Misreporting vs Under reporting: immunity available where transfer pricing adjustments reflect arm's length benchmarking and full disclosure granted

Whether a penalty for misreporting can be imposed on transfer pricing adjustments was examined by distinguishing under reporting simpliciter from misreporting as defined by statute; misreporting requires misrepresentation, suppression, false entries or failure to disclose international transactions. Where adjustments result from arm's length benchmarking using comparables, prescribed transfer pricing information was maintained and international transactions were disclosed, the ingredients of misreporting were not established and immunity for under reporting applies. Consequently, penalties premised on misreporting are not sustainable when adjustments conform to arm's length price and required documentation and disclosure are present.

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Issues: Whether the penalty of 200% under Section 270A(8) read with Section 270A(9) of the Income-tax Act, 1961 could be imposed on the petitioner for alleged misreporting arising from transfer pricing adjustments, and whether the petitioner was entitled to immunity under Section 270AA of the Income-tax Act, 1961.

Analysis: The proceedings arose from transfer pricing adjustments determined by the Transfer Pricing Officer under Section 92CA(3) and subsequently rectified under Section 92CA(5) read with Section 154. Section 270A distinguishes between simple under-reporting and under-reporting that is a consequence of misreporting, the latter attracting a higher penalty under sub-section (8) and being defined by sub-section (9). Section 270AA grants immunity only for under-reporting simpliciter and excludes cases where under-reporting results from misreporting as defined in Section 270A(9). The facts show the adjustments were made by application of arm's length price using comparables and were later rectified; the petitioner maintained information and documents under Section 92D and disclosed international transactions under Chapter X. The transfer pricing determination and its rectification involve estimation and benchmarking and, in the present facts, do not establish ingredients of misreporting such as misrepresentation, suppression, false entries, failure to record receipts, or failure to report international transactions as required by Section 270A(9). The matter thus falls within the exception in Section 270A(6)(d) concerning additions made in conformity with the arm's length price where prescribed information and documents were maintained and material facts disclosed. Having regard to these statutory distinctions and the record of disclosure and compliance, the imposition of penalty as consequence of misreporting was not warranted.

Conclusion: Penalty under Section 270A(8) read with Section 270A(9) cannot be sustained; the petitioner is entitled to immunity under Section 270AA and the impugned orders rejecting immunity and imposing penalty are set aside in favour of the petitioner.

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