2011 (8) TMI 459 - AT - Income Tax

Tribunal upholds deletion of penalty for good faith ALP determination in assessment year 2004-05

The Tribunal upheld the deletion of the penalty imposed under section 271(1)(c) for the assessment year 2004-05. The penalty was deleted as the assessee's ... Penalty u/s 271(1)(c) - ALP determination - TNMM - arm's length price (ALP) adjustments made to the value of international transactions entered into by the assessee - The grounds on which the ALP determination by the assessee has been rejected are thus reasonably debatable - Lack of good faith and due diligence cannot be inferred when the grounds on which ALP determined by the assessee has been rejected are reasonably debatable, even if correct - The assessee has obtained a transfer pricing study from an outside expert, and this transfer pricing study, objectivity of which is neither called into question or seems to be, upon perusal of this TP study, questionable to us anyway, approves TNMM for determination of ALP - a proposition which has not been specifically rejected by the revenue authorities - On these facts, lack of 'due diligence' in determining the ALP is neither indicated nor can be inferred - In such a situation, it cannot be said that the assessee has not determined the ALP in accordance with the scheme of section 92C in good faith and with due diligence - Accordingly, the facts of the present case did not warrant or justify the imposition of penalty under section 271(1)(c) - Decided in favour of assessee. Issues Involved:1. Justification of penalty deletion under section 271(1)(c) of the Income-tax Act, 1961.2. Application of the Transactional Net Margin Method (TNMM) vs. Comparable Uncontrolled Price (CUP) method for determining the arm's length price (ALP).3. Interpretation and application of Explanation 7 to section 271(1)(c) regarding ALP adjustments.Issue-wise Detailed Analysis:1. Justification of Penalty Deletion under Section 271(1)(c):The primary issue was whether the CIT(A) was justified in deleting the penalty of Rs. 39,56,921 imposed on the assessee under section 271(1)(c) for the assessment year 2004-05. The penalty was imposed due to ALP adjustments made to the value of international transactions entered into by the assessee. The Assessing Officer (AO) imposed the penalty on the grounds that the assessee had filed inaccurate particulars of income to evade tax, citing the Supreme Court's decision in Union of India v. Dharamedra Textile Processors [2008] 174 Taxman 571, which held that mens rea is not an essential ingredient for levy of penalty. However, the CIT(A) upheld the assessee's contention that merely because an addition was made to the income does not mean that the assessee concealed income. The CIT(A) emphasized that transfer pricing is not an exact science and reasonable people can draw different conclusions on the same facts. The penalty was thus deleted, and the Tribunal upheld this decision, noting that neither the main section 271(1)(c) nor Explanation 7 thereto justified the imposition of penalty in this case.2. Application of TNMM vs. CUP Method for Determining ALP:The assessee adopted the TNMM for computing the ALP, rejecting the CUP method due to the inability to make reliable adjustments for differing factors affecting brokerage rates. The TPO rejected the TNMM and adopted the CUP method, leading to an ALP adjustment of Rs. 1,10,29,746, which the assessee did not contest. The Tribunal noted that the TNMM is one of the prescribed methods under section 92C(1) and that the AO did not find any faults in the computation of ALP under TNMM. The Tribunal highlighted that the rejection of TNMM by the TPO was based on the preference for the CUP method, which is a debatable issue and does not indicate a lack of good faith or due diligence on the part of the assessee.3. Interpretation and Application of Explanation 7 to Section 271(1)(c):Explanation 7 to section 271(1)(c) deems the income added or disallowed due to ALP adjustments as concealed income unless the assessee demonstrates that the price was computed in good faith and with due diligence. The Tribunal observed that the assessee computed the ALP in accordance with the scheme of section 92C and provided a transfer pricing study from an external expert, which was not questioned by the revenue authorities. The Tribunal found that the grounds for rejecting the assessee's ALP determination were reasonably debatable and did not indicate a lack of good faith or due diligence. Consequently, the conditions for invoking Explanation 7 were not met, and the penalty under section 271(1)(c) was not warranted.Conclusion:The Tribunal upheld the CIT(A)'s decision to delete the penalty, emphasizing that the assessee's approach to determining the ALP was in good faith and with due diligence. The Tribunal concluded that neither the main section 271(1)(c) nor Explanation 7 justified the imposition of penalty in this case, leading to the dismissal of the appeal.