ACIT, New Delhi V. M/s Boston Scientific India Pvt. Ltd., New Delhi

ITA 1062/DEL/2013

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 6558 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-03-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I2
• Next Hearing Date: 17-12-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 22-02-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary; Difference of opinion
• Section: 69C; 92C; 92B; 10B; 68

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I-2 NEW DELHI BEFORE SMT DIVA SINGH, JUDICIAL MEMBER AND SH.L.P.SAHU, ACCOUNTANT MEMBER I.T.A .NO.-1062 & 1063/DEL/20 13 (ASSESSMENT YEAR- 2006-07 & 2007-08) ACIT, CIRCLE-12(1), NEW DELHI (APPELLANT) VS BOSTON SCIENTIFIC INDIA PVT. LTD., (FORMERLY KNOWN AS GUIDANT INDIA PVT. LTD.), C-40-41, OKHLA INDL. AREA, PHASE-II, NEW DELHI PAN-AABCG9446Q (RESPONDENT) APPELLANT BY SH. K.M.GUPTA, ADV. RESPONDENT BY SH. ANAND KUMAR KEDIA, CIT DR ORDER PER DIVA SINGH, JM BY THESE TWO APPEALS FILED BY THE REVENUE THE CORRE CTNESS OF THE CONSOLIDATED ORDER DATED 20.12.2012 OF CIT(A)-X X, NEW DELHI PERTAINING TO 2006-07 AND 2007-08 ASSESSMENT YEARS IS ASSAILED ON THE FOLLOWING GROUNDS IN THE RESPECTIVE APPEALS:- ITA NO.1062/DEL/2013 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) HAS ERRED IN HOLDING THAT IT IS NOT A FIT CASE FOR IMPOSITION OF PENALTY U/S 271(1)(C) THEREBY DELETIN G THE PENALTY OF RS.1,16,74,768/- LEVIED FOR ASSESSMENT YEAR 2006 -07. 2. THE APPELLANT CRAVES LEAVE, TO ADD, ALTER OR AMEND ANY GROUND OF APPEAL RAISED ABOVE AT THE TIME OF THE HEARING. DATE OF HEARING 17.12.2015 DATE OF PRONOUNCEMENT 01.03.2016 I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 2 OF 36 ITA NO.1063/DEL/2013 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) HAS ERRED IN HOLDING THAT IT IS NOT A FIT CASE FOR IMPOSITION OF PENALTY U/S 271(1)(C) THEREBY DELETIN G THE PENALTY OF RS.51,47,940/- LEVIED FOR ASSESSMENT YEAR 2007-0 8. 2. THE APPELLANT CRAVES LEAVE, TO ADD, ALTER OR AMEND ANY GROUND OF APPEAL RAISED ABOVE AT THE TIME OF THE HEARING. 2. THE RELEVANT FACTS OF THE CASE RELATABLE TO THE IS SUE ARE THAT THE ASSESSEE I.E. BOSTON SCIENTIFIC INDIA PVT. LTD. (PR EVIOUSLY KNOWN AS GUIDANT INDIA PRIVATE LIMITED) IS A COMPANY INCORPO RATED UNDER THE INDIAN COMPANIES ACT, 1956 IN JULY 2003. IT IS STAT ED TO BE PRIMARILY ENGAGED IN PROMOTION, MARKETING, SALES AND DISTRIBU TION IN INDIA OF A WIDE RANGE OF CARDIO-VASCULAR PRODUCTS AND RELATED MEDICAL INSTRUMENTS AND EQUIPMENTS MANUFACTURED BY THE BOST ON GROUP. THE ASSESSEE IS ALSO STATED TO BE PROVIDING POST SA LES RELATED SUPPORT SERVICES. THE AO IN BOTH THE ASSESSMENT YEARS REFE RRED THE MATTER TO THE TRANSFER PRICING OFFICER (HEREINAFTER REFERR ED TO AS TPO) FOR DETERMINATION OF ARMS LENGTH PRICE OF THE INTERNAT IONAL TRANSACTIONS. 3. THE RECORD SHOWS THAT IN THE AY 2006-07, TH E ASSESSEE HAD ONLY ONE BUSINESS SEGMENT, NAMELY, DIS TRIBUTION OF MEDICAL EQUIPMENTS WHICH WERE IMPORTED FROM TH E RELATED PARTIES. THIS WAS THE ONLY INTERNATIONAL TRANSACTI ON IN THE YEAR UNDER CONSIDERATION. THE ASSESSEE WAS FOUND TO HAVE USED RESALE PRICE METHOD (HEREINAFTER REFERRED TO AS RPM) AS THE MOST APPROPRIATE METHOD AND HAD SELECTED 6 COMPARABLE COMPANIES IN ITS TRANSFER PRICING STUDY (HEREINAFTER REFERRED TO AS TP STUDY). I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 3 OF 36 3.1. THE METHODOLOGY ADOPTED BY THE ASSESSEE WAS REJECT ED BY THE TPO FOLLOWING THE METHODOLOGY ACCEPTED IN ASSESSEE S CASE FOR 2005- 06 AY HOLDING THAT THE MOST APPROPRIATE METHOD (HER EINAFTER REFERRED TO AS MAM) WOULD BE TRANSACTIONAL NET MA RGIN METHOD (HEREINAFTER REFERRED TO AS TNMM) AS OPPOSED TO R PM SELECTED BY THE ASSESSEE. 3.1.1. ACCORDINGLY THE TPO ISSUED SHOW CAUSE NOTICE TO T HE ASSESSEE TO EXPLAIN THE SAME. IN RESPONSE TO THE S HOW CAUSE NOTICE THE ASSESSEE STATED THAT IN THE YEAR UNDER CONSIDER ATION IT HAD DISCONTINUED MARKETING SUPPORT SERVICE SEGMENT. IN THE EARLIER YEAR IT WAS EXPLAINED THAT THE ASSESSEE HAD TWO SEG MENTS I.E. MARKETING SUPPORT SEGMENT AS WELL AS THE DISTRIBUTI ON SEGMENT FOR WHICH PURPOSES IN THAT YEAR TNMM WAS CONSIDERED TO BE THE MOST APPROPRIATE METHOD. ACCORDINGLY IT JUSTIFIED ITS S ELECTION OF USING RPM AS THE MOST APPROPRIATE METHOD FOR ITS DISTRIB UTION SEGMENT. 3.1.2. THE EXPLANATION IN SUPPORT OF THE CHANGE OF METHOD OFFERED BY THE ASSESSEE WAS NOT ACCEPTED BY THE TPO. 3.1.3. FURTHER CONSIDERING THE 6 COMPARABLES OFFERED BY T HE ASSESSEE IN ITS TP STUDY, THE TPO REJECTED 3 COMPAR ABLES. RETAINING THE REMAINING 3 COMPARABLES OUT OF THESE 6 OFFERED, HE FURTHER REQUIRED THE ASSESSEE TO CONDUCT A FRESH SEARCH FOR THE I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 4 OF 36 BENCHMARKING PURPOSE UNDER TNMM AND DURING THE PROC EEDINGS ACCEPTED ANOTHER 3 COMPARABLES OFFERED BY THE ASSE SSEE. 3.1.4. THE TPO ALSO REJECTED THE MULTIPLE YEAR DATA USED BY THE ASSESSEE. 3.1.5. THUS USING THE SINGLE YEAR DATA AND CONSIDERING TH E NEW LIST OF 6 COMPARABLES OFFERED, HE PROPOSED AN ADDITION O F RS.3,46,84,993/- IN 2006-07 AY. 3.2. IN 2007-08 AY IT IS SEEN THAT SEEN THAT THE TPO A GAIN REJECTED USING RPM AS THE MOST APPROPRIATE METHOD BY THE ASS ESSEE IN ITS TP STUDY TAKING TNMM AS THE MAM FOR SIMILAR REASONS AS IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR. 3.2.1. OUT OF THE TOTAL 9 COMPARABLES OFFERED BY THE ASSES SEE, THE TPO REJECTED 3 COMPARABLES RETAINING 6 COMPARABLES OFFERED BY THE ASSESSEE. 3.2.2. HE FURTHER ALSO REJECTED THE MULTIPLE YEAR DATA AN D USING SINGLE YEAR DATA FOR THE 6 COMPARABLES RETAINED P ROPOSED AN ADDITION OF RS.1,52,93,937/- BY WAY OF ADJUSTMENT I N THE INTERNATIONAL TRANSACTION OF THE ASSESSEE. 3.3. IN BOTH THE YEARS, THE ASSESSEE DID NOT GO IN APPE AL AGAINST THE ADDITIONS MADE BY THE AO PURSUANT TO THE TPOS ORDE R. 4. AS A RESULT OF THE ADDITIONS TO THE INCOME OF THE ASSESSEE IN THE RESPECTIVE YEARS THE AO INITIATED PENALTY PROCEEDIN GS U/S 271(1)(C) I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 5 OF 36 AND REQUIRED THE ASSESSEE TO EXPLAIN WHY PENALTY U/ S 271(1)(C) SHOULD NOT BE IMPOSED FOR THE YEARS IN CONSIDERATIO N. 4.1. THE ASSESSEE IN THE COURSE OF THE PENALTY PROCEEDI NGS FOR THE A.Y.2006-07 VIDE LETTER DATED 10.06.2010 (COPY AT P AGE 47 OF THE PAPER BOOK) SUBMITTED THAT THE ADDITION WAS ACCEPTE D AS THE COMPANY WANTED TO DO AWAY WITH UNNECESSARY LITIGATI ON. 4.1.1. IT WAS ALSO PLEADED THAT DUE TAXES ON THE ADDITIO NS WERE PROMPTLY PAID PROVED ITS BONA FIDE. 5. SIMILAR SUBMISSIONS WERE OFFERED IN THE PENALTY PRO CEEDINGS IN A.Y.2007-08 THROUGH LETTER DATED 19.07.2011 BEFORE THE AO (COPY AT PAGE NO.114 OF THE PAPER BOOK). 6. NOT CONVINCED WITH THE EXPLANATION OFFERED, THE AO HELD THAT THE ASSESSEES EXPLANATION COULD NOT BE ACCEPTED ON THE FOLLOWING GROUNDS:- (I) THE CHANGE OF MOST APPROPRIATE METHOD; (II) REJECTION OF 3 COMPARABLES USED BY THE APPELLANT IN BOTH THE ASSESSMENT YEARS AND INCLUSION OF 3 COMPARABLES (AS SUPPLIED BY THE APPELLANT ITSELF) BY THE TPO IN AY 2006-07; AND (III) USE OF SINGLE YEAR DATA FOR BENCHMARKING THE INTERNATIONAL TRANSACTION. 6.1. FOR BOTH THE ASSESSMENT YEARS THE AO INVOKING EXPL ANATION I OF SECTION 271(1)(C) OF THE INCOME TAX ACT, 1961 LEVIE D PENALTY OVER- RULING THE FOLLOWING ARGUMENTS ADVANCED BY THE ASSE SSEE NAMELY I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 6 OF 36 (A) THAT IT HAD NOT SUPPLIED/FURNISHED ANY INACCURA TE PARTICULARS OF INCOME; (B) NOR IT HAD CONCEALED ANY PARTICULARS OF INCOME; AND (C) IT WAS A MERE CASE OF REJECTION OF A CLAIM MADE BY THE ASSESSEE FOR WHICH NO PENALTY COULD BE LEVIED. 7. AGGRIEVED BY THE PENALTY ORDER, THE ASSESSEE CAME IN APPEAL BEFORE THE CIT(A). APART FROM RE-ITERATING THE ARG UMENTS ADVANCED BEFORE THE AO, VARIOUS OTHER ARGUMENTS WERE ALSO RA ISED ASSAILING THE ACTION INCLUDING (A) JUSTIFICATION FOR THE CHA NGE OF MOST APPROPRIATE METHOD; (B) THAT REJECTION OF THE THREE COMPARABLES OUT OF SIX IN 2006-07 ASSESSMENT YEAR AND THREE COMPARA BLES OUT OF NINE IN 2007-08 ASSESSMENT YEAR DOES NOT DETRACT FR OM THE FACT THAT THE COMPARABLES ACCEPTED WERE ALL ALONG OFFERED BY THE ASSESSEE. ACCORDINGLY IT WAS CANVASSED NEITHER IT COULD BE HE LD TO BE CONCEALMENT NOR A CASE OF FILING OF INACCURATE PART ICULARS. 8. CONVINCED WITH THE EXPLANATION OFFERED THE CIT(A) P ROCEEDED TO QUASH THE PENALTY ORDER IN BOTH THE YEARS. 9. AGGRIEVED BY THIS, THE REVENUE IS IN APPEAL BEFORE THE ITAT IN BOTH THE YEARS. 10. THE LD. CIT DR PLACED HEAVY RELIANCE ON THE PENALTY ORDER. FURTHER ATTENTION WAS INVITED TO THE TPOS ORDER I N BOTH THE YEARS. IT WAS SUBMITTED THAT IN VIEW OF THE FOLLOWING SPEC IFIC FACTUAL I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 7 OF 36 SHORTCOMINGS POINTED OUT BY THE TPO THE ASSESSEE W AS REQUIRED TO BRING OUT THE CIRCUMSTANCES WHICH WARRANTED A CHANG E AND WAS ALSO FURTHER REQUIRED TO SUBMIT WHY TNMM SHOULD NOT BE U SED. IT WAS SUBMITTED THAT IN REGARD TO THE ISSUES NOTHING SUB STANTIAL WAS SAID BY THE ASSESSEE APART FROM MAKING GENERAL SUBMISSIO NS AS WOULD BE EVIDENT FROM THE TPOS ORDER. FOR READY-REFERENCE, PARA 5.1.1 & 5.1.2 OF THE TPOS ORDER RELIED UPON BY THE LD. CIT DR ADDRESSING THE SPEAKING QUERIES MADE FROM THE ASSESSEE ARE EXT RACTED HEREUNDER:- 5.1. SELECTION OF METHOD: 5.1.1. ASSESSEE HAD SELECTED RPM AS THE MOST APPROPRIATE METHOD IN ITS TP REPORT. THE TRANSFER PRICING REPORT AND THE FINANCIAL OF THE ASSESSEE WERE EXAM INED. AS PER DETAILS FURNISHED IN TRANSFER PRICING REPORT , THE ASSESSEE I.E. GUIDANT INDIA HAS BEEN CLASSIFIED AS A DISTRIBUTOR WHICH CARRIES OUT MARKETING, PROMOTION, SALES AND DISTRIBUTION OF GUIDANT PRODUCTS IN INDIA. THE ASSESSEE IS A 100% SUBSIDIARY DISTRIBUTOR OF ITS AE . THE FINANCIALS OF THE ASSESSEE INCLUDING P&L ACCOUNT WE RE EXAMINED. IT WAS FOUND THAT THE ASSESSEE IN THE CU RRENT YEAR HAD INCURRED A LOSS OF RS.79.05 LACS ON A TUR NOVER OF RS.37.61 CRS. AS COMPARED TO THIS, THE ASSESSEE HAD SHOWN A PROFIT OF RS.3.72 CRS ON A TURNOVER OF RS.2 8.27 CRS IN THE PREVIOUS YEAR I.E FY 2004-05. 5.1.2. SHOW CAUSE NOTICE TO THE ASSESSEE: I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 8 OF 36 VIDE ORDER SHEET ENTRY DATED 03.08.2009, THE ASSESS EE WAS ASKED TO STATE THE REASONS FOR INCURRING OF LOS SES AT THE NET LEVEL. THE ASSESSEE WAS ALSO ASKED TO STAT E AS TO WHETHER THERE WERE INTERNATIONAL TRANSACTION BEL OW THE GROSS PROFIT MARGIN AND HOW THEY WERE IMPACTING THE PROFITABILITY OF THE ASSESSEE. THE ASSESSEE WAS FURTHER ASKED TO STATE THAT WHY IT HAS CHANGED THE METHOD OF BENCHMARK INTERNATIONAL TRANSACTIONS FROM TNMM USED LAST YEAR TO RESALE PRICE METHOD (RPM). THE ASSESSEE WAS ASKED TO STATE THE CHANGE IN CIRCUMSTANCES THAT HAVE WARRANTED CHANGE IN COMPARABILITY METHOD. THE ASSESSEE WAS ALSO ASKED TO STATE AS TO WHAT WAS THE DIFFERENCE IN THE INTERNATIONAL TRANSACTION AS COMPARED TO LAST YEAR. THE ASSESSEE WAS ASKED TO SHOW CAUSE AS TO WHY TNMM METHOD SHOULD NOT BE USED TO BENCHMARK INTERNATIONAL TRANSACTIONS IN THIS YEAR ALSO ON ACCOUNT OF LOSSES AT THE NET LEVEL. (EMPHASIS PROVIDED) 10.1. THE LD. CIT DR FURTHER SUBMITTED THAT ADMITTEDLY AS PER RECORD THE OBJECTIONS OF THE ASSESSEE HAVE BEEN CON SIDERED AND OVER- RULED AND THAT THE TPO HAS ADOPTED TNMM AS THE MOST APPROPRIATE METHOD IN BOTH THE YEARS. IT WAS SUBMITTED THAT TH E ASSESSEE ADMITTEDLY HAS NOT CONTESTED THIS ISSUE FURTHER IN BOTH THE YEARS AND HAS ACCEPTED THE CHANGE OF METHOD CARRIED OUT BY TH E TPO. ACCORDINGLY IT WAS HIS SUBMISSION THAT SINCE THE IS SUE OF CHANGE OF I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 9 OF 36 METHODOLOGY HAS BEEN GIVEN UP BY THE ASSESSEE ITSEL F NOTHING FURTHER REMAINS FOR THE REVENUE TO SHOW THAT IT IS A CASE O F FILING OF INACCURATE PARTICULARS AND CONCEALMENT. 10.2. THE CIT DR ALSO SUBMITTED THAT THE ASSESSEE HAD SIGNIFICANT EXPENSES PERTAINING TO DISCOUNTS AND REBATES AND AL SO ADVERTISEMENTS AND SALES EXPENSES. IT WAS ARGUED T HAT HAD THE CLAIM OF THE ASSESSEE BEEN BONAFIDE, IT WOULD HAVE ATLEAST MADE ADJUSTMENT FOR THESE EXPENSES WHICH IS NOT A FACT. THE SAID ARGUMENT OF THE LD. CIT DR WAS STRONGLY OPPOSED BY THE LD.AR ON THE GROUND THAT THIS WAS NOT THE CASE OF THE AO ALS O. 10.3. IT WAS ALSO SUBMITTED BY THE LD. CIT DR THAT ALTHO UGH THE AO HAS INVOKED EXPLANATION 1 OF SECTION 271(1)(C) HOWE VER, THE CORRECT EXPLANATION WHICH THE AO SHOULD HAVE REFERRED TO S HOULD HAVE BEEN EXPLANATION 7 OF SECTION 271(1)(C). IT WAS HIS SUB MISSION THAT THE REVENUES CASE MAY NOT BE THROWN OUT ON THE GROUND OF WRONG REFERENCE MADE BY THE AO TO EXPLANATION 1 INSTEAD O F EXPLANATION 7 OF SECTION 271(1)(C). IT WAS SUBMITTED IN SUPPORT OF THE PRAYER THAT THERE WAS SUFFICIENT JUDICIAL PRECEDENT TO ALLOW TH E PRAYER OF THE REVENUE AND THE TRIBUNAL CAN CONSIDER THE ISSUE TAK ING THE CORRECT EXPLANATION ON RECORD WHILE DECIDING THE ISSUE. IT WAS SUBMITTED THAT THE COURTS HAVE REPEATEDLY HELD THAT WHERE TH E AO HAS WRONGLY INVOKED SECTION 68 IN PLACE OF SECTIONS 69, 69A, 69 B OR 69C ETC. THE I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 10 OF 36 ORDER DOES NOT BECOME BAD MERELY BECAUSE A WRONG SE CTION HAS BEEN QUOTED AND THE ISSUE CAN STILL BE CONSIDERED AND T HE ACTION UPHELD APPLYING THE CORRECT PROVISION. ACCORDINGLY, PLACI NG HEAVY RELIANCE UPON THE SAID EXPLANATION, IT WAS HIS SUBMISSION TH AT WHEN CONSIDERED IN THE LIGHT OF EXPLANATION 7 OF SECTIO N 271(1)(C), THE IMPUGNED ORDER DESERVES TO BE SET ASIDE AND THE PEN ALTY ORDER SHOULD BE UPHELD. IN THE FACTS OF THE PRESENT CASE IT WAS RE-ITERATED THAT THE ADDITIONS MADE HAVE BEEN ACCEPTED BY THE A SSESSEE. ACCORDINGLY RELYING UPON THE DECISION OF G.C.AGARW AL (1994)186 ITR 571 (SC) AND ACIT VS JEEVAN LAL SHAH (1994) 205 ITR 244 (SC), IT WAS HIS SUBMISSION THAT PENALTY IMPOSED DESERVED TO BE UPHELD IN BOTH THE YEARS. 11. THE LD. AR HEAVILY RELYING UPON THE IMPUGNED ORDE R INVITED SPECIFIC ATTENTION TO THE FACTS RECORDED BY THE CI T(A) IN PARAS 4.1 TO 4.4 OF HIS ORDER. SINCE IT IS A CONSOLIDATED ORDER FOR BOTH THE YEARS UNDER CONSIDERATION, HEAVY RELIANCE WAS PLACED THER EON. IT WAS HIS SUBMISSION THAT IN BOTH THE YEARS THE ASSESSEE VIDE LETTERS DATED 10.06.2010 AND 19.07.2011 IN THE TWO YEARS UNDER CO NSIDERATION (COPIES PLACED AT PAPER BOOK PAGES 47 AND 114 RESP ECTIVELY) HAS MADE IT CLEAR THAT THE ADDITIONS HAD BEEN ACCEPTED ONLY BECAUSE THE ASSESSEE DID NOT WANT TO ENTER INTO UNNECESSARY LIT IGATION. IT WAS SUBMITTED THAT THE BONAFIDE OF THE ASSESSEE IN ACCE PTING THE SAME IS I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 11 OF 36 EVIDENCED BY THE FACT THAT FULL PAYMENT OF TAXES WE RE MADE PROMPTLY AND DULY. 11.1. IT WAS HIS CLAIM THAT THE CHANGE IN METHOD WAS THE RESULT OF THE FACT THAT IN THE YEAR UNDER CONSIDERATION THE ASSESSEE HAD ONLY ONE SEGMENT I.E. DISTRIBUTION OF MEDICAL EQUIPMENT AND IT WAS CONSIDERED THAT ON ACCOUNT OF THE PECULIARITIES OF THIS SEGMENT RPM WAS THE MAM. IT WAS SUBMITTED THAT NO DOUBT THE ME THOD ADOPTED BY THE ASSESSEE IN THE EARLIER YEARS WAS TNMM BUT T HIS WAS ON THE GROUND THAT THEN IT ADMITTEDLY HAD TWO BUSINESS SEG MENTS NAMELY MARKETING SUPPORT SERVICES SEGMENT AND ALSO THE DISTRIBUTION SEGMENT. THUS TNMM WAS CONSIDERED TO BE THE MOST APPROPRIATE METHOD. IT WAS CLARIFIED THAT THE MEDICAL EQUIPMEN T IS DIRECTLY PROCURED FROM ITS AE AND SUPPLIED TO ITS DISTRIBUTO R CHAIN OR THE CLIENT AS IT MAY BE WHICH IS WHY RPM WAS CONSIDERED TO BE THE MAM. 11.2. THE LOSS INCURRED REFERRED TO BY THE LD. DR IT WAS SUBMITTED WAS THE RESULT OF CERTAIN FIXED COSTS WHICH CONTINU ED TO REMAIN QUA THE MARKETING SEGMENT WHICH THE ASSESSEE HAD DISC ONTINUED FROM THIS YEAR. 11.3. IT WAS SUBMITTED THAT PARA 5.1.5 AT PAGE 14 TO 15 AND TABLE 2 AND TABLE 3 EXTRACTED THEREIN BY THE CIT(A) ADEQUAT ELY ADDRESS THE POSITION. IT WAS SUBMITTED THAT ON PERUSAL OF THE SAME IT CAN BE I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 12 OF 36 SEEN THAT WHATEVER METHOD IS USED IN THE TWO YEARS THE RESULTS WOULD CLEARLY DEMONSTRATE THAT NO CASE FOR PENALTY IS MADE OUT. 11.4. IT WAS HIS SUBMISSION THAT EVEN WHEN CONSIDERING TH E ISSUE IN THE LIGHT OF THE REQUIREMENTS OF EXPLANATION 7 TO S ECTION 271(1)(C) IT CAN BE CONCLUDED THAT THE ASSESSEE HAS ACTED ALL AL ONG IN GOOD FAITH WITH DUE DILIGENCE WHICH ARE THE REQUIREMENTS INCOR PORATED IN EXPLANATION 7 TO SEC.271(1)(C). 11.5. IT WAS HIS SUBMISSION THAT ALL NECESSARY FACTS AND FIGURES FOR THE FINAL SIX COMPARABLES CONSIDERED IN 2006-07 A SSESSMENT YEAR AND THE SIX RETAINED IN 2007-08 ASSESSMENT YEAR BY THE TPO WERE OFFERED BY THE ASSESSEE. THE TPO IT WAS SUBMITTED MAY HAVE CHANGED THE METHOD BUT THE COMPARABLES OFFERED WERE NOT TINKERED WITH. ACCORDINGLY IT WAS HIS ARGUMENT THAT THE ASS ESSEES INTERNATIONAL TRANSACTIONS WERE AT ARMS LENGTH. 11.6. REFERRING TO THE RECORD IT WAS CLAIMED THAT WHATEVE R METHOD IS APPLIED IN 2006-07 AY, CONSIDERING THE SIX COMPARAB LES OFFERED NO ADJUSTMENT WOULD BE WARRANTED. THIS FACT IT WAS SU BMITTED IS EVIDENT FROM THE TABLE 2 IN PARA 5.1.5 OF THE IMPUG NED ORDER. 11.7. SIMILARLY IN 2007-08 AY IT WAS SUBMITTED IF TABLE 3 IN THE SAME PARA OF THE CIT(A)S ORDER IS CONSIDERED IT WO ULD SHOW THAT WHATEVER METHOD IS CONSIDERED THE MARGIN WOULD BE W ITHIN +/- 5%. 11.8. IT WAS ALSO HIS SUBMISSION THAT THE ARGUMENTS OF TH E LD.CIT I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 13 OF 36 DR THAT THE ASSESSEE HAD MARKETING INTANGIBLES IS O F NO RELEVANCE. INVITING ATTENTION TO TPOS ORDER INTERNAL PAGE 3 O F PAPER BOOK PAGE 9 IN THE CONTEXT OF PAGE 41 INTERNAL PAGE 3 OF THE TRANSFER PRICING STUDY REPORT, IT WAS SUBMITTED THAT THE ASSESSEE HA D SHOWN THE FOLLOWING INTERNATIONAL TRANSACTIONS IN 2006-07 AY: - NATURE OF INTERNATIONAL TRANSACTION MOST APPROPRIATE METHOD PROFIT LEVEL INDICATOR GUIDANT INDIAS PRICE/GROSS PROFIT MARGIN COMPARABLES PRICE/GROSS PROFIT MARGIN (ARITHMETIC MEAN) PURCHASE OF FINISHED PRODUCTS/EQUIPMENTS PURCHASE OF PROMOTIONAL UNITS RECHARGES FROM/TO GROUP COS. RESALE PRICE METHOD (RPM) GROSS PROFIT/SALES (GP/SALES) 39% 21% RECEIPT OF IT SERVICES COMPARABLE UNCONTROLLED PRICE METHOD (CUP) N.A. REFER PARAS 1.4.1 TO 1.4.3 BELOW REFER PARAS 1.4.1 TO 1.4.3 BELOW REIMBURSEMENT OF EXPENSES CUP N.A. REFER PARA 1.5.1 BELOW REFER PARA 1.5.1 BELOW 11.9. REFERRING TO THE SAID ORDER IT WAS SUBMITTED THAT T HE TPO HAD ADDRESSED AND QUASHED ONLY THE PURCHASE OF FINISHED PRODUCTS AND EQUIPMENTS AND THEREIN ALSO HE HAS ONLY CHANGED THE MAM FROM THE RPM METHOD TO TNMM METHOD. 11.10. RELYING UPON THE DECISIONS CONSIDERED BY THE CIT(A) IN PARA 5.3, 5.4, 5.5 AND 5.7 IN THE FACTS OF THE PRESENT C ASE WHOSE PECULIAR FACTS AND CIRCUMSTANCES HAVE BEEN DISCUSSED AT PAGE S 6-10 OF THE I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 14 OF 36 IMPUGNED ORDER, IT WAS HIS PRAYER THAT THE IMPUGNED ORDER MAY BE UPHELD. 11.11. INVITING ATTENTION TO PAGE 2 TO 6 OF THE IMPUGNED O RDER IT WAS HIS SUBMISSION THAT THE ARGUMENTS OF THE CIT DR THA T THE ISSUE BE CONSIDERED IN THE LIGHT OF THE REQUIREMENTS OF EXPL ANATION 7 TO SECTION 271(1)(C) HAS ALREADY BEEN ADDRESSING BY T HE CIT(A) WHO HAS EXAMINED THE PROVISIONS BEFORE QUASHING THE PENALTY . HEAVY RELIANCE WAS PLACED ON THE FINDINGS. 12. THE LD. CIT DR INVITING ATTENTION TO THE REPLY OF THE ASSESSEE BEFORE THE TPO IN PARA 5.1.6 & 5.1.8, SUBMITTED THA T IF RPM METHOD WAS THE MAM ACCORDING TO THE ASSESSEE THEN ADJUSTME NTS FOR THE DISCOUNTS AND REBATES AND ADVERTISEMENTS EXPENSES O N FACTS SHOULD HAVE BEEN MADE BY THE ASSESSEE. THE LD. AR OBJECTI NG TO THE STAND TAKEN SUBMITTED THAT THE LD.CIT DR HAS AGAIN TRAVEL LED BEYOND WHAT THE TPO HAS DONE AND SINCE TPO IN HIS ORDER HAS ONL Y ADDRESSED PURCHASE OF FINISHED GOODS AND EQUIPMENTS AND CONSI DERING THE ENTIRE CLAIM, THE SUBMISSIONS AND DETAILED TRANSFER PRICING STUDY ON RECORD HE DID NOT CONSIDER THE AMP ISSUE WHICH THE LD. CIT DR NOW IN THE PENALTY PROCEEDINGS WOULD LIKE TO ADDRESS. IT WAS HIS STAND THAT THE CIT DR CANNOT NOW RAISE A NEW ISSUE AND TH E REVENUE AT BEST CAN ONLY RELY FOR FACTS ON THE CASE MADE OUT B Y THE TPO AND AS THE TPO HAS ACCEPTED THE ASSESSEES TRANSFER PRICIN G REPORT AND HAS I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 15 OF 36 MERELY CHANGED THE MOST APPROPRIATE METHOD AND REDU CED CERTAIN COMPARABLES OFFERED BY THE ASSESSEE AND ACCEPTED TH E FURTHER INTRODUCTION OF THREE MORE COMPARABLES IN ONE YEAR AGAIN OFFERED BY THE ASSESSEE IT WAS SUBMITTED THAT NOW THE CIT DR CANNOT MAKE OUT A NEW CASE. IT WAS ALSO HIS ARGUMENT THAT EVEN OTHERWISE THE HONBLE DELHI HIGH COURT IN THE CASE OF SONY ERICSO N WHICH IS A CASE OF DISTRIBUTOR AND IN THE CASE OF MARUTI SUZUKI WHI CH IS A CASE OF A MANUFACTURER IT HAS BEEN CATEGORICALLY HELD THAT T HE AMP ISSUE PER SE CANNOT BE FORMING PART OF CHAPTER X OF THE INCOM E TAX ACT, 1961 AND IN THE FACTS OF THE PRESENT CASE THIS WAS NOT E VEN THE CASE OF THE AO. 13. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IN THE FACTS OF THE PRESENT C ASE ADMITTEDLY THE AO WRONGLY INVOKED EXPLANATION 1 OF SECTION 271(1)( C) INSTEAD OF EXPLANATION 7 OF SECTION 271(1)(C). THUS NOTING TH AT THE REQUEST WAS NOT OPPOSED ON BEHALF OF THE ASSESSEE, WE ALLOW THE PRAYER OF THE LD.CIT DR IN THE PECULIAR FACTS AND CIRCUMSTANCES O F THE CASE THAT THE ISSUES BE CONSIDERED IN THE LIGHT OF EXPLANATIO N 7 TO SECTION 271(1)(C) INSTEAD OF EXPLANATION 1 OF SECTION 271( 1)(C). 13.1. THE RELEVANT PROVISIONS OF SECTION 271(1)(C) ARE S ET OUT HEREUNDER FOR READY-REFERENCE:- I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 16 OF 36 271(1). IF THE [ASSESSING] OFFICER OR THE [COMMISSIONER (APPEALS) [OR THE [PRINCIPAL COMMISSI ONER OR] COMMISSIONER] IN THE COURSE OF ANY PROCEEDINGS UNDER THIS ACT, IS SATISFIED THAT ANY PERSON- (A) ************** (B) ************** (C) HAS CONCEALED THE PARTICULARS OF HIS INCOME OR FURNISHED INACCURATE PARTICULARS OF [SUCH INCOME, OR] (D) ************* EXPLANATION 7:- WHERE IN THE CASE OF AN ASSESSEE WH O HAS ENTERED INTO AN INTERNATIONAL TRANSACTION [OR SPECIFIED DOMESTIC TRANSACTION] 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 DEEM ED TO REPRESENT THE INCOME IN RESPECT OF WHICH PARTICULAR S HAVE BEEN CONCEALED OR INACCURATE PARTICULARS HAVE BEEN FURNISHED, UNLESS THE ASSESSEE PROVED TO THE SATISF ACTION OF THE ASSESSING OFFICER OR THE COMMISSIONER (APPEA LS) [OR THE [PRINCIPAL COMMISSIONER OR] COMMISSIONER] T HAT THE PRICE CHARGED OR PAID IN SUCH TRANSACTION WAS COMPUTED IN ACCORDANCE WITH THE PROVISIONS CONTAINE D IN SECTION 92C AND IN THE MANNER PRESCRIBED UNDER THAT SECTION, IN GOOD FAITH AND WITH DUE DILIGENCE]. 13.2. A PERUSAL OF THE ABOVE MAKES IT CLEAR THAT EXPLANAT ION 7 IS A DEEMING PROVISION WHERE BY IT IS DEEMED THAT IN THE CASE OF ANY ADDITION OR DISALLOWANCE IN THE CASE OF AN ASSESSEE WHO HAS ENTERED I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 17 OF 36 INTO AN INTERNATIONAL TRANSACTION DEFINED IN SECT ION 92B OF THE ACT THEN FOR THE PURPOSES OF SUB-SECTION (C) OF SECTION 271(1) THE SAID AMOUNT ADDED OR DISALLOWED WOULD BE DEEMED TO REPRE SENT SUCH INCOME IN RESPECT OF WHICH PARTICULARS HAVE BEEN CO NCEALED OR INACCURATE PARTICULARS HAVE BEEN FURNISHED. THE CA VEAT OR EXCEPTION BEING CARVED OUT ONLY IN THE CASE WHERE THE ASSESSE E PROVES THAT THE PRICE CHARGED OR PAID IN SUCH TRANSACTION WAS COMPU TED IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SECTION 92C; AND IN THE MANNER PRESCRIBED UNDER THAT SECTION IN GOOD FAITH AND WITH DUE DILIGENCE. 13.3. THUS IN ORDER TO CONSIDER WHETHER THE SAID REQUIREM ENTS OF EXPLANATION 7 HAVE BEEN MET OR NOT, IT IS NECESSARY TO CONSIDER THE ACT AND CONDUCT OF THE ASSESSEE AT THE TIME OF COMP UTING THE INTERNATIONAL TRANSACTION WHICH IS ALREADY A MATTER OF RECORD. 13.4. IT IS SEEN THAT THE ASSESSEE HAS DESCRIBED IT BUSI NESS PROFILE IN ITS TRANSFER PRICING STUDY WHICH HAS BEEN CONSI DERED BY THE TPO IN HIS INTERNAL PAGE 2 IN THE FOLLOWING MANNER:- 2.BUSINESS DESCRIPTION AS SUBMITTED BY ASSESSEE:- 2.1.GUIDANT CORPORATION WAS INCORPORATED IN 1994 AN D IS HEADQUARTERED IN INDIANAPOLIS, USA. IT IS THE ULTI MATE PARENT OF ALL GUIDANT GROUP COMPANIES ACROSS THE WO RLD. IT IS PRIMARILY ENGAGED IN THE DEVELOPMENT, MANUFACTURING AND MARKETING OF A BROAD ARRAY OF I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 18 OF 36 PRODUCTS AND SERVICE FOR CARDIAC AND VASCULAR PATIE NTS. ITS INDIAN OPERATIONS ARE CARRIED OUT ON BY GUIDANT INDIA, A WHOLLY OWNED INDIRECT SUBSIDIARY. 2.2. GROUP COMPANIES OWN SIGNIFICANT VALUABLE INTELLECTUAL PROPERTY RIGHTS AND OTHER COMMERCIAL O R MARKETING INTANGIBLES AND ARE INVOLVED IN COMPLEX PRODUCT DEVELOPMENT, MANUFACTURING AND BRAND DEVELOPMENT OF THE PRODUCTS. GROUP COMPANIES ALSO BEAR SIGNIFICANT BUSINESS AND ENTREPRENEURIAL RISKS OF PRODUCTS ACCEPTABILITY AND PERFORMANCE IN THE MARKE T. 2.3.GUIDANT INDIA IS PRIMARILY ENGAGED IN THE PROMOTION, SALES, MARKETING AND DISTRIBUTION O F THE CARDIOVASCULAR MEDICAL PRODUCTS AND EQUIPMENTS OF T HE GUIDANT GROUP AND RELATED POST SALE SUPPORT SERVICES. WHILE CARRYING OUT SUCH BUSINESS OPERATIONS, GUIDANT INDIA UNDERTAKES COMPARATIVELY LOWER RISKS THAN GROUPCOS AND UTILIZE ROUTINE TANGI BLE ASSETS. 13.5. ON CONSIDERATION OF FACTS WHICH HAVE BEEN ADDRESSED IN THE EARLIER PART OF THIS ORDER ELABORATELY IT IS EVIDEN T THAT IT IS UNDISPUTED THAT THE MOST APPROPRIATE METHOD SELECTED BY THE AS SESSEE WAS VARIED BY THE TPO AFTER GIVING THE ASSESSEE A REASO NABLE OPPORTUNITY OF BEING HEARD. IT IS SEEN THAT THE ASSESSEE HAD RAISED VARIOUS ARGUMENTS OPPOSING THE CHANGE OF METHOD AND DEFENDE D UNSUCCESSFULLY BEFORE THE TPO THE METHOD ADOPTED IN ITS TP STUDY. IT IS ALSO SEEN THAT THE ISSUE WAS NOT CONTESTED FURT HER BY THE ASSESSEE IN BOTH THE YEARS. IT IS A MATTER OF RECORD THAT T HE ADDITIONS ARE I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 19 OF 36 BASED ON THE COMPARABLES OFFERED BY THE ASSESSEE CO NSIDERING THE SINGLE YEAR DATA AS OPPOSED TO THE MULTIPLE YEAR DA TA. IT IS ALSO SEEN THAT IN THE FIRST YEAR I.E. 2006-07 AY OUT OF THE S IX COMPARABLES ORIGINALLY OFFERED BY THE ASSESSEE USING THE MULTIP LE YEAR DATA, THREE WERE RETAINED BY THE TPO CONSIDERING THE SINGLE YEA R DATA AND 3 WERE OUTRIGHTLY REJECTED. THE ASSESSEE WAS DIRECTE D TO CARRY OUT A FRESH SEARCH USING SINGLE YEAR DATA AND OUT OF THIS SEARCH CARRIED OUT BY THE ASSESSEE THREE OTHER COMPARABLES OFFERED BY THE ASSESSEE WERE ACCEPTED DURING THE ASSESSMENT PROCEEDINGS. IN THE SECOND YEAR I.E. 2007-08 AY, NINE COMPARABLES WERE OFFERED BY THE ASSESSEE USING THE MULTIPLE YEAR DATA AND THREE COMPARABLES WERE EXCLUDED BY THE TPO THUS RETAINING THE SIX COMPARABLES OFFE RED BY THE ASSESSEE USING SINGLE YEAR DATA THE ADDITIONS HAVE BEEN PROPOSED. 13.6. WE ALSO FIND FROM THE RECORD THAT THE CLAIM OF THE ASSESSEE BASED ON TABLE 2 AND TABLE 3 EXTRACTED BY THE CI T(A) IN SUPPORT OF THE CLAIM THAT WHETHER THE METHOD TAKEN IS RPM OR T NMM, CONSIDERING THE ORIGINAL SIX COMPARABLES OFFERED BY THE ASSESSEE IN 2006-07 ASSESSMENT YEARS OR THE NINE COMPARABLES OF FERED IN2007- 08 ASSESSMENT YEAR, THE INTERNATIONAL TRANSACTION I S AT ARMS LENGTH IN 2006-07 AND WITHIN +/-% IN 2007-08 ASSESSMENT Y EAR. WE FIND THAT THIS FACTUAL POSITION PLACED BEFORE THE CIT(A) AND ACCEPTED BY HIM HAS NOT BEEN EITHER ASSAILED BEFORE US OR REBUT TED BY THE I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 20 OF 36 REVENUE BY ANY ARGUMENT OR CONTRARY EVIDENCE. FOR READY- REFERENCE, WE EXTRACT THE RELEVANT PARA FROM THE OR DER HEREUNDER:- 5.1.5 . IN ORDER TO PROVE THE GOOD FAITH AND DUE DILIGENCE, THE APPELLANT HAD PLEADED THAT EVEN IF THE SAME ORIGINAL 6 COMPARABLES ARE TAKEN WITH A SINGLE YEAR DATA IN THE AY 2006-07, THE APPELLANTS INTERNATIONAL TRANSACTION IS AT ARMS LENGTH IN EIT HER OF THE METHODS I.E. RPM OR TNMM. THE SAME IS DEMONSTRATED BY THE APPELLANT IN THE FOLLOWING TABL E:- TABLE-2 FOR AY 2006 - 07 RPM TNMM S.NO. NAME OF THE COMPARABLE GP/SALES OP/SALES 1. ADVANCED MICRONIC DEVICES LIMITED 47.62% 5.85% 2. ASHCO INDUSTRIES LIMITED 45.46% 11.38% 3. BA & BROTHERS (EASTERN) LIMITED 9.67% 1.41% 4. BIJOY HANS LIMITED 6.25% -28.13% 5. DUCHEM LABORATORIES LIMITED - 9.57% - 23.01% 6. FULFORD (INDIA) LIMITED 45.37% 16.25% AVERAGE 24.13% -2.71% COMPANY MARGINS 38.86% -1.47% IN THE SAME WAY FOR THE AY 2007-08 IT IS CONTENDED THAT THE MARGIN OF THE APPELLANT WILL FALL WITHIN +/- 5% BY USING THE SAME SET OF 9 COMPARABLES USED IN THE TP STUDY WITH CURRENT YEAR DATA IN BOTH THE METHODS:- TABLE-3 FOR AY 2007-08 TNMM RPM S.NO. NAME OF THE COMPARABLE OP/SALES (%) GP/SALES (%) 1. ABOTT INDIA LTD. 13.50 32.81 2. ADVANCED MICRONIC DEVICES LTD. 10.15 47.62 3. BA & BROTHERS (EASTERN) LIMITED 2.64 9.67 4. BIJOY HANS LIMITED -68.89 6.25 5. HEMANT SURGICAL INDS LTD. 3,73 10.24 6. MARK REMEDIES LTD. DATE NOT AVAILABLE DATA NOT AVAILABLE 7. REMI SALES & ENGG. LTD. AVERAGE 3,77 18.52 8. SHARON BIO-MEDICINE LTD. 14.98 14.36 I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 21 OF 36 9. VIVO BIO TECH LTD. -212.12 17.50 ARITHMETIC MEAN - 29.03% 19.62% 13.7. WHEN CONSIDERING THE REQUIREMENTS OF THE STATUTORY PROVISION IT IS SEEN THAT A DEEMING FICTION IS CREATED BY EXP LANATION 7 WHICH IS A SPECIAL PROVISION WITH REGARD TO THE ARMS LENGTH PRICE MADE BY THE AO U/S 92C(4). THE DEEMING FICTION PROVIDES THAT W HEN SUCH AN ALP ADJUSTMENT HAS BEEN MADE, THE AMOUNT SO DISALLOWED OR ADDED BACK IS DEEMED TO REPRESENT THE INCOME IN RESPECT OF WHI CH PARTICULARS HAVE BEEN CONCEALED OR INACCURATE PARTICULARS HAVE BEEN FURNISHED. THE RIGOURS OF THE PENAL ACTION WOULD NOT BE ATTRAC TED IF THE ASSESSEE CAN DEMONSTRATE THAT THE PRICE CHARGED OR PAID IN SUCH TRANSACTION WAS COMPUTED IN ACCORDANCE WITH THE PRO VISION CONTAINED IN SECTION 92C AND IN THE MANNER PRESCRIBED UNDER THAT SECTION IN GOOD FAITH AND WITH DUE DILIGENCE (EMPHASIS PROVIDED). 13.7.1. THUS, WE FIND THAT THE LAW AS IT STANDS ON THE STA TUTE THE DEEMING FICTION CANNOT APPLY IN SUCH A SITUATION WH ERE THE ASSESSEE IS ABLE TO DEMONSTRATE THAT THE PRICE CHARGED OR PA ID IN RESPECT OF THE SAID INTERNATIONAL TRANSACTION WAS COMPUTED IN ACCORDANCE WITH THE REQUIREMENTS OF SECTION 92C AND THE EXERCISE WA S DONE IN GOOD FAITH AND DUE DILIGENCE. 13.8. THUS IN THE FACTS OF THE PRESENT CASE WHEN THE CO NDUCT OF THE ASSESSEE IS TAKEN INTO CONSIDERATION, IT IS SEEN TH AT IN REGARD TO I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 22 OF 36 CHANGE OF METHODOLOGY THE ASSESSEE HAS CONSISTENTLY MAINTAINED THAT THE CHANGE WAS EFFECTED IN VIEW OF THE FACT A PARTICULAR SEGMENT WAS DISCONTINUED IN THE YEAR UNDER CONSIDERATION AN D FOR THE DISTRIBUTION SEGMENT, RPM WAS CONSIDERED TO BE THE MOST APPROPRIATE METHOD. NOTWITHSTANDING THE FACT THAT THE EXPLANATION WAS NOT ACCEPTED AND THE ISSUE WAS GIVEN UP BY THE ASSESSEE FOR THE STATED REASONS OF AVOIDING LITIGATION THE FACT REM AINS THAT THE MERITS OF THE EXPLANATION IN THE PENALTY PROCEEDINGS HAS T O BE CONSIDERED INDEPENDENTLY. THE MERE FACT THAT THE ISSUE WAS GI VEN UP PER SE BY ITSELF WILL NOT BE SUFFICIENT TO CONCLUDE AGAINST T HE ASSESSEE AS THERE MAY BE MANY REASONS WHY THE ADDITION OR DISALLOWANC E IS NOT CHALLENGED FURTHER. 13.8.1. THE LEGAL POSITION THAT THE EXPLANATION IN THE PEN ALTY PROCEEDINGS WARRANTS A SEPARATE RE-CONSIDERATION IN THE PARAMETERS OF THE REQUIREMENTS OF THE PENAL PROVISION IS WELL- SETTLED. IN THE FACTS OF THE PRESENT CASE IT IS SEEN THAT IN JUSTIF ICATION FOR SELECTION OF RPM AS A METHOD BY THE ASSESSEE THE ARGUMENT HAS BE EN MADE THAT IN THE YEAR UNDER CONSIDERATION THERE WAS ONLY ONE SEGMENT I.E. DISTRIBUTION SEGMENT AS OPPOSED TO ANOTHER SEGMEN T I.E. OF MARKETING SERVICE SEGMENT WHICH WAS THE POSITION IN 2005-06 AY WHEREIN TNMM HAD BEEN SELECTED IN A MATTER OF RECO RD. THE ARGUMENT ON FACTS IS FOUND TO BE CORRECT. WHETHER THE SAID FACT CAN I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 23 OF 36 BE SAID TO BE SO PERSUASIVE AS TO LEAD ONLY TO THE INFERENCE THAT THE EXERCISE WAS IN GOOD FAITH FOLLOWING THE DUE DILIGE NCE STANDARDS SET OUT BY THE STATUTE AND THUS WARRANTS ON CONCLUSION IN FAVOUR OF THE ASSESSEE OR NOT IS A MATTER FOR CONSIDERATION. 13.8.2. GOOD FAITH PRESUPPOSES HONESTY AND FAIRNESS AT ITS CORE. HOWEVER, GOOD FAITH DOES NOT COVER THE SINS OF OMIS SION OR NEGLIGENCE. DUE DILIGENCE ON THE OTHER HAND DOES N OT TOLERATE NEGLIGENCE AND MAY BE DEFINED AS PRUDENT, RESPONSIB LE CARE AND ATTENTION REQUIRED TO BE EXERCISED BY A REASONABLE AND PRUDENT PERSON IN A GIVEN SITUATION. THUS, AS OBSERVED IN ACTS OF GOOD FAITH IT MAY NOT BE POSSIBLE TO QUESTION NEGLIGENCE WHERE DUE DILIGENCE STANDARDS ARE REQUIRED TO BE MET NEGLIGENCE CANNOT BE TOLERATED. SIMILARLY DUE DILIGENCE STANDARDS MAY NOT NECESSARI LY BE EMBEDDED WITH GOOD FAITH. 13.8.3. THUS THE LAW REQUIRES THAT THE STANDARDS TO BE MET BY A TAXPAYER PLEADING THAT PENALTY IS NOT LEVIABLE IN S ITUATIONS WHERE EXPLANATION 7 IS ATTRACTED HAS BEEN KEPT VERY HIGH. THE TWIN REQUIREMENTS OF THE ACT MAY BE CAPABLE OF BEING SUM MED UP IN THE TERM BEST EFFORTS WHICH NOT ONLY PRESUPPOSE DUE DILIGENCE BUT ALSO GOOD FAITH AS BEST EFFORTS MAY INCORPORATE N OT ONLY A DILIGENT STANDARD BUT CAN ALSO SUBSUME A GOOD FAITH STANDA RD. I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 24 OF 36 13.8.4. THUS WHEN CONSIDERED IN THE CONTEXT OF THE ABOVE PARAMETERS IT IS SEEN THAT RPM IS ONE OF THE METHO DS SET OUT IN RULE 10B MADE UNDER SECTION 92C OF THE ACT. A PERUSAL O F THE RULES SHOWS THAT NO HIERARCHY FOR SELECTING THE MOST APPR OPRIATE METHOD HAS BEEN PRESCRIBED UNDER THE RULES OR THE STATUTE. SUB-RULE (B) OF RULE 10B SPECIFICALLY LAYS DOWN THAT RPM IS ONE OF THE PRESCRIBED METHODS TO BE FOLLOWED IN CERTAIN CIRCUMSTANCES. T HUS WHEN THE CONDUCT OF THE ASSESSEE IN USING THIS METHOD IN THE YEAR UNDER CONSIDERATION IS CONSIDERED ALONGWITH THE JUSTIFICA TION FOR SELECTING THIS METHOD NAMELY HAVING ONLY ONE SEGMENT I.E. THE DISTRIBUTION SEGMENT IN THE YEAR CONSIDERATION AS OPPOSED TO T HE EARLIER FACTUAL POSITION THE EXPLANATION IS PLAUSIBLE AND ACCEPTABL E AND UNLESS REBUTTED BY SOME FACT OR ARGUMENT TO THE CONTRARY. THE ASSESSEE IS PRESUMED TO HAVE DISCHARGED HIS BURDEN OF HAVING AC TED IN GOOD FAITH WITH DUE DILIGENCE. NO MALAFIDE HAS BEEN ALL EGED BY THE REVENUE IN THE FACTS OF THE PRESENT CASE TO SHOW TH AT THE SELECTION OF THE SAID METHOD WAS WITH A DELIBERATE ATTEMPT TO DE FRAUD THE REVENUE AND THE SAID METHOD COULD NEVER HAVE BEEN S ELECTED IN GOOD FAITH WITH DUE DILIGENCE IN THE GIVEN FACTS. WE ARE OF THE CONSIDERED VIEW THAT MERE CHANGE OF METHOD BY THE T PO BY ITSELF IS NOT ENOUGH. ONCE THE TAX PAYER HAS GIVEN SUFFICIEN T AND COGENT REASONS, RELYING ON FACTS AND LAW IN SUPPORT OF ITS SELECTION OF I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 25 OF 36 METHOD THE ONUS SHIFTS TO THE REVENUE TO DEMONSTRAT E THAT EVEN ON FOLLOWING THE BEST EFFORTS, THE SAID METHOD COULD N EVER HAVE BEEN SELECTED I.E. THE DUE DILIGENCE REQUIREMENTS AND GO OD FAITH REQUIREMENTS WERE BREACHED DUE TO THE ACTIVE SELECT ION OF THIS METHOD. NO SUCH ARGUMENT HAS BEEN RAISED BEFORE US . THUS IN THE CONTEXT OF THESE CUMULATIVE FACTS AND LEGAL POSITIO N, WE FIND THAT THE EXPLANATION OFFERED QUA THE CHANGE OF METHOD, WHEN READ ALONGWITH THE REQUIREMENTS TO BE MET AS SET OUT IN EXPLANATI ON 7 TO SECTION 271(1)(C), WE FIND THAT THE CONCLUSION DRAWN ON FAC TS, THAT THE REQUIREMENTS ARE FULLY SATISFIED, AS TRANSACTION I S COMPUTED IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SECTION 92C AND IS BONAFIDE AND WITH DUE DILIGENCE. ACCORDINGLY, WE FI ND THAT ON THE SAID ISSUE THE REVENUE HAS FAILED TO LEAD ANY ARGUM ENT ON FACT OR LAW TO THE CONTRARY. 13.9. THE ASSESSEES CONDUCT WHICH FURTHER NEEDS TO BE CO NSIDERED IS WHETHER IN OFFERING THE COMPARABLES THE BEST EF FORTS PRACTICES WERE FOLLOWED BY IT, AS THE DUE DILIGENCE STANDARDS AND GOOD FAITH STANDARDS REQUIREMENT QUA THE SAID ISSUE ALSO NEEDS TO BE MET. IT IS A MATTER OF RECORD THAT IN BOTH THE YEARS UNDER CON SIDERATION THE ADDITIONS ARE BASED ON THE COMPARABLES OFFERED BY T HE ASSESSEE. NOT EVEN ONE COMPARABLE HAS BEEN INTRODUCED BY THE TPO. THE FACT THAT ALL THE COMPARABLES OFFERED WERE NOT ACCEPTED BY TH E TPO IN BOTH THE I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 26 OF 36 YEARS OR ALTERNATIVELY THE TPO HAS PARTIALLY ACCEPT ED THE COMPARABLES OFFERED BY THE ASSESSEE IN BOTH THE YEA RS ARE FACTS WHICH SUPPORT THE DUE DILIGENCE AND GOOD FAITH STAN DARDS. ADDRESSING THE COMPARABLE EXCLUDED BY THE TPO NO CA SE HAS BEEN MADE BY THE REVENUE TO SHOW THAT BY OFFERING THE CO MPARABLES EXCLUDED THE ASSESSEE WAS SO CARELESS, NEGLIGENT OR LACKING IN GOOD FAITH THAT THE EXERCISE WAS DONE WITH MALAFIDE TO D EFRAUD THE REVENUE. THE FACT THAT THE COMPARABLES RETAINED WE RE OFFERED BY THE ASSESSEE AND NO COMPARABLE HAS BEEN INTRODUCED BY T HE TPO ITSELF LEADS TO THE CONCLUSION THAT DUE DILIGENCE HAS BEEN EXERCISED IN GOOD FAITH BY THE ASSESSEE IN SELECTING THE COMPARABLES. THIS ARGUMENT HAS BEEN ACCEPTED BY THE CIT(A). ON EXAMINING THIS GRIEVANCE OF THE REVENUE, WE FIND THAT JUST BECAUSE CERTAIN COMP ARABLES WERE EXCLUDED BY THE TPO, THE CLAIM OF EXERCISE OF DUE D ILIGENCE AND GOOD FAITH IN SELECTING THE COMPARABLES OFFERED DOES NOT GET ERODED UNLESS THE SAME WAS REBUTTED BY THE REVENUE BY SHOWING SPE CIFIC INSTANCES EXPLICITLY INDICATING THAT IN THE SELECTION OF COMP ARABLES THE ASSESSEE HAD ACTED MALAFIDE AND THE EXERCISE WAS LACKING IN GOOD FAITH AND DUE DILIGENCE. NO SUCH ARGUMENTS IN REBUTTAL HAVE BEEN MADE BY THE REVENUE BEFORE US. ACCORDINGLY FOR THE REASONS GIVEN HEREIN ABOVE, WE FIND THAT ON THIS GROUND TOO THE REVENUE HAS FAILED TO UPSET THE FINDING OF THE CIT(A). I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 27 OF 36 13.10. THE NEXT ISSUE TAKEN BY THE REVENUE TO PROVE LACK O F GOOD FAITH AND EXERCISING DUE DILIGENCE IS THE USE OF MULTIPLE YEAR DATA IN THE TP STUDY PLACED ON RECORD IN 2006-07 AND 2007-0 8 AYS BY THE ASSESSEE. ON A CONSIDERATION OF THE JURISPRUDENCE AVAILABLE THEREON, WE FIND THAT EVEN ON THIS GROUND THE CLAIMS OF EXER CISE OF DUE DILIGENCE AND GOOD FAITH BY THE ASSESSEE IN COMPUTI NG THE TP STUDY IN ACCORDANCE WITH THE PROVISION OF SECTION 92C IS NOT ERODED. THE CONCLUSION IS SUPPORTED BY THE DECISION OF THE CO-O RDINATE BENCH DATED 17.09.2012 IN ITA NO.5566/DEL/2011 IN THE CAS E OF M/S VERIZON COMMUNICATION INDIA P. LTD. VS DCIT WHEREIN THE CO- ORDINATE BENCH HAD AN OCCASION TO CONSIDER MULTIPLE YEAR DATA FURNISHED BY THE ASSESSEE. BEFORE THE ITAT THE DEC ISIONS OF BOTH:- A) THE SPECIAL BENCH IN THE CASE OF AZTEK SOFTWARE & T ECHNOLOGY SERVICES LTD. VS ACIT (2007) 294 ITR 1832 (BANGALOR E) (SB); B) AND THE DECISION OF MENTOR GRAPHICS P. LTD. (2007) 109 ITD 10 (DELHI) WERE RELIED UPON BY THE PARTIES. THE CO-ORDINATE B ENCH CONSIDERING THE FACT THAT BOTH THESE DECISIONS WERE DELIVERED A FTER JULY 2007 HELD THAT PRIOR TO THESE DECISIONS THERE WAS A LEGAL DEB ATE AS TO WHETHER MULTIPLE YEAR DATA COULD BE USED OR ONLY THE CURRE NT YEARS DATA. THE DECISION OF THE CO-ORDINATE BENCH CONSIDERING T HAT THE CASE OF THE ASSESSEE PERTAINED TO 2006-07 AY CONCLUDED THAT IN 2006 WHEN THE ASSESSEE COMPLETED ITS TRANSFER PRICING STUDY A ND FILED ITS RETURN I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 28 OF 36 THE DEBATE WAS VERY MUCH ALIVE. ACCORDINGLY IT WAS HELD THAT PENALTY LEVIED ON THAT COUNT CANNOT BE SUSTAINED. ON CONSI DERING THE FACTS IN THE PRESENT CASE, WE FIND THAT ONE OF THE YEARS UNDER CONSIDERATION IS 2006-07 AY AND THE OTHER IS 2007-0 8 AY. THE TRANSFER PRICING STUDY FOR THESE TWO YEARS HAS BEEN FINALISED IN 2006 AND 2007. THUS IT CAN BE SAFELY CONCLUDED THAT THE ISSUE WAS THEN DEBATABLE. ONCE IT IS SEEN THAT ON THE ISSUE OF SI NGLE YEAR DATA OR MULTIPLE YEAR DATA THERE WAS A DEBATE TILL 2007, TH E TRANSFER PRICING STUDY HAVING BEEN PREPARED USING MULTIPLE YEAR DATA IN 2006-07 AND 2006-07 AYS CANNOT BE HELD TO BE A MALAFIDE EXERCIS E COMPUTED IN GROSS CARELESSNESS IN ORDER TO DEFRAUD THE REVENUE. AS SINGLE YEAR DATA AT THE BEHEST OF THE TPO WAS PROVIDED AND DUE TAXES ON THE ADJUSTMENTS MADE WERE PAID PROMPTLY THE ONLY CONCLU SION THAT COULD BE DRAWN IN THE PECULIAR FACTS AND CIRCUMSTA NCES OF THE CASE IS THAT THE USE OF MULTIPLE YEAR DATA WAS DONE WITH DUE DILIGENCE AND IN GOOD FAITH AS TILL 2007 THE ISSUE WAS DEBATABLE. 13.11. IT IS EVEN OTHERWISE EVIDENT FROM THE RECORD THAT EVEN BEFORE THE CIT(A) THE ASSESSEE HAS ARGUED IN SUPPORT OF I TS CLAIM OF GOOD FAITH AND DUE DILIGENCE IN SELECTING THE METHOD AND THE COMPARABLES ORIGINALLY OFFERED BY WAY OF COMPARABLE CHARTS EXTR ACTED IN THE IMPUGNED ORDER DEMONSTRATING THAT WHATEVER METHOD I S FOLLOWED THE RESULT WOULD DEMONSTRATE THAT EXERCISE OF THE ASSES SEE WAS IN GOOD I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 29 OF 36 FAITH AND WITH DUE DILIGENCE. WE FIND THAT THE SAI D CLAIM HAS BEEN ACCEPTED BY THE CIT(A) ON FACTS AND THE SAID FACTUA L POSITION HAS NOT BEEN DISPUTED BY THE REVENUE OR REBUTTED BY ANY EVI DENCE OR ARGUMENT TO THE CONTRARY BEFORE US. 13.12. IT IS FURTHER SEEN THAT CONSIDERING THE FACTS OF TH E PRESENT CASE THAT THE CIT(A) HAS HIMSELF EXAMINED THE LEGAL POSITION. THE CIT(A) HAS EXAMINED THE ISSUE IN THE LIGHT OF EXPL ANATION 7 TO SECTION 271(1)(C) OF THE ACT. RELIANCE HAS BEEN PL ACED UPON THE ORDER OF THE ITAT IN THE CASE OF CIT(A) VS RBS EQUI TIES INDIA LTD. IN ITA NO.4654/MUM/2009 ORDER DATED 26.08.2011 CONSIDE RING THE FACTS OF THAT CASE, WHERE THE SAID ASSESSEE I.E. RB S EQUITIES INDIA LTD. HAD ENTERED INTO INTERNATIONAL TRANSACTION WIT H ITS AES AND COMPUTED THE ARMS LENGTH PRICE BY APPLYING TNMM ME THOD WHICH WAS CHANGED BY THE TPO TO CUP METHOD WHERE THE CO-O RDINATE BENCH CONSIDERING THE EXPLANATION 7 TO SECTION 271( 1)(C) RELYING UPON K.P.VERGHESE VS ITO 131 ITR 597 (SC) HELD THAT PENALTY WAS NOT LEVIABLE. 13.13. THE VIEW TAKEN IS FURTHER SUPPORTED BY THE ORDER D ATED 17.05.2010 OF THE CO-ORDINATE BENCH SITTING AT MUMB AI IN ACIT VS FIRMENICH AROMATICS INDIA PVT. LTD. [ITA NO.4654/MU M/2009] WHEREIN ON NEAR IDENTICAL ISSUES I.E. CHANGE OF MET HOD HEREIN FROM RPM TO TNMM AND THEREIN FROM CUP TO TNMM IT HAS BEE N HELD TO BE I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 30 OF 36 A BONAFIDE DIFFERENCE OF OPINION. RELYING UPON THE FOLLOWING EXTRACT OF THE DECISIONS OF THE APEX COURT IN THE RELIANCE PETRO PRODUCT LTD. 322 ITR 158 (SC), IT WAS HELD THAT THERE WAS NO CAS E OF LEVY OF PENALTY AS THE ASSESSEE COULD NOT BE EXPECTED TO VI SUALISE THE INVOKING OF DIFFERENT METHOD BY THE TPO IN VALUING THE INTERNATIONAL TRANSACTION AS THE BASIC DATA FURNISHED BY THE ASSE SSEE WAS NOT FAULTED WITH:- A GLANCE AT THE PROVISIONS OF SECTION 271(1)(C) OF THE INCOME TAX ACT, 1961, SUGGESTS THAT IN ORDER TO BE COVERED BY IT, THERE HAS TO BE CONCEALMENT OF THE PARTICULARS OF THE INCOME OF THE ASSESSEE. SECONDL Y, THE ASSESSEE MUST HAVE FURNISHED INACCURATE PARTICULARS OF HIS INCOME. THE MEANING OF THE WORD PARTICULARS USED IN SECTION 271(1)(C) WOULD EMBRACE THE DETAILS OF T HE CLAIM MADE. WHERE NO INFORMATION GIVEN IN THE RETU RN IS FOUND TO BE INCORRECT OR INACCURATE, THE ASSESSEE C ANNOT BE HELD GUILTY OF FURNISHING INACCURATE PARTICULARS . IN ORDER TO EXPOSE THE ASSESSEE TO PENALTY, UNLESS THE CASE IS STRICTLY COVERED BY THE PROVISION, THE PENALTY P ROVISION CANNOT BE INVOKED. BY NO STRETCH OF IMAGINATION CA N MAKING AN INCORRECT CLAIM TANTAMOUNT TO FURNISHING INACCURATE PARTICULARS. THERE CAN BE NO DISPUTE TH AT EVERYTHING WOULD DEPEND UPON THE RETURN FILED BY TH E ASSESSEE, BECAUSE THAT IS THE ONLY DOCUMENT WHERE T HE ASSESSEE CAN FURNISH THE PARTICULARS OF HIS INCOME. WHEN SUCH PARTICULARS ARE FOUND TO BE INACCURATE, T HE LIABILITY WOULD ARISE. TO ATTRACT PENALTY, THE DET AILS I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 31 OF 36 SUPPLIED IN THE RETURN MUST NOT BE ACCURATE, NOT EX ACT OR CORRECT, NOT ACCORDING TO THE TRUTH OR ERRONEOUS. WHERE THERE IS NO FINDING THAT ANY DETAILS SUPPLIED BY THE ASSESSEE IN ITS RETURN ARE FOUND TO BE INCOR RECT OR ERRONEOUS OR FALSE THERE IS NO QUESTION OF INVITING THE PENALTY UNDER SECTION 271(1)(C). A MERE MAKING OF A CLAIM, WHICH IS NOT SUSTAINABLE IN LAW, BY ITSELF, WILL NOT AMOUNT TO FURNISHING INACCURATE PARTICULARS REGARDI NG THE INCOME OF THE ASSESSEE. SUCH A CLAIM MADE IN TH E RETURN CANNOT AMOUNT TO FURNISHING INACCURATE PARTICULARS. 13.14. NO DOUBT WHEN THERE IS A DIFFERENCE BETWEEN THE ASS ESSED INCOME AND THE RETURNED INCOME, A PRESUMPTION OF CO NCEALMENT OR FURNISHING OF INACCURATE PARTICULARS OF INCOME OR B OTH CAN BE RAISED AND THE ONUS IS ON THE ASSESSEE TO EXPLAIN THE DIFF ERENCE. HOWEVER THE MERE FACT THAT THE ADDITION IS ACCEPTED PER SE DOES NOT MANDATE THAT PENALTY IS LEVIABLE AS THE EXPLANATION OFFERED BY THE ASSESSEE IS REQUIRED TO BE CONSIDERED APPLYING THE VARIOUS TEST S AND PROPOSITIONS LAID DOWN BY THE COURTS TO LEVY OF PEN ALTY AND ONLY ON CONSIDERATION OF THE LEGAL POSITION ON THE FACTS TH E AO IS REQUIRED TO DECIDE WHETHER TO LEVY OR DROP THE PROCEEDINGS. TH E PENALTY CANNOT BE IMPOSED SIMPLY BECAUSE THE ADDITION IS ACCEPTED. IN THE PRESENT CASE WE ARE OF THE VIEW IT CAN BE IMPOSED ONLY WHE N THE EXPLANATION OFFERED IS SHOWN TO BE LACKING IN GOOD FAITH AND TH E TRANSACTION CAN BE SHOWN TO BE COMPUTED WITHOUT DUE DILIGENCE WITH WILFUL ATTEMPT I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 32 OF 36 TO DEFRAUD THE REVENUE. IT IS ALSO A SETTLED LEGA L POSITION THAT WHEREVER THERE IS A DEBATE ON THE ISSUE AND TWO VIE WS ARE POSSIBLE THE BONAFIDE OF AN EXPLANATION IN HAVING FOLLOWED O NE OF THE VIEWS CANNOT BE A GROUND FOR LEVYING PENALTY.. 13.15. AS WE HAVE ALREADY INDIVIDUALLY ADDRESSED EACH OF T HREE ISSUES ARISING IN THE PRESENT FACTS OF THE CASE IT IS FOUND THAT IN THE EVENT OF AN ADDITION OR DISALLOWANCE BY THE TPO IN EXPLANATION 7 OF SECTION 271(1)(C) POSTULATES FURTHER EXAMINATION OF THE CONDUCT OF THE ASSESSEE TO BE ADJUDGED ON THE TOUCHSTONES OF DUE DILIGENCE AND GOOD FAITH IN THE PREPARATION AND DOCUMENTATI ON OF ITS TRANSFER PRICING STUDY. ON CONSIDERATION OF THE BU RDEN CAST UPON THE ASSESSEE IN REGARD TO THE STANDARDS REQUIRED TO BE MAINTAINED PREPARATION OF ITS TRANSFER PRICING STUDY, HEAVY O NUS IS CAST UPON ON THE ASSESSEE IN CASE ANY ADDITION OR DISALLOWANCE I S MADE. THE PHRASE GOOD FAITH AND WITH DUE DILIGENCE IS USE D IN EXPLANATION 7 OF SECTION 271(1)(C) AS A HYPHENATED PHRASE WHICH L OOSES ITS ESSENTIAL MEANING OF THE INDIVIDUAL WORDS WHEN CON SIDERED SEPARATELY AS ABSTRACT PHRASES. GOOD FAITH ALONGW ITH DUE DILIGENCE PRESUPPOSES TRUE AND FAIR PRESENTATION WHICH IS NOT MISLEADING, AMBIGUOUS OR OBSCURE. GIVEN THE CLEAR INDICATIONS OF LAW THAT THE PRICE CHARGED OR PAID IN SUCH INTERNATIONAL TRANSAC TION (OR SPECIFIED DOMESTIC TRANSACTIONS WITH WHICH WE ARE NOT CONCERN ED IN THE I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 33 OF 36 PRESENT PROCEEDINGS) IS TO BE COMPUTED IN ACCORDANC E WITH THE PROVISIONS CONTAINED IN SECTION 92C AND IN THE MANN ER PRESCRIBED UNDER THAT SECTION IN SUCH ECONOMIC AND FINANCIAL R EPORTING THE TWIN REQUIREMENTS OF GOOD FAITH ALONGWITH DUE DILIGENCE IS ULTIMATELY A MATTER OF BONAFIDE CONJECTURE BASED UPON THE STANDA RDS OF THE FINANCIAL AND ECONOMIC DISCLOSURE OF THE ASSESSEE. IN THE PRESENT CASE IT IS FOUND THAT GIVEN THE CLEAR INDICATION OF COMPLIANCES REQUIRED BY LAW, THERE IS IN FACT A CLEAR EVIDENCE THAT DISCLOSURES MADE BY THE ASSESSEE WERE IN GOOD FAITH AND WITH DU E DILIGENCE AND THERE IS ABSENCE OF WILFUL OR MALAFIDE EFFORT TO CO NCEAL AND DEFRAUD THE REVENUE. DUE DILIGENCE PRESUPPOSES MAKING ALL POSSIBLE EFFORTS/ENDEAVOURS WHICH A PRUDENT MAN WOULD HAVE D ONE IN THE GIVEN CIRCUMSTANCES OR A PROCESS WHEREBY ONE GATHER S FACTS TO MAKE AN INFORMED CHOICE ON A MATTER. GOOD FAITH ON THE OTHER HAND IS AN ABSTRACT AND COMPREHENSIVE TERM. IT REQUIRES THAT THE ACTION SHOULD BE HONEST AND ENCOMPASSES A SINCERE BELIEF OR MOTIV E WITHOUT ANY MALICE OR THE DESIRE TO DEFRAUD OTHERS. IT IS DRA WN FROM THE LATIN TERM BONAFIDE AND COURTS USE THE TERM INTERCHANGEABLY. HOWEVER, IN THE PRESENT CASE THE TWIN REQUIREMENTS OF CONJOI NT COMPLIANCES PRESUPPOSE THAT THE TWO TERMS DUE DILIGENCE AND GO OD FAITH CANNOT BE USED INTERCHANGEABLY OR INDEPENDENT OF ONE ANOTH ER. THUS THE ACCEPTABLE STANDARDS LAID DOWN BY THE STATUTE ARE T HAT DUE AND I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 34 OF 36 DILIGENCE EFFORTS MADE BY A PRUDENT MAN IN A GIVEN SITUATION HAVE ALSO TO BE IN GOOD FAITH AS ALL DUE DILIGENT EFFORT S PER SE MAY NOT BE IN GOOD FAITH. CONVERSELY AN ACT DONE IN GOOD FAITH W ITH HONESTY AND SINCERITY PER SE IS NOT SUFFICIENT AS ACTS DONE IN GOOD FAITH PROTECTS ACTS OF NEGLIGENCE. HOWEVER, THE ACT OF COMPUTING A TRANSACTION IS TO BE DONE WITH DUE DILIGENCE I.E. STRICTLY IN ACCORDA NCE WITH THE PROVISIONS CONTAINED IN SECTION 92C AND IN THE RULE S FRAMED THERE UNDER AND THUS NECESSARILY IN THE MANNER PRESCRIBED THEREIN WHILE SO COMPUTING NO NEGLIGENCE EVEN IN GOOD FAITH IS LE GALLY ACCEPTABLE. HENCE THE STATUTE HAS MANDATED THAT NOT ONLY THE AS SESSEE IS REQUIRED TO ACT IN DUE DILIGENCE BUT IT MUST ALSO A CT IN GOOD FAITH. THE REQUIREMENTS ARE VERY STRINGENT AND REQUIRED TO BE MET SCRUPULOUSLY. IN THE FACTS OF THE PRESENT CASE, WE FIND THAT THE BONAFIDE OF THE ASSESSEE CANNOT BE DOUBTED. TO SUM UP IT IS SEEN THAT AT THE RELEVANT POINT OF THE TIME WHEN THE TP STUDY WAS FILED THERE WAS A DEBATE ON THE ISSUE OF SINGLE YEAR DATA AND MULTIPLE YEAR DATA. CONSIDERING THE CHANGE OF METHOD FROM RPM TO TNMM, WE FIND THAT THE ASSESSEES EXPLANATION THAT THE METHO D WAS CHANGED FROM TNMM FROM 2005-06 AY TO RMP IN 2006-07 & 2007- 08 AY ON THE GROUND THAT THERE WAS ONLY ONE SEGMENT IN THE Y EAR AND ACCORDINGLY THE MOST APPROPRIATE METHOD SELECTED WA S THE RPM. NOTWITHSTANDING THE FACT THAT THE SAID APPROACH WAS NOT APPROVED I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 35 OF 36 BY THE TPO, IT DOES NOT DETRACT FROM THE PLAUSIBLE CLAIM THAT IN VIEW OF ONLY ONE SEGMENT I.E. THE DISTRIBUTION SEGMENT T HE METHOD SELECTED IN GOOD FAITH AND DUE DILIGENCE WAS RPM. EVEN OTHERWISE WE FIND THAT THE ASSESSEE AT THE TIME OF FILING ITS TP STUDY COULD NOT ANTICIPATE THAT DESPITE THERE BEING ONLY ONE SEGMEN T, THE TPO WOULD STILL INSIST ON HOLDING THAT TNMM WOULD BE THE MOS T APPROPRIATE METHOD RELYING ON THE PAST POSITION WHERE CHANGE IN FACTS IS AN ADMITTED POSITION. THE DUE DILIGENCE STANDARDS ASS IDUOUSLY REQUIRED TO BE ADHERED TO IN THE PRESENT CASE ARE STANDARDS OF REASONABLE AND ORDINARY DILIGENCE. BUT EXTRAORDINA RY AND EXTREME MEASURES OF CARE, CAUTION AND PRUDENCE INSOMUCH AS TO ANTICIPATE A VIGILANCE TO THE EXTENT THAT DESPITE A PLAUSIBLE EXPLANATION ON FACTS THE MOST APPROPRIATE METHOD SELECTED BY THE ASSESSE E WOULD STILL BE DISTURBED BY THE TPO, IS BEYOND ALL THE POSSIBLE SH ADES OF DUE DILIGENCE EXPECTED FROM AN ASSESSEE AT THE TIME OF COMPUTING ITS TRANSACTION. 13.15.1. REVERTING TO THE OTHER ISSUES WE FURTHER FIND THA T EVEN WHEN THE ADDITIONS ARE CONSIDERED THEY ARE FOUND BA SED ON THE COMPARABLES OFFERED BY THE ASSESSEE IN THE TP STUDY IN 2007-08 AY AND IN 2006-07 AY. THE SIX COMPARABLES OFFERED WHE REIN THREE WERE REJECTED AND THREE MORE WERE OFFERED BY THE ASSESSE E DURING THE ASSESSMENT PROCEEDINGS. THUS WE FIND THAT THE INCL USION OR I.T.A .NO.-1062 & 1063 /DEL/2013 PAGE 36 OF 36 EXCLUSION OF COMPARABLES IN THE PECULIAR FACTS OF THE PRESENT CASE DOES NOT GIVE CAUSE TO HOLD THAT THIS WAS A CASE OF CONCEALMENT OR OF FILING OF INACCURATE PARTICULARS, NOTWITHSTANDING THE FACT THAT AS PER JUDICIAL PRECEDENT CITED SELECTION OF COMPARABLES H AS BEEN TO BE A SUBJECTIVE EXERCISE. WE FURTHER FIND THAT THE SPEC IFIC TABLES REPRODUCED BY THE CIT(A) AND EXTRACTED IN THE EARLI ER PART OF THIS ORDER IN PARA 5.1.1 OF THE IMPUGNED ORDER, WHEN THE POSITION IS CONSIDERED BY THE APPLYING TNMM OR RPM THE ASSESSEE IS FULLY WITHIN THE ARMS LENGTH PRICE IN 2006-07 AY WHICH FA CTUAL POSITION HAS NOT BEEN DISPUTED BY THE REVENUE AND RANGE OF + /-5% IN 2007- 08 AY. 13.16. ACCORDINGLY IN THE FACTS AS THEY STAND CONSIDERING THE ARGUMENTS OF THE PARTIES AND THE JUDICIAL PRECEDENT AVAILABLE, WE FIND THAT THE DEPARTMENTAL GROUND IN BOTH THE YEARS HAVE TO BE REJECTED. 14. IN THE RESULT, THE APPEALS OF THE REVENUE ARE DISM ISSED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 01 ST OF MARCH 2016. SD/- SD/- (L.P.SAHU) (DIVA SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 01/03/2016 *AMIT KUMAR* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REG ISTRAR ITAT NEW DELHI