Transfer pricing penalty provisions remain operative despite MAP resolution where the treaty contains no express penalty immunity.

A tax treaty prevails over the Income-tax Act only to the extent it expressly overrides domestic law, and in the absence of a specific treaty bar, penalty proceedings under Section 271(1)(c) remain maintainable. Penalty is a distinct proceeding from assessment, and Explanation 7 does not impose an automatic levy; the assessee may still show that transfer pricing was computed under Section 92C in good faith and with due diligence. Where a MAP resolution resolves the transfer pricing adjustment but does not address penalty, it does not confer immunity from penalty. The provision is therefore not rendered ultra vires and continues to apply subject to the statutory safeguards.

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Issues: Whether Section 271(1)(c) of the Income-tax Act, 1961, including Explanation 7, is unconstitutional or inapplicable to penalty proceedings arising from transfer pricing adjustments finally resolved under the Mutual Agreement Procedure under a double taxation avoidance convention.

Analysis: Article 253 and Section 90 of the Income-tax Act, 1961 enable implementation of treaty obligations, and where a tax treaty contains a specific provision overriding the Act, the treaty prevails to that extent. However, the agreement in question did not contain any provision granting immunity from penalty, nor did the MAP resolution deal with penalty. Penalty under Section 271(1)(c) is a distinct and independent proceeding from assessment, and its invocation depends on the statutory preconditions being satisfied. Explanation 7 does not create an automatic levy; the assessee may still show that the price was computed in accordance with Section 92C in good faith and with due diligence. In the absence of a treaty stipulation excluding penalty, the penalty provision remains operative and is not rendered ultra vires.

Conclusion: Section 271(1)(c) of the Income-tax Act, 1961 was held intra vires and applicable notwithstanding the MAP resolution, subject to the statutory safeguards governing penalty.

Ratio Decidendi: A double taxation treaty overrides the Income-tax Act only to the extent it specifically provides otherwise, and in the absence of an express treaty bar, penalty proceedings under Section 271(1)(c) remain maintainable as separate proceedings governed by their own statutory conditions.

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