2022 (7) TMI 947 - AT - Income Tax

Penalty u/s 271(1)(c) - Transfer Pricing adjustment made with regard to the transactions of the assessee-company with its Associated Enterprises - CIT - A deleted the penalty levy - HELD THAT - Under section 271(1)(c) of the Act, penalty is levied for concealing the particulars of income or furnishing inaccurate particulars of income by the assessee. It is also pertinent to note the provisions of Explanation 7 to section 271(1)(c) of the Act, which deals with penalty levied in respect of transfer pricing adjustment As per the provision of this explanation, any addition on account of transfer pricing adjustment shall be deemed to represent income in respect of which particulars have been concealed or inaccurate particulars have been furnished by the assessee as per section 271(1)(c) which will result in imposition of penalty under the said section. The Explanation further provides an exception, where no penalty will be imposed pursuant to aforesaid addition, if assessee proves to the satisfaction of the authority that the price charged or paid in such a transaction was computed in accordance with provisions contained in section 92C and such price was computed as per the manner prescribed under that section in good faith and with due diligence. The term good faith and due diligence in Explanation 7 to section 271(1)(c) of the Act were analysed by the Co ordinate Bench of Tribunal in DCIT v/s RBS Equities India Ltd. 2011 (8) TMI 459 - ITAT MUMBAI Section 92C of the Act deals with computation of ALP and enlists the methods to be followed for same. In the present case, assessee applied TNMM as the most appropriate method, which is also prescribed u/s 92C - as there is no dispute regarding the selection of most appropriate method in the present case. In the present case, the assessee has conducted and maintained contemporaneous transfer pricing documentation as per the provisions of section 92D of the Act read with Rule 10D of the Income Tax Rules. The assessee, in its transfer pricing report had conducted a detailed function, assets and risk analysis of its international transaction. It is also not the case, wherein, the transfer pricing documentations filed by the assessee were rejected by the TPO. Thus, applying the analysis of the term good faith and due diligence we are of the considered view that in the present case the assessee has computed the ALP in respect of the international transaction in good faith and with due diligence. Accordingly, we find no infirmity in the impugned order passed by the learned CIT(A) directing deletion of penalty levied under section 271(1)(c) - Decided against revenue.

Summary

Issues Involved:
1. Deletion of penalty imposed under section 271(1)(c) of the Income Tax Act, 1961, related to Transfer Pricing adjustment.
2. Methodology and appropriateness of comparable companies used for benchmarking by the assessee.
3. Alleged defects/anomalies in the Transfer Pricing study report.
4. Determination of international transactions at arm's length price.
5. Good faith and due diligence in computation of price under section 92C.

Issue-wise Detailed Analysis:

1. Deletion of Penalty under Section 271(1)(c):
The Revenue challenged the deletion of a penalty amounting to Rs. 57,37,070 imposed under section 271(1)(c) related to Transfer Pricing adjustments. The Tribunal upheld the deletion of the penalty, emphasizing that the assessee had conducted its Transfer Pricing study in good faith and with due diligence as per section 92C of the Act. The Tribunal noted that no specific defects were pointed out by the Departmental authorities regarding the Transfer Pricing study.

2. Methodology and Appropriateness of Comparable Companies:
The Tribunal observed that the methodology used by the assessee and the appropriateness of the comparable companies selected for benchmarking were not questioned at any stage in the proceedings before the TPO, AO, or CIT(A). The TPO ignored the assessee's Transfer Pricing study without pointing out any specific defect and proceeded to determine the ALP based on standard comparables used in the BPO/ITES segment by the Department.

3. Alleged Defects/Anomalies in the Transfer Pricing Study Report:
The Tribunal noted that the TPO selected certain comparables with an average margin of 27.80%, leading to an upward adjustment. However, the Tribunal found that at least five comparables used by the TPO had financials not available in the public domain when the assessee conducted its Transfer Pricing study. Therefore, penal consequences could not be imposed on the assessee for not using data unavailable at the time of its study.

4. Determination of International Transactions at Arm's Length Price:
The assessee adopted the Transactional Net Margin Method (TNMM) and claimed that the international transaction of 'Provision of Contact Centre Services' was at arm's length price, with an adjusted net cost plus mark-up of 12.83% compared to 9.95% for comparable independent companies. The TPO, however, proposed an upward adjustment. The CIT(A) restricted the adjustment, and the Tribunal upheld the deletion of the penalty, noting that the assessee's Transfer Pricing study was conducted in accordance with section 92C and no specific defects were identified.

5. Good Faith and Due Diligence in Computation of Price under Section 92C:
The Tribunal analyzed the terms 'good faith' and 'due diligence' as per Explanation 7 to section 271(1)(c), referring to the Co-ordinate Bench's decision in DCIT v/s RBS Equities India Ltd. It concluded that the assessee had computed the ALP in good faith and with due diligence. The Tribunal emphasized that the assessee's Transfer Pricing documentation was contemporaneous and conducted as per the provisions of section 92D and Rule 10D of the Income Tax Rules. Therefore, the penalty under section 271(1)(c) was not leviable.

Conclusion:
The Tribunal dismissed the Revenue's appeal and upheld the CIT(A)'s order directing the deletion of the penalty levied under section 271(1)(c) of the Act. The Tribunal found that the assessee had conducted its Transfer Pricing study in good faith and with due diligence, and no specific defects were identified by the Departmental authorities.