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 Attachment on Cash Credit of Assessee under GST Act: Delhi HC directs Bank to Comply Instructions to Vacate

The Pr. Commissioner Of Income Tax -7 Vs. Royal And Sun Alliances It Solutions (India) Pvt. Ltd.
May, 28th 2019

Referred Sections:
Section 260A complains that the ITAT
Section 271(1)(c)
Section 92C(4)
Section 92CA,

                                                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.


       SOLUTIONS (INDIA) PVT. LTD.                ..... Respondent
                     Through: Mr. Tapas Ram Misra, Adv.




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

ITA 422/2019                                                          Page 1 of 4
       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

ITA 422/2019                                                           Page 2 of 4
       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

ITA 422/2019                                                         Page 3 of 4
       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

ITA 422/2019                                                         Page 4 of 4
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