Penalty for failure to keep and maintain information and document, etc., in respect of certain transactions.

442(1)

The Assessing Officer or Commissioner (Appeals) may impose a penalty of 2% of the value of each international transaction or specified domestic transaction entered into by a person, if in respect of such transaction he,—

• (a) fails to keep and maintain any such information and document as required by section 171(1);
• (b) fails to report such transaction as he is required to do so; or
• (c) maintains or furnishes an incorrect information or document.

442(2)

The prescribed income-tax authority referred to in section 171(4) may impose a penalty of five lakh rupees on a person, if he fails to furnish the information and document required under the said section.

Explanation

Section Summary:

This section introduces penalties for failing to comply with documentation and reporting requirements related to international transactions or specified domestic transactions. It applies to taxpayers who either fail to maintain or provide the required information, fail to report such transactions, or provide incorrect information or documents.

Key Changes:

1. New Penalty Structure: The section introduces a penalty of 2% of the value of each international or specified domestic transaction for non-compliance with documentation and reporting requirements. This is a new provision aimed at ensuring stricter adherence to transfer pricing regulations.
2. Additional Penalty: A flat penalty of ₹5 lakh is introduced for failing to furnish information or documents as required under section 171(4).

Practical Implications:

1. For Taxpayers: Taxpayers involved in international or specified domestic transactions must ensure they maintain accurate records and report these transactions correctly. Failure to do so could result in significant financial penalties.
2. For Businesses: Companies engaged in cross-border transactions or large domestic transactions must invest in robust documentation and compliance processes to avoid penalties.
3. For Compliance Processes: Tax authorities now have a clear mechanism to penalize non-compliance, which may lead to increased scrutiny of transfer pricing documentation.

Critical Concepts:

1. International Transaction: Transactions between associated enterprises (e.g., parent company and subsidiary) located in different countries.
2. Specified Domestic Transaction: Certain high-value domestic transactions between associated enterprises, such as intercompany loans or services, that are subject to transfer pricing rules.
3. Section 171(1): Requires taxpayers to maintain and furnish information and documents related to international and specified domestic transactions.
4. Section 171(4): Empowers the tax authority to demand additional information or documents related to these transactions.

Compliance Steps:

1. Maintain Documentation: Ensure all required information and documents related to international or specified domestic transactions are kept and maintained as per section 171(1).
2. Accurate Reporting: Report all such transactions accurately in the prescribed format and within the stipulated timelines.
3. Respond to Notices: If the tax authority requests additional information under section 171(4), furnish the required details promptly to avoid penalties.

Examples:

1. Scenario 1: A multinational company fails to maintain transfer pricing documentation for a ₹10 crore transaction with its overseas subsidiary. The Assessing Officer imposes a penalty of 2% of the transaction value, amounting to ₹20 lakh.
2. Scenario 2: A domestic company does not provide the required documents for a specified domestic transaction when requested by the tax authority. The prescribed authority imposes a flat penalty of ₹5 lakh.

This section emphasizes the importance of compliance with transfer pricing documentation and reporting requirements to avoid substantial penalties.