2024 (7) TMI 1474 - AT - Income Tax

Revenue's appeal dismissed as penalty under section 271(1)(c) cannot be imposed on transfer pricing adjustments without proving lack of good faith or due diligence

ITAT Delhi dismissed Revenue's appeal challenging deletion of penalty u/s 271(1)(c) imposed on transfer pricing adjustment u/s 92CA. The court held that ... Penalty u/s 271(1)(c) - furnishing inaccurate particulars of its income - adjustment made u/s 92CA - whether the penalty levied u/s 271(1)(c) on the adjustment made u/s 92CA is legally valid or not? - HELD THAT:- CIT(A) rightly deleted addition as held AO while imposing the penalty, simply relied on the addition/adjustment made by the TPO and did not examine in detail as to whether penalty was imposable on such adjustments or not. The scheme of Explanation 7 to section 271(1)(c) of the Act makes it clear that the onus on the assessee is only to show that the ALP was computed by the assessee in accordance with the scheme of section 92C of the Act in good faith and with due diligence. It is not in dispute here that the ALP was computed in accordance with the scheme of section 92C in as much as there was no dispute over the MAM, PLI or timescale of data used. AO/TPO only adopted a different set of comparables to determine ALP. There is no allegation by the AO in the penalty order that the actions of the appellant lack good faith and due diligence. AO has not been able to demonstrate any specific act, fact or conduct of the affairs of the appellant which proves that it was lacking in good faith and was done without due diligence. No such argument has been raised nor suggested otherwise. Therefore, 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 appellant had not determined the ALP in accordance with the scheme of section 92C of the Act in good faith and with due diligence and accordingly, the conditions precedent for invoking Explanation 7 to section 271(1)(c) did not exist on the facts of the instant case. Appeal of the Revenue is dismissed. Issues Involved:1. Deletion of penalty amounting to Rs. 81,82,693/- levied by AO for furnishing inaccurate particulars of income.2. Transfer Pricing (TP) adjustment of Rs. 2.26 Cr.3. Validity of penalty levied under section 271(1)(c) on the adjustment made under section 92CA.Detailed Analysis:Issue 1: Deletion of Penalty for Furnishing Inaccurate Particulars of IncomeThe Revenue challenged the deletion of the penalty amounting to Rs. 81,82,693/- levied by the Assessing Officer (AO) on the grounds of furnishing inaccurate particulars of income. The penalty was originally imposed following a TP adjustment.Issue 2: Transfer Pricing Adjustment of Rs. 2.26 CrThe assessee, engaged in marketing and sales support for HTC brand mobile phones and accessories, filed a return of income declaring Rs. 73,81,430/-. The AO made a TP adjustment of Rs. 2.26 Cr under section 92CA of the Income Tax Act, 1961, due to disagreements over the choice of comparables in the TP study. The Transfer Pricing Officer (TPO) replaced the comparables used by the assessee, leading to the adjustment.Issue 3: Validity of Penalty under Section 271(1)(c) on Adjustment Made under Section 92CAThe primary question was whether the penalty levied under section 271(1)(c) on the TP adjustment was legally valid. The Tribunal referred to various judgments to address this issue:- Mitsui Prime Advanced Composite India Pvt. Ltd.: The Tribunal noted that penalty under section 271(1)(c) is not imposable if the assessee proves that the price charged or paid was computed in accordance with section 92C in good faith and with due diligence. The Tribunal found that the assessee's application of the Transactional Net Margin Method (TNMM) was in accordance with section 92C and done in good faith and due diligence. The TPO's action of changing the most appropriate method without substantial evidence was deemed faulty.- Sinosteel India Pvt. Ltd.: The Delhi High Court held that addition/disallowance under section 92C does not automatically attract penalty under section 271(1)(c) if the assessee shows the computation was done in good faith and with due diligence.- Verizon India Ltd.: The Delhi High Court emphasized that in the absence of any overt act indicating conscious suppression, blanket invocation of Explanation 7 to section 271(1)(c) would be unjust.- Giesecke and Devrient India Pvt. Ltd.: The Delhi High Court ruled that differences in ALP due to differing opinions between the TPO and the assessee do not justify penalty under section 271(1)(c).The Tribunal concluded that the AO did not demonstrate any lack of good faith or due diligence on the part of the assessee. The ALP was computed in accordance with section 92C, and the AO/TPO merely adopted a different set of comparables. Thus, the conditions for invoking Explanation 7 to section 271(1)(c) were not met.ConclusionThe Tribunal affirmed the order of the Commissioner of Income Tax (Appeals) [CIT(A)], which was based on a thorough analysis of section 271(1)(c) and supported by relevant judicial precedents. The appeal by the Revenue was dismissed, and the deletion of the penalty was upheld.Order Pronounced in the Open Court on 30/05/2024.