In a major relief to Tianjin Tianshi India Pvt. Ltd, the Delhi bench of the Income Tax Appellate Tribunal (ITAT) has held that the penalty under section 271(1)(c) of the Income Tax Act, 1961 cannot be levied if the transfer pricing provisions under section 92C was handled by the assessee in due diligence without any mala fide intentions.
The assessee is a Chinese based Company from TIENS Group of Companies. The assessee is engaged in the business of Trading/Distribution of Food Supplements and Health Care Equipments. The products dealt with by the Company are basically products manufactured in China or other places by Group concerns. Another Group Entity Tianjin Tianshi Biological Development Company Limited, incorporated at China has established a Foreign Branch Office in India which is a Foreign Company with Non-Resident Status falling under the category of an “Associate Enterprise” (AE) of the assessee, while the Indian Branch Office of this company specifically fall under the category of “Permanent Establishment” (PE).
On the first appeal, the first appellate authority deleted the penalty and held that the assessee was under the belief that the purchase from the PE of the foreign AE would not attract the transfer pricing provisions. It was held that the provisions of Explanation 7 to Section 271(1)(c) are not attracted in this case and deleted the penalty.
Concurring with the findings of the first appellate authority, the Tribunal held that the provisions of Explanation 7 accord a benefit to the assessees to prove that the price charged is paid in such transactions was computed in accordance with the provisions of Section 92C in good faith and due diligence.
“In the instant case, all the facts have been submitted before the revenue authorities while the assessee sued NP/TC, the revenue used OP/Sales. This amounts to a determination of ALP from a different angle, say at most from the angle of the revenue. It cannot be said that there was any surreptitious mechanism embarked upon by the assessee nor it can be said that the assessee failed to exercise their transactions with all the due-diligence. In the present case, the assessee has prepared its TP report in good faith and with due care. There is nothing on record to disprove the good faith and the due diligence discharged by the assessee in determining the ALP of transactions in the TP report submitted by the assessee,” the Tribunal added.