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

ITA 6743/DEL/2013

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 4090 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 7 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-08-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 16-05-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 24-12-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: RAHUL K MITRA
• Keywords: Transfer pricing; International transaction; Onus to prove
• Section: 92C; 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.-6743/DEL/2013 (ASSESSMENT YEAR-2007-08) 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 16 .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 PERT AINING TO 200708 ASSESSMENT YEAR ON THE FOLLOWING GROUNDS:- 1. THE CIT(A) ERRED IN CONFIRMING THE PENALTY UNDER SECTION 271(1)(C) OF THE INCOME TAX ACT, 1961 (THE ACT) AMOUNTING TO RS.2. 31 CRORES, WHICH WAS LEVIED BY THE ASSESSING OFFICER (AO) FOR ALLEGED CO NCEALMENT OF INCOME AND ALSO FURNISHING INACCURATE PARTICULARS OF INCOME WI TH RESPECT TO THE TRANSFER PRICING (TP) ADJUSTMENT OF RS.6.93 CRORES, WHICH WA S ULTIMATELY CONFIRMED BY THE HONBLE TRIBUNAL OUT OF THE ORIGINAL TP ADJU STMENT OF RS.262.90 CRORES INITIALLY MADE BY THE AO, AFTER GRANTING REL IEF FOR THE BALANCE PART OF THE TP ADJUSTMENT AMOUNTING TO RS.255.97 CRORES. 2. THE CIT(A) ERRED IN INVOKING THE PROVISIONS OF EXPL ANATION 7 OF SECTION 271(1)(C) OF THE ACT IN CONFIRMING THE AFORESAID LE VY OF PENALTY BY HOLDING THAT THE APPELLANT HAD FAILED TO PROVE BEFORE THE A O AND CIT(A) THAT THE TP ADJUSTMENT WITH REFERENCE TO WHICH THE PENALTY HAD BEEN LEVIED, AS I.T.A .NO.-6743/DEL/2013 PAGE 2 OF 15 REFERRED TO IN GROUND NO.1 ABOVE, DID NOT ARISE DUE TO ANY ABSENCE OF GOOD FAITH AND DUE DILIGENCE ON THE PART OF THE APPELLAN T IN COMPUTING THE PRICE OF ITS INTERNATIONAL TRANSACTIONS WITH THE FOREIGN ASSOCIATED ENTERPRISES (AES) IN ACCORDANCE WITH THE PROVISIONS OF SECTION 92C OF THE ACT. 2. IT WAS A COMMON STAND OF THE PARTIES BEFORE THE BE NCH THAT THE ARGUMENTS ADVANCED IN IDENTICAL APPEAL IN ITA NO.6742/DEL/201 3 FOR 2006-07 AY WOULD ADDRESS THE ISSUES IN THE PRESENT APPEAL ALSO AS FACTS, CIRCUMS TANCES, ARGUMENTS AND POSITION OF LAW FOR THE RESPECTIVE PARTIES WOULD CONTINUE TO REMAIN THE SAME. 3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL AVAILABLE ON RECORD. THE RECORD SHOWS THAT THE ASSESSEE SELECTED TNMM AS THE MOST APPROPRIATE METHOD WHEREIN DESCRIBING ITSELF AS A LOW-RISK PROVIDER IN ITS FAR ANALYSIS CARRIED OUT IN THE TP STUDY CLAIMED THAT FOR THE SERVICES RENDERED TO ITS FOREIGN AE THE ASSESSEE WAS REMUNERATED ON TOTAL OPERATING COSTS WITH A MARK-UP OF 15%. THE ORDERS FOR THE SPECIFIC REQUIREMENTS OF THE FOREIGN AE AS PER RECORD WERE DI RECTLY PLACED WITH THE THIRD PARTY VENDORS FROM WHOM THE GOODS WERE SOURCED AND THE AS SESSEE OPERATED AS A PROCUREMENT SUPPORT SERVICE COMPANY FOR ITS FOREIGN ASSOCIATED ENTERPRISE (AE) I.E. GAP US. GAP US SOURCED THE GOODS DIRECTLY FROM THIRD PARTY VENDORS IN INDIA AND THESE WERE NOT ROUTED THROUGH THE FINANCIAL ACCOUNTS OF THE ASSESSEE INTO ITS PROFIT & LOSS ACCOUNT. GIS INDIA WAS REMUNERATED AT TOTAL OPERATING COSTS PLUS A 15% MAR K-UP THEREON . THE SELECTION OF TNMM AS A MOST APPROPRIATE METHOD WAS ACCEPTED BY THE TP O. HOWEVER, THE TPO RE- CHARACTERIZED THE ASSESSEE AS A SIGNIFICANT RISK B EARING ENTITY HAVING INTANGIBLES INSTEAD OF BEING A LOW RISK OPERATOR. ACCORDINGLY, THE REM UNERATION MODEL WAS ALSO CHANGED TO COMMISSION ON VALUE OF TOTAL GOODS PROCURED BY THE FOREIGN AE AT 5.22% COMMISSION INSTEAD OF MARK-UP OF 15% ON TOTAL COSTS. THE TPO APPLIED 5.22% ON THE VALUE OF GOODS SOURCED DIRECTLY FROM THIRD PARTY VENDOR BY THE FOR EIGN AE AND PROPOSED AN ADJUSTMENT OF I.T.A .NO.-6743/DEL/2013 PAGE 3 OF 15 RS.255.97 CRORE. THE ISSUE WHEN CARRIED TO THE ITA T IN THE QUANTUM PROCEEDINGS RESULTED IN PARTIAL SUCCESS TO THE ASSESSEE TO THE EXTENT TH AT THE REMUNERATION MODEL OF THE ASSESSEE WAS ACCEPTED. HOWEVER, THE MARK-UP OF 15% DOCUMENTED IN THE TP STUDY WAS NOT ACCEPTED AND INSTEAD SUBSTITUTED FOR THE ESTIMA TED MARK UP OF 32%. THE ADDITION OF RS.255.97 CRORE WAS RESTRICTED TO RS.6.92 CRORE BY WAY OF THIS CONCESSION. 4. THIS ACCEPTANCE OF THE ENHANCED MARK-UP OF 32% AS OPPOSED TO 15% ORIGINALLY CLAIMED LEAD TO THE PASSING OF THE PENALTY ORDER BY THE AO INVOKING EXPLANATION 7 TO SECTION 271(1)(C). THE SAID ORDER WAS CONFIRMED IN APPEAL BY THE CIT(A). AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE THE ITAT. 5. THE RELEVANT PROVISION OF THE ACT INVOKED BY THE R EVENUE IS EXTRACTED HEREUNDER:- 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]. 6. THE SUBSTANTIAL QUESTION THAT ARISES FOR CONSIDERA TION IS WHETHER IN THE FACTS OF THE CASE THE ACCEPTANCE OF ENHANCED MARK-UP AS DECIDED BY THE ITAT LEADING TO THE ADDITION CAN IT BE CLAIMED IN VIEW OF THE DEEMING PROVISION OF EXPLANATION 7 OF SECTION 271(1)(C), I.T.A .NO.-6743/DEL/2013 PAGE 4 OF 15 THAT THE COMPUTATION OF PRICE CHARGED OR PAID BY TH E ASSESSEE IN THE INTERNATIONAL TRANSACTION AS DEFINED IN SECTION 92B WAS COMPUTED IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SECTION 92C IN GOOD FAITH AND WITH DUE DILIGENCE. IN THE EARLIER YEAR, WE HAVE CONSIDERED THE SAID PROVISION AND DULY NOTED THAT T HE LEGISLATURE HAS INTRODUCED A DEEMING PROVISION. A DEPARTURE HAS BEEN MADE TO BASIC PRIN CIPLE IN TAX JURISPRUDENCE WHERE PRIMARY BURDEN OF PROOF IS UPON THE AO TO ESTABLISH CONCEALMENT OF AMOUNT OR FURNISHING OF INACCURATE PARTICULARS THROUGH PRIMARY EVIDENCE. EXPLANATION 7 TO SECTION 271(1)(C) CARVES OUT AN EXCEPTION IN CASE OF INTERNATIONAL TR ANSACTION WHEREBY ANY AMOUNT ADDED OR DISALLOWED U/S 92C IT IS DEEMED TO REPRESENT THE IN COME OF THE ASSESSEE IN RESPECT OF WHICH PARTICULARS HAVE BEEN CONCEALED OR INACCURATE PARTICULARS HAVE BEEN FURNISHED. EXPLANATION 7 TO SECTION 271(1)(C) SHIFTS THE BURDEN UPON THE ASSESSEE TO PROVE THAT THE PRICE CHARGED OR PAID IN SUCH TRANSACTION WAS COMPU TED IN ACCORDANCE WITH THE PROVISIONS OF SECTION 92C IN THE PRESCRIBED MANNER IN GOOD FAI TH WITH DUE DILIGENCE. THUS, IT HAS BEEN CONCLUDED THAT IN ORDER TO CONSIDER WHETHER THE SA ID REQUIREMENTS OF EXPLANATION 7 HAVE BEEN MET OR NOT, IT IS NECESSARY TO CONSIDER THE FA CTS AND CIRCUMSTANCES LEADING TO THE ADDITION. WE HAVE NOTED THAT THE FACTS RELATED TO THE ISSUE HAVE BEEN THRASHED OUT IN THE QUANTUM PROCEEDINGS AND ARE A MATTER OF RECORD. WE HAVE HELD THAT THE EXPLANATION OFFERED IN THE PENALTY PROCEEDINGS IS REQUIRED TO B E CONSIDERED AFRESH IN THE LIGHT OF THE REQUIREMENTS OF THE RELEVANT PROVISION. IT HAS BEE N DULY NOTED THAT THE ONUS UPON THE TAXPAYER IS ONLY TO SHOW WHETHER THE ARMS LENGTH P RICE HAS BEEN COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF SECTION 92C OF THE ACT IN GO OD FAITH AND DUE DILIGENCE AND NOTHING MORE. WE HAVE HELD THAT MERELY BECAUSE THE ADDITIO N HAS BEEN SUSTAINED IN A CONTESTED ISSUE OR ACCEPTED WITHOUT A CONTEST CANNOT BE THE C RITERIA TO MECHANICALLY LEVY OR UPHOLD I.T.A .NO.-6743/DEL/2013 PAGE 5 OF 15 THE PENALTY LEVIED AS IT IS THE EVALUATION OF THE F ACTS AND CIRCUMSTANCES AS BORNE OUT FROM RECORD WHICH WOULD SHOW WHETHER THE ADDITION WAS AC CEPTED ON ACCOUNT OF MALA FIDE ARISING OUT OF A FAILURE OF THE ASSESSEE OR WAS IT A BONAFIDE DECISION BASED ON FACTS PRESENTED IN GOOD FAITH AND WITH DUE DILIGENCE IN T ERMS OF THE PROVISIONS OF SECTION 92C. IT HAS BEEN HELD THAT PENALTY CAN ONLY BE IMPOSED IF T HE EXPLANATION OFFERED IS SHOWN TO BE LACKING IN GOOD FAITH AND THE TRANSACTION CAN BE SH OWN TO BE COMPUTED WITHOUT DUE DILIGENCE WITH A WILLFUL ATTEMPT TO DEFRAUD THE REV ENUE AND NOT BECAUSE ADDITION IS SUSTAINED OR ACCEPTED. HENCE REVERTING TO THE BASI C ISSUE WHICH DEVOLVES FOR CONSIDERATION, WE ARE OF THE VIEW THAT WE ARE FIRST REQUIRED TO EXAMINE WHETHER THERE IS ANY PRIMARY EVIDENCE TO SHOW THAT BY ANY DELIBERATE ACT OF SUPPRESSIO VERI OR SUGGESTIO FALSI THE ASSESSEE HAS TRIED TO CONCEAL ANY INCOME OR FU RNISH INACCURATE PARTICULARS. EXAMINING THE FACTS OF THE PRESENT CASE, WE FIND THA T THE TPO HAS ACCEPTED TNMM AS THE MOST APPROPRIATE METHOD SELECTED AND HAS ALSO NOT I NTERFERED WITH, THE COMPARABLES SELECTED. THE RE-CHARACTERIZATION OF THE ASSESSEE AS SIGNIFICANT RISK SERVICE PROVIDER BY THE TPO WE FIND HAS NOT FOUND FAVOUR BY THE CO-ORDINAT E BENCH IN THE QUANTUM PROCEEDINGS IN ITS ORDER DATED 18.09.2013 IN ITA NO.5147/DEL/20 11 AND ITA NO.225/DEL/2012. THE RELEVANT EXTRACTS FROM THE ORDER IN THE QUANTUM PRO CEEDINGS IS EXTRACTED HEREUNDER:- 9.2. CHARACTERIZATION OF ASSESSEE AND ITS ASSOCIAT ED ENTERPRISES THROUGH FUNCTION, ASSETS AND RISK (FAR) ANALYSIS OF INTERNATIONAL TRANSACTIONS. 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 I.T.A .NO.-6743/DEL/2013 PAGE 6 OF 15 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) 6.1. WE FIND THAT THE CONDUCT OF THE ASSESSEE VIS-A-VIS ITS CLAIM OF GOOD FAITH AND DUE DILIGENCE IS FURTHER BROUGHT OUT FROM THE AFORESAI D FOLLOWING EXTRACTS FROM THE ORDER OF THE CO-ORDINATE BENCH PASSED IN THE QUANTUM PROCEEDINGS :- 9.4. LI & FUNG CASE AND TPO / DRP STAND I. .. II. . III. THE DEPARTMENT HAS HEAVILY RELIED ON THE LI & FUNG INDIAS CASE (SUPRA). IN THIS CASE, THE DELHI TRIBUNAL HELD THAT ON THE FACTS OF THE SAID CASE, THE PROCUREMENT COMPANY IN INDIA WAS ENTITLED TO A REVENUE LINKED I.T.A .NO.-6743/DEL/2013 PAGE 7 OF 15 REMUNERATION. THE DECISION IN THE CASE OF LI & FUNG PROCEEDED ON THE SPECIFIC FINDINGS OF THE TPO THAT THE ASSESSEE WAS NOT ABLE TO ESTABLIS H THAT THE FOREIGN PRINCIPAL IN HONG KONG HAD ANY SUBSTANC E, WHICH THE ASSESSEE WAS ALSO NOT ABLE TO SUBSTANTIATE BEFORE THE TRIBUN AL. IN THESE PECULIAR FACTS TRIBUNAL ACCEPTED THE FACTUAL POSITION THAT THE INDIAN ASSESSEE HAD ACTUALLY CARRIED OUT ALL THE SIGNIFICANT FUNCTIONS RELATING TO PROCUREMENT IN INDIA; AND THAT VERY LITTLE OR VIRTUALLY NIL FUNCTI ONS WERE CARRIED OUT AT THE LEVEL OF HONG KONG. IV. HOWEVER, THE FACTS IN THE APPELLANTS CASE ARE DIFFERENT IN AS MUCH AS ALL THE SIGNIFICANT DIRECTIONS RELATING TO PROCUREM ENT OF GOODS FROM 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 HANDBOOK & OTHER CORRESPONDENCES WHICH ARE P LACED ON RECORD AND HAVE NOT BEEN CONTROVERTED BY THE DEPARTMENT. IT EMERGES THAT ASSESSEE FOLLOWS AND EXECUTES THEM AS A SERVICE PRO VIDER. FOR SUCH PREORDAINED SUPPORT SERVICES, THE ASSESSEE CANNOT B E HELD TO BE ENTITLED TO REMUNERATION IN TERMS OF LI & FUNG CASE ON FOB VALUE OF GOODS PROCURED BY GAP US FROM THIRD PARTY VENDORS I N INDIA. IN THE CASE OF LI & FUNG INDIA, ASSESSEE ACTUALLY CARRIED OUT S IGNIFICANTLY 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 RE LIED ON THE FACT THAT LI & FUNG HONG REMUNERATION OF 5% OF VALUE OF GOODS PRO CURED SHOULD BE USED AS BENCHMARK RATE BY THE ASSESSEE. THE DEPARTMENT OVER LOOKED THE OTHER EXTREMELY IMPORTANT FACT OF THE PROFITABILITY EARNE D BY LI & FUNG THROUGH 5% PROCUREMENT SERVICE MODEL. THE TOTAL REMUNERATION E ARNED 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 ITAT BENCH HELD THAT CONSIDERING THE FACTS OF THE CASE, 80% OF COMMISSIO N (RS. 48.12 CRORES) EARNED BY LI & FUNG HONG KONG SHOULD BE ATTRIBUTED TO INDI AN COMPANY. THIS ATTRIBUTION RESULTED IN PROFITABILITY OF RS. 2.72 CRORES (RS. 4 8.12 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 ARM S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS FOR TAXPAYERS. (EMPHASIS PROVIDED) 6.2. THUS, WE FIND THAT DESPITE NOT ACCEPTING THE MARK- UP OF 15% THE CO-ORDINATE BENCH DID NOT COMMENT NEGATIVELY ON THE CONDUCT OF THE AS SESSEE AND INFACT WERE CRITICAL OF THE FLAWED APPROACH AND SWEEPING MANNER OF DECISION MAKING CARRIED OUT BY THE TPO. I.T.A .NO.-6743/DEL/2013 PAGE 8 OF 15 6.3. IT MAY BE APPROPRIATE TO EXTRACT FROM THE ORDER OF THE ITAT PASSED IN THE QUANTUM PROCEEDINGS THE FACTS LEADING TO HOW THE MARK-UP OF 32% CAME UP FOR CONSIDERATION:- 7.10 LD. COUNSEL AT THE END OF HIS ARGUMENTS SUMM ARIZED THE ARGUMENTS AS UNDER: GIVEN THE FUNCTIONAL, ASSET AND RISK PROFILE OF TH E APPELLANT, IT IS ENTITLED TO A REMUNERATION MODEL OF A MARK UP OR PROFIT ON ONLY I TS OPERATING EXPENSES OR VAR; AND NOT ON THE VALUE OF GOODS SOURCED BY GAP U S FROM THIRD PARTY VENDORS IN INDIA. INCIDENTALLY, ON IDENTICAL FACTS, THE DUTCH SUPREME COURT HAD ALSO APPROVED A COST PLUS REMUNERATION MODEL FOR A SIMILAR PROCUREM ENT COMPANY; AND NOT A COMMISSION LINKED TO VOLUME OF GOODS PROCURED, AS T HE LATTER OPTION WOULD HAVE RESULTED IN EXORBITANT PROFIT MARGIN ACCRUING TO THE PROCUREMENTS COMPANY, NAMELY IN EXCESS OF 600%. THE APPELLANTS MARK UP OF 15% ON OPERATING COSTS H AVE NOT BEEN CONTROVERTED BY THE TPO, WHO IN FACT, COMMITTED A G RAVE ERROR IN TAKING THE SAME COMPARABLES, AS CHOSEN BY THE APPELLANT, BUT M ERELY CHANGING THE PLI, WITHOUT EVEN APPRECIATING THAT THE INTENSITY OF FUN CTIONS OF SUCH COMPARABLES WERE MORE THAN 25 TIMES THAN THAT OF THE APPELLANT FOR, A APPLYING A TURNOVER LINKED REMUNERATION MODEL. IN THE EXTREME SITUATION, EVEN WITHOUT ADMITTING A FACTUAL SIMILARITY TO THE LI & FUNG RULING, THE MARK-UP ON OPERATING C OSTS CANNOT EXCEED ABOUT 32%, AFTER DULY ADJUSTING THE INTENSIT Y OF FUNCTIONS OF THE APPELLANT, VIS-A- VIS LI 8S FUNG. IN RESPONSE TO A SEPARATE SHOW-CAUSE NOTICE ISSUED BY THE TPO FOR AY 2006- 07 ITSELF, THE APPELLANT HAD CARRIED OUT A SEARCH F OR SERVICE PROVIDERS, WHICH YIELD AN OPERATING MARGIN OR OP/ VAE OF 19%, WHICH REMAINS UNCONTROVERTED BY THE TPO AND DRP. WHILE CONDUCTING THE TP ASSESSMENT IN THE CASE OF T HE APPELLANT FOR AY 2008-09, THE TPO HAD HIMSELF PROPOSED IN HIS SHOW C AUSE NOTICE, AN ALTERNATIVE SEARCH FOR SELECTING COMMISSION AGENTS, WHICH THE APPELLANT, WITH THE OBJECTIVE TO AVOID PROTRACTED LITIGATION, HAD F ORMALLY OFFERED TO ACCEPT. THE SAID SET OF COMPARABLES WILL RESULT IN A PROFIT ON OPERATING COSTS OF 26% FOR AY 2006-07. THUS, THERE ARE SEVERAL DATA POINTS AVAILABLE BY NO W FOR COMPARABLE MARGINS AROUND THE PLI OF OP/ VAE, NAMELY- (A) 3 COMPARABLE S IN THE APPELLANTS INITIAL SEARCH FOR DISTRIBUTORS, YIELDING 15.13% (B ) 6 COMPARABLES IN THE APPELLANTS SUBSEQUENT SEARCH FOR SERVICE PROVIDERS , YIELDING 19%; (C) 7 COMPARABLES CHOSEN BY THE TPO IN ITS SEARCH FOR COM MISSION AGENTS DURING THE TP ASSESSMENT FOR AY 2008-09, AS UPDATED WITH T HE RESULTS RELATING TO AY 2006-07, YIELDING 26.01%. AND (D) LI & FUNGS RESUL TS OF32.43% THE ARITHMETIC MEAN OF ALL THE ABOVE RESULTS YIELD AN OP/ VAE OF [(3X 15.13) +{6X 19) +(7X26.01)+32.43]/[3+6+7+L]=21. 99% OR 22% THUS, THE MAXIMUM MARGIN ON OPERATING COSTS WOULD S TILL HOVER AROUND 32% IN THE CASE OF THE APPELLANT, WITH 22% A S THE CENTRE OF ALL THE DATA POINTS, WITHOUT PREJUDICE TO THE PRIMA RY CONTENTION THAT I.T.A .NO.-6743/DEL/2013 PAGE 9 OF 15 THE APPELLANTS ORIGINAL MARGIN OF 15% ON OPERATING COSTS REMAINS UNCONTROVERTED BY THE TPO & DRP. 6.4. THE FOLLOWING EXTRACT FROM THE AFORESAID ORDER IN T HE QUANTUM PROCEEDINGS FURTHER BRINGS OUT THE FACTS AND THE BACKGROUND HOW THE ENH ANCED MARK-UP OF 32% WAS FINALLY SELECTED:- 9.5. DETERMINATION OF COST PLUS REMUNERATION IN ASS ESSES CASE. I) LD COUNSEL SHRI MITRA HAS PLACED ON THE RECORD A WORKING SUGGESTING THAT EVEN IF ONE WERE TO ASSIGN THE ENTIRE COMMISSION OF LI & FUNG GROUP TO LI & FUNG INDIA, THEN THE OP/ TOTAL COST OF LI & FUNG IN DIA WORKED OUT TO 32.43%, AS OPPOSED TO 15% ADOPTED BY THE APPELLANT, WHICH A GAIN, IS WITHIN ACCEPTABLE LIMITS. THUS AT THE END OF THE COST+ MAR K UP IN ASSESSEE CASE CANNOT BE STRETCHED BEYOND 32% LOOKING FROM LI FUNG CASE OR ANY OTHER ANGLE. (II) IT IS TRITE THAT INCOME TAX ASSESSMENTS AND AP PELLATE PROCEEDINGS ARE NON ADVERSARIAL IN NATURE, HELD TO BE AN EXERCISE OF FA IR DETERMINATION OF TAX LIABILITY PAYABLE BY THE ASSESSE. LOOKING AT THE SW EEPING OBSERVATIONS OF THE TPO AND DRP WHICH ARE NEITHER BASED ON ANY COGENT R EASONING NOR FACTUAL RELIABILITY, THE ASSESSMENTS AS FRAMED GIVE AN IMPR ESSION OF BEING WORK OF ADVERSARIAL APPROACH IN TAX LIABILITY DETERMINATION . HONBLE FINANCE MINISTER GENERALLY AND RECENTLY IN PARTICULAR GAVE A CLARION CALL THAT THE INCOME TAX PROCEEDINGS SHOULD BE FAIR AND NON ADVERSARIAL IN N ATURE. THIS IS RIGHTLY SO AS IT IS A SINE QUA NONE OF A TAX ADMINISTRATION WHICH USHER INTO A RULE A RULE OF LAW WHICH IS PREDICTABLE AND BASED ON SOUND REASONI NG AND IS NOT FRAUGHT WITH THE PERILS OF UNCERTAINTIES AND ADVERSITIES FO R THE TAXPAYERS. (III) IN VIEW OF THE FOREGOING WE HAVE NO HESITATIO N TO ACCEPT A CANDID PROPOSAL GIVEN BY THE ASSESSEE AND HOLD THAT ASSESSEE TP ADJUSTMENTS BE MADE BY ADOPTING THE 32% COST PLUS M ARK UP OF THE ASSESSEE FOR AY 2006-07 AND 2007-08. THE MARK-UP PR OPOSAL OF ASSESSEE IS HIGHER THAN MARK-UP OVER TOTAL COST EAR NED BY ALL COMPARABLES PLACED ON RECORD. THE ASSESSMENTS SHOUL D BE FRAMED ACCORDINGLY. WE MAY HASTEN TO ADD THAT THIS MARK WE WILL BE SUBJECTED TO VARIATION IS SUBSEQUENT YEARS IF THE F ACTS AND CIRCUMSTANCES OF THE CASE SO WARRANT. (EMPHASIS PROVIDED) 6.5. ACCORDINGLY, IN THE LIGHT OF THESE PECULIAR FACTS AND CIRCUMSTANCES AND CONSIDERING THE ORDER DATED 10.08.2016 IN ITA NO.6742/DEL/2013, WE FIND THAT THERE IS NOTHING ON RECORD TO SHOW THAT THE ARMS LENGTH COMPUTATION OF THE TRANSACTION HAS BEEN COMPUTED DISREGARDING THE REQUIREMENTS OF SECTION 92C OF THE INCOME TAX ACT. IT IS A MATTER OF RECORD THAT TNMM AS THE MOST APPROPRIATE METHOD HAS BEEN ACCEPTED BY THE TPO, THE I.T.A .NO.-6743/DEL/2013 PAGE 10 OF 15 OP/TC, PLI HAS NOT BEEN TINKERED WITH NOR HAVE THE COMPARABLES SELECTED BEEN COMMENTED UPON. THE TPOS ACTION OF RE-CHARACTERIZ ING THE ASSESSEE AS A SIGNIFICANT RISK BEARING SERVICE PROVIDER OPERATING ON COMMISSION ON THE VALUE OF GOODS PROCURED BY THE FOREIGN AE HAS NOT BEEN ACCEPTED BY THE CO-ORDINATE BENCH OF THE ITAT IN THE QUANTUM PROCEEDINGS AND THE ASSESSEES CLAIM THAT IT IS A L IMITED RISK BEARING SUPPORT SERVICE PROVIDER AS CLAIMED IN ITS TP STUDY HAS FOUND ACCEP TANCE BY THE ITAT. THUS, ADMITTEDLY CONSIDERING THE EXPLANATION OF THE ASSESSEE WITHIN THE REQUIREMENTS OF THE EXPLANATION 7 TO SECTION 271(1)(C) WE FIND THAT THE CLAIM THAT THE TP STUDY HAVING BEEN CARRIED OUT IN GOOD FAITH AND WITH DUE DILIGENCE ADHERING TO THE REQUIR EMENTS OF SECTION 92C STANDS ESTABLISHED. THE ENHANCED MARK-UP, WE FIND WAS A S ITUATION WHERE IN THE FACE OF THE PREVALENT VIEW HELD BY THE CO-ORDINATE BENCH IN LI & FUNGS CASE THE ASSESSEE DESPITE PLEADING THAT 15% MARK-UP BASED ON AGREEMENTS CONSI DERED IN THE TP STUDY SHOULD BE ACCEPTED FINALLY CONCEDED IN THE FACE OF THE PREVAL ENT VIEW AND AGREED TO ACCEPT THE ESTIMATED ENHANCED MARK-UP. THE ASSESSEE AS PER RE CORD AGREED THAT EVEN APPLYING THE STANDARD LAID DOWN IN THE CASE OF LI & FUNG I.E. OF 32% THE RESULTANT RELIEF FAR OUTWEIGHED THE COST OF SUSTAINING THE ADDITION OF 2% OF THE OR IGINAL AMOUNT. WE HAVE EXTRACTED AND FOUND, ON CONSIDERING THE ORDER OF THE CO-ORDINATE BENCH THAT THE CO-ORDINATE BENCH CATEGORICALLY HELD THAT THE FACTS IN THE CASE OF LI & FUNG WERE ENTIRELY DISTINGUISHABLE FROM THE FACTS OF THE PRESENT CASE, LEADING THEM TO ACCE PT THE REMUNERATION MODEL OF THE ASSESSEE. THESE PECULIAR FACTS BRINGS OUT THE UNAV OIDABLE CONCLUSION THAT THE CHOICE OF ACCEPTING THE ENHANCED MARK-UP WAS VISITED UPON THE ASSESSEE IN VIEW OF THE PRECEDENT FOLLOWED BY THE ITAT. THUS BEYOND ARGUING THAT THE STANDARD LAID DOWN THEREIN CANNOT BE APPLIED TO IT, THE ASSESSEE HAD THE CHOICE EITHER T O ACCEPT THE ENHANCED MARK-UP OR I.T.A .NO.-6743/DEL/2013 PAGE 11 OF 15 LITIGATE FURTHER. WITH HANDSIGHT, IT IS EVIDENT TH AT HAD THE ASSESSEE EXERCISED THE CHOICE TO LITIGATE THEN IN VIEW OF THE DECISION OF THE HONBL E HIGH COURT IN THE CASE OF LI & FUNG CASE THERE CAN BE NO DOUBT THAT THE ASSESSEE HAD AN ARGU ABLE CASE IN ITS FAVOUR IN THE QUANTUM PROCEEDINGS. HOWEVER THE FACT REMAINS THAT THE ASS ESSEE CHOSE TO CONCEDE BUT THIS DECISION TO CONCEDE AND ACCEPT A PARTIAL ADDITION B Y NO STRETCH OF IMAGINATION CAN BE SAID TO BE GUIDED OR MOTIVATED BY ANY MALA FIDE INTENT I N ORDER TO COVER ITS DUPLICITY AND TO DEFRAUD THE REVENUE. THE DECISIONS TO CONCEDE AND/ OR WITHDRAW OR LITIGATE FURTHER APART FROM BEING GUIDED BY FACTORS LIKE THE QUANTUM INVOL VED FOR THE ASSESSEE AND VARIOUS OTHER CONSIDERATION IS ALSO DICTATED BY CIRCUMSTANCES WHI CH DETERMINE THE APPETITE TO LITIGATE OF THE TAX APYER. THERE MAY BE VERY MANY REASONS WHER E THE LITIGANT MAY LACK THE APPETITE TO LITIGATE BASED ON ISSUES LIKE COSTS INVOLVED, UN CERTAINTY, DESIRE TO SETTLE PEACEFULLY DEVOTING TIME AND ENERGY TO BUSINESS OR PROFESSION AND THUS AVOID HARASSMENTS OF LITIGATION ETC. THUS EVERY DECISION TO WITHDRAW CA NNOT BE A CASE OF MALAFIDE INTENT. IN THE FACTS OF THE PRESENT CASE IT MAY NOT BE OUT OF PLAC E TO REFER TO THE DECISION OF THE ITAT IN 2009-10 AND 2010-11 AYS IN ASSESSEES OWN CASE WHER EIN FOLLOWING THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF LI & FUNG MARK-UP OF 15% ON COSTS HAS BEEN ACCEPTED BY THE ITAT. WE ALSO FIND THAT THE ORDER OF THE ITAT IN THE QUANTUM PROCEEDINGS IN THE YEAR UNDER CONSIDERATION WAS CHALLENGED BY T HE REVENUE AND DISMISSED BY THE HONBLE HIGH COURT VIDE ORDER DATED 29.01.2016 ON T HE GROUNDS OF EXTRAORDINARY DELAY OF 815 DAYS. ACCORDINGLY CONSIDERING THE PECULIAR FAC TS AND CIRCUMSTANCES OF THE PRESENT CASE AND CONSIDERING THE SPECIFIC PROVISION INVOKED, WE FIND THAT IN THE ABSENCE OF ANY ARGUMENT ON FACTS DEMONSTRATING THAT THE COMPUTATIO N IN THE TP STUDY PLACED ON RECORD IS IN VIOLATION OF THE REQUIREMENTS OF SECTION 92C OF THE ACT AND THE SAID EXERCISE WAS NEITHER I.T.A .NO.-6743/DEL/2013 PAGE 12 OF 15 DONE IN GOOD FAITH NOR WITH DUE DILIGENCE, THE DEPA RTMENTAL ACTION FAILS. WE FIND THAT THE FOLLOWING CONCLUSION AS ARRIVED AT IN ITA NO.6742/D EL/2013 FULLY APPLIES TO THE FACTS OF THE PRESENT CASE:- 4.9. IN THE FACTS OF THE PRESENT CASE IT IS SEEN THAT THE REQUIREMENTS OF SECTION 92C HAVE BEEN MET AS THE SELECTION OF TNMM IS ONE OF THE METHODS PROVIDED AND ADDRESSING THE INGREDIENTS OF SECTION 271(1)(C) THE SELECTION OF METHOD 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 UN ABLE TO AGREE WITH THE VIEW TAKEN BY THE TAX AUTHORITIES. NO DOUBT THE ONUS IS PLACED BY THE STATUTE UPON THE ASSESSEE TO DEMONSTRATE THAT ITS COMPUTATI ON OF PRICE PAID OR CHARGED WAS WITHIN THE FOUR CORNERS OF THE MANNER P RESCRIBED U/S 92C AND NOTWITHSTANDING THE ADDITION MADE THE EXERCISE WAS UNDERTAKEN IN GOOD FAITH AND WITH DUE DILIGENCE. HAVING SO DEMONSTRATED BY T HE CONSISTENT EXPLANATION ON RECORD IN THE FACTS OF THE PRESENT C ASE THE ONUS SHIFTS TO THE REVENUE TO DEMONSTRATE THAT BY A SPECIFIC ACT, FACT OR CONDUCT THE AFFAIRS OF THE ASSESSEE IN REGARD TO COMPUTATION OF PRICE CHAR GED OR PAID WAS LACKING IN GOOD FAITH AND WAS DONE WITHOUT DUE DILIGENCE. NO SUCH ARGUMENT HAS BEEN RAISED NOR ANY FACT HAS BEEN BROUGHT TO OUR NO TICE 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 AN Y HELP TO THE REVENUE. THOUGH THE TERMS GOOD FAITH AND DUE DILIGENCE H AVE NOT BEEN DEFINED UNDER THE ACT ACCORDINGLY THE DEFINITION OF THE TER M IN GOOD FAITH AS DEFINED UNDER THE GENERAL CLAUSES ACT MAY BE TAKEN INTO CONSIDERATION. THE TERM IN GOOD FAITH HAS BEEN DEFINED IN THE BLACKS LAW DICTIONARY; SIXTH EDITION WHICH DEFINES THE TERM AS GOOD FAITH IS AN INTANGI BLE AND ABSTRACT QUALITY WITH NO TECHNICAL MEANING OR STATUTORY DEFI NITION, 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 A DVANTAGE, AND AN INDIVIDUALS PERSONAL GOOD FAITH IS CONCEPT OF HIS OWN MIND AND INNER SPIRIT AND, THEREFORE, 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 DESCRIBE THAT STATE OF MIND DENOTING HONESTY OF PURPOSE, FREEDOM FROM INTENTION TO DEFRA UD, AND, GENERALLY SPEAKING, MEANS BEING FAITHFUL TO ONES DUTY OR OBL IGATION. [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 T HE ITAT IN ITA NO.1062 & 1063/DEL/2013 IN THE CASE OF ACIT VS BOSTON SCIENTIFIC INDIA PVT. LTD. WHEREIN IT HAS BEEN OBSERVED:- 13.8.2. GOOD FAITH PRESUPPOSES HONESTY AND FAIRNESS AT IT S CORE. HOWEVER, GOOD FAITH DOES NOT COVER THE SINS OF OMIS SION OR I.T.A .NO.-6743/DEL/2013 PAGE 13 OF 15 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 NOT ON LY A DILIGENT STANDARD BUT CAN ALSO SUBSUME A GOOD FAITH STANDA RD. 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, HELD GOOD FAITH IMPORTS THE EXERCISE OF DUE CARE AND ATTENTION. A PERSON CAN BE EXCUSED FOR HAVING COMMITTED AN ERROR OF JU DGMENT ONLY IF HE EXERCISED DUE CARE AND ATTENTION AND HIS CONDUCT MA KES IT CLEAR THAT THERE WAS NO NEGLIGENCE ACCORDING TO REASONABLE STANDARDS . THE STANDARD OF CARE REQUIRED IS THAT OF A REASONABLY PRUDENT MAN WHO AC TS WITH THE CARE AND CAUTION REQUIRED OF A PERSON IN HIS POSITION DEALIN G 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 AND ASCERTAIN WHETHER IT CAN BE SAID TO HAVE BEEN BE GO VERNED AND GUIDED BY GOOD FAITH AND DUE DILIGENCE OR NOT. IN THE FACTS O F THE PRESENT CASE AS PER THE TP STUDY REPORT MADE AVAILABLE 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 THIRD-PARTY VENDORS IN INDIA AND IN RESPECT OF THESE THE ASSESSEE RENDERS SOURCING SUPPORT SERVICES. FOR THE SAID EXERCISE THE ASSESSEE IS REMUNERATED A T TOTAL OPERATING COSTS +15% MARKUP. IT IS A FACT THAT THE TPO DID NOT ACCE PT THE REMUNERATION MODEL OF THE ASSESSEE AND CHANGED THE CHARACTERIZAT ION FROM LIMITED RISK BEARING SOURCE SINGLE SUPPORT SERVICE 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 ASSES SEE THAT IS A MARKUP ON TOTAL OPERATING COSTS. IT IS A FACT THAT THE MAR KUP OF 15% AS CLAIMED BY THE ASSESSEE WAS NOT ACCEPTED BY THE ITAT AND AS PE R THE ARGUMENTS OF THE ASSESSEE, A MARKUP OF 32% WAS ACCEPTED IN ORDER TO ACHIEVE A CLOSURE ON THE ISSUE WHERE THE ENERGY AND COSTS DEVOTED TOWARD S 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 THIS CON CESSION MADE BY THE ASSESSEE THAT THE MARKUP OF 32% IS ACCEPTABLE. WE H AVE NO REASON TO DISBELIEVE THAT THE FACTS IN SUPPORT OF THE ARGUMEN TS THAT THE DECISION NOT TO AGITATE THE ISSUE BEYOND THE ITAT WAS GUIDED BY PRU DENCE IN ORDER TO BUY I.T.A .NO.-6743/DEL/2013 PAGE 14 OF 15 PEACE AND AVOID PROTRACTED LITIGATION WHERE THE AMO UNT 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 WHEREIN ADDITION OF RS.236.22 CRORES WAS PROPOSED AND PURSUANT TO THE O RDER OF THE DRP HAD BEEN MADE BY THE ASSESSING OFFICER, THE SAME STOOD REDUCED TO RS.4.92 CRORE AND RESULTANT RELIEF OF DELETION OF ADDITION OF RS.231,31 CRORE. THE CONSEQUENT ADDITION SUSTAINED OF RS.4.92 CRORES WA S CONSIDERED TO BE NOT SO BIG AN AMOUNTS THAT IN THE FACE OF THE PREVALENT VI EW OF THE ITAT IN LI & FUNG AND THE ASSESSEE UNDERSTOOD THAT THE ITAT WAS NOT WILLING TO ACCEPT THE ARGUMENT THAT 15% WAS CORRECT AND TRUE. THIS D ECISION MADE IN THE PECULIAR FACTS AND CIRCUMSTANCES DOES NOT MAKE OUT A CASE THAT THE DECISION NOT TO LITIGATE AND ACCEPT WAS MALAFIDE. 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 GOOD FAITH NOR THE CLAIM OF DUE DILIGENCE AND INSTEAD ONLY ADD RESSED THE SHEER HELPLESSNESS OF THE ASSESSEE. IT IS NECESSARY TO C ONSIDER THE CLAIMS REALISTICALLY AND AN ASSESSEE AFTER RELYING UPON TH E CORRECTNESS OF ITS TP STUDY IN THE FACE OF THEN PREVALENT VIEW AS PER JU DICIAL 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 PALTREY ADDITION WHEREIN ADMIT TEDLY RELIEF TO THE EXTENT OF 98% OF THE ADDITION WAS GRANTED AND ONLY 2% OF THE ADDITION STOOD SUSTAINED IS A PERSONAL CHOICE DEPENDING ON A PERSO NS APPETITE TO LITIGATE. THE CHOICE TO MAINTAIN PEACE OF MIND AND AVOID PROT RACTED LITIGATION DOES NOT IN ANY WAY LEAD TO THE CONCLUSION THAT INACCURATE P ARTICULARS WERE FILED OR THERE WAS CONCEALMENT. INFACT THE PRUDENT DECISION RESULTED IN SUBSTANTIAL RELIEF BEING GRANTED TO THE ASSESSEE. INFACT SUBSE QUENT JUDICIAL PRECEDENT WOULD SHOW THAT HAD THE ASSESSEE NOT CONCEDED THE I SSUE 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 PROCEEDINGS HAS NOT BEE N 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 DATE D 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 RE CORD, 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 AFF AIRS WITHOUT GOOD FAITH AND DUE DILIGENCE AS AT EVERY STEP THE ASSESSEE HAS BEEN ABLE TO DEMONSTRATE THAT THE NOTWITHSTANDING THE ADDITION A CCEPTED BY WAY OF AN ESTIMATE THE CLAIM THAT THE ARMS LENGTH PRICE HAS B EEN COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF SECTION 92C OF TH E ACT STANDS UNREBUTTED ON RECORD. THE MERE FACT THAT ADDITION HAS BEEN PA RTIALLY SUSTAINED BY ITSELF IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE DOES NOT WARRANT THE PENAL ACTION. I.T.A .NO.-6743/DEL/2013 PAGE 15 OF 15 6.6. ON CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND NOTHING HAS BEEN PLACED ON RECORD BY THE REVENUE TO SHOW THAT THE CH OICE SO EXERCISED BY THE TAX PAYER TO ACCEPT THE ENHANCED MARK-UP IN THE PECULIAR FACTS A ND CIRCUMSTANCES OF THE CASE CAN CONSTITUTE ACTS OF SUPPRESSIO VERI OR SUPPRESSIO FALSI LACKING GOOD FAITH AND IN VIOLATION OF DUE DILIGENCE REQUIREMENT. WE FIND THAT ALL PRIMAR Y FACTS REQUIRED TO BE DISCLOSED HAVE BEEN FOUND TO BE CORRECTLY MADE AVAILABLE IN REGARD TO THE INTERNATIONAL TRANSACTION AND THE INTERNATIONAL TRANSACTION DISCLOSED HAS BEEN COMPUT ED AS PER THE PROVISIONS OF SECTION 92C IN GOOD FAITH AND WITH DUE DILIGENCE. 7. IN VIEW OF THE ABOVE DETAILED REASONS ON FACTS AND LAW THE IMPUGNED ORDER IS SET ASIDE AND THE PENALTY ORDER IS QUASHED. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOW ED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 16 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 ASSISTAN T REGISTRAR, ITAT NEW DELHI