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Deloitte Consulting India Pvt. Ltd. Fairmount Level II, Hiranandani Business Park, Powai, Mumbai-400 076 Vs. Asst. CIT, Circle 2(2), AayakarBhavan, Mumbai-400 020
May, 21st 2014
                                  ITA Nos. 7 6 5 0 & 7 6 5 1 /Mu m/2 0 1 3 ( A .Y s.2 0 0 4 - 0 5 & 2 0 0 5 - 0 6 )
                                                            Deloitte Consulting India Pvt. Ltd. vs. Asst. CIT


       , . .  . . ,   ,                                  

               ./I.T.A. Nos. 7650& 7651/Mum/2013
              (  / Assessment Years: 2004-05& 2005-06)

Deloitte Consulting India Pvt. Ltd.                         Asst. CIT, Circle 2(2),
(Formerly known as `Mastek DC                               AayakarBhavan,
Offshore Development Company Pvt.              /            MaharshiKarveMarg,
Ltd.), Fairmount Level II,                                  Mumbai-400 020
Hiranandani Business Park,
Powai, Mumbai-400 076

   . /  . /PAN/GIR No. AABCD 0476 H
         ( /Appellant)                               :                 (     / Respondent)

                                                           Shri P. J. Pardiwala,
          / Appellant by                             :     Shri Madhur Agarwal&
                                                           Shri K. K. Ved
             /Respondent by                          :     Shri Sanjeev Jain

                          /                          :     13.02.2014
                   Date of Hearing
                                                     :     13.05.2014
           Date of Pronouncement

                                      / O R D E R
Per Sanjay Arora, A. M.:

       This is a set of two appeals by the assessee, i.e., for two consecutive years, being
assessment years 2004-05 & 2005-06, arising out of the separate orders by the
Commissioner of Income Tax (Appeals)-5, Mumbai (CIT (A) for short) of even date, i.e.,
29.11.2013, confirming the levy of penalty u/s. 271(1) (c) of the Income Tax Act (`the
Act' herein after) for the relevant years. The issues arising in both the appeals being the

                                   ITA Nos. 7 6 5 0 & 7 6 5 1 /Mu m/2 0 1 3 ( A .Y s.2 0 0 4 - 0 5 & 2 0 0 5 - 0 6 )
                                                             Deloitte Consulting India Pvt. Ltd. vs. Asst. CIT

same, the appeals were heard together, and are being disposed of vide a common,
consolidated order.

2.     At the very outset it was brought to our notice by the ld. Authorized
Representative (AR), the assessee's counsel, that the hon'ble jurisdictional High Court
has since modified the stay order as passed by the Tribunal, and which would thus obtain,
even as the certified copy of its order is as yet neither available from the Registry nor
available on line. The hearing in the case was accordingly proceeded with on that basis.
The order by the hon'ble court stood subsequently, i.e., vide its letter dated 18/2/2014,
brought on record by the assessee.

3.     The sole issue arising in the instant appeals, agitated per five grounds, identical for
both the years, is the maintainability in law of the levy of penalty u/s. 271(1)(c) of the
Act for the relevant years in facts and circumstances of the case, which again bear
striking similarity.

4. We shall begin by recounting the back-ground facts of the case. The assessee,
incorporated as a private limited company on 30/7/2001, is a joint venture company of
Mastek Limited and Deloitte Consulting. While Mastek, which along with its affiliates
holds 50.1 percent of shares, is a publically held Indian information technology
application outsourcing company, Deloitte Consulting (DC), registered as a limited
partnership in New York, USA, holding as a group the balance 49.9 percent
shareholding, is a one of the world's leading management consulting firms.

4.1    The assessee entered into a software development service agreement with Deloitte
to provide software related services to Deloitte. Deloitte enters into consulting
assignments with its US clients. For such assignments, the areas pertaining to software
development and information technology services are provided by the assessee in terms
of the contract between the assessee and Deloitte only when the assessee possesses the
requisite resources to provide such services. The assessee provides both offshore and
onshore site services under the contract with Deloitte. The offshore services are provided

                                  ITA Nos. 7 6 5 0 & 7 6 5 1 /Mu m/2 0 1 3 ( A .Y s.2 0 0 4 - 0 5 & 2 0 0 5 - 0 6 )
                                                            Deloitte Consulting India Pvt. Ltd. vs. Asst. CIT

through Mastek and the on-site services would be provided through Majesco, a US based
company and a subsidiary of Mastek. Accordingly, while DC plays a lead role in the
generation of sales, in the management and the delivery of projects and managing and
maintaining the company's customer relationship, Mastek provides and manages the
company's infrastructural facilities, the operations, including recruitment, training,
administration and support as a part of its current and future facilities as well as delivery
capability and project quality. The entire turnover of the assessee represents earnings
provided from Deloitte for providing software development and information technology
services. The risks assumed by the respective parties are in consonance with their
respective functions and responsibilities, and toward which reference is made to para 5.1
of the TPO's order u/s. 92CA(3) for AY 2004-05 (PB pgs. 30-31).

4.2    The assessee was found to have during the relevant years, as indeed in the past,
entered into four categories of international transactions with DC - from whom its entire
revenue came to be realized, as under:

(a) Software and IT services provided to AEs;
(b) Software and IT services availed from AEs;

(c) Reimbursement of market services availed; and

(d) Reimbursement of support services availed

Reference was made for both the years, as for the immediately preceding years, i.e., AY
2002 -03 and AY 2003 -04, by the Assessing Officer (AO) to the Transfer Pricing Officer
(TPO) for determining the arm's length price (ALP) of the said transactions, who
accepted the valuation as booked for all save one, i.e., the third category of the
transactions, as for the said two preceding years, determining the arm's length price
thereof at nil. The assessee had valued the same at the amount/s as booked and claimed,
i.e., on actuals, at Rs. 5.86 crores and Rs. 6.61 crores for the two consecutive years under
reference respectively. The assessee, apart from its reply on merits, had also informed the
TPO that it had `revised' its returns for the relevant years, i.e., on 29/3/2006 and

                                  ITA Nos. 7 6 5 0 & 7 6 5 1 /Mu m/2 0 1 3 ( A .Y s.2 0 0 4 - 0 5 & 2 0 0 5 - 0 6 )
                                                            Deloitte Consulting India Pvt. Ltd. vs. Asst. CIT

14/12/2007 respectively, disallowing the entire marketing expense as claimed, and that
therefore no transfer pricing adjustment u/s. 92CA on account of this international
transaction/s would arise. The TPO observed that no revised audit report per the requisite
Form (# 3CEB) had been furnished for the said transaction/s, booked as reimbursement
of actual expenses, along with the revised return/s. Accordingly, rejecting the declared
value of the said transactions, he assessed the `transfer price' thereof at nil, stating his
reasons for the same. As regards the issue of deduction of u/s. 10A, claim under which
had been correspondingly enhanced by the assessee consequent to the increase in the
returned income on account of disallowance of the marketing expense per the `revised
return/s', the same would be considered by the AO in the assessment proceedings. In the
view of the A.O., the same could not be allowed in view of the specific provision of
section 92CA(4). The revision was not valid in-as-much as reference had already been
made to the TPO; the assessee's claim for the said expenditure having been already
subject to examination by the TPO for the earlier years (AYs 2002-03& 2003-04),
determining the ALP at, again, nil, for which an adjustment had been advised by him to
the AO, so that the entire amount came to be added back in assessment. Section 92CA(4)
would thus hold, proscribing deduction u/s. 10A. The same found confirmation in appeal
for essentially the same reasons and, further, by the Tribunal vide its consolidated order
for five (5) consecutive years, being AYs 2002-03 to 2006-07 (in ITA Nos. 3910-
11/2009; 579,1272-73/2011, Mumbai `L' Bench, dated 30/3/2012), even as the assessee
had not claimed the said expense for the latest year (AY 2006-07) per the original return
itself. The assessee's `suo motu' disallowance was inconsistent with its books of account,
reflecting the said expenditure on actuals and, resultantly, not accompanied by an
auditor's report u/s. 92E. An adjustment on that account, advised by the TPO by, again,
valuing the ALP of the relevant transaction at nil, would follow. No cognizance to the
revised return/s or the `suo motu' disallowance of the impugned expenditure could
therefore be given, necessitating an adjustment on that account. Denial of deduction
u/s.10A follows in consequence, condition for grants of which are also not complied
with. The findings by the Tribunal are at paras 33 to 53 of its order, whereby it endorses

                                  ITA Nos. 7 6 5 0 & 7 6 5 1 /Mu m/2 0 1 3 ( A .Y s.2 0 0 4 - 0 5 & 2 0 0 5 - 0 6 )
                                                            Deloitte Consulting India Pvt. Ltd. vs. Asst. CIT

the finding by the Revenue for the relevant years, which it found the assessee as failing to

4.3    Penalty proceedings for furnishing inaccurate particulars of income, satisfaction
for which stood recorded at the time of framing the assessment, were initiated, as it
appears, subsequent to the confirmation in quantum proceedings at the first appellate
stage. The assessee explained that it had considered prudent to, from a commercial
perspective, incur the cost of marketing personnel (5) of DC who were specifically
engaged in marketing the assessee's offshore capabilities. Further, no adjustment
u/s.92C(4) shall arise in view of the suo motu revision of its returns disallowing the
relevant expenditure, leading though to no enhancement in income due to a
corresponding increase in the deduction u/s.10A. However, no material to support its case
on facts, which stood considered by the Transfer Pricing Officer (TPO) in framing his
order u/s.92CA(3), being adduced, the assessee's contention did not pass muster. Even
the revision was considered as not voluntary in-as-much as reference to the TPO had
already been made, and who had already answered the reference thereto u/s. 92CA for the
earlier years, valuing the said transaction at Nil. Accordingly, the `revision' was only a
deliberate attempt to avoid the applicability and rigor of section 92C(4), precluding the
deduction inter alia u/s.10A for any enhancement in income upon adoption of the ALP as
determined. Penalty u/s. 271(1)(c) was accordingly levied at 100% of the tax on the
amount initially claimed as marketing expense. The same found confirmation in appeal;
the ld. CIT(A) after an extensive review of the case law holding as under for both the
years, which sums up the Revenue's case:

`4.2.6 Thus from the careful reading of the provisions of section 271(1)(c) together with
the explanation-1 there under and the various available judicial pronouncements, as
discussed in the above paras, no proof of mensrea is required for levy of such civil
penalty. But the imposition of penalty would not be justified if the explanation given is
found bonafide and all the facts relating to the same and material to the computation of
his total income have been disclosed by him. The disclosure should be full so that the
nature of claim (expense or receipts) could be inferred from the financial statements (and
/or the notes on accounts, audit enclosed with the return) itself. There should be a
bonafide ground for the claim, be as debatable issue or even where two views were
                                  ITA Nos. 7 6 5 0 & 7 6 5 1 /Mu m/2 0 1 3 ( A .Y s.2 0 0 4 - 0 5 & 2 0 0 5 - 0 6 )
                                                            Deloitte Consulting India Pvt. Ltd. vs. Asst. CIT

plausible. Merely because some addition has been made and such addition has become
final, it does not necessarily follow that penalty is leviable. Thus where inadmissible
claims were made due to inadvertent and bonafide mistakes, penalty is held to be not
warranted. The AOs are expected to exercise their discretion based on the facts of the
case. Mere claim of the assessee that the issue was debatable and or two views were
possible in law and facts is also not enough. The burden to substantiate such claim is
upon the assessee. If the explanation given is found not to be bona fide then levy of
penalty would be justified.
4.3     In the present case, the assessee had made a claim of the expense which was
allocated to it by its associate enterprise Deloitte USA out of their marketing expenses.
The determination of Arm's length price in the context of the international transactions
with associate enterprises assumes importance and plays its role to ensure that profits are
not diverted to those associate enterprises by paying them more than what would
normally be done to any third party. On reference to the TPO indeed found that the
assessee was not required to take any marketing function in terms of the master service
agreement with its associate enterprise Deloitte USA; that both the parties had clearly
demarcated role to play for which they were compensated; and there was no valid reason
for Deloitte USA to allocate any part of the cost incurred by it to perform the role agreed
by it. Accordingly the TPO determined the arm's length price of marketing expenses so
claimed by the assessee as NIL. The assessee in fact, had simply accepted such findings
of the TPO by filing its revised return before the order was passed by the TPO. It is noted
that reference was already made to the TPO and the proceedings were in progress when
the assessee filed his revised return. So admission/disclosure of additional income was
not voluntary, more so when similar view was already taken in its earlier years (AY 2002
-03 & 2003-04). The deduction thereon was not admissible u/s. 10A by the virtue of the
proviso to s. 92C (4). This is not a case where issue could be termed as debatable or even
two views were possible; and as such in the facts of the case it has to be held that
assessee had indeed furnished inaccurate particulars of its income and AO has rightly
imposed penalty u/s. 271(1)(c) for that default. Accordingly levy of penalty of Rs. 2,05,
26,780/- (*) u/s. 271 (1) (c) in the year under consideration for the said default is
confirmed.'[(*) Rs. 2,31,18,488/- for AY 2005-06]
Aggrieved, the assessee is in second appeal.

5.     We have heard the parties, and perused the material on record.
5.1    The respective cases of the parties inform the foregoing narrative of the events
leading to the appeals to the tribunal, the second appellate authority under the Act. Before
us, the assessee did not dispute the factual findings by the TPO, even as reference was
made to his order u/s.92CA(3) for A.Y. 2004-05 (PB pgs.29-37) during the course of
hearing. We do not find any reference thereto even in the assessee's written submissions

                                   ITA Nos. 7 6 5 0 & 7 6 5 1 /Mu m/2 0 1 3 ( A .Y s.2 0 0 4 - 0 5 & 2 0 0 5 - 0 6 )
                                                             Deloitte Consulting India Pvt. Ltd. vs. Asst. CIT

dated 12.09.2013 to the ld. CIT(A) (copy on record), non-consideration of which has
been alleged per ground no. 1:4 of the appeals for both the years. The same, in fact, could
not be in the absence of, as afore-noted, any material being adduced in the penalty
proceedings, or even at the appellate stage, rebutting the clear and definite findings of
fact by the TPO, which got subsequently crystallized, and only upon affording
opportunity to the assessee to rebut the same, in the orders of the authorities below in the
quantum proceedings, culminating in that by the tribunal, the final fact finding authority.
No improvement in its case, i.e., on facts, having been made in the penalty proceedings,
the same stood discountenanced by the Revenue, as apparent from the relevant orders.
The assessee, howsoever feebly, stating of the costs as having been incurred from a
commercial perspective, we consider it incumbent to state explicitly the definite findings
of fact, as determined, in this regard: (refer TPO's orders for the relevant years)
       a) the assessee failed to furnish the details in support of its contentions as
          made before the TPO on being specifically called upon to do so by him;
       b) the assessee's role as per the agreement was to execute the projects and
          render software development services. It was, accordingly, not assigned
          any marketing function per the Master Service Agreement (MSA). The
          question of it being allocated marketing cost, or a part thereof, therefore,
          does not arise. In fact, neither has the assessee similarly allocated any
          development cost to Deloitte, nor partook any profit in respect of the
          marketing services being carried on by DC, i.e., on account of cost
       c) the rendering of any services or its benefits to the assessee could also
          not be exhibited by it;
       d) there was no separate documentation qua the cost allocation as made on
          and incurred by the assessee; and
       e) though stated in terms of costs allocation, the same is only a manner of
          incurring the cost for marketing services stated to be availed by the
          assessee. The only evidence adduced was qua accounts receivable, risk
          and responsibility qua which stands specifically assigned under the
          agreement to DC. There has been no rendering of any marketing
          services to the assessee, while the DC stands adequately compensated
          for undertaking the marketing function.

                                   ITA Nos. 7 6 5 0 & 7 6 5 1 /Mu m/2 0 1 3 ( A .Y s.2 0 0 4 - 0 5 & 2 0 0 5 - 0 6 )
                                                             Deloitte Consulting India Pvt. Ltd. vs. Asst. CIT

The cost of the said services stood, accordingly, determined by him at Nil; there being in
fact no revision by the assessee of the auditor's report/s u/s.92E (copy on record)
supporting its `revised' claim/s. Further, for A.Y. 2005-06, the assessee rather sought to
justify the operating margin, being, at 17.68%, lower than the comparable mean of
27.31%, on the basis of `disallowance' of its claim for marketing services availed, which
would operate to increase its operating margin to 27.56%, i.e., more than the bench mark.
Reference in this regard may also be made to para 33 of the tribunal's order dated
30.03.2012 (supra) by way of abundantly clarifying facts:

'33. From the above, it is clear that the assessee company admits that (i) marketing
services provided by Deloitte to the assessee company is a separate class of international
transactions between the assessee and Deloitte; (iii) It is also clear that the assessee
company's entire revenue are only from Deloitte and that too from job work. It is not a
case where the contracts from clients are passed on to the assessee on a back-to-back
basis. Only a portion of the work obtained by Deloitte from the client, where the assessee
has the required skill and capabilities i.e., that certain job work is given by Deloitte to the
assessee; (iv) billing is done on an hourly basis; (vi) there is no work or job that the
assessee company has obtained from any third party for all these assessment years
directly or indirectly i.e., the assessee does not render any software services to any third
party either in India or outside India.'

No doubt, therefore, the DC is marketing the assessee's capabilities, but then that is
precisely what it is required to do under its arrangement with the assessee. The same
constitutes its' business, and not that of the assessee, which is only providing job work
(consultancy) services to it through its' off-shore and on-shore facilities. There is, thus,
no question of any reimbursement therefor by the assessee to DC. How, then, one may
ask, does it lie in the assessee's mouth to contend that the expenses of five senior
manager level personnel of DC was borne from a commercial perspective or as a prudent
businessman? Then, again, how can the assessee, in view thereof, seek to justify its claim
of having revised its returns for the relevant years with the view to avoid litigation in
relation to the admissibility of its claim. In fact, lest one may be persuaded to consider it
in light of the argument that the adjustment is of no consequence, result as it does in like
increase in the deduction u/s.10A, it may be clarified, as by the ld. Departmental
Representative (DR) during hearing, that for both the preceding years of its existence,
                                   ITA Nos. 7 6 5 0 & 7 6 5 1 /Mu m/2 0 1 3 ( A .Y s.2 0 0 4 - 0 5 & 2 0 0 5 - 0 6 )
                                                             Deloitte Consulting India Pvt. Ltd. vs. Asst. CIT

i.e., the previous years relevant to A.Ys 2002-03 and 2003-04, there was no claim for
deduction u/s.10A, so that the adjustment had no tax impact, excluding penalty.

5.2    The foregoing discussion and emphasis on the factual aspects of the case, even as
the assessee does not pursue its case, in view of, and only understandably, the admission
of a mistake of a wrong claim qua the marketing expense, with any force, is made for one
more reason. That is, whether, the revision by the assessee of its return/s is valid. We do
not consider it as so. True, a wrong statement could be discovered by an assessee at any
time, and the TPO's report for the preceding years are independent of that may follow for
the current year/s, so that nothing turns on the TPO's reports for those years. However,
reference to the TPO for the current year/s, which for both the years, being on 01.09.2005
and 23.01.2006 for the two years respectively, is much prior to the date of `revision', is
without doubt relevant in-as-much as an enquiry with regard to the ALP of the
international transactions, including for marketing services, would follow. Rather, for all
we know, even the notices to the assessee by the TPO would have been issued prior to the
revision; the ld. CIT(A) in fact stating of the proceedings before the TPO being in
progress at the relevant time. The `revision' made in anticipation of the proposed
adjustment is thus not voluntary but guided by the motive to eschew an adjustment and,
resultantly, the debilitating impact of section 92C(4). Voluntariness, and bona fides, it is
trite law, are essential ingredients of a valid revision u/s.139(5), while in the present case
the assessee is well aware of having made a claim per its return, being in fact made year
after year, for which it is unable to state, much less establish, any basis. In any case of the
matter, the revision is outside the purview of section 139(5) for A.Y. 2005-06 in-as-much
as the return is filed outside the time limit prescribed there for under law, which expires
on 31.03.2007, while the second return was filed on 14.12.2007.

5.3    We, next, consider the assessee's contention that it having admitted to a wrong
claim, increasing its income to that extent, deduction u/s.10A could not be validly denied,
in which case no penal consequence would follow as the returned and assessed income

                                  ITA Nos. 7 6 5 0 & 7 6 5 1 /Mu m/2 0 1 3 ( A .Y s.2 0 0 4 - 0 5 & 2 0 0 5 - 0 6 )
                                                            Deloitte Consulting India Pvt. Ltd. vs. Asst. CIT

would be the same. Toward this, it claims the tribunal's order in quantum proceedings,
rejecting the said claim (i.e., u/s.10A) as not correct in-as-much as it states that the
condition/s of section 10A is not complied with. The tribunal, it is stated, has failed to
appreciate that the disallowance was with reference to an item of expenditure claimed in
the computation of its income of the eligible business, and not with reference to an item
of income per se. Income would stand enhanced as a direct consequence of disallowance,
so that where otherwise eligible, deduction u/s.10A would follow directly, as explained
by the hon'ble jurisdictional high court in CIT v. Gems Jewellery India Ltd. [2010] 330
ITR 175 (Bom). The argument is flawed for more than one reason, notwithstanding that
the cited decision, even otherwise binding on us, lays down the correct proposition of law
that the disallowance of an expense claimed in the computation of income has no bearing
on the quality or the character of the said income but only on its quantum, so that where
entitled to deduction, would continue to be so qua the `increased' income in consequence
of the disallowance. The same, rather, can be said to be a pure matter of fact rather than
of a law, i.e., unless of course there is a bar or any other statutory impediment, as indeed
attends the instant case per section 92C(4), which reads as under:

       `Computation of arm's length prince.
       92C. (1) The arm's length prince in relation to an international transaction
       shall be determined......
       (2)    .............
       (3)    .............
       (4)    Where an arm's length price is determined by the Assessing Officer under
       sub-section (3), the Assessing Officer may compute the total income of the
       assessee having regard to the arm's length price so determined:

       Provided that no deduction under section 10A or section 10AA or section
       10B or under Chapter VI-A shall be allowed in respect of the amount of
       income by which the total income of the assessee is enhanced after
       computation of income under this sub-section.'

       We have already opined as to why the revision by the assessee in the instant case
cannot be considered as a valid revision under law. That being the case, the `revised
return' is non-est in law and the only valid return by the assessee is its original return/s,

                                   ITA Nos. 7 6 5 0 & 7 6 5 1 /Mu m/2 0 1 3 ( A .Y s.2 0 0 4 - 0 5 & 2 0 0 5 - 0 6 )
                                                             Deloitte Consulting India Pvt. Ltd. vs. Asst. CIT

whereby claim for marketing expenses has been made. Accordingly, notwithstanding a
claim to revision, which is thus not valid in law, the enhancement of its income is only in
consequence of its adjustment to the returned income u/s.92C(4) r/w.s. 92CA(4). The
rigor of section 92C(4) is thus attracted, and despite the assessee's income bearing the
same quality or character, would stand disqualified to that extent for being allowed
deduction u/s.10A in its respect. In other words, the assessee's argument, valid in
principle, fails in the facts and circumstances of the case and the specific provision of law
governing the same. Further, we observe that the assessee is selectively reading para 51
of the tribunal's order dated 30.03.2012 (supra), overlooking its finding per para 53
thereof (also refer par 4.2 of this order). Even so, we are mindful of the fact that we are in
penalty proceedings, so that a disclosure, even if barred by limitation as to time, may yet
be valid from the stand point of the levy of penalty if otherwise made bona fide. We have
however found the disclosure for both the years as not voluntary. The assessee has in fact
been claiming the said expenditure, stated to be by way of                          reimbursement to its
Associate Enterprise (AE), year after year since inception, failing to exhibit or
substantiate its case for any of the years. It is this that led the Revenue to claim the
disclosure (disallowance) as having been made on being cornered, with the view to
preempt an adjustment and, further, avoid the rigor of section 92C(4), i.e., vide first
proviso thereto. The finding being one of fact, has attained finality with the tribunal's
order in the quantum proceedings, even as our examination; the assessee claiming to have
made the payment from a commercial perspective, finds our independent endorsement.
Far from it, we have found the assessee's claim to be bald and de hors the facts borne out
by the material on record.
       Continuing further, though the language of section 92C(4) is clear and
unambiguous, it may be relevant to discuss the rationale of the first proviso thereof. It
needs to be appreciated that the transfer pricing (TP) adjustment notwithstanding, the
amount represented thereby has not been actually received in India or, as the case may
be, has actually gone out of the country. This aspect stands explained by CBDT vide its
Circular No. 14, reference, quoting a part thereof (point 55.12) - to the same effect as

                                  ITA Nos. 7 6 5 0 & 7 6 5 1 /Mu m/2 0 1 3 ( A .Y s.2 0 0 4 - 0 5 & 2 0 0 5 - 0 6 )
                                                            Deloitte Consulting India Pvt. Ltd. vs. Asst. CIT

stands emphasized by us, has been referred to and highlighted in the assessment order for
A.Y. 2005-06. In the facts of the case, the payment to the extent of the expenditure
claimed has already been paid (ostensibly by way of reimbursement), while no services
have been found as a fact to have been rendered or availed (resulting in their being valued
at nil). In other words, the foreign exchange to that extent stands lost to the country,
warranting a denial of deduction to which the amount may otherwise be eligible. The
assessee, in fact, pleads of the same as being construed as discount to DC, the AE under
reference, from whom it's income arises (refer para 25 of the tribunal's order (supra)).
Reference in this regard may also be made to section 92(2) of the Act. Surely, the
disallowance or, more precisely, the TP adjustment of the marketing expenses would not
have resulted but for the reference being made to the TPO to determine the ALP of the
relevant international transaction. It is in this view of the matter, and the incident legal
framework, that the tribunal states of the income arising out of adjustment as being not
derived from export. In fact, we do not think that we need to, in view of the express
provision of section 92C(4), travel thus far, and the very fact that the TP adjustment
stands made and upheld, would be sufficient to deny a claim for deduction u/s.10A.

5.4    Could it then be said with any measure of creditability that a deduction u/s.10A
would yet ensue, or that the assessee's claim is legal, so that no penalty could arise? The
argument, even otherwise, has a deep fault line. Any adjustment in assessment is only
with reference to some provision of law, so that the issue by that score becomes legal,
excluding penalty! The only and the true import of the argument is that where the issue is
debatable, amenable to more than one view, penalty (for concealment or furnishing
inaccurate particulars of income) could not be levied, even as stated by the ld.CIT(A).
This is for the simple reason that the view being pursued by the assessee becomes its
explanation, precluding invocation of either clause (A) or (B) of Explanation 1 to section
271(1)(c). Nothing more and nothing less. Which provision of law, and what
interpretation thereof, which would then have to be considered on the touchstone of
reasonableness, is, on the other hand, being pressed by the assessee in the instant case?

                                   ITA Nos. 7 6 5 0 & 7 6 5 1 /Mu m/2 0 1 3 ( A .Y s.2 0 0 4 - 0 5 & 2 0 0 5 - 0 6 )
                                                             Deloitte Consulting India Pvt. Ltd. vs. Asst. CIT

We are at loss to fathom; being conspicuous by its absence. The argument is without any
substance or basis in facts. The assessee's entire case is de hors any explanation, i.e.,
toward its claim, either for the expenditure or for deduction u/s.10A in the instant case,
only on the basis of which the application or otherwise of Explanation 1 is to be
adjudged. This is as in its absence, or on being not substantiated or not proven as bona
fide, Explanation 1 would stand invoked, attracting penalty u/s.271(1)(c). In fact, a TP
adjustment attracts Explanation 7 to the provision, so that all that the assessee is required
to do in such a case, to save the levy of penalty u/s.271(1)(c), is to prove that the price
paid for the international transaction by way of marketing services availed was computed
on arm's length principle, following the manner prescribed, in good faith and due
diligence. It is clear that all that the law thereby requires for the assessee is to establish
his bona fides, found seriously wanted by the Revenue. Contrast and juxtapose this with
the fact that it has been found that no services have in fact been rendered or availed of in
the instant case, with the assessee being unable to prove the truth of the transaction,
stating it to be considered as a discount to its principal buyer, an AE. This fact, which is
in contradiction to its own TP report u/s.92E (per Form 3CEB), stands admitted by the
assessee, claiming, by its suo motu disallowance, to have been wrongly claimed. How, it
does not explain? That is, the very same report that the assessee is under law obliged to
defend and prove as representing a true and fair account of its international
transaction/s, i.e., as being undertaken following the arm's length principle, stands
disowned by it.
       It is not surprising, therefore, that no revised report u/s.92E accompanies the
`revised returns'. Though the assessee seeks to justify the same on the basis that there is
no provision for `revision' of the said report, we find the same specious and per se
unacceptable. Anything which is wrong, or discovered as so, is not valid. The same
therefore has to be necessarily withdrawn, admitting the same as not correct and, further,
furnishing in its stead, what it deems as the correct version. The same would only bring
forth and inform the reason as to what infirmity attended the same as well exhibit the
validity of the substituted, `correct' report. The TP report, it needs to be appreciated, is

                                  ITA Nos. 7 6 5 0 & 7 6 5 1 /Mu m/2 0 1 3 ( A .Y s.2 0 0 4 - 0 5 & 2 0 0 5 - 0 6 )
                                                            Deloitte Consulting India Pvt. Ltd. vs. Asst. CIT

the assessee's justification for having incurred the expenditure on an arm's length basis,
i.e., constitutes its explanation, so that notwithstanding a disagreement or difference with
the Revenue with regard to its quantum, the assessee can, in view of its explanation, duly
substantiated in-as-much as the said report is only based on the assessee's books of
account, underlying contracts, documents (which the law obliges it to maintain and
furnish on being called upon to ­ s.92D), comparable cases, etc., whether construed with
reference to Explanation 1 or Explanation 7 thereof, would save penalty u/s.271(1)(c)
for concealment of, or furnishing inaccurate, particulars of income. While, what the
assessee does in the present case is to disclaim the expenditure or withdraw the claim in
its respect. In support of which transaction then, one may ask, could it submit the revised
report? The plea is false. This is precisely why we called its argument or explanation for
not furnishing a revised report/s as specious. No wonder, no report accompanies the non-
claim of the said expense, as also afore-noted, for A.Y. 2006-07. The transaction or the
expenditure in its respect, stands already undertaken or, as the case may, incurred. The
same cannot therefore be denied and nothing much turns in law on the assessee not
claiming the said expenses. Reference in this context may be made to section 92CA(2B),
inserted on the statute w.r.e.f. 01.06.2002. It is not the assessee's case that the relevant
contract stands rescinded, and that therefore the amount becomes recoverable to the
       The same, as observed earlier, stands in fact paid year after year. In sum, rather
than supporting its claim for expenditure as incurred and claimed, which, where so done
validly, would eschew or save penalty, whether considered from the standpoint of
Explanation 1 or Explanation 7 to section 271(1)(c), being the assessee's explanation
toward its claim of having incurred a business expenditure on commercial principles, the
assessee disowns the same, admitting it to have not been validly made. Only
voluntariness of the withdrawal of the expenditure could under the circumstances exclude
penalty, while we have already observed the said withdrawal to be not so, but guided the
by consideration of being unable to prove its claim, as indeed by all concerned in both in
the quantum and the penal proceedings. Explanation 1 to section 271(1)(c), thus, gets

                                   ITA Nos. 7 6 5 0 & 7 6 5 1 /Mu m/2 0 1 3 ( A .Y s.2 0 0 4 - 0 5 & 2 0 0 5 - 0 6 )
                                                             Deloitte Consulting India Pvt. Ltd. vs. Asst. CIT

attracted in full rigor; the assessee's case being, as afore-stated, sans any explanation,
much less supported and bona fide. The assessee in fact can be said to have under the
circumstances made a bogus claim per its original return/s. Further, the adjustment to
income in assessment arising on account of a TP adjustment, so that money to that extent
has already either not been received in or, as the case may be, gone out of the country,
corresponding deduction u/s.10A, to which it may otherwise be entitled to in law, shall
per force law be not available to it. This is precisely why the law, per Explanation 7 to
section 271(1)(c) requires the assessee to justify its international transaction on the basis
of bona fides ­ an essential attribute saving penalty, so that no penalty, despite
enhancement in income due to denial of deduction u/s.10A on the amount of adjustment,
shall follow. The assessee, thus, has no case at the threshold, which gets aborted by it
disclaiming its transaction. The question of proving its international transactions, which
would be its explanation, thus just does not arise.

5.5    The assessee's next plea is of a complete disclosure of material facts, made,
adverting to the audit report u/s.92E. We are at loss to, in the given facts and
circumstances of the case, fathom even the import of the argument. It is only on failing,
and abysmally at that, to demonstrate any business purpose of its relevant international
transaction that a TP adjustment, valuing the same at nil, was advised by the TPO and
came to be made. Does the assessee's return or the TP report or its books of account, etc.
on which the return is based, state so or likewise, i.e., that no services stood rendered or
availed of by the assessee in respect of the marketing services. Implicit in the claim of
reimbursement of expenditure is the claim of services having been rendered and availed
of, while the assessee could not support the said claim with any material or
documentation at any stage nor demonstrate any benefit having been received on account
of payment (refer para 4.1 of this order). It is only the verification procedure under the
Act (by way of reference to and inquiry by the TPO) which brings forth the complete
absence of business purpose, leading to its valuation at nil and, resultantly, a retraction by
the assessee. The disclosure per the audit report u/s. 92E forming part of its return/s is

                                   ITA Nos. 7 6 5 0 & 7 6 5 1 /Mu m/2 0 1 3 ( A .Y s.2 0 0 4 - 0 5 & 2 0 0 5 - 0 6 )
                                                             Deloitte Consulting India Pvt. Ltd. vs. Asst. CIT

thus both false and misleading. How, we wonder, could it then under the circumstances
seek refuge under the said plea, which is thus not only not valid but also contrary to the
facts of the case. The argument of complete disclosure, unless the same is true, is of little
consequence in law and, in fact, itself false. Further, even as a legal plea, the same has
severe limitations to it, for one could claim any expenditure, stating that no penalty could
for that reason arise, even as the law, per Explanation 7, or Explanation 1 for that matter,
to section 271(1)(c) is abundantly clear, so that the said requirement has to be coupled
with substantiation of the explanation, which in the present case is the assessee's audit
report furnished u/s. 92E, together with the documents maintained in its respect, made
bona fide. The said argument in fact assumes validity in circumstances such as of
debatable legal issues where the given facts, truly disclosed, could yet lead to the view
being adopted or canvassed by the assessee. The argument, thus, is invalid and of no

5.6    The plea of revision as being motivated by the consideration to avoid litigation
qua the admissibility of its claim is equally without basis in facts and, in the clear and
proven facts of the case, only needs to be stated to be rejected, being false (also refer para
5.1 of this order). Reference in this context may also be made to the decision in the case
of CIT v. Mak Data Ltd. [2013] 352 ITR 1 (Del), referred to by the ld. DR, which stands
since upheld by the apex court. As such, looked at from any angle there has been both
concealment as well as furnishing inaccurate particulars of income in the present case,
even as there may be areas of overlap and, further, the Revenue has clearly made out a
case for the latter. That a plausible explanation, the onus to substantiate which is on the
assessee, saves penalty, represents trite law, expounded by the apex court over decades
(refer: CIT v. Atul Mohan Bindal [2009] 317 ITR 1 (SC); UOI v. Dharmendra Textile
Processors [2008] 306 ITR 277 (SC); K.P. Madhusudhanan vs. CIT [2001] 251 ITR 99
(SC); B.A. Balasubramaniam and Bros. v. CIT (1999) 236 ITR 977 (SC); Addl. CIT vs.
Jeevan Lal Shah [1994] 205 ITR 244 (SC), to cite some, and which is completely absent
in the instant case. The ld. CIT(A), whose findings are comprehensive, has correctly

                                     ITA Nos. 7 6 5 0 & 7 6 5 1 /Mu m/2 0 1 3 ( A .Y s.2 0 0 4 - 0 5 & 2 0 0 5 - 0 6 )
                                                               Deloitte Consulting India Pvt. Ltd. vs. Asst. CIT

appreciated both, the facts as well as the law in the matter, so that there has been no
omission on his part to consider any aspect of the matter, even as the assessee did not
press its Gd. # 1:4, alleging so, before us. We, on our part, have focused on facts
inasmuch as an explanation in most cases, as indeed in the present case, is an issue of
fact, to find the assessee's case to be sans any explanation and not maintainable ex facie.
The assessee's case therefore fails whether the enhancement in its income is considered
as on account of a TP adjustment or for denial of deduction u/s. 10A, i.e., from the stand-
point of both Explanation 1 or 7 to s. 271(1)(c). This also explains our non-reference to
the case law advanced by both the sides; our decision representing only the application of
the settled law to the facts of the case as determined. We, therefore, have no hesitation in
upholding the levy of penalty. We decide accordingly.

6.       In the result, the assessee's appeals are dismissed.
                    Order pronounced in the open court on May 13, 2014
                    Sd/-                                      Sd/-
            (Dr. S. T. M. Pavalan)                        (Sanjay Arora)
            / Judicial Member                                  / Accountant Member

 Mumbai; Dated : 13.05.2014

. ../Roshani, Sr. PS
                /Copy of the Order forwarded to :
1.    / The Appellant
2.        / The Respondent
3.    () / The CIT(A)
4.    / CIT­ concerned
5.       ,   , / DR, ITAT, Mumbai
6.    / Guard File

ITA Nos. 7 6 5 0 & 7 6 5 1 /Mu m/2 0 1 3 ( A .Y s.2 0 0 4 - 0 5 & 2 0 0 5 - 0 6 )
                          Deloitte Consulting India Pvt. Ltd. vs. Asst. CIT

                          / BY ORDER,

           , / ITAT, Mumbai

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