In a significant case, the Gujarat High Court has held that penalty under section 271 (1)(c) of the Income Tax Act, 1961 cannot be invoked in the absence of material establishing concealing of income.
M/S Shell Global Solutions International B V, the respondent assessee company is a Foreign Company registered in Netherlands, deriving income from Royalties or fees for technical services. A return of income of Rs.9,19,53,530/- was filed. Audit Report under Section 92E relating to international transactions for 3CEB was filed. The case was selected for scrutiny and a notice under Section 143(2) of the Act was issued on 22.09.2010.
On verification of Form 3CEB, it was noticed that the assessee company had entered into international transactions. The case of the assessee was referred to the Transfer Pricing Officer for determination of Arm’s length price of the international transactions. A draft order was passed under Section 144C(1) and the assessee made objections before the Dispute Resolution Panel.
The DRP issued directions under Section 144C(5) of the Act. A reference was made under Section 92CA(1) of the Income Tax Act to the Transfer Pricing Officer who passed an order on 10.10.2011 making an upward adjustment of Rs.29,43,61,998/- on account of variations in service charges.
The upward total adjustment by way of an order under Section 92CA(3) of Rs.29,43,61,998/- was made as above. By assessment order dated 25.10.2012 penalty proceedings were also proposed to be initiated under Section 271(1)(C) for furnishing inaccurate particulars of income and thereby concealing income. The assessment order was under challenge before the ITAT which dismissed the appeal.
In the penalty proceedings it was the case of the respondent assessee that the whole mechanism known as the Base Erosion Theory was adopted and the application of arm’s length principles for making TP adjustment was not proper. Since the assessee had charged additional fees from its Indian AES in order to comply with Arm’s Length Standards, the additional fees would have been taxed in India in the hands of the appellant @ 10% on a gross basis.
At the same time, the said additional fees would have been allowed or deducted in the hands of the payers HLPL to compute their business profits where such allowances or deductions would have obtained tax shields @ 33.99% in the hands of the taxpayers. Thus, the application of arm’s length principles would have resulted in the erosion of taxes payable in India to the extent of 24%.
In the penalty proceedings invoking Explanation 7 to Section 271(1)(C) to DCIT, International Taxation Division vide order dated 20.07.2017 held the assessee liable to penalty. The CIT(A) confirmed the order of penalty. The Tribunal, however, held that the additions on which penalty had been levied were a debatable issue in light of the variance of legal issues and opinions of the Karnataka Bench and the Pune Bench and hence two views were possible and mere difference of opinion does not justify levy of penalty.
A division bench comprising of Justice Biren Vaishnav and Justice Mauna M Bhatt observed that “as the assessee had furnished all the details of its expenditure as well as income in its Return, which details, in themselves, were not found to be inaccurate nor could be viewed as the concealment of income on its part. It was up to the authorities to accept its claim in the Return or not.”
“Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the Revenue, that by itself would not, in our opinion, attract the penalty under Section 271(1) (c). If we accept the contention of the Revenue then in case of every Return where the claim made is not accepted by Assessing Officer for any reason, the assessee will invite penalty under Section 271(1)(c).”, the bench concluded
The Court dismissed the appeals as there were no questions of law much less substantial questions of law involved.
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