Facts of the Case

  • The respondent-assessee, Sinosteel India Pvt. Ltd., was engaged in providing support services to its holding company and associated enterprises for procurement and supply of metallurgical materials.
  • The assessee earned commission at lower rates in international transactions compared to a higher commission earned in a single third-party transaction.
  • The assessee excluded this third-party transaction as an internal comparable while applying the CUP (Comparable Uncontrolled Price) method due to:
    • Low transaction volume
    • Isolated nature of transaction
    • Long-term relationship with associated enterprises
  • The Transfer Pricing Officer (TPO) included the internal comparable and made adjustment to income.
  • Penalty proceedings were initiated under Section 271(1)(c) for concealment of income.

Issues Involved

  1. Whether penalty under Section 271(1)(c) is leviable when transfer pricing adjustment arises from a debatable issue regarding comparables.
  2. Whether the assessee failed to compute ALP in good faith and due diligence as required under Explanation 7.
  3. Whether exclusion of an internal comparable constitutes concealment or furnishing inaccurate particulars 

Petitioner’s Arguments (Revenue)

  • The assessee failed to correctly compute arm’s length price as per Section 92C.
  • Explanation 7 deems additions in transfer pricing as concealed income unless due diligence is proved.
  • The assessee did not justify exclusion of internal comparable in the Transfer Pricing report.
  • Therefore, penalty u/s 271(1)(c) was rightly imposed.

Respondent’s Arguments (Assessee)

  • The exclusion of internal comparable was justified due to:
    • Small volume
    • One-time transaction
    • Difference in business dynamics (long-term vs isolated)
  • All material facts and transactions were fully disclosed to the authorities.
  • The issue involved interpretation and selection of comparables, making it debatable.
  • Reliance placed on judicial precedents that penalty cannot be imposed on debatable issues.

Court’s Findings / Order

  • The Delhi High Court upheld the Tribunal’s order deleting penalty.
  • Key findings:
    • Penalty is not automatic merely because addition is made.
    • The issue of including/excluding comparables was debatable, as even the quantum appeal was admitted by the High Court.
    • The assessee had:
      • Acted in good faith
      • Exercised due diligence
      • Provided a reasonable explanation for exclusion of comparable
    • The Tribunal’s finding on bona fide conduct is a finding of fact and cannot be interfered with.

Important Clarifications

  • Explanation 7 creates a deeming fiction for concealment in transfer pricing cases, but:
     Penalty will NOT apply if:
    • ALP computation is done as per Section 92C
    • The assessee acted in good faith
    • Due diligence is demonstrated
  • Debatable issues in transfer pricing = No penalty
  • Distinction between:
    • Quantum proceedings (ALP determination)
    • Penalty proceedings (bona fide conduct)

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2018:DHC:4854-DB/SKN03082018ITA8252018.pdf

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