Where in respect of international transactions relating, assessee failed to adopt CUP method and did not benchmark each of international transaction separately, TPO was justified in making addition to assessee’s ALP on basis of CUP method and also passing penalty order under section 271(1)(c).

 

Case: Genom Biotech (P.) Ltd. vs.Income-tax Officer- 10 (3) 1, Mumbai

 

FACTS

 

The assessee was a company engaged in the business of ‘manufacturing and trading of pharmaceutical products’. It recorded international transactions with Associated Enterprises (AEs). Those AEs eventually sold the goods to the buyers at Ukraine. The assessee benchmarked those transactions by adopting Cost Plus Method (CPM).

 

In transfer pricing proceedings, the TPO found that AEs of the assessee were engaged in buying similar products for sale of the same at Ukraine from unrelated parties as well. Thus, TPO opined that those transactions would constitute CUP, which could be used for benchmarking assessee’s international transactions.

On the basis of CUP method, the TPO made addition to assessee’s ALP which was duly accepted by assessee. Thereupon, the Assessing Officer passed a penalty order under section 271(1)(c) in respect of aforesaid addition.

 

Upon receiving the penalty order, the assessee made an appeal to the Commissioner (Appeals). The CIT(A) confirmed the penalty order. On higher appeal it was observed and held that:

 

The assessee had international transactions with the AEs who in turn supply the materials to the buyers in the Ukraine. Similarly, some unrelated parties also supplied materials to Ukrine using the assessee’s AEs. Thus, there is direct CUP useful for TP studies of the impugned international transactions. There was no discussion or justification in the orders. Therefore, assessee fairly conceded on this point and agreed for adjustment to its international transactions.

 

Now, the issue under consideration relates to ‘concealment of income’ or ‘furnishing of inaccurate particulars of income’. One needs to decide in the light of the provisions of Explanation 7 to section 271(1)(c).

 

Assessee was well aware about the availability of CUPs at least for the two international transactions. The assessee benchmarked all transactions in aggregation while applying the CPM. In that sense, due diligence is not in existence in not using the CUP method and not benchmarking the transaction with the TP study. Next condition relates to the ‘good faith’. Good faith is not demonstrated by assessee.

 

Considering the above factual matrix of the case, this is the fit case for levy of penalty and therefore, the decision taken by the lower authorities was affirmed. Choose correct TP method or else pay concealment penalty.

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