Transfer pricing penalty under Explanation 7 is not automatic where computation was bona fide and disclosures were complete.

Penalty under section 271(1)(c) read with Explanation 7 is not automatic in transfer pricing matters. Where the assessee discloses all material facts and shows that the price of international transactions was computed under section 92C in good faith and with due diligence, the deeming fiction in Explanation 7 is displaced. The TNMM method and comparable selection were not disturbed, and the remuneration model was accepted in quantum proceedings. A partial adjustment survived only because the assessee accepted an enhanced mark-up to buy peace, which by itself did not establish concealment or furnishing of inaccurate particulars. On that basis, the penalty was held not leviable.

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Issues: Whether penalty under section 271(1)(c) read with Explanation 7 was leviable on the transfer pricing adjustment, and whether the assessee had computed the price of its international transactions in accordance with section 92C in good faith and with due diligence.

Analysis: Explanation 7 creates a deeming fiction for additions arising from international transactions, but the deeming fiction is displaced if the assessee shows that the price was computed under section 92C in good faith and with due diligence. The record showed that the assessee had disclosed the material facts, the TNMM method and comparable selection were not disturbed, and the remuneration model as a cost-plus arrangement was accepted in the quantum proceedings. The partial addition survived only because the assessee accepted an enhanced mark-up to buy peace and avoid further litigation. A mere acceptance of an estimated adjustment, without any material showing lack of honesty, negligence, or intent to defraud, does not establish concealment or furnishing of inaccurate particulars.

Conclusion: The penalty was not leviable, as the assessee's transfer pricing computation was held to have been made in good faith and with due diligence, and the partial sustained adjustment did not justify penalty.

Ratio Decidendi: In transfer pricing cases, penalty under Explanation 7 to section 271(1)(c) is not automatic; it cannot be sustained where the assessee has disclosed all material facts and demonstrates that its price computation under section 92C was bona fide and exercised with due diligence, even if a part of the adjustment is later accepted or sustained.

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