Commissioner Of Income Tax-Ii vs M/S Leroy Somer & Controls (India) ...
2013 Latest Caselaw 3830 Del

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*       IN THE HIGH COURT OF DELHI AT NEW DELHI
+                  INCOME TAX APPEAL NO. 410/2012
                                       Reserved on: 13th August, 2013
                                   Date of decision: 30th August, 2013
        COMMISSIONER OF INCOME TAX-II
                                                          ..... Appellant
                          Through Mr. Kamal Sawhney, Sr. Standing
                          Counsel.

                          versus

        M/S LEROY SOMER & CONTROLS (INDIA) PVT. LTD.
                                            ..... Respondent

Through Mr. Kaanan Kapoor, Advocate.

CORAM:

HON'BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE SANJEEV SACHDEVA

SANJIV KHANNA, J.:

Commissioner of Income Tax, Delhi-II in this appeal under

Section 260A of the Income Tax Act, 1961 (Act, for short), submits

that the tribunal was wrong in affirming the order of the Commissioner

of Income Tax (Appeals) deleting penalty of Rs.22,20,100/- imposed

under Section 271G of the Act by the Assessing Officer.

2. Tribunal has given two reasons for dismissing the appeal of the

Revenue and upholding deletion of penalty under Section 271G. It has

recorded that the penalty under the said Section can be imposed only if

there is failure to furnish information and documents required by an

Assessing Officer under Section 92D(3) of the Act within the time

period of thirty days or the extended period. In the present case, the

Assessing Officer had not asked for any specific information or

document from the assessee, which was not supplied within the period

stated in Section 92D(3). The Assessing Officer had wrongly assumed

that there was default in supplying information or documents within

thirty days or extended period on the ground that all documents

prescribed under Rule 10D of the Income Tax Rules, 1962 (Rules, for

short) should have been furnished within the prescribed period of thirty

days or the extended period. Secondly, the tribunal has observed that

the Transfer Pricing Officer (TPO) had issued first notice under

Section 92CA(3) and 92D(3) of the Act seeking information and

evidence by 10th January, 2008. The date of service of notice was not

known and there was no evidence whether or not time was extended. The

TPO submitted the transfer pricing report on 26th February, 2008,

accepting that in view of the functional and economic analysis of the

assessee in comparables, no adverse inference should be drawn in respect

of international transactions. The TPO, however, in the office note,

which was not meant for the assessee, had recorded that the transfer

pricing report was filed late on 26th February, 2008. The assessee had

claimed that for export sale it had followed Comparable Uncontrolled

Price (CUP) comparability and had applied Transactionable Net Margin

Method (TNMM) as most appropriate for other transactions. However, it

could not establish the CUP comparability. Thus, presumably the

assessee was not maintaining any document under Rule 10D read with

Section 92D(3) of the Act. TPO recorded that all documents had been

prepared when the proceedings before TPO had started. TPO further

observed that assessee was liable for penalty under Section 271AA and

under Section 271G for late submission of TP documentation.

3. We are only concerned with the order under Section 271G and

not with the order of penalty under Section 271AA.

4. Order under Section 271G passed by the Assessing Officer is

cryptic and devoid of any reasoning or factual narration. It merely

records that the reply of the assessee was not satisfactory and further

states that the office note was not meant for the assessee. The only

reason given is that the reply of the assessee was not acceptable and

default under Section 271G has been established beyond doubt. The

Assessing Officer mentions that the assessee had failed to file Rule

10D documents within the time specified, i.e., thirty days.

5. Commissioner of Income Tax (Appeals) deleted the penalty

observing that the Assessing Officer has not explained the grievance as

to filing of documents and the TPO has not mentioned any grievance in

his order relating to filing of document, i.e., delay in filing documents.

6. Section 271G of the Act prior to amendment by Act 23 of 2012

was as under:-

"271G. If any person who has entered into an international transaction 71[or specified domestic transaction] fails to furnish any such information or document as required by sub- section (3) of section 92D, the Assessing Officer or the Commissioner (Appeals) may direct that such person shall pay, by way of penalty, a sum equal to two per cent of the value of the international transaction for each such failure.]"

7. Section 92-D prior to its amendment by Act 23 of 2012 reads:-

"92-D.Maintenance and keeping of information and document by persons entering into an international transaction.- (1) Every person who has entered into an international transaction shall keep and maintain such information and document in respect thereof, as may be prescribed.

(2) Without prejudice to the provisions contained in sub-section (1), the Board may prescribe the period for which the information and document shall be kept and maintained under that sub-section.

(3) The Assessing Officer or the Commissioner (Appeals) may, in the course of any proceeding under this Act, require any person who has entered into an international transaction to furnish any information or document in respect thereof, as may be prescribed under sub-section (1), within a period of thirty days from the date of receipt of a notice issued in this regard:

Provided that the Assessing Officer or the Commissioner (Appeals) may, on an

application made by such person, extend the period of thirty days by a further period not exceeding thirty days."

8. Sub-section (3) of Section 92D postulates that an Assessing

Officer, Commissioner (Appeals) may require any person, who has

entered into an international transaction to furnish information or

document, as may be prescribed, under sub-section (1) within a period

of thirty days from the date of receipt of notice, which period under the

proviso can be extended. Sub-section (1) to Section 92D states that

every person, who enters into international transaction, shall keep and

maintain information and document in respect thereof, as may be

prescribed. Section 271G prescribes penalty in case a person fails to

furnish information or document required by sub-section (3) of Section

92D to the Assessing Officer or Commissioner (Appeals). In such

cases, the Assessing Officer or Commissioner (Appeals) may "direct

that the assessee will pay penalty of a sum equal to 2% of the value of

the international transaction". The penalty imposable is discretionary

and is not mandatory.

9. The CIT(Appeals) and the tribunal are right that the Assessing

Officer in his order under Section 271G has not mentioned which

document or information was required by a notice under Section

92D(3) of the Act and was not furnished by the assessee within a

period of thirty days or the extended period. Notice under Section

92D(3) should specify the information or document, which was

required to be submitted and if and when there is a failure or delay in

submission of the said documentation or information, penalty can be

imposed under Section 271G of the Act. Order under Section 271G

passed by the Assessing Officer in the present case merely records that

there was failure to file Rule 10D documentation without specifying or

stating which document or information was not furnished in spite of

notice calling for the said information or document under Section

92D(3). In the absence of the said basic details or facts, the order of

penalty under Section 271G cannot be sustained.

10. We have also examined Rule 10D. Rule 10D(1) is as follows:-

"10D. (1) Every person who has entered into an international transaction shall keep and maintain the following information and documents, namely:--

(a) a description of the ownership structure of the assessee enterprise with details of shares or other ownership interest held therein by other enterprises;

(b) a profile of the multinational group of which the assessee enterprise is a part along with the name, address, legal status and country of tax residence of each of the enterprises comprised in the group with whom international transactions have been entered into by the assessee, and ownership linkages among them;

(c) a broad description of the business of the assessee and the industry in which the assessee operates, and of the business of the associated enterprises with whom the assessee has transacted;

(d) the nature and terms (including prices) of international transactions entered into with each associated enterprise, details of property transferred or services provided and the quantum and the value of each such transaction or class of such transaction;

(e) a description of the functions performed, risks assumed and assets employed or to be employed by the assessee and by the associated enterprises involved in the international transaction;

(f) a record of the economic and market analyses, forecasts, budgets or any other financial estimates prepared by the assessee for the business as a whole and for each division or product separately, which may have a bearing on the international transactions entered into by the assessee;

(g) a record of uncontrolled transactions taken into account for analysing their comparability with the international transactions entered into, including a record of the nature, terms and conditions relating to any uncontrolled transaction with third parties which may be of relevance to the pricing of the international transactions;

(h) a record of the analysis performed to evaluate comparability of uncontrolled transactions with the relevant international transaction;

(i) a description of the methods considered for determining the arm's length price in relation to each international transaction or class of transaction, the method selected as the most appropriate method along with explanations as to why such method was so selected, and how such method was applied in each case;

(j) a record of the actual working carried out for determining the arm's length price, including details of the comparable data and financial information used in applying the most appropriate method, and adjustments, if any, which were made to account for differences

between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions;

(k) the assumptions, policies and price negotiations, if any, which have critically affected the determination of the arm's length price;

(l) details of the adjustments, if any, made to transfer prices to align them with arm's length prices determined under these rules and consequent adjustment made to the total income for tax purposes;

(m) any other information, data or document, including information or data relating to the associated enterprise, which may be relevant for determination of the arm's length price."

11. Rule 10D(1) consists of clauses (a) to (m). Clause (m) states

any other information, data or document, including information or data

relating to the associated enterprises, which may be relevant for

determination of arm's length price. A bare perusal of sub-clauses (a)

to (m) would indicate that some of the information and details pertain

to the assessee and the associated enterprise, their ownership, structure,

address, name, broad description of business etc. The assessees are

also required to maintain details like, nature and terms of international

transaction, property or services provided and quantum and value of

each transaction etc. However, some of the clauses are very broad and

wide like clause (m) mentioned above. These clauses relate to record

of economic and market analysis, forecasts, budget and other financial

estimates prepared by an assessee, record of uncontrolled transactions

for realising their comparability with international transactions

including record of nature, terms and conditions relating to

uncontrolled transactions with third parties, record of analysis

performed to evaluate comparability of uncontrolled transactions.

These are general clauses relating to data, details etc. of third parties

etc. These details, data, information etc. can be voluminous,

fluctuating and otherwise capacious.

12. Sub-rule (3) to Rule 10D states that information specified in

Rule 1 shall be supported by authentic documents, which may include

the documents mentioned in sub-clauses (a) to (g). These include

official publication report, status and data bases of Government of

countries of residents of associated enterprises or other countries,

market research studies, price publications including stock exchange

and commodity market quotations, agreement contracts with unrelated

enterprises etc. The word used in sub-section (3) to Rule 10D is

"may".

13. It is clear from the reading of Section 10D that it will include

almost anything and everything relating to international transactions,

including data bases, reports, publications, data bases from

Governments or bodies outside India. Some other stipulations are

assessee specific and not general, broad or heterogeneous.

14. Sub-rule (4) further states that the documents specified in sub-

rules (1) and (2), as far as possible, be contemporaneous and should be

latest by the specified date referred to in Section 92F(iv), i.e., due date

in Explanation 2 below Section 139(1). Thus, indicating the

documentation/information may be floating, transient and changeable.

Constant assimilation may be required. Besides, data/information can

also vary. The tribunal has rightly concluded that with such a broad

rule, which requires documentation and information voluminous and

virtually unlimited, Section 271G has to be interpreted reasonably and

in a rational manner. Information or documentation, which is assessee

specific or specific to the associated enterprises, should be readily

available, whereas other documentation or information relates to data

bases or transactions entered into by third parties may require

collation/collection from time to time. There cannot be any end or

limit to the documentation or information relating to data bases or third

parties. When there is general and substantive compliance of the

provisions of Rule 10D, it is sufficient. The Legislature was conscious

of this fact and, therefore, had specifically stipulated in Section 92D(3)

that the Assessing Officer or Commissioner (Appeals) may require a

person to furnish any information or document in respect thereof and

on failure of the said person to furnish the documentation within the

specified time, penalty under Section 271G can be imposed. Thus, for

imposing penalty the Revenue must first mention the document and

information, which was required to be furnished but was not furnished

by the assessee within the specified time. The documentation or

information should be one specified in Rule 10D, which has been

formulated in terms of Section 92D(1) of the Act. Looking from any

quarter and angle, the appeal of the Revenue is misconceived, totally

lacking in merits and is, therefore, dismissed.

(SANJIV KHANNA) JUDGE

(SANJEEV SACHDEVA) JUDGE AUGUST 30th, 2013 VKR