ITA No.1844/Del/07

IN THE INCOME TAX APPELLATE TRIBUNALDELHI BENCH ‘C’

BEFORE HON’BLE PRESIDENT SHRI VIMAL GANDHI ANDSHRI DEEPAK R.SHAH, ACCOUNTANT MEMBER

ITA No. 1844/Del/07Asstt.Year: 2003-04

Cargill India Pvt.Ltd. vs Dy. Commissioner of13, Abul Fazal Road, Income-tax, Cir. 3(1)Bengali Market, New Delhi.New Delhi.(PAN: AAACC3269J)(Appellant) (Respondent)

Appellant by: Shri C.S.Aggarwal, Sr.Adv.Respondent by: Shri L.M.Pandey, CIT (DR).

O R D E R

PER VIMAL GANDHI, PRESIDENT.

This appeal by the taxpayer for the assessment year 2003-04 (F.Y

2002-03) is directed against order of the Commissioner of Income-tax

(Appeals) [CIT(Appeals)] upholding levy of penalty of Rs 40,46,41,376/-

u/s 271G of the Income-tax Act (the Act) for not submitting the documents

called from the tax payer in time.

2. The taxpayer company M/s Cargill India Pvt.Ltd. (CIP in short ) is a

wholly owned Indian subsidiary of Cargill Mauritius Limited which in turn

is a wholly owned subsidiary of Cargill Inc., USA. The taxpayer company,

in India, in the relevant period, was engaged in the business of import,

export and domestic trading in edible oils, fertilizers, grains, oil seeds and

other food products including processed food. The taxpayer was also

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engaged in the business of processing crude oil. The taxpayer had carried

various transactions with its foreign associate enterprises (AEs in short) of

value of Rs 20,23,20,68,761/- and filed audit report in Form 3CEB along

with the return. The summary of the transactions carried and the method

applied by the taxpayer to show that transactions with AE were carried at

arms’ length is reproduced from para 2.1 of TPO’s order dated 22.03.2006

and is as under:

“2.1 During he year, the assessee has undertaken the following international transactions:

S.No. Description of transaction Method Value (in Rs.)1 Purchase of oil CUP 27,99,48,9182 Contract cancellation penalty/charges CUP 5,27,7963 Purchase of fertilizers CUP 1,38,26,80,9574 Purchase of corn. TNMM 72,05,26,4645 Purchase of soyabean meals TNMM 73,92,33,8146 Purchase of soyabeans TNMM 5,63,26,75,2097 Sale of ferrous CUP 9,67,29,9038 Sale of rice CUP 18,04,86,8359 Sale of wheat TNMM 3,85,55,49,17310 Sale of soyabean meals CUP 97,60,92,51911 Sale of corn. TNMM 72,11,48,36912 Sale of soyabeans TNMM 5,48,78,02,61013 Purchase of assets CUP 7,21,69714 Support service fee received TNMM 1,08,47,44115 Availing of administrative services Cost Plus

Method1,90,999

16 Commission paid on sales of ferrous CUP 51,54,53317 Distribution commission income TNMM 19,58,80018 Ocean freight savings - 4,90,71,54219 Cost sharing arrangement - 2,71,71,20220 Dispatch income received TNMM 1,13,14,42821 Reimbursement of expenses paid - 80,72,55622 Demurrage charges TNMM 1,09,31,72923 Contact extension / penalty charges 27,35,82724 Provision of support agency services - 3,04,95,440

Total: 20,23,20,68,761

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As total value of international transaction with AE exceeded Rs 5 crores, the

Assessing Officer (A.O) made reference to the Transfer Pricing Officer

(TPO in short) for determining the Arms’ Length Price (ALP in short) of

those transactions. The TPO in above order did not accept book value of

various transactions shown by the taxpayer and proposed an addition of Rs

50,17,08,483/-, to be made in the assessment of the taxpayer. The above

order was incorporated and addition on account of adjustments for transfer

pricing was made in the assessment order. However, above addition on merit

is subject matter of a different appeal and not the issue before us.

3. It is claimed by the Revenue that taxpayer failed to comply with

directions of the TPO and did not submit documents sought from the

taxpayer in time and, therefore, committed a default u/s 271G of the Income-

tax Act. The Assessing Officer imposed penalty of Rs 40,46,41,376/- on the

taxpayer under the above provision.

4. The learned CIT (Appeals) while confirming levy of penalty and in

the concluding paras has held as under:

“(vii) On consideration of arguments and perusal of penalty order and ld. AR’s submission and paper book, I find that the time limit for furnishing the documents and detail was prescribed as on 21.11.2005. There is no dispute on this date from either of the sides. However, as per ld. AR, the assessee has furnished all the details prescribed under the Income-tax Act and Rule 10D of the Income-tax Rules on or before 16.11.2005. The rest of details furnished later on 21.11.2005 were only supporting documents and back up paper and the same cannot be treated as violation of section 92D(3) read with Rule 10D of Income-tax Rules. On the other hand, the AO observed that the relevant document prescribed under Rule 10D from which arm’s length price could have been determined were not filed within due date. Hence, the

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assessee failed to furnish the prescribed documents / information within due date.

Considering both sides of point of view, I have to examine the documents which could be filed before 16.11.2005 and or after 21.11.2005 or not filed at all. On going through the penalty order, I find that the appellant has applied CUP method for some of the transactions while for certain transactions, it has applied Cost Plus Method (CPM) and Transactional Net Margin Method (TNMM). In this regard, I have to quote following observation of the AO given in the penalty order with reference to CUP, CPM & TNMM.

(A) The AO’s observation at Page 10 Para 21:

“As seen from the above, the assessee has not furnished any comparable data with respect to the international transaction where CUP method is used as to determine the arms length price. The actual working details of the comparable data and financial information used in applying the CUP method was not furnished. Hence, the documentation filed by the assessee company on 16.11.2005 was quite inadequate and does not satisfy the statutory requirements as mentioned in Rule 10D of the Income Tax Rules, 1962. It is evident from these submissions that application of the CUP method as recorded by the assessee was only a formal deliberation, cosmetic in nature and was not sustainable with logical date of comparables.”

(B) The AO’s observation at Page11, Para 23:

“It is seen from the above that no back up documents /agreements were given by the assessee on the basis of which the said Cost Plus Method was applied. It has also not furnished any comparable data of similar transactions undertaken by comparables in a similar industry and to this extent the CPM was not justified by the assessee. Hence, the documentation filed was incomplete.”

(C) AO’s observation at Page 11, Para 24:

“During the year under reference there are major international transactions termed as Export of Wheat and Merchanting trade and the functional analysis of which is mentioned at page 25 and selection of Transactional Net Margin Method as method for transfer pricing at page 39 of document-I dated 16.11.2005. The assessee has taken itself as the tested party and has stated its transactions to be at arm’s length by selection of comparables from the Capitaline database. What the assessee has

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mentioned is merely a search process through which it has attempted to identify a set of comparables. In the conclusion at page 46 of document-I, the assessee has merely intimated that profit level indicator used for benchmarking international transactions is OPM which means operating margin over sales/turnover. It is concluded in this paragraph that OPM of assessee is 0.09% which is better than 20 final set of comparables having OPM at 6.95%. The names of comparables, their financial data, their working of OPM and the details of their financial profile was not available in this document. The working of operating profit margin of the assessee was also not available in documentation submitted by the assessee on 16.11.2005In totality, the approach is totally devoid of any merit whatsoever to draw any reasonable conclusion regarding the justification of the assessee having maintained arm’s length standards in the transactions it has proposed to cover under TNMM.”

(D) The AO’s conclusion at Page 13, Para 29:

“As seen from the above paragraphs, the assessee company had not furnished proper documentation as required statutorily in 92CD read with Rule 10D. Hence, the penalty under section 271G of the Income Tax Act is attracted. The reply furnished by the assessee is highly unsatisfactory. I am, therefore, satisfied that it is a fit case for imposition of penalty under section 271AA of the act. The quantum of penalty leviable under section 271G of the Income Tax Act is 2% of the value of the international transaction for each such failure.”

The AO further observed that the assessee company had not furnished the documentation as required statutorily with respect to the transaction shown in the chart prepared at page 14 of the assessment order. The total international transaction has been worked out in the chart for Rs 2023.20 crore.

(viii) On examination of the evidences and after going through the observation of AO, I reached to the conclusion that the documents furnished beyond due date i.e. after 21.11.2005 were not ‘supporting documents’, argued by ld. AR but the same were vital for the determination of arm’s length of international transactions. I further find that these documents are prescribed under sub-rule G, H, I & J of Rule 10D of the Income Tax Rules. In substance, I find that the appellant failed to furnish the prescribed documents / informations within due date before the TPO. Hence, it violated the provision of section 92D(3) read with Rule 10D, G, H, I & J of Income-tax Rules.

(ix) The ld. AR has argued about the failure of non furnishing document on account of the reasonable cause being grey area in new provision of

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Section 92D read with Rule 10D of the Income Tax Rules. However, I do not agree with the ld. AR as the assessee was required to furnish necessary documents / information as prescribed under section 10D of the Income Tax Rules within due date but it failed to furnish the vital documents / information. I further find that the appellant is well supported by the CA & legal Advisors. Hence, the plea of grey areas and ignorance of law is not sustainable in the appellant’s case.

(x) The ld. AR with an alternative argument pleaded that the penalty should not be levied on the total turnover but it should be levied on international transaction of Rs 2023.20 crore. For the sake of convenience, the relevant portion of written submission at page 54 is reproduced below:

“ Without prejudice, it is submitted that assuming for the sake of an argument, but without admitting, that there was an alleged default committed by the assessee and penalty was rightly leviable, it could have been imposed only in respect of those international transactions forming part of the value of international transactions of Rs 2023.20 crore, in respect of which there was an alleged non compliance of clauses (g) to(j) of Rule 10D of the Income Tax Rules. It is thus evident that the penalty has been imposed mechanically and without application of mind.”

On going through the penalty order, I find that the AO has worked out the international transaction vide chart given at page 14 of the penalty order (under dispute). Thus, the AO after determining the international transaction at Rs 2023,20,68,788/-, levied the penalty @ 2% against such transactions only. Thus, the AO has levied the penalty on the value of international transaction of Rs 2023.20 crore, as argued by ld. AR. Hence, there is neither any difference in transaction nor any scope to interfere with that.

In substance, I find that the appellant has committed default by not furnishing the prescribed document / information within due date. Hence, there was violation of provision of section 92D(3) read with Rule 10D of the Income Tax Rules. With these observations, I hold that the AO was justified to levy penalty under section 271G amounting to Rs 40,46,41,376/- and, thus, the action of the AO is upheld.

In effect, the appeal is dismissed.”

4.1 It is clear from above that penalty of Rs 40,46,41,376/- has been

imposed on the taxpayer for not furnishing documents and information

called from him by due date which has been taken as 16.11.2005. In other

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words, the penalty has been levied for delay in furnishing the documents

later than 16.11.2005.

5. We are, therefore, to see whether penalty of more than Rs 40 crores in

this case is justified for delay in the submission of the documents claimed to

have been called by the TPO in terms of section 92D(3) of the Act.

5.1 Before proceeding to consider the legality and validity of aforesaid

penalty on the facts and circumstances of the case, it would be necessary to

refer to the relevant provisions of the Transfer Pricing Regulation under the

Income-tax Act.

5.2 Section 92(1) of the Act enjoins that any income arising from an

international transaction shall be computed having regard to arm’s length

price. It is, therefore, mandatory to take income of international transactions

at arm’s length price both by the taxpayer and the taxing authorities. The

Central Board of Direct Taxes vide Instruction No.3 dated 20th May, 2003

has directed all its Officers to refer all cases for determination of ALP to

TPO in which value of international transaction exceeds Rs 5 crores.

Accordingly, this case was also referred to the TPO for the above purposes.

Vide order dated 31.3.2006 the TPO determined the ALP and suggested

adjustment to be made in the assessment. The A.O added the suggested

amount of the adjustment in the assessment. The TPO in his order also

observed that taxpayer had failed to comply with provisions of section 92D

read with Rule 10D of Income-tax Rules by not furnishing information in

time and, therefore, action u/s 271AA and 271G should be taken by the A.O.

Accordingly, penalty proceedings u/s 271G were taken and after hearing the

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taxpayer and after obtaining report from the TPO, penalty in question was

imposed and upheld by the ld. CIT (Appeals).

6. It is the claim of the tax authorities that TPO had called for certain

information and documents u/s 92D(3) which the taxpayer failed to submit

within the specified period of 30 days as extended by another 30 days under

proviso to the above section. The TPO, therefore, asked the Assessing

Officer to take action u/s 271AA and 271G of the Income-tax Act,

Information and documents prescribed under sub-section (1) of Section 92D

(Rule 10 D of Income-tax Rules) which the taxpayer has to keep and

maintain and which the taxpayer can be asked to furnish as per sub-section

(3) of Section 92D were not furnished within the specified time. But how

these documents were summoned in the present case is to be seen. Whether

or not default for which penalty in question has been imposed took place.

We are also to see the circumstances under which the default, if any, was

committed. We would, therefore, examine various notices issued by the TPO

and information furnished by the taxpayer in reply from time to time.

Although audit report is not an information or document mentioned in Rule

10D of Income-tax Rules, but report’s connection with the Rule 10D is

important and is to be seen under section 92F. The report dated 27.11.2003

from RSM & Co., Chartered Accountant was duly furnished on the

prescribed Form 3CEB is not in dispute. The report contained name and

address of the taxpayer, list of the associated enterprises with whom the

taxpayer had entered into international transactions, their names, relationship

etc particulars in respect of transactions of intangible properties given, name

with details were entered. Other columns of the prescribed Form in respect

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of transactions were duly filled and information was given in Exhibits

attached with the report. It is running into 18 pages and its copy is available

at pages No. 8 to 25 of paper book Vol.1. The report claims that goods and

services were transferred at arms’ length price. The report further showed

that taxpayer had carried transaction with its 17 foreign associated

enterprises listed at pages 15 and 16 of the report. It had carried transactions

of purchase of oil, purchase of fertilizers, sale of soyabean meals, wheat,

ferrous, rice, purchase of corn, sale of soyabeans, transfer of misc. assets,

rendering of services, cost sharing arrangement, demurrage charges,

reimbursement of expenses etc. It also gave the method used for

determination of arms length price which was either comparable

uncontrolled price (CUP) or Transactional Net Margin Method (TNMM).

6.1 Besides the above report on Form 3CEB, the taxpayer had furnished

audit report on Form 3CA dated 8th October, 2003 along with report on Form

3CD dated 28th August, 2003 which are running into 61 pages. Copies of the

same are available at page No. 153 to 214 of the paper book of the taxpayer.

7. On a reference for the determination of transfer price to him, the TPO

issued notice dated September 22, 2005 requesting the assessee to furnish

some information and documents. The said notice/letter is referred to

hereunder to appreciate the contention that it was a notice u/s 92D(3) of the

Act:

“A reference has been received u/s 92CA(1) of the Income-tax Act from Cir. 3(1), New Delhi, the Assessing Officer, to determine u/s 92CA(3) the arm’s length price in respect of ‘international transactions’ entered into by you during the F.Y. 2002-03. You are,

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hereby required to attend my office on 10.10.05 at 1.00 a.m. either in person or by a representative duly authorized in writing in this behalf or produce or cause thereby to be produced at the same time, any evidence and/or material, which has been relied upon by you in support of computation of arm’s length price of the aforesaid international transactions. Further, in accordance with Rule 10D(2) of the Income-tax Rules, please substantiate on the basis of material available with you that the income arising from aforesaid international transactions has been computed in accordance with Section 92 of the Income-tax Act.

2. For the purpose of determination of ‘arm’s length price’ u/s 92CA(3) in respect of such international transactions, the following information/documents may also be filed in my office on or before the above mentioned date:

(a) Balance sheet and Profit and loss account for F.Y. 2002-03 alongwith copy of Audit Report and Tax Audit Report filed with the Return.

(b) Statement of Computation of income filed with Return for A.Y. 2003-04.

(c) Information and documents maintained as prescribed u/s 92D of the Income-tax Act, 1961 read with Rule 10D of the IT Rules.

If the above requirements are not complied with the arm’s length price for ‘international transactions’ during the F.Y. 2002-03 shall be determined u/s 92CA(3) of the I.T.Act on merits and on the basis of material on record.”

8. The taxpayer, vide application dated October 10, 2005 sought an

adjournment on the ground that its representative was traveling and was not

available.

9. The TPO issued second notice on 13 October, 2005 to the taxpayer

which is as under:

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“Sub: Notice u/s 92CA(3) of the Income-tax Act, 1961 – Computation of Arm’s Length Price – Assessment Year 2003-04 – regarding.

Please refer to this office letter dated 22.09.2005 requesting you to submit documentation as prescribed under Rule 10D of the Income-tax Rules by 10th October, 2005. However, the above-said documentation is yet to be submitted by your company.

Please submit the desired documentation by 7th November, 2005.”

10. On 7th November, 2005, taxpayer again sought adjournment as

relevant person who was to collect information and documents had to rush

home due to some personal matter. Thereafter the TPO issued letter dated 8 th

November, 2005 to the taxpayer which stated as under:

“Sub: Notice u/s 92CA(3) of the Income-tax Act, 1961 – Computation of Arm’s Length Price – Assessment Year 2003-04 – regarding.

Please refer to proceedings u/s 92CA(3) of the Income Tax Act, 1961 pending in the office of the undersigned.

2. This office letter dated 22.09.2005 requested you to submit documentation as prescribed under Rule 10D of the Income Tax Rules by 10th October 2005. However, your company submitted no documentation on that date.

3. Another letter dated 13.10.2005 was issued requesting to submit the desired documentation by 7th November 2005.

4. On 7th November 2005, RSM & Co. filed a letter requesting for yet another date, it may be mentioned that as per the provisions of Section 92D maximum permitted period is 30 days and relevant section is reproduced below for ready reference:

Maintenance and keeping of information and document by persons entering into an international transaction.

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92D. (1) Every person who has entered into an international transaction shall keep and maintain such information and document in respect thereof, as may be prescribed86.

(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.

5. It is reiterated that since time maximum permitted under the act for filing of statutory documentation is 30 days extendable by another thirty days. You are, therefore, again advised that statutory documentation, as prescribed, under Section 92D of the I.T. Act read with Rule 10D of the I.T. Rules may be filed immediately and latest by 21.11.2005. If possible documentation may be filed earliest possible even before 21.11.2005.”

11. It is claimed by Shri C.S.Agarwal, Sr.Advocate, the learned counsel

for the taxpayer that TPO has himself extended time upto November

21,2005 as per his fresh notice. This was done under proviso to section

92D(3) of Income Tax Act and, therefore, there could not be any default

upto the aforesaid date. This inference of no default can be drawn by what

has been observed by the TPO in his notice dated November 8, 2005

wherein it is clearly stated that the filing of statutory documentation is

extendable by another 30 days.

11.1 The taxpayer has claimed that on November 16, 2005 it filed

information and documents with covering letter from RSM & Co. with

several annexures and Notes running into 54 pages (copies available at pages

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95 to 145 of Paper Book Vol.I ). The said information once again gave

background of the taxpayer, referred to Chapter X i.e. to Indian Transfer

Pricing Regulations (TPR). How above regulations were applied to

determine ALP of various transactions carried by the taxpayer with its

Associated Enterprises (AEs) was explained. It was further stated that the

taxpayer has maintained all the prescribed information and documents.

11.2 On furnishing of the information, the taxpayer added the following

Note:

“V. Furnishing of Information

In your goodself’s captioned notice, you have called upon the assessee to produce any evidence and/or material which has been relied upon by it in support of computation of the ALP of the international transactions entered into during FY 2002-03. In addition to the above, your goodself has also called upon the assessee to furnish the following:

1. Balance sheet and Profit and Loss account for FY 2002-03 along with copy of Audit Report and Tax Audit report filed with the return of income (ROI) for AY 2003-04,

2. Statement of computation of income filed with the ROI for AY 2003-04.

3. Information and documents maintained as prescribed u/s 92D of the Act read with Rule 10D of the Rules.

In connection with the above, under instructions from, and for and on behalf of the assessee, we submit as under:

1. In respect of item (1) above, as required by your goodself, we have attached herewith the copies of the Balance sheet, Profit and Loss account, Audit Report and Tax Audit report filed with the ROI for the captioned AY (refer Annexure 1).

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2. In respect of item (2) above, as required by your goodself, we have attached herewith the statement of computation of income filed with the ROI for captioned AY (refer Annexure 2)

3. In respect of item (3) above, as required by your goodself, we have attached herewith our submissions (refer Annexure 3).

We trust the above fully meets with your goodself’s requirements and would be happy to provide further additional information / clarification that your goodself may desire. Further we also crave leave to add any documents in this regard.

Certified copy of the Power of Attorney executed by our client in our favour to represent before your goodself is attached herewith.”

12. We ignore for the purposes of this discussion Annexure 1 and 2 which

were audit report and computation of income already filed by the taxpayer

and proceed to consider Annexure 3. With annexure 3, the taxpayer had tried

to give information prescribed under Rule 10D(1) as under:

“Annexure 3Information/ documents as prescribed under Section 92D of the Act read with Rule 10D of the Rules:

Nature of Information/Documents prescribed under Rule 10D(1)

Nature of International Transaction

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

Refer Annexure 3.1

(b) 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.

Refer Annexure 3.2

(c) Broad description of the business of the assessee and the industry in which the assessee operates, and of the

Refer Annexure 3.3

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business of the associated enterprises with whom the assessee has transacted.(d) 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.

Refer Annexure 3.4

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

Refer Annexure 3.5

(f) 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.

Not relevant

(g) Record of uncontrolled transactions taken into account for analyzing 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.

Refer Annexure 3.6

(h) Record of the analysis performed to evaluate comparability of uncontrolled transactions with the relevant international transaction.

Refer Annexure 3.6

(i) Description of the methods considered for determining the ALP 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.

Refer Annexure 3.6

(j) Record of the actual working carried out for determining the ALP, 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.

Refer Annexure 3.7

(k) The assumptions, policies and price negotiations, if any, which have critically affected the determination of the ALP.

Refer Annexure 3.7

(l) Details of the adjustments, if any, made to transfer prices to align them with ALPs determined under these rules and consequent adjustment made to the total income for tax purposes.

Not relevant

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(m) Any other information, data or document, including information or data relating to the associated enterprise, which may be relevant for determination of the ALP.

Not relevant

12.1 In the letter dated November 21, 2005, the assessee made reference to

information filed in TPO’s office on November 16, 2005 and further stated

as under:

“We trust the same (information) are in order. Should your goodself require any further clarification / information, we shall be glad to furnish the same.”

12.2 During the course of hearing, the learned TPO instructed the taxpayer

to furnish further information documents as per letter dated 12 th December,

2005, which reads as under:

“In your 10D documentation there is nothing in suggestion and justification of Comparative Uncontrolled Price wherever it is used in the sense that, with what uncontrolled transaction your international transaction is benchmarked, is not provided.

Similarly wherever Transactional Net Margin Method is used, your documentation does not provide which comparables are used, it further does not provide any functional details of comparables it is also not providing except reject matrix.

In the case of payment of discounting charges which was not reported in 3CEB. Even in documentation of 10D at page 17 figures of payment is mentioned and it is justified at page 41 by an averment that the rate charged is LIBOR + 12.5 basis points and PLR is on higher side without actually demonstrating the same.

In view of the above arguments please show cause why 10D documentation be not treated as insufficient and is requested that the same be furnished according to the rules.”

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12.3 The taxpayer filed further information on December 20/23.12.2005

with a covering letter which had the following references:

“With reference to the personal hearing before your goodself today, we, under instructions from, and for and on behalf of the assessee, attach herewith the working of application of TNMM in respect of the following international transactions:

- Export of wheat – Refer Annexures 1 to 7,- Merchanting trade – Refer Annexures 8 to 15- Provision of support – services – Refer Annexures 16 to 28.- Provision of support agency services – Refer Annexures 29 to 39.

- Provision of distribution services – Refer Annexures 29 to 39.

We crave leave to furnish the remaining information / documents sought by your goodself on the next date of hearing i.e. December 23, 2005.”

12.4 In response to above show cause notice, the taxpayer submitted

further documents in December, 2005. In doing so, the taxpayer, according

to the TPO, committed a default which he recorded as under:

“3.3 In response to above show cause, no reply was submitted on merits, instead on 20th December, 2005, the assessee submitted a reply which was dated 12.12.2005. This document contained working of TNMM in respect of wheat, Merchanting trading, Support services, support agency services and distribution services; (this document is hereinafter referred as document-II). The contents of this letter were supposed to be part of original statutory documentation.

3.4 Even at this stage the documentation was not complete and on 23 rd

December, 2005, CIPL submitted more backup papers in the form of Annexure’s, substantiating applicability of Comparable Uncontrolled Price method in oil, fertilizer, soya meal, rice, discounting charges, purchase of assets, commission on ferrous etc. (Document-III). In this letter assessee defended its stand that the earlier documentation was complete and was adequate compliance the requirements of rule 10D documentation.

It may be seen that the assessee company, therefore, consumed all most 3 months in compliance of submission of statutory and contemporaneous documentation. The documentation was submitted in a piece meal manner spread over various dates.

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3.5 CIPL has failed to file statutory documentation by the due date as per provisions of section 92D of Income Tax Act read with rule 10D of Income-tax Rules. Apart from the above the following documents which are critical in determination of arm’s length price of international transaction were not submitted as part of documentation submitted on 16.11.2005.

I. a record of uncontrolled transactions taken into account for analyzing their comparability including a record of the nature, terms and conditions relating to any uncontrolled transaction with third parties;

II. a record of the analysis performed to evaluate comparability of uncontrolled transactions with the relevant international transaction;

III. a record of the actual working carried out.

3.6 The Assessing Officer may consider initiating proceeding under section 271AA and 271G of Income Tax Act.

3.7 Further, it is worthwhile to mention that the assessee did not report a transaction related to “Payment of discounting charges”. In documentation submitted on 16.11.2005 at page 17, the assessee has admitted that it did not report, thus transaction related to “Payment of discounting charges” in Form 3CEB. It is, therefore, evident that by due date of filing of 3CEB no statutory documentation was maintained. Moreover, even in the documentation on 16.11.2005 nothing except that Comparable Uncontrolled Price method is most appropriate method to benchmark this international transaction was mentioned by CIPL. The total documentation submitted in respect of this international transaction is just one paragraph at page 41 of Document-I and one page in Document-III submitted on 23.12.2005. This page is a list of discounting contracts entered into by the assessee during the year along with rate of interest charged. The documentation is totally insufficient and qualifies to be characterized as no documentation. Hence it is a case where action both under section 271AA and 271G of Income Tax Act can be considered by the Assessing Officer.”

13. It appears that on the basis of above order, the Assessing Officer

initiated penalty proceedings u/s 271G by issuing show cause notice to the

taxpayer on 13.4.2006 to explain why penalty be not imposed under the

above provision. The taxpayer raised objection to the show cause notice vide

its reply dated 18.5.2006 claiming that penalty proceedings were not

initiated during the course of assessment proceedings and, therefore, no

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penalty can now be levied. The Assessing Officer rejected this contention, as

according to him Scheme of Section 271G was different from Scheme of

Section 271(1) and, therefore, it is not necessary to initiate penalty

proceedings during the course of assessment proceedings. The contention

was rejected. The Assessing Officer further relied upon provision of Section

92D which, according to him, was to be read along with the provisions of

section 271G. Both the sections, according to the Assessing Officer, are

independent of assessment proceedings. The decisions referred to and relied

upon by the taxpayer and noted by Assessing Officer in para 7 of the

impugned order were held to be not applicable.

13.1 The Assessing Officer also rejected the objection of the taxpayer that

no specific ground of initiation of penalty proceedings was mentioned in the

show cause notice. According to the Assessing Officer in the show cause

notice, reference to penalty u/s 271G was made and since the taxpayer failed

to furnish information or documents as required under sub-section (3) of

Section 92D of the act, the requirements of the provision were satisfied. He

rejected this objection also.

13.2 The Assessing Officer also considered the claim of the taxpayer on

merit that it had maintained information and documents under Rule 10D of

Income Rules read with Section 92D of Income-tax Act and furnished them

within the prescribed time when called by the TPO. The Assessing Officer

has recorded that report on the submission of the taxpayer was called from

the TPO with relevant record of the proceedings. The TPO’s report is dated

23.6.2006 where he had made reference to various order sheet entries of

proceedings before him and stated that taxpayer had failed to furnish

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requisite documents as prescribed under section 92D, read with Rule 10D of

Income-tax Rules. Taxpayer’s attention was also invited to the report of the

TPO and objections were invited. These were submitted to the Assessing

Officer, vide submission dated 29.8.2006.

13.3 In para 13 of his order, the Assessing Officer has briefly referred to

the various notices issued to the taxpayer seeking information. The

Assessing Officer rejected taxpayer’s claim that it had submitted all the

documents and information by 16.11.2005. According to the Assessing

Officer, documents and information filed by the taxpayer by 16.11.2005

were quite inadequate and did not satisfy the statutory requirement as

envisaged in Rule 10D. The Assessing Officer has thereafter noted value of

transactions of various description and method applied for evaluating their

ALP. He noted that the taxpayer had applied CUP and TNMM methods to

evaluate international transactions with associated enterprises (AE). He

noted steps to be taken under comparable uncontrolled price method (CUP)

under Rule 10B(1)(a) of Income-tax Rules. He further noted requirement of

clauses (g) to (j) of Rule 10D(1) of Income-tax Rules. Thereafter he referred

to documentations filed by the taxpayer with TPO on 16.11.2005 (wrongly

recorded as 16.11.2006 by the A.O).

13.4 After taking note of the submissions made by the taxpayer before the

TPO, the Assessing Officer concluded that taxpayer, “has not furnished any

comparable data with respect to the international transactions where ‘CUP’

method is used to determine the arm’s length price. The actual working,

details of the comparable data and financial information used in applying the

CUP method was not furnished.” Hence the documentation filed by the

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taxpayer on 16.11.2005 was quite inadequate and did not satisfy the

statutory requirement as per Rule 10D.

13.5 The taxpayer further failed to give backup documents/agreements on

the basis of which cost plus method was applied. It failed to furnish

comparable data of similar transactions undertaken by comparable in a

similar industry. Hence documentation was incomplete.

13.6 As regards Transactional Net Margin Method (TNMM) applied by the

taxpayer, the Assessing Officer has recorded as under:

“III. Transactional Net Margin Method (TNMM):

24. During the year under reference there are major international transactions termed as Export of Wheat and Merchanting trade and the functional analysis of which is mentioned at page 25 and selection of Transactional Net Margin Method as method for transfer pricing at page 39 of document-I dated 16.11.2005. The assessee has taken itself as the tested party and has stated its transactions to be at arm’s length by selection of comparables from the Capitaline database. What the assessee has mentioned is merely a search process through which it has attempted to identify a set of comparables. In the conclusion at page 46 of document-I, the assessee has merely intimated that profit level indicator used for benchmarking international transaction is OPM which means operating margin over sales/turnover. It is concluded in this paragraph that OPM of assessee is 0.09 percent which is better than 20 final set of comparables having OPM at –6.95%. The names of comparables, their financial data, their working of OPM and the details of their functional profile was not available in this document. The working of operating profit margin of the assessee was also not available in documentation submitted by the assessee on 16.11.2005.

In totality, the approach is totally devoid of any merit whatsoever to draw any reasonable conclusion regarding the justification of the assessee having maintained arm’s length standards in the transactions it has proposed to cover under TNMM.”

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13.7 The Assessing Officer also noted the contention of the taxpayer that it

had furnished all documents under Rule 10D by 16.11.2005 and what was

furnished on 12.12.2005, were actually “additional backup papers”. The

Assessing Officer held the view that documents furnished on 12.12.2005

were not additional backup papers but were inextricably linked with

transactions and justification of their adherence to the arm’s length principle.

These were basic documents.

13.8 In respect of certain other international transactions, the Assessing

Officer observed as under:

“26. In case of other international transactions relating to Ocean Freight Savings, Cost Sharing Arrangements, Reimbursement of expenses paid, Contact extension / penalty charges and provision of support agency services, no method was adopted by the assessee to justify their arm’s length nature. Even if, the assessee considered that these transactions were outside the purview of any benchmarking on any method prescribed under the act, reasonable and attributable justifications ought to have been brought out by it in the Transfer Pricing report. No such analysis was made and again, the documentation maintained under Rule 10D in respect of these transactions was found incomplete.”

13.9 No penalty for payment of discount charges was imposed u/s 271G,

with the following observations:

“28. Though the assessee has not furnished the required documentation as prescribed under the Rule 10D, this issue (“Payment of discounting charges”) was not considered for the levy of penalty u/s 271G since the levy of penalty u/s 271AA for non maintenance of proper documentation was already considered against the assessee vide the order of even date.”

13.10. The Assessing Officer computed penalty u/s 271G at Rs

40,46,41,376/-, as under:

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“30. Hence, the total value of international transaction on which penalty u/s 271G is to be levied is Rs 20,23,20,68,788 (excluding the transaction relating to “Payment of discounting charges” for which penalty u/s 271AA is being levied). Amount of 2% of the same, amounting to Rs 40,46,41,376 is levied on the assessee company u/s 271G of the I.T. Act for non furnishing the information or document as required under section 92D of the Act read with Rule 10D of the I.T. Rules, 1962.”

14. The taxpayer challenged levy of above penalty in appeal before the

CIT (Appeals) and reiterated the submissions advanced before the Assessing

Officer which are summarized by the learned CIT (Appeals) in para 2 of the

impugned order. He has recorded his findings on various points in para 3

which are summarized hereunder:-

(i) The ld. CIT (A) has recorded that it is not necessary to initiate penalty

proceedings during the course of assessment proceedings. These can be

initiated at any time. The Assessing Officer can adjudicate and pass an

independent order u/s 271G

(ii) That penalty imposed was not time barred as limitation was to

commence from the date of issue of show cause notice. Dates are not

recorded.

(iii) That it was not necessary for Additional C.I.T. to provide opportunity of

being heard to the taxpayer before granting approval for the levy of penalty.

(iv) That penalty proceedings u/s 271G were different from penalty

proceedings u/s 271(1) where a “satisfaction” is required to be recorded

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during the course of assessment proceedings. There was no such requirement

u/s 271G.

(v) The learned CIT (Appeals) further recorded that penalty proceedings u/s

271G are different from penalty provisions of section 271AA. In the appeal

before him he was concerned with penalty imposed u/s 271G only.

(vi) On examination of various findings of the Assessing Officer at page 10,

11, 13 and in paras 21, 23, 24 and 29 of the order imposing penalty, the

learned CIT (Appeals) reached the conclusion that documents furnished

beyond due date i.e. after 21.11.2005 were not “supporting documents”.

These were vital in determination of ALP in international transaction. These

documents are prescribed under sub-rule (g), (h), (i) and (j) of Rule 10D of

Income-tax Rules. The appellant had failed to furnish the prescribed

documents / information within the due date and, therefore, penalty was

rightly levied and worked out. The penalty order was accordingly confirmed.

15. In these appellate proceedings, Shri C.S.Agarwal, learned counsel for

the taxpayer appellant vehemently contended that there was no default in

maintaining Information and documents prescribed as per Rule 10D.

Auditor’s report on Form 3CEB was also furnished in time. He further

contended that provisions of sub-section (3) of Section 92D are directory

and not mandatory. In the present case, no valid proceedings u/s 271G of

Income-tax Act were initiated. The penalty proceedings could have been

initiated during the course of assessment proceedings. It was further

necessary for the Assessing Officer to record, during the course of

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assessment proceedings and in the assessment order, that assessee had

committed a default u/s 271G of the Income-tax Act. This, according to Mr.

Agarwal, was implied requirement of law. The learned Commissioner had

also granted approval to the levy of penalty in a mechanical manner and,

therefore, such mechanical approval vitiated the entire proceeding. Shri

Agarwal placed reliance on the decision of Hon’ble Supreme Court in the

case of CIT vs. D.P.Sandu Bros. Chembur P.Ltd. (2005) 273 ITR 1. Shri

Agarwal further pleaded that Assessing Officer who made assessment order

had no jurisdiction to initiate or levy penalty. No default admittedly was

committed in the proceedings taken by him. The default, if any, was

committed before TPO, therefore only TPO had jurisdiction to initiate

penalty proceedings as he was also defined as Assessing Officer in the

statutory regulations. There is nothing in section 271G to show that

Assessing Officer could punish even for the default committed in

proceedings not before him.

15.1 Shri Agarwal stated that notice issued by the Assessing Officer was

invalid in law and otherwise vague. Shri Agarwal drew our attention to the

show cause notice issued to the taxpayer which is as under:

“It is noticed that you have failed to furnish the information or documents as required under sub-section (3) of Section 92D….”

It was argued that in fact no show cause notice for purported default

allegedly committed under clauses (g), (h), (i), (j) of Rule 10D was ever

issued. The show cause notice issued is highly vague and non specific of the

charge to which the taxpayer was expected to respond. In fact two show

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cause notices under sections 271AA and 271G contradicted each other were

issued. Shri Agarwal relied upon decision of Supreme Court in Reckitt &

Colman of India Ltd. vs. Collector of Central Excise 1996 (88) E.L.T.

641 wherein their Lordships have observed as under:

“10. There is no allegation of the respondents being parties to any arrangement. In any event, no material in that regard was placed on record. The show cause notice is the foundation on which the department has to build up its case. If the allegations in the show cause notice are not specific and are on the contrary vague, lack details and/or unintelligible that is sufficient to hold that the noticee was not given proper opportunity to meet the allegations indicated in the show cause notice. In the instant case, what the appellant has tried to highlight is the alleged connection between the various concerns. That is not sufficient to proceed against the respondents unless it is shown that they were parties to the arrangements, if any. As no sufficient material much less any material has been placed on record to substantiate the stand of the appellant, the conclusions of the Commissioner as affirmed by the CEGAT cannot be faulted.”

15.2 Shri Agarwal also relied upon decision of Supreme Court in the case

of Hindustan Polymers Co. Ltd. vs. Collector of Central Excise, Guntur

1999 (106) E.L.T. 12.

15.3 Shri Agarwal also contended that penalty in the present case was

levied on a different footing than what assessee was asked to respond as per

show cause. Principles of natural justice were also vitiated in this case. Shri

Agarwal also submitted that as per settled proposition of law, penalty

provisions are required to be strictly construed.

15.4 In support of contention that penalty proceedings are to be initiated

during the course of assessment proceedings, Shri Agarwal relied upon

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decision of jurisdictional High Court in the case of CIT vs. Sardar Amarjit

Singh 132 ITR 365 (Del), wherein it has been held as under:

“There is also another aspect to s.275. It also contains implicitly a limitation that the penalty proceedings should be commenced before the completion of the assessment….”

He also relied upon decision of Ahmedabad High Bench of Income-tax

Appellate Tribunal in the case of H.Ajitbhai& Co. vs. ACIT 45 ITD 262.

15.5 In support of contention that before initiation, no satisfaction was

recorded that default in terms of section 271G was committed in the

assessment proceedings or in the assessment order, Shri Agarwal drew our

attention to the assessment order and also the finding of learned CIT

(Appeals) in para V, page 7 of his order. As Assessing Officer has failed to

record his satisfaction regarding initiation of penalty proceedings u/s 271G

in his assessment order, therefore, subsequent initiation of penalty

proceedings are void ab initio and totally vitiated in law. For above

proposition, Shri Agarwal relied upon the following decisions:

(i) D.M.Manasvi vs. CIT 86 ITR 557 (SC),

(ii) CIT vs. S.V.Angidi Chettiar 44 ITR 739 (SC),

(iii) CIT vs. Mayar India Ltd. 142 Taxman 230 (Del) (2005),

(iv) CIT vs. Ram Commercial Enterprises Ltd. 246 ITR 568 (Del),

(v) Diwan Enterprises vs. CIT 246 ITR 571 (Del),

(vi) CIT vs. B.R.Sharma 275 ITR 303 (Del),

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(vii) CIT vs. Vikas Promoters (P) Ltd. 277 ITR 377 (Del),

(viii) Saroop Lal Adlakha vs. DCIT 97 ITD 6 (Del ITAT),

(ix) CIT vs. Super Metal Re-Rollers 265 ITR 82 (Del).

He submitted that above mentioned decisions were in the context of section

271(1)(c), yet the ratio of these judgments was equally applicable u/s 271G.

15.6 Shri Agarwal also attacked reference made by the Assessing Officer

to TPO u/s 92CA(1) as illegal and not in accordance with law, yet when his

attention was drawn to binding decision of Full Bench in the case of Aztech

Software & Tech Ltd. vs. ACIT 107 ITD 141 ™, he did not further

address on this aspect.

15.7 The show cause notice is verbatim reproduction of penalty provision

as laid in section 271G without application of mind and without specifying

the nature of default. Such a notice is clearly illegal and for this proposition,

Shri Agarwal relied upon decision of Hon’ble Supreme Court in the case of

Amrit Foods vs. Commissioner of Central Excise UP 2005 (190) ELT

433, wherein their Lordship observed as under:

“The revenue has preferred an appeal from the order of the Tribunal setting aside the imposition of penalty under Rule 173Q of the Central Excise Rules, 1944. The Tribunal has set aside the order of the Commissioner on the ground that neither the show cause notice nor the order of the Commissioner specified which particular clause of Rule 173Q had been allegedly contravened by the appellant. We are of the view that the finding of the Tribunal is correct. Rule 173Q contains six clauses the contents of which are not same. It was, therefore, necessary for the assessee to be put on notice as to the

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exact nature of contravention for which the assessee was liable under the provisions of the 173Q. This not having been done the Tribunal’s finding cannot be faulted. The appeal is, accordingly, dismissed with no order as to costs.”

He also relied upon decision of Hon’ble Madras High Court in the case of

B.Lakshmichand v. Government of India 1983 (12) ELT 322 wherein it

was held that no penalty could be validly imposed unless specific clause is

quoted and show cause notice must contain specific allegations and the

amount of duty payable. He also relied upon decision of Hon’ble Delhi High

Court in the case of CIT vs. Ajay Hari Dalmia 157 ITR 145 (Del).

15.8 Shri Agarwal also argued that the Assessing Officer contradicted

himself by issuing notice u/s 271AA and 271G of the Income-tax Act. If no

accounts or documents were maintained as alleged, then there was no

question of producing them. The learned counsel’s submission was as under:

“(iii) It would be apparent from the said two notices that the ACIT without specifying, in respect whereof Appellant had failed to furnish information or documents and in respect whereof the Assessee had failed to keep and maintain information and documents, has directed the Assessee to show cause, why penalty be not imposed under two independent different statutory provisions namely 271G and 271AA of the Act and as such notices were vague and contradictory. Further it is submitted that the order of assessment made by the assessing Officer (copy placed at page 1-9 of paper book-1) nowhere shows that there was any such failure as was alleged by him in his show cause notices.”

15.9. Shri Agarwal relied upon the case of Smt. Ramilaben Ratilal

Shah vs. ACIT 100 Taxman (Mag) 338, a decision of Ahmedabad Bench

of the Income-tax Appellate Tribunal wherein it was held as under:

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“if the Assessing Officer is not precise about the charge while issuing the show cause notice for initiating the penalty proceedings, the penalty levied is liable to be cancelled on this score alone, since the very issuance of the show-cause notice initiating the penalty proceedings, is invalid.”

16. Shri Agarwal stated that even on merit there was no justification to

impose any penalty recording that the taxpayer appellant had failed to

furnish information or documents required by the statutory provision. As is

clear from order, penalty has been levied for furnishing documents found to

be “inadequate” and it has been held that documents filed on 16.11.2005

were insufficient which insufficiency was rectified by letters filed on

12.12.2005 and 23.12.2005. However, no such specific “inadequacy” was

mentioned in the show cause notice. In this connection, Shri Aggarwal in

support of above contention has drawn our attention to following

observations at page 14 of order u/s 271G:

“…… However as seen from the documentation filed by the assessee company vide submissions dated 16.11.2005 the documentation filed was quite inadequate…..”

It is clear from record that Assessing Officer was totally unspecific besides

being unclear in respect of the default allegedly committed by the taxpayer.

This is evident from Assessing Officer’s observations which are different

and changing in different parts of order u/s 271G.

16.1 Shri Agarwal further submitted that it is well settled law that an

opportunity of being heard must be real, effective and not illusionary. In the

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instant case, it is apparent that show cause notices were vague, unspecific,

contradictory and general in nature. Therefore, levy of penalty was totally

vitiated, so was its initiation. When objection on above account was raised

before the learned CIT (Appeals), he failed to address the above contention

regarding validity of the show cause notice. Shri Agarwal thus emphasized

contradiction in the penalty order and the show cause notice where it was

time and again stated that documents filed by the taxpayer by 16.11.2005

were inadequate (para 14 of penalty order u/s 271G) whereas in para 29 of

the same order, it is stated as under:

“As seen from the above paragraphs, the assessee company had not furnished proper documentation as required statutorily in Section 92D read with Rule 10D of the IT rules.”

In support of the contention that levy of penalty on a different footing than

one on which it is initiated would lead to inference that reasonable

opportunity was not afforded to the taxpayer and, therefore, penalty could

not be sustained. Shri Agarwal also relied upon decision of Supreme Court

in the case of CCE vs. Brindavan Beverages (P) Ltd. & Ors, which has

already been quoted.

16.2 Shri Agarwal then drew our attention to sub-section (2) of Section 274

of Income-tax Act providing that no order imposing penalty shall be made

unless assessee has been heard or has been given reasonable opportunity of

being heard. Further the penalty order must have prior approval of the Joint

Commissioner where penalty exceeds Rs 20,000/-. In the present case the

Additional Commissioner, Range-III granted approval in a mechanical

manner without affording any opportunity of being heard to the assessee.

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Therefore, order was bad in law. In support of his contention, Shri Agarwal

relied upon decision of Hon’ble Supreme Court in the case of

R.B.Shreeram Durga Prasad and Fatechand Nursing Das vs. Settlement

Commissioner (IT and WT) and Another 176 ITR 169 where it has been

observed as under:

“the act in violation of principle of natural justice or a quasi-judicial act is void or of no value. The Hon’ble SC in so holding has relied on its judgment in the case of State of Orissa vs. Dr. (Miss) Binapani Dei (Reported at [1967] 2 SCR 625).”

16.3 Shri Agarwal also relied upon decision of Supreme Court in the case

of Rajesh Kumar & Others vs. DCIT & Others 287 ITR 91. He also

relied upon Circular No. 12 dated August 23, 2001 of Central Board of

Direct Taxes and drew our attention to the following observations:

“However, this is a new legislation. In the initial years of its implementation, there may be room for different interpretation leading to uncertainties…. While it is necessary to protect our tax base, there is a need to ensure that the tax-payers are not put to avoidable hardship in the implementation of these regulations.”

16.4 Shri Agarwal reiterated that findings of the Assessing Officer were

beyond jurisdiction and on appeal, learned CIT (Appeals) failed to consider

that Assessing Officer had exceeded his jurisdiction and commented upon

maintenance of documents under Rule 10D of Income-tax Rules in respect

of international transactions with AE’s in respect of which TPO did not

make any adverse observations on maintenance or production of documents.

Shri Agarwal further submitted that, In respect of certain international

transactions such as Ocean Freight Savings, Cost sharing arrangements,

reimbursement of expenses paid, contract extension, provision of

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support agency services, etc., no observations on deficiency on filing of

documentation have been made by the TPO. On the other hand, the AO

has not only commented upon maintenance of documentation even in

respect of such transactions but has also levied penalty on the same,

which in any case should not have been levied. Shri Agarwal further

submitted, that the TPO while computing the Arm’s length price in

respect of the international transactions entered into by the appellant

has not considered any fresh evidence but has merely relied upon the

documents / records furnished by the appellant during the course of

transfer pricing proceedings. This fact is conclusive enough to indicate

that proper documentation, including supporting documentation, were

maintained by the appellant and the same were made available to the

TPO as and when called for to enable him to compute the arm’s length

price in respect of the international transaction entered into by the

appellant.

16.5 Shri Agarwal further argued that provisions of Section 271G can

be invoked only in a case where prescribed information and documents

are not furnished within the prescribed time. He drew our attention to

provision of section 92D(3) and 271G and argued that u/s 92D(3), the

Assessing Officer or the CIT (Appeals) has discretion to call for

information, documents as prescribed under section 92D(1) read with Rule

10D in the course of any proceedings under the Act. If the taxpayer fails to

furnish prescribed documents within the prescribed period of 30 days or 60

days as envisaged in the statutory provision, the penalty can be imposed.

Shri Agarwal argued that question of invoking above provision cannot arise

as there was no default by the taxpayer as T.P.O. never exercised his power

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u/s 92D(3). Shri Agarwal referred to TPO’s first notice and detail of the

documents summoned from him. The above notice, according to Shri

Agarwal, was not in spirit of the statutory provision. On the information

called, Shri Agarwal submitted that by Sl.No.3 the TPO has called for

“all” the information which has been maintained by the appellant in

relation to the international transactions. He submitted that the

documentation requirements under Rule 10D are huge and cast onerous

documentation responsibilities upon the appellant. A perusal of rule

10D of the rules would show that the data required to be maintained is

huge and can be considered as equivalent to separate and additional

books of account.

Shri Agarwal also referred to provision of section 142(1)(ii) and 143(3)

that even for purposes of regular assessment, the Assessing Officer has

to exercise his discretion in a reasonable manner for assessment

purposes. The T.P.O. adopted unreasonable and illegal approach.

Shri Agarwal further argued that it is clear from the order of the TPO dated

22.3.2006 that all documents were filed by the taxpayer. The TPO has

recorded as under:

“… In response to notice u/s 92CA, the authorized representative of the assessee appeared from time to time. The documentation under Rule 10D of the Income-tax Rules was submitted and placed on record.”

16.6 Shri Agarwal further submitted that CIT (Appeals) failed to appreciate

that no penalty u/s 271G was leviable as all information and documentation,

as per the provision of Rule 10D, were furnished. Shri Agarwal also

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provided us a chart regarding happening on each date of hearing before the

TPO from 22nd September, 2005 to 23rd December, 2005. Shri Agarwal

referred to reply letter dated 16.11.2005 filed before TPO to show that there

was a bonafide attempt to comply with provision of section 92D read with

Rule 10D of the Income-tax Act. It was accordingly contended that all

information / documents prescribed by section 92D of Income-tax Act read

with Rule 10D were duly furnished vide letter dated 16.11.2005 and only

additional information and voluminous back up documents were furnished

to TPO vide letters dated December 12, 2005 and December 23, 2005. The

taxpayer from time to time cooperated with the TPO.

16.7 Shri Agarwal in the alternative and without prejudice to above

submissions, submitted that the implementation of transfer pricing policy is

at initial stage and the CBDT itself has stated that it would not put taxpayers

to avoidable hardships in the implementation of these regulations. It is

submitted that documents were filed as per the understanding of the new law

by the taxpayer and as per the advice received by the taxpayer from time to

time relating to transfer pricing regulations. There was no malafide intention

on the part of the assessee to commit any default. The default, if any, of few

days could not be said to be without a reasonable cause.

16.8 Shri Agarwal further submitted that plea of a reasonable cause

before the Assessing Officer was raised in letter dated May 18, 2006 as

under:

“Despite significant movement of its key finance /accounting personnel responsible for coordinating, collating and compiling the information / documents maintained by the various business

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departments, the assessee extended complete cooperation in the assessment proceedings. To place on record, the Country Finance Controller left the organization on October 25, 2005 and a new Controller was hired who joined the organization on November 7, 2005, and was thus uninitiated in respect of the subject assessment proceedings. The new Controller is based out of the assessee’s office in Pune. Further, the position of Manager (Corporate Accounts) fell vacant, and was filled on September 1, 2005.”

It was again reiterated in reply dated August 29, 2006 that alleged delay had

occurred on account of a reasonable cause and in the absence of country

financial controller. However, Assessing Officer imposed penalty without

making any adverse comment on the pleaded cause. The learned CIT

(Appeals) in appellate proceedings also did not record any adverse finding

on the cause pleaded and explained by the taxpayer. Therefore, even if the

alleged failure was proved, no penalty is exigible or sustainable as failure

took place on account of a reasonable cause. The Assessing Officer and

learned CIT (Appeals) have erred both on facts and in law in levying and

upholding penalty without recording a finding on the reasonable cause. Shri

Agarwal, in this connection, relied upon the decision of Hon’ble Supreme

Court in the case of Hindustan Steel Ltd vs State of Orissa 83 ITR 26

wherein it has been observed as under:

“Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute.”

In the case of Woodward Governor India Pvt.Ltd. vs. CIT & Others 253

ITR 745(Del) wherein, in the context of Section 271C (penalty for failure to

deduct tax at source), the Hon’ble Court held as under:

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“Levy of penalty under section 271C… is not automatic. In order to bring in application of Section 271C, in the backdrop of the overriding non obstinate clause in Section 273B, absence of reasonable cause, existence of which has to be established, is a sine qua non. Before levying penalty, the concerned officer is required to find out that even if there was any failure to deduct tax at source, the same was without reasonable cause … the cause shown has to be considered and only if it is found to be frivolous, without substance or foundation, would the prescribed consequences follow.”

In Azadi Bachao Andolan vs. Union of India [2001] 252 ITR 471 (Del), it

is explained that reasonable cause can be reasonably said to be a cause

which prevents a man of average intelligence and ordinary prudence, acting

under normal circumstances, without negligence or inaction or want of bona

fides.

The Apex Court in Collector vs. P.Mangamma [2003] 4 SCC 488, while

interpreting the word “reasonable” has observed as follows (headnote):

“It would be hard to give an exact definition of the word ‘reasonable’. Reason varies in its conclusions according to the idiosyncrasy of the individual and the times and circumstances in which he thinks. The reasoning which built up the old scholastic logic stands now like the jingling of a child’s toy. But mankind must be satisfied with the reasonableness within reach; and in cases not covered by authority, the decision of the judge usually determines what is ‘reasonable’ in each particular case; but frequently reasonableness, ‘belongs to the knowledge of the law, and therefore, to be decided by the courts’. An attempt to give a specific meaning to the word ‘reasonable’ is trying to count what is not a number and measure what is not space. It means prima facie in law reasonable in regard to those circumstances of which the actor, called upon to act reasonably, knows or out to know. It is impossible a priori to state what is reasonable as such in all cases. You must have the particular facts of each case established

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before you can ascertain what is reasonable under the circumstances”.

17. Shri Agarwal further submitted that keeping the above principles in

mind, it is evident in the instant case, the appellant had explained that

despite significant movement of its key finance/ accounting personnel

responsible for coordinating, collating and compiling the information/

documents maintained by the various business departments, the

appellant extended complete cooperation in the assessment proceedings.

The Country Finance Controller left the organization on 25.10.2005 and

a new Controller was appointed who joined the organization on

07.11.2005 and was thus unfamiliar with the instant assessment

proceedings. The new Controller is based out of the appellant’s office in

Pune. Further, the position of Manager (Corporate Accounts) fell

vacant, and was filled on 01.09.2005. Thus, even for the sake of an

argument it is presumed that the appellant furnished a part of the prescribed

information / documents only after the statutorily prescribed deadline of 60

days, the above facts would, in terms of Section 273B of the Income-tax

Act, would constitute reasonable cause for failure to do so. The delay too

was rectified within 10 days of intimation of the same from the TPO.

17.1 As such the appellant humbly submits that, it has extended its full

cooperation in the Transfer Pricing assessment proceedings initiated in its

case under section 92CA of the Income-tax Act, by way of furnishing all the

information / documents / clarifications to the TPO, (inspite of the fact that

there was significant movement of key finance personnel responsible for

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maintaining these records), as and when called for, and thus, there was total

absence of mens rea in this case.

18. The submissions of counsel for the assessee were opposed by Shri

L.M.Pandey, learned Departmental Representative appearing for the

Revenue. It was contended that taxpayer’s submission that notice issued u/s

271G was without jurisdiction, is without any substance. In this connection,

Shri Pandey drew our attention to provisions of section 271G of the Income-

tax Act. He argued that Assessing Officer is within his jurisdiction to issue

notice under the above provision as assessment proceedings were finalized

by him and assessment was made by him. He argued that legislative

provision on the above aspects was clear and unambiguous. Explanation to

section 92CA clarifies that TPO would be an Assessing Officer for purposes

of section 92C and section 92D of the Act. The TPO is to compute ALP by

application of most appropriate method. He further argued that section 92C

and 92CA make it clear that when ALP is determined by Assessing Officer

u/s 92C(3), the Assessing Officer may recomputed the total income of the

taxpayer having regard to ALP so determined. Shri Pandey emphasized that,

it is aptly clear that the provisions of S.92C are expressly available to

the A.O and once a reference is made these provisions up to the

determination of ALP is relayed to the TPO.

18.1 Shri Pandey further argued that T.P.O. has been given power u/s

92CA to determine the ALP only on a reference made by the A.O. The TPO

can use powers u/s 92C and Section 92D which are relayed to him for

determining ALP. He has to record whether the documents prescribed were

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‘filed’ or ‘not filed’ within the prescribed statutory period. The penalty u/s

271G is to be initiated by the authority who is empowered to levy the

penalty which is Assessing Officer.

18.2 Shri Pandey further contended that it was not right on the part of the

taxpayer to contend that taxpayer did not commit any default before the

Assessing Officer and, therefore, his action in imposing penalty was not in

accordance with law. Shri Pandey once again placed reliance on statutory

provision of section 92D which authorizes the TPO and the Assessing

Officer to summon information and documents from the taxpayer. Shri

Pandey further contended that authorities of Assessing Officer and TPO may

be different in form but in substance they are one in this interregnum.

18.3 Shri Pandey further contended that claim of the taxpayer that notice

issued by TPO was vague and invalid is also without any substance. Shri

Pandey argued that once Assessing Officer had made order of the TPO as

part of his assessment order, entire finding and recording of TPO was

migrated to and became part of assessment order which was part of AO’s

satisfaction and finding. The TPO in the order had made clear as to which

documents the taxpayer had failed to furnish. Besides the taxpayer was

provided adequate opportunity to appear before the A.O and contest the

proposed penalty. According to Shri Pandey, the specific documents and

default attached thereto were explicitly explained to the taxpayer which is

clear from the penalty order. Accordingly, it was submitted that there was no

defect in the show cause notice.

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18.4 Shri Pandey further submitted that it is not correct on the part of the

taxpayer to contend that default in question was merely a technical or venial

default. The taxpayer failed to comply with statutory provision and file

documents within the specified time and thus committed a default u/s 271G

of the Income-tax Act. The taxpayer deliberately and in defiance of statutory

provisions refused to file information and documents sought from the

taxpayer to show the basis of its claim that international transactions were at

arm’s length. Thus from act and conduct of the taxpayer mens rea on the part

of the taxpayer is clearly established.

18.5 Shri Pandey also refuted the claim of the taxpayer that as documents

were furnished before culmination of proceedings before the TPO, no

default was committed. It was stated that documents and information was to

be furnished within the time limit as fixed under the Statute and, therefore,

penal provisions would be attracted if statutory time limit is not complied

with. The burden to establish transactions were carried at arm’s length is on

the taxpayer. It is for the taxpayer to establish and furnish requisite details

on the application of appropriate method for determination of ALP and

justify the same by producing relevant information and documents. The

whole scheme relating to determination of tax liability, under the transfer

pricing are sequential steps of the legislative process and, therefore, default

in furnishing of documents have a direct bearing. This has been emphasized

by the Special Bench of ITAT in the case of Aztec Software & Technology

Services Ltd. vs. Asstt. CIT 107 ITD 141 (Bangalore) (SB). Shri Pandey,

therefore, argued that intentions of the Legislature in this issue are quite

clear. The limitation or time, within which documents are to be filed, could

not be altered.

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18.6 Shri Pandey also argued that non mention of any specific clause of

Rule 10D in the show cause notice did not affect the validity of the notice.

The taxpayer was allowed opportunities and further hearings and all details

were made known to the taxpayer as is evident from the penalty order.

18.7 Shri Pandey also argued that Assessing Officer considered all pleas

advanced by the taxpayer and its reply was found unsatisfactory. The CIT

(Appeals) also dealt in para 3(ix) of its order with plea of reasonable cause

taken by the taxpayer. It was, therefore, not correct that plea of the taxpayer

relating to reasonable cause was not discussed.

18.8 Shri Pandey also challenged the argument of the taxpayer that

documents filed after 16.11.2005 were merely supporting documents. The

orders and annexures of the TPO’s order in uncertain terms spell out that

documents filed later should have been filed within the due time as in the

absence of these documents the justification put forward by the taxpayer for

ALP could not be understood or verified.

18.9 It was also wrong to claim that entire international transactions could

not be made basis of levy of penalty. Shri Pandey justified the quantum of

penalty imposed as the taxpayer has failed to furnish documents and

information in respect of all the 24 international transactions. Hence no fault

could be found with the basis of the penalty.

19. Shri Pandey further referred to impugned order of CIT (Appeals)

wherein he has pointed out that under the provisions of section 274(2) of the

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Act, no responsibility is cast on the Assessing Officer to provide opportunity

of being heard to the taxpayer before making a reference to the TPO.

Likewise, such opportunity is not to be provided to the taxpayer before

approval for levy of penalty is granted. The arguments advanced on behalf

of the taxpayer were devoid of any substance, Shri Pandey added.

19.1 Shri Pandey further argued that it was wrong on the part of the

taxpayer to contend that principles of natural justice were violated in this

case. Here material relied upon by the Assessing Officer for invoking

provisions of section 271G was quoted from the order and record of the

TPO. This material was duly put to the taxpayer before levy of penalty. No

material against the taxpayer was used without reference to the taxpayer.

Thus all the principles of natural justice were followed and fully satisfied.

Shri Pandey relied upon Circular No. 12 dated 23.08.2001 of the Central

Board of Direct Taxes specifying 31st August,2001 as cut out date up to

which leverage could be provided for formalities relating to transfer pricing.

The default in the present case was committed after the above date. There

was no respite or privilege granted to the taxpayer to take shelter and claim

relief.

19.2 Shri Pandey also gave para-wise reply to the taxpayer’s synopsis in

the written submissions contained in Volume-II of the paper book. He

argued that contention of the assessee that only insufficient documents were

given till the time allowed and supporting documents were given later on

and that penalty was levied without valid initiation, were all incorrect

submissions. The order of the TPO had amalgamated in the order u/s 143(3)

by clear remarks of the Assessing Officer inasmuch as it became a part of

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the said order. Thus there was satisfaction of the Assessing Officer relating

to breach of time in submitting documents.

19.3 Shri Pandey further argued that section 275 of the Act lays down the

time limit for passing penalty order and there is no time for initiation of

penalty proceedings. He further relied upon decision in the case of CIT vs.

Madan Roller Flour Mills [1999] 71 ITD 274 (Asr.) wherein it was held

that penalty proceedings were independent of assessment proceedings and,

there was no need to initiate them before the completion of the assessment.

Shri Pandey also referred to decision of Guwahati High Court in the case of

Assam State Warehousing Corporation vs. cIT [2007] 288 ITR 25. Shri

Pandey also cited cases where penalty proceedings are initiated u/s 271(1)(c)

on the basis of prima facie adjustments and without issuing notice u/s 143(2)

of Income-tax Act. He emphasized that initiation of penalty proceedings can

be totally independent of assessment proceedings.

19.4 Shri Pandey further referred to section 275 providing for limitation for

imposing penalty. Shri Pandey contended that limitation issues were serious

issues and are governed by express statutory provisions and not by any

implied law. Initiation and imposition of penalty provisions are governed by

express statutory provisions. One penalty provision cannot be blindly

applied to the other penalty provision.

19.5 Shri Pandey also argued that show cause notice issued by the

Assessing Officer u/s 271G was quite valid. He submitted that no format of

show cause notice has been prescribed under the Act. Therefore, Assessing

Officer is only required to quote section under which the show cause notice

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is issued. In case the default is not clear to the taxpayer, he may make

necessary correspondence with the Assessing Officer to clarify any issue. In

this case, copy of order of Assessing Officer and of TPO as also report of the

TPO was duly furnished to the taxpayer. There is no material on record to

show that taxpayer was unaware of the nature of default he was required to

meet. The taxpayer raised plethora of arguments to support its contention on

purported default. The taxpayer was allowed personal hearings and after

considering arguments and material on record, penalty was imposed.

Therefore, technical objection of the taxpayer was devoid of merit.

20. Shri Pandey also challenged taxpayer’s submissions that findings of

the Assessing Officer were beyond jurisdiction. As stated earlier, the

Transfer Pricing Officer and the Assessing Officer had found that statutory

documentation were not filed in time and, therefore, taxpayer committed

default u/s 271G in respect of international transactions carried by the

taxpayer with its AEs. It was wrong on the part of the taxpayer to contend

that some international transactions such as ocean freight savings, cost

sharing arrangements, reimbursement of expenses paid and provision of

support agency services on which no observation on deficiency was made by

the TPO. All these were international transactions and ought to have been

benchmarked on a particular method for determination of the ALP. Even in

respect of these transactions, taxpayer failed to furnish information and

documents within the prescribed time. As late as on 20th December, 2005 it

supplied working of TNMM in respect of support agency services which

were required to be given in the original documentation filed in November,

2005. Documents relating to transactions on which CUP method was applied

were furnished as late as on 23.12.2005. Therefore, TPO rightly commented

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on totality of the transactions and contention of the taxpayer that only in

respect of part of the international transactions, default was committed, was

without substance. From record, it is clear that taxpayer failed to furnish

documents, it was required to furnish u/s 92D(3) of the Income-tax Act and,

therefore, committed a default u/s 271G. The learned Departmental

Representative also distinguished the cases cited by the taxpayer.

21. We have given careful thought to the rival submissions of the parties.

We have also examined relevant statutory provisions and the case law cited

before us. In the case of Aztec Software & Technology Services Ltd. 107

ITD 141 (Bangalore) (SB), the Special Bench of the Tribunal, after

considering parallel transfer pricing regulations in large number of countries,

as also Indian Regulations on the subject, observed as under:

“132. A dispassionate study of provisions of various countries on Burden of Proof, would show, the following fundamental features:

(i) That the burden to establish that international transaction is carried at ALP, is on the taxpayer who is to disclose all the relevant information and documents relating to prices charged and profit earned with related and unrelated customer.

(ii) If the Assessing Officer has determined an ALP, other then the price declared by the assessee, AO has to prove that the price determined by him is reliable and reasonable and confirms the statutory requirement unless the case is covered by situation No.(iii) below.

(iii) In case of failure on the part of the taxpayer to comply with the statutory provisions, the tax authorities would have to determine the ALP. In such a situation, burden of proof on tax authorities is much reduced.

133. Having regard to the statutory provisions, particularly the mandate of section 92(1) and 92D read with relevant rules, we hold

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that it is obligatory on the part of the taxpayer to furnish information relating to controlled international transactions, select a suitable method for determination and furnish ALP of such international transactions carried by it and give basis and supporting authentic evidence of ALP and adjustments made. The Taxpayer has further to cooperate in the determination of the ALP by the tax authorities by furnishing all relevant information. The tax authorities in cases where they are of the opinion that ALP has not been correctly determined by the taxpayer, can substitute their own ALP on the basis of material or information furnished by the assessee or collected by them. However, such ALP has to be determined having in mind provisions of sections 92 and 92C and other Rules and regulations. While determining ALP, tax authorities are bound to follow principles of natural justice and be fair and reasonable to the taxpayer. Any material collected to be used against the taxpayer is to be put to tax payer to explain. Having regard to the purpose of the legislation and application of similar enactment world over, it must further be held that adjustments made on account of ALP by tax authorities can be deleted in appeal only if the appellate authorities are satisfied and records a finding that ALP submitted by the assessee is fair and reasonable. Merely by finding faults with the transfer price determined by the revenue authorities (A.O. / TPO), addition on account of “adjustments” cannot be deleted. This is because the mandate of section 92(1) is that in every case of international transaction, income has to be determined having regard to ALP. Therefore, unless ALP furnished by the taxpayer is specifically accepted, the appellate authorities on the basis of material available on record has to determine ALP itself. Subject to statutory provisions, Appellate authorities can direct lower revenue authorities to carry this exercise in accordance with law. The matter cannot be left hanging in between. ALP of international transaction has to be determined in every case.

134. x x x x x

135. On consideration of the relevant provisions, it is evident that in the process of determining Arm’s Length Price, the first important factor to consider is the specific characteristics of services rendered both in the international transaction as also in the uncontrolled transaction. Next important aspect required to be considered is amount of assets employed, risk involved, both in controlled and

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uncontrolled transactions. If there are such differences between transactions taken for comparison, which are likely to affect the price or cost charge etc in the open market then reasonable and accurate evaluation is to be done and adjustment made. Reliability of uncontrolled transaction would depend upon the degree of comparability. The uncontrolled transaction may not be taken “as comparable” if there are such material differences as can not be adjusted. If data found satisfy above requirements then further proceedings to find the most appropriate method, best suited to the facts and circumstances of a particular international transaction is to be selected. In other words, most appropriate method would be the method which provides most reasonable results having regard to the data available for determining arm’s length price. If there are more than one ALPs determined on the application of most appropriate method then arithmetical mean of such prices or price at option of the assessee within 5% variation is to be adopted (Proviso to section 92C(2) ).”

22. As in the present case, question of validity of levy of penalty of Rs

40,46,41,376/- imposed u/s 271G for not furnishing information and

documents within the time specified in notice u/s 92D(3) is under challenge,

we will examine the Scheme relating to maintenance of information and

documents and their furnishing before the revenue authorities for

determining the ALP. The Assessing Officer / TPO needs information and

documents on controlled and uncontrolled international transactions and

other relevant evidence. The taxpayer, under the legislation, is rightly

thought to be the best person to supply the relevant information being a

party to the international transaction. The information and documents are

prescribed as per Rule 10D of Income-tax Rules, quoted hereafter. In the

column No.2 on the right are the form/stage where particular information

under specific clauses is required to be given.

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Rule 10D. Information and documents to be kept and maintained under section 92D.

“(1) Every person who has entered into an Time/form when international transaction shall keep and maintain information is to the following information and documents, namely:- be furnished as

per clause. No.1 No.2

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

(a) In the audit report on form 3CEB.

(b) a profile of the multinational group of which the assessee enterprise is a part along with the name, address, legal status and country to 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;

(b) – same –

(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;

(c) – same -

(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;

(d) In Form 3CEB in the audit report or u/s 92D(3) or u/s 92CA(2)

(e) a description of the functions performed, risks (e) – same -

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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;

(f) – same –

(g) a record of uncontrolled transactions taken into account for analyzing 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;

(g) – same –

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

(h) – same –

(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;

(i) – same -

(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

(j) – same –

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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;

(k) – same –

(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;

(l) – same -

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.

(m) – same -

(2) Nothing contained in sub-rule (1) shall apply in a case where the aggregate value, as recorded in the books of account, of international transactions entered into by the assessee does not exceed one crore rupees :Provided that the assessee shall be required to substantiate, on the basis of material available with him, that income arising from international transactions entered into by him has been computed in accordance with section 92.(3) The information specified in sub-rule (1) shall be supported by authentic documents, which may include the following :

(a) official publications, reports, studies and data bases from the Government of the country of residence of the associated enterprise, or of any other country;

(b) reports of market research studies carried out and technical publications brought out by institutions of national or international repute;

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(c) price publications including stock exchange and commodity market quotations;

(d) published accounts and financial statements relating to the business affairs of the associated enterprises;

(e) agreements and contracts entered into with associated enterprises or with unrelated enterprises in respect of transactions similar to the international transactions;

(f) letters and other correspondence documenting any terms negotiated between the assessee and the associated enterprise;

(g) documents normally issued in connection with various transactions under the accounting practices followed.

(4) The information and documents specified under sub-rules (1) and (2), should, as far as possible, be contemporaneous and should exist latest by the specified date referred to in clause (iv) of section 92F:Provided that where an international transaction continues to have effect over more than one previous year, fresh documentation need not be maintained separately in respect of each previous year, unless there is any significant change in the nature or terms of the international transaction, in the assumptions made, or in any other factor which could influence the transfer price, and in the case of such significant change, fresh documentation as may be necessary under sub-rules (1) and (2) shall be maintained bringing out the impact of the change on the pricing of the international transaction.

(5) The information and documents specified in sub-rules (1) and (2) shall be kept and maintained for a period of eight years from the end of the relevant assessment year.”

22.1 Sub-rule (2) of Rule 10D provides that no record in books may be

maintained in case international transactions entered into by the taxpayer did

not exceed one crore rupees. Proviso to above sub-rule requires the assessee

to substantiate on the basis of material available with him that international

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transactions entered into by him have been computed in accordance with

section 92.

22.2 Sub-rule (3) of Rule 10D prescribe the documents which would be

needed to support the information. Here different clauses require different

type of supporting documents as briefly discussed herein below.

(a) refers to official publications, reports, studies and data basees from

the Government of the country of AE or any other country.

(b) require reports of market research studies carried out and technical

publications brought out by institutions of national or international

repute;

(c) requires price publications including stock exchange and

commodity market quotations;

(d) requires published accounts and financial statements relating to the

business affairs of the AEs.

Similar types of information are also mentioned clauses (e), (f) and (g).

22.3 Sub-rule (4) enjoins that information and documents specified in sub-

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

exist by specified date referred to in clause (iv) of section 92F.

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22.4 Sub-rule (5) prescribe the period for which information and

documents specified in sub-rules (1) & (2) are to be maintained. The period

specified is 8 years from the end of the relevant assessment year.

22.5 It is clear from the consideration of Rule 10D and its various sub-

rules, that documents and information prescribed under the above rule is

voluminous and it would only be in rarest cases that all the clauses of sub-

rules would be attracted. It is not possible to casually ask for information

under all the clauses. It is likely that in some cases the taxpayer need not

carry any analysis of functions performed, risk assumed and assets

employed; there may be an exactly similar uncontrolled transaction with

independent unconnected party to establish that transaction was an Arm’s

length transaction. In such a case, clause (e) of Rule 10D(1) would have no

application and no information under this clause need be maintained or

produced before tax authorities. Likewise, there might be no necessity to

carry economic analysis, take forecasts, budgets or other financial estimates

of business. International transaction involved may be of such a nature that

analysis and forecasts etc mentioned above have no connection or relevance

for the determination of ALP. Depending upon the nature of the transaction

question of application of assumptions, policies or price negotiations and,

therefore, of clause (k) of sub-rule (1) would arise. This is itself indicated in

the said clause by use of word ‘if any’. It is, therefore, clear that one or more

clauses of sub-rule (1) are applicable and not all clauses of the Rule in a

given case. It would all depend upon the facts and circumstances of the case

more particularly the nature of international transactions carried or services

involved.

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Likewise supporting documents, official publications, reports, market

research studies, technical publications of Government or other institute of

national or international repute, and all the documents mentioned in Rule

10D(3) may not be needed in case of every taxpayer. Stock exchange, price

publication or commodity, market quotations would only be relevant in

cases of international transactions involving stock or commodities. Such

information would be totally irrelevant in cases of transactions, say for

example relating to “intangibles”. Application of one or more clauses of sub-

rule (3) would depend upon facts involved in the international transactions.

Further, if official publications are needed in the case, other documents like

report, studies, and data from Government agencies mentioned in the same

clause might not be required. Information even in the same clause may be

alternative in some cases. It is evident from the information / documents

prescribed in sub-rules of Rule 10D that the taxpayer and the tax authorities

are to see what information and documents and from which particular clause

is relevant and therefore, needed for determining ALP. The consideration of

above aspect is material before issuing notice u/s 92D(3), if it is to serve its

purpose.

The above said prescribed information is gathered from the taxpayer

through various means and at different stages of assessment proceedings.

The initial or first information relating to international transactions is

gathered from the taxpayer in the prescribed audit report in Form 3CEB.

This report is required to be submitted along with the return of income as per

section 92E of the Act which is as under:-

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“Report from an accountant to be furnished by persons entering into international transaction.92E. Every person who has entered into an international transaction during a previous year shall obtain a report from an accountant and furnish such report on or before the specified date in the prescribed form duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed.”

23. Further information gathered through the prescribed Tax Audit Report

under the above section is as under:

3CEB REPORT FROM AN ACCOUNTANT TO BE FURNISHED UNDER SECTION 92E RELATING TO INTERNATIONAL TRANSACTION(S)

FORM NO. 3CEB

[See rule 10E]

Report from an accountant to be furnished under section 92E relating

to international transaction(s)

1. *I/We have examined the accounts and records of ............. (name and address of the assessee with PAN) relating to the international transactions entered into by the assessee during the previous year ending on 31st March ........

2. In *my/our opinion proper information and documents as are prescribed have been kept by the assessee in respect of the international transaction(s) entered into so far as appears from *my/our examination of the records of the assessee.

3. The particulars required to be furnished under section 92E are given in the annexure to this Form. In *my/our opinion and to the best of my/our information and according to the explanations given to *me/us, the particulars given in the annexure are true and correct.

...................

**Signed

Name ............................

Address ...........................

....................................

Membership No ...............

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Place : ............

Date : .............

Notes :

1. *Delete whichever is not applicable.

2. **This report has to be signed by -

(i) a chartered accountant within the meaning of the Chartered Accountants Act, 1949 (38 of 1949); or

(ii) any person who, in relation to any State, is, by virtue of the provisions in sub-section (2) of section 226 of the Companies Act, 1956 (1 of 1956), entitled to be appointed to act as an auditor of companies registered in that State.

ANNEXURE TO FORM NO. 3CEB

Particulars relating to international transactions required to be furnished under section 92E of the Income-tax Act, 1961

Part A

1. Name of the assessee :

2. Address :

3. Permanent account number :

4. Status :

5. Previous year ended :

6. Assessment year :

Part B

7. List of associated enterprises with whom the assessee has entered into international transactions, with the following details :

(a) Name of the associated enterprise.

(b) Nature of the relationship with the associated enterprise as referred to in section 92A(2).

(c) Brief description of the business carried on by the associated enterprise.

8. Particulars in respect of transactions in tangible property :

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A. Has the assessee entered into any international Yes/No transaction(s) in respect of purchase/sale of raw material, consumables or any other supplies for assembling/processing/manufacturing of goods/articles from/to associated enterprises ?

If 'yes', provide the following details in respect of each associated enterprise and each transaction or class of transaction :

(a) Name and address of the associated enterprise with whom the international transaction has been entered into,

(b) Description of transaction and quantity purchased/sold.

(c) Total amount paid/received or payable/receivable in the transaction -

(i) as per books of account,

(ii) as computed by the assessee having regard to the arm's length price.

(d) Method used for determining the arm's length price [see section 92C(1)]

B. Has the assessee entered into any international Yes/No transaction(s) in respect of purchase/sale of traded/finished goods ?

If 'yes' provide the following details in respect of each associated enterprise and each transaction or class of transaction :

(a) Name and address of the associated enterprise with whom the international transaction has been entered into.

(b) Description of transaction and quantity purchased/sold.

(c) Total amount paid/received or payable/receivable in the transaction -

(i) as per books of account.

(ii) as computed by the assessee having regard to the arm's length price.

(d) Method used for determining the arm's length price [see section 92C(1)]

C. Has the assessee entered into any international Yes/No transaction(s) in respect of purchase/sale of any other tangible moveable/immovable property or lease of such property ?

If 'yes' provide the following details in respect of each associated enterprise and each transaction or class of transaction :

(a) Name and address of the associated enterprise with whom the international transaction has been entered into.

(b) Description of the property and nature of transaction.

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(c) Number of units of each category of moveable/immovable property involved in the transaction.

(d) Amount paid/received or payable/receivable in each transaction of purchase/sale, or lease rent paid/received or payable/receivable in respect of each lease provided/entered into -

(i) as per books of account.

(ii) as computed by the assessee having regard to the arm's length price,

(e) Method used for determining the arm's length price [see section 92C(1)]

9. Particulars in respect of transactions in intangible property :

Has the assessee entered into any international transaction(s) Yes/No in respect of purchase/sale/use of intangible property such as know-how, patents; copyrights, licensees, etc. ?

If 'yes' provide the following details in respect of each associated enterprise and each category of intangible property :

(a) Name and address of the associated enterprise with whom the international transaction has been entered into.

(b) Description of intangible property and nature of transaction.

(c) Amount paid/received or payable/receivable for purchase/sale/use of each category of intangible property -

(i) as per books of account.

(ii) as computed by the assessee having regard to the arm's length price.

(d) Method used for determining the arm's length price [see section 92C(1)]

10. Particulars in respect of providing of services :

Has the assessee entered into any international transaction(s) in Yes/No respect of services such as financial, administrative, technical, commercial services, etc. ?

If 'yes' provide the following details in respect of each associated enterprise and each category of service :

(a) Name and address of the associated enterprise with whom the international transaction has been entered into.

(b) Description of services provided/availed of/from the associated enterprise.

(c) Amount paid/received or payable/receivable for the services provided/taken -

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(i) as per books of account.

(ii) as computed by the assessee having regard to the arm's length price.

(d) Method used for determining the arm's length price [see section 92C(1)]

11. Particulars in respect of lending or borrowing money :

Has the assessee entered into any international transaction(s) Yes/No in respect of granting/receiving loans/advances to or from associated enterprise ?

If 'yes' provide the following details in respect of each associated enterprise and each loan/advance :

(a) Name and address of the associated enterprise with whom the international transaction has been entered into.

(b) Nature of financing agreement.

(c) Currency in which loan/advance granted/received.

(d) Interest rate charged/paid in respect of each loan/advance.

(e) Amount paid/received or payable/receivable in the transaction -

(i) as per books of account.

(ii) as computed by the assessee having regard to the arm's length price.

(f) Method used for determining the arm's length price [see section 92C(1)]

12. Particulars in respect of mutual agreement or arrangement :

Has the assessee entered into any international transaction with Yes/No an associated enterprise or enterprises by way of a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises ?

If 'yes' provide the following details in respect of each agreement/arrangement :

(a) Name and address of the associated enterprise with whom the international transaction has been entered into.

(b) Description of such mutual agreement or arrangement.

(c) Amount paid/received or payable/receivable in each such transaction -

(i) as per books of account.

(ii) as computed by the assessee having regard to the arm's length price.

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(d) Method used for determining the arm's length price [see section 92C(1)]

13. Particulars in respect of any other transaction :

Has the assessee entered into any other international transaction Yes/No Yes/No not specifically referred to above, with associated enterprise ?

If 'yes' provide the following details in respect of each associated enterprise and each transaction :

(a) Name and address of the associated enterprise with whom the international transaction has been entered into.

(b) Description of the transaction.

(c) Amount paid/received or payable/receivable in the transaction -

(i) as per books of account.

(ii) as computed by the assessee having regard to the arm's length price.

(d) Method used for determining the arm's length price [see section 92C(1)]

...................

**Signed

Name ....................

Address ...................

Place : .............

Date : .............

Notes : **This annexure has to be signed by -

(i) a chartered accountant within the meaning of the Chartered Accountants Act, 1949 (38 of 1949); or

(ii) any person who, in relation to any State, is, by virtue of the provisions in sub-section (2) of section 226 of the Companies Act, 1956 (1 of 1956), entitled to be appointed to act as an auditor of companies registered in that State.".

1069 ]

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24. It is clear from above that name and addresses of taxpayer, its

associated concerns, nature of relationship with such concerns, brief

description of business and details of international transactions carried on

with the associated enterprises, besides the method used for determining

ALP in respect of each international transaction is required to be given in

the report.

24.1 The Assessing Officer must have the above report (3CEB) with him to

determine the question whether total value of the transactions is more or less

than Rs 5 crore (now enhanced to Rs 15 crore) to consider the question

whether determination of ALP is to be referred to the Transfer Pricing

Officer (TPO) or not. If the total value exceeds the prescribed limit, the

Assessing Officer has to refer the matter to the TPO.

24.2 It is, therefore, reasonable to presume that in every transfer pricing

case relevant information, along with Form 3CEB is available on record and

A.O / T.P.O is supposed to proceed with the basic and initial information of

international transactions carried by the taxpayer in the relevant period as

disclosed in form 3CEB. He is supposed to have specialized training and,

therefore, understand what job he is to perform for achieving the purpose of

the regulations.

24.3 It is clear from above discussion that information prescribed

under Rule 10D in different column is voluminous, alternative and it

would have to be seen as to what information, from which clause, is

required on the facts of the given case. Secondly, information from

certain clauses of Rule 10D is obtained in audit report on Form 3CEB

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required to be filed along with the return. Thirdly, the TPO before

proceeding to determine ALP has above basic and initial information of

international transactions carried by the assessee.

24.4 Armed with above initial information and when knowing details of

international transactions carried by the taxpayer and the method employed

to determine the ALPs of transactions, further proceedings are carried

towards determination of ALP. The relevant provisions of the scheme of

assessment are as under:-

“Computation of arm’s length price.

92C. (1) x x x x(2) x x x x

(3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that—(a)the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2); or(b)any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or(c)the information or data used in computation of the arm’s length price is not reliable or correct; or(d)the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D,the Assessing Officer may proceed to determine the arm’s length price in relation to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him:

Provided that an opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the arm’s length price should not be so determined on the basis of material or information or document in the possession of the Assessing Officer.”

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24.5 Where, on a reference, the TPO is to determine ALP of an

international transaction, Sub-sections (2), (3) abd (4) of section 92CA are

relevant and are reproduced below:

[Reference to Transfer Pricing Officer.92CA. (1) x x x x x (2) Where a reference is made under sub-section (1), the Transfer Pricing Officer shall serve a notice on the assessee requiring him to produce or cause to be produced on a date to be specified therein, any evidence on which the assessee may rely in support of the computation made by him of the arm’s length price in relation to the international transaction referred to in sub-section (1).(3) On the date specified in the notice under sub-section (2), or as soon thereafter as may be, after hearing such evidence as the assessee may produce, including any information or documents referred to in sub-section (3) of section 92D and after considering such evidence as the Transfer Pricing Officer may require on any specified points and after taking into account all relevant materials which he has gathered, the Transfer Pricing Officer shall, by order in writing, determine the arm’s length price in relation to the international transaction in accordance with sub-section (3) of section 92C and send a copy of his order to the Assessing Officer and to the assessee.

84b[(4) On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section 92C in conformity with the arm’s length price as so determined by the Transfer Pricing Officer.](The portion is highlighted to emphasize the scheme of the regulations)

Maintenance and keeping of information and document by persons entering into an international transaction.92D. (1) Every person who has entered into an international transaction shall keep and maintain such information and document in respect thereof, as may be prescribed86.(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 :

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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.

Penalty for failure to keep and maintain information and document in respect of international transaction.271AA. Without prejudice to the provisions of section 271, if any person fails to keep and maintain any such information and document as required by sub-section (1) or sub-section (2) of section 92D, the Assessing Officer or Commissioner (Appeals) may direct that such person shall pay, by way of penalty, a sum equal to two per cent of the value of each international transaction entered into by such person.]

Penalty for failure to furnish information or document under section 92D.271G. If any person who has entered into an international 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.]

Penalty not to be imposed in certain cases.273B. Notwithstanding anything contained in the provisions of 20[clause (b) of sub-section (1) of] 21[section 271, section 271A, 22[section 271AA,] section 271B 23[, section 271BA], 24[section 271BB,] section 271C, 25[section 271CA, ] section 271D, section 271E, 26[section 271F, 27[section 271FA,] 28[section 271FB,] 29[section 271G,]] clause (c) or clause (d) of sub-section (1) or sub-section (2) of section 272A, sub-section (1) of section 272AA] or 30[section 272B or] 31[sub-section (1) 32[or sub-section (1A)] of section 272BB or] 33[sub-section (1) of section 272BBB or] clause (b) of sub-section (1) or clause (b) or clause (c) of sub-section (2) of section 273, no penalty shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the said provisions if he proves that there was reasonable cause34 for the said failure.]

24.6 In the present case as we are concerned with levy of penalty u/s 271G

for failure to furnish information / documents required by sub-section (3) of

Section 92D, we may have a good look at the said provision. On

consideration of provisions of Section 92D(3), we find that above provision

can be applied in the following circumstances:

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(i) in the course of the proceedings under the Act before the Assessing

Officer or the Commissioner (Appeals).

(ii) Any documents or information prescribed under sub-section (1)

may be required.

(iii) required to be furnished under sub-section (3) within 30 days (as

extended by another 30 days) from the receipt of notice issued in this

regard.

Thus the Assessing Officer or Commissioner (Appeals), may require (from

any person) any information or document as may be prescribed. Word

‘any’ information or document cannot ordinarily mean ‘all’ the documents

prescribed under rule 10D. The word ‘required” is important as it rules out

option with the taxpayer and makes it obligatory to furnish the requisite

information.

It is clear from above that power under above section can be used in the

course of assessment proceedings i.e. in proceedings for determination of

ALP and only for requiring to furnish prescribed information or

documents under Rule 10D. It being a provision connected with procedure

to help an assessment must be purposefully construed. But regulation does

not provide any time or stage when power to issue notice is to be exercised.

However, scheme of assessment do indicate the stage at which it is to be

issued and the purpose, which is required to be achieved through the

issuance of such a notice. We have already noted what are the implications

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and effect of prescribed Rule 10D on the powers to be exercised under

section 92D(3). We have also noted that taxpayer has filed preliminary or

initial information of its ALP of international transaction when reference is

received by the TPO u/s 92CA(1).

24.7 The TPO is thereafter required to serve notice under sub-section (2) of

Section 92CA of the Act. The statutory scheme envisages that the TPO shall

serve a notice requiring the taxpayer to produce evidence in support of his

computation of ALP. Therefore an opportunity to prove that its ALP is

correct has to be allowed to the taxpayer. It is mandatory requirement of the

regulations. Thereafter notices u/s 92D(3) may be issued requiring the

taxpayer to furnish information on “specified points”, depending upon the

facts of the case. We are not suggesting that issuance of notice u/s 92D(3)

along with notice u/s 92CA(2) is illegal but where heavy penalty is attracted

for non-compliance, it has to be shown that the notice u/s 92D(3) is

complied, both in letter and in the spirit of the Statute. This conclusion is

based on the scheme and the clear language used in the regulations. Steps as

per regulations are to be followed in sequence. Report in Form No. 3CEB in

the first instance, is obtained from the taxpayer. Next step is to issue notice

u/s 92CA(2) to the taxpayer to produce evidence in support of ALP.

25. Under sub-section (2) of Section 92CA, evidence in support of ALP

would ordinarily include information and documents referred to in sub-

section (3) of section 92D which are prescribed in various clauses of rule

10D(1) as discussed above. Documents and information prescribed are

required to be maintained to help to determine ALP and are to be filed to

support ALP by the taxpayer in response to notice u/s 92CA(2) of the act. If

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on consideration of evidence produced by the taxpayer the TPO is satisfied

that ALP has been properly and correctly determined by the taxpayer, it is

the end of the matter. There is no question of issuing further notice under

any provision to the taxpayer. However, if complete information is not

furnished, or otherwise, TPO is of the view that more information on

specified points is required from the taxpayer, the TPO can issue notice

under sub-section (3) of section 92D. TPO can also issue notice u/s 92CA(3)

of the Act, depending upon the facts of the case and the information needed.

Only in case of failure of the taxpayer to support its ALP by filing necessary

evidence, question of requiring taxpayer to furnish prescribed information

would arise. There is no rationality in requiring information, documents

from the taxpayer first under section 92D(3) and thereafter provide

opportunity to the taxpayer to support its ALP. Further having regard to

purpose of the regulations, the notice u/s 92D(3) must require specific

information (or document) which the taxpayer failed to furnish u/s 92CA(2)

but which according to the TPO are necessary for determination of ALP of

international transactions.

Above view is fully supported by sub-section (3) of section 92CA of

the act providing for the determination of the ALP by the TPO. Besides

evidence/material referred to in the above sub-section, the TPO is further

required to consider “such evidence as TPO may require on specified

points”. Thus requirement of evidence on specific points is clearly stated.

Therefore, notice u/s 92D(3) can not be vague but must require specific

information. This is established from clear language and scheme of the

regulation.

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26. In the case of The Barium Chemicals Ltd. and Anr vs.

Sh.A.J.Rana and Others 1972 (59) AIR S.C 591, their Lordship of

Supreme Court considered notice issued by the competent authority u/s

19(2) of Foreign Exchange Regulation Act, 1992, which is as under:

“2. (a) In case the said information, book or document is in the possession of any person, the Central Government or as the case may be, the Reserve Bank may by order in writing, require such person to furnish to the Central Government or the Reserve Bank or any person specified in the order such information, book or other document.

(b) In case, however, the information, book or document is not in the possession of the person to whom the order is addressed, but it is possible in the opinion of the Central Government or the Reserve Bank, for such person to obtain and furnish that information, book or other document, the Central Government or the Reserve Bank may, by order in writing, require such person to obtain and furnish to the Central Government or the Reserve Bank or any person specified in the order such information, book or other document.”

Their Lordship after considering meaning of words, “consider it necessary or

expedient” and after holding that application of mind with regard to

necessity to obtain and examine documents to be furnished made the

following pertinent observations on sub-section 19(2):

“16. The language of Section 19(2) of the act points to the conclusion while an order under it may be made with respect to ‘any information; book or other document’, it is essential that such information, book or other document should be specified in the order. This is apparent from the concluding part of the said sub-section wherein there is reference to ‘such information, book or other document’. The word ‘such’ points to the necessity of specifying the information, book or other documents in the order. It is, no doubt, true that the order can relate to a large number of books, documents or informations, it is all the

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same imperative that the same should be particularized in the order. According to sub-section (1A) of Section 23 of the act, if any person contravenes any of the provisions of this Act or of any rule, direction or order made thereunder, for the contravention of which no penalty is expressly provided, he shall, upon conviction by a Court, be punishable with imprisonment for a term which may extend to two years, or with fine, or with both. The fact that penal consequences follow from non-compliance with an order made under sub-section (2) of Section 19 also highlights the importance of specifying the information, book or other document in the order.”

Above decision is fully applicable to the case in hand. Slight difference in

the language of section 19(2) considered by their Lordship and Section

92D(3) does not make any material difference. A corporate body like the

taxpayer cannot be imprisoned but only fined which may be as heavy as

more than Rs 40 crores imposed in this case. Consequences provided in

section 271G are quite severe.

27. Thus notice u/s 92D(3) is different from other statutory notices. Here

the Assessing Officer or CIT (Appeals) are empowered to require from the

taxpayer or any person who has entered into an international transaction to

furnish any prescribed information or document. Notice u/s 92D(3) has to be

confined to the furnishing of information or document as may be

“prescribed”. It is unauthorized to require the noticee to furnish non-

prescribed information. If in the notice non-prescribed information is also

called for, it would not be treated as notice under section 92D(3) but under

section 92CA(3) or some other provision of the Act irrespective of the title

or label given to such a notice. Relevant information can be sought under

notice u/s 92CA(3) also. Further, there is no restriction of furnishing

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prescribed information in response to notice u/s 92CA(2) of the Act to

support the computation of ALP by the taxpayer. However, we do not see

any authority u/s 92D(3) with the T.P.O. to require the taxpayer to furnish

non specified information or such information or document already filed by

the taxpayer or use of the provision without asking the taxpayer to support

first its ALP of International transactions. The case of any person other than

the taxpayer for notice u/s 92D(3) stands on a different footing than of the

taxpayer to whom notice u/s 92CA(2) has been issued.

28. Further u/s 92D(3), it will not be possible to call for, all the

information prescribed under Rule 10D including supporting information

and documents mentioned in sub-rule (3) in a routine or a casual manner

without application of mind as to what specific information is required to

achieve the purpose of the regulations. Information which has already been

furnished by the taxpayer either in the audit report or in response to notice

u/s 92CA(2) would be of no use and, there is no point in requiring the same

information again or require un-prescribed information u/s 92D(3) and cast

additional burden on the taxpayer. In all such cases, it would no more remain

valid notice u/s 92D(3) / 271G of the Act. Application of mind to find and

consideration of material on record and to see what further information on

specific point is required, is essential before issuing notice u/s 92D(3) of the

Act to the taxpayer. The notice is a serious notice as non-compliance within

the specified time would lead to imposition of penalty, which may amount to

several crores. It is not a routine notice, which can be casually issued calling

for any information or all prescribed information. Where the taxpayer has

“option” to select relevant information, it is not a notice u/s 92D(3) as

“option” and word “require” do not go together. Having regard to the

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scheme noted above, the said notice is issued to get information on specified

point needed on the facts and circumstances of the case for purposes of

determining ALP.

Penalty u/s 271G.

29. We now proceed to consider conjunctively provisions of section 92D,

271G and 273B of the Income-tax Act quoted above.

29.1 It is evident from the above provisions that penalty u/s 271G can be

imposed on any person who has entered into an international transaction but

fails to furnish information or document as required under sub-section (3) of

Section 92D. On account of above default (failure), the defaulter is liable to

pay penalty for a sum equal to 2% of value of international transactions for

each such default. Provisions of section 273B overrides section 271G. In

other words no penalty can be imposed for above failure of the person to

furnish documents in time if such failure is proved to be due to a “reasonable

cause”.

30. With the above legal background, we proceed to consider facts and

circumstances of the case. The TPO in this case issued first notice on

September 22, 2005 which has been reproduced in the earlier part of this

order. In para 1 of the notice, he asked the assessee to support and

substantiate the computation of ALP in international transactions. This is

required by section 92CA(2). As per para No.2 the T.P.O. further required to

furnish information including the balance sheet, profit and loss account,

statement of computation of income, audit report, tax report and also,

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“information and documents maintained as prescribed u/s 92D of Income-

tax Act, 1961 read with Rule 10D of Income-tax Rules” without specifying

any particular information clause of Rule 10D. The aforesaid notice was a

notice u/s 92CA(2) but the TPO by asking further information made it a

notice u/s 92CA(3). Only under above sub-section TPO can call for

information like balance sheet, P&L account, and audit report, which already

stood filed and which are un-prescribed. Such unspecific information could

not be required u/s 92D(3). Why and how information already furnished and

could be obtained from AO was required or needed is not clear from the

notice or other material available on record. The notice was issued in a

casual manner. The TPO had not examined records of the tax payer nor

nature or details of International transactions. There was total lack of

application of mind as to what information was required in this case. It was a

omnibus notice without any regard of unwarranted heavy burden it was

likely to place on the taxpayer not authorized u/s 92D(3). It was an

unintelligible notice where all the information and documents maintained

under Rule 10D of Income-tax Rules were required in addition to the

information referred to above.

31. The second notice issued on similar lines on 13th October, 2005 asking

for submission of documents by 7th November, 2005 did not improve the

situation. A third notice dated 8th November, 2005 was again issued quoting

provision of section 92D and calling upon the assessee to file information

and documents latest by 21.11.2005. The said notice also had all infirmities

noted in the first notice.

32. In the light of what we have discussed above relating to requirement

of valid notice u/s 92D(3) of the Act, above mentioned notices cannot be

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treated as valid and legal to justify application of provision u/s 271G of the

act and levy of penalty of more than Rs 40 crores. These are omnibus notices

issued without application of mind and without considering documents

already placed by the taxpayer on record and without consideration as to

which of the specific clauses of sub-rule (1) or other sub rules was attracted

or which relevant information was needed in this case. Under section

92D(3), A.O. or CIT (Appeals) is authorized to require prescribed

information but here both prescribed and un-prescribed information like

balance sheet, profit and loss account, computation of income etc was also

required to be furnished from the taxpayer before the taxpayer could file

evidence under section 92CA(2). Not only primary documents necessary to

support the computation of ALP of taxpayer, but also supporting documents

detailed in sub-rule (3) of Rule 10D were required to be furnished without

considering which supporting documents out of several mentioned in

various clauses of the said sub-rule were available with the taxpayer. The

burden of selection / relevancy of clauses applicable was shifted to the

taxpayer. The notice only increased burden of the taxpayer and confused the

noticee. Above notices issued without application of mind and without

considering relevancy and requirement of all the prescribed information and

documents under Rule 10D vitiated the legality of the notices. Above notices

could not be treated as proper and legal notices in terms of section 92D(3) of

the act. The failure, therefore, of the taxpayer to comply such notices in time

can not justify levy of penalty of Rs 40,46,41,376/-. The notice being illegal

question of levy of penalty did not arise.

33. Apart from the decisions cited by Shri Agarwal, the learned counsel

for taxpayer, our above view is supported by decision of Calcutta High

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Court in the case of New Central Jute Mills Co. Ltd. vs. Dwijendralal

Brahmachari & Ors. 90ITR 467 where a notice was issued by the I.T.O.

asking for production of all the books of accounts and documents of

company lying in the custody of the Registrar of the Company. The Court

found that books of accounts and documents summoned were not seized and

not seen by the ITO and, therefore, the ITO had no knowledge and could not

have any knowledge about the contents of books and documents nor could

determine the relevancy or otherwise of said books and documents. The

Court held that notice clearly suggested that ITO had not applied his mind

before issuing the notice. It was also held tobe vague and illegal. The notice

was, therefore, held to be beyond statutory powers, illegal and quashed

accordingly. The facts here are quite similar.

34. In the light of above discussion, we hold that three notices referred to

above issued by the TPO could not be treated as valid notices issued in terms

of section 92D(3) of the Act and, therefore, did not attract penalty provisions

of section 271G of the Income-tax Act.

35. TPO’s letter dated 12th December, 2005, after considering documents

filed by the assessee pointed out certain defects in the comparative

uncontrolled price method employed by the tax payer without any

benchmark. Likewise TNMM method used was stated to be without

providing documents used as comparable nor the functional details of

comparables was provided. Such like defects were pointed out. The

aforesaid notice relating to specific defects and calling for their rectification

could be treated as a notice u/s 92D(3) of the Income-tax Act although not

so labeled by the A.O. However, admittedly before the end of December,

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2005, all documents and information were furnished by the taxpayer. So

there was no default in not submitting documents and information within the

prescribed time to attract provisions of Section 271G of the Income-tax Act.

Therefore, on facts we find no justification in the levy of penalty in question.

36. We further find substance in the arguments of the learned counsel for

the assessee that not only notices as above were vague, non-specific and

showed lack of application of mind, even the show cause notice issued u/s

271G suffered from the same defect. No specific clause of the rule or detail

of the international transaction relating to which default was committed,

were stated in the show cause notice issued by the A.O. The notices issued

were prima facie illegal and bad in law. He relied upon the decision in the

case of Reckitt & Colman of India Ltd. (supra) and on the case of Hindustan

Polymers Co. Ltd. (supra). In the case of Amrit Foods vs. Commissioner of

Central Excise UP 2005 (190) ELT 433, wherein their Lordship observed

as under:

“The revenue has preferred an appeal from the order of the Tribunal setting aside the imposition of penalty under Rule 173Q of the Central Excise Rules, 1944. The Tribunal has set aside the order of the Commissioner on the ground that neither the show cause notice nor the order of the Commissioner specified which particular clause of Rule 173Q had been allegedly contravened by the appellant. We are of the view that the finding of the Tribunal is correct. Rule 173Q contains six clauses the contents of which are not same. It was, therefore, necessary for the assessee to be put on notice as to the exact nature of contravention for which the assessee was liable under the provisions of the 173Q. This not having been done the Tribunal’s finding cannot be faulted. The appeal is, accordingly, dismissed with no order as to costs.”

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In above case the Apex Court held that if allegations in the show cause

notice are not specific and are vague, lack details and / or unintelligible, that

is sufficient to hold that noticee was not given proper opportunity. Such

notice was struck. The cited decisions are applicable to the facts of the case

and arguments of Shri Agarwal are well taken. As penalty of 2% u/s 271G is

imposable in respect of international transaction, it was necessary to specify

in the show cause notice u/s 271G, the international transactions or the

documents / information with reference to which the taxpayer committed the

default by failing to furnish the requisite information in time. This would

enable him to file a proper reply in defence. Without detail of default, no

adequate reply could be furnished. The contention of learned Departmental

Representative that specific clauses of Rule 10D(1) under which information

was not furnished within time and default was committed were mentioned in

the penalty order is of no avail. The mention of above detail in the order is of

no use. The details were required to be mentioned in the show cause notice

so as to afford reasonable and adequate opportunity to the assessee to meet

out the case and serve the purpose of the notice. For above defect also, the

penalty proceedings are held to be vitiated and liable to be cancelled.

37. The third submission of Shri Agarwal that assessee had explained that

small delay in the furnishing of information within the prescribed time took

place on account of a reasonable cause as its Financial Controller had gone

out of town and was not available to furnish information which was

voluminous and highly technical in nature. Besides the assessee was not

clear as to what was required to be furnished in support of determined ALP

and other supporting information mentioned in sub-rule (3) of Rule 10D. In

the above and other circumstances duly given in reply to the show cause

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notice, the taxpayer had claimed that delay, if any, was on account of a

reasonable cause and, therefore, no penalty was exigible. The taxpayer had

filed information bonafidely according to its understanding of regulations

and legal guidance received by it. The A.O. failed to refute any of the claim

and recorded no finding on the “reasonable cause” pleaded by the taxpayer.

In other words it was not held that the delay was without a reasonable cause.

The same position continue unaltered in appellate proceedings before the

learned CIT (Appeals). The case pleaded by the taxpayer was neither

examined nor refuted before upholding the levy of penalty. The learned

Departmental Representative tried to challenge above argument of Shri

Agarwal. However, on facts we are of view that arguments of Shri Agarwal

are well taken. As already discussed, provision of Section 271G is to be read

alongwith provision of section 273B of the Income-tax Act. The penalty u/s

271G can be imposed only if the default is held to be proved to be without

reasonable cause. Once a reasonable cause for delay is pleaded then it has to

be examined in accordance with law. In the present case, no attempt has

been made by the Revenue to look into, examine or refute the claim of

reasonable cause put forth by the taxpayer. The case, therefore, cannot be

taken to have been rejected. The penalty has been imposed without

considering application of section 273B of the Income-tax Act which as

noted earlier overrides provisions of Section 271G of the Income-tax Act.

We are of the view that the present case is covered u/s 273B. The delay, if

any, in the submission of information or documents within the prescribed

time is held to be due to a reasonable cause. Therefore, the penalty is not

sustainable on account of this ground also. Besides we are of view that

penalty of Rs 40,46,41,376/- for mere delay of about a month or so in the

submission of information and documents assuming entire case of revenue is

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established, is to be held to be imposed on mere technical grounds. Having

regard to the settled law that no penalty for technical or venial default is

imposable, we find force in this alternative argument of Shri Agarwal.

38. The learned counsel for the assessee has also vehemently argued that

no satisfaction in this case was recorded by the Assessing Officer during the

course of assessment proceedings. We are not inclined to accept this

contention, as in our view, provisions of section 271G are quite different

from provisions of section 271(1) of the Act. Therefore, CIT (Appeals) was

quite justified in holding that no satisfaction need be recorded before

initiating proceedings u/s 271G of the Income-tax Act. Apart from above, in

the present case, the TPO has specifically recorded details of the alleged

default committed by the assessee in not furnishing information / documents

which the TPO thought he was competent to require u/s 92D of the Act.

Therefore, there is no merit in the contention that satisfaction was not

recorded in this case, although we are canceling penalty on some other

ground and this finding does not materially affect the ultimate result of the

appeal. There are several other grounds / arguments raised by the parties, but

in the light of our decision recorded above, no useful purpose would be

served in dealing with each of those grounds. Therefore, on facts of the case,

we hold that the penalty imposed is not exigible and the same is hereby

cancelled.

39. In the result, assessee’s appeal is allowed.

Pronounced in Open Court on 15.02.2008.

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Sd/- sd/-

(Deepak R.Shah) (Vimal Gandhi)ACCOUNTANT MEMBER PRESIDENT

Dated: February 15, 2008.DRS

Copy of order forwarded to:1. Cargill India Pvt.Ltd. 13, Abul Fazal Road, Bengali Market, New

Delhi.2. Dy.CIT, Cir. 34(1), New Delhi.3. CIT4. CIT(Appeals) VI, New Delhi.5. DR

Dy.Registrar, ITAT

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