DCIT, New Delhi V. M/s. Verizon Communication India Pvt. Ltd., New Delhi

ITA 994/DEL/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 97003 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 6 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-08-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: H
• Next Hearing Date: 29-06-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 19-02-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Additional evidence; Question of law; Speculation loss; Commercial expediency
• Section: 143(3); 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : H : NEW DELHI BEFORE SHRI I.C. SUDHIR, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER ITA NO . 994 /DEL/201 3 ASSESSMENT YEAR: 2007 - 08 DCIT, VS. VERIZON COMMUNICATION CIRCLE - 17(1), INDIA PVT. LTD., 3 RD FLOOR, NEW DELHI RADISSON COMMERCIAL PLAZA, A - WING, NH - 8, MAHIPALPUR, NEW DELHI (PAN: AAACW3738L ) ( APPELLANT ) (RESPONDENT) APPELLANT : SH. J.P. CHANDREKAR, SR. DR RESPONDENT BY: SH. M. VENKATRAMAN, C OUNSEL , MS. AARTI JAIN, SH. PRABHAT LATH & SH. SANDEEP PURI, CAS DATE OF HEARING: 29.06.2015 DATE OF PRONOUNCEMENT: 19.08.2015 ORDER PER INTURI RAMA RAO, A.M. : THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF CIT(A), DATED 23.01.2013 FOR THE ASSESSMENT YEAR 2007 - 08. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: I. LD. CIT(A) ERRED IN LAW ON THE FACTS OF THE CASE IN CANCELLING THE PENALTY OF RS. 75,01,329/ - IMPOSED BY THE AO U/S 271(1)(C) OF THE I.T. ACT. II. THE RESPONDENT ASSESSSEE COMPANY CRAVES, LEAVE OR RESERVING THE RIGHT TO AMEND MODIFY, ALTER, ADD OR FOREGO ANY GROUND(S) OF APPEAL AT ANY TIME BEFORE OR DUR ING THE HEARING OF THIS APPEAL. 2. THE BRIEF FACTS OF THE CASE ARE AS UNDER : 2 THE RESPONDENT ASSESSSEE COMPANY IS ENGAGED IN THE BUSINESS OF PROVIDING INTERNET SERVICES INCLUDING INSTALLING, OPERATING AND MAINTAINING INTERNATIONAL GATEWAYS AND TELECOMMUNI CATION NETWORKS AND HOSTING PORTAL SITES. THE RESPONDENT ASSESSSEE COMPANY FILED ITS RETURN OF INCOME FOR AY 2007 - 08 ON NOVEMBER 14, 2007 DECLARING INCOME OF RS. 41,084,081 / - . THE RETURN OF INCOME WAS SELECTED FOR SCRUTINY AND A DRAFT ASSESSMENT ORDER UNDE R SECTION 143(3) READ WITH SECTION 144C OF THE ACT DATED DECEMBER 16, 2010 HAD BEEN PASSED, WHEREIN ADJUSTMENTS TO THE EXTENT OF RS. 25,004,431 HAVE BEEN MADE ON ACCOUNT OF THE FOLLOWING: TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF ALLEGED DIFFERENCE IN AR M'S LENGTH PRICE AND THE PRICE CHARGED BY VCIPL 21,104,431 DISALLOWANCE OF MANAGEMENT FEE 39,00,000 TOTAL 25,004,431 THE RESPONDENT ASSESSSEE COMPANY SUBSEQUENTLY FILED A LETTER DATED JANUARY 25, WITH THE OFFICE OF THE ASSESSING OFFICER STATING THAT WITHOUT PREJUDICE TO THE FACT THAT IT IS NOT AGREEABLE TO THE ADDITION PROPOSED IN THE DRAFT ASSESSMENT ORDER, IN ORDER TO BUY PEACE AND TO AVOID THE 'COST OF LONG - DRAWN LITIGATION IN INDIA, THE RESPONDENT ASSESSSEE COMPANY HAS DECIDED NOT TO PURSUE THE MATTER FURTHER AND THEREFORE IS NOT FILLING THE OBJECTIONS BEFORE THE HON'BLE DISPUTE RESOLUTION PANEL. THE RESPONDENT ASSESSSEE COMPANY SPECIFICALLY MENTION ED THAT SAID ACCEPTANCE BY THE RESPONDENT ASSESSSEE COMPANY , SHOULD NOT, IN ANY MANNER BE CONSTRUED AS RESPONDENT ASSESSSEE COMPANY 'S ACCEPTANCE OF THE ADJUSTMENTS MADE TO THE RETURNED INCOME. SUBSEQUENTLY, THE ASSESSING OFFICER PASSED THE FINAL ASSESSMEN T ORDER UNDER SECTION 143(3) OF THE ACT ON FEBRUARY 17,2011 . THE RESPONDENT ASSESSSEE COMPANY SUBMITS THAT THESE ADDITIONS HAVE BEEN MADE WITHOUT APPRECIATING THE LEGAL POSITION AND FACTUAL EVIDENCES FILED BY THE RESPONDENT ASSESSSEE COMPANY DURING THE CO URSE OF ASSESSMENT PROCEEDINGS. THE VARIOUS DEFICIENCIES AS APPARENT FROM THE ASSESSMENT ORDER O F TRANSFER PRICING ORDER ARE BRIEFLY DISCUSSED BELOW: 1.1 TRANSFER PRICING ADJUSTMENT OF RS. 21,104,431/ - THE RESPONDENT ASSESSSEE COMPANY SUBMITS THAT THE ARM'S LENGTH PRICE AS DETERMINED BY THE A DDITIONAL DIRECTOR OF INCOME - TAX, TRANSFER PRICING OFFICER - 11(4), NEW DELHI, SUFFERED FROM INTER ALIA FOLLOWING DEFICIENCIES: 3 THE LEARNED TPO HAS ERRED IN REJECTING THE ECONOMIC ANALYSIS UNDE RTAKEN BY THE RESPONDENT ASSESSSEE COMPANY WITHOUT PROVIDING A SUITABLE REASON FOR THE SAME; THE LEARNED TPO HAS FAILED TO GIVE DUE COGNIZANCE TO THE FUNCTIONS, ASSETS & RISK (FAR) ANALYSIS CONDUCTED BY THE TAXPAYER; THE LEARNED TPO HAS ERRED IN REJE CTING THE COMPARABLE COMPANIES AS CONSIDERED BY THE RESPONDENT ASSESSSEE COMPANY WITHOUT PROVIDING SUFFICIENT BASIS FOR REJECTING THEM; THE LEARNED TPO HAS ERRED IN HER INTERPRETATION OF RULE 10B(4) OF THE INCOME - TAX RULES, 1962 ('RULES ). USING DATA N OT AVAILABLE AT THE TIME OF PREPARING THE TRANSFER PRICING DOCUMENTATION IS CONTRARY TO AND BEYOND WHAT IS PRESCRIBED UNDER THE ACT AND THE RELEVANT RULES. THE SAME IS ALSO NOT IN ACCORDANCE WITH THE PRINCIPLES LAID DOWN IN THE DECISION OF THE HON'BLE INCO ME - TAX APPELLATE TRIBUNAL ('ITAT'), BANGALORE BENCH IN PHILIPS SOFTWARE CENTRE PRIVATE LIMITED V ACIT (119 TIJ 721) THE ARM'S LENGTH PRICE HAS BEEN DETERMINED BY THE LEARNED TPO WITHOUT MAKING APPROPRIATE ADJUSTMENTS ON ACCOUNT OF DIFFERENCES IN WORKIN G CAPITAL EMPLOYED BY THE RESPONDENT ASSESSSEE COMPANY VIS - A - VIS THE COMPARABLES CONSIDERED BY HIM AND IN THIS PROCESS, THE LEARNED TPO ALSO IGNORED THE PROVISIONS OF THE INDIAN TRANSFER PRICING REGULATIONS AND VARIOUS JUDICIAL PRECEDENTS AVAILABLE IN THIS REGARD. 1.2 DISALLOWANCE OF MANAGEMENT FEE OF RS. 39,00,000/ - THE LEARNED ASSESSING OFFICER DISALLOWED THE ENTIRE EXPENDITURE OF RS 3,900,000, BEING AMOUNT PAID , TO VERIZON INDIA PRIVATE LIMITED ('VIPL') FOR PROVISION OF VARIOUS SERVICES SUCH AS SALES, MARKETING, ADVERTISING ETC. THE DISALLOWANCE HAS BEEN MADE ON THE ALLEGATION THAT THE RESPONDENT ASSESSSEE COMPANY HAS NOT BROUGHT ON RECORD ANY MATERIAL/ EVIDENCE TO ESTABLISH THAT THE SAID EXPENSES WERE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS AND UTILIZED FOR THE PURPOSE OF BUSINESS CARRIED ON BY THE RESPONDENT ASSESSSEE COMPANY . ACCORDINGLY, THE LEARNED ASSESSING OFFICER DISALLOWED THE CLAIM FOR EXPENSES ALLEGING THAT THE CONDITIONS PRESCRIBED UNDER SECTION 37(1) OF THE ACT ARE NOT FULFILLED. IN THIS REGARD, AT THE OUTSET, THE RESPONDENT ASSESSSEE COMPANY SUBMITS THAT THE FOLLOWING DOCUMENTS WERE FILED BY IT BEFORE THE LEARNED ASSESSING OFFI CER DURING THE COURSE OF ASSESSMENT HEARING IN SUPPORT OF THE CLAIM FOR MANAGEMENT FEES AMOUNTING TO RS. 3,900,000: 4 (A) COPY OF 'MANAGEMENT SERVICE AGREEMENT' ENTERED INTO BETWEEN VIPL AND VCIPL IN RESPECT OF AFORESAID SERVICES (B) SERVICE ORDER FORM S ENTERED INTO BY THE RESPONDENT ASSESSSEE COMPANY WITH ITS CUSTOMERS USING THE ASSISTANCE OF VIPL EMPLOYEES THE S UBMISSION DATED DECEMBER 10, 2010 WAS FILED BY THE RESPONDENT ASSESSSEE COMPANY BEFORE THE LEARNED ASSESSING OFFICER IS . HOWEVER, THE DISALLOWANCE HAS BEEN MADE BY THE LEARNED ASSESSING OFFICER WITHOUT CONSIDERING THE EVIDENCES PLACED ON RECORD AND APPRECIATING THE COMMERCIAL EXPEDIENCY OF THE EXPENDITURE INCURRED BY THE RESPONDENT ASSESSSEE COMPANY . DURING THE YEAR UNDER CO NSIDERATION, THE RESPONDENT ASSESSSEE COMPANY HAS UNDERTAKEN BUSINESS WORTH RS. 449 MILLION. THE LEARNED ASSESSING OFFICER HAS COMPLETELY FAILED TO APPRECIATE THAT DURING THE RE LEVANT FINANCIAL YEAR, THE RESPONDENT ASSESSSEE COMPANY DID NOT HAVE ANY EMPLOY EE ON ITS PAYROLL FOR CARRYING ON THE BUSINESS IN INDIA AND TO PROVIDE THE SERV I CE R ELATED TO RENDERING OF SERVICES BY THE RESPONDENT ASSESSSEE COMPANY . THE RESPONDENT ASSESSSEE COMPANY SUBMITS THAT BOTH VIPL AND VCIPL ARE PART OF THE SAME VERIZON GROUP. A CCORDINGLY, FOR EFFECTIVE AND OPTIMUM UTILIZATION OF THE EMPLOYEES OF VIPL, VCIPL USED THE SERVICES OF VIPL EMPLOYEES IN ORDER TO MANAGE ITS BUSINESS IN INDIA AND TO CARRY , S ALES, MARKETING AND OTHER ADMINISTRATIVE ACTIVITIES ETC., WHICH ARE INTEGRAL PARTS OF THE BUSINESS CARRIED ON BY IT. THE RESPONDENT ASSESSSEE COMPANY SUBMITS THAT FOR THIS PURPOSE, IT ENTERED INTO A 'MANAGEMENT SERVICE AGREEMENT' WITH VIPL AT A FIXED FEE O F RS. 325,000 PER MONTH. AS MENTIONED EARLIER, A COPY OF THE AGREEMENT ALONG WITH SAMPLE SERVICE ORDER FORMS ENTERED INTO BY THE RESPONDENT ASSESSSEE COMPANY WITH ITS CUSTOMERS USING THE ASSISTANCE OF VIPL EMPLOYEES WERE ALREADY PLACED ON RECORD. HOWEVER, DESPITE ALL THE EXPLANATION AND EVIDENCES PROVIDED TO THE LEARNED ASSESSING OFFICER, THE DISALLOWANCE WAS MADE . ACCORDINGLY, GIVEN THE POSITION MENTIONED ABOVE WHICH IS DULY SUPPORTED BY THE DETAILED DOCUMENTATION MAINTAINED BY THE RESPONDENT ASSESSSEE C OMPANY (AND DULY FURNISHED TO THE LEARNED ASSESSING OFFICER DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS), THE RESPONDENT ASSESSSEE COMPANY WAS NOT IN AGREEMENT WITH THE ADJUSTMENTS MADE IN THE ASSESSMENT ORDER. HOWEVER, IN ORDER TO BUY PEACE OF MIND AN D TO AVOID THE COST OF LONG - DRAWN LITIGATION, THE RESPONDENT ASSESSSEE COMPANY HAD AGREED NOT TO CHALLENGE THE DRAFT ASSESSMENT ORDER DATED DECEMBER 16, 2010 PASSED BY THE LEARNED ASSESSING OFFICER. 1. PENALTY PROCEEDINGS SUBSEQUENT TO THE ASSESSMENT ORD ER, THE PENALTY PROCEEDINGS WERE INITIATED AGAINST THE RESPONDENT ASSESSSEE COMPANY VIDE SHOW CAUSE NOTICE UNDER SECTION 271(1)(C) READ WITH SECTION 274 OF THE ACT. IN RESPONSE TO THE SAME, THE 5 RESPONDENT ASSESSSEE COMPANY FILED DETAILED SUBMISSIONS VIDE L ETTER DATED JULY 6, 2011 (COPY ENCLOSED AS ANNEXURE 5) PUTTING FORTH THE FACTUAL POSITION AND LEGAL POSITION SUPPORTING NON LEVY OF PENALTY ON THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE DESPITE THE FACT THAT THE RESPONDENT ASSESSSEE COMPANY HAD NOT CH ALLENGED THE, ADJUSTMENTS FOR THE REASONS EXPLAINED ABOVE. FURTHER, FOLLOWING DOCUMENTS WERE AGAIN ENCLOSED TO THE AFORESAID SUBMISSION DATED JULY 6, 2011: (A) COPY OF 'MANAGEMENT SERVICE AGREEMENT' ENTERED INTO BETWEEN VIPL AND VCIPL; (B) SERVICE ORD ER FORMS ENTERED INTO BY THE RESPONDENT ASSESSSEE COMPANY WITH ITS CUSTOMERS USING THE ASSISTANCE OF VIPL EMPLOYEES; AND (C) COPY OF DETAILED TRANSFER PRICING DOCUMENTATION AS MAINTAINED BY THE RESPONDENT ASSESSSEE COMPANY AND FILED BEFORE THE LEARNED TR ANSFER PRICING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS. HOWEVER, THE LEARNED ASSESSING OFFICER PASSED AN ORDER DATED AUGUST 29, 2011 UNDER SECTION 271(1}(C) OF THE ACT, WHEREIN PENALTY FOR AN AMOUNT OF RS. 75, 01,329 BEING 100% OF THE TAX ALLE GED TO HAVE BEEN EVADED IN RESPECT OF THE AD DITIONS AMOUNTING TO RS. 2,50,04, 431 MADE IN THE ASSESSMENT ORDER ON THE GROUND THAT THE RESPONDENT ASSESSSEE COMPANY HAS FURNISHED INACCURATE PARTICULARS OF INCOME AND FAILED TO OFFER AND PROVE ANY BONA - FIDE EXP LANATION IN RESPECT OF THE ADDITIONS MADE TO THE RETUNED INCOME. WHILE PASSING THE SAID ORDER, THE LEARNED ASSESSING OFFICER COMPLETELY IGNORED THE SUBMISSION MADE BY THE RESPONDENT ASSESSSEE COMPANY AND VARIOUS JUDICIAL PRECEDENTS SUBMITTED BEFORE HIS OFF IC E VIDE LETTER DATED JULY 6, 201 4 . 3. HOWEVER, THE ASSESSING OFFICER DISAGREED WITH THIS SUBMISSION MADE BY THE RESPONDENT ASSESSEE COMPANY AND PROCEEDED TO LEVY PENALTY OF RS. 75,01,329/ - VIDE ORDER DATED 29 TH AUGUST, 2011. BEING AGGRIEVED, AN APPEAL WAS FILED BEFORE THE CIT(A) WHO HAD DELETED THE PENALTY ORDER BY HOLDING AS UNDER: 6.2 ON A SIMILAR FACT IN THE RESPONDENT ASSESSSEE COMPANY 'S OWN CASE FOR THE AY 2006 - 07, PENALTY WAS LEVIED BY THE AO WHICH WAS CONFIRMED BY THE HON'BLE ITAT THROUGH ITS ORDER DATED 17.09.2012. WHILE CONFIRMING THE PENALTY, THE HON'BLE ITAT HAS MADE THE FOLLOWING OBSERVATION: ' IN OUR VIEW THE PROPOSITIONS LAID DOWN IN ALL THOSE CASES DO NOT COME TO THE RESCUE OF THE ASSESSEE ON T HE FACTS OF THIS CASE FOR THE REASON THAT THE ASSESSEE HAS FAILED TO EXPLAIN AND SUBSTANTIATE ITS CLAIM FOR DEDUCTION OF MANAGEMENT FEE PAID WITH EVIDENCE. THE EXPLANATION CANNOT BE CONSIDERED AS BONA FIDE. THE ISSUE IS NOT DEBATABLE. IT IS NOT A CASE OF M ERE DISALLOWANCE ON A DIFFERENCE OF 6 OPINION. UNDER THE CIRCUMSTANCES WE CONFIRM THE LEVY OF THE PENALTY ON THIS ITEM OF DISALLOWANCE. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED IN PART. 6.3. CONSEQUENTLY, IN THE PRESENT ASSESSMENT YEAR, THE RESPONDENT ASSESSSEE COMPANY CLAIMED THAT IT HAD PRESENTED SUFFICIENT EVIDENCE BEFORE THE AO TO JUSTIFY ITS PAYMENTS FOR MANAGEMENT SERVICES PAID TO ITS SISTER CONCERN, NAMELY, VERIZON INDIA PVT. LTD. DURING THE COURSE OF APPEAL PROCEEDINGS, THE RESPONDENT ASSESSSEE COMPANY PRESENTED ADDITIONAL EVIDENCE FOR JUSTIFYING THE REASONABLENESS OF ITS PAYMENT UNDER THIS HEAD. TREATING IT AS AN ADDITIONAL EVIDENCE, THE SAME WAS SENT TO THE AO ON 19.11.2012 FOR HIS COMMENTS. THE AO, IN HIS REMAND REPORT DATED 14.01.2 013, HAS STATED THAT THE RESPONDENT ASSESSSEE COMPANY HAS FAILED TO JUSTIFY OR PROVIDE ANY REASON AS TO WHAT PREVENTED HIM TO FILE ADDITIONAL EVIDENCE BEFORE THE AO DURING THE ASSESSMENT PROCEEDINGS AND SUBSEQUENT PENALTY PROCEEDINGS. IN VIEW OF THIS, HE S TATED THAT THE ADDITIONAL EVIDENCE SHOULD BE ACCEPTED AT THIS STAGE. 6.4 THE RESPONDENT ASSESSSEE COMPANY WAS GIVEN THE COPY OF THE REMAND REPORT. IN RESPONSE THE RESPONDENT ASSESSSEE COMPANY HAS MADE THE FOLLOWING SUBMISSION DATED 15.01.2013 IN THIS REG ARD WHICH IS EXTRACTED BELOW: 'THIS IS WITH REFERENCE TO THE CAPTIONED MATTER. IN THIS REGARD, ON BEHALF OF AND INSTRUCTIONS FROM OUR SUBJECT CLIENT, OUR SUBMISSION IN RESPONSE TO THE REMAND REPORT ISSUED BY THE LEARNED ASSESSING OFFICER, IS AS UNDER: AS SUBMITTED EARLIER, THE RESPONDENT ASSESSSEE COMPANY HAS FILED THESE EVIDENCES IN ORDER TO SUPPORT THE CLAIM OF MANAGEMENT FEE EXPENSE OF RS 3,900,000 WHICH HAS BEEN DISALLOWED BY LEARNED ASSESSING OFFICER ON THE ALLEGATION THAT THE RESPONDENT ASSESSSE E COMPANY HAS NOT BROUGHT ON RECORD ANY MATERIAL/EVIDENCE TO ESTABLISH THAT THE SAID EXPENSES WERE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS AND UTILIZED FOR THE PURPOSE OF BUSINESS CARRIED ON BY THE RESPONDENT ASSESSSEE COMPANY . ACCO RDINGLY, THE LEARNED ASSESSING OFFICER DISALLOWED THE CLAIM FOR EXPENSES ALLEGING THAT THE CONDITIONS PRESCRIBED UNDER SECTION 37(1) OF THE INCOME - TAX ACT, 1961 (ACT) ARE NOT FULFILLED. SUBSEQUENTLY, THE LEARNED ASSESSING OFFICER PASSED A ORDER LE VYING PEN ALTY UNDER SECTION 271 (1)(C) OF THE ACT BY HOLDING THAT SUFFICIENT FACTS/EVIDENCES WERE NOT FILED ON RECORD DESPITE THE FACT THAT EVIDENCES LIKE MASTER SERVICE AGREEMENT AND SERVICE ORDER FORMS (ON SAMPLE BASIS) WERE FURNISHED BEFORE THE LEARNED ASSESSING OFFICER. WITH REGARD TO THE REMAND REPORT OF THE LEARNED ASSESSING OFFICER, IT IS SUBMITTED THAT THE RESPONDENT ASSESSSEE COMPANY WAS ALWAYS UNDER THE BONA - FIDE BELIEF THAT THE EVIDENCES PRODUCED BEFORE THE LEARNED ASSESSING OFFICER DURING THE COURSE OF A SSESSMENT PROCEEDINGS AND PENALTY PROCEEDINGS WERE SUFFICIENT EVIDENCES TO CLAIM THE MANAGEMENT FEE EXPENSE OF RS. 3,900,000. HOWEVER, THESE DOCUMENTS ARE NOW BEING FILED BY THE RESPONDENT ASSESSSEE 7 COMPANY BEFORE YOUR HONOR'S OFFICE BASED ON THE ORDER OF HON'BLE DELHI BENCH OF THE INCOME - TAX APPELLATE TRIBUNAL (ITAT) IN RESPONDENT ASSESSSEE COMPANY 'S OWN CASE FOR AY 2006 - 07, WHEREIN IT HAS BEEN HELD AS UNDER: 11. BEFORE THE FIRST APPELLATE AUTHORITY ALSO, THE ASSESSEE HAS NOT BROUGHT OUT ANY EVIDENCE TO SUBSTANTIATE ITS CLAIM FOR DEDUCTION OF MANAGEMENT FEE. BEFORE US ALSO THE ASSESSEE HAS NOT SUBSTANTIATED HIS CLAIM BY PRODUCING EVIDENCE. THE RESPONDENT ASSESSSEE COMPANY SUBMITS THAT THESE EVIDENCES ARE AN EXTENSION OF EXISTING EVIDENCES ON RECORD AND BASED ON THE ORDER OF THE HON'BLE TRIBUNAL FOR AY 2006 - 07, IT HAS BECOME NECESSARY TO FILE THESE ADDITIONAL EVIDENCES AS THE EVIDENCES FILED EARLIER BY RES PONDENT ASSESSSEE COMPANY WERE FOUND TO BE INADEQUATE. THE RESPONDENT ASSESSSEE COMPANY ALWAYS BELIEVED THAT ITS CLAIM FOR NON LEVY OF PENALTY WOULD BE SUSTAINABLE WITH THE EVIDENCE ALREADY ON RECORD. HOWEVER, WITH THE HON'BLE ITAT TAKING A DIFFERENT VIEW, THE RESPONDENT ASSESSSEE COMPANY HAS TO FILE THESE FURTHER EVIDENCE. THE ADDITIONAL EVIDENCES SUBSTANTIATE THE FACTUM OF RENDERING OF SERVICE, COMMERCIAL EXPEDIENCY AND ACTUAL INCURRENCE OF THE MANAGEMENT FEE EXPENDITURE. THE RESPONDENT ASSESSSEE COM PANY SUBMITS THAT THE ADDITIONAL EVIDENCES ARE RELEVANT TO ADJUDICATE UPON THE JUSTIFICATION OF THE CLAIM MADE BY THE RESPONDENT ASSESSSEE COMPANY AND WOULD STRONGLY SUPPORT ITS CONTENTION THAT IN THE PRESENT CASE PENALTY CANNOT BE LEVIED. FURTHER, THE RES PONDENT ASSESSSEE COMPANY HAS ALREADY PROVIDED DETAILED SUBMISSION IN ITS APPLICATION FOR ADMISSION OF ADDITIONAL EVIDENCE ABOUT SUFFICIENT CAUSE' AND YOUR HONOR'S POWERS TO ADMIT ADDITIONAL EVIDENCE AS PROVIDED UNDER RULE 46A OF THE RULES. FURTHER, WITH REGARD TO THE CONTENTION OF THE LEARNED ASSESSING OFFICER THAT THE RESPONDENT ASSESSSEE COMPANY DID NOT FILE THE APPEAL AGAINST THE ASSESSMENT ORDER UNDER SECTION 143(3) OF THE ACT FOR AY 2007 - 08, AS ALREADY SUBMITTED BEFORE YOUR HONOR THAT THE RESPON DENT ASSESSSEE COMPANY DID NOT AGREE TO THE ADDITIONS PROPOSED IN THE DRAFT ASSESSMENT ORDER. HOWEVER, IN ORDER TO BUY PEACE AND TO AVOID THE COST OF LONG - DRAWN LITIGATION IN INDIA, THE RESPONDENT ASSESSSEE COMPANY DECIDED NOT TO PURSUE THE MATTER FURTHE R AND THEREFORE, DID NOT FILE OBJECTIONS BEFORE THE HON'BLE DISPUTE RESOLUTION PANEL (DRP'). A LETTER IN THIS REGARD BRINGING THE AFORESAID FACTS ON RECORD WAS DULY FILED WITH THE LEARNED ASSESSING OFFICER AND IS FORMING PART OF THE PAPERBOOK FILED BEFORE YOUR HONOR. THE RESPONDENT ASSESSSEE COMPANY SUBMITS THAT THE SAID ACCEPTANCE BY THE RESPONDENT ASSESSSEE COMPANY , SHOULD NOT, IN ANY MANNER BE CONSTRUED AS RESPONDENT ASSESSSEE COMPANY 'S ACCEPTANCE OF THE ADJUSTMENTS MADE TO THE RETURNED INCOME. THE SAME VIEW HAS ALSO BEEN UPHELD BY THE HON'BLE ITAT IN THE RESPONDENT ASSESSSEE COMPANY 'S OWN CASE FOR AY 2006 - 07 (ITA NO. 5567/ DEL/2011), WHEREIN THE HON'BLE TRIBUNAL EXTRACTED THE FOLLOWING FROM ITS ORDER IN THE CASE OF VERIZON INDIA PRIVATE LIMITED: 8 'IT IS ANOTHER MATTER THAT THE ASSESSEE CHOSE NOT TO CARRY THE ISSUE IN APPEAL THE REASONS OF WHICH HAVE BEEN EXPLAINED. THAT BY ITSELF DOES NOT WARRANT LEVY OF PENALTY UNDER SECTION 271 (L)(C) OF THE INCOME TAX ACT, 1961 FURTHER, IT IS SUBMITTED THAT THE A SSESSMENT PROCEEDINGS AND PENALTY PROCEEDINGS ARE TWO DIFFERENT THINGS. THE RESPONDENT ASSESSSEE COMPANY DID NOT FILE OBJECTION BEFORE THE HON'BLE DRP CONSIDERING THE QUANTUM INVOLVED, IN ORDER TO BUY PEACE AND TO AVOID LITIGATION AND ACCORDINGLY ACCEPTED THE ADJUSTMENTS. HOWEVER, THE SAME DOES NOT MEAN THAT RESPONDENT ASSESSSEE COMPANY AGREES WITH THE ADJUSTMENT AND HAS LOST ITS RIGHT TO PROVE ITS BONA - FIDE DURING THE COURSE OF PENALTY PROCEEDINGS. BY WAY OF FILING ADDITIONAL EVIDENCES AS PER THE OBSERVATI ONS OF THE HON'BLE ITAT FOR AY 2006 - 07, THE RESPONDENT ASSESSSEE COMPANY IS ESTABLISHING THE GENUINENESS OF THE EXPENDITURE INCURRED WHICH IN TURN PROVES THAT THE PENALTY CANNOT BE LEVIED ON THE SAME AS THE EXPENDITURE WAS INCURRED FOR THE PURPOSE OF BUSI NESS OF THE RESPONDENT ASSESSSEE COMPANY . IN THIS REGARD, THE RESPONDENT ASSESSSEE COMPANY PLACES RELIANCE ON THE FOLLOWING: JURISDICTIONAL HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS ARETIC INVESTMENT (P) LTD (APPEAL NO. 264 OF 2009) WHEREIN IT HE LD AS UNDER: '3. IT IS WELL - SETTLED THAT ASSESSMENT PROCEEDINGS AND PENALTY PROCEEDINGS ARE DISTINCT AND INDEPENDENT OF EACH OTHER. NO DOUBT, THE FINDINGS IN THE ASSESSMENT PROCEEDINGS WOULD HAVE SIGNIFICANCE IN THE PENALTY PROCEEDINGS ALSO BUT THEY ARE NOT DECISIVE OR DETERMINATIVE. THIS POSITION HAS BEEN ESTABLISHED IN SEVERAL DECISIONS WHICH INCLUDE CIT V. KHODAY ESWARSA AND SONS [1972] 83 ITR 369 (SE) AND CIT V. J.K. SYNTHETIC LTD. [1996] 219 ITR 267 . 4. WITH RESPECT TO THE FACT THAT THE ASSESSEE H AD ACCEPTED THE VIEW TAKEN BY THE ASSESSING OFFICER THAT THE LOSS DUE TO TRADING IN SHARES WAS IN THE NATURE OF A SPECULATIVE LOSS, THE ASSESSEE CONTENDED THAT IN THE PENALTY PROCEEDINGS, IT CAN TAKE UP THE PLEA THAT THE CLAIM MADE IN THE RETURN WAS BONA F IDE. 5 . IN VIEW OF THE ABOVE, NO SUBSTANTIAL QUESTION OF LAW ARISES FOR CONSIDERATION. ACCORDINGLY, THE APPEAL IS DISMISSED' FURTHER, IN CIT V. J.K. SYNTHETIC LTD. [1996J 219 ITR 267, HON'BLE DELHI HIGH COURT HELD AS UNDER: 'HOWEVER, THE PROCEEDINGS FOR IMPOSITION OF PENALTY AND ASSESSMENT PROCEEDINGS ARE TWO SEPARATE AND INDEPENDENT PROCEEDINGS AND, THEREFORE, SEPARATE AND DISTINCT PROVISIONS HAVE BEEN ENACTED IN THE STATUTE FOR INITIATION OF THE SAME. UNDER THE PROVISIONS O F SECTION 271 (1), A PERSON BECOMES LIABLE TO 9 PAY PENALTY WITHIN THE TERM AND LANGUAGE OF CLAUSE (A) OR (B) OR (C). THEREFORE, THE FINDINGS RECORDED BY THE TRIBUNAL IN THE QUANTUM APPEAL CANNOT BE SAID TO BE DECISIVE AND CONCLUDED FACTOR IN THE PENALTY PRO CEEDINGS. ' ADDITIONALLY, IN RESPONDENT ASSESSSEE COMPANY 'S OWN CASE FOR AY 2006 - 07, THE HON'BLE TRIBUNAL HAS DELETED PENALTY LEVIED ON TRANSFER PRICING ADJUSTMENT DESPITE THE FACT THAT NO APPEAL WAS FILED BEFORE THE APPELLATE AUTHORITIES AGAINST THE A SSESSMENT ORDER. FURTHER, WITH REGARD TO THE CASE LAWS RELIED UPON BY THE LEARNED ASSESSING OFFICER, THE RESPONDENT ASSESSSEE COMPANY SUBMITS THAT THE SAME ARE COMPLETELY ON DIFFERENT SET OF FACTS. IN VIEW OF THE AFORESAID, THE RESPONDENT ASSESSSEE COMPA NY HUMBLY PRAYS BEFORE YOUR HONOR THAT THE ADDITIONAL EVIDENCES BE ADMITTED AND CONSIDERED ON MERITS AS THE SAME GOES TO THE ROOT OF THE MATTER AND IS ESSENTIAL FOR RENDERING SUBSTANTIAL JUSTICE TO THE RESPONDENT ASSESSSEE COMPANY . REASONS FOR DECISION : I HAVE PERUSED THE ORDER OF THE AO U/S 143(3) AND U/S 271(1)(C) OF THE IT ACT AS WELL AS HIS REMAND REPORT. I HAVE CONSIDERED THE SUBMISSION FILED BY THE RESPONDENT ASSESSSEE COMPANY . THE MAIN CONTENTION IS THE DISALLOWANCE OF MANAGEMENT EXPENSES PAID BY THE RESPONDENT ASSESSSEE COMPANY COMPANY. ASSESSEE COMPANY IS NOT HAVING ANY EMPLOYEES ON ITS ROLES WHICH IS EVIDENCED BY THE AUDITED FINANCIAL ACCOUNTS. HOWEVER, THE RESPONDENT ASSESSSEE COMPANY HAS AN INCOME OF RS. 44.96 CRORES DURING THIS ASSESSMENT YE AR. THESE TWO FACTS ARE NOT CONTRADICTED BY THE AO. 4 THEREFORE, THE IMPORTANT QUESTION WHICH NEEDS TO BE ANSWERED IS HOW THE RESPONDENT ASSESSSEE COMPANY IS EARNING THIS INCOME WHICH IS IN CRORES WITHOUT ANY EMPLOYEES? THE ANSWER IS SUPPLIED BY THE RESPOND ENT ASSESSSEE COMPANY THAT IT USES THE EMPLOYEES ON THE PAY ROLES OF ITS SISTER CONCERN I.E. VERIZON INDIA PVT. LTD. THE RESPONDENT ASSESSSEE COMPANY AS WELL AS ITS SISTER CONCERN ARE IN THE SAME PREMISES I.E. 3RD FLOOR, RADISSON COMMERCIAL PLAZA, NATIONAL HIGHWAY - 8, NEW DELHI - 110037. FOR USING THE EMPLOYEES AND FOR PAYMENT OF FEES FOR THE SERVICES, THE RESPONDENT ASSESSSEE COMPANY HAS AN AGREEMENT WITH THE SISTER CONCERN DATED 25.02.2005. THIS AGREEMENT WAS PRESENTED BEFORE THE AO DURING THE ASSESSMENT PRO CEEDINGS AS WELL AS DURING PENALTY PROCEEDINGS. THE AUDITED FI NANCIALS WERE ALSO BEFORE THE AO FOR THE BOTH THE COMPANIES, I AM OF THE OPINION THESE TWO FACTS .PUT TOGETHER PROVIDE SUFFICIENT JUSTIFICATION FOR THE CLAIM OF MANAGEMENT FEES DEDUCTION. HOWE VER, THE RESPONDENT ASSESSSEE COMPANY PRODUCED ADDITIONAL EVIDENCE IN THE FORM OF 1) ADDITIONAL SERVICE ORDER FORMS SIGNED BY THE EMPLOYEES OF THE VERIZON INDIA PVT. LTD. ON BEHALF OF THE RESPONDENT ASSESSSEE COMPANY WITH ITS CUSTOMERS, 2) DECLARATION FROM VERIZON INDIA PVT. LTD. THAT THESE ARE ALL ITS EMPLOYEES, 3) TDS CERTIFICATE CONFIRMING PAYMENT TO VERIZON INDIA PVT. LTD. 10 AND 4) A CERTIFICATE FROM CHARTERED ACCOUNTANTS STATING THAT THERE ARE NO EMPLOYEES ON THE ROLE OF THE RESPONDENT ASSESSSEE COMPANY . THE ADDITIONAL EVIDENCE IS IN FACT NO ADDITIONAL EVIDENCE IN STRICT SENSE OF THE TERMS SINCE THE TDS CERTIFICATES AND THE FINANCIALS ARE VERY MUCH AVAILABLE BEFORE THE AO. THE CHARTERED ACCOUNTANT CERTIFICATE DOES NOT BRING ANY FACTS ON RECORD EXCEPT BY STATING THAT THE RESPONDENT ASSESSSEE COMPANY HAS NO EMPLOYEES ON ITS ROLES WHICH IS VERY MUCH EVIDENT FROM THE AUDITED ACCOUNTS THEREFORE, EVEN WITHOUT RELYING ON THE ADDITIONAL EVIDENCE THE CASE CAN BE DECIDED. THE PROFIT AND LOSS ACCOUNT OF THE RESPON DENT ASSESSSEE COMPANY UNDER THE HEAD EXPENDITURE HAS ONLY TWO ITEMS, NAMELY, COST OF SERVICES AND ADMINISTRATIVE AND OTHER EXPENSES. THERE IS NO EMPLOYEE COST UNDER ANY OF THE SUB HEADINGS OF THE PROFIT AND LOSS ACCOUNT WHICH CLEARLY SHOWS THAT THE COMPAN Y IS MANAGING ITS AFFAIRS BY RELYING ON THE EMPLOYEES OF ITS SISTER CONCERN. THE TDS CERTIFICATE WAS ALSO DULY ACKNOWLEDGED BY GIVING CREDIT IN THE SISTER CONCERN BY THE AO IN VIEW OF THIS, THERE IS NO DOUBT THAT THE MANAGEMENT SERVICE CHARGES WERE PAYABLE BY THE ASSESSEE TO ITS SISTER CONCERN. IT IS A DIFFERENT MATTER THAT THE RESPONDENT ASSESSSEE COMPANY HAD NOT CHALLENGED THIS ADDITION MADE BY THE AO IN THE ASSESSMENT ORDER. THAT ITSELF DOES NOT JUSTIFY IMPOSITION OF PENALTY. THE ORDER OF THE HON'BLE ITA T IN ITS OWN CASE FOR THE AY 2006 - 07 (SUPRA) IS RELIED WHEREIN IT HAS MADE THE FOLLOWING OBSERVATIONS: 'IT IS ANOTHER MATTER THAT THE ASSESSEE CHOSE NOT TO CARRY THE ISSUE IN APPEAL THE REASONS OF WHICH HAVE BEEN EXPLAINED. THAT BY ITSELF DOES NOT WARRAN T LEVY OF PENALTY UNDER SECTION 271 (1)(C) OF THE INCOME TAX ACT, 1961' 6.6 IT IS ALSO INTERESTING THAT THE RESPONDENT ASSESSSEE COMPANY IS CLAIMING ITS ENTIRE INCOME AS DEDUC TION U/S 80I A OF THE IT ACT FOR THIS ASSESSMENT YEAR ALSO. THE AO HAS ALLOWED THE DEDUCTION ON THE ENHANCED INCOME AS A RESULT OF ENHANCEMENT DUE TO THE DISALLOWANCE OF MANAGEMENT FEE EXPENSES. THIS ALSO CLEARLY ESTABLISHES THAT THIS IS NOT A FIT CASE FOR IMPOSITION O F PENALTY SINCE THE RESPONDENT ASSESSSEE COMPANY IS NOT DERIVING ANY BENEFIT BY MAKING SUCH CLAIM OF DEDUCTION. THERE IS NO DIFFERENCE BETWEEN THE ASSESSED TAX AND RETURNED TAX ON THIS ACCOUNT. THEREFORE, THIS IS AN ADDITIONAL REASON WHY THIS IS NOT A FIT CASE FOR LEVY OF PENALTY U/S 271(1)(C). CONSEQUENTLY, E NTIRE PENALTY OF RS. 75,01,329/ - FOR AY 2007 - 08 IMPOSED BY THE AO IS DELETED. NOW, BEING AGGRIEVED WITH THE ABOVE ORDER, THE REVENUE IS BEFORE US WITH THE PRESENT APPEAL. 11 2. THE LD. SR. DEPARTMENTAL REPRESENTATIVE PLACED RELIANCE ON THE ORDER OF THE ASSESSING OFFICER AND PLEADED FOR THE CONFIRMATION OF THE PENALTY ORDER. 3. ON THE OTHER HAND, THE LEARNED AUTHORIZED REPRESENTATION PLACED HEAVY RELIANCE ON THE ORDER OF CIT(A). 4. WE HAVE HEARD THE RIVAL SUBMI SSIONS OF THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN THIS CASE, THE ISSUE IN APPEAL HAS TO BE ADJUDICATED KEEPING IN VIEW THE PROVISIONS OF EXPLANATION VII TO SECTION 271(1)(C) OF THE ACT, FOR THE PURPOSES OF INVOKING EXPLANATION VII TO SECTION 271 (1)(C). THE PRE - REQUISITE CONDITION IS THAT THE ASSESSING OFFICER HAS TO RECORD A FINDING THAT THE ASSESSEE COMPANY HAD NOT ACTED IN GOOD FAITH AND IN DUE DILIGENCE AND THE EXPLANATION OFFERED BY THE ASSESSEE COMPANY WAS NOT BONA FIDE. IN THE ABSENCE OF SU CH A FINDING, THE PENALTY CANNOT BE LEVIED. OBVIOUSLY IN THIS CASE, THERE WAS NO SUCH REFERENCE IN THE ORDER PASSED UNDER SECTION 271(1)(C). IN FACT, THERE WAS NOT EVEN A WHISPER ABOUT THIS IN THE ORDER OF PENALTY. FURTHER, IN THE CASE OF TRANSFER PRICING ADJUSTMENTS, THE ADDITIONS ARE MADE ONLY ON DIFFERENCE OF OP INION IN ESTIMATING THE ALP AND ARE MATTER OF ESTIMATION AGAINST ESTIMATION AND THEREFORE NO PENALTY IS LEVIABLE . 5. THE FACT THAT THE RESPONDENT ASSESSSEE COMPANY HAD CHOSEN NOT TO CARRY THE ISSUE IN APPEAL BY ITSELF DOES NOT WARRANT LEVY OF PENALTY UNDER SECTION 271(1)(C) AS HELD BY ITAT, DELHI BENCH IN THE ASSESSEE S OWN CASE I.E. M/S VERIZON COMMUNICATION INDIA P. LTD. VS DCIT, [2013] 140 ITD 122 (DEL.) . THEREFORE, RESPECTFULLY FOLLOWING THE RATI O LAID DOWN IN THE ABOVE CA SE, WE 12 UPHOLD THE ORDER OF THE CIT(A) IN DELETING THE PENALTY OF RS. 75,01,329/ - FOR AY 2007 - 08. ACCORDINGLY, THE APPEAL FILED BY THE REVENUE IS DISMISSED. 6. IN THE RESULT, THE APPEAL IS DISMISSED. THE DECISION IS PRONOUNCED IN THE OPEN COURT ON 1 9 T H A U G U S T , 2015. S D / - S D / - ( I.C. SUDHIR ) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 1 9 T H AUGUST , 2015. RK/ - COPY FORWARDED TO: 1. RESPONDENT ASSESSSEE COMPANY 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI