BABCOCK & BROWN INDIA P.LTD,MUMBAI vs. DCIT 3(1), MUMBAI

The sole grievance of the assessee relates to the penalty levied under section 271(1)(c) of the Income Tax Act, 1961( in short ‘the Act’) on account of upward pricing adjustment made by the Assessing Officer.

The roots for the levy of penalty lie in the assessment order dated 1/3/2013 made under section 143(3) r.w.s. 144C(3) of the Act.

The assessee is engaged in the business of providing investment advisory services. For its international transactions, transfer pricing study report was filed alongwith the return of income. The matter was referred to the Transfer Pricing Officer (TPO) for the determination of arm’s length price in respect of international transactions entered with the Associated Enterprises of the assessee.

After considering the facts and the submissions and the transfer pricing study report of the assessee, the TPO recommended an upward adjustment of Rs.4,03,58,886/-. Objections were raised before the DRP, which were dismissed. The assessment was completed by making upward adjustment of Rs.4,03,58,886/-. Simultaneously, penalty proceedings were initiated under section 271(1)(c) of the Act for filing inaccurate particulars of income.

The assessee carried the matter before Ld. CIT(A) but without any success.

Before us, the Ld. Counsel for the assessee reiterated what has been stated before the lower authorities. It is the say of the Ld. Counsel for the assessee that assessee’s transfer pricing study report was based on a study conducted by an independent expert and the expert justified the pricing as arm’s length price using TNMM method. It is the say of the Ld. Counsel for the assessee that in so far as the transfer pricing additions are concerned, Explanation -7 is the relevant explanation to be considered alongwith section 271(1)(c) of the Act. Strong reliance

We have given careful consideration to the orders of the authorities below. We have also considered carefully the decision of the Co-ordinate Bench relied upon by the Ld. Counsel for the assessee. The undisputed fact is that the assessee had adopted TNMM method as most appropriate method for determining the arm’s length price with the comparables. It is also a fact that the TPO has also followed the TNMM method. Thus, there is no dispute in so far as adoption of most appropriate method is concerned. Admittedly, the upward adjustment have been made on account of different sets of comparables taken by the TPO. It is also an admitted fact that the assessee did not contest the assessment order because it was under liquidation and was going to wind-up its affairs.

In our considered opinion, the determination of reasonable arm’s length price is a matter of estimate. Merely because it is possible to arrive at two different estimates of arm’s length price, it cannot be held that the lower of the two estimates is based on inaccurate particulars, while higher one is accurate. We also find that with regards to penalty under section 271(1)(c) of the Act in respect of transfer pricing additions, only Explanation -7 to the section has to be considered. A perusal of the said Explanation shows that no penalty can be levied where the pricing is done in good faith and with due diligence. In the present case, the transfer pricing of the assessee is based on a study

We, therefore, set aside the order of Ld. CIT(A) and direct the AO to delete the impugned penalty.

In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on 20/11/2015.