Schaeffler India Ltd Vs ACIT (ITAT Ahmedabad)
Conclusion: Penalty under section 271(1)(c) was not to be levied as Explanation 7 to section 271(1)(c), which specifically governs penalty in transfer pricing cases, was neither invoked during the initiation nor discussed while levying the penalty and neither TPO nor CIT(A) ever held that the ALP was computed outside the statutory provisions, or that the study report lacked diligence or was not prepared in good faith.
Held: The penalty under section 271(1)(c) was imposed in connection with a Transfer Pricing adjustment of Rs. 17.15 crore made in respect of the manufacturing and trading segments, which was based on (i) the TPO’s decision to use PBIT/Sales as the Profit Level Indicator (PLI) instead of PBDIT/Sales as adopted by assessee, (ii) changes in the filters and comparables used for benchmarking, and (iii) adjustments made to the operating profit computation by excluding items such as liabilities written back, bad debts written off, and provisions for doubtful debts. The penalty was levied only on the ground that the adjustments made by TPO were upheld by CIT(A) and partly confirmed by ITAT. However, it was noted that assessee had furnished relevant details in the return of income, the transfer pricing study report, and during the course of assessment and penalty proceedings, none of which were found to be inaccurate or false. TNMM was accepted by TPO as the most appropriate method, and the adjustments arose on account of differences in interpretation, such as the use of PBIT versus PBDIT as the PLI, and in the treatment of certain operating items-issues which were debatable. It was noted that several judicial precedents, including CIT vs. Reliance Petroproducts (P) Ltd (2010) 189 Taxman 322 (SC), Mastek Ltd vs. DCIT (2012) 28 taxmann.com 292 (ITAT Ahd), and PCIT vs. Global Vantedge (P) Ltd (2018) 95 taxmann.com 377 (Delhi HC) had held that mere differences in opinion or debatable issues should not attract penalty. In the instant case penalty was levied for furnishing inaccurate particulars of income, despite there being no specific finding by the Tax Authorities that the ALP was not computed in good faith or without due diligence. Moreover, Explanation 7 to section 271(1)(c), which specifically governs penalty in transfer pricing cases, was neither invoked during the initiation nor discussed while levying the penalty. In the instant case, the assessee had used a prescribed method (TNMM) under section 92C of the Act and disclosed the selection of filters, comparables, and operating margin computation in the transfer pricing study report. Neither the TPO nor CIT(A) ever held that the ALP was computed outside the statutory provisions, or that the study report lacked diligence or was not prepared in good faith. In view of these facts and the settled legal position, the necessary conditions under Explanation 7 for imposing penalty were not satisfied. Accordingly, penalty levied by AO was unsustainable in law and was hereby deleted.
