Section 271(1)(c) provides that the AO or CIT(A) may levy a penalty where the assessee has concealed the particulars of his income or has furnished inaccurate particulars of his income.  The Karnataka HC dealt with a situation as to whether penalty u/s 271(1)(c) can be levied where the addition is made as per MAP resolution under DTAA.

Toyota Kirloskar Motor (P.) Ltd. v. UOI [2019] 109 137 (Karnataka HC)

The Assessee a subsidiary of Toyota Motor Corporation, Japan (AE) and was engaged in the business of manufacture and trade of passenger cars and multi-utility vehicles. During relevant year, Assessee entered into various international transactions with its various AEs.  The TPO made TP adjustment, which was confirmed by DRP.  Final assessment order was passed and penalty notice u/s 271(1)(c) was issued. 

In the meanwhile, AE invoked the Mutual Agreement Procedure [MAP] under the India-Japan DTAA before the National Tax Agency of Japan during seeking re-determination of TP adjustment. The Indian Competent Authority and the National Tax Authority of Japan after deliberations came to the conclusion that the TP adjustment should be reduced to Rs. 91.80 crores as against Rs. 240.11 crores determined by the TPO.  Assessee accepted the MAP resolution and AO passed the order giving effect to MAP resolution. 

The AO passed an order imposing penalty under section 271[1][c] in respect of the TP adjustment on the ground that the assessee had concealed income.  The Assessee filed appeal before CIT(A). 

The assessee also filed the writ petition before HC challenging the constitutional validity of section 271[1][c] along with Explanation 7 insofar as the same being applied to mutual agreement between sovereign Nations under DTAA.  The Assessee contended that section 271[1][c] should be read down and it should be held that it has had no application in respect of amounts determined pursuant to MAP resolution under DTAA.

The HC dismissed the writ petition.  The HC held that provisions of section 271[1][c] shall continue to apply unless there is specific provision in DTAA.  The HC observed that “unless a specific provision is made in the Double Taxation Avoidance Agreement in as much as penalty is concerned, the provisions of Section 271[1][c] of the Act shall continue to apply or in other words, where a specific provision is made in the DTA Agreement, waiving of penalty, the same shall prevail over the penalty provisions of the Income Tax Act are concerned. Only in such circumstances, Section 271 [1] [c] of the Act cannot be invoked. Merely for the reason that Article 253 of the Constitution of India provides for enacting any law for implementing any agreement, treating or convention with foreign countries and Section 90 is engrafted to avoid Double Taxation it cannot be held that Section 271[[1][c] of the Act is ultravires the constitution as far as levy of penalty subsequent to passing of the order under Section 44(G) and (H) of the Rules. The competency of the legislature to levy penalty under Section 271[1][c] of the Act cannot be disputed as the said provision itself is a self-contained code distinct from the assessment provisions.”

The HC held that MAP order is an adjustment to assessment order and is not annulment of assessment order.  The relevant observations of HC are as follows:

“The order passed by the mechanism provided under Section 90 can be construed as an adjustment to the assessment order but not an annulment of the assessment order. If by such an adjustment, the assessment order is annulled in its entirety, setting aside the tax levied on income, then the arguments of the petitioners can hold good prohibiting the authorities to invoke the penal proceedings irrespective of any explicit finding regarding the penal consequences in the order of MAP. However, in the present set of facts, such a situation would not arise in view of the adjustment made to certain extent in the order passed under Rule 44H(5), implementing the order of MAP reducing the transfer pricing adjustment to Rs. 91,80,00,000/- as against Rs. 240,11,91,692/-. The onus lies on the assessee to establish that the said addition now finally decided by MAP is not due to concealment of income or furnishing of inaccurate particulars and moreover, the computation was made under Section 92C in the manner prescribed under that Section, in good faith and with due diligence.”

The HC concluded that Section 271(1)(c) of the Act is intra vires the constitution in so far as imposing of penalty on amounts determined pursuant to MAP resolution under DTAA.

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