2016 (4) TMI 514 - AT - Income Tax

Tribunal cancels penalty under Income Tax Act citing pricing methodology variance and assessee's good faith

The Tribunal allowed the assessee's appeal, setting aside the penalty imposed under section 271(1)(c) of the Income Tax Act. The Tribunal found that the ... Penalty under section 271(1)(c) - income arising from an international transaction, having regard to its arm’s length price, as mandated by Section 92(1) of the Act - Held that:- The orders of the authorities below in the quantum assessment proceedings reveal that all information and documents as required by Section 92C of the Act read with rule 10B of the Income Tax Rules, 1962 for the purpose of determination of arm’s length price were furnished by the assessee. Moreover, the addition determined by the income-tax authorities is not on account of any inaccuracy, discrepancy or concealment found in the information and documents furnished by the assessee for determining the arm’s length price of the international transaction with the associated enterprise. The addition is due to the difference in the pricing methodology adopted by the income-tax authorities for determining the expected profits from the associated enterprise. Therefore, in our view, the fact-situation in the present case does not suggest that the computation of price charged in the impugned international transaction done as per Section 92C of the Act is lacking in good faith or due diligence, so as to render the assessee liable for penalty under section 271(1)(c) of the Act r.w. Explanation-7 thereof. - Decided in favour of assessee Issues Involved:1. Imposition of penalty under section 271(1)(c) of the Income Tax Act, 1961.2. Determination of Arm's Length Price (ALP) for international transactions under section 92C of the Act.3. Application of Explanation-7 to section 271(1)(c) regarding the concealment of income or furnishing inaccurate particulars.Detailed Analysis:1. Imposition of Penalty under Section 271(1)(c):The primary grievance of the assessee was the imposition of a penalty amounting to Rs. 60,72,210/- under section 271(1)(c) of the Income Tax Act, 1961. The penalty was imposed by the Assessing Officer (AO) on the grounds that the assessee furnished inaccurate particulars of income concerning the addition of Rs. 1,78,64,680/- due to transfer pricing adjustments. The AO's decision was affirmed by the Commissioner of Income Tax (Appeals) [CIT(A)], leading to the assessee's appeal before the Tribunal.2. Determination of Arm's Length Price (ALP):The assessee, a wholly-owned subsidiary of a US-based company, engaged in manufacturing magnetic components, declared a loss in its return of income for the assessment year 2008-09. The Transfer Pricing Officer (TPO) proposed an upward adjustment to the stated value of international transactions with the associated enterprise, which was eventually scaled down by the CIT(A). The dispute centered on the calculation of the 6% mark-up on the standard cost of operations, which the TPO argued should be on the total costs incurred.3. Application of Explanation-7 to Section 271(1)(c):Explanation-7 to section 271(1)(c) deems any addition or disallowance in computing total income under section 92C(4) as concealment or furnishing of inaccurate particulars unless the assessee proves that the price was computed in good faith and with due diligence. The Tribunal noted that the assessee's transfer pricing study and the application of the Transaction Net Margin Method (TNMM) were not disputed. The issue arose due to a difference in opinion on the cost base for applying the 6% mark-up. The Tribunal emphasized that the facts and circumstances did not indicate any lack of good faith or due diligence on the assessee's part.Conclusion:The Tribunal found that the assessee had furnished all required information and documents for determining the ALP and that the addition was due to a difference in pricing methodology rather than any inaccuracy or concealment. The Tribunal concluded that the return of income filed by the assessee was in good faith and with due diligence. Consequently, the Tribunal set aside the CIT(A)'s order and directed the AO to delete the penalty of Rs. 60,72,210/- imposed under section 271(1)(c) of the Act.Result:The appeal of the assessee was allowed, and the penalty imposed under section 271(1)(c) was deleted.