The Delhi High Court agreed with the tribunal's decision, to remove a penalty imposed on the taxpayer for an alleged concealment of income with respect to certain related-party transactions even though the taxpayer accepted the transfer pricing adjustment. The High Court held that because the taxpayer had entered a new line of business (manufacturing), the taxpayer’s failure to disclose certain benefits and advantages from related-party services could not have triggered the automatic presumptive application of the penalty.
The case is: Pr.CIT v. Mitsui Prime Advanced Composites India Pvt. Ltd.
The Transfer Pricing Officer determined that the taxpayer (a subsidiary of a Japanese entity, engaged in manufacturing) did not avail itself of any services for which payments were made to related parties, and that no benefit was shown to have been received from related parties. Rather, the Transfer Pricing Officer found that there was a duplication of services, and determined the arm's length price of three international transactions (specified business and consultancy services, engineering support services, and management support services) as "nil" applying the comparable uncontrolled price (CUP) method.
The Assessing Officer rejected the taxpayer's claim that the transactional net margin method (TNMM) was applicable, and instead applied the CUP method. The Assessing Officer initiated penalty proceedings for concealment of income, finding that the taxpayer did not show good faith or that its explanation was satisfactory. The taxpayer accepted the transfer pricing adjustment, but contested the penalty assessment.
The tribunal rejected the findings of the Transfer Pricing Officer that there was a duplication of services, and instead found that because the taxpayer had not previously conducted any manufacturing activity, the acquisition of business and services under the three agreements could not be characterized as a duplication of services. The tribunal concluded that the three international transactions of the taxpayer and its related parties were genuine and bona fide. The tribunal determined that the Transfer Pricing Officer was misdirected in evaluating the international transactions and payments to the related parties as the mere rendering of services, but that the payments were mainly for acquiring business and for the receipt of technical know-how. The tribunal concluded that the Assessing Officer's penalty imposition was contrary to the actual factual situation in this case.
The High Court essentially agreed with the tribunal, and found that the taxpayer's claim was in respect of a new line of business and that its failure could not have triggered the automatic presumptive application of the penalty. The High Court concluded that the facts in each situation must be analyzed and that generalizations must be avoided.
Read a March 2017 report [PDF 334 KB] prepared by the KPMG member firm in India: Penalty for concealment of income is to be deleted even though adjustment made by the TPO is accepted by the taxpayer
© 2018 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.