19. Penalty – Concealment of income – Sections 92CA and 271(1)(c) – Recomputation of arm’s length price of specified domestic transaction not carried out at arm’s length – Transactional net margin method or comparable uncontrolled price method – difference in method leading to rejection of loss claimed in respect of genuine new line of business – Penalty cannot be imposed –

CIT vs. Mitsui Prime Advanced Composites India Pvt. Ltd.;
392 ITR 280 (Del):

Based upon the Transfer Pricing Officer’s Determination of
the arm’s length price, the Assessing Officer rejected the assessee’s claim
that the transactional net margin method was applicable and adopted the
comparable uncontrolled price method u/s. 92CA of the Act, where the difference
in the method led to the rejection by the Assessing Officer of the losses
claimed by the Assessee. The assessee did not appeal as it had consistently
incurred losses. The Assessing Officer initiated penalty proceedings on the
ground that an adverse order u/s. 92C attracted the Explanation 7 to section
271(1)(c). The Assessing Officer was of the opinion that the explanation
offered by the assessee was not satisfactory and did not display good faith,
which was a prerequisite under Explanation 7. He therefore imposed penalty u/s.
271(1)(c) of the Act. The Tribunal found that the assessee had acquired
business from one GSC for supply of products as well as availing the
engineering services to set up a plant for manufacturing the designated
products which included the manufacturing facility and resulted in the sale of
goods and which indicated the benefit derived by the assessee from the three
international transactions with its associate enterprises. The Appellate
Tribunal held that to say that the assessee did not avail of any services at
all was incorrect. It also held that the assessee had not only acquired the new
business but also had availed of the services to set up a plant, the details of
which were disclosed to the Transfer Pricing Officer by a letter, which was
sufficient elaboration of the nature of services availed of by the assessee
under the three international transactions. It also held that since no
manufacturing activity was done by the assessee, in the past as it was simply a
trader, acquiring of “business” and availing of the services under the three
agreements with its associated enterprises could not be characterised as
duplication of services. The Tribunal deleted the penalty.

On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under:

“i)  The Appellate Tribunal did not in any manner
deviate from Explanation 7 to section 271(1)(c) of the Act. Furthermore having
regard to the fact that the assessee’s claim was in respect of a new line of
business of manufacturing introduced for the first time in the given year, its
failure per se could not have trigged the automatic presumptive
application of Explanation 7 of section 271(1)(c) as perceived by the
authorities.