2014 (1) TMI 946 - AT - Income Tax

Penalty u/s 271(1)(c) of the Act Method for determining Arm s length price Held that - The assessee has demonstrated from the transfer pricing study, that CUP method could not be applied because no comparable data were available in the public domain - This explanation of the assessee is corroborated by the fact that the T.P.O has collected the data for applying the CUP by requisition made under section 133(6) of the Income Tax Act Which clearly shows that the data were not available in the public domain and the transfer pricing officer has exercised its power under section 133(6) read with section 92CA(7) - Once the assessee has brought out the fact on record that CUP was not selected because of non-availability of data, then, the assessee s case falls under the exception provided under Explanation 7 of u/s 271(1)(c) of the Act, being acted in good faith and with due diligence - the assessee has clearly made out a case that the price in relation to international transactions has been determined by adopting TNMM in good faith and with due diligence, because the data for applying CUP were not available in the public domain thus, the penalty in respect of the adjustment made under section 92C(4) is not justified and liable to be deleted - Decided in favour of Assesse and against Revenue.

Issues Involved:
1. Levy of penalty under section 271(1)(c) of the Income Tax Act for the assessment years 2002-03 and 2004-05.
2. Selection of the most appropriate method for determining the arm's length price (ALP) in international transactions.
3. Applicability of Comparable Uncontrolled Price (CUP) method versus Transactional Net Margin Method (TNMM).
4. Determination of whether the assessee acted in good faith and with due diligence in selecting the method for transfer pricing.
5. Interpretation and application of Explanation 7 to section 271(1)(c) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Levy of Penalty under Section 271(1)(c):
The appeals were directed against the orders of the CIT(A) arising from penalty orders passed under section 271(1)(c) of the Income Tax Act for the assessment years 2002-03 and 2004-05. The CIT(A) confirmed the penalty for 2002-03 but deleted it for 2004-05. The penalty was imposed due to transfer pricing adjustments made by the TPO, who rejected the TNMM method used by the assessee and applied the CUP method instead. The Tribunal had earlier confirmed the adjustments made by the TPO.

2. Selection of the Most Appropriate Method for ALP:
The assessee had used TNMM as the most appropriate method for benchmarking its international transactions involving the import of raw materials (APIs). The TPO rejected this and applied the CUP method, leading to an upward adjustment in the arm's length price. The assessee argued that the selection of the method was based on a bona fide belief and that the issue was debatable, especially since it was the first year of transfer pricing provisions in India.

3. Applicability of CUP Method versus TNMM:
The TPO's decision to apply the CUP method was upheld by the CIT(A) and the Tribunal. The assessee contended that the High Court had admitted substantial questions of law regarding the right to choose the most appropriate method and the applicability of the CUP method, indicating that the issue was debatable. The Tribunal noted that merely because the High Court admitted the appeal did not automatically mean the issue was debatable.

4. Good Faith and Due Diligence:
The assessee argued that the selection of TNMM was made in good faith and with due diligence, as no comparable data was available for applying the CUP method. The Tribunal acknowledged that the TPO had to collect data under section 133(6), indicating that such data was not publicly available. This supported the assessee's claim of acting in good faith and with due diligence.

5. Explanation 7 to Section 271(1)(c):
Explanation 7 to section 271(1)(c) states that any addition made under section 92C(4) shall be deemed to represent concealed income unless the assessee proves that the price was computed in accordance with section 92C in good faith and with due diligence. The Tribunal found that the assessee had demonstrated good faith and due diligence in selecting TNMM due to the non-availability of comparable data for CUP. Therefore, the penalty under section 271(1)(c) was not justified.

Conclusion:
The Tribunal concluded that the assessee acted in good faith and with due diligence in selecting TNMM as the most appropriate method due to the lack of comparable data for CUP. Consequently, the penalty for the assessment year 2002-03 was deleted, and the order of the CIT(A) for the assessment year 2004-05, which deleted the penalty, was upheld. The appeal of the assessee was allowed, and the appeal of the revenue was dismissed.

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