Utimate Taxes: ASSISTANT COMMISSIONER OF INCOME TAX vs.BOSTON SCIENTIFIC INDIA PVT. LTD.

ASSISTANT COMMISSIONER OF INCOME TAX vs.BOSTON SCIENTIFIC INDIA PVT. LTD.

AHMEDABAD TRIBUNAL

DIVA SINGH, JM & L. P. SAHU, AM.

ITA No. 1062 & 1063/Del/2013

Mar 1, 2016

(2016) 46 CCH 0210 DelTrib

Legislation Referred to

Section 68, 271(1)(c), 92C

Case pertains to

Asst. Year 2006-07 & 2007-08

Issue

Penalties

SubIssue

Section 271(1)(c)

Decision in favour of:

Assessee

Penalty u/s 271(1)(c )—Deletion of penalty—Assessee was company incorporated under the Indian Companies Act, 1956—Assessee stated to be primarily engaged in promotion, marketing, sales and distribution in India of wide range of cardio-vascular products and related medical instruments and equipments manufactured by ‘’x’ group—Assessee also stated to be providing post sales related support services— AO in both assessment years referred matter to Transfer Pricing Officer for determination of arm’s length price of international transactions— TPO proposed an addition of Rs.3,46,84,993—AO held that assessee concealed particulars of income— As a result of additions to income of assessee in respective years AO initiated penalty proceedings u/s 271(1)(c)— AO imposed penalty u/s 271(1) (c ) on assessee— CIT(A) deleted penalty imposed on assessee—Held , AO wrongly invoked Explanation 1 of section 271(1)(c) instead of Explanation 7 of section 271(1)(c)— In both years under consideration additions were based on comparables offered by assessee— Not even one comparable had been introduced by TPO—All comparables offered were not accepted by TPO in both years or alternatively TPO partially accepted comparables offered by assessee in both years were facts which supported due diligence and good faith standards—Addressing comparable excluded by TPO no case had been made by Revenue to show that by offering comparables excluded assessee was so careless, negligent or lacking in good faith that exercise was done with malafide to defraud Revenue—Comparables retained were offered by assessee and no comparable had been introduced by TPO itself lead to conclusion that due diligence had been exercised in good faith by assessee in selecting comparables—ITAT held that just because certain comparables were excluded by TPO, claim of exercise of due diligence and good faith in selecting comparables offered did not get eroded unless same was rebutted by Revenue by showing specific instances explicitly indicating that in selection of comparables assessee had acted malafide and exercise was lacking in good faith and due diligence— No such arguments in rebuttal had been made by Revenue before ITAT— No infirmity in Order of CIT(A)—Revenue’s Appeal dismissed.

Held

ITA No.1062/Del/2013-Revenue's Appeal

It is a matter of record that in both the years under consideration the additions are based on the comparables offered by the assessee. Not even one comparable has been introduced by the TPO. The fact that all the comparables offered were not accepted by the TPO in both the years or alternatively the TPO has partially accepted the comparables offered by the assessee in both the years are facts which support the due diligence and good faith standards. Addressing the comparable excluded by the TPO no case has been made by the Revenue to show that by offering the comparables excluded the assessee was so careless, negligent or lacking in good faith that the exercise was done with malafide to defraud the Revenue. The fact that the comparables retained were offered by the assessee and no comparable has been introduced by the TPO itself leads to the conclusion that due diligence has been exercised in good faith by the assessee in selecting the comparables. This argument has been accepted by the CIT(A). On examining this grievance of the Revenue, we find that just because certain comparables were excluded by the TPO, the claim of exercise of due diligence and good faith in selecting the comparables offered does not get eroded unless the same was rebutted by the Revenue by showing specific instances explicitly indicating that in the selection of comparables the assessee had acted malafide and the exercise was lacking in good faith and due diligence. No such arguments in rebuttal have been made by the Revenue before us. Accordingly for the reasons given herein above, ITAT find that on this ground too the Revenue has failed to upset the finding of the CIT(A).(Para13.9)

Conclusion

Merely because certain comparables were excluded by TPO, claim of exercise of due diligence and good faith in selecting comparables offered did not get eroded unless same was rebutted hence penalty levied u/s 271(1)(c ) was deleted

In favour of

Assessee

Transfer Pricing—Computation of Arms length Price—Transfer Pricing adjustment— Use of multiple year data in TP study— Lack of good faith and exercising due diligence—AO adopted multiple year data in TP study and same was rejected by TPO—Penalty levied on assessee for Using multiple year data in TP study—CIT(A) set aside Order of TPO—Revenue stated that there was lack of good faith and exercising due diligence in respect of use of multiple year data in TP study placed on record in 2006-07 and 2007-08 AYs by assessee—Held, phrase “good faith” and “with due diligence” used in Explanation 7 of section 271(1)(c) as hyphenated phrase which lost its essential meaning of individual words when considered separately as abstract phrases—Bonafide of assessee could not be doubted—It seen that at relevant point of time when TP Study was filed there was debate on issue of single year data and multiple year data— Considering change of method from RPM to TNMM, it found that assessee’s explanation that method was changed from TNMM from 2005-06 AY to RMP in 2006-07 & 2007-08 AY on ground that there was only one segment in year and accordingly most appropriate method selected was RPM-Notwithstanding fact that said approach was not approved by TPO, it did not detract from plausible claim that in view of only one segment i.e. distribution segment method selected in good faith and due diligence was RPM— Assessee at time of filing its TP study could not anticipate that despite there being only one segment, TPO would still insist on holding that TNMM would be most appropriate method relying on past position where change in facts was admitted position— Due diligence standards assiduously required to be adhered to in present case were standards of reasonable and ordinary diligence— But extraordinary and extreme measures of care, caution and prudence insomuch as to anticipate a vigilance to extent that despite plausible explanation on facts , most appropriate method selected by assessee would still be disturbed by TPO, was beyond all possible shades of due diligence expected from assessee at time of computing its transaction.

Held

Phrase “good faith” and “with due diligence” is used in Explanation 7 of section 271(1)(c) as a hyphenated phrase which looses its essential meaning of the individual words when considered separately as abstract phrases.In the facts of the present case, ITAT find that the bonafide of the assessee cannot be doubted. To sum up it is seen that at the relevant point of the time when the TP Study was filed there was a debate on the issue of single year data and multiple year data. Considering the change of method from RPM to TNMM, we find that the assessee’s explanation that the method was changed from TNMM from 2005-06 AY to RMP in 2006-07 & 2007-08 AY on the ground that there was only one segment in the year and accordingly the most appropriate method selected was the RPM. Notwithstanding the fact that the said approach was not approved by the TPO, it does not detract from the plausible claim that in view of only one segment i.e. the distribution segment the method selected in good faith and due diligence was RPM. Even otherwise we find that the assessee at the time of filing its TP study could not anticipate that despite there being only one segment, the TPO would still insist on holding that TNMM would be the most appropriate method relying on the past position where change in facts is an admitted position. The due diligence standards assiduously required to be adhered to in the present case are standards of reasonable and ordinary diligence. But extraordinary and extreme measures of care, caution and prudence insomuch as to anticipate a vigilance to the extent that despite a plausible explanation on facts the most appropriate method selected by the assessee would still be disturbed by the TPO, is beyond all the possible shades of due diligence expected from an assessee at the time of computing its transaction.(Para13.15)

Conclusion

Assessee at time of filing its TP study could not anticipate that despite there being only one segment, TPO would still insist on holding that TNMM would be most appropriate method relying on past position where change in facts is an admitted position and there was lack of good faith and exercising due diligence on TPO/AO’s part.

In favour of

Assessee

Transfer Pricing—Computation of Arms length Price—Transfer Pricing adjustment—Selection of comparables —Penalty u/s 271(1)( C)—Revenue submitted that inclusion or exclusion of comparables gave cause to hold that this was case of concealment or of filing of inaccurate particulars—Held, additions found to be made based on comparables offered by assessee in TP study in 2007-08 AY and in 2006-07 AY—Six comparables offered wherein three were rejected and three more were offered by assessee during assessment proceedings—Inclusion or exclusion of comparables in peculiar facts of case did not give cause to hold that this was case of concealment or of filing of inaccurate particulars, notwithstanding fact that as per judicial precedent cited selection of comparables had been to be a subjective exercise—When position was considered by applying TNMM or RPM , assessee was fully within arms length price in 2006-07 AY which factual position had not been disputed by Revenue and range of +/-5% in 2007-08 AY-.

Held

Reverting to the other issues ITAT further find that even when the additions are considered they are found based on the comparables offered by the assessee in the TP study in 2007-08 AY and in 2006-07 AY. The six comparables offered wherein three were rejected and three more were offered by the assessee during the assessment proceedings. Thus ITAT find that the inclusion or exclusion of comparables in the peculiar facts of the present case does not give cause to hold that this was a case of concealment or of filing of inaccurate particulars, notwithstanding the fact that as per judicial precedent cited selection of comparables has been to be a subjective exercise. ITAT further find that the specific tables reproduced by the CIT(A) and extracted in the earlier part of this order in para 5.1.1 of the impugned order, when the position is considered by the applying TNMM or RPM the assessee is fully within the arms length price in 2006-07 AY which factual position has not been disputed by the Revenue and range of +/-5% in 2007-08 AY.(Para 13.15.1)

Conclusion

Inclusion or exclusion of comparables does not give cause to hold that it was case of concealment or of filing of inaccurate particulars, notwithstanding the fact that as per judicial precedent cited selection of comparables has been to be a subjective exercise

In favour of

Assessee

Cases Referred to

G.C. Agarwal (1994) 186 ITR 571 (SC)
ACIT vs. Jeevan Lal Shah (1994) 205 ITR 244 (SC)
Aztek Software & Technology Services Ltd. vs. ACIT (2007) 294 ITR 1832 (Bangalore) (SB)
Mentor Graphics P. Ltd. (2007) 109 ITD 10 (Delhi)
K.P. Verghese vs. ITO 131 ITR 597 (SC)
ACIT vs. Firmenich Aromatics India Pvt. Ltd. [ITA No.4654/Mum/2009]

Counsel appeared:

K.M. Gupta, Adv. for the Appellant.: Anand Kumar Kedia, CIT DR for the Respondent

DIVA SINGH, JM.

1. By these two appeals filed by the Revenue the correctness of the consolidated order dated 20.12.2012 of CIT(A)-XX, New Delhi pertaining to 2006-07 and 2007-08 assessment years is assailed on the following grounds in the respective appeals:-

ITA No.1062/Del/2013

1. “On the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in holding that it is not a fit case for imposition of penalty u/s 271(1)(c) thereby deleting the penalty of Rs.1,16,74,768/- levied for assessment year 2006-07.

2. The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of the hearing.”

ITA No.1063/Del/2013

2. The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of the hearing.”

2. The relevant facts of the case relatable to the issue are that the assessee i.e. Boston Scientific India Pvt. Ltd. (previously known as Guidant India Private Limited) is a company incorporated under the Indian Companies Act, 1956 in July 2003. It is stated to be primarily engaged in promotion, marketing, sales and distribution in India of a wide range of cardio-vascular products and related medical instruments and equipments manufactured by the Boston group. The assessee is also stated to be providing post sales related support services. The AO in both the assessment years referred the matter to the Transfer Pricing Officer (hereinafter referred to as “TPO”) for determination of arm’s length price of the international transactions.

3. The record shows that in the AY 2006-07, the assessee had only one business segment, namely, distribution of medical equipments which were imported from the related parties. This was the only international transaction in the year under consideration. The assessee was found to have used Resale Price Method (hereinafter referred to as “RPM”) as the most appropriate method and had selected 6 comparable companies in its Transfer Pricing study (hereinafter referred to as “TP study”).

3.1. The methodology adopted by the assessee was rejected by the TPO following the methodology accepted in assessee’s case for 2005-06 AY holding that the Most Appropriate Method (hereinafter referred to as “MAM”) would be Transactional Net Margin Method (hereinafter referred to as “TNMM”) as opposed to RPM selected by the assessee.

3.1.1. Accordingly the TPO issued show cause notice to the assessee to explain the same. In response to the show cause notice the assessee stated that in the year under consideration it had discontinued “marketing support service segment”. In the earlier year it was explained that the assessee had two segments i.e. marketing support segment as well as the distribution segment for which purposes in that year TNMM was considered to be the most appropriate method. Accordingly it justified its selection of using RPM as the most appropriate method for its “distribution segment”.

3.1.2.The explanation in support of the change of method offered by the assessee was not accepted by the TPO.

3.1.3. Further considering the 6 comparables offered by the assessee in its TP study, the TPO rejected 3 comparables. Retaining the remaining 3 comparables out of these 6 offered, he further required the assessee to conduct a fresh search for the benchmarking purpose under TNMM and during the proceedings accepted another 3 comparables offered by the assessee.

3.1.4. The TPO also rejected the multiple year data used by the assessee.

3.1.5. Thus using the single year data and considering the new list of 6 comparables offered, he proposed an addition of Rs.3,46,84,993/- in 2006-07 AY.

3.2. In 2007-08 AY it is seen that seen that the TPO again rejected using RPM as the most appropriate method by the assessee in its TP study taking TNMM as the MAM for similar reasons as in the immediately preceding assessment year.

3.2.1. Out of the total 9 comparables offered by the assessee, the TPO rejected 3 comparables retaining 6 comparables offered by the assessee.

3.2.2. He further also rejected the multiple year data and using single year data for the 6 comparables retained proposed an addition of Rs.1,52,93,937/- by way of adjustment in the international transaction of the assessee.

3.3. In both the years, the assessee did not go in appeal against the additions made by the AO pursuant to the TPO’s order.

4. As a result of the additions to the income of the assessee in the respective years the AO initiated penalty proceedings u/s 271(1)(c) and required the assessee to explain why penalty u/s 271(1)(c) should not be imposed for the years in consideration.

4.1. The assessee in the course of the penalty proceedings for the A.Y.2006-07 vide letter dated 10.06.2010 (copy at page 47 of the paper book) submitted that the addition was accepted as the company wanted to do away with unnecessary litigation.

4.1.1. It was also pleaded that due taxes on the additions were promptly paid proved it’s bona fide.

5. Similar submissions were offered in the penalty proceedings in A.Y.2007-08 through letter dated 19.07.2011 before the AO (copy at page no.114 of the paper book).

6. Not convinced with the explanation offered, the AO held that the assessee’s explanation could not be accepted on the following grounds:-

(i) “The change of most appropriate method;

(ii) Rejection of 3 comparables used by the appellant in both the assessment years and inclusion of 3 comparables (as supplied by the appellant itself) by the TPO in AY 2006-07; and

(iii) Use of single year data for benchmarking the international transaction.”

6.1. For both the assessment years the AO invoking Explanation I of section 271(1)(c) of the Income Tax Act, 1961 levied penalty over- ruling the following arguments advanced by the assessee namely

(a) that it had not supplied/furnished any inaccurate particulars of income;

(b) nor it had concealed any particulars of income; and

7. Aggrieved by the penalty order, the assessee came in appeal before the CIT(A). Apart from re-iterating the arguments advanced before the AO, various other arguments were also raised assailing the action including (a) justification for the change of most appropriate method; (b) that rejection of the three comparables out of six in 2006-07 assessment year and three comparables out of nine in 2007-08 assessment year does not detract from the fact that the comparables accepted were all along offered by the assessee. Accordingly it was canvassed neither it could be held to be concealment nor a case of filing of inaccurate particulars.

8. Convinced with the explanation offered the CIT(A) proceeded to quash the penalty order in both the years.

9. Aggrieved by this, the Revenue is in appeal before the ITAT in both the years.

10. The Ld. CIT DR placed heavy reliance on the penalty order. Further attention was invited to the TPO’s order in both the years. It was submitted that in view of the following specific factual shortcomings pointed out by the TPO the assessee was required to bring out the circumstances which warranted a change and was also further required to submit why TNMM should not be used. It was submitted that in regard to the issues nothing substantial was said by the assessee apart from making general submissions as would be evident from the TPO’s order. For ready-reference, para 5.1.1 & 5.1.2 of the TPO’s order relied upon by the Ld. CIT DR addressing the speaking queries made from the assessee are extracted hereunder:-

5.1. Selection of Method:

5.1.1. “Assessee had selected RPM as the most appropriate method in its TP report. The transfer pricing report and the financial of the assessee were examined. As per details furnished in transfer pricing report, the assessee i.e. Guidant India has been classified as a distributor which carries out marketing, promotion, sales and distribution of Guidant products in India. The assessee is a 100% subsidiary distributor of its AE. The financials of the assessee including P&L account were examined. It was found that the assessee in the current year had incurred a loss of Rs.79.05 lacs on a turnover of Rs.37.61 Crs. As compared to this, the assessee had shown a profit of Rs.3.72 Crs on a turnover of Rs.28.27 Crs in the previous year i.e FY 2004-05.

5.1.2. Show cause notice to the assessee:

Vide order sheet entry dated 03.08.2009, the assessee was asked to state the reasons for incurring of losses at the net level. The assessee was also asked to state as to whether there were international transaction below the Gross Profit Margin and how they were impacting the profitability of the assessee.

The assessee was further asked to state that why it has changed the method of benchmark international transactions from TNMM used last year to Resale Price Method (RPM). The assessee was asked to state the change in circumstances that have warranted change in comparability method. The assessee was also asked to state as to what was the difference in the international transaction as compared to last year.

The assessee was asked to show cause as to why TNMM method should not be used to benchmark international transactions in this year also on account of losses at the net level.”

(emphasis provided)

10.1. The Ld. CIT DR further submitted that admittedly as per record the objections of the assessee have been considered and over- ruled and that the TPO has adopted TNMM as the most appropriate method in both the years. It was submitted that the assessee admittedly has not contested this issue further in both the years and has accepted the change of method carried out by the TPO. Accordingly it was his submission that since the issue of change of methodology has been given up by the assessee itself nothing further remains for the Revenue to show that it is a case of filing of inaccurate particulars and concealment.

10.2. The CIT DR also submitted that the assessee had significant expenses pertaining to discounts and rebates and also advertisements and sales expenses. It was argued that had the claim of the assessee been bonafide, it would have atleast made adjustment for these expenses which is not a fact. The said argument of the Ld. CIT DR was strongly opposed by the Ld.AR on the ground that this was not the case of the AO also.

10.3. It was also submitted by the Ld. CIT DR that although the AO has invoked Explanation 1 of section 271(1)(c) however, the correct Explanation which the AO should have referred to should have been Explanation 7 of section 271(1)(c). It was his submission that the Revenue’s case may not be thrown out on the ground of wrong reference made by the AO to Explanation 1 instead of Explanation 7 of section 271(1)(c). It was submitted in support of the prayer that there was sufficient judicial precedent to allow the prayer of the Revenue and the Tribunal can consider the issue taking the correct Explanation on record while deciding the issue. It was submitted that the Courts have repeatedly held that where the AO has wrongly invoked section 68 in place of sections 69, 69A, 69B or 69C etc. the order does not become bad merely because a wrong section has been quoted and the issue can still be considered and the action upheld applying the correct provision. Accordingly, placing heavy reliance upon the said explanation, it was his submission that when considered in the light of Explanation 7 of section 271(1)(c), the impugned order deserves to be set aside and the penalty order should be upheld. In the facts of the present case it was re-iterated that the additions made have been accepted by the assessee. Accordingly relying upon the decision of G.C.Agarwal (1994)186 ITR 571 (SC) and ACIT vs Jeevan Lal Shah (1994) 205 ITR 244 (SC), it was his submission that penalty imposed deserved to be upheld in both the years.

11. The Ld. AR heavily relying upon the impugned order invited specific attention to the facts recorded by the CIT(A) in paras 4.1 to 4.4 of his order. Since it is a consolidated order for both the years under consideration, heavy reliance was placed thereon. It was his submission that in both the years the assessee vide letters dated 10.06.2010 and 19.07.2011 in the two years under consideration (copies placed at Paper Book pages 47 and 114 respectively) has made it clear that the additions had been accepted only because the assessee did not want to enter into unnecessary litigation. It was submitted that the bonafide of the assessee in accepting the same is evidenced by the fact that full payment of taxes were made promptly and duly.

11.1. It was his claim that the change in method was the result of the fact that in the year under consideration the assessee had only one segment i.e. “distribution of medical equipment” and it was considered that on account of the peculiarities of this segment RPM was the MAM. It was submitted that no doubt the method adopted by the assessee in the earlier years was TNMM but this was on the ground that then it admittedly had two business segments namely “marketing support services” segment and also the “distribution segment”. Thus TNMM was considered to be the most appropriate method. It was clarified that the medical equipment is directly procured from its AE and supplied to its distributor chain or the client as it may be which is why RPM was considered to be the MAM.

11.2. The loss incurred referred to by the Ld. DR it was submitted was the result of certain fixed costs which continued to remain qua the “marketing segment” which the assessee had discontinued from this year.

11.3. It was submitted that para 5.1.5 at page 14 to 15 and Table 2 and Table 3 extracted therein by the CIT(A) adequately address the position. It was submitted that on perusal of the same it can be seen that whatever method is used in the two years the results would clearly demonstrate that no case for penalty is made out.

11.4. It was his submission that even when considering the issue in the light of the requirements of Explanation 7 to section 271(1)(c) it can be concluded that the assessee has acted all along in good faith with due diligence which are the requirements incorporated in Explanation 7 to sec.271(1)(c).

11.5. It was his submission that all necessary facts and figures for the final six comparables considered in 2006-07 assessment year and the six retained in 2007-08 assessment year by the TPO were offered by the assessee. The TPO it was submitted may have changed the method but the comparables offered were not tinkered with. Accordingly it was his argument that the assessee’s international transactions were at arms length.

11.6. Referring to the record it was claimed that whatever method is applied in 2006-07 AY, considering the six comparables offered no adjustment would be warranted. This fact it was submitted is evident from the table 2 in para 5.1.5 of the impugned order.

11.7. Similarly in 2007-08 AY it was submitted if Table 3 in the same para of the CIT(A)’s order is considered it would show that whatever method is considered the margin would be within +/- 5%.

11.8. It was also his submission that the arguments of the Ld.CIT DR that the assessee had marketing intangibles is of no relevance. Inviting attention to TPO’s order internal page 3 of Paper Book page 9 in the context of page 41 internal page 3 of the Transfer Pricing Study Report, it was submitted that the assessee had shown the following international transactions in 2006-07 AY:-

Nature of International Transaction	Most Appropriate Method	Profit Level Indicator	Guidant India’s Price/Gross Profit Margin	Comparables Price/Gross Profit Margin (Arithmetic Mean)
Purchase of finished products/equipments Purchase of promotional units Recharges from/to Group Cos.	Resale Price Method (‘RPM’)	Gross Profit/Sales (‘GP/Sales’)	39%	21%
Receipt of IT Services	Comparable Uncontrolled Price Method (CUP)	N.A.	Refer Paras 1.4.1 to 1.4.3 below	Refer paras 1.4.1 to 1.4.3 below
Reimbursement of expenses	CUP	N.A.	Refer para 1.5.1 below	Refer para 1.5.1 below

11.9. Referring to the said order it was submitted that the TPO had addressed and quashed only the purchase of finished products and equipments and therein also he has only changed the MAM from the RPM method to TNMM method.

11.10. Relying upon the decisions considered by the CIT(A) in para 5.3, 5.4, 5.5 and 5.7 in the facts of the present case whose peculiar facts and circumstances have been discussed at pages 6-10 of the impugned order, it was his prayer that the impugned order may be upheld.

11.11. Inviting attention to page 2 to 6 of the impugned order it was his submission that the arguments of the CIT DR that the issue be considered in the light of the requirements of Explanation 7 to section 271(1)(c) has already been addressing by the CIT(A) who has examined the provisions before quashing the penalty. Heavy reliance was placed on the findings.

12. The Ld. CIT DR inviting attention to the reply of the assessee before the TPO in para 5.1.6 & 5.1.8, submitted that if RPM method was the MAM according to the assessee then adjustments for the discounts and rebates and advertisements expenses on facts should have been made by the assessee. The Ld. AR objecting to the stand taken submitted that the Ld.CIT DR has again travelled beyond what the TPO has done and since TPO in his order has only addressed purchase of finished goods and equipments and considering the entire claim, the submissions and detailed Transfer Pricing Study on record he did not consider the AMP issue which the Ld. CIT DR now in the penalty proceedings would like to address. It was his stand that the CIT DR cannot now raise a new issue and the Revenue at best can only rely for facts on the case made out by the TPO and as the TPO has accepted the assessee’s Transfer Pricing Report and has merely changed the most appropriate method and reduced certain comparables offered by the assessee and accepted the further introduction of three more comparables in one year again offered by the assessee it was submitted that now the CIT DR cannot make out a new case. It was also his argument that even otherwise the Hon’ble Delhi High Court in the case of Sony Ericson which is a case of distributor and in the case of Maruti Suzuki which is a case of a manufacturer it has been categorically held that “the AMP issue per se cannot be forming part of chapter X of the Income Tax Act, 1961” and in the facts of the present case this was not even the case of the AO.

13. We have heard the rival submissions and perused the material available on record. In the facts of the present case admittedly the AO wrongly invoked Explanation 1 of section 271(1)(c) instead of Explanation 7 of section 271(1)(c). Thus noting that the request was not opposed on behalf of the assessee, we allow the prayer of the Ld.CIT DR in the peculiar facts and circumstances of the case that the issues be considered in the light of Explanation 7 to section 271(1)(c) instead of Explanation 1 of section 271(1)(c).

13.1. The relevant provisions of section 271(1)(c) are set out hereunder for ready-reference:-

271(1). “If the [Assessing] Officer 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)

(d) *

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 proved 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].”

13.2. A perusal of the above makes it clear that Explanation 7 is a deeming provision where by it is deemed that in the case of any addition or disallowance in the case of an assessee who has entered into an “international transaction” defined in Section 92B of the Act then for the purposes of sub-section (c) of section 271(1) the said amount added or disallowed would be deemed to represent such income in respect of which particulars have been concealed or inaccurate particulars have been furnished. The caveat or exception being carved out only in the case where the assessee proves 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.

13.3. Thus in order to consider whether the said requirements of Explanation 7 have been met or not, it is necessary to consider the act and conduct of the assessee at the time of computing the international transaction which is already a matter of record.

13.4. It is seen that the assessee has described it business profile in its transfer pricing study which has been considered by the TPO in his internal page 2 in the following manner:-

2.Business description as submitted by assessee:-

2.1.Guidant corporation was incorporated in 1994 and is headquartered in Indianapolis, USA. It is the ultimate parent of all Guidant group companies across the world. It is primarily engaged in the development, manufacturing and marketing of a broad array of products and service for cardiac and vascular patients. Its Indian operations are carried out on by Guidant India, a wholly owned indirect subsidiary.

2.2. Group companies own significant valuable intellectual property rights and other commercial or marketing intangibles and are involved in complex product development, manufacturing and brand development of the products. Group Companies also bear significant business and entrepreneurial risks of products acceptability and performance in the market.

2.3.Guidant India is primarily engaged in the promotion, sales, marketing and distribution of the cardiovascular medical products and equipments of the Guidant Group and related post sale support services. While carrying out such business operations, Guidant India undertakes comparatively lower risks than GroupCos and utilize routine tangible assets.”

13.5. On consideration of facts which have been addressed in the earlier part of this order elaborately it is evident that it is undisputed that the most appropriate method selected by the assessee was varied by the TPO after giving the assessee a reasonable opportunity of being heard. It is seen that the assessee had raised various arguments opposing the change of method and defended unsuccessfully before the TPO the method adopted in its TP study. It is also seen that the issue was not contested further by the assessee in both the years. It is a matter of record that the additions are based on the comparables offered by the assessee considering the single year data as opposed to the multiple year data. It is also seen that in the first year i.e. 2006-07 AY out of the six comparables originally offered by the assessee using the multiple year data, three were retained by the TPO considering the single year data and 3 were outrightly rejected. The assessee was directed to carry out a fresh search using single year data and out of this search carried out by the assessee three other comparables offered by the assessee were accepted during the assessment proceedings. In the second year i.e. 2007-08 AY, nine comparables were offered by the assessee using the multiple year data and three comparables were excluded by the TPO thus retaining the six comparables offered by the assessee using single year data the additions have been proposed.

13.6. We also find from the record that the claim of the assessee based on Table 2” and “Table 3” extracted by the CIT(A) in support of the claim that whether the method taken is RPM or TNMM, considering the original six comparables offered by the assessee in 2006-07 assessment years or the nine comparables offered in2007-08 assessment year, the international transaction is at arm’s length in 2006-07 and within +/-% in 2007-08 assessment year. We find that this factual position placed before the CIT(A) and accepted by him has not been either assailed before us or rebutted by the Revenue by any argument or contrary evidence. For ready- reference, we extract the relevant para from the order hereunder:-

5.1.5. “In order to prove the ‘good faith and due diligence’, the appellant had pleaded that even if the same original 6 comparables are taken with a single year data in the AY 2006-07, the appellant’s international transaction is at arm’s length in either of the methods i.e. RPM or TNMM. The same is demonstrated by the appellant in the following table:-

Table-2

	For AY 2006-07	RPM	TNMM
S.No.	Name of the Comparable	GP/Sales	OP/Sales
1.	Advanced Micronic Devices limited	47.62%	5.85%
2.	Ashco Industries Limited	45.46%	11.38%
3.	BA & Brothers (Eastern) Limited	9.67%	1.41%
4.	Bijoy Hans Limited	6.25%	-28.13%
5.	Duchem Laboratories Limited	-9.57%	-23.01%
6.	Fulford (India) Limited	45.37%	16.25%
	Average	24.13%	-2.71%
Company Margins 38.86% -1.47%

In the same way for the AY 2007-08 it is contended that the margin of the appellant will fall within +/- 5% by using the same set of 9 comparables used in the TP study with current year data in both the methods:-

Table-3

	For AY 2007-08	TNMM	RPM
S.No.	Name of the Comparable	OP/Sales (%)	GP/Sales (%)
1.	Abott India Ltd.	13.50	32.81
2.	Advanced Micronic Devices Ltd.	10.15	47.62
3.	BA & Brothers (Eastern) Limited	2.64	9.67
4.	Bijoy Hans Limited	-68.89	6.25
5.	Hemant Surgical Inds Ltd.	3,73	10.24
6.	Mark remedies Ltd.	Date Not available	Data Not available
7.	Remi Sales & engg. Ltd. Average	3,77	18.52
8.	Sharon Bio-Medicine Ltd.	14.98	14.36
9.	Vivo Bio Tech Ltd.	-212.12	17.50
	Arithmetic Mean	-29.03%	19.62%

13.7. When considering the requirements of the statutory provision it is seen that a deeming fiction is created by Explanation 7 which is a special provision with regard to the arm’s length price made by the AO u/s 92C(4). The deeming fiction provides that when such an ALP adjustment has been made, the amount so disallowed or added back is deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished. The rigours of the penal action would not be attracted if the assessee can demonstrate “that the price charged or paid in such transaction was computed in accordance with the provision contained in section 92C and in the manner prescribed under that section in good faith and with due diligence (emphasis provided)”.

13.7.1. Thus, we find that the law as it stands on the statute the deeming fiction cannot apply in such a situation where the assessee is able to demonstrate that the price charged or paid in respect of the said international transaction was computed in accordance with the requirements of section 92C and the exercise was done in good faith and due diligence.

13.8. Thus in the facts of the present case when the conduct of the assessee is taken into consideration, it is seen that in regard to change of methodology the assessee has consistently maintained that the change was effected in view of the fact a particular segment was discontinued in the year under consideration and for the distribution segment, RPM was considered to be the most appropriate method. Notwithstanding the fact that the explanation was not accepted and the issue was given up by the assessee for the stated reasons of avoiding litigation the fact remains that the merits of the explanation in the penalty proceedings has to be considered independently. The mere fact that the issue was given up per se by itself will not be sufficient to conclude against the assessee as there may be many reasons why the addition or disallowance is not challenged further.

13.8.1. The legal position that the explanation in the penalty proceedings warrants a separate re-consideration in the parameters of the requirements of the penal provision is well-settled. In the facts of the present case it is seen that in justification for selection of RPM as a method by the assessee the argument has been made that in the year under consideration there was only one segment i.e. “distribution segment” as opposed to another segment i.e. of “marketing service segment” which was the position in 2005-06 AY wherein TNMM had been selected in a matter of record. The argument on facts is found to be correct. Whether the said fact can be said to be so persuasive as to lead only to the inference that the exercise was in good faith following the due diligence standards set out by the statute and thus warrants on conclusion in favour of the assessee or not is a matter for consideration.

13.8.2. Good faith presupposes honesty and fairness at its core. However, good faith does not cover the sins of omission or negligence. Due diligence on the other hand does not tolerate negligence and may be defined as prudent, responsible care and attention required to be exercised by a reasonable and prudent person in a given situation. Thus, as observed in acts of “good faith” it may not be possible to question negligence where due diligence standards are required to be met negligence cannot be tolerated. Similarly due diligence standards may not necessarily be embedded with good faith.

13.8.3. Thus the law requires that the standards to be met by a taxpayer pleading that penalty is not leviable in situations where Explanation 7 is attracted has been kept very high. The twin requirements of the Act may be capable of being summed up in the term “best efforts” which not only presuppose “due diligence” but also “good faith” as best efforts may incorporate not only “a diligent standard” but can also subsume “a good faith standard”.

13.8.4. Thus when considered in the context of the above parameters it is seen that RPM is one of the methods set out in Rule 10B made under section 92C of the Act. A perusal of the Rules shows that no hierarchy for selecting the most appropriate method has been prescribed under the Rules or the Statute. Sub-Rule (b) of Rule 10B specifically lays down that RPM is one of the prescribed methods to be followed in certain circumstances. Thus when the conduct of the assessee in using this method in the year under consideration is considered alongwith the justification for selecting this method namely having only one segment i.e. the “distribution segment” in the year consideration as opposed to the earlier factual position the explanation is plausible and acceptable and unless rebutted by some fact or argument to the contrary. The assessee is presumed to have discharged his burden of having acted in good faith with due diligence. No malafide has been alleged by the Revenue in the facts of the present case to show that the selection of the said method was with a deliberate attempt to defraud the Revenue and the said method could never have been selected in good faith with due diligence in the given facts. We are of the considered view that mere change of method by the TPO by itself is not enough. Once the tax payer has given sufficient and cogent reasons, relying on facts and law in support of its selection of method the onus shifts to the Revenue to demonstrate that even on following the best efforts, the said method could never have been selected i.e. the due diligence requirements and good faith requirements were breached due to the active selection of this method. No such argument has been raised before us. Thus in the context of these cumulative facts and legal position, we find that the explanation offered qua the change of method, when read alongwith the requirements to be met as set out in Explanation 7 to section 271(1)(c), we find that the conclusion drawn on facts, that the requirements are fully satisfied, as transaction is computed in accordance with the provisions contained in section 92C and is bonafide and with due diligence. Accordingly, we find that on the said issue the Revenue has failed to lead any argument on fact or law to the contrary.

13.9. The assessee’s conduct which further needs to be considered is whether in offering the comparables the “best efforts” practices were followed by it, as the due diligence standards and good faith standards requirement qua the said issue also needs to be met. It is a matter of record that in both the years under consideration the additions are based on the comparables offered by the assessee. Not even one comparable has been introduced by the TPO. The fact that all the comparables offered were not accepted by the TPO in both the years or alternatively the TPO has partially accepted the comparables offered by the assessee in both the years are facts which support the due diligence and good faith standards. Addressing the comparable excluded by the TPO no case has been made by the Revenue to show that by offering the comparables excluded the assessee was so careless, negligent or lacking in good faith that the exercise was done with malafide to defraud the Revenue. The fact that the comparables retained were offered by the assessee and no comparable has been introduced by the TPO itself leads to the conclusion that due diligence has been exercised in good faith by the assessee in selecting the comparables. This argument has been accepted by the CIT(A). On examining this grievance of the Revenue, we find that just because certain comparables were excluded by the TPO, the claim of exercise of due diligence and good faith in selecting the comparables offered does not get eroded unless the same was rebutted by the Revenue by showing specific instances explicitly indicating that in the selection of comparables the assessee had acted malafide and the exercise was lacking in good faith and due diligence. No such arguments in rebuttal have been made by the Revenue before us. Accordingly for the reasons given herein above, we find that on this ground too the Revenue has failed to upset the finding of the CIT(A).

13.10. The next issue taken by the Revenue to prove lack of good faith and exercising due diligence is the use of multiple year data in the TP study placed on record in 2006-07 and 2007-08 AYs by the assessee. On a consideration of the jurisprudence available thereon, we find that even on this ground the claims of exercise of due diligence and good faith by the assessee in computing the TP study in accordance with the provision of section 92C is not eroded. The conclusion is supported by the decision of the Co-ordinate Bench dated 17.09.2012 in ITA No.5566/Del/2011 in the case of M/s Verizon Communication India P. Ltd. vs DCIT wherein the Co- ordinate Bench had an occasion to consider multiple year data furnished by the assessee. Before the ITAT the decisions of both:- a) the Special Bench in the case of Aztek Software & Technology Services Ltd. vs ACIT (2007) 294 ITR 1832 (Bangalore) (SB); b) and the decision of Mentor Graphics P. Ltd. (2007) 109 ITD 10 (Delhi) were relied upon by the parties. The Co-ordinate Bench considering the fact that both these decisions were delivered after July 2007 held that prior to these decisions there was a legal debate as to whether multiple year data could be used or only the current year’s data. The decision of the Co-ordinate Bench considering that the case of the assessee pertained to 2006-07 AY concluded that in 2006 when the assessee completed its Transfer Pricing Study and filed its return the debate was very much alive. Accordingly it was held that penalty levied on that count cannot be sustained. On considering the facts in the present case, we find that one of the years under consideration is 2006-07 AY and the other is 2007-08 AY. The Transfer Pricing Study for these two years has been finalised in 2006 and 2007. Thus it can be safely concluded that the issue was then debatable. Once it is seen that on the issue of single year data or multiple year data there was a debate till 2007, the transfer pricing study having been prepared using multiple year data in 2006-07 and 2006-07 AYs cannot be held to be a malafide exercise computed in gross carelessness in order to defraud the Revenue. As single year data at the behest of the TPO was provided and due taxes on the adjustments made were paid promptly the only conclusion that could be drawn in the peculiar facts and circumstances of the case is that the use of multiple year data was done with due diligence and in good faith as till 2007 the issue was debatable.

13.11. It is even otherwise evident from the record that even before the CIT(A) the assessee has argued in support of its claim of good faith and due diligence in selecting the method and the comparables originally offered by way of comparable charts extracted in the impugned order demonstrating that whatever method is followed the result would demonstrate that exercise of the assessee was in good faith and with due diligence. We find that the said claim has been accepted by the CIT(A) on facts and the said factual position has not been disputed by the Revenue or rebutted by any evidence or argument to the contrary before us.

13.12. It is further seen that considering the facts of the present case that the CIT(A) has himself examined the legal position. The CIT(A) has examined the issue in the light of Explanation 7 to Section 271(1)(c) of the Act. Reliance has been placed upon the order of the ITAT in the case of CIT(A) vs RBS Equities India Ltd. in ITA No.4654/Mum/2009 order dated 26.08.2011 considering the facts of that case, where the said assessee i.e. RBS Equities India Ltd. had entered into International transaction with its AE’s and computed the arm’s length price by applying TNMM method which was changed by the TPO to CUP method where the Co-ordinate Bench considering the Explanation 7 to section 271(1)(c) relying upon K.P.Verghese vs ITO 131 ITR 597 (SC) held that penalty was not leviable.

13.13. The view taken is further supported by the order dated 17.05.2010 of the Co-ordinate Bench sitting at Mumbai in ACIT vs Firmenich Aromatics India Pvt. Ltd. [ITA No.4654/Mum/2009] wherein on near identical issues i.e. change of method herein from RPM to TNMM and therein from CUP to TNMM it has been held to be a bonafide difference of opinion. Relying upon the following extract of the decisions of the Apex Court in the Reliance Petro Product Ltd. 322 ITR 158 (SC), it was held that there was no case of levy of penalty as the assessee could not be expected to visualise the invoking of different method by the TPO in valuing the international transaction as the basic data furnished by the assessee was not faulted with:-

“A glance at the provisions of section 271(1)(c) of the Income Tax Act, 1961, suggests that in order to be covered by it, there has to be concealment of the particulars of the income of the assessee. Secondly, the assessee must have furnished inaccurate particulars of his income. The meaning of the word “particulars” used in section 271(1)(c) would embrace the details of the claim made. Where no information given in the return is found to be incorrect or inaccurate, the assessee cannot be held guilty of furnishing inaccurate particulars. In order to expose the assessee to penalty, unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By no stretch of imagination can making an incorrect claim tantamount to furnishing inaccurate particulars. There can be no dispute that everything would depend upon the return filed by the assessee, because that is the only document where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. To attract penalty, the details supplied in the return must not be accurate, not exact or correct, not according to the truth or erroneous.

Where there is no finding that any details supplied by the assessee in its return are found to be incorrect or erroneous or false there is no question of inviting the penalty under section 271(1)(c). A mere making of a claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such a claim made in the return cannot amount to furnishing inaccurate particulars.”

13.14. No doubt when there is a difference between the assessed income and the returned income, a presumption of concealment or furnishing of inaccurate particulars of income or both can be raised and the onus is on the assessee to explain the difference. However the mere fact that the addition is accepted per se does not mandate that penalty is leviable as the explanation offered by the assessee is required to be considered applying the various tests and propositions laid down by the Courts to levy of penalty and only on consideration of the legal position on the facts the AO is required to decide whether to levy or drop the proceedings. The penalty cannot be imposed simply because the addition is accepted. In the present case we are of the view it can be imposed only when the explanation offered is shown to be lacking in good faith and the transaction can be shown to be computed without due diligence with wilful attempt to defraud the Revenue. It is also a settled legal position that wherever there is a debate on the issue and two views are possible the bonafide of an explanation in having followed one of the views cannot be a ground for levying penalty..

13.15. As we have already individually addressed each of three issues arising in the present facts of the case it is found that in the event of an addition or disallowance by the TPO in Explanation 7 of section 271(1)(c) postulates further examination of the conduct of the assessee to be adjudged on the touchstones of “due diligence” and “good faith” in the preparation and documentation of its Transfer Pricing study. On consideration of the burden cast upon the assessee in regard to the standards required to be maintained preparation of its transfer pricing study, heavy onus is cast upon on the assessee in case any addition or disallowance is made. The phrase “good faith” and “with due diligence” is used in Explanation 7 of section 271(1)(c) as a hyphenated phrase which looses its essential meaning of the individual words when considered separately as abstract phrases. Good faith alongwith due diligence presupposes true and fair presentation which is not misleading, ambiguous or obscure. Given the clear indications of law that the price charged or paid in such international transaction (or specified domestic transactions with which we are not concerned in the present proceedings) is to be computed in accordance with the provisions contained in section 92C and in the manner prescribed under that section in such economic and financial reporting the twin requirements of good faith alongwith due diligence is ultimately a matter of bonafide conjecture based upon the standards of the financial and economic disclosure of the assessee. In the present case it is found that given the clear indication of compliances required by law, there is in fact a clear evidence that disclosures made by the assessee were in good faith and with due diligence and there is absence of wilful or malafide effort to conceal and defraud the Revenue. Due diligence presupposes making all possible efforts/endeavours which a prudent man would have done in the given circumstances or a process whereby one gathers facts to make an informed choice on a matter. Good faith on the other hand is an abstract and comprehensive term. It requires that the action should be honest and encompasses a sincere belief or motive without any malice or the desire to defraud others. It is drawn from the Latin term bonafide and Courts use the term interchangeably. However, in the present case the twin requirements of conjoint compliances presuppose that the two terms due diligence and good faith cannot be used interchangeably or independent of one another. Thus the acceptable standards laid down by the statute are that due and diligence efforts made by a prudent man in a given situation have also to be in good faith as all due diligent efforts per se may not be in good faith. Conversely an act done in good faith with honesty and sincerity per se is not sufficient as acts done in good faith protects acts of negligence. However, the act of computing a transaction is to be done with due diligence i.e. strictly in accordance with the provisions contained in section 92C and in the rules framed there under and thus necessarily in the manner prescribed therein while so computing no negligence even in good faith is legally acceptable. Hence the statute has mandated that not only the assessee is required to act in due diligence but it must also act in good faith. The requirements are very stringent and required to be met scrupulously. In the facts of the present case, we find that the bonafide of the assessee cannot be doubted. To sum up it is seen that at the relevant point of the time when the TP Study was filed there was a debate on the issue of single year data and multiple year data. Considering the change of method from RPM to TNMM, we find that the assessee’s explanation that the method was changed from TNMM from 2005-06 AY to RMP in 2006-07 & 2007-08 AY on the ground that there was only one segment in the year and accordingly the most appropriate method selected was the RPM. Notwithstanding the fact that the said approach was not approved by the TPO, it does not detract from the plausible claim that in view of only one segment i.e. the distribution segment the method selected in good faith and due diligence was RPM. Even otherwise we find that the assessee at the time of filing its TP study could not anticipate that despite there being only one segment, the TPO would still insist on holding that TNMM would be the most appropriate method relying on the past position where change in facts is an admitted position. The due diligence standards assiduously required to be adhered to in the present case are standards of reasonable and ordinary diligence. But extraordinary and extreme measures of care, caution and prudence insomuch as to anticipate a vigilance to the extent that despite a plausible explanation on facts the most appropriate method selected by the assessee would still be disturbed by the TPO, is beyond all the possible shades of due diligence expected from an assessee at the time of computing its transaction.

13.15.1. Reverting to the other issues we further find that even when the additions are considered they are found based on the comparables offered by the assessee in the TP study in 2007-08 AY and in 2006-07 AY. The six comparables offered wherein three were rejected and three more were offered by the assessee during the assessment proceedings. Thus we find that the inclusion or exclusion of comparables in the peculiar facts of the present case does not give cause to hold that this was a case of concealment or of filing of inaccurate particulars, notwithstanding the fact that as per judicial precedent cited selection of comparables has been to be a subjective exercise. We further find that the specific tables reproduced by the CIT(A) and extracted in the earlier part of this order in para 5.1.1 of the impugned order, when the position is considered by the applying TNMM or RPM the assessee is fully within the arms length price in 2006-07 AY which factual position has not been disputed by the Revenue and range of +/-5% in 2007-08 AY.

13.16. Accordingly in the facts as they stand considering the arguments of the parties and the judicial precedent available, we find that the departmental ground in both the years have to be rejected.

14. In the result, the appeals of the Revenue are dismissed.

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