Transfer pricing penalty cannot rest on different comparables alone when pricing was adopted in good faith and with due diligence.

In transfer pricing matters, penalty under section 271(1)(c) is not justified merely because a different set of comparables produces a higher arm's length price estimate. Where the assessee applies the Transactional Net Margin Method on the basis of an independent expert study, and the method is accepted as appropriate but the adjustment arises from selection of different comparables, the arm's length price remains an estimate and does not by itself show furnishing of inaccurate particulars. Explanation 7 applies, and penalty is unwarranted when the pricing is adopted in good faith and with due diligence. On these facts, deletion of the penalty was upheld.

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Issues: Whether penalty under section 271(1)(c) of the Income-tax Act, 1961 was leviable on transfer pricing adjustment where the assessee had adopted the Transactional Net Margin Method on the basis of an independent transfer pricing study and the adjustment arose from selection of different comparables.

Analysis: The arm's length price was found to be a matter of estimation, and a mere difference between two possible estimates did not by itself establish furnishing of inaccurate particulars. For transfer pricing additions, Explanation 7 to section 271(1)(c) governed the levy of penalty, and penalty could not be imposed where the pricing was adopted in good faith and with due diligence. The assessee's transfer pricing study was prepared by an outside expert, the TNMM method was accepted by both sides as the most appropriate method, and the Revenue had not shown absence of due diligence or lack of good faith.

Conclusion: Penalty under section 271(1)(c) was not sustainable and the deletion of the penalty was warranted.

Ratio Decidendi: In transfer pricing matters, penalty for furnishing inaccurate particulars cannot be levied merely because a different set of comparables leads to a higher arm's length price estimate, where the assessee's pricing is based on an expert study and is shown to have been adopted in good faith and with due diligence.

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