DCIT 4(1), MUMBAI V. ABN AMRO ASIA EQUITIES (INDIA) LTD, MUMBAI

ITA 2570/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 54944 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2004-2005
• Appeal Filed On: 01-04-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JAY MANKAD
• Keywords: Transfer pricing; International transaction
• Section: 92C; 92

Judgement Text

ITA NO. 2570/MUM/2010 ASSESSMENT YEAR: 2004- 05 PAGE 1 OF 11 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI A BENCH, MUMBAI BEFORE SHRI PRAMOD KUMAR (ACCOUNTANT MEMBER) AND SHRI VIJAY PAL RAO (JUDICIAL MEMBER) ITA NO. 2570/MUM/2010 ASSESSMENT YEAR: 2004-05 DY. COMMISSIONER OF INCOME TAX CIRCLE 4(1), MUMBAI ...APPELLANT VS. RBS EQUITIES INDIA LTD RESPONDENT (FORMERLY KNOWN AS ABN AMRO ASIA EQUITIES INDIA LT D.) 83/84, SAKHAR BHAWAN, BEHIND OBEROI TOWERS NARIMAN POINT, MUMBAI 400021 PAN : AAACH1596D APPEARANCES: P K B MENON, FOR THE APPELLANT JAY MANKAD, FOR THE RESPONDENT DATE OF HEARING : AUGUST 11, 2011 DATE OF PRONOUNCEMENT : AUGUST 26 , 2011 O R D E R PER PRAMOD KUMAR: 1. THE SHORT ISSUE THAT WE ARE REQUIRED TO ADJUDICA TE IN THIS APPEAL IS WHETHER OR NOT THE CIT(A) WAS JUSTIFIED IN DELETING T HE IMPUGNED PENALTY OF RS. 39,56,921 IMPOSED ON THE ASSESSEE UNDER SECTION 271( 1)(C) OF THE INCOME TAX ACT, 1961, FOR THE ASSESSMENT YEAR 2004- 05, IN RESPECT OF ARMS LENGTH PRICE (ALP) ADJUSTMENTS MADE TO THE VALUE OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE. ITA NO. 2570/MUM/2010 ASSESSMENT YEAR: 2004- 05 PAGE 2 OF 11 2. THE ASSESSEE BEFORE US IS A CORPORATE MEMBER OF THE BOMBAY STOCK EXCHANGE AS ALSO NATIONAL STOCK EXCHANGE, AND ALSO H OLDS A MERCHANT BANKER LICENCE FROM SECURITIES AND EXCHANGE BOARD OF INDIA. DURING THE RELEVANT PREVIOUS YEAR, THE ASSESSEE HAS CARRIED OUT STOCK B ROKING ACTIVITIES FOR FOREIGN INSTITUTIONAL INVESTORS, MUTUAL FUNDS, DOMESTIC FINAN CIAL INSTITUTIONS AND BANKS. IN THE COURSE OF BUSINESS SO CARRIED OUT, THE ASSES SEE HAS ALSO PROVIDED STOCK BROKING SERVICES TO CERTAIN ASSOCIATED ENTERPRISES, NAMELY, ABN AMRO ASIA (MAURITIUS) LIMITED, MAURITIUS, ABN AMRO ASSETS MANAG EMENT (ASIA) LIMITED, HONG KONG; ABM AMRO ASIA EQUITIES ( UK) LIMITED, UK, AND ABN AMRO BANK NV, THE NETHERLANDS. WHILE COMPUTI NG ARMS LENGTH PRICE, THE ASSESSEES TRANSFER PRICING STUDY HAD ADOPTED THE TRANSACTIONAL NET MARGIN METHOD. THE CUP METHOD WAS REJECTED FOR THE REASON THAT TO COMP ARE SIMILARITY OF TRANSACTIONS, ONE WOULD NEED TO ESTABLISH THE CLOSEN ESS OF ALL MATERIAL FACTORS AFFECTING THE PRICING OF TRANSACTIONS, BUT THERE ARE VARIOUS FACTORS THAT AFFECT THE BROKERAGE RATES VIZ VOLUMES TRADED, TYPES OF TR ADE AND NATURE OF SERVICES INCLUDED THEREIN, CLIENT RELATIONSHIP, CLIENT TYPE, MARKET FORCES AT THE POINT OF TIME WHEN TRANSACTIONS WERE ENTERED INTO, BROKERAGE O FFERED BY THE COMPETITION, BUSINESS REFERRALS BY THE CLIENTS AND OT HER RELATED FACTORS, AND THE DIFFERENCES ON ACCOUNT OF THESE FACTORS MAY NOT BE QUANTIFIABLE AT ALL. THE ASSESSEE TOOK THE STAND THAT INDIAN TRANSFER PRICIN G REGULATIONS PRESCRIBE APPLICATION OF CUP METHOD, IN DETERMINING ARMS LENGT H PRICE, ONLY IN CASES WHEREIN RELIABLE ADJUSTMENTS CAN BE MADE FOR DIFFER ING FACTORS, WHICH WOULD AFFECT THE PRICE, AND SINCE, IN THE INSTANT CASE, N O RELIABLE ADJUSTMENTS COULD BE MADE TO NEUTRALIZE ALL THE VARYING FACTORS, IT WAS NOT POSSIBLE TO APPLY INTERNAL CUPS FOR ASCERTAINING THE ARMS LENGTH PRICE. IN TH E COURSE OF THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER REFERRED THE ASC ERTAINMENT OF ARMS LENGTH PRICE TO THE TRANSFER PRICING OFFICER, AND, IN THE COURSE OF THE PROCEEDINGS BEFORE THE TPO, IT WAS ONCE AGAIN CONTENDED BY THE ASSESSEE THAT PRICES CHARGED FOR STOCK BROKING SERVICES TO THE AES CANNO T BE COMPARED WITH PRICES CHARGED FOR STOCK BROKING SERVICES TO THE NON AES F OR THE REASON THAT NO MARKETING EFFORT ARE REQUIRED, OR CREDIT RISKS INVO LVED, IN DOING BUSINESS WITH ITA NO. 2570/MUM/2010 ASSESSMENT YEAR: 2004- 05 PAGE 3 OF 11 AE, AND AS NO RESEARCH INPUTS ARE FURNISHED TO THE AES. IT WAS SUBMITTED THAT WHILE AES ARE GIVEN SERVICES IN THE NATURE OF EXEC UTION ONLY, NON AES ARE BEING RENDERED FULL BROKING SERVICES. THE TPO REJ ECTED THESE CONTENTIONS AND OBSERVED THAT THERE IS NO AGREEMENT BETWEEN THE AS SESSEE AND ITS AE AND NO DOCUMENTARY EVIDENCES IN THIS REGARD HAS BEEN PRODU CED EXCEPT A CONFIRMATION LETTER FROM MR ANIL SHAH, HEAD OF EQUITIES OF THE AS SESSEE COMPANY- WHICH IS ONLY A SELF SERVING LETTER. THE TPO ALSO OBSERVED THAT ..THE CONTENTION OF THE ASSESSE THAT NO MARKETING AND SALES EFFORTS ARE REQU IRED IN THE CASE OF THE AES IS NOT ACCEPTABLE IN TOTALITY AND THAT IT IS NO POSSIBLE THAT MARKETING AND SALES DEPARTMENT WOULD NOT HAVE MADE ANY EFFORTS IN SOURC ING BUSINESS FROM AES. WITH THESE OBSERVATIONS, THE TPO REJECTED THE TNMM M ETHOD AND PROCEEDED TO ADOPT CUP. IT WAS MAINLY IN THIS BACKDROP THAT T HE TPO MADE AN ADJUSTMENT OF RS 1,10,29,746 TO THE ARMS LENGTH PRICE OF BROKI NG SERVICE CHARGES INVOICED BY THE ASSESSEE TO ITS AES. THIS DETERMINATION OF T HE ALP WAS ADOPTED BY THE ASSESSING OFFICER. THE ASSESSEE DID NOT PURSUE THE MATTER IN APPEAL, AND THIS ALP ADJUSTMENT OF RS 1,10,29,746 THUS ATTAINED FINA LITY. 3. THE MATTER, HOWEVER, DID NOT REST THERE. 4. IN THE PENALTY PROCEEDINGS, THE ASSESSING OFFICER FURTHER OBSERVED THAT THE TPO HAS CALCULATED THE ARMS LENGTH PRICE IN A VERY SYSTEMATIC METHOD AND HIS CALCULATION IS BASED ON A SOLID FOOTING AND THU S THE ASSESSEE HAS FILED INACCURATE PARTICULARS OF HIS INCOME TO EVADE TAX IN RESPECT OF HIS TRUE INCOME TO EVADE TAX IN RESPECT OF THE SAME. HE ALSO NOTED THAT THE PROVISIONS OF EXPLANATION 1 TO SECTION 271(1)(C) CLEARLY APPLY TO T HE FACTS OF THIS CASE. THE ASSESSING OFFICER ALSO OBSERVED THAT IN A RECENT JUDGMENT, HONBL SUPREME COURT, IN THE CASE OF UNION OF INDIA VS DHARMEDRA T EXTILE PROCESSORS(2008) 14 DTR 114, HAVE HELD THAT ELEMENT OF MENS REA IS NOT AN ESSENTIAL INGREDIENT FOR LEVY OF PENALTY AND THUS PENALTY IS TO BE LEVIED IN ALL CASES OF CONCEALMENT OF INCOME OR FILING OF INACCURATE PARTICULARS. ON THE BASIS OF THIS REASONING, THE ASSESSING OFFICER IMPOSED A PENALTY EQUIVALENT TO 10 0% TAX SOUGHT TO BE THUS ITA NO. 2570/MUM/2010 ASSESSMENT YEAR: 2004- 05 PAGE 4 OF 11 EVADED, WHICH WORKED OUT TO RS 39,56,921. AGGRIEVED , ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A). 5. IT WAS SUBMITTED BEFORE THE CIT(A) THAT BASED ON FAR (FUNCTIONS, ASSETS AND RISK) ANALYSIS UNDERTAKEN BY THE ASSESSEE, AND TAKING INTO CONSIDERATION THE PROVISIONS OF SECTION 92 C OF THE INCOME TAX ACT READ WITH RULE 10 B AND 10 C OF THE INCOME TAX RULES, THE ASSESSEE HAD CONSIDE RED TNMM AS THE MOST APPROPRIATE METHOD WITH NET PROFIT MARGIN (NPM) AS THE PROFIT LEVEL INDICATOR TO BENCHMARK ITS STOCK BROKING TRANSACTIONS WITH ITS AES. IT WAS ALSO SUBMITTED THAT THE TRANSFER PRICING STUDY, WHICH EXAMINED ALL THE FACTORS IN DETAIL, HAD COME TO THE CONCLUSION THAT CUP CANNOT REASONABLY A PPLY TO THIS FACT SITUATION. THE SUBMISSIONS BEFORE THE TPO AND THE AO WERE REIT ERATED, AND IT WAS SUBMITTED THAT IT WAS NOT THE CASE THAT THE ASSESSE E DID NOT FURNISH ADEQUATE OR IMPROPER INFORMATION, AND THAT THE ALP ADJUSTMEN T MADE BY THE TPO WAS ON ACCOUNT OF DIFFERENT APPROACH ADOPTED BY TPO WHICH ITSELF IS HIGHLY DEBATABLE. RELIANCE WAS PLACED ON DECISION OF A COO RDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF DCIT VS VERTEX CUSTOMER SE RVICES INDIA PVT LTD (126 TTJ 184). LEARNED CIT(A) UPHELD THE CONTENTIONS OF THE ASSESSEE AND OBSERVED THAT MERELY BECAUSE AN ADDITION HAS BEEN MADE TO THE INCOME OF THE ASSESSEE, WHICH HAS BEEN ACCEPTED BY THE ASSESSEE, DOES NOT M EAN THAT THE ASSESSEE HAS CONCEALED INCOME. RECOGNIZING THE POSITION THAT CONS IDERATION FOR PENALTY ARE DIFFERENT THAN THE CONSIDERATION WHILE MAKING THE AD DITION, LEARNED CIT(A) FURTHER OBSERVED THAT THIS ASPECT OF THE LAW ASSUM ES GREATER IMPORTANCE WHEN WE ARE DEALING WITH LEVY OF PENALTY..WHICH DEALS WITH SPECIAL PROVISIONS RELATING TO THE TRANSFER PRICING REGULATIONS . HE WAS OF THE VIEW THAT TRANSFER PRICING IS NOT AN EXACT SCIENCE AND THE ARMS LENGT H PRICE IS AN ESTIMATE ONLY, AND IT IS INHERENT IN TRANSFER PRICING THAT REASONA BLE PEOPLE CAN END UP DRAWING DIFFERENT CONCLUSIONS ON THE SAME FACTS. L EARNED CIT(A) CO NCLUDED THAT THE EXPLANATION OFFERED BY THE APPELLANT IS BONAFIDE AND THERE IS NEITHER ANY CONCEALMENT OF INCOME NOR FURNISHING OF INACCUR ATE PARTICULARS. THE PENALTY WAS, ACCORDINGLY, DELETED. HOWEVER, THE ASS ESSING OFFICER IS NOT ITA NO. 2570/MUM/2010 ASSESSMENT YEAR: 2004- 05 PAGE 5 OF 11 SATISFIED BY THE STAND SO TAKEN BY THE CIT(A) AND IS IN APPEAL BEFORE US. 6. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD, AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE AS ALSO THE APPLICABLE LEGAL POSITION. 7. THE RELEVANT PORTION OF SECTION 271(1)(C) AND EX PLANATIONS 1 AND 7 THERETO, WHICH ARE RELEVANT FOR THE PRESENT PURPOSE S, ARE AS FOLLOWS: 271. FAILURE TO FURNISH RETURNS, COMPLY WITH NOTICES, CONCEALMENT OF INCOME, ETC. (1) IF THE ASSESSING OFFICER OR THE COMMISSIONER (APPEALS) OR THE CIT IN THE COURSE OF ANY PROCEEDINGS UNDER THIS ACT, IS SATISFIED THAT ANY PERSON (A) AND (B) ******** (C) HAS CONCEALED THE PARTICULARS OF HIS INCOME OR FURNISHED INACCURATE PARTICULARS OF SUCH INCOME, HE MAY DIRECT THAT SUCH PERSON SHALL PAY BY WAY OF PENALTY, (I) , (II) AND (III) ******** EXPLANATION 1.: WHERE IN RESPECT OF ANY FACTS MATERIAL TO THE COMPUTATION OF THE TOTAL INCOME OF ANY PERSON UNDER THIS ACT, (A) SUCH PERSON FAILS TO OFFER AN EXPLANATION OR OFFERS AN EXPLANATION WHICH IS FOUND BY THE ASSESSING OFFICER OR THE COMMISSIONER (APPEALS) OR THE CIT TO BE FALSE, OR (B) SUCH PERSON OFFERS AN EXPLANATION WHICH HE IS NOT ABLE TO SUBSTANTIATE AND FAILS TO PROVE THAT SUCH EXPLANATION IS BONA FIDE AND THAT ALL THE FACTS RELATING TO THE SAME AND MATERIAL TO THE COMPUTATION OF HIS TOTAL INCOME HAVE BEEN DISCLOSED BY HIM, THEN, THE AMOUNT ADDED OR DISALLOWED IN COMPUTING THE TOTAL INCOME OF SUCH PERSON AS A RESULT THEREOF SHALL, FOR THE PURPOSES OF CLAUSE (C) OF THIS SUBSECTION, BE DEEMED TO REPRESENT THE INCOME IN RESPECT OF WHICH PARTICULARS HAVE BEEN CONCEALED. EXPLANATIONS 2 TO 6 ********************* EXPLANATION 7 : WHERE IN THE CASE OF AN ASSESSEE WHO HAS ENTERED INTO AN INTERNATIONAL TRANSACTION DEFINED IN SECTION 92B, ANY AMOUNT IS ADDED OR DISALLOWED IN COMPUTING THE TOTAL INCOME UNDER SUB-SECTION (4) OF SECTION ITA NO. 2570/MUM/2010 ASSESSMENT YEAR: 2004- 05 PAGE 6 OF 11 92C THEN, THE AMOUNT SO ADDED OR DISALLOWED SHALL, FOR THE PURPOSES OF CLAUSE (C) OF THIS SUB-SECTION, BE DEEMED TO REPRESENT THE INCOME IN RESPECT OF WHICH PARTICULARS HAVE BEEN CONCEALED OR INACCURATE PARTICULARS HAVE BEEN FURNISHED, UNLESS THE ASSESSEE PROVES TO THE SATISFACTION OF THE ASSESSING OFFICER OR THE COMMISSIONER (APPEALS) OR THE COMMISSIONER THAT THE PRICE CHARGED OR PAID IN SUCH TRANSACTION WAS COMPUTED IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SECTION 92C AND IN THE MANNER PRESCRIBED UNDER THAT SECTION, IN GOOD FAITH AND WITH DUE DILIGENCE. (****************** NOT RELEVANT FOR PRESENT PURPOS ES) 8. A PLAIN READING OF THESE STATUTORY PROVISIONS M AKES IT CLEAR THAT SO FAR AS THE SCHEME OF PENALTY FOR CONCEALMENT OF INCOME IS CONCERNED, IT IS LIKE THIS. IT IS SINE QUA NON FOR IMPOSITION OF PENALTY THAT DURING THAT THE ASS ESSING OFFICER OR THE CIT(A), DURING THE COURSE OF ANY PRO CEEDINGS BEFORE THE HIM, SHOULD BE SATISFIED THAT THE ASSESSEE HAS (I) CONCE ALED HIS INCOME , OR (II) FURNISHED INACCURATE PARTICULARS OF INCOME. IT IS NOT EVEN ASSESSING OFFICERS CASE THAT THE PENALTY COULD HAVE BEEN IMPOSED ON T HE ASSESSEE UNDER THE MAIN PROVISIONS OF SECTION 271(1)(C), AND RIGHTLY S O, BECAUSE A PENALTY UNDER THE MAIN SECTION, AS A PLAIN READING OF THIS SECTIO N UNAMBIGUOUSLY INDICATES, CAN ONLY BE LEVIED WHEN THERE IS SOMETHING ON RECOR D TO LEAD TO POSITIVE FINDING THAT THE ASSESSEE HAS CONCEALED INCOME OR F URNISHED INACCURATE PARTICULARS. CONCEALMENT AS ALSO FURNISHING OF INACCURATE PAR TICULARS CANNOT BE PASSIVE IN NATURE, AND, THEREFORE, UNLESS THERE IS MATERIAL ON RECORD DEMONSTRATE ACTIVE CONDUCT OF THE ASSESSEE TOWARDS CONCEALMENT OF INCOME OR TOWARDS FURNISHING OF INACCURATE PARTICULARS, PE NALTY UNDER THE MAIN SECTION CAN NOT BE IMPOSED. THAT IS NOT THE SITUAT ION BEFORE US. HOWEVER, IN ADDITION TO THE SITUATION SO ENVISAGED, I.E. IN THE CASE OF CONCEALMENT OF INCOME OR IN THE CASE OF INACCURATE PARTICULARS HAV ING BEEN FURNISHED, THERE ARE SITUATIONS IN WHICH THE ASSESSEE DEEMED TO H AVE CONCEALED THE INCOME OR FURNISHED THE INACCURATE PARTICULARS. THESSSE ARE T HE SITUATION IN WHICH, EVEN WITHOUT THERE BEING ANYTHING TO INDICATE CONCEALMEN T OF INCOME OR FURNISHING OF INACCURATE PARTICULARS , STATUTORY DEEMING FICTION FOR CONCEALMENT OF INCOME AND FURNISHING OF INACCURATE PARTICULARS COMES INTO PLAY. IN ADDITION ITA NO. 2570/MUM/2010 ASSESSMENT YEAR: 2004- 05 PAGE 7 OF 11 TO NORMAL CONNOTATIONS OF CONCEALMENT AND FURNISHING OF INACCURATE PARTICULARS THUS, A DEEMING FICTION IS ALSO IMPLICIT IN THE SCH EME OF PENALTY PROVISIONS. ONE DEEMING FICTION, BY WAY OF EXPLANAT ION 1 TO SECTION 271(1)(C) ENVISAGES TWO SITUATIONS (A) FIRST, WHERE IN RESPECT OF ANY FACTS MATERIAL TO THE COMPUTATION OF TOTAL INCOME UNDER THE PROVISION S OF THE ACT, THE ASSESSEE FAILS TO OFFERS AN EXPLANATION OR THE EXPLANATION O FFERED BY THE ASSESSEE IS FOUND TO BE FALSE BY THE ASSESSING OFFICER OR THE C IT(A); AND, (B) SECOND, WHERE IN RESPECT OF ANY FACTS MATERIAL TO THE COMPU TATION OF TOTAL INCOME UNDER THE PROVISIONS OF THIS ACT, THE ASSESSEE IS N OT ABLE TO SUBSTANTIATE THE EXPLANATION AND THE ASSESSEE FAILS TO PROVE THAT SU CH EXPLANATION IS BONAFIDE AND THAT THE ASSESSEE HAD DISCLOSED ALL THE FACTS R ELATING TO THE SAME AND MATERIAL TO THE COMPUTATION OF TOTAL INCOME. THER E IS, HOWEVER, ANOTHER DEEMING FICTION, WHICH IS A SPECIAL PROVISION WITH REGARD TO THE ARMS LENGTH PRICE ADJUSTMENTS MADE BY THE ASSESSING OFFICER UND ER SECTION 92C(4).THIS DEEMING FICTION PROVIDES THAT WHERE ANY ALP ADJUST MENTS ARE MADE UNDER SECTION 92 C(4), THE AMOUNT SO DISALLOWED OR ADDED BACK IS DEEMED TO REPRESENT THE INCOME IN RESPECT OF WHICH PARTICULAR S HAVE BEEN CONCEALED OR INACCURATE PARTICULARS HAVE BEEN FURNISHED, UNLESS THE ASSESSEE CAN DEMONSTRATE THAT 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 F AITH AND WITH DUE DILIGENCE. IN OTHER WORDS, THEREFORE, THE DEEMING FICTION CANN OT APPLY WHEN ASSESSEE IS ABLE TO SHOW THAT PRICE CHARGED OR PAID IN RESPECT OF RELATED INTERNATIONAL TRANSACTION WAS COMPUTED IN ACCORDANC E WITH THE SCHEME OF SECTION 92 C, AND IN THE MANNER PRESCRIBED THEREIN, IN GOOD FAITH AND DUE DILIGENCE. WHILE EXPLANATION 1 IS A GENERAL PROVISI ON IN THE SENSE IT DEALS WITH EXPLANATION ON ANY FACTS RELATING TO COMPUTATION O F TOTAL INCOME, EXPLANATION 7 IS A SPECIFIC PROVISION WHICH IS CONFINED TO ANY AMOUNT IS ADDED OR DISALLOWED IN COMPUTING THE TOTAL INCOME UNDER SUB- SECTION (4) OF SECTION 92C. THE QUESTION AS TO WHICH EXPLANATION IS TO BE APPL IED, ON THE FACTS OF THIS CASE WHICH IS SPECIFICALLY DEALING WITH A N AL P ADJUSTMENT UNDER SECTION ITA NO. 2570/MUM/2010 ASSESSMENT YEAR: 2004- 05 PAGE 8 OF 11 92C(4), IS NOT DIFFICULT TO ANSWER. IT IS FAIRLY WE LL SETTLED IN LAW THAT GENERAL PROVISIONS DO NOT OVERRIDE SPECIFIC PROVISIONS, AS APTLY DESCRIBED BY THE MAXIM GENERALIA SPECIALIBUS NON DEROGANT . A SPECIAL PROVISION NORMALLY EXCLUDES THE OPERATION OF A GENERAL PROVISION AND W E ARE OF THE VIEW THAT SUCH A PRINCIPLE GOVERNS THE INSTANT CASE ALSO. IN THE C ASE OF SOUTH INDIA CORPORATION (P) LTD. VS. SECRETARY, BOARD OF REVENU E AIR 1964 SC 207, AT P. 215, HONBLE SUPREME COURT HAD AN OCCASION TO CONSI DER WHETHER ART. 277 OR ART. 372 OF THE CONSTITUTION OF INDIA SHOULD GOVERN THE PARTICULAR SITUATION INVOLVED THEREIN. THEIR LORDSHIPS THEN POINTED OUT THAT 'A SPECIAL PROVISION SHOULD BE GIVEN EFFECT TO THE EXTENT OF ITS SCOPE, LEAVING THE GENERAL PROVISION TO CONTROL CASES WHERE SPECIFIC PROVISIONS DO NOT A PPLY.' THEREFORE, IN A SITUATION IN WHICH EXPLANATION 7 COMES INTO PLAY, T HE PROVISIONS OF EXPLANATION 1 CANNOT BE APPLIED. IT IS THUS CLEAR T HAT SO FAR AS THE PRESENT CASE IS CONCERNED, THE SAME IS TO BE EXAMINED ON THE TOU CHSTONE OF LEGAL POSITION UNDER EXPLANATION 7 TO SECTION 271(1)(C). IN THIS VIEW OF THE MATTER, THE ASSESSING OFFICERS REFERENCE TO EXPLANATION 1 TO S ECTION 271(1)(C), AND RELIANCE UPON JUDICIAL PRECEDENTS ON THE SCOPE OF T HE SAID EXPLANATION, IS WHOLLY MISCONCEIVED. THE QUESTION THEN ARISES WHET HER, ON THE FACTS OF THE PRESENT CASE, PENALTY COULD HAVE BEEN IMPOSED IN TH E LIGHT OF LEGAL POSITION UNDER EXPLANATION 7 TO SECTION 271(1)(C). 9. THE SCHEME OF EXPLANATION 7 TO SECTION 271(1)(C) MAKES IT CLEAR THAT THE ONUS ON THE ASSESSEE IS ONLY TO SHOW THAT THE A LP WAS COMPUTED BY THE ASSESSEE IN ACCORDANCE WITH THE SCHEME OF SECTION 9 2 C IN GOOD FAITH AND WITH DUE DILIGENCE. IT IS NOT EVEN IN DISPUTE IN THE PR ESENT CASE THAT THE ALP WAS COMPUTED IN ACCORDANCE WITH THE SCHEME OF SECTION 92 C INASMUCH AS TRANSACTIONAL NET MARGIN METHOD (TNMM), WHICH IS FO LLOWED BY THE ASSESSEE, IS ONE OF THE PRESCRIBED METHOD UNDER SECTION 92 C( 1) AND THE ASSESSING OFFICER HAS NOT FOUND ANY FAULTS IN COMPUTATION OF ALP IN ACCORDANCE WITH TRANSACTION NET MARGIN METHOD. IN FACT, HE HAS REJE CTED THE TNMM ON THE GROUND THAT CUP METHOD COULD BE APPLIED TO THE FACT S OF THIS CASE. WHATEVER ITA NO. 2570/MUM/2010 ASSESSMENT YEAR: 2004- 05 PAGE 9 OF 11 BE THE LEGAL MERITS OF THIS APPROACH AND THE JUDICI AL PRECEDENTS BY THE COORDINATE BENCHES ON THIS ISSUE, IT IS CERTAINLY A HIGHLY CONTENTIOUS ISSUE WHETHER A PRIORITY IN THE METHODS OF DETERMINING AL PS CAN BE SAID TO EXIST, EVEN IMPLICITLY, GIVING AN EDGE TO CUP OVER OTHER M ETHODS. IN A SITUATION, THEREFORE, WHEN THE TNMM IS REJECTED BY THE REVENUE AUTHORITIES, WITHOUT FINDING ANY SPECIFIC REASONS FOR INAPPLICABILITY OF THE TNMM AND SIMPLY ON THE GROUND THAT A DIRECT METHOD IS MORE APPROPRIATE TO THE PARTICULAR FACT SITUATION, IT CANNOT AT ALL BE A FIT CASE FOR IMP OSITION OF PENALTY INASMUCH AS IT CANNOT BE SAID THAT IN A SUCH SITUATION, AND DESPIT E THE FINDINGS CONTESTED OR UNCONTESTED TO THE EFFECT THAT A DIRECT METHOD IS PREFERABLE, THE ALP HAS NOT BEEN COMPUTED BY THE ASSESSEE UNDER THE SCHEME OF S ECTION 92 C OF THE ACT. AS TO THE SCOPE OF CONNOTATIONS OF EXPRESSION IN G OOD FAITH APPEARING IN EXPLANATION 7, WE FIND GUIDANCE FROM SECTION 3(22) OF GENERAL CLAUSES ACT WHICH STATES THAT A THING SHALL BE DEEMED TO BE D ONE IN GOOD FAITH WHERE IT IS IN FACT DONE HONESTY, WHETHER IT IS DONE NEGLIGE NTLY OR NOT. A THING DONE IN GOOD FAITH IS A THING DONE HONESTLY, AND, THEREFORE , IT IS NOT EVEN NECESSARY WHETHER IN DOING THAT THING THE ASSESSEE HAS BEEN N EGLIGENT OR NOT. THERE IS NO WAY THAT AN ASSESSEE CAN PROVE HIS HONESTY, BECAUSE HONESTY, IN PRACTICAL TERMS, ONLY IMPLIES LACK OF DISHONESTY, AND PROVING NOT BEING DISHONEST IS ESSENTIALLY PROVING A NEGATIVE, WHICH, AS HONBLE S UPREME COURT HAS OBSERVED IN THE CASE OF KP VERGHESE VS ITO (131 ITR 597), IS ALMOST IMPOSSIBLE. HOWEVER, AS THE EXPRESSION GOOD FAITH IS USED ALO NGWITH DUE DILIGENCE, WHICH REFERS TO PROPER CARE, IT IS ALSO ESSENTIAL THAT NOT ONLY TH E ACTION OF THE ASSESSEE SHOULD BE IN GOOD FAITH, I.E. HONESTLY, BU T ALSO WITH PROPER CARE. AN ACT DONE WITH DUE DILIGENCE, IN OUR HUMBLE UNDERSTA NDING, WOULD MEAN AN ACT DONE WITH AS MUCH AS CARE AS A PRUDENT PERSON WOULD TAKE IN SUCH CIRCUMSTANCES. IN VIEW OF THESE DISCUSSIONS, IN OU R CONSIDERED VIEW, AS LONG AS NO DISHONESTY IS FOUND IN THE CONDUCT OF THE ASS ESSEE AND AS LONG AS HE HAS DONE WHAT A REASONABLE MAN WOULD HAVE DONE IN HIS C IRCUMSTANCES, TO ENSURE THAT THE ALP WAS DETERMINED IN ACCORDANCE WITH THE SCHEME OF SECTION 92 C, DEEMING FICTION UNDER EXPLANATION 7 CANNOT BE INVO KED. ITA NO. 2570/MUM/2010 ASSESSMENT YEAR: 2004- 05 PAGE 10 OF 11 10. COMING TO THE FACTS OF THE CASE BEFORE US, WE F IND THAT THE ASSESSEE HAS DETERMINED THE ALP IN GOOD FAITH INASMUCH AS HE HAS PROCEEDED ON THE BASIS THAT TNMM IS MOST APPROPRIATE METHOD ON THE FACTS O F THIS CASE, AND HE HAS ALSO SET OUT THE REASONS AS TO WHY CUP MUST NOT BE APPLIED IN THIS CASE. WHILE THE TPO HAS NOT EVEN QUESTIONED THE FORMER, HE HAS REJECTED LATTER ONLY ON THE GROUNDS THAT (A) IT IS INCORRECT TO PROCEED ON THE BASIS THAT NO MARKETING EFFORTS ARE REQUIRED IN THE CASE OF THE AES, AND (B ) THE ONUS WAS ON THE ASSESSEE TO DEMONSTRATE THAT NO RESEARCH INPUTS WER E GIVEN BY THE AES. BOTH OF THESE REASONS, TO SAY THE LEAST, ARE HIGHLY QUES TIONABLE . THE VERY FOUNDATION OF TRANSFER PRICING EXERCISE IS THAT WHE REAS WHEN INDEPENDENT ENTERPRISE DEAL WITH EACH OTHER, THEIR FINANCIAL AN D COMMERCIAL TERMS ARE DICTATED BY THE DYNAMICS OF MARKET FORCES, IT IS NO T EXACTLY THE CASE VIS--VIS DEALINGS WITH INTRA ASSOCIATED ENTERPRISES TRANSACT IONS AND THAT ASSOCIATED ENTERPRISES ARE ABLE TO INFLUENCE COMMERCIAL DECISI ONS OF EACH OTHER. THE PLEA THAT WHEN INTRA ASSOCIATED ENTERPRISES TRANSACTIONS ARE INHERENTLY TREATED AS NOT REALLY BASED ON THE DYNAMICS OF MARKET FORCES, IT IS UNREALISTIC TO EXPECT THAT MARKETING EFFORTS ARE ALSO REQUIRED FOR SECURI NG INTRA AE BUSINESS, CANNOT BE DISMISSED AS WORTHY OF OUTRIGHT REJECTION . IT IS ALSO WELL SETTLED IN LAW THAT NOBODY CAN BE EXPECTED TO PROVE THE IMPOSS IBLE OF PROVING A NEGATIVE. THEREFORE, TO EXPECT THE ASSESSEE TO ESTA BLISH THAT THE ASSESSEE DID NOT GIVE RESEARCH INPUTS TO THE AES MAY PERHAPS IN DEED BE AN IMPOSSIBLE BURDEN TO DISCHARGE. THE GROUNDS ON WHICH THE ALP DETERMINATION BY THE ASSESSEE HAS BEEN REJECTED ARE THUS REASONABLY DEBA TABLE. LACK OF GOOD FAITH AND DUE DILIGENCE CANNOT BE INFERRED WHEN THE GROUN DS ON WHICH ALP DETERMINED BY THE ASSESSEE HAS BEEN REJECTED ARE RE ASONABLY DEBATABLE, EVEN IF CORRECT. THE ASSESSEE HAS OBTAINED A TRANSFER P RICING STUDY FROM AN OUTSIDE EXPERT, AND THIS TRANSFER PRICING STUDY, OBJECTIVIT Y OF WHICH IS NEITHER CALLED INTO QUESTION OR SEEMS TO BE, UPON PERUSAL OF THIS TP STUDY, QUESTIONABLE TO US ANYWAY, APPROVES TNMM FOR DETERMINATION OF ALP A PROPOSITION WHICH HAS NOT BEEN SPECIFICALLY REJECTED BY THE REVENUE AUTHO RITIES. ON THESE FACTS, LACK OF DUE DILIGENCE IN DETERMINING THE ALP IS NEITHE R INDICATED NOR CAN BE ITA NO. 2570/MUM/2010 ASSESSMENT YEAR: 2004- 05 PAGE 11 OF 11 INFERRED. IN SUCH A SITUATION, IT CANNOT BE SAID T HAT THE ASSESSEE HAS NOT DETERMINED THE ALP IN ACCORDANCE WITH THE SCHEME OF SECTION 92 C IN GOOD FAITH AND WITH DUE DILIGENCE. IN OUR CONSIDERED VI EW, THEREFORE, THE CONDITIONS PRECEDENT FOR INVOKING EXPLANATION 7 TO SECTION 271 (1)(C) DID NOT EXIST ON THE FACTS OF THIS CASE. NEITHER THE CASE OF THE ASSESSE E IS COVERED BY THE MAIN SECTION 271(1)(C), NOR EXPLANATION 7 THERETO CAN BE I NVOKED ON THE FACTS OF THIS CASE. EXPLANATION 1 TO SECTION 271(1)(C), AS WE HA VE SEEN EARLIER IN OUR DISCUSSIONS, HAS NO APPLICATION IN RESPECT OF ADDIT IONS OR DISALLOWANCES IN RESPECT OF ALP ADJUSTMENTS ANYWAY, NOR ANY OTHER DE EMING FICTIONS COME INTO PLAY HERE. ACCORDINGLY, THE FACTS OF THE PRESENT C ASE DID NOT WARRANT OR JUSTIFY THE IMPOSITION OF PENALTY UNDER SECTION 271(1)(C). W E, THEREFORE, APPROVE THE CONCLUSIONS ARRIVED AT BY THE LEARNED CIT(A) AND DE CLINE TO INTERFERE IN THE MATTER. 11. IN THE RESULT, THE APPEAL IS DISMISSED. PRONOU NCED IN THE OPEN COURT TODAY ON 26 TH DAY OF AUGUST, 2011. SD/XX SD/XX (VIJAY PAL RAO ) (PRAMOD KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI; 26 TH _ DAY OF AUGUST, 2011 . COPY FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER , MUMBAI 4. DEPARTMENTAL REPRESENTATIVE, A BENCH, MUMBAI 5. GUARD FILE TRUE COP Y BY ORDER ETC. ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, MUMBAI