M/s. Gap International Sourcing (India) Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 6742/DEL/2013

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 4114 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 7 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-08-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 16-05-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 24-12-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: RAHUL K MITRA
• Keywords: Depreciation; Transfer pricing; International transaction; Difference of opinion
• Section: 92C; 143(3); 92B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I-2 NEW DELHI BEFORE SMT DIVA SINGH, JUDICIAL MEMBER AND SH.PRASHANT MAHARISHI, ACCOUNTANT MEMBER I.T.A . NO.-6742 /DEL/2013 (ASSESSMENT YEAR-2006-07) GAP INTERNATIONAL SOURCING INDIA PVT.LTD., UNIT 201, DLF SOUTH COURT, 1 ST FLOOR, DISTRICT CENTRE, SAKET, NEW DELHI-110017. PAN-AACCG3437E (APPELLANT) VS DCIT, CIRCLE-12(1), NEW DELHI. (RESPONDENT) APPELLANT BY SH. RAHUL K.MITRA, AR RESPONDENT BY SH.SANJAY KUMAR , SR. DR DATE OF HEARING 16 .0 5 .2016 DATE OF PRONOUNCEMENT 10 .0 8 .2016 O R D E R PER DIVA SINGH, JUDICIAL MEMBER THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE A SSAILING THE CORRECTNESS OF THE ORDER DATED 12.11. 2013 OF CIT(A)-XX, NEW DELHI PER TAINING TO 2006-07 ASSESSMENT YEAR ON VARIOUS GROUNDS. FOR THE PURPOSES OF THE PRESEN T PROCEEDINGS, WE PROPOSE TO TREAT GROUND NOS.2 & 3 AS GROUNDS TO BE DECIDED BY THE IT AT AND THE REMAINING GROUNDS ARE TREATED AS ARGUMENTS IN SUPPORT OF THE GROUNDS RAIS ED. FOR READY-REFERENCE, THESE ARE REPRODUCED HEREUNDER:- THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE; L. THE CIT(A) ERRED IN CONFIRMING THE PENALTY UNDER S ECTION 271(1) (C) OF THE INCOME -TAX ACT, 1961 (THE ACT) AMOUNTING TO RS 1.65 CRO RES, WHICH WAS LEVIED BY THE ASSESSING OFFICER (AO) FOR ALLEGED CONCEALMENT OF I NCOME AND ALSO FURNISHING INACCURATE PARTICULARS OF INCOME WITH RESPECT TO TH E TRANSFER PRICING (TP) ADJUSTMENT OF RS 4.92 CRORES, WHICH WAS ULTIMATELY CONFIRMED BY THE HONBLE TRIBUNAL OUT OF THE ORIGINAL TP ADJUSTMENT OF RS 23 6.23 CRORES INITIALLY MADE BY THE I.T.A .NO.-6742/DEL/2013 PAGE 2 OF 23 AO, AFTER GRANTING RELIEF FOR THE BALANCE PART OF T HE TP ADJUSTMENT AMOUNTING TO RS 231.31 CRORES. 2. THE CIT(A) ERRED IN INVOKING THE PROVISIONS OF EXP LANATION 7 OF SECTION 271(1) (C) OF THE ACT IN CONFIRMING THE AFORESAID LEVY OF PENA LTY BY HOLDING THAT THE APPELLANT HAD FAILED TO PROVE BEFORE THE AO AND CIT(A) THAT T HE TP ADJUSTMENT WITH REFERENCE TO WHICH THE PENALTY HAD BEEN LEVIED, AS REFERRED TO IN GROUND N0.1 ABOVE, DID NOT ARISE DUE TO ANY ABSENCE OF GOOD FAI TH AND DUE DILIGENCE ON THE PART OF THE APPELLANT IN COMPUTING THE PRICE OF ITS INTERNATIONAL TRANSACTIONS WITH THE FOREIGN ASSOCIATED ENTERPRISES (AES) IN ACCORDA NCE WITH THE PROVISIONS OF SECTION 92C OF THE ACT. 3. THE CIT(A) ERRED IN HOLDING THAT THE TP ADJUSTMENT, WHICH WAS CONFIRMED BY THE HONBLE TRIBUNAL AMOUNTING TO RS 4.92 CRORES OUT OF THE INITIAL TP ADJUSTMENT OF RS 236.23 ORIGINALLY MADE BY THE AO, HAVING BEEN COMPU TED WITH REFERENCE TO A MARK UP OF 32% ON OPERATIONAL COST OF THE APPELLANT, WAS IN FACT THE RESULT OF A CONCESSION OR ADMISSION MADE BY THE APPELLANT BEFOR E THE HONBLE TRIBUNAL THAT THE SAID FIGURE OF 32% ACTUALLY REPRESENTED THE ARM S LENGTH MARK UP WITH RESPECT TO THE INTERNATIONAL TRANSACTIONS OF PROVIDING SOUR CING SUPPORT SERVICES BY THE APPELLANT IN FAVOUR OF FOREIGN AES. 4. THE CIT(A) ERRED IN NOT APPRECIATING THAT THE APPEL LANT HAD NEVER CONCEDED BEFORE THE HONBLE TRIBUNAL THAT THE SAID FIGURE OF 32% WA S THE ARMS LENGTH MARK UP OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO WITH TH E FOREIGN AES, AS REFERRED TO IN GROUND NO. 3 ABOVE. 5. THE SAID FIGURE OF 32% WAS A DERIVED MARK UP ON THE OPERATING COST EARNED BY A PRIVATE COMPANY, NAMELY M/S LI & FUNG (INDIA) PRIVA TE LIMITED, WITH RESPECT TO ITS GLOBAL PROFITS; AND NOT LIMITED TO THE PROFITS MADE BY IT IN INDIA, WHERE THE HONBLE DISPUTE RESOLUTION PANEL (DRP) AND ACCORDINGLY TH E AO HAD RELIED UPON THE SAID COMPANY IN THE CONTEXT OF A JUDGEMENT OF THE HONBL E DELHI TRIBUNAL RENDERED IN THE CASE OF THE SAID COMPANY FOR THE PROPOSITION TH AT THE REMUNERATION POLICY OF THE APPELLANT WAS TO BE COMPUTED WITH REFERENCE TO COMMISSION OF THE VALUE OF THE GOODS PROCURED BY THE OVERSEAS AES OF THE APPELLANT FROM INDIA, AN ASSERTION WHICH WAS OUTRIGHT REJECTED BY THE HONBLE TRIBUNAL IN THE APPELLANTS OWN CASE FOR THE RELEVANT ASSESSMENT YEAR BY HOLDING THAT THE RE MUNERATION POLICY OF THE APPELLANT WAS TO BE DETERMINED AS A MARK UP ON ONLY ITS OPERATIONAL COST AND NOT A COMMISSION ON THE VALUE OF GOODS PROCURED BY THE OV ERSEAS AES FROM THIRD PARTY VENDORS IN INDIA. 6. THE SAID FIGURE OF 32%, IN THE FORM OF A MARK UP ON THE OPERATIONAL COST OF THE APPELLANT, WAS NEVER EVER APPLIED OR EVEN PROPOSED TO BE APPLIED BY THE TRANSFER PRICING OFFICER (TPO), THE DRP OR THE AO DURING THE COURSE OF ORIGINAL ASSESSMENT PROCEEDINGS, SINCE THE LINE OF ACTION ON THE PART O F THE SAID AUTHORITIES WAS ONLY TO COMPUTE THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF THE APPELLANT ENTERED INTO WITH FOREIGN AES WITH REFERENCE TO A C OMMISSION OF 5% ON THE VALUE OF GOODS PROCURED BY THE FOREIGN AES DIRECTLY FROM THIRD PARTY VENDORS IN INDIA - AN ASSERTION WHICH WAS OUTRIGHT REJECTED BY THE HONBL E TRIBUNAL WHILE DISPOSING THE QUANTUM APPEAL OF THE APPELLANT FOR THE RELEVANT AS SESSMENT YEAR. 7. ON THE PREMISES OF GROUND NOS. 5 AND 6 ABOVE, THE C IT(A) ERRED IN NOT APPRECIATING THE FACT THAT THERE WAS NO OCCASION O R SCOPE ON THE PART OF THE APPELLANT TO HAVE NOT COMPUTED ITS ARMS LENGTH PRI CE IN ACCORDANCE WITH THE PROVISIONS OF SECTION 92C OF THE ACT WITH REFERENCE TO SUCH DERIVED FIGURE OF 32% AS A MARK UP ON ITS OPERATING COST, SINCE THE SAID FIGURE OF 32%, BEING A MARK UP I.T.A .NO.-6742/DEL/2013 PAGE 3 OF 23 ON OPERATING COST, DID NOT EXIST IN THE AOS ORDER PASSED UNDER SECTION 143(3) OF THE ACT READ WITH SECTION 144C OF THE ACT OR IN ANY PUBLIC DATABASE AVAILABLE EITHER WITH THE AO OR THE APPELLANT, NAMELY PROWESS AND CA PITALINE PLUS, WITH REFERENCE TO WHICH COMPARABLE BENCHMARKING ANALYSIS WAS CARRI ED OUT WHETHER DURING THE COURSE OF PREPARING THE RETURN OF INCOME OR EVEN DU RING THE ASSESSMENT PROCEEDINGS; AND THEREFORE THE CIT(A) FURTHER ERRED IN CONFIRMING THE LEVY OF PENALTY AS AFORESAID, BY INVOKING THE PROVISIONS OF EXPLANATION 7 OF 271 (1) (C) OF THE ACT. 8. DURING THE COURSE OF THE PROCEEDINGS OF THE QUANTUM / MERIT APPEAL BEFORE THE HONBLE TRIBUNAL RELATING TO THE RELEVANT ASSESSMEN T YEAR, THE AUTHORISED REPRESENTATIVE OF THE APPELLANT, WHILE DISPUTING TH E RELIANCE PLACED BY THE DRP, THE AO AND THE DEPARTMENTAL REPRESENTATIVE ON THE JUDGE MENT OF THE HONBLE TRIBUNAL RENDERED IN THE CASE OF LI & FUNG INDIA (SUPRA) FOR THE PROPOSITION THAT, BY FOLLOWING THE SAID JUDGEMENT OF THE HONBLE TRIBUNA L, A COMMISSION BASED FORM OF REMUNERATION MODEL WAS TO BE APPLIED EVEN IN THE CA SE OF THE APPELLANT, WHICH AS AFORESAID, WAS OUTRIGHT REJECTED BY THE HONBLE TRI BUNAL IN THE APPELLANTS OWN CASE , MADE A MENTION THAT EVEN WHILE ADOPTING THE CORRECT MODEL OF MARK UP ON OPERATING COST, THE SAID MARK UP COULD, UNDER NO CI RCUMSTANCES, EXCEED THE DERIVED MARK UP ON OPERATING COST IN THE CASE OF LI & FUNG, REPRESENTING ITS GLOBAL PROFITS; AND NOT JUST THE PROFITS DERIVED BY SUCH C OMPANY IN INDIA, AS OPPOSED TO THE EXORBITANT MARK UP ON OPERATING COST AMOUNTING TO 830.95%, WHICH WAS IMPUTED BY THE DRP AND THE AO, BY WRONGLY APPLYING A COMMISSION BASED MODEL IN THE CASE OF APPELLANT; AND THUS THE AUTHORISED R EPRESENTATIVE OF THE APPELLANT HAD NEVER CONCEDED BEFORE THE HONBLE TRIBUNAL THAT THE SAID FIGURE OF 32% WAS THE ARMS LENGTH MARK UP OF THE RELEVANT INTERNATIO NAL TRANSACTION ENTERED INTO BY THE APPELLANT WITH OVERSEAS AES. 9. THE CIT(A) ERRED IN APPRECIATING THE FACT THAT THE APPELLANT PLACED THE SAID FIGURE OF 32% AS BEING ONE OF THE SEVERAL DATA POINTS WHIC H COULD HAVE BEEN TAKEN FOR COMPUTING THE ARMS LENGTH MARK UP ON THE OPERATION AL COST OF THE APPELLANT, THE OTHER DATA POINTS BEING 15.13%, 19% AND 26%, AS EVI DENT FROM THE ORDER OF THE HONBLE TRIBUNAL PASSED IN THE APPELLANTS CASE FOR THE RELEVANT ASSESSMENT YEAR; AND AS ALSO REPRODUCED BY THE CIT(A) IN ITS OWN ORD ER WHILE CONFIRMING THE PENALTY, WITH A FURTHER SUBMISSION THAT ARITHMETIC MEAN OF ALL SUCH DATA POINTS WAS 22%, WITHOUT PREJUDICE TO THE PRIMARY CONTENTION TH AT THE APPELLANTS ORIGINAL MARGIN OF 15% ON OPERATING COST REMAINED UNCONTROVE RTED BY THE DRP AND THE AO; AND IT IS A DIFFERENT MATTER ALTOGETHER THAT HO NBLE TRIBUNAL ADOPTED SUCH EXTREME FIGURE OF 32% AS THE ARMS LENGTH PRICE, IN THE PROCESS GIVING RELIEF TO THE APPELLANT FOR AN AMOUNT OF RS 231.31 CRORES OUT OF THE ORIGINAL TP ADJUSTMENT OF INR 236.22 MADE BY THE AO. 10. THE CIT(A) ERRED IN NOT APPRECIATING THE FACT THAT APPELLANT HAD NEITHER CONCEALED PARTICULARS NOR FURNISHED ANY INACCURATE PARTICULAR S OF INCOME INTER-ALIA WITH RESPECT TO THE TP ADJUSTMENT OF INR 4.92 CRORES ULT IMATELY CONFIRMED BY THE HONBLE TRIBUNAL IN THE QUANTUM/MERIT APPEAL, OUT O F THE ORIGINAL TP ADJUSTMENT OF INR 236.22 CRORES MADE BY THE AO, SINCE THE TPO, DR P AND AO HAD ALL ALONG PROCEEDED TO COMPUTE THE ARMS LENGTH PRICE IN THE CASE OF THE APPELLANT AS A 6.07% COMMISSION ON THE VALUE OF GOODS PROCURED BY FOREIGN AES FROM THIRD PARTY VENDORS IN INDIA AND HAD NOT CALCULATED THE ARMS L ENGTH MARK UP OF 32% ON THE OPERATING COST OF APPELLANT, BEING THE REMUNERATION POLICY WHICH WAS FINALLY APPROVED BY THE HONBLE TRIBUNAL IN THE APPELLANTS CASE; AND THE SAID FIGURE OF 32% AS A MARK UP ON OPERATING COST CAME UP AS A POI NT IN THE DATA RANGE ONLY I.T.A .NO.-6742/DEL/2013 PAGE 4 OF 23 DURING THE COURSE OF DISCUSSIONS BEFORE THE HONBLE TRIBUNAL AND THAT TOO IN THE CONTEXT OF A PRIVATE COMPANY, WHOSE FINANCIALS WERE NOT AVAILABLE IN THE PUBLIC DATABASE AND WHOSE REFERENCE WAS MADE BY THE AO, TH E DRP AND THE DEPARTMENTAL REPRESENTATIVE TO AUGMENT THEIR ARGUME NTS FOR THE ADOPTION OF A COMMISSION BASED REMUNERATION MODEL. 11. WITHOUT PREJUDICE TO ANY OTHER CONTENTIONS OF THE APPELLANT PREFERRED IN GROUNDS AS ABOVE, EVEN ASSUMING BUT NOT ADMITTING THAT THE ADOPTION OF THE SAID FIGURE OF 32% AS THE ARMS LENGTH MARK UP ON OPERATING COST O F THE APPELLANT, AROSE DUE TO A DIFFERENCE OF OPINION BETWEEN THE HONBLE TRIBUNA L AND THE APPELLANT, SUCH DIFFERENCE OF OPINION DID NOT AUTOMATICALLY INFER A NY LACK OF BONAFIDE, GOOD FAITH OR DUE DILIGENCE ADOPTED BY THE APPELLANT WHILE DETERM INING THE PRICE FOR ITS INTERNATIONAL TRANSACTIONS ENTERED INTO WITH ITS FO REIGN AES, MORE SO WHEN SUCH DERIVED FIGURE WAS NEVER AVAILABLE BEFORE THE APPEL LANT AT THE TIME OF FILING OF RETURN OF INCOME OR BY THE REVENUE AUTHORITIES AT T HE TIME OF ASSESSMENT PROCEEDINGS FOR THE RELEVANT ASSESSMENT YEAR AND ; IN SUCH PREMISES THE CIT(A) ERRED IN CONFIRMING THE LEVY OF PENALTY AMOUNTING T O RS 1.65 CRORES IN THE CASE OF THE APPELLANT. 12. WITHOUT FURTHER PREJUDICE TO ANY OF THE GROUNDS AS MENTIONED ABOVE, THE AO AND THE CIT(A) ERRED IN LEVYING AND CONFIRMING THE PENA LTY RESPECTIVELY BY IGNORING THE FACT THAT THE APPELLANT HAD INVOKED MUTUAL AGREEMEN T PROCEDURE (MAP) UNDER ARTICLE 27 OF THE INDIA - US TAX TREATY INTER-ALIA WITH RESPECT TO THE TP ADJUSTMENT OF RS 236.22 ORIGINALLY MADE BY THE TPO, WHICH INCL UDES THE SUM OF RS 4.92 CRORES WHICH WAS ULTIMATELY CONFIRMED BY THE HONBLE TRIBU NAL UNDER THE CIRCUMSTANCES AS ABOVE, WHICH AS PER CLAUSE 5 OF MOU ENTERED BETWEEN INDIA AND UNITED STATES WITH REFERENCE TO SUCH MAP, ANY ASSESSMENT AND COLL ECTION IN RELATION, TO PENALTY NEED TO BE KEPT IN ABEYANCE TILL THE RESOLUTION OF SAID MAP PROCEEDINGS AND THEREFORE THE ORDER PASSED BY THE SAID AO IN IMPOSI NG THE SAID PENALTY NEED TO BE CANCELLED AND HELD VOID AB-INITIO. THE APPELLANT CRAVES LEAVE TO ALTER, AMEND OR WITHD RAW ALL OR ANY OF THE GROUNDS HEREIN OR ADD ANY FURTHER GROUNDS AS MAY BE CONSIDE RED NECESSARY EITHER BEFORE OR DURING THE HEARING. 2. THE LD. AR CARRYING US THROUGH THE PENALTY ORDER, THE IMPUGNED ORDER AND REFERRING TO THE ORDER OF THE ITAT PASSED IN THE QUANTUM PROC EEDINGS SUBMITTED THAT THE CONCESSION OF MARK-UP OF 32% WAS MADE IN THE QUANTUM PROCEEDIN GS IN THE BACKGROUND WHERE THERE WAS AN ORDER OF THE ITAT IN THE CASE OF M/S LI AND FUNG INDIA P. LIMITED VS DCIT [2011] 16 TAXMANN.COM 192 (DEL.). A PERUSAL OF THE TP STUDY OF THE ASSESSEE AVAILABLE ON RECORD, IT WAS SUBMITTED WOULD SHOW TH AT AT NO POINT OF TIME MARK UP OF 32% WAS EVER BEING CONSIDERED BY THE ASSESSEE. NOR WAS ANY SUCH PROPOSAL MADE BY THE TPO. AMONGST THE SEVERAL DATA POINTS AVAILABLE FOR COMPU TING THE ARMS-LENGTH PRICE AT NO POINT I.T.A .NO.-6742/DEL/2013 PAGE 5 OF 23 OF TIME 32% MARK-UP EITHER BY THE ASSESSEE OR BY TH E AUTHORITIES HAD EVER BEEN CONSIDERED. THE SAID FIGURE SURFACED FOR THE FIRST TIME DURING THE HEARING OF THE QUANTUM PROCEEDINGS IN ASSESSEES CASE. IT WAS SUBMITTED T HAT SINCE THE ORDER OF THE ITAT IN LI AND FUNG INDIA P. LTD. (CITED SUPRA) WAS AVAILABLE BEFO RE THE ITAT AS A RESULT OF THE VIEW EXPRESSED THEREIN CONSIDERING THE FACT THAT THE ULT IMATE IMPACT ON THE ASSESSEE IN THE QUANTUM PROCEEDINGS WAS NOT SO DETRIMENTAL TO THE A SSESSEE THUS FOR THE SAKE OF PEACE OF MIND, THE CONCESSION WAS MADE BEFORE THE ITAT. IN THE CIRCUMSTANCES, IT WAS HIS PRAYER THAT PENALTY MAY BE QUASHED AS IT IS NOT A CASE OF CONCEALMENT. IT WAS ALSO SUBMITTED THAT IN THE FACE OF THE DECISION OF THE HONBLE HIGH COU RT IN THE VERY CASE OF LI AND FUNG INDIA P. LTD. (CITED SUPRA) PENALTY IN THE PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE WAS NOT MAINTAINABLE. 2.1. REFERRING TO THE FACTS IT WAS SUBMITTED THAT THE R ECORD WOULD SHOW THAT PENALTY U/S 271(1)(C) WAS INITIATED ON ACCOUNT OF THE FOLLOWING ADDITIONS/DISALLOWANCES:- I) ADDITION ON ACCOUNT OF TRANSFER PRICING - RS.2,36, 22,31,473/- II) EXCESSIVE CLAIM OF DEPRECIATION - RS.27,02,896/- 2.2. IN THE QUANTUM PROCEEDINGS IT WAS SUBMITTED THE AD DITION ON ACCOUNT OF EXCESSIVE CLAIM OF DEPRECIATION WAS DELETED BY THE ITAT IN IT A NO.228/DEL/2012 DATED 18.09.2012 AND ONLY THE ADDITION ON ACCOUNT OF TRANSFER PRICIN G ADJUSTMENT PARTIALLY SURVIVED AS THE MARK-UP ON COST INCURRED FOR SERVICES PROVIDED WAS ENHANCED FROM 15% TO 32%. HOWEVER, THE REMUNERATION MODEL OF THE ASSESSEE IT WAS SUBMI TTED WAS ACCEPTED AND THE RE- CHARACTERIZING DONE BY THE TPO OF THE REMUNERATION MODEL OF THE ASSESSEE ON A COMMISSION ON THE VALUE OF GOODS WAS NOT APPROVED BY THE ITAT. THIS ADDITION WHICH HAS BEEN ACCEPTED BY THE ASSESSEE IT WAS SUBMITTED HAS FORME D THE BASIS FOR LEVYING PENALTY U/S I.T.A .NO.-6742/DEL/2013 PAGE 6 OF 23 271(1)(C) BY INVOKING EXPLANATION 7 OF THE INCOME TA X ACT, 1961. IT WAS SUBMITTED THAT DESPITE OFFERING DETAILED EXPLANATIONS IN WAITING BEFORE THE AO IN THE PENALTY PROCEEDINGS VIDE TWO SPECIFIC LETTERS THE RECEIPT OF WHICH IS A CCEPTED BUT THE AO HE HAS HELD THAT THE ASSESSEE HAS REMAINED SILENT. 2.3. IT WAS SUBMITTED THAT THOUGH THE SUBMISSIONS ADVANCED ON BEHALF OF THE ASSESSEE BEFORE THE CIT(A) ON FACTS AND LAW ARE EXTRACTED IN PARA 5 FROM PAGES 14 TO 18. HOWEVER, THESE DID NOT MEET WITH ANY SUCCESS. THE LD.AR CARR YING US THROUGH THEM SUBMITTED THAT BY AND LARGE THE ASSESSEE RELIES ON THESE ARGUMENTS AND PRAYS THAT PENALTY IN THE FACTS ON RECORD WAS NOT LEVIABLE. 2.4. CARRYING US THROUGH THE FINDING OF THE CIT(A) IT W AS SUBMITTED THAT THE PENALTY HAS BEEN CONFIRMED MECHANICALLY ON THE REASONING THAT D UE TO VARIATION IN THE MARK-UP FROM THE TP STUDY TO THE ENHANCED MARK-UP IGNORING THE DETAILED ARGUMENTS ON FACTS AND LAW IT WAS HELD THAT THE ASSESSEE DID NOT CARRY OUT ITS TP STUDY WITH GOOD FAITH AND DUE DILIGENCE. ADDRESSING THIS FINDING IT WAS SUBMITTE D BY THE LD.AR THAT THE DETAILED SUBMISSION WERE COMPLETELY IGNORED. 2.5. RELYING UPON THE COPY OF THE SYNOPSIS CONTAINING T HE GIST OF THE ARGUMENTS ON FACTS AND LAW RELIED UPON BY THE ASSESSEE, IT WAS S UBMITTED THAT THE PENALTY ON FACTS DESERVES TO BE QUASHED. CARRYING US THROUGH THE SY NOPSIS FILED IT WAS SUBMITTED THAT THE ASSESSEE OPERATES AS A PROCUREMENT SUPPORT SERVICE COMPANY FOR ITS FOREIGN ASSOCIATED ENTERPRISE (AE) I.E. GAP US. IT WAS SUBMITTED THAT GAP US SOURCES THE GOODS DIRECTLY FROM THIRD PARTY VENDORS IN INDIA (IN RESPECT OF WH ICH THE ASSESSEE HAD RENDERED SOURCING SUPPORT SERVICES). THESE IT WAS SUBMITTED ARE NOT ROUTED THROUGH THE FINANCIAL ACCOUNTS OF THE ASSESSEE INTO ITS PROFIT & LOSS ACCOUNT. TH E ASSESSEE IT WAS SUBMITTED IS I.T.A .NO.-6742/DEL/2013 PAGE 7 OF 23 REMUNERATED AT TOTAL OPERATING COSTS PLUS A 15% MAR K-UP THEREON AND THEREFORE THE TOTAL OPERATING COST DOES NOT INCLUDE THE VALUE OF GOODS SOURCED BY GAP US FROM THIRD PARTY VENDORS. THE COST PLUS MODEL ADOPTED BY THE ASSESS EE IT WAS SUBMITTED WAS NOT ACCEPTED BY THE TPO AND HE APPLIED A COMMISSION AT THE RATE OF 6.07% IN AY 2006-07 ON THE VALUE OF GOODS PROCURED BY GAP US DIRECTLY F ROM THIRD PARTY VENDORS FROM INDIA, LEADING TO A TP ADJUSTMENT OF RS.236.22 CRORES. TH E TPO WHILE PROPOSING THE ADDITION IT WAS SUBMITTED RELIED UPON THE ORDER OF THE ITAT IN THE CASE OF LI & FUNG INDIA PRIVATE LIMITED (LI & FUNG INDIA). IT WAS SUBMITTED THAT BY THE TIME THE QUANTUM APPEAL CAME UP BEFORE THE ITAT CONSIDERING THE ARGUMENT OF THE ASSESSEE THAT THE FACTS IN THE CASE OF LI & FUNG IN ASSESSEES CASE WERE DISTINGUISHABLE W HICH ARGUMENT WAS ACCEPTED BY THE ITAT AND THE REMUNERATION MODEL OF THE ASSESSEE AS DISCLOSED IN THE TP STUDY WAS ACCEPTED. THE ITAT IT WAS SUBMITTED HELD THAT THE ASSESSEE WAS ENTITLED TO A MARK-UP ON TOTAL OPERATING COSTS OF GIS INDIA ONLY (AND NOT THE VALUE OF GOODS SOURCED BY GAP US) AND THUS COMMISSION BASED REMUNERATION WAS HELD TO BE NOT APPLICABLE TO THE ASSESSEE. HOWEVER, ON THE ISSUE OF MARK-UP THE DER IVED MARK-UP ON OPERATIONAL COSTS, AS IN THE CASE OF LI & FUNG INDIA OF 32% WAS ACCEPT ED AND NOT MARK-UP OF 15% AS PER ASSESSEES TP STUDY BASED ON AGREEMENT WITH THE FOR EIGN AE. BY CONCEDING TO ACCEPT THE SAID MARK-UP THE ASSESSEE IT WAS SUBMITTED WAS A BE NEFICIARY OF RELIEF TO THE EXTENT OF RS.231.31 CRORES OUT OF THE TOTAL ADJUSTMENT OF RS. 236.22 CRORES MADE BY THE AO AND THE ADJUSTMENT WAS THUS RESTRICTED TO ONLY RS.4.92 CROR ES. AS A RESULT OF THIS DECISION IT WAS SUBMITTED THE ASSESSEE RECEIVED RELIEF OF MORE THAN 98%. THE SAID DECISION IT WAS SUBMITTED WAS ACCEPTED BY THE ASSESSEE AND NO APPEA L AGAINST THE SAME WAS FILED. THE DECISION TO GIVE UP AND SETTLE THE ISSUE IT WAS SUB MITTED WAS GUIDED BY WANTING TO BUY I.T.A .NO.-6742/DEL/2013 PAGE 8 OF 23 PEACE AND AVOID PROTRACTED LITIGATION. INVITING AT TENTION TO THE HIGH HANDEDNESS OF THE REVENUE IT WAS SUBMITTED THAT THE AO IN THE PENALTY PROCEEDINGS IN PARA 3 DULY ACKNOWLEDGED THAT IN RESPONSE TO SHOW CAUSE NOTICE REQUIRING THE ASSESSEE TO EXPLAIN WHY THE PENALTY UNDER SECTION 271(1)(C) OF THE ACT SHOULD NOT BE LEVIED THE ASSESSEE RESPONDED BY TWO SPECIFIC LETTERS. HOWEVER, IN SUBS EQUENT PARAS I.E. PARA 4 AND 6 OF THE ORDER, THE AO NOTED THAT THE ASSESSEE HAS BEEN SILE NT IN RESPONSE TO THE SHOW CAUSE NOTICE FOR IMPOSING PENALTY AND HAS FAILED TO REBUT THE ALLEGATIONS. 2.6. APART FROM RELYING UPON THE SUBMISSION BEFORE THE AO AND THE CIT(A) AT PAGES 2 TO 20 OF THE PAPER BOOK IT WAS REITERATED THAT THAT IT IS MERELY A CHANGE IN THE MARK-UP BEING ADOPTED BY THE ITAT WHILE ACCEPTING THE COST PLUS REMUNERATION MODEL FOLLOWED BY THE ASSESSEE AND THUS THERE EXISTED NO BASIS FOR EI THER INITIATING OR IMPOSING OR FOR THIS MATTER CONFIRMING THE PENALTY. 2.7. IT WAS ALSO SUBMITTED THAT THE ITAT IN ASSESSEES OWN CASE IN 2009-10 AND 2010-11 AYS ACCEPTING THE MARK-UP OF 15% ON OPERATIONAL COS TS THE ENTIRE ADDITION WAS DELETED. 2.8. ON THE BASIS OF THESE FACTS, ARGUMENTS AND LEGAL P OSITION IT WAS SUBMITTED ADOPTION OF A DIFFERENT MARK-UP IN THE FACTS OF THE PRESENT CASE CANNOT BE TREATED AS CONCEALMENT OR FURNISHING OF INACCURATE PARTICULARS. RELIANCE WAS PLACED ON M/S. BABCOCK & BROWN INDIA PVT. LTD. (ITA NO. 2214/MUM/2015); ADP PVT. LTD. [TS-310 -ITAT-2013(HYD)-TP]; AND UNITED ONLINE SOFTWARE DEVELOPMENT (INDIA) PVT. LTD [TS-493-ITAT- 2015(HYD)-TP]. IT WAS ALSO SUBMITTED THAT NON FILING OF APPEAL AT HIGHER FORUMS DOES NOT NECE SSARILY ATTRACT PENALTY. IN SUPPORT OF THE SAID PROPOSITION, RELIANCE WAS PLACED ON BOSTON SCIENTIFIC INDIA PVT. LTD [TS-73-ITAT- 20I6(DEL)-TP]; AND MITSUI PRIME ADVANCED COMPOSITES INDIA . LTD [TS-193-ITAT- 2016(DEL)-TP]. IT WAS FURTHER SUBMITTED THAT FOR LEVYING PENALTY THERE MUST BE AB SENCE OF I.T.A .NO.-6742/DEL/2013 PAGE 9 OF 23 GOOD FAITH AND DUE DILIGENCE AS HELD BY THE ITAT IN RBS EQUITIES INDIA LTD (FORMERLY KNOWN AS ABN AMRO ASIA EQUITIES INDIA LTD.) [ITA NO. 2570/ MUM/2010, 201 L-TII-91-ITAT-MUM- TP, TS-492-ITAT-201 L(MUM)]; M/S VERIZON COMMUNICA TION INDIA PVT. LTD. VS. DC1T [ITA NO: 5566/DEL/2011]; SERDIA PHARMACEUTICALS (INDIA) PVT. LTD. (ITA NO. 7215/MUM/2007); M/S FIRMENICH AROMATICS (INDIA) PVT. LTD [ITA NO 46 54/MUM/2009]. 2.9. ACCORDINGLY IT WAS SUMMED UP THAT THE ASSESSEE HAS CONDUCTED ITS TRANSFER PRICING STUDY IN A BONA FIDE MANNER AND THE ITAT HAS UPHELD THE SELECTION OF MOST APPROPRIATE METHOD FOLLOWED IN THE TP DOCUMENTATION MAINTAINED BY THE COMPANY HAS ALSO ACCEPTED THE PLI AND THE REMUNERATION MODEL/STANDS ACCEPTED AND HAS MERELY ADOPTED A DIFFERENT MARK-UP. THUS A MERE DIFFERENCE IN THE MARK-UP ADO PTED BY THE ASSESSEE IT WAS SUBMITTED DOES NOT JUSTIFY THE LEVY OF PENALTY FOR CONCEALMEN T OR OF FURNISHING INACCURATE PARTICULARS OF INCOME. 3. THE LD. SR. DR RELYING UPON THE CONSISTENT ORDERS OF THE REVENUE SUBMITTED THAT PENALTY WAS LEVIABLE IN TERMS OF EXPLANATION 7 OF S ECTION 271(1)(C) AND CONSIDERING THESE VERY FACTS AND SUBMISSIONS THE PENALTY LEVIED BY TH E AO HAS BEEN CONFIRMED BY THE CIT(A). CARRYING US THROUGH THE FINDINGS OF THE RESPECTIVE AUTHORITIES, IT WAS HIS ARGUMENT THAT THERE IS NO DOUBT THAT THE TP STUDY OF THE ASSESSEE HAS NOT BEEN ACCEPTED BY THE TPO AND EVEN IF THE REMUNERATION MODEL OF THE ASSESSEE HAS ULTIMATELY BEEN ACCEPTED IN THE QUANTUM PROCEEDINGS BY THE ITAT THE FACT REMAINS TH AT THE MARK-UP OF 15% HAS NOT BEEN ACCEPTED AND ENHANCED MARK-UP HAS BEEN CONCEDED BY THE ASSESSEE AND THE ISSUE NOT HAVING BEEN AGITATED FURTHER DEMONSTRATES THAT THER E WAS CONCEALMENT. THE DECISION IN SUBSEQUENT YEARS AND THE DECISION OVERTURNING THE D ECISION OF THE ITAT BY THE HONBLE HIGH COURT IN LI AND FUNG IT WAS SUBMITTED ARE SUBS EQUENT FACTS AND NOT RELEVANT. I.T.A .NO.-6742/DEL/2013 PAGE 10 OF 23 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL AVAILABLE ON RECORD. BEFORE WE ADDRESS THE FACTS, WE FIRST EXTRACT THE R ELEVANT PROVISION WHICH HAS BEEN INVOKED BY THE REVENUE IN THE FACTS THE PRESENT CASE:- 13.1. THE RELEVANT PROVISIONS OF SECTION 271(1)(C) ARE SET OUT HEREUNDER FOR READY-REFERENCE:- 271(1). IF THE [ASSESSING] OFFICER OR THE [COMMISS IONER (APPEALS) [OR THE [PRINCIPAL COMMISSIONER OR] COMMISSIONER] IN THE CO URSE OF ANY PROCEEDINGS UNDER THIS ACT, IS SATISFIED THAT ANY P ERSON- (A) ************** (B) ************** (C) HAS CONCEALED THE PARTICULARS OF HIS INCOME OR FURN ISHED 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 C OMPUTING 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 DEEMED TO REPRESENT THE INCOME IN RESPECT OF WHICH PARTICULARS HAVE BEEN CONCEALED OR INACCURATE PARTICULARS HAVE BEEN FURNISHED, UNLESS THE ASSESSEE PROVED TO THE SATISFACTION OF THE ASSESSIN G OFFICER OR THE COMMISSIONER (APPEALS) [OR THE [PRINCIPAL COMMISSIO NER OR] COMMISSIONER] THAT THE PRICE CHARGED OR PAID IN SUC H TRANSACTION WAS COMPUTED IN ACCORDANCE WITH THE PROVISIONS CONTAINE D IN SECTION 92C AND IN THE MANNER PRESCRIBED UNDER THAT SECTION, IN GOO D FAITH AND WITH DUE DILIGENCE]. 4.1. A PERUSAL OF THE ABOVE MAKES IT CLEAR THAT EXPLANAT ION 7 OF SECTION 271(1)(C) IS A DEEMING PROVISION WHEREBY IT IS DEEMED THAT IN CASE OF ANY ADDITION OR DISALLOWANCE IN THE CASE OF AN ASSESSEE WHO HAS ENTERED INTO AN INTERN ATIONAL TRANSACTION DEFINED IN SECTION 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 REPRESENT SU CH INCOME IN RESPECT OF WHICH PARTICULARS HAVE BEEN CONCEALED OR INACCURATE PARTI CULARS HAVE BEEN FURNISHED. EXCEPTION IS CARVED OUT ONLY IN THE CASE WHERE THE ASSESSEE P ROVES THAT THE PRICE CHARGED OR PAID IN SUCH TRANSACTION WAS COMPUTED IN ACCORDANCE WITH TH E PROVISIONS CONTAINED IN SECTION 92C; AND IN THE MANNER PRESCRIBED UNDER THAT SECTION IN GOOD FAITH AND WITH DUE DILIGENCE. I.T.A .NO.-6742/DEL/2013 PAGE 11 OF 23 THUS IN ORDER TO CONSIDER WHETHER THE SAID REQUIREM ENTS OF EXPLANATION 7 HAVE BEEN MET OR NOT, IT IS NECESSARY TO CONSIDER THE FACTS AND CIRC UMSTANCES LEADING TO THE ADDITION HAVING BEEN MADE. THE DISCUSSION ON THESE FACTS IS RELEVA NT AND MATERIAL IN ORDER TO DECIDE THE ISSUE. THE FACTS RELATED TO THE ISSUE HAVE BEEN TH RASHED OUT IN THE QUANTUM PROCEEDINGS AND ARE A MATTER OF RECORD. BEFORE WE ADDRESS THE SAME, WE ARE OF THE VIEW THAT IT WOULD NOT BE OUT OF PLACE TO REFER TO THE SETTLED LEGAL P OSITION THAT LEVY OF PENALTY IS NOT AUTOMATIC. THE EXPLANATION OFFERED IN THE PENALTY PROCEEDINGS IS REQUIRED TO BE CONSIDERED AFRESH IN THE LIGHT OF THE REQUIREMENTS OF THE RELE VANT PROVISION AND SIMPLY BECAUSE THE ADDITION HAS BEEN SUSTAINED IN A CONTESTED ISSUE OR ACCEPTED WITHOUT A CONTEST CANNOT BE THE CRITERIA TO MECHANICALLY LEVY OR UPHOLD THE PEN ALTY LEVIED. 4.2. THE ONUS UPON THE TAXPAYER IS ONLY TO SHOW WHETHER THE ARMS LENGTH PRICE HAS BEEN COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF SECTION 92C OF THE ACT IN GOOD FAITH AND DUE DILIGENCE AND NOTHING MORE. THE FACT THAT THAT THE ADDITION IS CONTESTED OR GIVEN UP PER SE WOULD NOT BE DETERMINATIVE OF THE ISSUE. IT IS THE EVALUATION OF THE FACTS AND CIRCUMSTANCES AS BORNE OUT FROM RECORD WHICH WOULD THROW LIGHT WHETHER THE DECISION NOT TO CONTEST WAS BONA FIDE OR MALA FIDE ARISING OUT O F A FAILURE OF THE ASSESSEE. IT IS NECESSARY TO ESTABLISH WHAT WERE THE GUIDING FACTOR S WHICH CONTRIBUTED TO THE DECISION. IT IS A SETTLED LEGAL POSITION THAT THE MERE FACT THAT AN ADDITION IS ACCEPTED PER SE DOES NOT MANDATE THAT PENALTY IS LEVIABLE IT IS THE EXPLANAT ION OFFERED BY THE ASSESSEE IN THE PENALTY PROCEEDINGS ADDRESSING THE FACTS WHY SURRENDER IS M ADE WHICH IS REQUIRED TO BE CONSIDERED. APPLYING THE VARIOUS TESTS AND PROPOSI TIONS LAID DOWN BY THE COURTS TO THE LEVY OF PENALTY AND ON CONSIDERATION OF THE LEGAL P OSITION ON THE FACTS THE AO IS REQUIRED TO DECIDE THE ISSUE. CONSIDERATION OF THE EXPLANATION OFFERED IS MANDATORY ONLY THEN THE I.T.A .NO.-6742/DEL/2013 PAGE 12 OF 23 DECISION CAN BE SAID TO BE ARRIVED AT WHETHER TO LE VY OR DROP THE PROCEEDINGS. AT THE COST OF REPETITION, PENALTY CANNOT BE IMPOSED SIMPLY BEC AUSE THE ADDITION IS ACCEPTED. IT CAN ONLY BE IMPOSED IF THE EXPLANATION OFFERED IS SHOWN TO BE LACKING IN GOOD FAITH AND THE TRANSACTION CAN BE SHOWN TO BE COMPUTED WITHOUT DUE DILIGENCE WITH A WILLFUL ATTEMPT TO DEFRAUD THE REVENUE. 4.3. WHEN THE FACTS OF THE PRESENT CASE ARE CONSIDERED, WE FIND THAT THE TP STUDY QUA THE ISSUE WAS ACCEPTED BY THE TPO TO THE EXTENT THA T THE MOST APPROPRIATE METHOD SELECTED AS TNMM WAS NOT TINKERED WITH. THE COMPAR ABLES OFFERED WERE ALSO NOT INTERFERED WITH. CONSIDERING THE AGREEMENT OF THE ASSESSEE WITH THE FOREIGN AE WHICH HAS BEEN REPRODUCED IN THE TPOS ORDER ITSELF VERBATIM SHOWS THAT FULL FACTS HAVE BEEN DISCLOSED ALL ALONG INCLUDING THE FEE SCHEDULE WHIC H HAS ALSO BEEN REPRODUCED BY THE TPO. ON ANALYZING THE SAME, THE TPO HELD THAT THE CORREC T COMPENSATION MODEL AT ARMS LENGTH PRICE WOULD BE COMMISSION ON FOB COST OF GOODS SOUR CED FROM INDIA AND THE ADDITION WAS PROPOSED. BY THE TIME, THE ISSUE IN THE QUANTUM PR OCEEDINGS CAME UP BEFORE THE DRP THE DECISION OF THE ITAT IN THE CASE OF LI & FUNG HOLDI NG THE SAME VIEW WAS AVAILABLE AND THE ASSESSEE CONSEQUENTLY FAILED TO GET ANY RELIEF. IT IS A FACT THAT THE CO-ORDINATE BENCH IN THE QUANTUM PROCEEDINGS DID NOT APPROVE THE INTERFERENC E WITH THE REMUNERATION MODEL OF THE ASSESSEE MADE BY THE TPO AND UPHELD BY THE DRP. IT WOULD BE APPROPRIATE TO REFER AT THIS STAGE TO THE FINDINGS ARRIVED AT IN THE QUANTUM PRO CEEDINGS. THE RELEVANT EXTRACTS FROM THE ORDER IN THE QUANTUM PROCEEDINGS ARE EXTRACTED HEREUNDER:- 9.2. CHARACTERIZATION OF ASSESSEE AND ITS ASSOCIAT ED ENTERPRISES THROUGH FUNCTION, ASSETS AND RISK (FAR) ANALYSIS OF INTERNATIONAL TRANSACTIONS. I.T.A .NO.-6742/DEL/2013 PAGE 13 OF 23 THE FAR ANALYSIS GIVES THE BASIS OF BROAD CHARACTER IZATION FOR E.G. MANUFACTURER, SERVICE PROVIDER, DISTRIBUTOR, ETC WITH A FURTHER S UB-CHARACTERIZATION INCLUDING LOW-RISK SERVICE PROVIDER, HIGH RISK SERVICE PROVID ER; FULL-FLEDGED MANUFACTURER, CONTRACT MANUFACTURER, ETC. THESE CHARACTERIZATIONS ARE VITALLY IMPORTANT TO DETERMINE THE ARMS LENGTH PRICE OF INTERNATIONAL T RANSACTIONS. I. AUTHORITIES BELOW HAVE PROCEEDED ON PREMISE THAT ASSESSEE IS A RISK BEARING AE AND ITS FUNCTIONS ARE NOT IN THE NATURE OF A SERVICE PROVIDER ONLY. THE FAR ATTRIBUTABLE TO ASSESSEE ARE FAR GREA TER THAN WHAT ARE CLAIMED. ASSESSEE HAS DEVELOPED SUBSTANTIAL INTANGI BLES IN THE FORM OF HUMAN RESOURCES AND SUPPLY CHAIN. BESIDES LOCATION ADVANTAGES AVAILABLE TO ASSESSEE HAVE NOT BEEN FACTORED IN THE ALP. II. ON THESE OBSERVATIONS, AND BY PUTTING RELIANCE ON THE CASE OF LI & FUNG INDIA, IT HAS BEEN HELD THAT ASSESSEE PERFORMS THE FUNCTIONS OF A RISK BEARING AGENT AND THEREFORE, COST PLUS PLI ADO PTED BY THE ASSESSEE FOR ALP DETERMINATION IS NOT THE MOST APPROPRIATE. THEREBY THE COST PLUS PLI HAS BEEN SUBSTITUTED BY 5% ON FOB VALUE OF GOOD S OUTSOURCED BY THE ENTITIES OF FOREIGN ENTERPRISES WHICH HAS BEEN CONS IDERED TO BE THE TP VALUE. III. IN OUR CONSIDERED VIEW, NO SUPPORTING MATERIAL HAS BEEN BROUGHT ON RECORD THAT ASSESSEE; GIS INDIA HAS BORN E ANY BUSINESS RISKS ARISING FROM ITS ACTIVITIES WITH GAP USA. THERE ARE NO ADVERSE FACTS, MATERIAL OR EVIDENCE ON THE BASIS WHEREOF LD. TPO HAS MADE ARRIVED AT SUCH A CONCLUSION. THE LD. TPO HAS NOT GIVEN ANY EXAMPLES OR COMPARABLES WHATSOEVER TO DEM ONSTRATE WHICH MAJOR BUSINESS RISKS MUCH LESS ANY RISK ARE BORNE B Y GIS INDIA AND HOW. IN A SWEEPING MANNER IT HAS BEEN HELD THAT AS FUNCT IONS FOLLOW RISKS, AND SINCE, IN HIS WISDOM GIS INDIA UNDERTAKES KEY FUNCTIONS, THEREFORE IT MUST ALSO BE BEARING THE CONSEQUENT RI SKS. THE OBSERVATION IS FLAWED AS FROM THE HANDBOOK AND GUIDELINES IT CL EARLY EMERGES THAT ASSESSEE HAD NO WISDOM OR DISCRETION IN THESE TERMS. IV. .. V. .. VI. .. VIII. IN VIEW OF ALL THESE FACTS WE ARE UNABLE TO AGREE W ITH THE PROPOSITIONS OF TPO THAT ASSESSEE WORKS AS A RISK BEARING AGENT OF THE AE AND IT POSSESSES HUMAN RESOURCES INTANGIBLES ALO NG WITH SUPPLY CHAIN RESOURCES. THE FACTS AND CIRCUMSTANCES LEAD US TO A CONCLUSION THAT ASSESSEE IS A LOW RISK PROCUREMENT SUPPORT SER VICE PROVIDER ONLY. (EMPHASIS PROVIDED) 4.4. THE FOLLOWING EXTRACTS FROM THE ORDER OF THE CO-OR DINATE BENCH WOULD FURTHER BE RELEVANT TO REFER TO IN ORDER TO CONSIDER THE CONDU CT OF THE ASSESSEE VIS-A-VIS ITS CLAIM OF GOOD FAITH AND DUE DILIGENCE WHICH IS UNDER SCRUTIN Y:- I.T.A .NO.-6742/DEL/2013 PAGE 14 OF 23 9.4. LI & FUNG CASE AND TPO / DRP STAND I. .. II. . III. THE DEPARTMENT HAS HEAVILY RELIED ON THE LI & FUNG IND IAS CASE (SUPRA). IN THIS CASE, THE DELHI TRIBUNAL HELD THAT ON THE FACT S OF THE SAID CASE, THE PROCUREMENT COMPANY IN INDIA WAS ENTITLED TO A REVENUE LINKED R EMUNERATION. THE DECISION IN THE CASE OF LI & FUNG PROCEEDED ON THE SPECIFIC FINDINGS OF THE TPO THAT THE ASSESSEE WAS NOT ABLE TO ESTABLISH THAT THE FOREIGN PRINCIPAL IN HONG KONG HAD ANY SUBSTANCE, WHICH THE ASSESSEE WAS ALSO NOT ABLE TO SUBSTANTIA TE BEFORE THE TRIBUNAL. IN THESE PECULIAR FACTS TRIBUNAL ACCEPTED THE FACTUAL POSITION THAT THE INDIAN ASSESSEE HAD ACTUALLY CARRIED OUT ALL THE SIGNIFICANT FUNCTIONS RELA TING TO PROCUREMENT IN INDIA; AND THAT VERY LITTLE OR VIRTUALLY NIL FUNCTIONS WE RE CARRIED OUT AT THE LEVEL OF HONG KONG. IV. HOWEVER, THE FACTS IN THE APPELLANTS CASE ARE DIFFERENT IN AS MUC H AS ALL THE SIGNIFICANT DIRECTIONS RELATING TO PROCUREMENT OF GOODS F ROM THIRD PARTY VENDORS IN INDIA, NAMELY (A) DESIGNS & TRENDS OF APPAREL; (B) QUALITY PARAMETERS OF MATERIALS: (C) TERMS & CONDITIONS FOR DEALING WITH VENDORS, ETC, ARE ALL PROVIDED BY GAP US TO THE APPELLANT THROUGH THE VOLUMINOUS VENDOR HA NDBOOK & OTHER CORRESPONDENCES WHICH ARE PLACED ON RECORD AND HAVE N OT BEEN CONTROVERTED BY THE DEPARTMENT. IT EMERGES THAT ASSESSEE FOLLOWS AND EXECUTES THEM AS A SERVICE PROVIDER. FOR SUCH PREORDAINED SUPPORT SERVICES, THE ASSESSEE C ANNOT BE HELD TO BE ENTITLED TO REMUNERATION IN TERMS OF LI & FUNG CASE O N FOB VALUE OF GOODS PROCURED BY GAP US FROM THIRD PARTY VENDORS IN INDIA. IN THE CASE OF LI & FUNG INDIA, ASSESSEE ACTUALLY CARRIED OUT SIGNIFICANTLY VALUE ADDED FUNCTIONS IN INDIA, WHICH IS NOT THE CASE BEFORE US. V. EVEN IF WE OVERLOOK THE FACTUAL DISSIMILARITIES BETWEEN THE LI & FUNG INDIA AND ASSESSEES CASE, THE TRANSACTIONAL PROFITABILITY EA RNED BY LI & FUNG INDIA SUPPORTS THE CASE OF ASSESSEE. THE DEPARTMENT HAS HEAVILY RELIED ON THE FACT THAT LI & FUNG HONG REMUNERATION OF 5% OF VALUE OF GOODS PROCURED SHOUL D BE USED AS BENCHMARK RATE BY THE ASSESSEE. THE DEPARTMENT OVERLOOKED THE OTHER E XTREMELY IMPORTANT FACT OF THE PROFITABILITY EARNED BY LI & FUNG THROUGH 5% PROCUR EMENT SERVICE MODEL. THE TOTAL REMUNERATION EARNED BY LI & FUNG HONG KONG WAS RS. 60.15 CRORES AGAINST COST INCURRED BY INDIAN COMPANY OF RS. 45.42 CRORES AND SOME MINOR COSTS INCURRED IN HONG KONG. THE ITA T BENCH HELD THAT CONSIDERING THE FACTS OF THE CASE, 80% OF COMMISSION (RS. 48.12 CRO RES) EARNED BY LI & FUNG HONG KONG SHOULD BE ATTRIBUTED TO INDIAN COMPANY. THIS ATTRIB UTION RESULTED IN PROFITABILITY OF RS. 2.72 CRORES (RS. 48.12 CRORES RS. 45.42 CRORES) FOR THE INDIAN COMPANY RESULTING IN THE NET PROFIT / TOTAL COST OF 6%. DEPARTMENT OVERLOOKED THESE IMPORTANT FACTS WHICH MUST BE TAKEN INTO CONSIDERATION USING THIS EXAMPLE AS BENCHMARK FOR DETERMINING ARMS LENGTH P RICE OF INTERNATIONAL TRANSACTIONS FOR TAXPAYERS. (EMPHASIS PROVIDED) 4.5. IN THE FACE OF THESE CLEAR CRITICAL AND SPEAKING O BSERVATIONS OF THE CO-ORDINATE BENCH, WE FIND THAT THERE IS NOT EVEN A WHISPER OF A SLUR ON THE CONDUCT OF THE ASSESSEE AND INFACT IT IS THE REVENUE WHICH IS SEVERELY CAST IGATED FOR THE FLAWED APPROACH AND I.T.A .NO.-6742/DEL/2013 PAGE 15 OF 23 SWEEPING MANNER OF DECISION MAKING. THE TP STUDY RELIED UPON BY THE ASSESSEE AS FAR AS THE SELECTION OF MOST APPROPRIATE METHOD AND SEL ECTION OF COMPARABLES IS CONCERNED, HAS BEEN UPHELD BY THE TPO HIMSELF. THE REMUNERATI ON MODEL HAS BEEN UPHELD BY THE ITAT. THUS, TO THIS EXTENT AS PER RECORD THERE IS NO DOUBT THAT THE TP STUDY HAS BEEN PREPARED WITH DUE DILIGENCE AND IN GOOD FAITH. 4.6. THE NEXT ISSUE WHICH THEN ARISES FOR OUR CONSIDERAT ION IS CAN THE ACCEPTANCE OF ENHANCED MARK-UP OF 32% AS AGAINST THE MARK-UP OF 1 5% IN THE TP STUDY BE SO FATAL AS TO ATTRACT THE RIGOROUS OF THE ACT. THE FACT THAT THE MARK-UP OF 32% WAS AN ESTIMATED MARK- UP IS AN ACCEPTED FACT AND HAS NOT BEEN DISPUTED BY THE REVENUE. ADMITTEDLY THE SAID MARK-UP HAS NEITHER BEEN CONSIDERED BY THE ASSESSEE IN ITS TP STUDY NOR HAS IT BEEN PROPOSED BY THE TPO OR FOR THAT MATTER BY THE DRP. THE SAID ISSUE ADMITTEDLY SURFACED FOR THE FIRST TIME BEFORE THE ITAT WHERE FACED WITH THE POSITION WHERE THE ASSESSEE REALIZING AND ACCEPTING ITS INABILITY TO PERSUADE THE BENCH T O TAKE A VIEW ON THE FACTS AND NOT ON PRECEDENT AVAILABLE IN THE CASE OF LI & FUNG, THE FACTS OF WHICH CASE HAD BEEN HELD TO BE DISTINGUISHABLE THAT THE ASSESSEE FINDING ITSELF UN ABLE TO CONVINCE TO THE CONTRARY FINALLY CHOSE TO ACCEPT PART ADDITION AS A LESSER EVIL BY P ROPOSING AND SUGGESTING THE ESTIMATED MARK-UP OF 32% AS OPPOSED TO CONTINUE LITIGATION ON THE ISSUE TILL THE LAST POSSIBLE STAGE. THE RECORD SHOWS THAT THE MARK-UP OF 32% WAS ONE OF THE MANY DATA POINTS FOR CONSIDERATION BEFORE THE BENCH. 4.7. THE CORRECTNESS OF THE TP STUDY WITH DUE DILIGENCE AND GOOD FAITH IS EVIDENT FROM THE FACT THAT IN TWO CONSECUTIVE SUBSEQUENT YEARS F OR THE SAME ACTIVITY THE CO-ORDINATE BENCHES OF THE ITAT HAVE ACCEPTED THE MARK-UP OF 15 %. THE FACT THAT THE CO-ORDINATE BENCHES TOOK THE VIEW NOT ONLY RELYING ON THE DOCUM ENTATION IN THE TP STUDY AND THE I.T.A .NO.-6742/DEL/2013 PAGE 16 OF 23 AGREEMENTS WHICH WERE MADE AVAILABLE TO THE TPO EVE N IN THE PRESENT PROCEEDINGS. THE DECISION OF THE JURISDICTIONAL HIGH COURT DATED 16. 12.2013 IN THE CASE OF LI & FUNG WHEREIN THE HONBLE COURT HAD BEEN TAKEN INTO CONSIDERATION BY THE CO-ORDINATE BENCHES NOTING THAT THE COURT HAD APPROVED THE REMUNERATION MODEL OF MARK-UP OF 5% ON THE OPERATION COST OF LI & FUNG INDIA, WITHOUT CONSIDERING THE VA LUE OF GOODS PROCURED BY THE FOREIGN AE OF LI & FUNG DIRECTLY FROM THIRD PARTY VENDORS IN I NDIA. IT IS NOT RELEVANT HERE TO ADDRESS IN DETAIL THE SEVERE CASTIGATION OF THE APPROACH OF TH E REVENUE NOTED AND POINTED OUT BY THE HONBLE COURT WHICH HAS OBSERVED THAT TAX AUTHORITIES SHOULD BASE THEIR CONCLUSIONS ON SPECIFIC FACTS AND NOT ON VAGUE GENERALITIES SUCH A S SIGNIFICANT RISK FUNCTIONAL RISK ENTERPRISE RISK ETC. WITHOUT ANY MATERIAL ON RECORD TO ESTABLISH SU CH FINDINGS. THE HONBLE COURT HAS FURTHER HELD IF SUCH FINDINGS ARE WARRANTED, THEY SHOULD BE SUP PORTED BY DEMONSTRABLE REASON, BASED ON OBJECTIVE FACTS AND THE RELATIVE EVALUATION OF THEI R WEIGHT AND SIGNIFICANCE. FOLLOWING THE SAID PRINCIPLE AND APPLYING THEM TO THE FACTS OF THE PRE SENT CASE, WE ARE OF THE VIEW THAT SIMPLY BECAUSE AN ESTIMATE LAID DOWN AS A STANDARD BY THE ITAT IN A CASE WHERE ADMITTEDLY IT HAD BEEN HELD THAT THE FACTS QUA THE ASSESSEE WERE MATE RIALLY, SIGNIFICANTLY AND SUBSTANTIALLY AT VARIANCE AND DIFFERENT WHERE THE CO-ORDINATE BENCH IN THE QUANTUM PROCEEDINGS HAS ELABORATELY DISCUSSED AND CONCLUDED THAT THE FACTS AND CIRCUMSTANCES IN THE CASE OF LI & FUNG WERE ENTIRELY DISTINGUISHABLE THE ACCEPTANCE OF AN ENHANCED MARK-UP DOES NOT ERODE THE CLAIM OF THE ASSESSEE IN THE PECULIAR FACTS OF THE CASE. CONSIDERING THE FACTS OF THE LI & FUNG, THE CO-ORDINATE BENCH HAD HELD THAT THE FOREI GN AE ADMITTEDLY LACKED THE PECULIAR DOMAIN KNOWLEDGE NECESSARY FOR CARRYING OUT THE ACT IVITIES WHICH KNOWLEDGE AND EXPERTISE EXCLUSIVELY VESTED WITH THE INDIAN AE. THE CO-ORDINA TE BENCH HAD ALSO OBSERVED THAT THE HIGHER RETURNS OF THIS FOREIGN AE WHO HAD NO CORE CO MPETENCE VIS-A-VIS THE INDIAN AE I.T.A .NO.-6742/DEL/2013 PAGE 17 OF 23 ENTITY WHICH HAD THE CORE STRENGTH AND DID THE ENTI RE LEGWORK HAVING DEMONSTRATIVE KNOWLEDGE, EXPERTISE AND CAPABILITY FOR THE TASKS U NDERTAKEN BY IT DESERVED A HIGHER SHARE IN THE PROFITS. AS OPPOSED TO THIS IN THE FACTS OF THE PRESENT CASE THE ENTIRE DECISION-MAKING ON APPAREL SPECIFICATIONS, FASHIONS QUALITY, COLOUR DESIGN WAS WELL WITHIN THE CAPABILITY OF THE FOREIGN AE WHO AS PER ITS HANDBOOK DIRECTLY PLAC ED ORDERS MEETING REQUIREMENTS WITH THE THIRD-PARTY VENDORS AND THE ASSESSEES ROLE WA S ONLY LIMITED TO PROVIDING SERVICES TO FACILITATE THESE. THUS IN THE FACE OF THESE CLEAR- CUT DISTINCTIONS THE CO-ORDINATE BENCH IN THE QUANTUM PROCEEDINGS CONCLUDED THAT THE ASSESSEE WAS A LOW-RISK SERVICE PROVIDER. THE REMUNERATION MODEL OF COST PLUS METHOD WAS HELD TO BE MOST APPROPRIATE. HENCE THE DECISION TO ACCEPT AN ESTIMATE BY THE ASSESSEE OF T HE STANDARD LAID DOWN IN A DISTINGUISHABLE CASE WAS MADE IN PECULIAR FACTS AND CIRCUMSTANCES OF THE PRESENT CASE. IT CANNOT BE SAID TO BE AN ACCEPTANCE BY THE ASSESSEE ON ACCOUNT OF ANY MALAFIDE OR CARELESSNESS DETECTED WHERE AFTER OFFERING AN EXPLA NATION RELYING UPON THE AGREEMENTS AND THE CORRECTNESS OF THE SAME BASED ON THE TP STU DY, THE ASSESSEE FACES A WALL OF OBSTRUCTION, THE ASSESSEE EITHER HAD A CHOICE TO AC CEPT A MODICUM OF ADDITION BY WAY OF AN ESTIMATE OR GO THE FULL CIRCLE OF LEGAL BATTLE RIGH T UP TO THE TOP. THE EXERCISE OF CHOICE TO CLOSE AN ISSUE WITH THE ADDITION IN ORDER TO ACHIEV E PEACE OF MIND CANNOT BE SAID TO BE SO FATAL, IN THE ABSENCE OF MALAFIDE, THAT THE ASSESSE E MUST NECESSARILY BE VISITED BY A PENALTY OF CONCEALMENT OR OF FILING INACCURATE PARTICULARS. THE CLAIM OF TP STUDY HAVING BEEN PREPARED AND CLAIM OF TRANSACTION BEING AT ARMS LEN GTH MODE IN GOOD FAITH AND DUE DILIGENCE CANNOT BE SAID TO HAVE BEEN ERODED BY ACC EPTING AN ENHANCED MARK-UP IN THESE PECULIAR FACTS. I.T.A .NO.-6742/DEL/2013 PAGE 18 OF 23 4.8. NO DOUBT EXPLANATION 7 TO SECTION 271(1)(C) IS A DE EMING PROVISION AND POSTULATES THAT ANY ADDITION ON ACCOUNT OF TRANSFER PRICING AD JUSTMENT SHALL BE DEEMED TO REPRESENT INCOME IN RESPECT OF WHICH PARTICULARS HAVE BEEN CO NCEALED OR INACCURATE PARTICULARS HAVE BEEN FURNISHED IN TERMS OF SECTION 271(1)(C). HOWE VER, THE LEGISLATURE HAS NOT INTENDED THE PENALTY TO BE AUTOMATICALLY INVOKED AND HAS CAR VED OUT AN EXCEPTION BY SETTING OUT IN CLEAR UNAMBIGUOUS LANGUAGE THAT NO PENALTY WILL BE IMPOSED AS A RESULT OF THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IF THE ASSES SEE IS ABLE TO PROVE THAT THE PRICE CHARGED OR PAID IN SUCH TRANSACTION WAS IN ACCORDAN CE WITH THE PROVISIONS OF SECTION 92C AND SUCH PRICE WAS COMPUTED AS PER THE MANNER PRESC RIBED UNDER THAT SUCTION IN GOOD FAITH AND WITH DUE DILIGENCE. THUS ONLY IF ON RECO RD, CONSIDERING THE EXPLANATION OF THE ASSESSEE IT CAN BE CONCLUDED THAT THE ADDITION ON A CCOUNT OF TRANSFER PRICING ADJUSTMENT IS A RESULT OF COMPUTATION OF PRICE CHARGED OR PAID WI THOUT ADHERING TO OR MEETING THE REQUIREMENTS OF COMPUTING THE PRICE CHARGED OR PAID AS REQUIRED BY SECTION 92C EITHER IN GOOD FAITH NOR WITH DUE DILIGENCE, THE PENALTY CAN BE IMPOSED. 4.9. IN THE FACTS OF THE PRESENT CASE IT IS SEEN THAT T HE REQUIREMENTS OF SECTION 92C HAVE BEEN MET AS THE SELECTION OF TNMM IS ONE OF THE MET HODS PROVIDED AND ADDRESSING THE INGREDIENTS OF SECTION 271(1)(C) THE SELECTION OF M ETHOD BY THE TPO HAS NOT BEEN UPSET. 4.10. CONSIDERING THE OVERALL FACTUAL MATRIX WHEREIN THE FACTS HAVE BEEN RE-VISITED BY US IN GREAT DETAIL, WE FIND OURSELVES UNABLE TO AGREE WIT H THE VIEW TAKEN BY THE TAX AUTHORITIES. NO DOUBT THE ONUS IS PLACED BY THE STATUTE UPON THE ASSESSEE TO DEMONSTRATE THAT ITS COMPUTATION OF PRICE PAID OR CHARGED WAS WITHIN THE FOUR CORNERS OF THE MANNER PRESCRIBED U/S 92C AND NOTWITHSTANDING THE ADDITION MADE THE E XERCISE WAS UNDERTAKEN IN GOOD FAITH AND WITH DUE DILIGENCE. HAVING SO DEMONSTRATED BY T HE CONSISTENT EXPLANATION ON RECORD IN I.T.A .NO.-6742/DEL/2013 PAGE 19 OF 23 THE FACTS OF THE PRESENT CASE THE ONUS SHIFTS TO TH E REVENUE TO DEMONSTRATE THAT BY A SPECIFIC ACT, FACT OR CONDUCT THE AFFAIRS OF THE AS SESSEE IN REGARD TO COMPUTATION OF PRICE CHARGED OR PAID WAS LACKING IN GOOD FAITH AND WAS DONE WITHOUT DUE DILIGENCE. NO SUCH ARGUMENT HAS BEEN RAISED NOR ANY FACT HAS BEEN BROU GHT TO OUR NOTICE TO SUGGEST OTHERWISE. THE VIEW TAKEN APPEARS TO BE THAT SIMPL Y BECAUSE THE ADDITION IS ACCEPTED THE PENALTY IS TO BE LEVIED. 4.11. WE FIND CONSIDERING THE JUDICIAL PRECEDENT AND THE PECULIAR FACTS OF THE PRESENT CASE THE SAID ARGUMENT DOES NOT LEND ANY HELP TO THE REV ENUE. THOUGH THE TERMS GOOD FAITH AND DUE DILIGENCE HAVE NOT BEEN DEFINED UNDER THE ACT ACCORDINGLY THE DEFINITION OF THE TERM IN GOOD FAITH AS DEFINED UNDER THE GENERAL CLAUSES ACT MAY BE TAKEN INTO CONSIDERATION. THE TERM IN GOOD FAITH HAS BEEN D EFINED IN THE BLACKS LAW DICTIONARY; SIXTH EDITION WHICH DEFINES THE TERM AS GOOD FAITH IS AN INTANGIBLE AND ABSTRACT QUALITY WITH NO TECHNICAL MEANING OR STATU TORY DEFINITION, AND IT ENCOMPASSES, AMONG OTHER THINGS, AN HONEST BELIEF, THE ABSENCE O F MALICE AND THE ABSENCE OF DESIGN TO DEFRAUD OR TO SEEK AN UNCONSCIONABLE ADVANTAGE, AND AN INDIVIDUALS PERSONAL GOOD FAITH IS CONCEPT OF HIS OWN MIND AND INNER SPIRIT AND, THERE FORE, MAY NOT CONCLUSIVELY BE DETERMINED BY HIS PROTESTATIONS ALONE. (DOYLE VS. GORDON, 158 N.Y. S.2D 248, 259, 260]. IN COMMON USAGE THIS TERM IS ORDINARILY USED TO DE SCRIBE THAT STATE OF MIND DENOTING HONESTY OF PURPOSE, FREEDOM FROM INTENTION TO DEFRA UD, AND, GENERALLY SPEAKING, MEANS BEING FAITHFUL TO ONES DUTY OR OBLIGATION. [EFRONE VS. KAHNANOVITZ, 249 CAL. APP. 187 S 57 CAL. RPTR. 248, 251]. IT MAY NOT BE OUT OF PLACE TO QUOTE FROM THE ORDER DATED 01.03.2016 OF THE ITAT IN ITA NO.1062 & 1063/DEL/2013 IN THE C ASE OF ACIT VS BOSTON SCIENTIFIC INDIA PVT. LTD. WHEREIN IT HAS BEEN OBSERVED:- I.T.A .NO.-6742/DEL/2013 PAGE 20 OF 23 13.8.2. GOOD FAITH PRESUPPOSES HONESTY AND FAIRNESS AT IT S CORE. HOWEVER, GOOD FAITH DOES NOT COVER THE SINS OF OMISSION OR NEGLIG ENCE. DUE DILIGENCE ON THE OTHER HAND DOES NOT TOLERATE NEGLIGENCE AND MAY BE DEFINE D AS PRUDENT, RESPONSIBLE CARE AND ATTENTION REQUIRED TO BE EXERCISED BY A REASONA BLE AND PRUDENT PERSON IN A GIVEN SITUATION. THUS, AS OBSERVED IN ACTS OF GOO D FAITH IT MAY NOT BE POSSIBLE TO QUESTION NEGLIGENCE WHERE DUE DILIGENCE STANDARDS A RE REQUIRED TO BE MET NEGLIGENCE CANNOT BE TOLERATED. SIMILARLY DUE DILI GENCE STANDARDS MAY NOT NECESSARILY 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 SITUATIONS WHERE EX PLANATION 7 IS ATTRACTED HAS BEEN KEPT VERY HIGH. THE TWIN REQUIREMENTS OF THE ACT MA Y BE CAPABLE OF BEING SUMMED UP IN THE TERM BEST EFFORTS WHICH NOT ONLY PRESUP POSE DUE DILIGENCE BUT ALSO GOOD FAITH AS BEST EFFORTS MAY INCORPORATE NOT ON LY A DILIGENT STANDARD BUT CAN ALSO SUBSUME A GOOD FAITH STANDARD. 4.12. THE ALLAHABAD HIGH COURT IN THE CASE OF KEDAR NATH V. STATE [AIR 1965 ALL 233] (AT P. 236) WHILE OPINING ON THE MEANING OF THE SAID TERM, HEL D GOOD FAITH IMPORTS THE EXERCISE OF DUE CARE AND ATTENTION. A PERSON CA N BE EXCUSED FOR HAVING COMMITTED AN ERROR OF JUDGMENT ONLY IF HE EXERCISED DUE CARE AND ATTENTION AND HIS CONDUCT MAKES IT CLEAR THAT THERE WAS NO NEGLIGENCE ACCORDING TO REA SONABLE STANDARDS. THE STANDARD OF CARE REQUIRED IS THAT OF A REASONABLY PRUDENT MAN W HO ACTS WITH THE CARE AND CAUTION REQUIRED OF A PERSON IN HIS POSITION DEALING WITH A MATTER OF SIMILAR IMPORTANCE. 4.13. AT THE COST OF RE-ITERATION IN ORDER TO DECIDE AND ADJUDICATE UPON THE SAID ISSUE, IT IS NECESSARY TO CONSIDER THE CONDUCT OF THE ASSESSEE A ND ASCERTAIN WHETHER IT CAN BE SAID TO HAVE BEEN GOVERNED AND GUIDED BY GOOD FAITH AND DUE DILIGENCE OR NOT. IN THE FACTS OF THE PRESENT CASE AS PER THE TP STUDY REPORT MADE AVAILA BLE BY THE ASSESSEE TO THE TAX AUTHORITIES THE ASSESSEE OPERATES AS A PROCUREMENT SUPPORT SERVICE COMPANY FOR ITS FOREIGN AE. THE FOREIGN AE DIRECTLY SOURCES THE GOODS FROM TH IRD-PARTY VENDORS IN INDIA AND IN RESPECT OF THESE THE ASSESSEE RENDERS SOURCING SUPP ORT SERVICES. FOR THE SAID EXERCISE THE ASSESSEE IS REMUNERATED AT TOTAL OPERATING COSTS +1 5% MARKUP. IT IS A FACT THAT THE TPO I.T.A .NO.-6742/DEL/2013 PAGE 21 OF 23 DID NOT ACCEPT THE REMUNERATION MODEL OF THE ASSESS EE AND CHANGED THE CHARACTERIZATION FROM LIMITED RISK BEARING SOURCE SINGLE SUPPORT SER VICE PROVIDER TO A COMMISSION AGENT. THE SAID ISSUE IN THE QUANTUM PROCEEDINGS REACHED THE I TAT AND IT IS A FACT THAT THE ITAT UPHELD THE REMUNERATION MODEL OF THE ASSESSEE THAT IS A MARKUP ON TOTAL OPERATING COSTS. IT IS A FACT THAT THE MARKUP OF 15% AS CLAIMED BY T HE ASSESSEE WAS NOT ACCEPTED BY THE ITAT AND AS PER THE ARGUMENTS OF THE ASSESSEE, A MA RKUP OF 32% WAS ACCEPTED IN ORDER TO ACHIEVE A CLOSURE ON THE ISSUE WHERE THE ENERGY AND COSTS DEVOTED TOWARDS LITIGATION WERE CONSIDERED TO BE NOT SUFFICIENT TO AGITATE FOR THE FURTHER RELIEF OF ABOUT 2% OF THE RELIEF WHICH WAS WITHHELD BY VIRTUE OF THE CONCESSI ON MADE BY THE ASSESSEE THAT THE MARKUP OF 32% IS ACCEPTABLE. WE HAVE NO REASON TO D ISBELIEVE THE CLAIM THAT IN THE FACTS THE PRESENT CASE THAT THE DECISION NOT TO AGITATE T HE ISSUE BEYOND THE ITAT WAS GUIDED BY PRUDENCE IN ORDER TO BUY PEACE AND AVOID PROTRACTED LITIGATION WHERE THE AMOUNT AT STAKE FOR THE ASSESSEE WAS NOT SUFFICIENT TO CONSIDER THE OPTION OF FURTHER LITIGATION. IT IS A FACT THAT AS A RESULT OF THE ADDITIONS MADE BY THE TPO W HEREIN ADDITION OF RS.236.22 CRORES WAS PROPOSED AND PURSUANT TO THE ORDER OF THE DRP HAD B EEN MADE BY THE ASSESSING OFFICER, WHICH STOOD REDUCED TO RS.4.92 CRORE WITH THE RESUL TANT RELIEF OF DELETION OF ADDITION OF RS.231,31 CRORE. THE CONSEQUENT ADDITION SUSTAINED OF RS.4.92 CRORES WAS CONSIDERED TO BE NOT SO BIG AN AMOUNT THAT IN THE FACE OF THE PRE VALENT VIEW OF THE ITAT IN LI & FUNG WHEREIN THE ASSESSEE UNDERSTOOD THAT THE ITAT WAS N OT WILLING TO ACCEPT THE ARGUMENT THAT 15% WAS CORRECT AND TRUE. THE DECISION SO MAD E IN THE PECULIAR FACTS AND CIRCUMSTANCES DOES NOT MAKE OUT A CASE THAT THE DEC ISION NOT TO LITIGATE AND ACCEPT WAS MALAFIDE. I.T.A .NO.-6742/DEL/2013 PAGE 22 OF 23 4.14. THUS THE DECISION TO ACCEPT A PARTIAL ADDITION IN THE FACTS OF THE PRESENT CASE NO WHERE REFLECTS NEGATIVELY ON EITHER THE CLAIM OF GO OD FAITH NOR THE CLAIM OF DUE DILIGENCE AND INSTEAD ONLY ADDRESSED THE SHEER HELPLESSNESS O F THE ASSESSEE. IT IS NECESSARY TO CONSIDER THE CLAIMS REALISTICALLY AND AN ASSESSEE A FTER RELYING UPON THE CORRECTNESS OF ITS TP STUDY IN THE FACE OF THEN PREVALENT VIEW AS PER JUDICIAL PRECEDENT EITHER HAS A CHOICE TO ACCEPT A MODICUM OF ADDITION BY WAY OF AN ESTIMATE OR GO THE FULL CIRCLE OF LITIGATION RIGHT UPTO THE TOP. THE EXERCISE OF CHOICE TO CLOSE AN ISSUE BY ACCEPTING A PALTRY ADDITION WHEREIN ADMITTEDLY RELIEF TO THE EXTENT OF 98% OF T HE ADDITION WAS GRANTED AND ONLY 2% OF THE ADDITION STOOD SUSTAINED IS A PERSONAL CHOICE D EPENDING ON A PERSONS APPETITE TO LITIGATE. THE CHOICE TO MAINTAIN PEACE OF MIND AND AVOID PROTRACTED LITIGATION DOES NOT IN ANY WAY LEAD TO THE CONCLUSION THAT INACCURATE PART ICULARS WERE FILED OR THERE WAS CONCEALMENT. INFACT THE PRUDENT DECISION RESULTED IN SUBSTANTIAL RELIEF BEING GRANTED TO THE ASSESSEE. IT IS SEEN THAT SUBSEQUENT JUDICIAL PREC EDENT WOULD SHOW THAT HAD THE ASSESSEE NOT CONCEDED THE ISSUE THE ASSESSEE MAY HAVE HAD A GOOD ARGUABLE CASE BEFORE THE NEXT FORUM AS THE DECISION OF THE HONBLE HIGH COURT IN LI AND FUNGS CASE HAS SHOWN. IT IS FURTHER SEEN THAT THE DECISION IN THE QUANTUM PROCE EDINGS HAS NOT BEEN UPSET BY THE HONBLE HIGH COURT AND INFACT THE REVENUES APPEAL IN 2007-08 AY HAS BEEN DISMISSED BY THE HONBLE HIGH COURT VIDE ORDER DATED 29.01.2016 AS PER COPY PLACED AT PAPER BOOK PAGE 118 TO 119 ON ACCOUNT OF EXTRAORDINARY DELAY OF 815 DAYS. 4.15. ACCORDINGLY CONSIDERING THE FACTS, ARGUMENTS, LEGAL PRECEDENT, RELEVANT PROVISION AND THE MATERIAL AVAILABLE ON RECORD, WE HOLD THAT THE PENALTY ORDER DESERVES TO BE QUASHED AS NO CASE HAS BEEN MADE OUT BY THE REVENUE TO SHOW THAT THE ASSESSEE CONDUCTED ITS AFFAIRS WITHOUT GOOD FAITH AND DUE DI LIGENCE. ON THE CONTRARY WE FIND THAT AT I.T.A .NO.-6742/DEL/2013 PAGE 23 OF 23 EVERY STEP THE ASSESSEE HAS BEEN ABLE TO DEMONSTRAT E THAT THE NOTWITHSTANDING THE ADDITION ACCEPTED BY WAY OF AN ESTIMATE THE CLAIM T HAT THE ARMS LENGTH PRICE HAS BEEN COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF SECTI ON 92C OF THE ACT STANDS UNREBUTTED ON RECORD. THE MERE FACT THAT ADDITION HAS BEEN PARTI ALLY SUSTAINED BY ITSELF IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE DOES NOT WARRANT THE PENAL ACTION. 5. THE PENALTY ORDER IS QUASHED AND THE IMPUGNED ORDE R IS SET ASIDE BY ALLOWING THE APPEAL OF THE ASSESSEE. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOW ED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 10 TH OF AUGUST, 2016. SD/- SD/- (PRASHANT MAHARISHI) (DIVA SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER *AMIT KUMAR* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI