Assistant Commissioner of Income Tax, Pune V. Honeywell Automation India Limited, Pune

ITA 845/PUN/2017

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 3043 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 2 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-06-2021
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 21-04-2021
• Assessment Year: 2005-2006
• Appeal Filed On: 07-04-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: IS DIRECTED AGAINS T PASSED
• Keywords: Transfer pricing; International transaction; Bad and doubtful debts; Provision of bad debts
• Section: 271(1)(c); 92C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH C, PUNE VIRTUAL COURT BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER ITA NO.845/PUN/2017 / ASSESSMENT YEAR: 2005-06 ACIT, CIRCLE-11, PUNE VS. HONEYWELL AUTOMATION INDIA LIMITED, SURVEY NO.56 & 57, HADAPSAR INDUSTRIAL ESTATE, HADAPSAR, PUNE 411 013 PAN : AAACT3904F APPELLANT RESPONDENT / ORDER PER R.S.SYAL, VP : THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER PASSED BY THE LD. CIT(A) ON 23-01-2017 DELETING PENALTY O F RS.1,48,40,838/- IMPOSED BY THE ASSESSING OFFICER (AO) BY INVOKING EXPLANATION 7 TO SECTION 271 (1)(C) OF THE INCOM E-TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) IN RELATIO N TO THE ASSESSMENT YEAR 2005-06. 2. BRIEFLY, THE FACTS OF THE CASE ARE THAT THE ASSESSEE HAS BEEN CARRYING THE BUSINESS IN THE AUTOMATION AND CONTROL INDUSTRY. ASSESSEE BY SHRI SIDDHESH CHAUGULE REVENUE BY SHRI MAHADEVAN A.M. KRISHNAN DATE OF HEARING 17-06-2021 DATE OF PRONOUNCEMENT 18-06-2021 ITA NO.845/PUN/2017 HONEYWELL AUTOMATION INDIA LIMITED 2 CERTAIN INTERNATIONAL TRANSACTIONS WERE REPORTED IN FORM NO.3CEB . ON A REFERENCE MADE BY THE AO, THE TRANSFER PRICING OFF ICER (TPO) DETERMINED THE ARMS LENGTH PRICE (ALP) AND ACCORDING LY PROPOSED TRANSFER PRICING ADJUSTMENT OF RS.36,47,76,500/ -. THE FIRST APPEAL HAD THE EFFECT OF REDUCING THE TRANSFER PRICING ADJUSTMENT TO RS.4,13,68,191/-. ON THE BASIS OF THE SU STAINED AMOUNT OF TRANSFER PRICING ADDITION, THE AO IMPOSED PENALTY U/S.271(1)(C) OF THE ACT AMOUNTING TO RS.1,48,40,838/-. THE LD. CIT(A) DELETED THE SAME. THE REVENUE HAS COME UP IN APP EAL AGAINST SUCH DELETION. 3. WE HAVE HEARD BOTH THE SIDES THROUGH VIRTUAL COURT AND GO NE THROUGH THE RELEVANT MATERIAL ON RECORD. THE PENALTY HAS B EEN IMPOSED U/S 271(1)(C) WITH REFERENCE TO EXPLANATION 7, WH ICH READS AS UNDER : EXPLANATION 7. WHERE IN THE CASE OF AN ASSESSEE WHO HAS ENTERED INTO AN INTERNATIONAL TRANSACTION OR SPECIFIED DOMESTIC TRANSACTION DEFINED IN SECTION 92B, ANY AMOUNT IS ADDED OR DISALLOWED IN COMPUTING THE TOTAL INCOME UNDER SUB-SECTION (4) OF SECTION 92C, THEN, THE AMOUNT SO ADDED OR DISALLOWE D 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 PRINCIPAL COMMISSIONER OR COMMISSIONER THAT THE PRICE CHARGED OR PAID IN SUCH TRANSACTION WAS COMPUTED IN ACCORDANCE WITH THE PROVISIONS CONTAINED ITA NO.845/PUN/2017 HONEYWELL AUTOMATION INDIA LIMITED 3 IN SECTION 92C AND IN THE MANNER PRESCRIBED UNDER THAT SECTION, IN GOOD FAITH AND WITH DUE DILIGENCE. 4. ON CIRCUMSPECTION OF THE EXPLANATION 7, IT IS MANIFESTED THAT EVERY TRANSFER PRICING ADDITION IS DEEMED TO REPRESENT CON CEALED INCOME ETC. WARRANTING IMPOSITION OF PENALTY UNLESS THE ASSE SSEE CUMULATIVELY SATISFIES THE FOLLOWING THREE CONDITIONS, VIZ., I) THAT THE ALP WAS COMPUTED AS PER ONE OF THE PRESCRIBED METHODS U/S 92C; II) SUCH ALP DETERMINATION WAS IN THE MANNER PRESCRIBED UNDER THE RELEVANT RULE; AND III) SUCH ALP DETERMINATION WAS DONE IN GOOD FAITH AND WITH DUE DILIGENCE. 5. THERE IS NO DISPUTE INSOFAR AS THE FIRST CONDITION OF TH E EXPLANATION 7 IS CONCERNED INASMUCH AS THE ASSESSEE COMPU TED THE ALP IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SECTION 92C BY APPLYING THE TRANSACTIONAL NET MARGIN METHOD (TNMM), WHICH IS ONE OF THE RECOGNIZED METHODS. THUS THE FIRST C ONDITION IS NOT VIOLATED. 6. THERE IS ALSO NO QUARREL THAT SECOND CONDITION IS ALSO N OT VIOLATED AS THE ASSESSEE DETERMINED THE ALP IN THE MANNER PRESCRIBED UNDER RULE 10B(1)(E) OF THE INCOME-TAX RULES, 1962, ITA NO.845/PUN/2017 HONEYWELL AUTOMATION INDIA LIMITED 4 WHICH PROVIDES MECHANISM FOR DETERMINING THE ALP UNDER THE TNMM. 7. THE THIRD CONDITION STIPULATES THAT THE ALP DETERMINATION SHOULD HAVE BEEN DONE BY THE ASSESSEE IN GOOD FAITH AND WITH DUE DILIGENCE. TWO EXPRESSIONS HAVE BEEN USED HEREIN: `GOOD F AITH AND `DUE DILIGENCE, BOTH OF WHICH HAVE NOT BEEN DEFINED UNDER THE ACT. SECTION 3(22) OF THE GENERAL CLAUSES ACT, 1897 DEFINE S `GOOD FAITH AS: `A THING SHALL BE DEEMED TO BE DONE IN GO OD FAITH WHERE IT IS IN FACT DONE HONESTLY, WHETHER IT IS DONE NEGLIGENTLY OR NOT. AS PER THIS DEFINITION, THE DOING OF AN ACT HONESTLY IS A REQUISITE CONDITION OF GOOD FAITH. AN ACT DONE HONESTLY DOES NOT CEASE TO BE DONE IN `GOOD FAITH, EVEN IF IT WAS DONE NEG LIGENTLY. THE SECOND EXPRESSION USED HEREIN IS `DUE DILIGENCE, WHIC H IS NOT DEFINED EVEN UNDER THE GENERAL CLAUSES ACT. IN THE ABSEN CE OF ITS ANY SPECIFIC DEFINITION, WE REVERT TO ITS CONNOTATION IN COMMON PARLANCE. ORDINARILY, THE TERM `DILIGENCE MEANS `CAREFULNES S AND `DUE MEANS `ADEQUATE. THE EXPRESSION `DUE DILIGENCE, ON A WHOLE, MEANS DOING OF A THING WITH ADEQUATE CARE. IN ONE SENSE, `DILIGENCE IS AN ANTONYM OF `NEGLIGENCE. WHEN WE READ BO TH THE EXPRESSIONS `GOOD FAITH AND `DUE DILIGENCE USED IN JUX TAPOSITION TO EACH OTHER IN THE PROVISION, CONTEXTUALLY, THEY WOULD MEAN ITA NO.845/PUN/2017 HONEYWELL AUTOMATION INDIA LIMITED 5 DETERMINING THE ALP HONESTLY AND WITH DUE CARE AND NOT NEGLIGENTLY. 8. NOW WE PROCEED TO EXAMINE THE BASIS OF THE TRANSFER PRICING ADDITION MADE BY THE AO FOR ASCERTAINING IF THE ASSESSEES A LP COMPUTATION LACKED EITHER GOOD FAITH OR DUE DILIGENCE OR BOTH S O TO WARRANT THE IMPOSITION OF PENALTY. IN COMPUTING THE `OPERATING COSTS BASE UNDER THE TNMM, THE ASSESSEE TREATED BAD DE BTS AND PROVISION OF BAD DEBTS AS NON-OPERATING COSTS. THE TPO ALBE IT ACCEPTED THE APPLICATION OF THE TNMM AS THE MOST APPROPRIATE METHOD ALONG WITH THE PLI, BUT TREATED BAD DEBTS AND PROVISION FOR BAD DEBTS AS OPERATING COSTS AND FURTHER WENT ON TO EX CLUDE CERTAIN COMPANIES FROM THE LIST OF COMPARABLES BY INTRODUCING A BAD DEBT FILTER. WHILE UPHOLDING BAD DEBTS AS OPERATING COST, THE TRIBUNAL APPROVED THE CONTENTION OF THE ASSESSEE FOR TREATING PROVISION FOR BAD DEBTS AS NON-OPERATING AS THE SAME WAS SUO MOTU DISALLOWED BY THE ASSESSEE IN THE COMPUTATION OF ITS TOTAL INCOME. THE TRIBUNAL ALSO REJECTED THE DEPARTMENTAL POINT OF VIEW OF APPLYING A BAD DEBT FILTER FOR EXCLUDING CERTAIN COMPANIES FRO M THE LIST OF COMPARABLES. ON AN OVERVIEW OF THE ABOVE FACTUAL SC ENARIO, IT IS PALPABLE THAT THE STAND OF THE ASSESSEE ON THE ISSUES RA ISED BY THE TPO IN THE ALP DETERMINATION CANNOT BE CONSTRUED AS LACKING ITA NO.845/PUN/2017 HONEYWELL AUTOMATION INDIA LIMITED 6 EITHER GOOD FAITH OR DUE DILIGENCE. IT WAS A GENUINE DIFFER ENCE OF OPINION BETWEEN THE ASSESSEE AND THE TPO, WHICH GOT RESOLVED BY THE TRIBUNAL SUBSTANTIALLY IN FAVOUR OF THE ASSESSEE. THUS IT IS OVERT THAT THE ASSESSEE DID NOT VIOLATE EVEN THE THIRD CONDITION. 9. IN VIEW OF THE FOREGOING DISCUSSION, WE ARE SATISFIED T HAT ALL THREE NECESSARY INGREDIENTS FOR NON-IMPOSITION OF PENALTY IN TERMS OF EXPLANATION 7 TO SECTION 271(1)(C) ARE SATISFIED IN THE EXTA NT CASE. WE, THEREFORE, ACCORD OUR IMPRIMATUR TO THE IMPU GNED ORDER DELETING THE PENALTY. 10. IN THE RESULT, THE APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 18 TH JUNE, 2021. SD/- SD/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE P RESIDENT PUNE; DATED : 18 TH JUNE , 2021 SATISH / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. THE CIT(A)-13, PUNE 4. 5. THE PR.CIT-5, PUNE , , C / DR C, ITAT, PUNE 6. / GUARD FILE / BY ORDER, // TRUE COPY // SENIOR PRIVATE SECRETARY , / ITAT, PUNE ITA NO.845/PUN/2017 HONEYWELL AUTOMATION INDIA LIMITED 7 DATE 1. DRAFT DICTATED ON 17-06-2021 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 18-06-2021 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. DATE OF UPLOADING ORDER SR.PS 8. FILE SENT TO THE BENCH CLERK SR.PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK 10. DATE ON WHICH FILE GOES TO THE A.R. 11. DATE OF DISPATCH OF ORDER. *