Recently in the case of Deloitte Consulting India Pvt Ltd (Taxpayer) [TS-148-ITAT-2014(Mum)-TP] regarding levy of penalty in the case of a transfer pricing (TP) adjustment.

Here is the summary of the case and decision:

The Taxpayer, an Indian company, had entered into a Master Service Agreement (MSA) with its Associated Enterprise (AE), Deloitte Consulting (DC), a limited partnership registered in New York. The Taxpayer was engaged by its AE to provide software development services. The AE was responsible for undertaking marketing activities and entering into consulting contracts with customers in the US.

During the Financial Year 2003-04 and 2004-05, the Taxpayer was allocated marketing costs by the AE to the extent relatable to its operations.  The Taxpayer was entitled to claim a tax holiday on the profits derived from the export of software development services for the relevant years. Subsequent to commencement of the audit proceedings for the relevant years, the Taxpayer filed a revised tax return and voluntarily performed a TP adjustment by not claiming the allocated marketing costs as a tax deduction and claimed tax holiday on the enhanced total income.

The Tax Authority disregarded the revised tax return and thereafter made a TP adjustment by disallowing the claim made in the original return for the marketing costs and denied tax holiday on the enhanced income arising from the TP adjustment. The Tax Authority also levied penalty at 100% of the tax liability arising from the TP adjustment on grounds that the Taxpayer had concealed true particulars of income/ furnished inaccurate particulars of income.  The TP adjustment and levy of penalty was upheld by the First Appellate Authority.

Court decision:

The Income-Tax Appellate Tribunal (ITAT) upheld the TP adjustment and the levy of penalty and they also observed that the revised tax return filed by the Taxpayer to reverse its claim of marketing expense was filed after beginning of TP audit proceedings in keenness of a TP adjustment. Further, the revised tax return was not accompanied by a revised TP Accountant’s Report. Thus, the revised tax return was held invalid as it was not “voluntary,” a prerequisite for filing a revised tax return. The Tribunal also observed that protection from levy of penalty may be claimed in case of a TP adjustment only in bona fide cases where the arm’s length price (ALP) has been determined in good faith and due diligence.