No Section 270A(8) Penalty for TP Adjustment Without Proof of Deliberate Concealment: Madras HC

Verizon Data Services India Private Limited Vs DCIT (Madras High Court)

Madras HC: No 270A(8) Penalty Without Proof of Deliberate Concealment; Holds Verizon’s TP Compliance Bars ‘Misreporting’ Tag

Facts:

• The Petitioner, Verizon Data Services India Private Limited, filed its return of income for the Assessment Year 2020–21 on 24.12.2020 declaring a gross total income of Rs. 2,83,97,38,290/-. During the course of assessment proceedings, a reference was made under Section 92CA(1) of the Income Tax Act, 1961 to the Transfer Pricing Officer (TPO) for determination of the Arm’s Length Price (ALP) in respect of international transactions entered into by the Petitioner.
• The Transfer Pricing Officer, after conducting proceedings and examining the submissions and documentation furnished by the Petitioner, passed an order dated 30.03.2023 under Section 92CA(3) proposing an upward adjustment of Rs. 4,49,59,601/- to the income of the Petitioner. The adjustment was made in relation to the international transactions undertaken by the Petitioner in its software development, testing and support services segment. The TPO determined that the margin of the Petitioner was not within the permissible range when compared with selected comparables under the Transactional Net Margin Method (TNMM), and accordingly computed the Arm’s Length Price by applying the median margin of the comparable companies.
• Pursuant to the TPO’s order, the Assessing Officer, in the Assessment Order dated 02.11.2023, added the said upward adjustment to the total income of the Petitioner. In the assessment order, it was specifically stated that penalty proceedings under Section 270A for “misreporting” of income were being initiated separately in respect of the upward adjustment determined by the TPO.
• Subsequently, the TPO passed a rectification order dated 03.10.2023 under Section 92CA(5) read with Section 154 of the Act, on an application filed by the Petitioner pointing out certain errors in computation of margins of comparable companies. Upon verification, the TPO revised the margins and recomputed the Arm’s Length Price. As a result, the original upward adjustment of Rs. 4,49,59,601/- was reduced to Rs. 2,02,13,445/-.
• Consequent to the rectification, the assessment was completed under Section 143(3) read with Section 144C on 03.11.2023, determining the total assessed income at Rs. 2,85,99,58,545/-, after adding the revised transfer pricing adjustment of Rs. 2,02,13,445/- to the income declared by the Petitioner.
• On the very same day, a notice under Section 274 read with Section 270A was issued proposing to levy penalty under Section 270A of the Act. The proceedings culminated in an order dated 30.05.2024 imposing penalty of Rs. 1,01,74,640/- under Section 270A on the ground that the under-reporting of income was in consequence of misreporting.
• In the meanwhile, the Petitioner had filed an application in Form No. 68 on 30.11.2023 seeking immunity under Section 270AA of the Act from imposition of penalty under Section 270A. A show cause notice dated 26.12.2023 was issued proposing to reject the application for immunity. The Petitioner submitted its reply reiterating its earlier submissions made before the National Faceless Assessment Centre, along with supporting annexures. However, by order dated 29.12.2023, the application for grant of immunity under Section 270AA was rejected.
• Aggrieved by the rejection of its application for immunity under Section 270AA dated 29.12.2023 and the penalty order dated 30.05.2024 imposing penalty under Section 270A for Assessment Year 2020–21, the Petitioner filed the present Writ Petition under Article 226 of the Constitution of India before the High Court of Judicature at Madras, seeking quashing of both the orders and a direction to grant immunity under Section 270AA of the Act.

Issues:

• Whether the rejection of the Petitioner’s application for grant of immunity under Section 270AA of the Income Tax Act, 1961, vide order dated 29.12.2023, was justified in law.
• Whether the imposition of penalty under Section 270A of the Income Tax Act, 1961, vide order dated 30.05.2024, on the ground that the under-reporting of income was in consequence of “misreporting”, was sustainable.
• Whether the transfer pricing adjustment made pursuant to the order of the Transfer Pricing Officer under Section 92CA(3), as rectified under Section 92CA(5) read with Section 154, could be treated as “under-reporting of income in consequence of misreporting” within the meaning of Section 270A(8) read with Section 270A(9) of the Act.
• Whether the Petitioner’s case fell within the exception carved out under Section 270A(6)(d) of the Income Tax Act, 1961, in respect of additions made in conformity with the Arm’s Length Price determined by the Transfer Pricing Officer, where information and documentation under Section 92D had been maintained and international transactions had been disclosed under Chapter X.
• Whether, in the facts of the case, the Petitioner was entitled to immunity under Section 270AA of the Income Tax Act, 1961, in respect of the transfer pricing adjustment made for Assessment Year 2020–21.

Observation:

• The Hon’ble Court observed that Section 270A of the Income Tax Act, 1961 makes a clear distinction between “under-reporting of income” and “under-reporting of income in consequence of misreporting of income”, and that enhanced penalty under Section 270A(8) can be levied only when the case strictly falls within any of the circumstances enumerated under Section 270A(9). The Court further observed that misreporting represents an aggravated form of under-reporting characterized by deliberate and willful conduct, and therefore cannot be inferred mechanically merely because an addition has been made in assessment.
• The Hon’ble Court observed that the penalty proceedings in the present case were initiated solely on the basis of the transfer pricing adjustment proposed by the Transfer Pricing Officer while determining the Arm’s Length Price under Section 92CA(3), as subsequently rectified under Section 92CA(5) read with Section 154. The Court observed that transfer pricing determination inherently involves estimation, benchmarking, application of comparables and margin analysis, and therefore such adjustment by itself cannot be equated with misrepresentation or suppression of facts so as to attract Section 270A(9).
• The Hon’ble Court observed that none of the specific instances of “misreporting of income” as enumerated under Section 270A(9), namely misrepresentation or suppression of facts, failure to record investments, claim of expenditure not substantiated by evidence, recording of false entries, failure to record receipts, or failure to report international transactions under Chapter X, were established in the present case. The Court observed that the Petitioner had disclosed the international transactions, maintained documentation under Section 92D, and furnished the necessary material during the proceedings, thereby ruling out the applicability of Section 270A(9).
• The Hon’ble Court observed that in order to sustain a penalty for misreporting, there must be clear and categorical incriminating material demonstrating deliberate and conscious concealment or furnishing of false particulars. The Court observed that no such material existed on record and that the Revenue had not demonstrated any willful attempt on the part of the Petitioner to evade tax.
• The Hon’ble Court observed that Section 270A(6)(d) expressly excludes from the ambit of “under-reporting” any addition made in conformity with the Arm’s Length Price determined by the Transfer Pricing Officer, provided the assessee has maintained prescribed documentation under Section 92D, declared the international transaction under Chapter X, and disclosed all material facts relating to such transaction. The Court observed that the Petitioner satisfied these statutory conditions and therefore the case squarely fell within the exception carved out under Section 270A(6)(d).
• The Hon’ble Court observed that once the case falls within the exclusion under Section 270A(6)(d), even simplicitor under-reporting under Section 270A(7) would not survive, and consequently the enhanced penalty under Section 270A(8) for misreporting was wholly unsustainable.
• The Hon’ble Court observed that immunity under Section 270AA is not available only in cases where under-reporting is in consequence of misreporting within the meaning of Section 270A(8) read with Section 270A(9). The Court observed that since the present case did not involve misreporting and fell within the statutory exclusion, rejection of the Petitioner’s application for immunity under Section 270AA was without authority of law.
• The Hon’ble Court observed that the impugned order dated 29.12.2023 rejecting immunity under Section 270AA and the penalty order dated 30.05.2024 imposing penalty under Section 270A were not sustainable in law. The Court therefore allowed the Writ Petition and set aside the impugned orders.

FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT