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2016 (4) TMI 209 - AT - Income TaxPenalty u/s 271(1)(c) - TPA adjustment - disallowance in the case of an assessee who has entered into an international transaction defined in Section 92B - Held that - In the present case it is found that given the clear indication of compliances required by law, there is in fact a clear evidence that disclosures made by the assessee were in good faith and with due diligence and there is absence of wilful or malafide effort to conceal and defraud the Revenue. Due diligence presupposes making all possible efforts/endeavours which a prudent man would have done in the given circumstances or a process whereby one gathers facts to make an informed choice on a matter. Good faith on the other hand is an abstract and comprehensive term. It requires that the action should be honest and encompasses a sincere belief or motive without any malice or the desire to defraud others. It is drawn from the Latin term bonafide and Courts use the term interchangeably. However, in the present case the twin requirements of conjoint compliances presuppose that the two terms due diligence and good faith cannot be used interchangeably or independent of one another. Thus the acceptable standards laid down by the statute are that due and diligence efforts made by a prudent man in a given situation have also to be in good faith as all due diligent efforts per se may not be in good faith. Conversely an act done in good faith with honesty and sincerity per se is not sufficient as acts done in good faith protects acts of negligence. However, the act of computing a transaction is to be done with due diligence i.e. strictly in accordance with the provisions contained in section 92C and in the rules framed there under and thus necessarily in the manner prescribed therein while so computing no negligence even in good faith is legally acceptable. Hence the statute has mandated that not only the assessee is required to act in due diligence but it must also act in good faith. The requirements are very stringent and required to be met scrupulously. In the facts of the present case, we find that the bonafide of the assessee cannot be doubted. To sum up it is seen that at the relevant point of the time when the TP Study was filed there was a debate on the issue of single year data and multiple year data. Considering the change of method from RPM to TNMM, we find that the assessee s explanation that the method was changed from TNMM from 2005-06 AY to RMP in 2006-07 & 2007-08 AY on the ground that there was only one segment in the year and accordingly the most appropriate method selected was the RPM. Notwithstanding the fact that the said approach was not approved by the TPO, it does not detract from the plausible claim that in view of only one segment i.e. the distribution segment the method selected in good faith and due diligence was RPM. Even otherwise we find that the assessee at the time of filing its TP study could not anticipate that despite there being only one segment, the TPO would still insist on holding that TNMM would be the most appropriate method relying on the past position where change in facts is an admitted position. The due diligence standards assiduously required to be adhered to in the present case are standards of reasonable and ordinary diligence. But extraordinary and extreme measures of care, caution and prudence insomuch as to anticipate a vigilance to the extent that despite a plausible explanation on facts the most appropriate method selected by the assessee would still be disturbed by the TPO, is beyond all the possible shades of due diligence expected from an assessee at the time of computing its transaction. - Decided in favour of assessee.
Issues Involved:
1. Imposition of penalty under Section 271(1)(c) for AY 2006-07. 2. Imposition of penalty under Section 271(1)(c) for AY 2007-08. Issue-wise Detailed Analysis: 1. Imposition of Penalty under Section 271(1)(c) for AY 2006-07: The Revenue challenged the CIT(A)'s decision to delete the penalty of Rs. 1,16,74,768 levied for AY 2006-07. The assessee, Boston Scientific India Pvt. Ltd., had used the Resale Price Method (RPM) for transfer pricing, which was rejected by the Transfer Pricing Officer (TPO) in favor of the Transactional Net Margin Method (TNMM). The TPO's adjustments led to an addition of Rs. 3,46,84,993. The Assessing Officer (AO) initiated penalty proceedings under Section 271(1)(c), which the assessee contested, arguing that the addition was accepted to avoid unnecessary litigation and taxes were promptly paid. The AO rejected the explanation and imposed the penalty. The CIT(A) quashed the penalty, leading to the Revenue's appeal to ITAT. The ITAT considered the arguments and found that the assessee's selection of RPM was justified due to the discontinuation of the marketing support service segment, leaving only the distribution segment. The assessee's explanation for the change in methodology was plausible and demonstrated good faith and due diligence. The ITAT noted that the TPO's adjustments were based on comparables offered by the assessee and that the use of single-year data over multiple-year data was a debatable issue at the time. The ITAT concluded that the assessee acted in good faith and with due diligence, meeting the requirements of Explanation 7 to Section 271(1)(c). Therefore, the deletion of the penalty by the CIT(A) was upheld. 2. Imposition of Penalty under Section 271(1)(c) for AY 2007-08: The Revenue also challenged the CIT(A)'s decision to delete the penalty of Rs. 51,47,940 levied for AY 2007-08. Similar to AY 2006-07, the TPO rejected the RPM in favor of TNMM, leading to an addition of Rs. 1,52,93,937. The AO initiated penalty proceedings, which the assessee contested with similar arguments as for AY 2006-07. The AO imposed the penalty, which was quashed by the CIT(A). The ITAT considered the arguments and found that the assessee's explanation for using RPM due to the discontinuation of the marketing support service segment was justified. The ITAT noted that the TPO's adjustments were based on comparables offered by the assessee and that the use of single-year data over multiple-year data was a debatable issue at the time. The ITAT concluded that the assessee acted in good faith and with due diligence, meeting the requirements of Explanation 7 to Section 271(1)(c). Therefore, the deletion of the penalty by the CIT(A) was upheld. Conclusion: The ITAT upheld the CIT(A)'s decision to delete the penalties for both AY 2006-07 and AY 2007-08. The assessee's selection of RPM was justified, and the adjustments made by the TPO were based on comparables offered by the assessee. The assessee acted in good faith and with due diligence, meeting the requirements of Explanation 7 to Section 271(1)(c). The appeals of the Revenue were dismissed.
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