The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has upheld the deletion of a penalty imposed on Aon Services India Pvt. Ltd. under Section 271(1)(c) of the Income Tax Act, 1961, holding that transfer pricing adjustments arising from changes in filters and selection of comparable companies involved highly debatable issues.

The bench of  Vimal Kumar (Judicial Member) and M. Balaganesh (Accountant Member) while following the tribunal’s decisions in the company’s own cases for earlier assessment years, upheld the Commissioner of Income Tax (Appeals)’s order deleting the penalty. 

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The appellant/assessee filed its income tax return on September 30, 2008, declaring income of ₹9,46,63,523. The return was initially processed under Section 143(1), and the case was subsequently selected for scrutiny.

The Assessing Officer passed an assessment order on August 24, 2012, making an addition of ₹44,06,38,092 on the basis of the arm’s length price determined by the Transfer Pricing Officer (TPO). Separate penalty proceedings were initiated under Section 271(1)(c), which deals with concealment of income or furnishing inaccurate particulars of income.

The transfer pricing adjustment comprised ₹19,87,96,730 relating to the software development services segment and ₹24,18,41,362 relating to the information technology enabled services segment.

After considering the company’s written response, the Assessing Officer passed the penalty order on April 28, 2016. The company challenged that order before the Commissioner of Income Tax (Appeals), who allowed its appeal on April 30, 2019. The Revenue then approached the tribunal against the deletion of the penalty.

The department argued that the Commissioner (Appeals) had erred in deleting the entire penalty for furnishing inaccurate particulars of income in connection with the transfer pricing adjustment.

It emphasised that the Dispute Resolution Panel had confirmed the quantum addition. The Revenue also maintained that the resolution under the Mutual Agreement Procedure (MAP) had not granted relief for approximately ₹12.90 crore of the transfer pricing adjustment.

On that basis, the Department sought reversal of the appellate order deleting the penalty.

The company submitted that the adjustment resulted from the TPO modifying the economic analysis undertaken in its transfer pricing study.

According to its submissions, the TPO changed the filters used for identifying comparable companies, rejected certain companies selected by the assessee and introduced additional comparables. The company argued that these were matters on which different views could reasonably arise and could not, by themselves, justify a concealment penalty.

It further submitted that transfer pricing was not an exact science. Different conclusions on the arm’s length price could emerge from the same facts depending on the comparables, filters and benchmarking approach adopted.

The company relied particularly on the tribunal’s decisions in its own cases for assessment years 2006–07 and 2007–08, in which deletion of penalties had been upheld because the adjustments arose from debatable questions concerning filters and comparable selection.

The company also contended that it had determined the arm’s length price through an economic analysis supported by a transfer pricing study prepared for the relevant year.

It maintained that all relevant particulars had been disclosed in its return and that the necessary details and documentary evidence had been provided to the Assessing Officer and the TPO.

According to the company, the tax authorities had not identified any inaccuracy in the particulars furnished. It therefore argued that a disagreement with its benchmarking analysis did not establish that it had concealed income or supplied inaccurate particulars.

These submissions formed part of its broader argument that it had acted bona fide and maintained the requisite transfer pricing documentation.

The company explained that the original adjustment covered transactions with both US-based and non-US associated enterprises.

Of the total ₹44,06,38,092 adjustment proposed by the TPO, ₹41,79,89,294 related to US transactions, which were addressed through MAP. The company continued to challenge the adjustment relating to non-US transactions before the tribunal.

Referring to the separate quantum appeal for assessment year 2008–09, the company submitted that the tribunal had directed the exclusion of six of eight disputed comparables in the software development segment and remanded the remaining two for fresh consideration. In the information technology enabled services segment, it said that nine comparables had been directed to be excluded.

The company contended that giving effect to those directions would eliminate the adjustment relating to non-US transactions. This was its submission regarding the anticipated effect of the quantum proceedings; the present order decided the Revenue’s appeal against deletion of the penalty.

The tribunal placed reliance on its earlier decisions concerning the same assessee for assessment years 2006–07 and 2007–08.

In the reasoning reproduced from the earlier order, the tribunal had explained that changes in filters and comparable companies involved highly debatable issues. Additions arising from those differences did not justify accusing the assessee of furnishing inaccurate particulars or concealing income.

The earlier order also recorded that the original transfer pricing adjustment for the preceding year had substantially reduced following MAP resolution and appellate proceedings, while the Assessing Officer had considered the entire original adjustment when imposing the penalty.

Applying that precedent to the present dispute, the bench rejected the Revenue’s grounds as devoid of merit and dismissed its appeal. The deletion of the penalty under Section 271(1)(c) consequently remained intact.

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