Penalty for transfer pricing adjustment not justified if ALP was determined in good faith and with due diligence

M/s Halcrow Consulting India Pvt. Ltd. Vs. DCIT (ITAT Delhi)

In this case Grounds on which the ALP determined by the assessee has been rejected are reasonably debatable. The assessee had obtained a transfer pricing study from an outside expert and the objectivity of the same was not called into question. Therefore, 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 had not determined the ALP in accordance with the scheme of section 92C in good faith and with due diligence and accordingly, the conditions precedent for invoking Explanation 7 to section 271(1) (c) did not exist on the facts of the instant case.

If we accept the contentions of the department that addition on account of transfer pricing adjustment invariably means absence of good faith and due diligence, then each and every case involving transfer pricing adjustment would call for imposition of penalty us/ 271(1)(c) of the Act.

In absence of any overt act, which indicates conscious and material suppression, invocation of Explanation 7 to Section 271(1)(c)in a blanket manner could not only be injurious to the assessee but ultimately would be contrary to the purpose for which it was en grafted in the statute. it might lead to a rather peculiar situation where the assessee who might otherwise accept such determination may be forced to litigate further to escape the clutches of Explanation 7.