SCHAEFFLER INDIA LTD. (FORMERLY KNOWN AS INA BEARING INDIA PVT. LTD.),VADODARA V. THE ACIT, CICLE-1(1)(2) NOW DCIT, CIRCLE-1(1)(1), VADODARA

ITA 1872/AHD/2024

AI Insights

The case involves Schaeffler India Ltd., which appealed against the penalty imposed by the Assistant Commissioner of Income Tax for alleged inaccuracies in the particulars of income furnished during the assessment year 2009-10. The penalty was primarily based on a Transfer Pricing adjustment and disallowance of additional depreciation on second-hand machinery. The ITAT examined whether the penalty was justified under section 271(1)(c) of the Income Tax Act, considering the methods and comparables used by the assessee in its Transfer Pricing study, and whether these were in good faith and with due diligence.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 668646 (ITAT-AHMEDABAD)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-06-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2009-2010
• Other Referred Cases: CIT vs. Reliance Petroproducts (P) Ltd, Mastek Ltd vs. DCIT, PCIT vs. Global Vantedge (P) Ltd, Chegg India (P) Ltd vs. ACIT, ITO vs. Carraro Technologies India (P) Ltd, Principal Commissioner of Income Tax-2 vs. Sinosteel India (P.) Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RIGNESH DAS
• Assessee Lawyers: BHAVIN MARFATIA
• Keywords: Difference of opinion; Opportunity of being heard; Transfer pricing; International transaction; Bad and doubtful debts; Depreciation; Additional depreciation; Period of limitation
• Section: 143(3); 271(1)(c); 92C

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, AHMEDABAD BEFORE DR. BRR KUMAR, VICE PRESIDENT & SHRI SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER I.T.A. No.1872/Ahd/2024 (Assessment Year: 2009-10) Schaeffler India Ltd. (formerly known as INA Bearings India Pvt. Ltd.), Schaeffler India Ltd., Opp. ABB, P.O. Maneja Vadodara-390013 Vs. Assistant Commissioner of Income Tax, Circle-1(1)(2), Vadodara (Now Deputy Commissioner of Income Tax, Circle-1(1)(1), Vadodara [PAN No.AAACI7163H] (Appellant) .. (Respondent) Appellant by : Shri Bhavin Marfatia, A.R. Respondent by: Shri Rignesh Das, CIT DR Date of Hearing 01.05.2025 Date of Pronouncement 23.06.2025 O R D E R PER SIDDHARTHA NAUTIYAL - JUDICIAL MEMBER: This appeal has been filed by the Assessee against the order passed by the Ld. Commissioner of Income Tax (Appeal), (in short “Ld. CIT(A)”), National Faceless Appeal Centre (in short “NFAC”), Delhi vide order dated 30.08.2024 passed for A.Y. 2009-10. 2. The assessee has raised the following grounds of appeal: “Invalid Penalty Proceedings: 1. The learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [\"CIT(A)\"] erred in fact and in law in confirming the action of the learned Assistant Commissioner of Income Tax, Circle 1(1)(2), Vadodara (\"the AO\") in passing the penalty order which is not valid as per law. ITA No. 1872/Ahd/2024 Schaeffler India Ltd. vs. DCIT Asst.Year –2009-10 - 2– 2. The learned CIT(A) erred in fact and in law in confirming the action of the learned AO in initiating the penalty proceedings despite the fact that the penalty pro- ceedings attained finality vide penalty order dated 22.04.2019. Non-existing entity: 3. The learned CIT(A) erred in fact and in law in confirming the action of the learned AO in levying penalty u/s 271(1)(c) of the Income Tax Act, 1961 (\"the Act\") despite the fact that the order was passed by the learned AO in the name of non-existing entity. 4. The learned CIT(A) erred in fact and in law in confirming the action of the learned AO in passing the invalid order. Without prejudice to the above: Time-barred proceedings: 5. The learned CIT(A) erred in fact and in law in confirming the action of the learned AO in levying the penalty u/s 271(1)(c) without appreciating the specific provi- sions of section 275(1A) of the Act. 6. The learned CIT(A) erred in fact and in law in confirming the action of the learned AO in passing the order beyond the period of limitation as prescribed u/s 275(1A) of the Act. 7. The learned CIT(A) erred in fact and in law in confirming the action of the learned AO in passing the time-barred order and therefore the order passed by the learned AO is invalid and liable to be quashed. Without prejudice to the above: Penalty u/s 271(l)(c) - Rs. 2.76.33.870: 8. The learned CIT(A) erred in fact and in law in confirming the action of the learned AO in levying penalty u/s 271(l)(c) of Rs. 2,76,33,870. 9. The learned CIT(A) erred in fact and in law in confirming the action of the learned AO in levying penalty despite the fact that the Appellant has not furnished inaccurate particulars of income either in return of income or during the course of assessment proceedings. 10. The learned CIT(A) erred in fact and in law in confirming the action of the learned AO in levying penalty on transfer pricing adjustment without satisfying the conditions stipulated in Explanation 7 to section 271(l)(c) of the Act. 11. The learned CIT(A) erred in fact and in law in confirming the action of the learned AO in levying penalty without appreciating the fact that the Arm's Length Price ITA No. 1872/Ahd/2024 Schaeffler India Ltd. vs. DCIT Asst.Year –2009-10 - 3– (\"ALP\") was computed by the Appellant in good faith and as per the provisions of section 92C of the Act. 12. The learned CIT(A) erred in fact and in law in confirming the action of the learned AO in levying penalty on debatable issue. 13. The learned CIT(A) erred in fact and in law in confirming the action of the learned AO in levying penalty merely on the basis of difference of opinion. 14. The learned CIT(A) erred in fact and in law in confirming the action of the learned AO in levying penalty without appreciating the facts on record in proper perspective. 15. The learned CIT(A) erred in fact and in law in confirming the action of the learned AO in levying penalty without granting proper opportunity of being heard. 16. Your Appellant craves the right to add to or alter, amend, substitute, delete or modify all or any of the above grounds of appeal.” 3. The brief facts of the case are that the assessee filed its return of income at a loss of Rs. (-)19,80,74,542/-. The case was selected for scrutiny, and assessment under section 143(3) read with section 144C(3) of the Income Tax Act, 1961 (Act), was finalized on 29.05.2013, determining the assessed loss at Rs. (-)2,00,59,396/-. The assessee is engaged in manufacturing and trading in needle roller bearings and engine components. During the course of assessment proceedings, two main disallowances were made in the assessment order: a Transfer Pricing adjustment amounting to Rs. 17,15,40,000/- and a disallowance of additional depreciation on second-hand machinery valued at Rs. 64,75,146/-. As a result, penalty proceedings under section 271(1)(c) were initiated on the assessee. In appeal before CIT(A), since the assessee did not contest the disallowance of additional depreciation on second-hand machinery, penalty of Rs. 22,00,950/- under section 271(1)(c) was levied vide order dated 25.03.2015. In relation to the Transfer Pricing adjustment, ITA No. 1872/Ahd/2024 Schaeffler India Ltd. vs. DCIT Asst.Year –2009-10 - 4– the assessee had entered into international transactions with associated enterprises amounting to Rs. 1,61,33,11,882/-. In the Transfer Pricing proceedings, the Transfer Pricing Officer (TPO), made an upward adjustment of Rs. 17,15,40,000/-. This included Rs. 12,45,49,000/- relating to manufacturing business and Rs. 4,69,91,000/- to the distribution segment. Based on the TPO’s order, the same amount was added to the assessee's returned income, and penalty proceedings under section 271(1)(c) were again initiated for furnishing inaccurate particulars. The assessee challenged the CIT(A)’s decision before the Hon'ble ITAT, which remanded the case back to the CIT(A) with directions to provide the assessee a proper opportunity of hearing. Following this, the CIT(A) passed an order dated 15.11.2016 directing the Assessing Officer to recompute the arm’s length price (ALP). Based on this, the DCIT, Pune, vide order dated 16.01.2017, revised the TP adjustment to Rs. 8,13,00,000/- for the manufacturing segment and deleted the Rs. 4,69,91,000/- adjustment for the trading segment. The assessee contended that the penalty of Rs. 22,00,950/- had already been deleted by the ITAT; however, this argument was not accepted by the Tax Authorities. The Assessing Officer held that the penalty imposed on the disallowance of depreciation was levied through a separate order dated 25.03.2015, and the assessee had not offered any explanation regarding the TP adjustment of Rs. 8,13,00,000/- . Therefore, the Assessing Officer held that this was a fit case for imposition of penalty under section 271(1)(c) for furnishing inaccurate particulars of income. ITA No. 1872/Ahd/2024 Schaeffler India Ltd. vs. DCIT Asst.Year –2009-10 - 5– 4. In appeal before the Commissioner (Appeals), the assessee contended that it had determined the Arm’s Length Price of its international transactions with Associated Enterprises using the Transactional Net Margin Method (TNMM), which was the most appropriate method under section 92C of the Act. For the purpose of benchmarking, the Assessee selected comparables by applying specific search filters, which were clearly specified in its transfer pricing study report. The Profit Level Indicator (PLI) was calculated using the Profit Before Depreciation, Interest, and Tax to Sales (PBDIT/Sales) ratio, primarily due to higher depreciation rates charged by the Assessee and underutilization of fixed assets compared to comparables. This computation yielded an average PLI of 5.38% for comparable companies, whereas the Assessee’s own PLI stood at 12.60%, indicating that the international transactions under the manufacturing segment were at arm’s length. The assessee submitted all relevant documents and justifications for its method and comparables during assessment. However, the Transfer Pricing Officer (TPO) disagreed with the assessee’s approach, thereby changing the comparable set by relying on data from the preceding year and rejecting certain filters, particularly the ones relating to manufacturing revenue percentage and turnover multiples. The TPO also rejected the use of PBDIT as the PLI and instead used Profit Before Interest and Tax (PBIT) to Sales, thus computing a lower PLI of -6.58% for the assessee and 4.11% for the comparable set, which led to an upward adjustment of Rs. 12.46 crore. The Assessee submitted before CIT(Appeals) that such rejection of its methodology and adjustments was not based on any ITA No. 1872/Ahd/2024 Schaeffler India Ltd. vs. DCIT Asst.Year –2009-10 - 6– identified defects in the documentation or reasoning but reflected merely a difference in opinion. It was further pointed out that the assessee had made certain adjustments—such as excluding foreign exchange loss, bad debts, and provisions for obsolete inventory-on the grounds that these were already disallowed in the return of income and had been accepted in prior years. However, the TPO disallowed these adjustments in the relevant assessment year without justifying the inconsistency with past practice. The assessee argued that under Explanation 7 to section 271(1)(c), penalty for transfer pricing adjustments can be levied only if it is proven that the price charged was not determined in accordance with section 92C of the Act and not done in good faith and with due diligence. In this case, the AO failed to make any reference to Explanation 7 in the penalty order or record any findings suggesting non-compliance with these conditions. There was no claim by the AO or the TPO that the assessee’s selection of TNMM was inappropriate or that its method of determining ALP was not in accordance with section 92C of the Act. On the contrary, both the TPO and the ITAT, in the quantum proceedings, had accepted TNMM as the most appropriate method. Further, the Assessee contended before CIT(Appeals) that the search filters applied in selecting comparables by the assessee were consistent with judicial precedents and were applied in good faith. The filter for 90% minimum manufacturing revenue was based on the fact that 100% of the Assessee’s revenue in the relevant segment came from manufacturing. Although the Department chose to apply a 75% threshold, this was merely a difference in opinion rather than a finding of fault or inaccuracy in the assessee’s approach. In support of its decision to use ITA No. 1872/Ahd/2024 Schaeffler India Ltd. vs. DCIT Asst.Year –2009-10 - 7– PBDIT/Sales as the PLI, the assessee supported this position on various grounds such as the charging of depreciation at higher-than-standard rates, substantial recent expansion, and underutilization of capacity—all of which distorted the depreciation figures relative to comparable companies. The assessee also submitted that section 271(1)(c) does not authorize the imposition of penalty merely because the explanations offered by the assessee are not accepted by the AO. There was no concealment of income or furnishing of inaccurate particulars; all material facts and explanations were duly submitted and no part of the information was found to be false or misleading. The assessment itself was concluded after considering the submissions and documents provided by the Assessee. Therefore, while the AO might have valid grounds for making additions during regular assessment, the imposition of penalty required a higher threshold-namely, proof of concealment or lack of bona fides-which was absent in this case. The Assessee relied on judicial pronouncements in support of the contention that even if the claim is ultimately rejected or found not in accordance with the law, no penalty can be levied if the assessee has disclosed all facts and provided a bona fide explanation. Therefore, the assessee submitted that the penalty imposed by the AO was unwarranted and deserved to be deleted. 5. However, CIT(Appeals) did not agree with the contentions of the assessee and dismissed the appeal of the assessee with the following observations: ITA No. 1872/Ahd/2024 Schaeffler India Ltd. vs. DCIT Asst.Year –2009-10 - 8– “1. Section 271(1)(c) states: 271. (1) If the Assessing Officer or the33-34 [Joint Commissioner (Appeals) or the] Commissioner (Appeals) or the Principal Commissioner or Commissioner in the course of any proceedings under this Act, is satisfied that any person— (a) [***] (b) has failed to comply with a notice under sub-section (2) of section 115WD or under sub-section (2) of section 115WE or under sub-section (1) of section 142 or subsection (2) of section 143 or fails to comply with a direction issued under subsection (2A) of section 142, or (c) has concealed the particulars of his income or furnished inaccurate particulars of such income, or Sections clearly states that If the Assessing Officer or the33-34 [Joint Commissioner (Appeals) or the] Commissioner (Appeals) or the Principal Commissioner or Commissioner in the course of any proceedings under this Act, is satisfied that any person) has concealed the particulars of his income or furnished inaccurate particulars of such income, shall be liable for penalty u/s 271(1)(c) of the Income Tax Act 1961 and in the present case the assessee has furnished inaccurate particulars as the addition has also been confirmed by the Hon'ble ITAT. In the light of the above facts and discussions, this appellate authority upheld the penalty levied by the assessing officer amounting to Rs 2,76,33,870/- under section 271(1)(c) of the IT Act for furnishing inaccurate particular of income. 6. Conclusion: In the result, the appeal is dismissed.” 6. The assessee is in appeal before us against the aforesaid order passed by CIT(Appeals) confirming the levy of penalty u/s 271(1)(c) of the Act. Before us, the Counsel for the assessee primarily reiterated the arguments taken before CIT(Appeals). In response, the Ld. DR placed reliance on the observations made by the Assessing Officer and Ld. CIT(Appeals) in their respective orders. 7. We have heard the rival contentions and perused the material on record. On going through the facts of the instant case, we are of the considered view that this is not a fit case of levy of penalty u/s 271(1)(c) ITA No. 1872/Ahd/2024 Schaeffler India Ltd. vs. DCIT Asst.Year –2009-10 - 9– of the Act. The penalty in question was imposed in connection with a Transfer Pricing adjustment of Rs. 17.15 crore made in respect of the manufacturing and trading segments, which was based on (i) the TPO’s decision to use PBIT/Sales as the Profit Level Indicator (PLI) instead of PBDIT/Sales as adopted by the Assessee, (ii) changes in the filters and comparables used for benchmarking, and (iii) adjustments made to the operating profit computation by excluding items such as liabilities written back, bad debts written off, and provisions for doubtful debts. The penalty was levied only on the ground that the adjustments made by the TPO were upheld by the CIT(A) and partly confirmed by the ITAT. However, we note that the assessee had furnished relevant details in the return of income, the transfer pricing study report, and during the course of assessment and penalty proceedings, none of which were found to be inaccurate or false. The TNMM was accepted by the TPO as the most appropriate method, and the adjustments arose on account of differences in interpretation, such as the use of PBIT versus PBDIT as the PLI, and in the treatment of certain operating items-issues which in our view are debatable. We note that several judicial precedents, including CIT vs. Reliance Petroproducts (P) Ltd (2010) 189 Taxman 322 (SC), Mastek Ltd vs. DCIT (2012) 28 taxmann.com 292 (ITAT Ahd), and PCIT vs. Global Vantedge (P) Ltd (2018) 95 taxmann.com 377 (Delhi HC) have held that mere differences in opinion or debatable issues should not attract penalty. In the instant case penalty was levied for furnishing inaccurate particulars of income, despite there being no specific finding by the Tax Authorities that the ALP was not computed in good faith or without due diligence. Moreover, ITA No. 1872/Ahd/2024 Schaeffler India Ltd. vs. DCIT Asst.Year –2009-10 - 10– Explanation 7 to section 271(1)(c), which specifically governs penalty in transfer pricing cases, was neither invoked during the initiation nor discussed while levying the penalty. In the case of Chegg India (P) Ltd vs. ACIT (2021) 126 taxmann.com 272 (ITAT Delhi) and ITO vs. Carraro Technologies India (P) Ltd (2019) 102 taxmann.com 541 (ITAT Pune), it has been held that non-invocation of Explanation 7 makes the penalty unsustainable in transfer pricing matters. In the case of Principal Commissioner of Income Tax-2 vs. Sinosteel India (P.) Ltd. [2019] 102 taxmann.com 610 (Delhi)[03-08-2018], the High Court held that Explanation 7 to section 271(1)(c) states that penalty is not to be imposed where assessee establishes that price charged or paid was computed as per provisions of section 92C and assessee had acted in good faith and with due diligence and conduct of assessee is distinguishing and relevant factor to be adjudicated in penalty proceedings thus, as in present case assessee acted in good faith no penalty under section 271(1)(c) should be imposed. While passing the order, Hon'ble High Court made the following observations: 16. Explanation 7 to section 271(1)(c) of the Act reads:- \"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 disallowed shall, for the purposes of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished, unless the assessee proves to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Principal Commissioner or Commissioner that the price charged or paid in such transaction was computed in accordance with the provisions contained in section 92C and in the manner prescribed under that section, in good faith and with due diligence.\" ITA No. 1872/Ahd/2024 Schaeffler India Ltd. vs. DCIT Asst.Year –2009-10 - 11– Thus, addition or disallowance made while computing the income under section 92C of the Act, is deemed to be concealed income or income of which inaccurate particulars have been furnished. Explanation 7 however states that penalty is not to be imposed where the assessee establishes that the price charged or paid was computed as per provisions of Section 92C and the assessee had acted in good faith and with due diligence. Conduct of the assessee is the distinguishing and relevant factor to be adjudicated in the penalty proceedings. Onus to establish bona fides and exercise of due diligence is on the assessee. Explanation of the assessee on the computation of arms length price may be the same, but appreciation and consideration is from a different point of view, i.e. bona fides and due diligence. 17. Respondent-assessee had applied CUP method to compute the arms length price of the international transactions with the associated enterprises. Revenue has not disputed that the CUP method was the preferred or appropriate method to be applied. Revenue no doubt states that there was lack of reliable data for application of the CUP method, but the method adopted and applied by the respondent-assessee was not rejected. 18. As noticed above, the respondent-assessee had justified and explained why the independent transaction was disregarded as an internal comparable, for two reasons. Firstly, the transaction was of low value in comparison with transactions with associated entities. Secondly, it was a single transaction, whereas transactions with associated enterprises were continuous and based upon long-term business relationship. This factual position and distinction is undisputed. In view of the factual matrix, the explanation of the respondent/assessee was accepted as bona fide and that the assessee had exercised due diligence in selection of the method and comparables. It is in this context, we find that the Tribunal has taken a reasonable and considered view of the matter. The said findings on the question of explanation, bona fides and due diligence is a finding of fact. 19. There was divergence of view whether the internal isolated/sole unrelated third party transaction should be taken as a comparable. In the quantum proceedings the stand of the respondent-assessee that the internal transaction should be excluded has been rejected. This has resulted in transfer pricing addition. However, as recorded above, the issue and question before the Tribunal in penalty proceeding was different; whether the respondent-assessee while excluding the internal transaction had acted in good faith and with due diligence. The Tribunal has duly applied its mind to the relevant aspect of good faith and due diligence. The Tribunal has held that the respondent-assessee had been able to discharge the onus placed upon them in terms of Explanation 7 to section 271(1)(c) of the Act and show that their stand and stance in not taking into consideration the internal transaction was in good faith and they had acted with due diligence. These findings of the Tribunal in the present case are factual and clearly plausible and reasonable. 20. Recording the aforesaid, we do not find any reason to interfere in the impugned order. The appeal is accordingly dismissed. No costs. ITA No. 1872/Ahd/2024 Schaeffler India Ltd. vs. DCIT Asst.Year –2009-10 - 12– 8. In the instant case, the assessee had used a prescribed method (TNMM) under section 92C of the Act and disclosed the selection of filters, comparables, and operating margin computation in the transfer pricing study report. Neither the TPO nor CIT(A) ever held that the ALP was computed outside the statutory provisions, or that the study report lacked diligence or was not prepared in good faith. In view of these facts and the settled legal position, in our view the necessary conditions under Explanation 7 for imposing penalty are not satisfied. Accordingly, we hold that the penalty levied by the AO is unsustainable in law and is hereby deleted. Since, we have given our findings on merits of the case, the other technical grounds raised by the assessee on jurisdiction are not being separately adjudicated. 9. In the result, appeal of the assessee is allowed. This Order pronounced in Open Court on 23/06/2025 Sd/- Sd/- (DR. BRR KUMAR) (SIDDHARTHA NAUTIYAL) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad; Dated 23/06/2025 TANMAY, Sr. PS TRUE COPY आदेश की Ůितिलिप अŤेिषत/Copy of the Order forwarded to : 1. अपीलाथŎ / The Appellant 2. ŮȑथŎ / The Respondent. 3. संबंिधत आयकर आयुƅ / Concerned CIT 4. आयकर आयुƅ(अपील) / The CIT(A)- 5. िवभागीय Ůितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाडŊ फाईल / Guard file. आदेशानुसार/ BY ORDER, उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपीलीय अिधकरण, अहमदाबाद / ITAT, Ahmedabad "