Lack of good faith and due diligence cannot be inferred when the grounds on which ALP determined by the assessee has been rejected are reasonably debatable

DCIT Vs RBS Equities India Ltd. (ITAT Mumbai)- Rejection of most appropriate method selected by the assessee does not mean that assessee carried out transfer pricing study without good faith and due diligence and hence, penalty for concealment of income cannot be sustained.

The Tribunal has held that the Explanation 1 to Section 271(1)(c) cannot be applied to the cases where the additions are made to the total income on account of transfer pricing adjustments. These cases should be subject to penalty under Explanation 7 to Section 271(1)(c) only if the assessee does not prove to the satisfaction of the tax authorities that the price charged or paid in an international transaction was computed in accordance with the provisions contained in section 92C and in the manner prescribed under that section, in good faith and with due diligence.

The Tribunal has further observed that deeming fiction under Explanation 7 to Section 271(1)(c) cannot be invoked as long as no dishonesty is found in the conduct of the assessee and as long as he has done what a reasonable man would have done in his circumstances, to ensure that the ALP was determined in accordance with the scheme of Section 92C.

Relevant Extract From the Case law

Assessee has determined the ALP in good faith inasmuch as he has proceeded on the basis that TNMM is most appropriate method on the facts of this case, and he has also set out the reasons as to why CUP must not be applied in this case. While the TPO has not even questioned the former, he has rejected latter only on the grounds that (a) it is incorrect to proceed on the basis that no marketing efforts are required in the case of the AEs, and (b) the onus was on the assessee to demonstrate that no research inputs were given by the AEs. Both of these reasons, to say the least, are highly questionable . The very foundation of transfer pricing exercise is that whereas when independent enterprise deal with each other, their financial and commercial terms are dictated by the dynamics of market forces, it is not exactly the case vis-à-vis dealings with intra associated enterprises transactions and that associated enterprises are able to influence commercial decisions of each other.The plea that when intra associated enterprises transactions are inherently treated as not really based on the dynamics of market forces, it is unrealistic to expect that marketing efforts are also required for securing intra AE business, cannot be dismissed as worthy of outright rejection. It is also well settled in law that nobody can be expected to prove the impossible of proving a negative. Therefore, to expect the assessee to establish that the assessee did not give research inputs to the AEs may perhaps indeed be an impossible burden to discharge. The grounds on which the ALP determination by the asses see has been rejected are thus reasonably debatable. Lack of good faith and due diligence cannot be inferred when the grounds on which ALP determined by the assessee has been rejected are reasonably debatable, even if correct. 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 TP study, questionable to us anyway, approves TNMM for determination of ALP– a proposition which has not been specifically rejected by the revenue authorities. On these facts, lack of ‘due diligence’ in determining the ALP is neither indicated nor can be inferred. In such a situation, it cannot be said that the assessee has not determined the ALP in accordance with the scheme of Section 92 C in good faith and with due diligence. In our considered view, therefore, the conditions precedent for invoking Explanation 7 to Section 271(1)(c) did not exist on the facts of this case. Neither the case of the assessee is covered by the main section 271(1)(c), nor Explanation 7 thereto can be invoked on the facts of this case. Explanation 1 to Section 271(1)(c), as we have seen earlier in our discussions, has no application in respect of additions or dis allowances in respect of ALP adjustments anyway, nor any other deeming fictions come into play here. Accordingly, the facts of the present case did not warrant or justify the imposition of penalty under section 271(1)(c).

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