Penalty for Concealment of Income
The provisions of transfer pricing are designed to keep a check on the practice of reducing the tax liability by entering into transactions at prices higher/lower than market prices with one or more associated entity. As per section 92 when any specified domestic transaction is carried out between associated enterprises, the said transaction should be carried out at arm’s length price. In other words, income arising or allowance of any expenses to an entity resulting from specified domestic transactions with associated enterprise should be computed by having regard to arm’s length price of such transaction.
The provisions of section 92 will apply only if the aggregate value of specified domestic transactions entered into by the taxpayer during the year exceeds Rs. 20Cr.
Meaning of specified domestic transaction
For the above purpose, specified domestic transaction means any of the following transactions which is not an international transaction:
|Nature of Transaction||Brief description of the transaction|
|(i) Any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of sub-section (2) of section 40A.||Section 40A(2)(b) gives list of entities which are treated as related entities of a taxpayer, inter-alia, any relative of an individual taxpayer, director in the case of a company, a partner in the case of a partnership firm, etc.|
|(ii) Any transaction referred to in section 80A.||As per section 80A(6) when a taxpayer claiming deduction under various sections, inter-alia, sections 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID, 80-IE etc., carries certain transactions with its associated entities, these transactions should be carried out at fair market value. So, if a transaction is covered under section 80A, then it will be treated as a specified domestic transaction.|
|(iii) Any transfer of goods or services referred to in sub-section (8) of section 80-IA.||Section 80-IA provides for deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, telecommunication services, power generation, etc.Section 80-IA(8) covers inter-unit transfer of goods and services by an entity claiming deduction under section 80-IA.|
|(iv) Any business transacted between the taxpayer and other person as referred to in sub-section (10) of section 80-IA.||Section 80-IA provides for deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, telecommunication services,power generation, etc.A taxpayer claiming deduction under section 80-IA may enter into business transaction with other person with whom he has close connection. The transaction may be arranged in such a manner that the profit earned by the taxpayer from such transaction is more than the normal profit. By doing so the profit of other entity is diverted to the taxpayer and in tune the taxpayer will not pay tax on the profit so diverted (because he will claim deduction under section 80IA of higher profit). Such type of transactions are covered under section 80-IA(10).|
|(v) any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of sub-section (8) or sub-section (10) of section 80-IA are applicable.||Section 10AA provides for exemption in respect of income generated by a unit located in Special Economic Zone.Under Chapter VI-A there are various sections under which the taxpayer can claim deduction. Only those sections of Chapter VI-A are relevant to which the provisions of section 80-IA(8) and (10) are applicable.Section 80-IA(8) and (10) have already has been discussed above.|
|(vi) Any other transaction as may be prescribed||No other transaction prescribed as yet by CBDT under this clause.|
The above transactions will be treated as the specified domestic transaction only if the aggregate value of these transactions entered into by the taxpayer during the year exceeds Rs. 20 Cr.
Methods of computation of arm’s length price
As discussed earlier, a taxpayer should carry out specified domestic transactions at arm’s length price. Arm’s length price is to be determined by applying any of the following methods:
- Comparable Uncontrolled Price Method
- Resale Price Method
- Cost Plus Method
- Profit Split Method
- Transactional Net Margin Method
- Such other method as may be prescribed by the CBDT.
Penalty under section 271(1)(c)
Many times a taxpayer may try to reduce tax liability by concealing his income or by furnishing inaccurate particulars of his income. In such a case, by virtue of section 271(1)(c), the taxpayer shall be liable to pay penalty for concealing his income or for furnishing inaccurate particulars of his income.
Section 271(1)(c) provides that if the taxpayer has concealed his income or has furnished inaccurate particulars of his income, then he shall be liable to pay penalty which could be 100% to 300% of the taxes evaded.
As per Explanation 7 to section 271(1)(c), in the case of a taxpayer who has entered into a specified domestic transaction, any amount added or disallowed in computing the total income under section 92C(4), shall be deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished. However, such penalty would not be attracted if the taxpayer proves to the satisfaction of the tax authorities that the price charged or paid in such transaction was computed in accordance with the provisions contained in section 92C (*) and in the manner prescribed therein, in good faith and with due diligence.
(*) Section 92C deals with methods of computation of arm’s length price.
In other words, in case of specified domestic transaction if following conditions are satisfied, then penalty under section 271(1)(c) can be levied :
- Taxpayer enters into any specified domestic transaction.
- The said transaction is not carried out at arm’s length price.
- Tax authorities recomputed the income of the taxpayer by applying the arm’s length
In the above case, income that has increased on account of arm’s length price will be treated as concealed income or income in respect of which the taxpayer has furnished inaccurate particulars and penalty under section 271(1)(c) will be levied at 100% to 300% of tax evaded or sought to be evaded due to such transaction.
However, no penalty will be levied if the taxpayer proves to the satisfaction of the tax authorities that :
- The price charged or paid in the specified domestic transaction was at arm’s length price computed in accordance with the provisions of section 92C.
- The price charged or paid in the specified domestic transaction was computed in the manner prescribed therein.
- The price charged or paid in the specified domestic transaction was computed in good faith and with due diligence.
Penalty for Concealment of Income
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