Penalty for transfer pricing adjustment on interest-free loans fails where the assessee fully disclosed the transaction and gave a bona fide explanation.
Penalty under section 271(1)(c) was held unsustainable where the assessee had fully disclosed interest-free loans advanced to an associated enterprise and explained that the funds came from own resources as start-up support or as equity-like investment. The transfer pricing documentation contained the relevant particulars, and the explanation was not found false. In those circumstances, a sustained transfer pricing adjustment on its own did not establish concealment of income or furnishing of inaccurate particulars under Explanation 7. The penalty was deleted because the revenue had not shown lack of bona fides in the assessee's explanation.
Issues: Whether penalty under section 271(1)(c) of the Income-tax Act, 1961 was leviable in relation to the transfer pricing adjustment on interest-free loans advanced to an associated enterprise, and whether the assessee had furnished inaccurate particulars or concealed income within the meaning of Explanation 7.
Analysis: The assessee had disclosed the loan transaction and the relevant particulars in the transfer pricing documentation, and had given an explanation that the funds were advanced from own funds as start-up support and, alternatively, as investment in the nature of equity or quasi-equity. The explanation furnished before the tax authorities was not rejected as being false, and the record showed disclosure of the transaction and the basis on which no interest was charged. In these circumstances, the mere fact that the transfer pricing adjustment was ultimately sustained in part did not, by itself, establish concealment or furnishing of inaccurate particulars so as to attract penalty.
Conclusion: Penalty under section 271(1)(c) was not sustainable and was deleted.
Final Conclusion: The appeals succeeded on merits, and the penalty additions did not survive.
Ratio Decidendi: Where the assessee has fully disclosed the transaction and offers a plausible explanation for not charging interest, a transfer pricing adjustment by itself does not justify penalty for concealment or inaccurate particulars unless the explanation is shown to be false or lacking bona fides.
TaxTMI 
AI Drafter ✕
TaxTMI 
