2015 (11) TMI 1622 - AT - Income Tax

Penalty levied under section 271(1)(c) - TPA adjustment - Held that - The determination of reasonable arm s length price is a matter of estimate. Merely because it is possible to arrive at two different estimates of arm s length price it cannot be held that the lower of the two estimates is based on inaccurate particulars while higher one is accurate. We also find that with regards to penalty under section 271(1)(c) of the Act in respect of transfer pricing additions only Explanation -7 to the section has to be considered. A perusal of the said Explanation shows that no penalty can be levied where the pricing is done in good faith and with due diligence. In the present case the transfer pricing of the assessee is based on a study conducted by an independent expert M/s.Price Waterhouse Coopers Chartered Accountants. 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 transfer pricing study questionable to us anyway approves TNMM method for determination of arm s length price - a proposition which has not been specifically rejected by the Revenue authorities. On these facts lack of due diligence in determining the arm s length price is neither indicted nor can be inferred. In such a situation it cannot be said that the assessee has not determined the arm s length price in accordance with the scheme of section 92C in good faith and with due diligence. The conditions precedent for invoking Explanation-7 to section 271(1)(c) did not exist on the facts of this case. - Decided in favour of assessee.

Summary

Issues involved:
1. Condonation of delay in filing the appeal.
2. Penalty under section 271(1)(c) of the Income Tax Act, 1961 for inaccurate particulars of income.

Detailed Analysis:
1. Condonation of Delay:
The appellant's appeal was delayed by 42 days, and the appellant sought condonation of the delay, supported by an affidavit. The tribunal considered the affidavit and concluded that the appellant had reasonable and sufficient cause for the delay, thus condoning the delay and admitting the appeal.

2. Penalty under Section 271(1)(c):
The penalty was imposed due to an upward pricing adjustment made by the Assessing Officer based on the Transfer Pricing Officer's recommendation. The appellant, engaged in providing investment advisory services, had filed a transfer pricing study report for international transactions. The TPO recommended an upward adjustment, leading to penalty proceedings under section 271(1)(c) for inaccurate particulars of income.

During the penalty proceedings, the appellant explained its disagreement with the TPO's arm's length price determination, citing differences in comparable companies and the desire to avoid prolonged litigation due to the company being under voluntary winding up. The AO, however, applied Explanation-1 to section 271(1)(c) and levied the penalty, a decision upheld by the CIT(A).

The tribunal, after careful consideration, found that the appellant had used the TNMM method for determining arm's length price, which was also followed by the TPO. The tribunal emphasized that the determination of arm's length price involves estimation and that the appellant's pricing was based on a study by an independent expert, approved the TNMM method, and lacked evidence of lack of due diligence. Therefore, the tribunal set aside the penalty, directing the AO to delete it.

In conclusion, the tribunal allowed the appeal, emphasizing that the conditions for invoking Explanation-7 to section 271(1)(c) did not exist in this case, as the appellant had acted in good faith and with due diligence in determining the arm's length price, based on expert advice and approved methods.