IN THE ITAT AHMEDABAD BENCH ‘A’
Deputy Commissioner of Income-tax
IT APPEAL NO. 2050 (AHD.) OF 2008
[ASSESSMENT YEAR 2002-03]
OCTOBER 19, 2012
Anil Chaturvedi, Accountant Member
This appeal is filed by the assessee against the order of Ld. CIT (A)-VIII, Ahmedabad dated 23-3-2007 for the assessment year 2002-03 confirming the penalty levied u/s.271(1)(c ) of the Act of Rs.49,31,547/-.
2. Assessee is a limited company engaged in the business of software development. It filed its return of income on 31-10-2002 disclosing total income at Rs. Nil. The assessment was finalized vide order passed u/s. 143(3) on 28-12-2004 determining the total income at Rs. 6,72,81,044/-. While finalizing the assessment, dis allowance of Rs. 3,72,63,859/- was made on account of adjustments in respect of international transactions. Against the order of A.O., the assessee preferred appeal before CIT (A). CIT (A) vide his order dated 24-5-2006 confirmed the dis allowance to the extent of Rs.1,38,13,859/-. A.O. initiated penalty proceedings on the additions made and vide order dated 23-3-2007 levied penalty u/s. 271(1) (c) on the aforesaid addition sustained by CIT (A) for the reason that according to the A.O. the assessee had concealed income to the extent of Rs.1,38,13,859/- by claiming excess amount not related to the business of the assessee. He held that the furnishing of inaccurate particular of income was willful and deliberate with the intention to avoid taxes. He accordingly levied penalty of Rs.49,31,547/-.Aggrieved with the order of A.O., the assessee carried the matter before CIT (A). CIT (A) vide order dated 19-3-2008 confirmed the penalty by holding as under:-
“5. The appellant was asked to furnish a copy of the Accountant’s report in form 3CEB filed along with the return of income. It is found that in column 12 of the Annexure to the said report, the Chartered Accountant is supposed to give the details of international transactions entered into by the appellant with the Associated Enterprises by way of arrangement for allocation or apportionment of or any contribution to any cost or expense incurred or to be incurred in connection with a benefit, service, or facility provided or to be provided to any one or more of such enterprises. As per Annexure- E to the said clause 12 filed by the Accountant, it is seen that the Accountant has not reported anything about the cost of traveling expenses and legal fees incurred on behalf of the Associated Enterprises. Thus, it is a clear case of non disclosure made by the appellant, and whatever disclosure has been made by the Accountant in regard to other international transactions does not serve the real purpose as the disclosure has been made in such a manner and it is camouflaged in such a manner that it needed deep scrutiny by the A.O. to find out other international transactions to arrive at the correct determination of income of the appellant as it has been found in this case by the A.O. that the appellant has incurred other international transactions like traveling expenses and legal fees on behalf of the Associated Enterprises. Thus, the disclosure made by the Accountant and the appellant is not true and correct, and not full disclosure and the information regarding all international transactions have not been reported, so it amounts to furnishing of inaccurate particulars of its income. The appellant is advised by a team of legal and professional experts and for non reporting of the said transactions, it can definitely be said that it is a deliberate and conscious act of concealment. The appellant may have reasons not to make separate recovery from the Associated Enterprises for the said expenses but basic issue here is that the full facts regarding all international transactions were not disclosed in the Accountant’s report and in the return of income as held by the TPO, and the A.O. and the CIT (A). As held by CIT (A) and A.O., the appellant should have definitely charged or recovered the cost of traveling expenses and legal fees from its Associated Enterprises/subsidiary but has decided not to recover the same. The TPO has not allowed the same as business expenditure and has directed for adjustment to be made on account of those expenses to the income of the appellant. The A.R. has submitted that the concept of Transfer Pricing was a new concept and the law was evolving in the year under consideration. But this could not have prevented the appellant from disclosing the other international transactions, and the appellant could have given an explanation or a note saying that the international transactions in respect of traveling expenses and legal fees incurred by the appellant did not call for pricing adjustment.
6. I also find that the Explanation-7 to section 271(1)(c) of the Act is quite clear and it specifies that in the case of an assessee who has entered into an international transaction defined in section 92B if any amount is disallowed or added in computing the total income, the amount added or disallowed shall be deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars of income have been furnished. Provisions of Explanation 7 to section 271(1)(c) are akin to the provisions of Explanation 1 to section 271(1)(c). In both the Explanations, it is for the assessee to prove that the explanation was bona fide and a particular action or omission was in good faith and with due diligence. The burden cast on the appellant is heavy. As per Explanation-7 to section 271(1)(c), the appellant has to prove that the price charged or paid in such transactions was in accordance with the provisions of section 92 C in good faith and with due diligence. As the appellant has not been able to discharge this burden, this addition has been made by the TPO and the A.O. and the same has been confirmed by CIT (A). As it is a provision of services to an Associated Enterprise who is a non resident, it is definitely an international transaction within the meaning of section 92B. It is absolutely clear that all the facts relating to the international transactions which are material to computation of income were not disclosed by the appellant. Accordingly, as the appellant has furnished inaccurate particulars of income and it is a deliberate act on the part of the appellant in not disclosing the said particulars of international transactions, in my view the A.O. has rightly levied penalty u/s. 271(1)(c ) of the Act is held to be justified and same is confirmed.”
3. Aggrieved by the order of CIT (A), the assessee is now in appeal before us.
4. Before us, the Ld. A.R. submitted that the assessee had international transactions as defined in Sec. 92B of the Act with its associated enterprises. The said international transactions were duly reported in the Accountant’s report in form No.3CEB. In order to determine the Arm’s length Price for the international transactions a reference was made u/s.92CA (1) by A.O. to TPO & TPO passed an order dated 31-8-2004 and sent it to the A.O. for his consideration suggesting the following transfer pricing adjustments.
6. The Ld. A.R. submitted that the traveling expenses incurred by the assessee relate to the persons seconded to the aforesaid enterprises. A separate recovery was not warranted due to the business rationale namely that the secondment of the person leads to more offshore business for the assessee. The persons seconded get substantial amount of experience and knowledge which enhances their skill and efficiency and on their return the upgraded skills and experience helps the assessee to use them on high end jobs. It was further submitted that the assessee had never perceived the transaction to be international transaction requiring determination of arm’s length price. With respect to legal fees it was submitted that it pertained to the fees paid for advisory services rendered by Baker and Mickenzie. A portion of the advice was rendered in relation to exploring the option of incorporating the Belgium subsidiary. The assessee considered it to be genuine business expenditure on its bonafide belief that the expenses were incurred on commercial considerations and there was no intention to gain any tax advantage. It was further submitted that the transfer pricing adjustments were made only in relation to certain activities alleged by TPO to be treated as international transactions. The Ld. A.R. submitted that there is neither concealment of income or a case of furnishing of inaccurate particulars. All the details required were furnished including the transfer pricing study report. It was further submitted that there is no finding indicating that the assessee had failed to offer any information or that the information provided was false. It was further submitted that the transfer pricing legislation being new to India there may be room for different interpretations. He thus urged that in view of the aforesaid facts, the penalty levied be deleted.
7. On the other hand the Ld. D.R. supported the order of A.O. and CIT (A).
8. We have heard the rival submissions and perused the material on record. It is seen that the A.O. has levied penalty on the adjustments made by the TPO with respect to international transactions. It is an undisputed fact that the international transactions were reported by assessee in Form 3CEB.Transfer Pricing adjustments have been made only in relation to certain activities stated by Transfer Pricing Officer to be of international transactions. The penalty under sec.271(1)(c) of the Act is leviable if the A.O. is satisfied in the course of any proceedings under the Act that any person has concealed the particulars of his income or furnished inaccurate particulars of such income. It is well settled that assessment proceedings and penalty proceedings are separate and distinct and the finding in the assessment proceedings cannot be regarded as conclusive for the purposes of the penalty proceedings.
9. The necessary in gradients for attracting Explanation 1 to Sec.271(1)(c) are that (i) the person fails to offer the explanation, or (ii) he offers the explanation which is found by the A.O. or the CIT (A) or the CIT to be false, or (iii) the person offers explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same have been disclosed by him. If the case of an assessee falls in any of these three categories, then according to the deeming provision provided in Explanation1 to Sec. 271(1)(c) the amount added or disallowed in computing the total income shall be considered as the income in respect of which particulars have been concealed, for the purposes of Cl. (c) of Sec. 271(1), and the penalty follows. On the other hand, if the assessee is able to offer an explanation, which is not found by the authorities to be false, and assessee has been able to prove that such explanation is bona fide and that all the facts relating to the same have been disclosed by him, then in that case penalty shall not be imposed.
10. As per Explanation 7; no penalty is leviable if the assessee proves that the price charged or paid in such transaction was computed in accordance with the provisions contained in Sec. 92C and in the manner prescribed under section in good faith and with due diligence.
11. In the present case the assessee has furnished all the required details called for from time to time. Assessee had also disclosed material facts before the A.O. The A.O. has not given any finding indicating that the assessee had failed to offer any information or the information provided was false. The assessee has not concealed any material fact and the information given by the assessee has not been found to be incorrect. The claim of the assessee was reduced by CIT (A). In view of the totality of the aforesaid we are of the view that no penalty can be levied in the present case. We therefore, direct the deletion of penalty. Thus the ground of the assessee is allowed.
12. Thus the appeal of the assessee is allowed.