Vijay Pal Rao, Judicial Member - These two appeal one by the assessee and other by the revenue are directed against the respective orders of the CIT(A), arising from the penalty orders passed u/s 271(1)(c) of the Income Tax Act for the assessment years 2002-03 & 2004-05.
2. Since the issue involved in both the appeals is identical; therefore, we take the assessment year 2002-03 as base year for deciding the controversy. The brief leading to the levy of penalty are as under; The assessee was engaged in manufacturing and marketing of Finished Dosage Forms ("FDFs"). The product manufacture by the assessee is based on Active Pharmaceutical Ingredients ("APIs"), which is imported from assessee's associated enterprises at France and Egypt. Since, the assessee has imported the raw material APIs being Trimetazidine and Indapamide from its AEs, therefore, the assessee entered into International Transactions which required to be benchmarking as per the provisions of Transfer Pricing regulations. The assessee benchmarking its International Transactions of import of raw material by using Transactional Net Margin Method ("TNMM") as the most appropriate method for determining the arm's length price (ALP). The Transfer Pricing Officer ("TPO") rejected TNMM as most appropriate method and instead applied Comparable Uncontrolled Price ("CUP") as the most appropriate method for benchmarking the International Transactions pertaining to import of the APIs. Consequently, the TPO made an upward adjustment of Rs.1,95,33,408/-towards arm's length price of the International Transactions. The assessee challenge the action of the TPO/AO before the CIT(A), but could not succeed. On further appeal this Tribunal has also confirm the adjustment made by the TPO for both the assessment years vide order dated 31.12.2010. In the mean time the AO initiated the penalty proceedings u/s 271(1)(c) of the Income-tax Act and passed the respective orders u/s271(1)(c) of the Income-tax Act imposing the penalty being 100% of the tax sought to be evaded, in respect of the addition made due to transfer pricing adjustment. On appeal, the CIT(A) has confirmed the levy of penalty for the assessment year 2002-03, however, for the assessment year 2004-05 the CIT(A) has deleted the penalty. Hence both the assessee as well as revenue for filed the appeals against the respective impugned orders passed against them.
3. Before us, the ld. AR of the assessee has submitted that the appeal filed by the assessee against the order of this Tribunal in quantum has been admitted on the substantial question of law as framed by the Hon'ble High Court and one of the questions which has been admitted by the Hon'ble High Court is regarding the right to choose the most appropriate method for determining the arm's length price rests with the taxpayers and the other substantial question of law as admitted by the Hon'ble High Court is the applicability of Comparable Uncontrolled Price (CUP) method being most appropriate method for determining the arm's length price. Thus, ld. AR of the assessee has submitted that when the High Court has admitted the substantial question of law on the applicability of the CUP method on the basis which the addition has been made, it becomes apparent that the addition in question is a debatable issue and in such circumstances penalty cannot be levied u/s 271(1)(c). In support of his contention, he has relied upon the decision of this Tribunal in case of Nayan Builders & Developers (P.) Ltd. v. ITO in Appeal ITA No.2379/2009. He has also relied upon the decision dated 05.10.2010 of Hon'ble Delhi High Court in the case of Liquid Investment & Trading Co. in IT Appeal No.240/2009 and submitted that the Hon'ble High Court has observed that against the quantum the assessee has preferred an appeal before the High Court which has been admitted and substantial question of law has been framed. This itself shows that the issue is debatable.
4. The second leg of argument of ld. AR is that the assessment year 2002-03, is the first year of transfer pricing provisions coming into operation in India. Hence, in the absence of any kind of precedence to rely on for choice of the most appropriate method the decision of the assessee to benchmarking its transactions by adopting TNMM as most appropriate method cannot be held as concealment of its income or furnishing inaccurate particulars of income. He has referred to CBDT notification dated 21st August 2001, whereby rules 10A to 10E were inserted in the Income Tax Rules, which prescribe the manner in which an Arm's Length Price in relation to an international transactions is to be determined by the most appropriate method. One of the various factors to be considered in selecting most appropriate method as per these rules is "taxpayers are free to select the most appropriate method as long as their selection is made taking into account the factors prescribed." The transfer pricing provisions involved complex issues and, therefore, with a view to avoid hardship to the taxpayers at the initial stages of implementation the Central Board of Direct Taxes ("CBDT") vide its Circular No.14 of 2001 dated 22nd November, 2001, issue guidelines towards, the transfer pricing requirements. Therefore, this being first year of transfer pricing provisions coming into operation both the assessee and revenue were new to the transfer pricing regime. Thus, ld. AR of the assessee has submitted that the selection of the most appropriate method for determination of Arm's Length Price by the assessee is based on bona fide belief and even, if the method selected by the assessee was not found as the most appropriate method, the same would not attract the penalty u/s 271(1)(c). He has supported the order of the ld. CIT(A) for the assessment year 2004-05 and submitted that the ld. CIT(A) has deleted the penalty in the subsequent in the year after consideration the CBDT circular/ notification. He has relied upon the decision of Hon'ble Supreme Court in the Case of CIT v. Eli Lilly & Co. (India) (P.) Ltd [2009] 312 ITR 225/178 Taxman 505 and submitted that Hon'ble Supreme Court has observed that when the assessee was under a genuine and bona fide belief that it was not under any obligation to deduct tax at source from the home salary paid to the foreign Company and, consequently, the Hon'ble Court was of the view that in none of the 104 cases penalty was leviable u/s 271(1)(c) as the respondent in each case has discharged its burden of showing reasonable cause for failure to deduct tax at source. Relying on the decision of the Hon'ble Supreme Court he submitted that the assessee in this case has also discharged its burden to show the decision was genuine and under bona fide belief. He has also relied the decision of the Hon'ble Supreme Court in the case of CIT v. Reliance Petroproducts (P) Ltd. [2010] 322 ITR 158/189 Taxman 322, wherein the Hon'ble Court held that "mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. He has further submitted that when there is a difference between the revenue and assessee in selecting and applying the most appropriate method for determining the arm's length price then, such difference constitute a bona fide difference of opinion and does not tantamount to furnishing of inaccurate particulars of income as held by this Tribunal in case of Dy. CIT v. Firmenich Aromatics (I) (P.) Ltd. [2012] 53 SOT 269 (URO)/24 taxmann.com 271 (Mum.).
5. The next contention of the ld. AR is that the TNMM was identified as most appropriate method for computing ALP because no comparable data was available to apply CUP method. Therefore, in the absence of availability of internal CUP data as well as external CUP the assessee determine the arm's length price, in accordance with the provisions of section 92C in good faith and with due diligence. The provisions of u/s 271(1)(c) would not attract, when the assessee had a bona fide reason to apply TNMM as most appropriate method in the absence of any data to follow any other method and particularly CUP. He has referred to transfer pricing study analysis at page no.634 of the paper book and submitted that the assessee has clearly made out the reasons for not selecting the CUP as the most appropriate method because no comparable was available and particularly data were not available in the public domain. In support of his contention, he has referred the order of transfer pricing officer and submitted that the TPO collected the data for applying CUP by issuing the notice under section 133(6) which shows that the data were not available in the public domain. The ld. AR has further contended that in the quantum appeal, the Tribunal while confirming the addition on account of transfer pricing adjustment has not considered various key evidence/documents. Which has been brought to the notice of the AO and CIT(A) in the penalty proceedings to justify the claim of the assessee.
6. On the other hand, ld. DR has submitted that the assessee has not specifically rejected CUP as most appropriate method in the transfer pricing study and selected TNMM without justification as to why the CUP was not selected. He has further submitted that the TPO has held that the CUP is most appropriate method for determining the arm's length price in respect of the international transactions entered into by the assessee. The order of the TPO in holding the CUP as the most appropriate method has been upheld by this Tribunal. Therefore, it cannot be said that the assessee has acted in a manner prescribed under section 92C in good faith and with due diligence. Thus, in view of the Explanation 7 of section 271(1)(c) of the Act, any amount added in the total income of the assessee as per the section 92C(4) for shall be deemed to represent the income in respect of which price have been concealed or inaccurate price have been furnished in terms of the provisions of u/s 271(1)(c) of the Act. He has relied upon the order of the ld. CIT(A) for the assessment year 2002-03.
7. We have considered the rival submissions as well as relevant material on record. The addition on account of transfer pricing adjustment has been made by the TPO by rejecting TNMM as adopted by the assessee and thereby determine the arm's length price by adopting CUP as the most appropriate method for the raw material imported by the assessee from its associates enterprises. The decision of the TPO in rejecting TNMM and adopting CUP as the most appropriate method in relation to the international transactions of raw material imported by the assessee has been confirmed by this CIT(A), as well as, by this Tribunal. The assessee has forcefully contended before us, that the addition due to adopting different method for determination of arm's length price is a debatable issue and, therefore, the claim of the assessee, though not accepted that by itself would not attract the penalty u/s 271(1)(c) as held by the Hon'ble Supreme Court, in the case of Reliance Petroproducts (P) Ltd. (Supra) . To substantiate this contention that the issue of addition is a debatable in nature the ld. AR has referred and relied upon the substantial question of law framed by the Hon'ble High Court in the appeal preferred by the assessee against the order of this Tribunal in quantum. The decision of Hon'ble Delhi High Court dated 05.10.2010 in the case of Liquid Investment & Trading Co.(supra) has been relied upon on this point.
8. There is no quarrel on the point that if, the assessee has made a claim which is debatable then even, if the claim of the assessee is not accepted or acceptable under the provisions of law it would not ipso facto lead to the conclusion that the assessee has concealed particulars of income or furnished inaccurate particulars of income, unless, the claim of the assessee is bogus or absolutely wrong. The question whether the claim of the assessee is a debatable issue requires examination of the fact and it can be ascertained only from the facts and circumstances under which the claim has been made. Merely, because a substantial question of law, has been admitted by the Hon'ble High Court in the appeal preferred by the assessee does not ipso facto establish that the claim of the assessee involved a debatable question of law and consequently, the penalty provisions u/s 271(1)(c) would not be attracted. The Hon'ble Delhi High Court in case of Liquid Investment & Trading Co. (supra) has observed as under:
"Both the CIT(A) as well as the ITAT have set aside the penalty imposed by the Assessing Officer under section 271(1)(c) of the Income Tax Act, 1961 on the ground that the issue of deduction under section 14A of the Act was a debatable issue. We may also note that against the quantum assessment where under deduction under section 14A of the Act was prescribed to the assessee, the assessee has preferred an appeal in this Court under Section 260A of the Act which has also been admitted and substantial question of law framed. This itself shows that the issue is debatable. For these reasons, we are of the opinion that not question of law arises in the present case."
9. It is clear from the order of the Hon'ble High Court that the issue involved in the addition was disallowance under section 14A of the Income Tax Act which itself is a debatable issue and, therefore, the penalty levied against the disallowance/addition made under section 14A would not sustain. It is pertinent note that the said decision in Liquid Investment Trading Co. is subsequent to the decision of Hon'ble Supreme Court in the case of Reliance Petroproducts (P) Ltd. (Supra) wherein an identical issue of levy of penalty u/s 271(1)(c) against disallowance made under section 14A of the Income-tax Act was involved. Thus, it is the nature of addition/disallowance, which is material to determine whether the issue involved in the addition is a debatable issue and, therefore, the claim of the assessee is a bona fide claim, though not acceptable. An identical issue has been considered by the Hon'ble Delhi High Court in the case of CIT v. Splender Construction [2012] 208 Taxman 302 (Mag.)/22 taxmann.com 407 wherein the Tribunal had deleted the penalty on the ground that the issue was debatable, as the appeal filed by the assessee against the quantum order was admitted by the High Court. The Hon'ble High Court has held in para 9 and 10 as under:
"9. In the facts and circumstances of the present case, we cannot agree with the approach adopted by the Tribunal. We are of the opinion that the Tribunal has side tracked the main issue. It was a case where the land in question was purchased in the financial year 1998-99. Thereafter, it was shown in the balance sheet as 'stock in trade'. However, during the financial year in question when the land was sold, the same have been converted by the assessee from 'stock in trade' to "investment". Obviously, this change in the books of accounts, just before the sale of the property, was made to avoid payment of full taxes by changing the complexion of the earnings made on the sale of the property. The Assessing Officer, however, still allowed the change but then was right in holding that the period of holding the asset was reckoned from the date when it was converted as 'investment' from 'stock in trade' and not from the date when the land was purchased. Therefore, the gain was to be treated as short term capital gain. The assessee, under the garb "long term capital gain" wanted to pay lesser tax. It had thus clearly furnished inaccurate particulars of income.
10. The issue was not debatable as held by the Tribunal in the impugned order. No doubt, appeal was admitted. However, the Tribunal has glossed over a very important and fundamental fact. In quantum proceedings, appeal filed by the assessee i.e ITA 662/2009 came up for admission on 16th September, 2009. On the same date, appeal was admitted, arguments heard and orders were dictated in the court dismissing the appeal there and then. In this factual backdrop, when order of the Assessing Officer in quantum proceedings was sustained by all successive authorities and this Court also dismissed the appeal at the admission stage, albeit after admitting the same, it cannot be said that the issue was debatable."
10. Merely, because the appeal of the assessee against the quantum order has been admitted by the Hon'ble High Court and question of law is frame does not ipso facto lead to the conclusion that the assessee's claim is bona fide because it is a debatable issue. Even, otherwise the legislature has made it clear by inserting Explanation 7 to section u/s 271(1)(c) that any addition in the computation of the total income is made as per the provisions of section 92C. The amounts so added or disallowed shall for the purpose of Clause(c) of section 271(1) would be deemed to represent the income, in respect of which the particulars have been concealed or inaccurate particulars have been furnished unless, the assessee proves to the satisfaction of the taxing authority that the price charges are paid in international transactions was computed in accordance with the provisions of section 92C and in the manner prescribed under that section in good faith and with due diligence. For ready reference, we quote Explanation 7 as under:
"Where in the case of an assessee who has entered into an international transaction [or specified domestic transation] defined in section 92B, any amount is added or disallowed in computing the total income under sub-section(4) of section 92C, then, the amount so added or disallowed shall, for the purposes of clause(c) of this sub-section, be deemed to represent the income in respect of which particulars have been conceals or inaccurate particulars have been furnished, unless the assessee proves to the satisfaction of the Assessing Officer or the Commissioner (Appeals)[or the Commissioner] that the price charged or paid in such transaction was computed in accordance with the provisions contained in section 92C and in the manner prescribed under that section, in good, faith and with due diligence."
11. The cases of addition/disallowance in computing the total income as the provisions of section 92C does not fall under the general rule of bona fide explanation as per Explanation 1 to section 271(1)(c). The Explanation 7, itself has prescribed exceptions in the case whether the price has been computed in accordance with the provisions of section 92C and in the manner prescribed their under in good faith and with due diligence. Therefore, if the assessee proves to the satisfaction of the taxing authority that the price charged or paid has been computed as per the provision and manner prescribed under section 92C, in good faith and with due diligence then the addition made section 94C(4) would not attract the penalty. The decision relied upon by the ld. AR of the assessee are either on the issue of disallowance/addition other then the transfer pricing provisions or where the Explanation-7 to u/s271(1)(c) has not been considered. Once the exclusion from attracting the provisions of u/s 271(1)(c) has been provided in the Explanation-7 itself then the first requirement for escaping from the levy of penalty u/s271(1)(c), against the addition made as per the provisions of section 92C is that the decision of the assessee in computation of the price in respect of international transactions is as per the provisions and manner prescribed under section 92C and further the said decision is taken in good faith and with due diligence.
12. In the case, in hand the assessee has applied TNMM as the most appropriate method in respect of international transactions of import of raw material, Rule 10C of Income Tax Rules prescribes the factors for selecting the most appropriate method as under:
"(1) for the purpose of sub-section(1) of section 92C, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction, and which provides the most reliable measure of an arm's length price in relation to the international transactions.
(2) In selecting the most appropriate method as specified in sub-rule(1), the following factors shall be taken into account, namely:—
| (a) |
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the nature and class of the international transaction; |
(b) |
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the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises; |
(c) |
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the availability, coverage and reliability of data necessary for application of the method; |
(d) |
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the degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions; |
(e) |
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the content to which reliable and accurate adjustments can be made to account for differences, if, any, between the international transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions; |
(f) |
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the nature, extent and liability of assumptions required to be made in application of a method." |
13. A bare reading of rule 10C of the Income-tax Rules 1962 manifest that most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transactions. Sub-rule(2) stipulates various factors to be taken in the account for selecting the most appropriate method. The first factor is the nature and class of international transactions. The other factors as per sub-rule(2) inter alia includes availability, coverage, reliability of data necessary for application of method. No doubt that in the case of international transactions regardings purchase of raw material the most appropriate method for determining the ALP would be Comparable Uncontrolled Transactions (CUP). However, the selection of the method is further subjected to the various factors and one of the factors is the availability, coverage and reliability of data necessary for application of the method. In the case, in hand the assessee has demonstrated from the transfer pricing study, that CUP method could not be applied because no comparable data were available in the public domain. This explanation of the assessee is corroborated by the fact that the T.P.O has collected the data for applying the CUP by requisition made under section 133(6) of the Income Tax Act. Which clearly shows that the data were not available in the public domain and the transfer pricing officer has exercised its power under section 133(6) read with section 92CA(7). Once the assessee has brought out the fact on record that CUP was not selected because of non-availability of data, then, the assessee's case falls under the exception provided under Explanation 7 of u/s 271(1)(c) of the Act, being acted in good faith and with due diligence.
14. Accordingly, in view of the above facts and circumstances of the case, as well as, above discussion we are of the considered opinion that the assessee has clearly made out a case that the price in relation to international transactions has been determined by adopting TNMM in good faith and with due diligence, because the data for applying CUP were not available in the public domain. Hence, the penalty in respect of the adjustment made under section 92C(4) is not justified and liable to be deleted. Accordingly, we delete the penalty for the assessment year 2002-03.
15. Since, the facts as well as issue is identical for the assessment year 2004-05, therefore, we uphold the order of the CIT(A), thereby the penalty levied u/s 271(1)(c) of the Income-tax Act was deleted.
16. In the result, the appeal of the assessee is allowed and appeal of the revenue is dismissed.