IN THE ITAT DELHI BENCH ‘H’
Verizon Communication India (P.) Ltd.
Deputy Commissioner of Income-tax
IT APPEAL NO. 5566 (DELHI) OF 2011
[ASSESSMENT YEAR 2006-07]
SEPTEMBER 17, 2012
J. Sudhakar Reddy, Accountant Member
This is an appeal filed by the assessee against the order of the Ld. CIT(A)-XIX, New Delhi dt. 01.09.2011 for the Assessment Year 2006-07.
2. The assessee is a company and is engaged in the business of providing marketing support services. The assessee filed its return of income for the Assessment Year 2006-07 on 29.11.2006 declaring a loss of Rs.4,52,05,744/-. The return was selected for scrutiny and the assessment order was passed under Section 143(3) read with S.92CA(3) of the Income Tax Act, 1961 on 22.2.2010. A transfer pricing adjustment of Rs. 2,25,67,539/- was made. The Assessing Officer before finalizing the assessment proceedings initiated penalty proceedings under Section 271(1)(c) of the Income Tax Act, 1961. Show cause notice dated 22.2.2010 was served on the assessee. On 28.5.2010 the assessee filed his reply. The Assessing Officer after considering the reply, vide order dt. 28.6.2010 levied penalty under Section 271(1)(c) by holding that the assessee furnished inaccurate particulars. He held that the assessee has failed to offer and prove any bonafide explanation for using multi year data. He also held that the assessee has not disclosed all the facts material in the computation of the total income. The assessee carried the matter in appeal. He submitted that acceptance of the adjustment made by the Transfer Pricing Officer (TPO), in view of the fact that the assessee is a loss making unit, is no justification for the Assessing Officer to levy the penalty. He relied on a number of case laws and submitted that the issue in question is debatable and the assessee had no malafide intention to evade taxes. It was submitted that the explanation furnished by the assessee was bonafide. The First Appellate authority confirmed the penalty by observing that the assessee has concluded its comparability analysis of the transactions based on earlier years data and not on the basis of current year data. The First Appellate Authority gave detailed reasons from para 18 to 37 of his order. Aggrieved the assessee is in appeal before us on the following grounds.
“1. Based on the facts and the circumstances of the case and in law, the Hon’ble Commissioner of Income Tax (Appeals)-XIX (Hon’ble Commissioner of Income Tax (Appeals) has erred in upholding the penalty order passed by the ld. DCIT, Circle 17(1), New Delhi (Ld.AO) levying penalty of Rs.80,00,000/- on the appellant under Section 271(1)(c ) of the Income Tax Act, 1961.
2. Based on the facts and the circumstances of the case and in law, the Hon’ble Commissioner of Income Tax (Appeals) has erred in upholding the order of the ld. AO that the appellant has furnished inaccurate documentation and failed to provide a bonafide explanation in respect of the addition made to the returned income.”
2. Ld. Sr. Advocate Mr. S. Venkatraman submitted that no penalty can be levied on T.P. adjustment, when certain comparables are included and certain other comparables are excluded. As per the Ld. Counsel addition of certain samples and deletion of certain samples, which caused variation, is no ground for levy of penalty. He submitted that as the assessee was having a loss, it did not file any appeal on the T.P. adjustment. He filed the paper book. He relied on the decision of the Delhi Bench of the Tribunal in the case of Sony India (P.) Ltd. v. Dy. CIT  114 ITD 448 (Delhi). He also relied on the following case laws-
i. Kanbay Software India (P.) Ltd. v. Dy. CIT  31 SOT 153 (Pune)
ii. Dy. CIT v. Vertex Customer Services (India) (P.) Ltd.  34 SOT 532 (Delhi)
iii. Asstt. CIT v. Firmenich Aromatics (India) (P.) Ltd. [ITA no. 4654/Mumbai/2009 F Bench of the Tribunal order dt. 17th May, 2010]
iv. Dy. CIT v. Advanced Sysstek (P.) Ltd. [IT Appeal No. 878 (Ahd.) of 2009, dated 11-5-2012]
3. Ld. D.R. Mr. JH Ahalwal on the other hand submitted that the arguments of the Sr. Counsel that no penalty can be levied under Section 271(1)(c) on any adjustment made under transfer pricing provisions is not sustainable in law. He submitted that when a transfer pricing adjustment is made, it leads to a variation between the returned income and the assessed income. He relied on the order of the Ld. CIT(A) and submitted that not only comparables were added but also the assessee had taken multiple year data, which is against the express provisions of the Income Tax Act, 1961. He vehemently contended that giving wrong comparables and wrong data, in contravention of the provisions of the Income Tax Act, 1961 tantamounts to furnishing of inaccurate particulars. He highlighted the fact that the selection of Besant Raj International Ltd. as a comparable was deliberate, as this comparable was not thrown up by any search process performed on Prowess or Capitaline. This company was just added to the list of comparables without any reason and only with the object of furnishing inaccurate particulars. He similarly relied on other portions of the Commissioner of Income Tax (Appeals)’s order and submitted that it cannot be laid down when some comparables are included and other comparables are excluded no penalty can be levied. He vehemently contended that the facts of each case has to be looked into. He submitted that the assessee has not proved its bonafide. He distinguished the case laws relied upon by the assessee. In reply, the ld. counsel for the assessee reiterated its contention that the entire exercise was bonafide.
4. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and on perusal of the papers on record and orders of the authorities below, we hold 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 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 adopt various tests and propositions laid down by the Courts 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 certain 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. v. Asstt. CIT  15 SOT 49 as well as the case of Mentor Graphics (Noida) (P.) Ltd. v. Dy. CIT  109 ITD 101 (Delhi).
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 account 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 appellant 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.
12. In the result the appeal of the assessee is allowed.
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