Sanjay Arora, Member (A) -
(1.) THIS is a set of two appeals by the assessee, i.e., for two consecutive years, being assessment years 2004 -05 & 2005 -06, arising out of the separate orders by the Commissioner of Income Tax (Appeals) -5, Mumbai (CIT (A) for short) of even date, i.e., 29.11.2013, confirming the levy of penalty u/s. 271(1)(c) of the Income Tax Act ('the Act' herein after) for the relevant years. The issues arising in both the appeals being the same, the appeals were heard together, and are being disposed of vide a common, consolidated order.
(2.) AT the very outset it was brought to our notice by the ld. Authorized Representative (AR), the assessee's counsel, that the Hon'ble jurisdictional High Court has since modified the stay order as passed by the Tribunal, and which would thus obtain, even as the certified copy of its order is as yet neither available from the Registry nor available on line. The hearing in the case was accordingly proceeded with on that basis. The order by the Hon'ble court stood subsequently, i.e., vide its letter dated 18/2/2014, brought on record by the assessee. The sole issue arising in the instant appeals, agitated per five grounds, identical for both the years, is the maintainability in law of the levy of penalty u/s. 271(1)(c) of the Act for the relevant years in facts and circumstances of the case, which again bear striking similarity.
(3.) WE shall begin by recounting the back -ground facts of the case. The assessee, incorporated as a private limited company on 30/7/2001, is a joint venture company of Mastek Limited and Deloitte Consulting. While Mastek, which along with its affiliates holds 50.1 percent of shares, is a publically held Indian information technology application outsourcing company, Deloitte Consulting (DC), registered as a limited partnership in New York, USA, holding as a group the balance 49.9 percent shareholding, is a one of the world's leading management consulting firms.
4.1 The assessee entered into a software development service agreement with Deloitte to provide software related services to Deloitte. Deloitte enters into consulting assignments with its US clients. For such assignments, the areas pertaining to software development and information technology services are provided by the assessee in terms of the contract between the assessee and Deloitte only when the assessee possesses the requisite resources to provide such services. The assessee provides both offshore and onshore site services under the contract with Deloitte. The offshore services are provided through Mastek and the on -site services would be provided through Majesco, a US based company and a subsidiary of Mastek. Accordingly, while DC plays a lead role in the generation of sales, in the management and the delivery of projects and managing and maintaining the company's customer relationship, Mastek provides and manages the company's infrastructural facilities, the operations, including recruitment, training, administration and support as a part of its current and future facilities as well as delivery capability and project quality. The entire turnover of the assessee represents earnings provided from Deloitte for providing software development and information technology services. The risks assumed by the respective parties are in consonance with their respective functions and responsibilities, and toward which reference is made to para 5.1 of the TPO's order u/s. 92CA(3) for AY 2004 -05 (PB pgs. 30 -31).
4.2 The assessee was found to have during the relevant years, as indeed in the past, entered into four categories of international transactions with DC -from whom its entire revenue came to be realized, as under:
(a) Software and IT services provided to AEs;
(b) Software and IT services availed from AEs;
(c) Reimbursement of market services availed; and
(d) Reimbursement of support services availed
Reference was made for both the years, as for the immediately preceding years, i.e., AY 2002 -03 and AY 2003 -04, by the Assessing Officer (AO) to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of the said transactions, who accepted the valuation as booked for all save one, i.e., the third category of the transactions, as for the said two preceding years, determining the arm's length price thereof at nil. The assessee had valued the same at the amount/s as booked and claimed, i.e., on actuals, at Rs. 5.86 crores and Rs. 6.61 crores for the two consecutive years under reference respectively. The assessee, apart from its reply on merits, had also informed the TPO that it had 'revised' its returns for the relevant years, i.e., on 29/3/2006 and 14/12/2007 respectively, disallowing the entire marketing expense as claimed, and that therefore no transfer pricing adjustment u/s. 92CA on account of this international transaction/s would arise. The TPO observed that no revised audit report per the requisite Form (# 3CEB) had been furnished for the said transaction/s, booked as reimbursement of actual expenses, along with the revised return/s. Accordingly, rejecting the declared value of the said transactions, he assessed the 'transfer price' thereof at nil, stating his reasons for the same. As regards the issue of deduction of u/s. 10A, claim under which had been correspondingly enhanced by the assessee consequent to the increase in the returned income on account of disallowance of the marketing expense per the 'revised return/s', the same would be considered by the AO in the assessment proceedings. In the view of the A.O., the same could not be allowed in view of the specific provision of section 92CA(4). The revision was not valid in -as -much as reference had already been made to the TPO; the assessee's claim for the said expenditure having been already subject to examination by the TPO for the earlier years (AYs 2002 -03 & 2003 -04), determining the ALP at, again, nil, for which an adjustment had been advised by him to the AO, so that the entire amount came to be added back in assessment. Section 92CA(4) would thus hold, proscribing deduction u/s. 10A. The same found confirmation in appeal for essentially the same reasons and, further, by the Tribunal vide its consolidated order for five (5) consecutive years, being AYs 2002 -03 to 2006 -07 (in ITA Nos. 3910 -11/2009; 579,1272 -73/2011, Mumbai 'L' Bench, dated 30/3/2012), even as the assessee had not claimed the said expense for the latest year (AY 2006 -07) per the original return itself. The assessee's 'suo motu' disallowance was inconsistent with its books of account, reflecting the said expenditure on actuals and, resultantly, not accompanied by an auditor's report u/s. 92E. An adjustment on that account, advised by the TPO by, again, valuing the ALP of the relevant transaction at nil, would follow. No cognizance to the revised return/s or the 'suo motu' disallowance of the impugned expenditure could therefore be given, necessitating an adjustment on that account. Denial of deduction u/s. 10A follows in consequence, condition for grants of which are also not complied with. The findings by the Tribunal are at paras 33 to 53 of its order, whereby it endorses the finding by the Revenue for the relevant years, which it found the assessee as failing to controvert.
4.3 Penalty proceedings for furnishing inaccurate particulars of income, satisfaction for which stood recorded at the time of framing the assessment, were initiated, as it appears, subsequent to the confirmation in quantum proceedings at the first appellate stage. The assessee explained that it had considered prudent to, from a commercial perspective, incur the cost of marketing personnel (5) of DC who were specifically engaged in marketing the assessee's offshore capabilities. Further, no adjustment u/s. 92C(4) shall arise in view of the suo motu revision of its returns disallowing the relevant expenditure, leading though to no enhancement in income due to a corresponding increase in the deduction u/s. 10A. However, no material to support its case on facts, which stood considered by the Transfer Pricing Officer (TPO) in framing his order u/s. 92CA(3), being adduced, the assessee's contention did not pass muster. Even the revision was considered as not voluntary in -as -much as reference to the TPO had already been made, and who had already answered the reference thereto u/s. 92CA for the earlier years, valuing the said transaction at Nil. Accordingly, the 'revision' was only a deliberate attempt to avoid the applicability and rigor of section 92C(4), precluding the deduction inter alia u/s. 10A for any enhancement in income upon adoption of the ALP as determined. Penalty u/s. 271(1)(c) was accordingly levied at 100% of the tax on the amount initially claimed as marketing expense. The same found confirmation in appeal; the ld. CIT(A) after an extensive review of the case law holding as under for both the years, which sums up the Revenue's case:
4.2.6 Thus from the careful reading of the provisions of section 271(1)(c) together with the explanation -1 there under and the various available judicial pronouncements, as discussed in the above paras, no proof of mens rea is required for levy of such civil penalty. But the imposition of penalty would not be justified if the explanation given is found bonafide and all the facts relating to the same and material to the computation of his total income have been disclosed by him. The disclosure should be full so that the nature of claim (expense or receipts) could be inferred from the financial statements (and/or the notes on accounts, audit enclosed with the return) itself. There should be a bonafide ground for the claim, be as debatable issue or even where two views were plausible. Merely because some addition has been made and such addition has become final, it does not necessarily follow that penalty is leviable. Thus where inadmissible claims were made due to inadvertent and bonafide mistakes, penalty is held to be not warranted. The AOs are expected to exercise their discretion based on the facts of the case. Mere claim of the assessee that the issue was debatable and or two views were possible in law and facts is also not enough. The burden to substantiate such claim is upon the assessee. If the explanation given is found not to be bona fide then levy of penalty would be justified.
4.3 In the present case, the assessee had made a claim of the expense which was allocated to it by its associate enterprise Deloitte USA out of their marketing expenses. The determination of Arm's length price in the context of the international transactions with associate enterprises assumes importance and plays its role to ensure that profits are not diverted to those associate enterprises by paying them more than what would normally be done to any third party. On reference to the TPO indeed found that the assessee was not required to take any marketing function in terms of the master service agreement with its associate enterprise Deloitte USA; that both the parties had clearly demarcated role to play for which they were compensated; and there was no valid reason for Deloitte USA to allocate any part of the cost incurred by it to perform the role agreed by it. Accordingly the TPO determined the arm's length price of marketing expenses so claimed by the assessee as NIL. The assessee in fact, had simply accepted such findings of the TPO by filing its revised return before the order was passed by the TPO. It is noted that reference was already made to the TPO and the proceedings were in progress when the assessee filed his revised return. So admission/disclosure of additional income was not voluntary, more so when similar view was already taken in its earlier years (AY 2002 -03 & 2003 -04). The deduction thereon was not admissible u/s. 10A by the virtue of the proviso to s. 92C(4). This is not a case where issue could be termed as debatable or even two views were possible; and as such in the facts of the case it has to be held that assessee had indeed furnished inaccurate particulars of its income and AO has rightly imposed penalty u/s. 271(1)(c) for that default. Accordingly levy of penalty of Rs. 2,05, 26,780/ - (*) u/s. 271(1)(c) in the year under consideration for the said default is confirmed.[(*) Rs. 2,31,18,488/ - for AY 2005 -06]
Aggrieved, the assessee is in second appeal.;