Pr.CIT v. Mitsui Prime Advanced Composites India Pvt. Ltd. |Penalty assessment for related-party transactions deleted

14 March 2017

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 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.

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