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DCIT Circle 17(1) New Delhi VS. M/s Verizon Communication India P.Ltd. A Wing, 3rd floor, Radisson Commercial New Delhi
September, 19th 2012
                  DELHI BENCHES: "H" NEW DELHI

                        SHRI AD JAIN, JM

                          ITA No: 5567/Del/2011
                      Assessment Year : - 2006-07

M/s Verizon Communication India P.Ltd. vs.        DCIT
A Wing, 3rd floor, Radisson Commercial            Circle 17(1)
Plaza, N.H. 8                                     New Delhi
New Delhi

PAN: : AACW 3738 L

(Appellant)                                       (Respondent)

               Appellant by : Shri N.Venkatram, Sr.Adv.&
              Ms.Shikha Gupta, Sri Rohit Tiwari, Shri S.Puri,
                        Shri Rishabh Jain, CAs
                Respondent by : Dr. B.R.R.Kumar, Sr.D.R.



       This is an appeal filed by the assessee directed against the order of

the CIT(A) dt. 2.9.2011 for the A.Y. 2006-07, wherein the First Appellate

Authority has confirmed the penalty levied u/s 271(1)(c) of the Act by the


2.     Facts in brief:- The assessee is a Company and had filed its return

of income declaring total loss of Rs.30,72,108/-. The assessment was

completed      u/s   142(3)   on   26.2.2010     after   making   the   following


         (a) transfer pricing adjustment Rs.82,77,528/-;

         (b) disallowance of management fee of Rs.39 lakhs.

The assessee has not filed any appeal on these additions. The AO issued

a notice proposing levy of penalty u/s 271(1) of the Act on 5.8.2010.

The assessee furnished an explanation submitting that:

(a)      As regards management fee disallowance, it was submitted that

the assessee did not have any employee for carrying on business in

India.    That in order to manage its business in India and to carry on

sales, marketing and other administrative activity which are integral

part of business operations, management services agreement was

entered into with VIPL for a fixed fee of Rs.3,25,000/- per month. The

copy of this agreement was produced before the AO in the assessment


(b)      That VIPL had rendered services and had offered this income in its

return of income.      To     substantiate the    services, a copy of    master

service agreement with the customers and emails exchanged by the

employees in India with various customers, were submitted on sample

basis. It was argued that there was commercial need and direct nexus of

the expenditure by VCIPL with the business operations of VIPL.

(c)      On determination of arms length price, it was submitted that

residual profits split method was applied and the provisions of the Act

and Rules were complied with. That since more than one comparable

price was available, the Arithmetical Mean (AM) was computed and that

variation of 5% from the aforesaid AM was computed and the resultant

requisite amount was determined as arms length price.

3.        The A.O. considered these submissions and has held as follows:-

i)        It is well settled, and in view of the decision of the Special Bench

of the Bangalore Tribunal in the case of Aztek Software & Technology

Services Ltd. vs. ACIT (2007) 294 ITR AT 32 Bangalore (SB), use of

current year data is only permissible, unless the Exception to the Rule is


ii)       That three comparables were chosen by the TPO for           detailed

reasons given in the TPO's order.

     4.   On disallowance of management fee, he held that the assessee has

 not submitted any details by way of emails etc.           He held that the

 assessee has failed to offer convincing and satisfactory reply, backed by

 evidence to answer the       basic questions raised by the AO during the

 assessment proceedings.        He confirmed the penalty after referring to

 certain case laws.

     5.   On appeal the First Appellate Authority on the issue of Transfer

 Pricing adjustments held that by selecting wrong set of comparables the

 assessee has tried to reduce the taxable income and justify its

 transaction with the Associated Enterprise.        He held that this was a

 conscious and deliberate act. He pointed out that the TPO rejected 5

comparables selected by the assesse, and hence it has             furnished

inaccurate particulars of income.

6.    On the issue of incurring of management fee he held that the

assessee did not offer any bonafide explanation for the claim of

expenditure.    He confirmed the penalty.     Aggrieved the assessee is in

appeal before us.

7.    This case was heard along with ITA no.5566/Del/11 in the case of

M/s Verizon Communications India P.Ltd. (VCIPL) for the A.Y. 2006-07.

Mr. N. Venkata Raman the Ld.Sr.Advocate argued for the assessee and

Dr. B.R.R.Kumar, Ld.Sr.D.R. represented the revenue. Both the parties

reiterated their    contentions raised in the case of VCIPL (supra). In

addition Mr. N. Venkata Raman submitted that the disallowance of

management fee does not warrant levy of penalty U/s.271(1)(c).           The

Ld.Sr.D.R.   pointed    out   that   the   assessee   neither   during   the

assesseement proceedings nor during the penalty proceedings furnished

evidence to substantiate the     genuineness of expenditure incurred by

payment of management fee.

8.    We have heard rival contentions. As regards penalty levied on the

item of transfer pricing adjustment, in our order of even date in the case

of VCIPL in ITA no.5566/Del/11 at para 5 to para9 we have held as


             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 thereafter apply the law based on
     various tests and interpretations laid down by the Courts
     and then come to a conclusion either 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 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
c)   Penalty cannot be levied when there are two possible views;
d)   Penalty cannot be levied when the issue in question is

     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. vs ACIT (2007) 294 ITR
     AT 32 Bangalore(SB) as well as the case of Mentor Graphics
     P.Ltd. (2007) 109 ITD 10.

     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 count cannot be sustained. The law on this issue was
     9.     Coming to the comparables being added and some
     being deleted from the T.P. report, while adjudicating the
     appeal 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
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."

9.    As the facts are similar in this case also, we are of the considered

opinion that the transfer pricing study done by the assessee was a

bonafide exercise for determining the arms length price and the

variations made by the T.P.O. to the arms length price, are a genuine

difference of opinion, which are      debatable. Under these facts and

circumstances, no penalty can be levied U/s 271(1)(c) on adjustment

made on account of Transfer Pricing provisions.

10.   Coming to the penalty levied on the disallowance, at para 6.3 to

6.5 at page 4 the AO in his order U/s 271(1)(c) observed as follows:-

       "6.3.       In this case, penalty under Section 271(1)(c ) is found to
       be leviable as the assessee has not disclosed all the facts material
       to the computation of its total income. The argument and the
       contention taken by the assessee were found unexplained or
       without any evidence at the time of assessment proceedings. In
       this case the explanation of the assessee has not been proved on
       the basis of evidences. In view of the above discussions, the
       submissions of the assessee have clearly been dealt by the TPO
       while passing her order. Further, malafide intention on the part of
       assessee need not be ;established any more. The onus was on the
       assessee to prove with evidences to the satisfaction of the
       Assessing Officer, the discrepancy noticed by him during the
       coruse of the assessment. The assessee has failed to discharge
       the onus caste upon him.
       6.4. As per the ratio laid down by the Hon'ble Supreme Court in
       the case of BA Balasubramanyam Bros & Co. vs. CIT 1999 (236)
       ITR 997 SC, wherever there is difference between the returned and
       assessed income there is inference of concealment as a rule of law.
       The responsibilities for rebutting such inference is squarely on the
       assessee. The assessee is expected to offer an explanation for the
       difference. In absence of any explanation by itself will merit
       penalty. Secondly, as regards to deliberate acts is concerned. It
       does not hold good now.
       6.5. After the insertion of explanation (1) below s.271(1)(c ) as held
       in the decision in the case of KP Madhusudanan vs CIT 251 ITR 99
       (SC), the decision in the case of Sir Sahadilal Sugar and General
       Mills Ltd. 168 ITR 705 (SC), did not held good. As clearly laid
       down in this decision as also in ;the decision of BA

       Balasubramanyam Bros & Co. vs. CIT 1999 (236) ITR 997 SC,
       after the deletion of word `deliberately' from s.271(1)(c ) and the
       insertion of explanation below s.271(1) with effect from 1.4.1964,
       the ratio of CIT vs. Anwar Ali 76 ITR 696 (SC), did not hold good
       and onus of proving that there was no concealment of income was
       on the assessee and mens rea had not to be proved ;by the

11.   Before the first appellate authority also, the assessee has not

brought out any evidence to substantiate its claim for deduction of

management fee. Before us also the assessee has not substantiated his

claim by producing evidence.      Except for making a statement, no

evidence is on record.    Our attention has not been       drawn by the

assessee to any evidence filed by the assessee before the lower

authorities. The concurrent factual finding of the Assessing Officer as

well as the Commissioner of Income Tax (Appeals) are not contradicted

with evidence before us. Submission cannot take the place of evidence.

Hence we have to uphold the factual findings of the lower authorities

that no evidence is produced to substantiate its claim of genuineness of

management fees.    Under the circumstances we are of the considered

opinion that the explanation offered by the assesee on this issue of

allowability of management fee is not bonafide and the claim remains

unexplained. Under the circumstances we confirm the levy of penalty on

the issue of disallowance of management fee.

12.   Coming to the various case laws relied upon by both the parties,

we find that the first appellate authority has discussed them in detail.

We have perused the case laws and also considered the propositions laid

down therein. In our view the propositions laid down in all those cases

do not come to the rescue of the assessee on the facts of this case for the

reason that the assessee has failed to explain and substantiate its claim

for deduction of management fee paid with evidence.          The explanation

cannot be considered as bonafide. The issue is not debatable. It is not a

case of mere disallowance on a difference of opinion              Under the

circumstances we confirm the levy of the penalty on this item of

disallowance. In the result, the appeal of the assessee is allowed in part.

13.   In the result the appeal of the assessee is allowed.

Order pronounced in the Open Court on 17th September,2012.

                Sd/-                                Sd/-
            (A.D. JAIN)                       (J.SUDHAKAR REDDY)
         JUDICIAL MEMBER                      ACCOUNTANT MEMBER

Dated: the 17th September, 2012


Copy of the Order forwarded to:
  1. Appellant; 2.Respondent; 3.CIT; 4.CIT(A); 5.DR; 6.Guard File

                                                       By Order

                                                       Dy. Registrar

1.   Date of Dictation:
2.   Draft placed before the Author on:
3.   Draft proposed and placed before Second Member on:
4.   Draft discussed/approved by the Second Member on:    /09
5.   Approved draft came to Sr.P.S. on:    /09
6.   Date of Pronouncement :      /09
7.   File sent to Bench Clerk on :
8.   Date on which file given to Head Clerk on:
9.   Date of dispatching the Order on:
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