Referred Sections:
Section 260A complains that the ITAT
Section 271(1)(c)
Section 92C(4)
Section 92CA,
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Decided on: 29th April, 2019
+ ITA 422/2019 & CM APPL. 19849/2019
THE PR. COMMISSIONER OF INCOME TAX -7 ..... Appellant
Through: Mr. Ruchir Bhatia, Sr. Std. Counsel.
versus
ROYAL AND SUN ALLIANCES IT
SOLUTIONS (INDIA) PVT. LTD. ..... Respondent
Through: Mr. Tapas Ram Misra, Adv.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE PRATEEK JALAN
S. RAVINDRA BHAT, J. (OPEN COURT)
%
1. The Revenue's appeal under Section 260A complains that the ITAT
fell into error in setting aside the penalty under Section 271(1)(c) read with
Explanation (7). It is contended that the assessee had in its Transfer Pricing
Report furnished for the purpose of ALP determination to the TPO,
showed that the arithmetic mean of the profit margin of the comparable was
at 13.41% only. However, the assessee offered the amount lower than that,
on the basis of its actual income to the profit margin. The TPO rejected it
and in the report brought all the transactions to tax, including those not
offered in the ALP stating as follows:-
"7.1 The assessee has submitted revenue projections showing
that if the capacity of the assessee had been utilized as per
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industry norms it would have earned 24% margin on costs.
The crucial question is not whether the capacity was utilized
but whether the under utilization was due to the market
conditions or due to the control exercised by the Associated
Enterprises. At a theoretical level, it can be argued that even if
lucrative contracts would have come the assessees way, it
could not have taken them up due to its status of being a
subsidiary of RSA group. This is contrary to risk reward
matrix of an independent company operating in a free market
scenario. Therefore, the assessee ought to be remunerated not
only for the projects carried out but also for the costs incurred
on keeping itself ready to perform services to only to its AEs"
2. The AO applied the TPO's logic and proceeded to impose penalty by
invoking Explanation (7) to Section 271(1)(c). The assessee's appeal to the
Commissioner was unsuccessful. The Tribunal by its impugned order set
aside the penalty and held as follows:-
"10. We have heard the rival submissions and also perused
the relevant finding given in the impugned orders. It is not in
dispute that assessee is a wholly owned subsidiary of its
foreign AE was set up as a 100% captive service provider to
cater information technology services and software
development/ IT solutions to RSA group of companies. There
was an operating loss of 13.23% on the cost. Though TP
documentation suggested the arms length price target of
13.41% however, it is not clear from the records as to whether
any king of adjustment was proposed in such TP
documentation. Ld. TPO, however has proceeded to make the
TP adjustment in a completely erroneous manner. His main
plank for making the upward adjustment was that there was
underutilisation of capacity by the assessee because of less
orders given by the AE to assessee; and therefore, assessee
should have been remunerated for idle capacity utilisation by
the AE; and assessee should have been allowed to operate in
an independent manner and it did not had any option to
optimise its return on capital and cost by obtaining third party
contracts. Such a reasoning for making the TP adjustment
without carrying out independent analysis with comparable
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uncontrolled transactions cannot be sustained. Ld. TPO
instead of benchmarking the transaction under the prescribed
method and FAR analysis with uncontrolled transactions has
proceeded with the hypothesis that if the full capacity of the
assessee had been utilised it would have earned 24% margin
on the cost and therefore, it is presumed that such an under
capacity utilisation was due to the control exercised by the AE.
Such an interpretation for determining of arms length price
unknown under the transfer pricing regulations either under
the Income Tax Act or under the Rules. In case under
utilization of capacity was the factor triggering ALP
determination, then the ld. TPO should have identified the
comparable in similar line then would have analysed the
capacity utilisation and made suitable adjustment without such
analysis the entire basis adopted by the TPO to make the TP
adjustment is wholly vitiated not only on facts but also under
the law.
11. Another bizarre approach of the AO while computing the
income of the assessee is that, he has given deduction u/s 10A
on such transfer pricing adjustment which is against the
provision of law as proviso below section 92C(4) categorically
provides that no such deduction u/s 10A is allowable for
transfer pricing adjustments made u/s 92C. Be that as it may
be, if the computation of the AO is taken into consideration,
then addition for ALP to the extent of Rs. 2.21 crores has been
given exemption and income has been computed at ,,nil in so
far as STPL unit is concerned; and only Rs. 43.94 lacs
addition has been made on account of TP adjustment in the
assessment order. Under these facts ostensibly the penalty of
Rs. 2.21 crores neither could have been levied nor could have
been computed by the AO, because there is no tax sought to be
evaded to the extent of this amount of adjustment. In any case
the manner in which arms length price has been determined
and TP adjustment has been made by the TPO, same is
unsustainable in law and consequently there cannot be any
question of furnishing of inaccurate particulars of income or
any concealment of income. Further there is no finding or
observation by the AO that the loss margin of 13.23% has been
found to be incorrect. Simply because adjustment has been
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made on certain hypothesis that AE should have remunerated
idle capacity utilisation and assessee was not allowed to carry
out any contract with the third party in the open market and
therefore, it should have earned more margin cannot be the
basis for levy of penalty u/s 27(1)(c). Hence under these facts
and circumstances, we hold that the penalty of Rs. 94,58,080/-
is unsustainable and is directed to be deleted."
3. Learned counsel for the Revenue emphasised that Explanation (7)
was for the purpose of international transactions undergoing transfer
pricing. Under Section 92CA, if a larger amount was determined by the
TPO, the difference between what is offered and what ought to have been
offered becomes not only taxable but subject to penalty.
4. This Court is of the opinion that in the given facts of this case, the
issue at best is debatable. It is also important to notice that during the
proceedings, it became evident that the assessee had wound up the
operations. What the TPO and later the AO desired the assessee to do, was
to include in hindsight, the income amounts which it had not received and
offer a higher rate of return or profit.
5. In these circumstances, the Court is of the opinion that the setting
aside of the penalty amount cannot be characterised as unreasonable. No
substantial question of law arises.
6. The appeal is dismissed.
S. RAVINDRA BHAT, J.
PRATEEK JALAN, J.
APRIL 29, 2019
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