profits there would have been base erosion
and Indian government would have suffered
losses on account of higher deduction that
would have been claimed by HLPL and
HPPL. However, the said arguments of the
Appellant will not be acceptable in light of
the decision of the Hon'ble Special Bench
and Ahmedabad ITAT mentioned supra that
under Indian transfer pricing provisions,
corresponding adjustment in the hands of
the Indian AEs are not allowed.
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...
In this case, Hon'ble ITAT has observed that
the deeming fiction under Explanation 7 to
Section 271(1)(c) of the Act cannot apply
when assessee is able to show that price
charged or paid in respect of related
international transaction was computed in
accordance with the scheme of Section 92C
of the Act, and in the manner prescribed
therein, in good faith and due diligence.
However, as clearly mentioned above that
both Special bench and Ahmedabad ITAT
has already taken a view against the
Appellant and hence now it cannot be
claimed that the Appellant has acted in good
faith and with due diligence.
Reliance is also placed on the various
decisions to argue that penalty should not
be levied when two views are possible,
However, in the case of the Appellant, there
is no difference of opinion as far as transfer
pricing adjustment is concerned. Hence, all
these decisions are of no help to the
appellant.
...
It is also pertinent to mention here the
provision of Income Tax Act 1961 for
reference:
Section 271(1)(c)) Explanation 7.-Where in
the case of an assessee who has entered
into an international transaction defined in
section 92B(, any amount is added or
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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
Commissioner] that the price charged or
paid in such transaction was computed in
accordance with the provisions contained in
section 92C and in the prescribed under
that section, in good faith and with due
diligence.]
In case of Appellant company, the income
was assessed by making upward
adjustment, hence the price charged by the
assessee company was not 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. Therefore the penalty levied
by the AO was in accordance with the
provisions of the Act.
...
Further, mere admission of appeal by
Hon'ble High Court does not justify that the
issue involved was purely a question of law
and hence penalty cannot be levied in such
cases. This interpretation is just like putting
an end to the penalty proceedings in each
and every case where appeal is admitted
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before the High Court. That is never the
intention of the law. Admission of any issue
before Hon'ble High Court is just a fact that
High Court has considered this issue to be
dealt as per the provisions of the law.
Hence, this argument is of no help to the
Appellant.
...
The plea of the appellant contending that
penalty proceedings are not maintainable on
the ground that AO has not recorded his
satisfaction to the effect that there has been
concealment of income/furnishing of
inaccurate particulars of income by the
assessee, has also been considered by
Supreme Court in the case of Mak Data Pvt.
Limited V/S CIT 38 taxmann.com 448 [2013]
wherein it is held as under:
10. The AO has to satisfy whether
Penalty Proceedings be initiated or not
during the course of Assessment
Proceedings and the AO is not required
to record his satisfaction in a particular
manner or reduce it into writing. The
scope of Section 271(1)(c) has been
elaborately discussed by this Court in
Union of India V/S Dharmendra Textile
Processors [2008] 13 SCC 369 and CIT
V/s Atul Mohan Bindal [2009] 90 SCC
589."
It can be seen from above finding of Hon'ble
Apex Court that while passing the
Assessment Order, AO is not at all required
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to record his satisfaction in writing or in
specific manner for which he is initiating
Penalty Proceedings. Thus, in present case,
AO has categorically stated that he is
satisfied that Penalty Proceedings is
required to be initiated for additions made
in Assessment Order which suffice the levy
of penalty. The AO has given detailed
findings why addition confirmed by first
appeal and before the Hon'ble ITAT is
subject to levy of penalty and also recorded
the manner in which such penalty is
required to be levied hence Penalty Order
passed by AO is within the framework of law
and cannot be held as invalid order on the
ground that AO has not recorded his
satisfaction in penalty notice or he has
initiated penalty under one limb and levied
penalty under the second limb. This
Decision of Hon'ble Supreme Court has not
been distinguished by High Courts hence
ratio laid down by Hon'ble Apex Court is
binding and AO is justified in levying penalty
under Section 271(1)(c) of the Act."
12. Discussion of the ITAT reads as under:
"11. We have heard the rival contentions
and perused the material on record. During
the course of arguments, the Bench called
for further information with regard to the
price being charged by the assessee to its
Associated Enterprises for services
rendered for the future assessment years in
order to ascertain that the assessee was
taking a consistent position, even for the
years when the Indian Associated
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Enterprises of the assessee had started
making profits that is to say that in the
years when the Indian AE started making
profits, the assessee continued to charge the
AE's at the same lower average weighted
rate as compared to third parties (as was
done in the impugned assessment year). The
assessee, vide submission dated 3rd
October 2022 confirmed that even in the
years when the AE of the assessee had
started making profits, the assessee was
charging at the same weighted average rate
for services rendered to them as in the
earlier years when the AE's were incurring
losses. Accordingly, the assessee had taken
a consistent position so far as the principal
of base erosion is concerned, in instant set
of facts. On the levy of penalty, we are in
agreement with the arguments put forward
by the counsel for the assessee to the effect
that the assessee has consistently taken the
position that the lower mark-up charged in
respect of services rendered to associated
enterprises, for the reason that transfer
pricing provisions are not attracted in cases
where there is no base erosion, so far as
taxes are concerned. Further, we also
observe that the assessee had made
adequate disclosure of all the material facts
in Form 3CEB, TPSR and also during the
course of the transfer pricing assessment
proceeding and scrutiny assessment
proceedings. Therefore, there is no
furnishing of any inaccurate particulars of
income by the assessee. We also observe
that it has been held by various Courts that
Explanation 7 to Section 271(1)(c) of the Act
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cannot be invoked while levying penalty in
relation to the transfer pricing adjustment,
when the said Explanation was neither
referred nor relied upon at the time of
initiation of the penalty proceedings under
the Act.
Another noteworthy point is that in our
view, the additions on which penalty has
been levied is a debatable issue. This is
evident from the fact that 'Base Erosion'
issue was dealt by the Special Bench -
Kolkata ITAT. Further, Pune ITAT has also
upheld argument of Base Erosion and
hence, two views are possible since at the
time of hearing before Pune ITAT, it took an
independent view since Kolkata SB decision
was rendered after the Pune ITAT decision.
The fact that Gujarat High Court has
admitted the issue for consideration also
supports the assessee's contention that the
issue involved is debatable. So far as
penalty with regards to reimbursement of
expenses is being treated as FTS is
concerned, in our view, it is a debatable
issue whether reimbursement of expenses
qualifies as FTS and there are various
decisions which have held that
reimbursement of expenses does not qualify
as FTS. Accordingly, we are of the
considered view that no penalty can be
levied u/s 271(1)(c) of the Act on account of
treating reimbursement of expenses as FTS.
11.1 In view of the above, we are of the
considered view, that in the instant set of
facts, no penalty u/s 271(1)(c) of the Act is
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liable to be imposed on the assessee.
Accordingly, we direct that the penalty u/s
271(1)(c) of the Act be deleted in the instant
set of facts.
12. In the result, all grounds of appeal of the
assessee are allowed."
13. What is evident from the discussion herein above
is that the CIT(A) did not accept the arguments on
base erosion since the arguments were considered
and dealt with in length by the ITAT Kolkatta Special
Bench in the case. According to the CIT(A) even if
the assessee was charging lower fees for technical
services to its Indian AEs and transfer pricing is
proposed in the hands of the assessee, no deduction
could be claimed by Indian AEs. Reading a particular
paragraph of the observations of the AO's order
reproduced by the CIT(A) itself would indicate that
there were two views possible and that the issue was
debatable. The same reads as under:
"The case referred by the Appellant M/s
Instrumentarium Corporation v ADIT (ITA
No.1548 and 1549/Kol/2009), was duly
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considered by the Hon'ble ITAT vide para 6 of
the order dated 17.11.2016. For reference the
para 6 of the ITAT order is as under:
"6 In the meantime, however, a special
bench of this Tribunal, consisting of three
members- including one of us, heard and
adjudicated upon a similar issue relating to
the theory or concept of "base erosion" in the
case of Instrumentarium Corporation Ltd
Finland Vs ADIT (2016) 71 taxmann.com 193
(SB). This assessee, in its capacity as an
intervener, was also heard by the Special
Bench, and the arguments of the assessee
were duly considered and adjudicated upon
by the special bench. The plea of the
assessee, on the theory of base erosion and as
argued by the assessee, was rejected.
Therefore the case law referred by the
assessee is not found sustainable and hence
rejected.
ii) Cummins Inc. v ADIT (ITA No.
2181/PN/2013 - dated 29 July 2016 In the
case referred the addition were made in one
assessment year and not made in other
assessment years. But in the case of assessee,
the upward adjustment on similar ground had
been suggested by the Transfer Pricing
Officer and subsequently the AO has made
assessment by adding the income in various
assessment years. The order of the Hon'ble
Tribunal is a combined order wherein the
appeal of the assessee is dismissed for A.Ys.
2007-08, 2008-09, 2009-10 and 2010-1 1.
Therefore the facts of the case referred arc
different from the facts of the assessee case
and hence rejected. iii) 3 Infotech Ltd. v.
DCIT (2011) 129 ITD 422 (Mum.),
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The case referred of 3i Infotech Ltd. v. DCIT
is also not applicable in the case of assessee.
The matter of the discussion in the said order
of Hon'ble Mumbai Tribunal is on base
erosion. The matter of base erosion was also
in the case of Instrumentarium Corporation
Ltd Finland Vs ADIT. All these case laws are
duly considered by the Hon'ble Ahmedabad
Tribunal in combined order dated 17.11.2016
in assessee's own case and the appeal of the
assessee was dismissed. Therefore the ease
laws referred by the assessee have no
relevance to the case of the assessee. The
concept of 'base erosion' has been dealt in
detail by the Tribunal and not found
acceptable."
14. Therefore even if the deemed provision on the
basis of Explanation 7 is pressed into service, then
also there can be a case based on good faith and it
cannot be termed as concealment.
15. What is evident is that the Assessing Officer has
found that the view of the ITAT in Cummins Inc v.
ADIT dated 29.07.2016 on facts may not apply. Even
though, a Mumbai Bench decision in the case of
Infotech Ltd. v. DCIT was on the subject of base
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erosion but the AO did not consider it appropriate as
the Ahmedabad Bench had relied upon the Special
Bench order of Kolkatta. These findings itself suggest
that there are in fact more than two opinions on the
subject of base erosion.
16. In the case of Reliance Petroproducts (supra),
paras 7 to 11 read as under:
"7. As against this, Learned Counsel appearing
on behalf of the respondent pointed out that the
language of Section 271(1)(c) had to be strictly
construed, this being a taxing statute and more
particularly the one providing for penalty. It was
pointed out that unless the wording directly
covered the assessee and the fact situation
herein, there could not be any penalty under the
Act. It was pointed out that there was no
concealment or any inaccurate particulars
regarding the income were submitted in the
Return. Section 271(1)(c) is as under:-
"271(1) If the Assessing Officer or the
Commissioner (Appeals) or the Commissioner
in the course of any proceedings under this Act,
is satisfied that any person-
(c) has concealed the particulars of his income
or furnished inaccurate particulars of such
income."
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A glance at this provision would suggest that in
order to be covered, there has to be concealment
of the particulars of the income of the assessee.
Secondly, the assessee must have furnished
inaccurate particulars of his income. Present is
not the case of concealment of the income. That
is not the case of the Revenue either. However,
the Learned Counsel for Revenue suggested that
by making incorrect claim for the expenditure on
interest, the assessee has furnished inaccurate
particulars of the income. As per Law Lexicon,
the meaning of the word "particular" is a detail
or details (in plural sense); the details of a claim,
or the separate items of an account. Therefore,
the word "particulars" used in the Section 271(1)
(c) would embrace the meaning of the details of
the claim made. It is an admitted position in the
present case that no information given in the
Return was found to be incorrect or inaccurate.
It is not as if any statement made or any detail
supplied was found to be factually incorrect.
Hence, at least, prima facie, the assessee cannot
be held guilty of furnishing inaccurate
particulars. The Learned Counsel argued that
"submitting an incorrect claim in law for the
expenditure on interest would amount to giving
inaccurate particulars of such income". We do
not think that such can be the interpretation of
the concerned words. The words are plain and
simple. In order to expose the assessee to the
penalty unless the case is strictly covered by the
provision, the penalty provision cannot be
invoked. By any stretch of imagination, making
an incorrect claim in law cannot tantamount to
furnishing inaccurate particulars. In
Commissioner of Income Tax, Delhi Vs. Atul
Mohan Bindal [2009(9) SCC 589], where this
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Court was considering the same provision, the
Court observed that the Assessing Officer has to
be satisfied that a person has concealed the
particulars of his income or furnished inaccurate
particulars of such income. This Court referred
to another decision of this Court in Union of
India Vs. Dharamendra Textile Processors
[2008(13) SCC 369], as also, the decision in
Union of India Vs.Rajasthan Spg. & Wvg. Mills
[2009(13) SCC 448] and reiterated in para 13
that:-
"13. It goes without saying that for applicability
of Section 271(1)(c), conditions stated therein
must exist."
8. Therefore, it is obvious that it must be shown
that the conditions under Section 271(1)(c) must
exist before the penalty is imposed. There can be
no dispute that everything would depend upon
the Return filed because that is the only
document, where the assessee can furnish the
particulars of his income. When such particulars
are found to be inaccurate, the liability would
arise. In Dilip N. Shroff Vs. Joint Commissioner
of Income Tax, Mumbai & Anr. [2007(6) SCC
329], this Court explained the terms
"concealment of income" and "furnishing
inaccurate particulars". The Court went on to
hold therein that in order to attract the penalty
under Section 271(1)(c), mens rea was
necessary, as according to the Court, the word
"inaccurate" signified a deliberate act or
omission on behalf of the assessee. It went on to
hold that Clause (iii) of Section 271(1) provided
for a discretionary jurisdiction upon the
Assessing Authority, inasmuch as the amount of
penalty could not be less than the amount of tax
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sought to be evaded by reason of such
concealment of particulars of income, but it may
not exceed three times thereof. It was pointed
out that the term "inaccurate particulars" was
not defined anywhere in the Act and, therefore,
it was held that furnishing of an assessment of
the value of the property may not by itself be
furnishing inaccurate particulars. It was further
held that the assessee must be found to have
failed to prove that his explanation is not only
not bona fide but all the facts relating to the
same and material to the computation of his
income were not disclosed by him. It was then
held that the explanation must be preceded by a
finding as to how and in what manner, the
assessee had furnished the particulars of his
income. The Court ultimately went on to hold
that the element of mens rea was essential. It
was only on the point of mens rea that the
judgment in Dilip N. Shroff Vs. Joint
Commissioner of Income Tax, Mumbai & Anr.
was upset. In Union of India Vs. Dharamendra
Textile Processors (cited supra), after quoting
from Section 271 extensively and also
considering Section 271(1)(c), the Court came to
the conclusion that since Section 271(1)(c)
indicated the element of strict liability on the
assessee for the concealment or for giving
inaccurate particulars while filing Return, there
was no necessity of mens rea. The Court went on
to hold that the objective behind enactment of
Section 271(1)(c) read with Explanations
indicated with the said Section was for providing
remedy for loss of revenue and such a penalty
was a civil liability and, therefore, willful
concealment is not an essential ingredient for
attracting civil liability as was the case in the
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matter of prosecution under Section 276-C of the
Act. The basic reason why decision in Dilip N.
Shroff Vs. Joint Commissioner of Income Tax,
Mumbai & Anr. (cited supra) was overruled by
this Court in Union of India Vs. Dharamendra
Textile Processors (cited supra), was that
according to this Court the effect and difference
between Section 271(1)(c) and Section 276-C of
the Act was lost sight of in case of Dilip N. Shroff
Vs. Joint Commissioner of Income Tax, Mumbai
& Anr. (cited supra). However, it must be
pointed out that in Union of India Vs.
Dharamendra Textile Processors (cited supra),
no fault was found with the reasoning in the
decision in Dilip N. Shroff Vs. Joint
Commissioner of Income Tax, Mumbai & Anr.
(cited supra), where the Court explained the
meaning of the terms "conceal" and inaccurate".
It was only the ultimate inference in Dilip N.
Shroff Vs. Joint Commissioner of Income Tax,
Mumbai & Anr. (cited supra) to the effect that
mens rea was an essential ingredient for the
penalty under Section 271(1)(c) that the decision
in Dilip N. Shroff Vs. Joint Commissioner of
Income Tax, Mumbai & Anr. (cited supra) was
overruled.
9. We are not concerned in the present case with
the mens rea. However, we have to only see as to
whether in this case, as a matter of fact, the
assessee has given inaccurate particulars. In
Webster's Dictionary, the word "inaccurate" has
been defined as:-
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"not accurate, not exact or correct; not
according to truth; erroneous; as an inaccurate
statement, copy or transcript".
We have already seen the meaning of the word
"particulars" in the earlier part of this judgment.
Reading the words in conjunction, they must
mean the details supplied in the Return, which
are not accurate, not exact or correct, not
according to truth or erroneous. We must hasten
to add here that in this case, there is no finding
that any details supplied by the assessee in its
Return were found to be incorrect or erroneous
or false. Such not being the case, there would be
no question of inviting the penalty under Section
271(1)(c) of the Act. A mere making of the claim,
which is not sustainable in law, by itself, will not
amount to furnishing inaccurate particulars
regarding the income of the assessee. Such claim
made in the Return cannot amount to the
inaccurate particulars.
10. It was tried to be suggested that Section 14A
of the Act specifically excluded the deductions in
respect of the expenditure incurred by the
assessee in relation to income which does not
form part of the total income under the Act. It
was further pointed out that the dividends from
the shares did not form the part of the total
income. It was, therefore, reiterated before us
that the Assessing Officer had correctly reached
the conclusion that since the assessee had
claimed excessive deductions knowing that they
are incorrect; it amounted to concealment of
income. It was tried to be argued that the
falsehood in accounts can take either of the two
forms; (i) an item of receipt may be suppressed
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fraudulently; (ii) an item of expenditure may be
falsely (or in an exaggerated amount) claimed,
and both types attempt to reduce the taxable
income and, therefore, both types amount to
concealment of particulars of one's income as
well as furnishing of inaccurate particulars of
income. We do not agree, as the assessee had
furnished all the details of its expenditure as well
as income in its Return, which details, in
themselves, were not found to be inaccurate nor
could be viewed as the concealment of income
on its part. It was up to the authorities to accept
its claim in the Return or not. Merely because
the assessee had claimed the expenditure, which
claim was not accepted or was not acceptable to
the Revenue, that by itself would not, in our
opinion, attract the penalty under Section 271(1)
(c). If we accept the contention of the Revenue
then in case of every Return where the claim
made is not accepted by Assessing Officer for
any reason, the assessee will invite penalty
under Section 271(1)(c). That is clearly not the
intendment of the Legislature.
11. In this behalf the observations of this Court
made in Sree Krishna Electricals v. State of
Tamil Nadu & Anr. [(2009) 23VST 249 (SC)] as
regards the penalty are apposite. In the
aforementioned decision which pertained to the
penalty proceedings in Tamil Nadu General Sales
Tax Act, the Court had found that the authorities
below had found that there were some incorrect
statements made in the Return. However, the
said transactions were reflected in the accounts
of the assessee. This Court, therefore, observed:
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"So far as the question of penalty is concerned
the items which were not included in the
turnover were found incorporated in the
appellant's account books. Where certain items
which are not included in the turnover are
disclosed in the dealer's own account books
and the assessing authorities include these
items in the dealer's turnover disallowing the
exemption, penalty cannot be imposed. The
penalty levied stands set aside."
The situation in the present case is still better as
no fault has been found with the particulars
submitted by the assessee in its Return."
17. In the case of Toyota Kirloskar Motor (P) Ltd.
V. Union of India reported in (2019) 109
taxmann.com 137 relied upon by Shri Soparkar,
Explanation 7 of Section 271(1)(C) was under
consideration where the Court held that the
Explanation cannot be applied blindly in a routine
manner to levy penalty on the additions made in the
absence of any material to establish the concealing of
income or furnishing inaccurate particulars.
Moreover, they are independent and distinct from the
assessment proceedings. Paras 23 to 30 of the
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Karnataka decision read as under:
"23. Explanation 7 to Section 271(1)cannot be
applied blindly in a routine manner to levy
penalty on the additions made in the absence of
any material to establish the concealing of the
income or furnishing the inaccurate particulars
by the assessee unless the assessee fails to prove
that in good faith and with due diligence the
price charged or paid in the transaction was
computed in accordance with Section 92C of the
Act. However, these issues requires to be
analyzed based on the facts and circumstances
of the case. There cannot be any straight jacket
formula to levy and determine the penalty. A
speaking order requires to be passed for levying
the penalty under section 271[1][c] of the Act
which is a self-contained code.
24. It is desirable to quote paragraphs 60 and 61
of Manjunatha Cotton and Ginning supra, which
reads as under:
"60. The penalty proceedings are distinct from
assessment proceedings, and independent
therefrom. The assessment proceedings are
taxing proceedings. The proceedings for
imposition of penalty though emanating from
proceedings of assessment are independent
and separate aspects of the proceeding.
Separate provision is made for the imposition
of penalty and separate notices of demand are
made for recovery of tax and amount of
penalty. Also separate appeal is provided
against order of imposition of penalty. Above
all, normally, assessment proceedings must
precede penalty proceedings. Assessee is
entitled to submit fresh evidence in the course
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of penalty proceedings. It is because penalty
proceedings are independent proceedings. The
assessee cannot question the assessment
jurisdiction in penalty proceedings. Jurisdiction
under penalty proceedings can only be limited
to the issue of penalty, so that validity of the
assessment or reassessment in pursuance of
which penalty is levied, cannot be the subject
matter in penalty proceedings. It is not possible
to give a finding that the re- assessment is
invalid in such penalty proceedings. Clearly,
there is no identity between the assessment
proceedings and the penalty proceedings. The
latter are separate proceedings that may, in
some cases, follow as a consequence of the
assessment proceedings. Though it is usual for
the Assessing Officer to record in the
assessment order that penalty proceedings are
being initiated, this is more a matter of
convenience than of legal requirement. All that
the law requires, so far as the penalty
proceedings are concerned, is that they should
be initiated in the course of the proceedings for
assessment. It is sufficient, if there is some
record somewhere, even apart from the
assessment order itself, that the Assessing
Officer has recorded his satisfaction that the
assessee is guilty of concealment or other
default for which penalty action is called for.
Indeed, in certain cases, it is possible for the
Assessing Officer to issue a penalty notice or
initiate penalty proceedings even long before
the assessment is completed. There is no
statutory requirement that the penalty order
should precede or be simultaneous with the
assessment order. In point of fact, having
regard to the mode of computation of penalty
outlined in the statute, the actual penalty order
cannot be passed until the assessment is
finalised.
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61. In the light of what is stated above, what
emerges is as under:
a) Penalty under Section 271(1)(c) is a civil
liability.
b) Mens rea is not an essential element for
imposing penalty for breach of civil obligations
or liabilities.
c) Willful concealment is not an essential
ingredient for attracting civil liability.
d) Existence of conditions stipulated in Section
271(1)(c) is a sine qua non for initiation of
penalty proceedings under Section 271.
e) The existence of such conditions should be
discernible from the Assessment Order or order
of the Appellate Authority or Revisional
Authority.
f) Even if there is no specific finding regarding
the existence of the conditions mentioned in
Section 271(1)(c), at least the facts set out in
Explanation 1(A) & (B) it should be discernible
from the said order which would by a legal
fiction constitute concealment because of
deeming provision.
g) Even if these conditions do not exist in the
assessment order passed, at least, a direction
to initiate proceedings under Section 271(1)(c)
is a sine qua non for the Assessment Officer to
initiate the proceedings because of the
deeming provision contained in Section 1(B).
h) The said deeming provisions are not
applicable to the orders passed by the
Commissioner of Appeals and the
Commissioner.
i) The imposition of penalty is not automatic.
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j) Imposition of penalty even if the tax liability
is admitted is not automatic.
k) Even if the assessee has not challenged the
order of assessment levying tax and interest
and has paid tax and interest that by itself
would not be sufficient for the authorities
either to initiate penalty proceedings or impose
penalty, unless it is discernible from the
assessment order that, it is on account of such
unearthing or enquiry concluded by authorities
it has resulted in payment of such tax or such
tax liability came to be admitted and if not it
would have escaped from tax net and as opined
by the assessing officer in the assessment
order.
l) Only when no explanation is offered or the
explanation offered is found to be false or when
the assessee fails to prove that the explanation
offered is not bonafide, an order imposing
penalty could be passed.
m) If the explanation offered, even though not
substantiated by the assessee, but is found to
be bonafide and all facts relating to the same
and material to the computation of his total
income have been disclosed by him, no penalty
could be imposed.
n) The direction referred to in Explanation 1B
to Section 271 of the Act should be clear and
without any ambiguity.
o) If the Assessing Officer has not recorded any
satisfaction or has not issued any direction to
initiate penalty proceedings, in appeal, if the
appellate authority records satisfaction, then
the penalty proceedings have to be initiated by
the appellate authority and not the Assessing
Authority.
(p) Notice under Section 274 of the Act should
specifically state the grounds mentioned in
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Section 271(1)(c), i.e., whether it is for
concealment of income or for furnishing of
incorrect particulars of income.
q) Sending printed form where all the ground
mentioned in Section 271 are mentioned would
not satisfy requirement of law.
r) The assessee should know the grounds which
he has to meet specifically. Otherwise,
principles of natural justice is offended. On the
basis of such proceedings, no penalty could be
imposed to the assessee.
s) Taking up of penalty proceedings on one
limb and finding the assessee guilty of another
limb is bad in law.
t) The penalty proceedings are distinct from the
assessment proceedings. The proceedings for
imposition of penalty though emanate from
proceedings of assessment, it is independent
and separate aspect of the proceedings.
u) The findings recorded in the assessment
proceedings in so far as "concealment of
income" and "furnishing of incorrect
particulars" would not operate as res judicata
in the penalty proceedings. It is open to the
assessee to contest the said proceedings on
merits. However, the validity of the assessment
or reassessment in pursuance of which penalty
is levied, cannot be the subject matter of
penalty proceedings. The assessment or
reassessment cannot be declared as invalid in
the penalty proceedings."
25. In the case of Brij Lal and others supra, in
the context of conclusion arrived by the
Settlement Commission invoking the special
procedure for computation of total income by,
under Sections 245C and 245D in Chapter xix-A
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of the Act, the Hon'ble Apex Court has observed
thus:
"23. Descriptively, it can be stated that
assessment in law is different from assessment
by way of settlement. If one reads section
245D(6) with section 245I, it becomes clear
that every order of settlement passed under
section 245D(4) shall be final and conclusive as
to the matters contained therein and that the
same shall not be re- opened except in the case
of fraud and misrepresentation. Under section
245F(1), in addition to the powers conferred on
the Settlement Commission under Chapter XIX-
A, it shall also have all the powers which are
vested in the income tax authority under the
Act. In this connection, however, we need to
keep in mind the difference between
"procedure for assessment" under Chapter XIV
and "procedure for settlement" under Chapter
XIX-A (see section 245D). Under section
245F(4), it is clarified that nothing in Chapter
XIX-A shall affect the operation of any other
provision of the Act requiring the applicant to
pay tax on the basis of self-assessment in
relation to matters before the Settlement
Commission."
26. It is thus held that the nature of the orders
under Section 143 and 144 is different from the
orders of the Settlement Commission under
Section 245-D4 of the Act.
27. In K.C. Builders and Another supra, the
Hon'ble Apex Court has observed that the
condition precedent for imposing penalty under
Section 271[1][c] would be that the assessee has
made conscious concealment or furnished
inaccurate particulars of his income, where the
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additions made in the assessment order, on the
basis of which penalty for concealment was
levied is finally annulled, or deleted, there
remains no basis set out for levying the penalty
for concealment, and, therefore in such a case no
such penalty can survive and the same is liable
to be cancelled. Thus, it is settled law that
penalty cannot stand if the assessment is set
aside.
28. In UNION OF INDIA VS. DHARMENDRA
TEXTILES PROCESSORS & OTHERS reported in
(2008) 306 ITR 277 (SC), the Hon'ble Apex Court
was dealing with the penalty provisions
contained in Section 11 [a][c] of the Central
Excise Act, 1944, reference was made to the
penalty provision in the Act, 1961 and the
Hon'ble Apex Court has held that mens era is not
an essential element for imposing penalty for
breach of civil obligations. In the case of
Manjunatha Cotton and Ginning Factory supra,
the Division Bench of this Court considering the
various judgments of the Hon'ble Apex Court and
more particularly Dharmendra Textiles case
supra, held that the decision in the Dharmendra
Textiles case is to be understood as a decision
under Section 11[a][c] of the Central Excise Act,
1944 and Rajasthan Spinning and Ginning case
of the Hon'ble Apex Court has been referred to,
while arriving at such a decision. In paragraph
65, the Division Bench has observed that the
subject matter of the penalty proceedings is the
order of the Appellate Authority and not the
order passed by the Assessing Authority. If the
Appellate Authority was satisfied with the
addition, it has to be made on the ground of
undervaluation of the closing stock which was
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not the finding recorded by the Assessing
Authority, which was not the basis for the
initiation of the penalty proceedings by the
Assessing Authority. In such circumstances, it
was held that the Appellate Authority ought to
have initiated penalty proceedings and issued
notice to the assessee to show cause why penalty
should not be imposed. The said procedure not
being followed and, therefore, though for
different reasons, the First Appellate Authority
has set aside the order levying penalty, the
Tribunal correctly appreciated the facts in a
proper perspective and was justified in not
interfering with the order of the appellate
authority in setting aside the penalty order.
...
30. The penalty proceedings are distinct from
assessment proceedings and independent there
from. The proceedings for imposition of penalty
though emanating from proceedings of
assessment are independent and separate
aspects of the proceedings. Merely alternative
dispute resolution has been opted by the assesse,
it would not invalidate the penalty proceedings
unless it has been considered, analyzed and a
decision is arrived at by the two sovereign States
under the MAP. The order passed by the
mechanism provided under Section 90 can be
construed as an adjustment to the assessment
order but not an annulment of the assessment
order. If by such an adjustment, the assessment
order is annulled in its entirety, setting aside the
tax levied on income, then the arguments of the
petitioners can hold good prohibiting the
authorities to invoke the penal proceedings
irrespective of any explicit finding regarding the
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undefined
penal consequences in the order of MAP.
However, in the present set of facts, such a
situation would not arise in view of the
adjustment made to certain extent in the order
passed under Rule 44H(5), implementing the
order of MAP reducing the transfer pricing
adjustment to Rs.91,80,00,000/- as against
Rs.240,11,91,692/-. The onus lies on the assessee
to establish that the said addition now finally
decided by MAP is not due to concealment of
income or furnishing of inaccurate particulars
and moreover, the computation was made under
Section 92C in the manner prescribed under that
Section, in good faith and with due diligence. At
the same time, Explanation 7 would not
empower the concerned authorities to levy
penalty automatically for such transactions. A
decision has to be taken by the authorities after
application of mind. These aspects involving
questions of fact requires to be considered by
the Authorities concerned and rightly the
petitioner has preferred an appeal against the
penalty proceedings in W.P.No.57865/2015.
Since the notice issued under Section 271[1][c]
of the Act being challenged in
W.P.No.56348/2015, the petitioner is at liberty
to file objections/reply to the notice impugned
within a period of two weeks from the date of
receipt of certified copy of the order. If such
reply/objections are filed as aforesaid, the same
shall be considered by the Assessing Officer in
accordance with law in an expedite manner.
Hence, the following.
ORDER
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i) Section 271(1)(C) of the Income Tax Act, 1961 is held intra vires the constitution in so far as imposing of penalty on amounts determined pursuant to Convention for avoidance of Double Taxation between Union of India and other sovereign countries which is enforced in Indian territory by Section 90 of the Income Tax Act, 1961 and the Rules made thereunder.
ii) Appellate Authority shall consider the appeal preferred by the petitioner against the order of penalty dated 22.09.2015 at Annexure - S [W.P.No.57865/2015] on merits and shall take a decision in accordance with law in an expedite manner.
iii) The petitioner in W.P.No.56348/2015 is at liberty to file reply/objections to the notice dated 27.10.2015 at Annexure-G within a period of two weeks from the date of receipt of certified copy of the order. On filing of such reply/objections, the Assessing Officer shall consider the same and take a decision in accordance with law in an expedite manner.
iv) With the aforesaid observations, writ petition stands dismissed."
18. Even in the case of Verizon India Pvt. Ltd.
(supra), the observations are as under:
" The present appeal against the order dated 08.08.2016 of Income Tax Appellate Tribunal is Page 43 of 57 Downloaded on : Thu Oct 26 20:50:17 IST 2023 NEUTRAL CITATION C/TAXAP/483/2023 CAV JUDGMENT DATED: 26/10/2023 undefined barred because the revenue has refiled it with a delay of 550 days. On this ground alone, the appeal is liable to be rejected.
This Court has considered the merits of the appeal as well. The brief facts are that during the relevant period, i.e. AY 2007-08, the assessee had, in the course of its return, relied upon a transfer pricing report. The report inter alia sought benefit of six comparables, by applying the Transactional Net Margin Method (TNMM) under Section 92C of the Income Tax Act, 1961. The report had relied upon twelve comparables; the Transfer Pricing Officer (TPO) rejected nine of them and based upon the surviving data, determined the Arms Length Pricing (ALP) and made adjustments in the final return. The Assessing Officer (AO), while accepting TPO's determination, was of the opinion that as per Explanation 7 to Section 271(1)(c), the addition was to be deemed to represent income and was, therefore, liable, and consequently penalty was leviable. The AO's order was set-aside by the ITAT.
We have considered the circumstances. The assessee in this case could not, in the opinion of this Court, visualize that out of the twelve comparables furnished, nine would be rejected and the matrix of calculations, as it worked, would radically undergo change. Pertinently, for the previous year 2006-07, the assessee's comparables - including some of those which were rejected in the present order, were in fact accepted when the matter reached finality. In these circumstances, the interpretation adopted by the AO was plainly erroneous. The Court is Page 44 of 57 Downloaded on : Thu Oct 26 20:50:17 IST 2023 NEUTRAL CITATION C/TAXAP/483/2023 CAV JUDGMENT DATED: 26/10/2023 undefined also of the opinion that in the absence of any overt act, which disclosed conscious and material suppression, invocation of Explanation 7 in a blanket manner could not only be injurious to the assessee but ultimately would be contrary to the purpose for which it was engrafted in the statute. It might lead to a rather peculiar situation where the assessees who might otherwise accept such determination may be forced to litigate further to escape the clutches of Explanation 7. For the above reasons, we are also satisfied that no substantial question of law arises. The appeal is accordingly dismissed along with the pending application."
19. What is therefore evident from the above is that provisions of Section 271(1)(C) and Explanation 7 is clearly not applicable.
20. Moreover, merely because the appeal of the assessee was admitted on the issue of quantum, the fact that the `Revenue's appeal ipso-facto requires to be admitted, is not necessary.
21. In the case of Sinosteel India (P) Ltd. (supra) a Division Bench of the Delhi High Court in that case Page 45 of 57 Downloaded on : Thu Oct 26 20:50:17 IST 2023 NEUTRAL CITATION C/TAXAP/483/2023 CAV JUDGMENT DATED: 26/10/2023 undefined held as under:
"Present appeal by the Revenue under Section 260A of the Income Tax Act, 1961(the Act, for short) in the case of M/s Sinosteel India Limited (respondent-assessee, for short) impugns the order dated 29th January, 2018 passed by the Income Tax Appellate Tribunal (Tribunal) deleting penalty for concealment of income under Section 271(1)(c) of the Act. The appeal relates to Assessment Year 2006-07.
2. Penalty for concealment was imposed for failure to correctly compute arm's length price of international transactions between the respondent-assessee and its holding company M/ s Sino Steel Corporation, China and associated enterprises by excluding internal comparable while applying the Comparable Uncontrolled Price (CUP) method.
3. Respondent-assessee was providing support and assistance to its holding company and associated enterprises in procuring and supplying metallurgical materials and related activities, for which the respondent-assessee was paid commission in related international transactions @ US$ 0.15 per DMT and US$ 0.33 per WMT.
4. During the year in question, the respondent- assessee had entered into a third party independent or unrelated international transaction in which commission @ US$ 0.50 per DMT was paid.
5. The respondent-assessee had received Page 46 of 57 Downloaded on : Thu Oct 26 20:50:17 IST 2023 NEUTRAL CITATION C/TAXAP/483/2023 CAV JUDGMENT DATED: 26/10/2023 undefined commission of Rs. 1,58,12,470/- and after setting off expenses and permissible deductions, the respondent-assessee had declared a total income of Rs. 42,30,567/- in its return.
6. Details with regard to unrelated third-party transaction were duly disclosed and informed to the Assessing Officer and Transfer Pricing Officer.
7. Respondent-assessee had justified exclusion of internal unrelated comparable in view of the small volume of transaction. It was an isolated transaction, substantially lower in value in comparison to the volume of the transactions with the associated enterprises, which were enduring and to continue over a period of time. It was normal in business to charge lower commission on larger volumes from parties with long-term business relationship.
8. Transfer Pricing Officer, vide order dated 28th August, 2009, however, did not agree with the respondent-assessee. Arm's length price was computed by taking the independent unrelated party comparable into consideration. Dispute Resolution Panel vide order dated 25th November, 2011 also rejected the respondent- assessee's challenge to include the internal comparable. By assessment order dated 9th September, 2010 income was assessed at Rs. 3,30,02,880/-. Penalty proceedings under Section 271(1)(c) of the Act were directed to be initiated.
9. In the present appeal, we are not concerned with the question whether the independent transaction should or should not be considered Page 47 of 57 Downloaded on : Thu Oct 26 20:50:17 IST 2023 NEUTRAL CITATION C/TAXAP/483/2023 CAV JUDGMENT DATED: 26/10/2023 undefined as a comparable. This would be decided in the quantum appeal pending before the High Court. Obviously, if the respondent-assessee succeeds, the penalty would be quashed for there is no addition, which has been sustained. However, the scope of the present appeal, as stated above, relates to the question of bona fides of the explanation of the respondent-assessee and whether exclusion of the internal comparable was after due diligence.
10. The Assessing Officer had imposed penalty referring to Explanation 7 to Section 271(1)(c) of the Act, and without any discussion on the question of explanation given by the assessee, it was observed and held:-
"In view of Explanation 7 of Section 271(1)(c) of the I.T. Act 1961, this amount of Rs.2,87,72,311/- shall also be deemed to represent the income in respect of which particulars have been concealed/inaccurate particulars have been furnished. The assessee has failed to establish that the price charged or paid in such transaction was computed in accordance with the provisions contained in section 92C of the IT Act 1961 and lathe manner prescribed under that section in good faith and with due diligence. In view of the above, I am of the considered opinion that the assessee has concealed particulars of its income and is liable to penalty u/s 271(1)(c) of the I.T. Act 1961." The Assessing Officer, in our view, had failed to appreciate that imposition of penalty was not automatic in the sense that it was mandatory as addition had been made in the quantum proceedings. 11. The Commissioner of Income Tax (Appeals) vide Page 48 of 57 Downloaded on : Thu Oct 26 20:50:17 IST 2023 NEUTRAL CITATION C/TAXAP/483/2023 CAV JUDGMENT DATED: 26/10/2023 undefined order dated 6 th October, 2015 upheld the penalty order observing that the respondent- assessee merely stated that the lower rate of commission was on account of higher volume. The transfer pricing report had not mentioned that the lower rate of commission was at arm's length when compared to internal comparable. Further, the respondent-assessee had not acted with due diligence. In view of Explanation 7 to Section 271 (1)(c) of the Act, penalty was rightly imposed on the deemed concealed income or income in respect of which inaccurate particulars were furnished. The Commissioner of Income Tax (Appeals), however, did observe that the respondent-assessee had filed fresh evidence in the penalty proceedings explaining and justifying lower rate for higher volume of transactions. This submission was rejected observing that fresh evidence was not part of the Transfer Pricing Report. It was stated that two opinions were not possible.
12. The Tribunal in the impugned order has held as under:-
"3. We have perused the submissions advanced by both the sides in the light of the records placed before us. 3.1. On perusal of assessment order, we observe that assessee as well as Ld.TPO agreed upon CUP to be the most appropriate method for computing the arm's length price. Further in our view, under CUP, selection of comparables is within strict parameters and has to be accurately made on functional similarities. Admittedly there was lack of comparables internal/external for the type of services rendered by assessee to its AE. It is Page 49 of 57 Downloaded on : Thu Oct 26 20:50:17 IST 2023 NEUTRAL CITATION C/TAXAP/483/2023 CAV JUDGMENT DATED: 26/10/2023 undefined observed that the transfer pricing adjustment is because of the difference in the computation of ALP due to lack of comparables. 3.2. Ld. A.R. forcefully contended that the addition based on the difference in arm's length price is a debatable issue and, therefore, the claim of assessee, though not accepted, that by itself would not attract the penalty u/s 271(1)(c) as held by the Hon'ble Supreme Court, in the case of Reliance Petroproducts (P) Ltd. reported in 322 ITR 158. To substantiate this contention that the issue of addition is debatable in nature, Ld. A.R. referred and relied upon the substantial question of law framed by the Hon'ble High Court in the appeal preferred by the assessee against the order of this Tribunal in quantum. The decision of Hon'ble Delhi High Court dated 05.10.2010 in the case of Liquid Investment & Trading Coo (supra) has been relied upon on this point, where Hon'ble Court has observed as under: "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 where under deduction under section 14A of the Act was prescribed to the assessee, the assessee 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." 3.3. Thus, it is the nature of addition/disallowance, which is material to determine whether the issue involved Page 50 of 57 Downloaded on : Thu Oct 26 20:50:17 IST 2023 NEUTRAL CITATION C/TAXAP/483/2023 CAV JUDGMENT DATED: 26/10/2023 undefined in the addition is a debatable issue and, therefore, the claim of the assessee is a bona fide claim, though not acceptable. Even otherwise legislature has made it clear by inserting Explanation 7 to section 271(1)(c) that any addition in the computation of the total income is made as per the provisions of section 92C. The amounts so added or disallowed shall for the purpose of Clause(c) of section 271(1) would be deemed to represent the income, in respect of which the particulars have been concealed or inaccurate particulars have been furnished unless, the assessee proves to the satisfaction of the taxing authority that the price or charges are paid in international transactions was computed in accordance with the provisions of section 92C and in the manner prescribed under that section in good faith and with the due diligence. For ready reference, we quote Explanation 7 as under: "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 subsection, 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) for the 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 Page 51 of 57 Downloaded on : Thu Oct 26 20:50:17 IST 2023 NEUTRAL CITATION C/TAXAP/483/2023 CAV JUDGMENT DATED: 26/10/2023 undefined diligence." 3.4. The cases of addition/disallowance in computing the total income as per the provisions of section 92C does not fall under the general rule of bona fide explanation as per Explanation 1 to section 271(1)(c). The Explanation 7, itself has prescribed exceptions in the case whether the price has been computed in accordance with the provisions of section 92C and in the manner prescribed there under in good faith and with due diligence. Therefore, if the assessee proves to the satisfaction of the taxing authority that the price charged or paid has been computed as per the provision and manner prescribed under section 92C, in good faith and with due diligence then the addition made under section 94C(4) would not attract the penalty. Once the exclusion from attracting the provisions u/s 271(1)(c) has been provided in the Explanation-7 itself then the first requirement for escaping from the levy of penalty u/ s 271(1)(c), against the addition made as per the provisions of section 92C is that the decision of the assessee in computation of the price in respect of international transactions is as per the provisions and manner prescribed under section 92C and further the said decision is taken in good faith and with due diligence. 3.5. No doubt that in the case of international transactions regarding purchase of raw material, the most appropriate method for determining the ALP would be Comparable Uncontrolled Transactions (CUP). However, the selection of the method is further subjected to various factors and one of the factors is the availability, coverage and reliability of data necessary for application of the method. In the facts of the present case entire adjustment has been made Page 52 of 57 Downloaded on : Thu Oct 26 20:50:17 IST 2023 NEUTRAL CITATION C/TAXAP/483/2023 CAV JUDGMENT DATED: 26/10/2023 undefined due to the lack of reliable data. We find that the decision of the Hon'ble Delhi High Court in Liquid Investments & Trading Co. (supra) clinches the issue in favour of the assessee. In this case it was held by the Hon'ble High Court that where the assessee has preferred an appeal u/s 260A of the Act which has also been admitted a substantial question of law framed; this itself shows that the issue is debatable. In our considered view no penalty u/s 271(1)(c) of the Act could be imposed on a debatable issue. In this view of the order we hold that the case of the assessee is not a fit case for levy of penalty u/ s 271(1)(c) of the Act and accordingly the grounds of the appeal by the assessee stand allowed."
13. Quantum appeal on the question of internal comparable has been admitted by the High Court. This is an admitted position.
14. The reasoning given by the Assessing Officer to impose penalty for concealment has been quoted in entirety. It shows complete non- application of mind by the said officer on the relevant considerations. The Commissioner of Income Tax (Appeals), however, did go deeper and had rejected the stand of the respondent- assessee on bona fides and due diligence. In spite of evidence placed by the respondent- assessee on the question of difference in quantum or volume of transactions, etc., it was observed that this evidence was not part of the Transfer Pricing Study.
15. Per contra, the Tribunal after referring to the material, had taken an opposite view after Page 53 of 57 Downloaded on : Thu Oct 26 20:50:17 IST 2023 NEUTRAL CITATION C/TAXAP/483/2023 CAV JUDGMENT DATED: 26/10/2023 undefined examining the factual matrix of the present case.
16. Explanation 7 to Section 271(1)(c) of the Act reads:- "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." Thus, addition or disallowance made while computing the income under Section 92C of the Act, is deemed to be concealed income or income of which inaccurate particulars have been furnished. Explanation 7 however states that penalty is not to be imposed where the assessee establishes that the price charged or paid was computed as per provisions of Section 92C and the assessee had acted in good faith and with due diligence. Conduct of the assessee is the distinguishing and relevant factor to be adjudicated in the penalty proceedings. Onus to establish bona fides and exercise of due diligence is on the assessee. Explanation of the assessee on the computation of arms length Page 54 of 57 Downloaded on : Thu Oct 26 20:50:17 IST 2023 NEUTRAL CITATION C/TAXAP/483/2023 CAV JUDGMENT DATED: 26/10/2023 undefined price may be the same, but appreciation and consideration is from a different point of view, i.e. bona fides and due diligence."
22. Even in the case of Principal Commissioner of Income Tax-5 v. Kalpana M. Bhatt rendered in Tax Appeal No.659 of 2017 in an oral order dated 11.09.2017, the Division Bench of this Court held as under:
"1. This appeal is filed by the Revenue challenging the judgement of the Income Tax Appellate Tribunal dated 14.12.2016 raising following question for our consideration:
"Whether the Appellate Tribunal was right in law and on facts in deleting the penalty of Rs. 22,44,00/- u/s. 271(1)(c) of the Act levied against the disallowance of exemption u/s. 54 of the Act of Rs. 1,00,00,000/-?"
2. The issue pertains to penalty imposed by the Assessing Officer against the respondent- assessee. The Tribunal, by the impugned order, confirmed the view of the CIT(Appeals) deleting the penalty. The Tribunal, of course, cited the sole reason of the quantum additions being deleted for confirming the view of the CIT (Appeals). Learned counsel for the Revenue, therefore, would be correct in pointing out that when the Revenue has, challenged the judgment of the Tribunal concerning the quantum Page 55 of 57 Downloaded on : Thu Oct 26 20:50:17 IST 2023 NEUTRAL CITATION C/TAXAP/483/2023 CAV JUDGMENT DATED: 26/10/2023 undefined additions which appeal is pending before the High Court, the question of penalty should normally be further examined. However, for reasons entirely different from those recorded by the Tribunal it may be possible to confirm the order of the CIT (Appeals) deleting the penalty. This is so because the very issue on which the Assessing Officer had initiated proceedings and ultimately imposed the penalty proceedings for and ultimately imposed penalty was a highly debatable legal issue as can be seen from the Tribunal's following observations in the judgement considering the quantum additions:
"7. We have considered the rival submissions and perused the material available on record and the paper book containing 1 to 149 pages filed by the assessee. From the facts of the case it is evidence that the grouse of the learned AO for denying exemption u/s. 54 of the Act was due to the following three reasons: (1) the asset which is the subject matter of transfer belonged to the assets of Late Shri Prabhashankar Patni which is separate assessable entity and not the assessee. (2) The asset which is the subject matter of transfer is predominantly is a case of transfer of land and the same cannot be treated as transfer of building with land appurtenant thereto as envisaged u/s. 54 of the Act. (3) The subject matter of assets being transferred was converted to commercial asset and no more remained as house property as defined u/s. 22 of the Act."
3. Thus, the Tribunal outlined three objections of the Revenue against granting the exemption to the assessee under section 54 of the Income Tax Act. The Tribunal thereafter proceeded to deal Page 56 of 57 Downloaded on : Thu Oct 26 20:50:17 IST 2023 NEUTRAL CITATION C/TAXAP/483/2023 CAV JUDGMENT DATED: 26/10/2023 undefined with each one of them threadbare and overruling each of the Revenue's objections. There is no element of any suppression on part of the assessee of material facts. The assessee had neither withheld the source of income nor provide accurate particulars about the income.
4. Under the circumstances, tax appeal is dismissed."
23. For the aforesaid reasons therefore the appeals deserve to be dismissed as no questions of law much less substantial questions of law are involved.
24. In the result, appeals are dismissed.
(BIREN VAISHNAV, J) (MAUNA M. BHATT,J) ANKIT SHAH Page 57 of 57 Downloaded on : Thu Oct 26 20:50:17 IST 2023