Facts of the Case

The assessee, Verizon India Pvt. Ltd., filed its return of income along with a Transfer Pricing study report for its international transactions with associated enterprises. The assessee adopted the Transactional Net Margin Method (TNMM) for benchmarking and selected certain comparables to determine the Arm’s Length Price (ALP) under Section 92C of the Income Tax Act, 1961.

During the transfer pricing proceedings, the Transfer Pricing Officer (TPO) rejected several comparables used by the assessee and determined the ALP by using different comparables, resulting in an adjustment to the assessee’s income.

Consequently, the Assessing Officer (AO) initiated penalty proceedings under Section 271(1)(c) alleging concealment of income and furnishing inaccurate particulars. The AO imposed a penalty of ₹63,33,517 relying upon Explanation 7 to Section 271(1)(c).

The assessee contended that the transfer pricing adjustment was accepted only to buy peace and avoid prolonged litigation, and such acceptance should not be treated as admission of concealment.

On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted the penalty. The Revenue filed an appeal before the Income Tax Appellate Tribunal (ITAT) challenging the deletion of the penalty. 

Issues Involved

  1. Whether penalty under Section 271(1)(c) can be imposed where transfer pricing adjustment arises due to difference in comparables and benchmarking methodology.
  2. Whether acceptance of a transfer pricing adjustment by the assessee amounts to admission of concealment or furnishing inaccurate particulars of income.
  3. Whether Explanation 7 to Section 271(1)(c) can be invoked when the assessee has maintained transfer pricing documentation and disclosed all material facts.

Petitioner’s Arguments (Revenue)

The Revenue contended that the CIT(A) erred in deleting the penalty imposed by the Assessing Officer.

It was argued that the assessee had accepted the transfer pricing adjustment, which indicated that the income originally reported was incorrect.

The Revenue further relied on Explanation 7 to Section 271(1)(c) and argued that when transfer pricing adjustments lead to an increase in income, penalty may be attracted if the assessee fails to substantiate the arm’s length nature of the transactions.

Accordingly, the Revenue sought restoration of the penalty imposed by the Assessing Officer. 

Respondent’s Arguments (Assessee)

The assessee submitted that all relevant facts regarding international transactions were fully disclosed in the return of income and the transfer pricing study.

It was argued that the adjustment arose merely due to a difference of opinion regarding the selection of comparables and benchmarking methodology.

The assessee further submitted that acceptance of the adjustment was only to avoid prolonged litigation and should not be construed as admission of concealment.

Reliance was placed on earlier Tribunal decisions in the assessee’s own case where similar penalties were deleted on identical facts.

Court Findings / Order

The Income Tax Appellate Tribunal held that penalty under Section 271(1)(c) is not sustainable in the present case.

The Tribunal observed that:

  • The assessee had maintained transfer pricing documentation and disclosed all material facts.
  • The transfer pricing adjustment resulted from a difference of opinion regarding comparables and methodology.
  • No evidence was brought on record by the Revenue to establish deliberate concealment of income or furnishing inaccurate particulars.

The Tribunal also noted that earlier orders in the assessee’s own case had already deleted similar penalties.

Accordingly, the Tribunal upheld the order of the CIT(A) deleting the penalty and dismissed the appeal filed by the Revenue.

Important Clarification

  • The assessee has disclosed all relevant facts,
  • Transfer pricing documentation is properly maintained, and
  • The adjustment arises due to bona fide differences in interpretation, comparables, or methodology.

Sections Involved

  • Section 271(1)(c) – Penalty for concealment of income or furnishing inaccurate particulars
  • Explanation 7 to Section 271(1)(c)
  • Section 92C – Computation of Arm’s Length Price
  • Rule 10B – Determination of Arm’s Length Price
  • Rule 10C – Most Appropriate Method

Link to download the order - https://itat.gov.in/public/files/upload/1703230247-3968-19,%20Verizon%20India%20Pvt.%20Ltd.pdf

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