Karnataka HC Upholds Penalty Relief For Palmer Investment’s Disclosed USL Share Sale, As Deal’s International-Transaction Status Is Debatable

The assessee, a non-resident foreign company, sold 43,76,771 shares in United Spirits Ltd. to Relay B.V. The Transfer Pricing Officer treated the sale as an international transaction and made a transfer-pricing adjustment.

The assessee challenged the underlying assessment, and this Court admitted its quantum appeals on substantial questions of law, including whether Relay B.V. was an associated enterprise when the shares were transferred.

The Assessing Officer imposed a penalty under Section 271(1)(c), alleging that the assessee had furnished inaccurate particulars. The Commissioner (Appeals) cancelled the penalty, and the Tribunal upheld that decision.

The Revenue appealed against the Tribunal’s order, relying on Explanation 7 to Section 271(1)(c).

Section 271(1)(c) permits a penalty for concealment of income or furnishing inaccurate particulars. Explanation 7 provides that an addition or disallowance relating to an international transaction or specified domestic transaction is treated as income in respect of which particulars were concealed or inaccurately furnished, unless the assessee establishes that the price was determined in accordance with Section 92C, in good faith and with due diligence.

In CIT v. Dr. Harsha N. Biliangady, [2017] 79 taxmann.com 376 (Karnataka), the Court held that where an addition is the subject of an admitted appeal on a substantial question of law, its sustainability is debatable and penalty cannot be imposed absent concealment or inaccurate particulars.

The Court also referred to CIT v. Ankita Electronics (P) Ltd., (2015) 379 ITR 529 (Karnataka), as covering the issue.

The Court accepted that Explanation 7 addresses additions relating to international transactions, but held that its application here arose against a disputed threshold question: whether the assessee and Relay B.V. were associated enterprises at the relevant time, making the sale an international transaction.

That question was already before the Court in the assessee’s quantum appeals and had been admitted as a substantial question of law.

The assessee had also fully disclosed the transaction.

In light of Dr. Harsha N. Biliangady and Ankita Electronics, the Court concluded that the disputed addition did not establish concealment or inaccurate particulars warranting a penalty.

It dismissed the Revenue’s appeal at the admission stage.