Penalty justified for failure to maintain Transfer Pricing Documents

DCIT Vs Convergys Customer Management Group Inc. (ITAT Delhi)

It is mandatory for all taxpayers, without exception, to obtain an independent accountant’s report in respect of all international transactions between associated enterprises or specified domestic transactions. The report has to be furnished by the due date of the tax return filing. Even if it is submitted that there is no international transaction, it cannot escape the assessee at least to obtain independent accountant’s report for specified domestic transactions. Thus, the assessee mandatorily has to maintain documents of its own. Non-maintaining documents on account that there is no international transaction and merely relying on the supporting documents of Associated enterprise, cannot be termed as reasonable cause for not maintaining the documents on its own under Section 273B of the Income Tax Act in respect to the international transactions as well as the specified domestic transactions as well. In fact, it is mandatory requirement to obtain an independent accountant’s report/documents in respect of specified domestic transactions with Associated Enterprises as per Section 92D of the Act and this mandate cannot be diluted by the so called reasonable cause given under Section 273B of the Act. Hence, the Assessing Officer was right in imposing the penalty under Section 271AA of the Income Tax Act and the CIT(A) was not right in deleting the penalty.

FULL TEXT OF THE ITAT JUDGEMENT

These two appeals are filed by the Revenue against the order dated 02/03/2015 passed by CIT (A)-42, New Delhi for Assessment Years 2006-07 & 2008-09 respectively.

2. The grounds of appeal are as under:-

ITA No. 3529/DEL/2015

1. On the facts and circumstances of the case, the Ld.CIT(A) has erred in quashing/deleting the penalty u/s 271(1)(c) & 271AA of the IT Act.

ITA No. 3530/DEL/2015

1. On the facts and circumstances of the case, the Ld.CIT(A) has erred in quashing/deleting the penalty u/s 271(1)(c) & 271AA of the IT Act.

3. Firstly we are taking up the Assessment Year 2006-07 as the facts are identical in both the assessment year. The assessee i.e. Convergys Customer Management Group Inc. is a non-resident company incorporated under laws of United States of America (‘USA’). It provides outsourced customer, employee and marketing support services as well as comprehensive Customer Management Services by utilizing its advanced information system capabilities, Human Resource Management Skills and Industry experience. The assessee has a subsidiary in India by the name of Convergys India Services Pvt. Ltd. To service its customers, the assessee procures services from India from the subsidiary of the assessee. The subsidiary of the assessee provides IT enabled call centre/back office support services to the assessee. For the Assessment Year 2006-07, the assessee filed its return of income as follows:-

The interest and FTS income was earned by the assessee from CIS and associated enterprises of the assessee in India. The Assessing Officer vide Assessment order dated 29/12/2008 held that the assessee has fixed place PE, Service PE and dependent PE as per Article 5 of Indo-USA DTAA and profits of Rs. 2,84,45,67,544/- were attributable to the PE of assessee in India. The Assessing Officer further made disallowance relating to PeopleSoft License cost/Maintenance charges amounting to Rs.68,17,878/- and the same as taxable on gross basis at 15% as “Royalty” under the provisions of Section 9(1) (vi) of the Act and Article 12 of the DTAA. As regards the IPLC/link charges amounting to Rs. 53,282,192/-, the Assessing Officer held that the same are taxable at 15% as “Equipment Royalty” as per clause (iva) of Explanation 2 to Section 9(1) (vi) of the Act and Article 12(2) read with Article 12(3) (b) of the DTAA. The assessee preferred an appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee. The assessee preferred an appeal before the Tribunal and the Tribunal has given a finding as follows:-

> The assessee has a Fixed Place PE in India.

> The assessee Company does not have a Dependent Agent PE in India.

> The method adopted for attribution of profits to PE, by the Assessing Officer and the CIT (A) is not correct and reliable and accordingly, the Tribunal gave its own methodology for arriving at the profits attributable to PE in India.

> PeopleSoft charges and IPLC charges are not taxable as Royalty under the provisions of Act and the DTAA.

Pursuant to the order of the Tribunal and appeal effect order was passed by the Assessing Officer u/s 254 of the Act dated 13/8/2013 wherein the income has been assessed as under:-

4. The assessee preferred appeal before the Hon’ble Delhi High Court which is admitted. In the meantime, the Assessing Officer issued show cause notice u/s 271(1) (c) and 271AA. The Assessing Officer levied penalty u/s 271AA vide order dated 3/1/2014 to the tune of Rs. 10,37,46,481/- which is 2% of the value of international transactions of Rs. 518,73,24,61/-.

5. Being aggrieved by the penalty u/s 271AA, the assessee preferred appeal before the CIT(A). The CIT(A) allowed the appeal of the assessee.

6. The Ld. DR submitted that the assessee has not maintained documents as per the requirement of the Section 92D where in every person has to maintain its own documents. The Ld. DR also relied upon Section 92D and Section 2 (31) of the definition of “Person” as per Income Tax Act. The Ld. DR submitted that the CIT(A) without stating any reasonable cause for not maintaining documents/information u/s 273B has simplicitor deleted the penalty. The Ld. DR pointed out the finding portion in Para 10.3 that the assessee has not maintained its TP Study report but in fact the Indian AE of the assessee has maintained the TP Study report which is relied by the assessee as being his own TP Study report. Therefore, the order of the CIT(A) should be quashed.

7. The Ld. AR relied upon the CIT(A) order. The Ld. AR further submitted that there was no international transaction, therefore, there was no need to maintain the TP documents.

8. We have heard both the parties and perused the material available on record. From the perusal of the records it seems that the assessee was not maintaining its separate TP documents. The contention of the assessee is that there is no international transaction, therefore, there was no need to maintain the TP documents. But as per Section 92D of the Income Tax Act, every person has to maintain its own document. Section 92D of the Act reads as under:

92D. (1) Every person who has entered into an international transaction [or specified domestic transaction] shall keep and maintain such information and document in respect thereof, as may be prescribed.”

It is mandatory for all taxpayers, without exception, to obtain an independent accountant’s report in respect of all international transactions between associated enterprises or specified domestic transactions. The report has to be furnished by the due date of the tax return filing. Even if it is submitted that there is no international transaction, it cannot escape the assessee at least to obtain independent accountant’s report for specified domestic transactions. Thus, the assessee mandatorily has to maintain documents of its own. Non-maintaining documents on account that there is no international transaction and merely relying on the supporting documents of Associated enterprise, cannot be termed as reasonable cause for not maintaining the documents on its own under Section 273B of the Income Tax Act in respect to the international transactions as well as the specified domestic transactions as well. In fact, it is mandatory requirement to obtain an independent accountant’s report/documents in respect of specified domestic transactions with Associated Enterprises as per Section 92D of the Act and this mandate cannot be diluted by the so called reasonable cause given under Section 273B of the Act. Hence, the Assessing Officer was right in imposing the penalty under Section 271AA of the Income Tax Act and the CIT(A) was not right in deleting the penalty. Thus, appeal of the Revenue being ITA No. 3529/DEL/2015 for A.Y. 2006-07 is allowed. As regards the appeal of the revenue being ITA No. 3530/DEL/2015 for A.Y. 2008-09, the same is identical to that of Appeal for A.Y. 2006-07. Hence appeal of the Revenue being ITA No. 3530/DEL/2015 for A.Y. 2008-09 is also allowed.

9. In result, both the appeals of the revenue are allowed.

Order pronounced in the Open Court on this 13t^h Day of October, 2020.