IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES: "H" NEW DELHI
BEFORE SHRI J.SUDHAKAR REDDY, A.M. AND
SHRI AD JAIN, JM
ITA No: 5567/Del/2011
Assessment Year : - 2006-07
M/s Verizon Communication India P.Ltd. vs. DCIT
A Wing, 3rd floor, Radisson Commercial Circle 17(1)
Plaza, N.H. 8 New Delhi
New Delhi
PAN: : AACW 3738 L
(Appellant) (Respondent)
Appellant by : Shri N.Venkatram, Sr.Adv.&
Ms.Shikha Gupta, Sri Rohit Tiwari, Shri S.Puri,
Shri Rishabh Jain, CAs
Respondent by : Dr. B.R.R.Kumar, Sr.D.R.
ORDER
PER J.SUDHAKAR REDDY, ACCOUNTANT MEMBER
This is an appeal filed by the assessee directed against the order of
the CIT(A) dt. 2.9.2011 for the A.Y. 2006-07, wherein the First Appellate
Authority has confirmed the penalty levied u/s 271(1)(c) of the Act by the
A.O.
2. Facts in brief:- The assessee is a Company and had filed its return
of income declaring total loss of Rs.30,72,108/-. The assessment was
2
completed u/s 142(3) on 26.2.2010 after making the following
adjustments.
(a) transfer pricing adjustment Rs.82,77,528/-;
(b) disallowance of management fee of Rs.39 lakhs.
The assessee has not filed any appeal on these additions. The AO issued
a notice proposing levy of penalty u/s 271(1) of the Act on 5.8.2010.
The assessee furnished an explanation submitting that:
(a) As regards management fee disallowance, it was submitted that
the assessee did not have any employee for carrying on business in
India. That in order to manage its business in India and to carry on
sales, marketing and other administrative activity which are integral
part of business operations, management services agreement was
entered into with VIPL for a fixed fee of Rs.3,25,000/- per month. The
copy of this agreement was produced before the AO in the assessment
proceedings.
(b) That VIPL had rendered services and had offered this income in its
return of income. To substantiate the services, a copy of master
service agreement with the customers and emails exchanged by the
employees in India with various customers, were submitted on sample
basis. It was argued that there was commercial need and direct nexus of
the expenditure by VCIPL with the business operations of VIPL.
(c) On determination of arms length price, it was submitted that
residual profits split method was applied and the provisions of the Act
3
and Rules were complied with. That since more than one comparable
price was available, the Arithmetical Mean (AM) was computed and that
variation of 5% from the aforesaid AM was computed and the resultant
requisite amount was determined as arms length price.
3. The A.O. considered these submissions and has held as follows:-
i) It is well settled, and in view of the decision of the Special Bench
of the Bangalore Tribunal in the case of Aztek Software & Technology
Services Ltd. vs. ACIT (2007) 294 ITR AT 32 Bangalore (SB), use of
current year data is only permissible, unless the Exception to the Rule is
applicable.
ii) That three comparables were chosen by the TPO for detailed
reasons given in the TPO's order.
4. On disallowance of management fee, he held that the assessee has
not submitted any details by way of emails etc. He held that the
assessee has failed to offer convincing and satisfactory reply, backed by
evidence to answer the basic questions raised by the AO during the
assessment proceedings. He confirmed the penalty after referring to
certain case laws.
5. On appeal the First Appellate Authority on the issue of Transfer
Pricing adjustments held that by selecting wrong set of comparables the
assessee has tried to reduce the taxable income and justify its
transaction with the Associated Enterprise. He held that this was a
conscious and deliberate act. He pointed out that the TPO rejected 5
4
comparables selected by the assesse, and hence it has furnished
inaccurate particulars of income.
6. On the issue of incurring of management fee he held that the
assessee did not offer any bonafide explanation for the claim of
expenditure. He confirmed the penalty. Aggrieved the assessee is in
appeal before us.
7. This case was heard along with ITA no.5566/Del/11 in the case of
M/s Verizon Communications India P.Ltd. (VCIPL) for the A.Y. 2006-07.
Mr. N. Venkata Raman the Ld.Sr.Advocate argued for the assessee and
Dr. B.R.R.Kumar, Ld.Sr.D.R. represented the revenue. Both the parties
reiterated their contentions raised in the case of VCIPL (supra). In
addition Mr. N. Venkata Raman submitted that the disallowance of
management fee does not warrant levy of penalty U/s.271(1)(c). The
Ld.Sr.D.R. pointed out that the assessee neither during the
assesseement proceedings nor during the penalty proceedings furnished
evidence to substantiate the genuineness of expenditure incurred by
payment of management fee.
8. We have heard rival contentions. As regards penalty levied on the
item of transfer pricing adjustment, in our order of even date in the case
of VCIPL in ITA no.5566/Del/11 at para 5 to para9 we have held as
follows:-
5. We do not agree with the proposition stated by the
Ld.Sr.Advocate Mr.N.Venkatraman that penalty under Section
271(1)(c) of the Income Tax Act, 1961 cannot be levied in cases
5
where adjustments have been made under transfer pricing
provisions i.e. Section 92A(4). What has to be seen, is
whether the assessee has undertaken a bonafide exercise for
computing the arm's length price. The question whether
penalty is attracted under Section 271(1)(c) of the Income Tax
Act, 1961 or not is to be determined based on the facts and
circumstances of each case. No general proposition of law
can be laid down that in all cases of transfer pricing
adjustements, where some comparables, referred to as
`samples' by the Ld.Sr.Counsel, are rejected and certain other
comparables are added, penalty under Section 271(1)(c) of the
Income Tax Act, 1961 cannot be levied. The position of law is
that, when there is a difference between the assessed income
and the returned income, there is a presumption of
concealment or furnishing of inaccurate particulars of income
or both, and the burden is on the assessee to explain the
difference. The A.O. would then consider as to whether this
explanation is bonafide and thereafter apply the law based on
various tests and interpretations laid down by the Courts
and then come to a conclusion either to levy a penalty or to
drop the proceedings.
6. There can not be any dispute on the broad propositions
of law canvassed by the assessee's counsel, as these are
supported by case laws. The propositions are,
a) Just because the assessee accepted the transfer pricing
adjustment, no penalty can be levied;
b) No penalty can be levied when the assessee's explanation is
bonafide;
c) Penalty cannot be levied when there are two possible views;
d) Penalty cannot be levied when the issue in question is
debatable.
7. We have to consider whether on the facts and
circumstances of the case on hand, these propositions can be
applied. The assessee in this case has used multiple year
data in computing the arm's length price. The TPO, the
Assessing Officer as well as the Commissioner of Income Tax
(Appeals) have held that, such action by the assessee is
contrary to the provisions of the Income Tax Act, 1961 and
thus it tantamounts to furnishing of inaccurate particulars of
income. Both the Assessing Officer as well as the
Commissioner of Income Tax (Appeals) relies on the decision of
the Special Bench of the Tribunal in the case of Aztek
Software & Technology Services Ltd. vs ACIT (2007) 294 ITR
AT 32 Bangalore(SB) as well as the case of Mentor Graphics
P.Ltd. (2007) 109 ITD 10.
6
8. It can be seen that both these decisions were delivered
after July, 2007. Prior to that there was a legal debate as to
whether multiple year data can be used or the current year
data has to be used. The arguments of the parties on this
issue can be found in these decisions. The Assessment Year
in question is 2006-07. In the year 2006, when the assessee
completed its Transfer Pricing study and filed the return of
income, this debate was very much alive. Thus we are of the
considered opinion that, this being a debatable issue at the
point of time when the assessee filed its return of income, the
assessee adopting multiple year data for arriving at arm's
length price is a bonafide exercise. Thus penalty levied on
that count cannot be sustained. The law on this issue was
evolving.
9. Coming to the comparables being added and some
being deleted from the T.P. report, while adjudicating the
appeal for Assessment Year 2005-06, this Bench of the
Tribunal has come to a conclusion that the First Appellate
Authority has rightly deleted the following companies as
comparables:-
a) TCE Consulting Engineers Ltd.
b) Engineers India Ltd.
c) Rights Ltd.
d) Water and Power Consultancy Services.
10. Thus deletion of these comparables cannot be aground
for imposition of penalty under Section 271(1)(c) of the Income
Tax Act, 1961. As far as selection of Besant Raj International
Ltd. is concerned as a comparable, the TPO has accepted the
same in the earlier AYs. Be as it may, selection of comparables
is a subjective exercise. The assessee has seriously contested
the conclusions drawn by the TPO on selection of comparables for
bench marking of international transactions. It is another matter
that the assessee chose not to carry the issue in appeal the
reasons of which have been explained. That by itself does not
warrant levy of penalty under Section 271(1)(c) of the Income Tax
Act, 1961.
11. In our considered opinion the assessee acted in the
bonafide manner in conducting its transfer pricing study and
arriving at an arm's length price. The explanation is bonafide
and under those circumstances the levy of penalty under Section
271(1)(c) of the Income Tax Act, 1961 is not warranted."
7
9. As the facts are similar in this case also, we are of the considered
opinion that the transfer pricing study done by the assessee was a
bonafide exercise for determining the arms length price and the
variations made by the T.P.O. to the arms length price, are a genuine
difference of opinion, which are debatable. Under these facts and
circumstances, no penalty can be levied U/s 271(1)(c) on adjustment
made on account of Transfer Pricing provisions.
10. Coming to the penalty levied on the disallowance, at para 6.3 to
6.5 at page 4 the AO in his order U/s 271(1)(c) observed as follows:-
"6.3. In this case, penalty under Section 271(1)(c ) is found to
be leviable as the assessee has not disclosed all the facts material
to the computation of its total income. The argument and the
contention taken by the assessee were found unexplained or
without any evidence at the time of assessment proceedings. In
this case the explanation of the assessee has not been proved on
the basis of evidences. In view of the above discussions, the
submissions of the assessee have clearly been dealt by the TPO
while passing her order. Further, malafide intention on the part of
assessee need not be ;established any more. The onus was on the
assessee to prove with evidences to the satisfaction of the
Assessing Officer, the discrepancy noticed by him during the
coruse of the assessment. The assessee has failed to discharge
the onus caste upon him.
6.4. As per the ratio laid down by the Hon'ble Supreme Court in
the case of BA Balasubramanyam Bros & Co. vs. CIT 1999 (236)
ITR 997 SC, wherever there is difference between the returned and
assessed income there is inference of concealment as a rule of law.
The responsibilities for rebutting such inference is squarely on the
assessee. The assessee is expected to offer an explanation for the
difference. In absence of any explanation by itself will merit
penalty. Secondly, as regards to deliberate acts is concerned. It
does not hold good now.
6.5. After the insertion of explanation (1) below s.271(1)(c ) as held
in the decision in the case of KP Madhusudanan vs CIT 251 ITR 99
(SC), the decision in the case of Sir Sahadilal Sugar and General
Mills Ltd. 168 ITR 705 (SC), did not held good. As clearly laid
down in this decision as also in ;the decision of BA
8
Balasubramanyam Bros & Co. vs. CIT 1999 (236) ITR 997 SC,
after the deletion of word `deliberately' from s.271(1)(c ) and the
insertion of explanation below s.271(1) with effect from 1.4.1964,
the ratio of CIT vs. Anwar Ali 76 ITR 696 (SC), did not hold good
and onus of proving that there was no concealment of income was
on the assessee and mens rea had not to be proved ;by the
department."
11. Before the first appellate authority also, the assessee has not
brought out any evidence to substantiate its claim for deduction of
management fee. Before us also the assessee has not substantiated his
claim by producing evidence. Except for making a statement, no
evidence is on record. Our attention has not been drawn by the
assessee to any evidence filed by the assessee before the lower
authorities. The concurrent factual finding of the Assessing Officer as
well as the Commissioner of Income Tax (Appeals) are not contradicted
with evidence before us. Submission cannot take the place of evidence.
Hence we have to uphold the factual findings of the lower authorities
that no evidence is produced to substantiate its claim of genuineness of
management fees. Under the circumstances we are of the considered
opinion that the explanation offered by the assesee on this issue of
allowability of management fee is not bonafide and the claim remains
unexplained. Under the circumstances we confirm the levy of penalty on
the issue of disallowance of management fee.
12. Coming to the various case laws relied upon by both the parties,
we find that the first appellate authority has discussed them in detail.
We have perused the case laws and also considered the propositions laid
9
down therein. In our view the propositions laid down in all those cases
do not come to the rescue of the assessee on the facts of this case for the
reason that the assessee has failed to explain and substantiate its claim
for deduction of management fee paid with evidence. The explanation
cannot be considered as bonafide. The issue is not debatable. It is not a
case of mere disallowance on a difference of opinion Under the
circumstances we confirm the levy of the penalty on this item of
disallowance. In the result, the appeal of the assessee is allowed in part.
13. In the result the appeal of the assessee is allowed.
Order pronounced in the Open Court on 17th September,2012.
Sd/- Sd/-
(A.D. JAIN) (J.SUDHAKAR REDDY)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: the 17th September, 2012
*manga
Copy of the Order forwarded to:
1. Appellant; 2.Respondent; 3.CIT; 4.CIT(A); 5.DR; 6.Guard File
By Order
Dy. Registrar
10
1. Date of Dictation:
2. Draft placed before the Author on:
3. Draft proposed and placed before Second Member on:
4. Draft discussed/approved by the Second Member on: /09
5. Approved draft came to Sr.P.S. on: /09
6. Date of Pronouncement : /09
7. File sent to Bench Clerk on :
8. Date on which file given to Head Clerk on:
9. Date of dispatching the Order on:
|