© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
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Mumbai Tribunal confirms concealment penalty under Section 271(1)(c) of the Income-tax Act and also rules on the validity of revised return

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Recently, the Mumbai bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Deloitte Consulting India Pvt. Ltd. (the taxpayer) confirmed levy of penalty under Section 271(1)(c) of the Income-tax Act, 1961 (the Act) on furnishing inaccurate particulars of income and also ruled that the return revised after reference to the Transfer Pricing Officer was only in anticipation of Transfer Pricing (TP) adjustment and to avoid rigours of Section 92C(4) of the Act. Further, the Tribunal disallowed the enhanced claim of Section 10A benefit as a result of the taxpayer’s suo-moto disallowance of reimbursement of marketing cost in the revised return. The Tribunal held that revised return was not filed voluntarily by the taxpayer, but was filed only after the initiation of TP proceedings. The Tribunal was of the opinion that the return was revised in anticipation of potential TP adjustment similar to previous years and to avoid the rigours of Section 92C(4) of the Act in connection with the Section 10A claim.

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Mumbai Tribunal confirms concealment penalty under Section 271(1)(c) of the Income-tax Act and also rules on the validity of revised return

  1. 1. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG IN INDIA Mumbai Tribunal confirms concealment penalty under Section 271(1)(c) of the Income-tax Act and also rules on the validity of revised return 23 May 2014 B Background Recently, the Mumbai bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Deloitte Consulting India Pvt. Ltd. 1 (the taxpayer) confirmed levy of penalty under Section 271(1)(c) of the Income-tax Act, 1961 (the Act) on furnishing inaccurate particulars of income and also ruled that the return revised after reference to the Transfer Pricing Officer (TPO) was only in anticipation of TP adjustment and to avoid rigours of Section 92C(4) of the Act. Further, the Tribunal disallowed the enhanced claim of Section 10A benefit as a result of the taxpayer’s suo-moto disallowance of reimbursement of marketing cost in the revised return. The Tribunal held that revised return was not filed voluntarily by the taxpayer, but was filed only after the initiation of TP proceedings. The Tribunal was of the opinion that the return was revised in anticipation of potential TP adjustment similar to previous years and to avoid the rigours of Section 92C(4) of the Act in connection with the Section 10A claim. ________________ 1 Deloitte Consulting India Pvt. Ltd. v. ACIT (ITA Nos. 7650 & 7651/Mum/2013) – Taxsutra.com Facts of the case  The taxpayer is a joint venture between two companies. The taxpayer entered into a software development service agreement with one of the joint venture partners to provide software related services. The entire turnover of the taxpayer represents earnings provided from this joint venture partner for providing software development and information technology services.  Reference was made by the Assessing Officer (AO) to the TPO for determining the Arm’s Length Price (ALP) of the international transactions. The TPO accepted all transactions to be at arm’s length except reimbursement of market services availed, (similar to two preceding years), determining the ALP thereof at nil.  The TPO was of the opinion that the taxpayer was not required to undertake any marketing function as per the master service agreement and that both the parties had a clearly demarcated role to play for which they were compensated.
  2. 2. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Accordingly, the TPO held that there was no valid reason for the joint venture partner to allocate any part of the cost incurred by it to perform the role agreed by it, which is the marketing function. The TPO accordingly determined the ALP of the reimbursement of market services availed as zero and proposed to make transfer pricing adjustments.  The taxpayer contented that it had considered it prudent from a commercial perspective to incur the cost of marketing personnel of the joint venture partner who were specifically engaged in marketing the taxpayer’s offshore capabilities and submitted that the marketing expense incurred should not be disallowed by the TPO.  The taxpayer had pointed out to the TPO that it had revised its return of income for the Assessment year (AY) 2003-04 and AY 2004-05 on 29 March 2006 and 14 December 2007 respectively, disallowing the entire marketing expense claimed in the original return, and therefore, there was no question of any transfer pricing adjustment under Section 92CA of the Act. The TPO rejected this claim observing that the taxpayer had failed to file a revised Form 3CEB in line with the revised returns.  Further, in the regular assessment the AO disallowed the claim of the taxpayer for enhanced deduction under Section 10A on disallowance of reimbursement of marketing services in view of the provisions of Section 92C(4) of the Act. The AO did not give cognize to the revised returns or the suo motu disallowance of the reimbursement of marketing services. Penalty under Section 271(1)(c) of the Act was accordingly levied at 100 per cent of the tax on the amount initially claimed as marketing expense.  The taxpayer filed an appeal before the Commissioner of Income-tax (Appeals) [CIT(A)]. However, the CIT(A) upheld the AO’s order and did not provide any relief for the taxpayer.  The CIT(A) held that the taxpayer had simply accepted the finding of the TPO by filing its revised return before the TP order was passed. It was also noted that reference was already made to the TPO and the proceedings were in progress when the taxpayer filed the revised return. The CIT(A) held that the admission/disclosure of additional income was not voluntary, more so when a similar view was already taken in its earlier years (AY 2002 -03 and 2003-04) and went on to hold that the deduction thereon was not admissible under Section 10A by the virtue of the proviso to Section 92C(4) of the Act.  The CIT(A) also held that this was not a case where the issue could be termed as debatable or even that two views were possible; and as such in the facts of the case it has to be held that taxpayer had indeed furnished inaccurate particulars of its income and AO has rightly imposed penalty under Section 271(1)(c) of the Act for that default.  Aggrieved by the order of the CIT(A), the taxpayer preferred an appeal before the Tribunal. Taxpayer’s contentions  The taxpayer reiterated the fact that it had considered it prudent from a commercial perspective to incur the cost of marketing personnel of the joint venture partner who were specifically engaged in marketing the taxpayer’s offshore capabilities, and submitted that there should not be any transfer pricing adjustment on the same.  Further, without prejudice, it was submitted that no adjustment under Section 92C(4) of the Act should arise in view of the suo motu revision of its returns disallowing the said expenditure, leading to no enhancement in taxable income due to a corresponding increase in the deduction under Section 10A of the Act.  It was also contended by the taxpayer that the amount disallowed in the revised return could be considered as a discount to its associated enterprise. However, the TP report submitted was not revised and gave a different picture. Tribunal’s ruling  The Tribunal observed that the joint venture partner markets the taxpayer’s capabilities, which is precisely what it is required to do under its arrangement with the taxpayer. The Tribunal held that the same constitutes the joint venture partner’s business, and not that of the taxpayer. Accordingly, it was held that there was no question of any reimbursement by the taxpayer to the joint venture partner for the marketing services provided.  The Tribunal also held that the taxpayer had failed to demonstrate the service it received or the benefit it received from receipt of such marketing services. The Tribunal also went on to mention that no separate documentation qua the cost allocation as made and incurred by the taxpayer was submitted to the TPO.  The Tribunal held that since the return was revised only after a reference was made to the TPO, the revision was made in anticipation of the proposed adjustment with a motive to avoid the adjustment, and thereby the disallowance of Section 10A benefit on the amount of TP adjustment.
  3. 3. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  Further, it was held by the Tribunal that if anything wrong is discovered in Form 3CEB filed, the same needs to be withdrawn and replaced by a revised Form 3CEB to give a correct picture although there is no specific provision in the Act for the same.  Further, it was held that since the taxpayer failed to demonstrate that any service was in fact rendered, the foreign exchange to that extent stands lost to the country, warranting a denial of deduction under Section 10A to which the amount may otherwise be eligible.  With regard to the taxpayer’s plea that there has been a complete disclosure of material facts, the Tribunal observed that the taxpayer failed to demonstrate any business purpose of its relevant international transaction. It is only by way of reference to and inquiry by the TPO which brings forth the complete absence of business purpose, leading to its valuation at nil and, resultantly, a retraction by the taxpayer. The disclosure per the audit report under Section 92E of the Act forming part of its return is thus both false and misleading.  The Tribunal held that in the current case the penalty proceedings could be dropped only if the taxpayer had voluntarily withdrawn the expenditure. Since the Tribunal had concluded that the withdrawal or revision was not voluntary but with a sole objective to avoid the rigours of the Section 92C(4), the penalty proceedings against the taxpayer were justified.  The Tribunal concluded that the findings of the CIT(A) are comprehensive and correct in fact and law. The Appeal of the taxpayer was rejected. Our comments The decision of the Mumbai Tribunal has the following takeaways:  When payment is made for services received, proper documentation demonstrating the receipt of the service must be maintained by the Companies. Documentation includes having properly worded agreements, proof of receipt of services, quantification of the benefits derived by the taxpayer in lieu of the services received, etc.  The revision of returns after the reference to the TPO may be rejected. The revision must be reflected in all the documents like the Form 3CEB, TP study, etc.  If there is an error discovered in the Form 3CEB filed, the taxpayer must withdraw the same and replace it with a corrected Form 3CEB even though there is no specific provision in the Act for the same. This point is worth noting given the fact that the new utility for uploading of the Form 3CEB online gives the taxpayer the option of selecting whether the Form is original or revised.  The Courts could consider the subsequent change in positions taken by the taxpayer as a result of previous years’ assessments as conceding and accepting the position taken by the revenue. In the current case, although the taxpayer mentioned that the change in position was to avoid prolonged litigation, the Tribunal did not accept the same.
  4. 4. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903,Near Vodafone House,Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bangalore Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi 4/F, Palal Towers M. G. Road, Ravipuram, Kochi 682 016 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Unit No. 603 – 604, 6th Floor, Tower – 1, Godrej Waterside, Sector – V, Salt Lake, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010

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