Penalty u/s. 271(1)(c) can not be imposed for bona fide difference of opinion in selection and application of transfer pricing method
Court :The Mumbai Income Tax Appellate Tribunal
Citation :ACIT v. Firmenich Aromatics (India) Pvt. Ltd. [ITA No. 4654/Mum/2009] dated 17 May, 2010
The Mumbai Income Tax Appellate Tribunal (“the Tribunal”) has discussed the principles in relation to application of penalty provisions, under section 271(1)(c) of the Income-tax Act, 1961 (“the Act”), in case of a transfer pricing adjustment involving ACIT v. Firmenich Aromatics (India) Pvt. Ltd. [ITA No. 4654/Mum/2009] dated 17 May, 2010
Specifically, the Tribunal held that where there is a difference between the Revenue and the assessee in selecting and applying a transfer pricing method for the purpose of determining the arm’s length transfer price, such difference constitutes a bona fide difference of opinion and does not tantamount to furnishing of inaccurate particulars of income by the assessee with the intent of concealing income. In doing so, the Tribunal also placed reliance on the Supreme Court judgment in the case of CIT v. Reliance Petroproducts Pvt. Ltd.  322 ITR 158 (SC). As a result, the Tribunal ruled in favour of the assessee and held that there was no case for penalty proceedings under section 271(1)(c) of the Act to be initiated against the Taxpayer.
The assessee selected and applied the Transactional Net Margin Method (“TNMM”) for determination of the arm’s length transfer price. Upon a reference made by the Assessing Officer (“AO”) to the Transfer Pricing Officer (“TPO”) under section 92CA(3) of the Act for determination of the arm’s length transfer price, the TPO instead selected and applied the Comparable Uncontrolled Price (“CUP”) method as the most appropriate transfer pricing method. Consequently, the TPO recomputed the arm’s length price and made a transfer pricing adjustment for the differential arising on account of use of CUP Method instead of TNMM.
This adjustment was considered by the AO as the addition to the assessee returned income and a penalty was levied on the adjusted income under section 271(1)(c) of the Act, holding that the assessee had furnished inaccurate particulars and had therefore concealed income.
The assessee appealed to the first level of the Appellate Authority — the Commissioner of Income Tax (Appeals) (“CIT(A)”) against the imposition of penalty by the Revenue. The CIT(A) accepted the assessee contention that a difference in selection and application of transfer pricing method can be considered as bona fide difference of opinion and does not tantamount to furnishing inaccurate particulars of income by the assessee. Accordingly, the CIT(A) cancelled the penalty.
Aggrieved by the order of the CIT(A), the Revenue preferred an appeal before the Tribunal.
The Tribunal upheld the order of the CIT(A), for the same reasons as stated by the CIT(A). Further, in doing so, the Tribunal placed reliance on the judgment of the Supreme Court judgment in the case of Reliance Petroproducts Pvt. Ltd. (above), wherein it was held that for penalty under section 271(1)(c) of the Act to be attracted, there must be concealment of particulars of the assessee income. Secondly, the assessee must have furnished inaccurate particulars of income. Accordingly, to attract penalty, there must be evidence that the details supplied in the taxpayer’s return are inaccurate, inexact, incorrect, false and erroneous. In the absence of any such finding, merely an incorrect claim, being a claim not sustainable in law, cannot tantamount to furnishing of inaccurate particulars by the assessee.
Following this judgment, the Tribunal held that given the facts of this case, there is no case for penalty to be initiated under section 271(1)(c) of the Act. In this context, the Tribunal stated that the assessee cannot be expected to visualize the method which would have been adopted by the Revenue. Further, since there is no dispute on the basic data furnished by the Taxpayer, on the basis of which the TPO selected and applied the CUP method, the Taxpayer cannot be said to have furnished inaccurate particulars.
The Tribunal ruling has reiterated the principle of ‘bona fide difference of opinion’ arising in the context of application of most appropriate transfer pricing method. The Tribunal has ruled that any addition to income arising as a result of bona fide difference of opinion cannot be used as a basis for levy of penalty.
The ruling is in line with that of the Delhi Bench of the Tribunal in the case of DCIT v. Vertex Customer Services (India) Pvt.Ltd.  126 TTJ 184 (Delhi) where it was also held that in the absence of a mala fide or contumacious conduct on the part of the Taxpayer, penalty proceeding under section 271(1)(c) of the Act cannot be initiated.