YASHPAL CHARAN ACIT, PAREL LAL BAUG vs. ALIBABA CLOUD IDIA LLP, ANDHERI EAST

The brief facts of the case are that The assessee, Alibaba Cloud India, filed its original return of income on 15.03.2022, declaring a total income of Rs.44,65,58,710/-. The case was selected for scrutiny under CASS, and notices under sections 143(2) and 142(1) of the Act were issued. In response, the assessee furnished the requisite details and information during the course of the assessment proceedings. The case was thereafter referred to the Transfer Pricing Officer ("Ld. TPO") for determination of the Arm's Length Price ("ALP") in respect of the international transactions entered into by the assessee with its Associated Enterprise ("AE"). After considering the submissions and documents furnished by the assessee, the Ld. TPO passed an order dated 26.10.2023 proposing a transfer pricing adjustment of Rs.91,47,99,952/- in respect of the international transaction relating to the rendering of cloud computing support services to its AE. Based on the transfer pricing order, the Ld. AO passed a draft assessment order dated 20.12.2023 assessing the total income of the assessee at Rs.136,13,58,662. Aggrieved by the draft assessment order, the assessee filed objections before the Hon'ble Dispute Resolution Panel ("DRP"), Mumbai, on 17.01.2024. Pursuant to the directions of the Hon'ble DRP dated 19.09.2024, the assessee filed an application before the Ld. TPO for passing an Order Giving Effect ("OGE"). Thereafter, the Ld. TPO passed the OGE on 17.12.2024, revising the transfer pricing adjustment to Rs.86,56,56,633/-. Consequently, the Ld. AO passed the final assessment order incorporating the revised transfer pricing adjustment and assessed the total income of the assessee at Rs.131,22,15,343/-. Consequently the Ld. AO initiated the proceeding u/s 270A of the Act and imposed the penalty amount to Rs. 60,49,90,108/- u/s 270A of the Act. The aggrieved assessee filed an appeal before the Ld. CIT(A). The Ld CIT(A) allowed the appeal of the assessee. Being aggrieved the revenue filed an appeal before us.

The Ld. DR argued and stands in favour of the orders of revenue authorities. The Ld. DR submitted a written note which is placed on record. The relevant paragraphs are reproduced as below:-

The Ld. AR argued and filed a paper book comprising pages 1 to 258, which has been placed on record. The Ld. AR contended that, in the assessee's case, the TPO had made the transfer pricing adjustments on account of differences in approach in relation to the economic/comparability analysis adopted by the TPO vis-a-vis with the assessee. Accordingly, all the conditions required u/s. 270A(6)(d) of the Act are duly satisfied. Therefore, the assessee squarely falls under the specific exclusion that is curved out under the said section. Consequently, the adjustment amounting to Rs. 8,56,56,633/-, as per the Order Giving Effect (OGE) as per the directions of the Hon'ble DRP, cannot be construed as under-reported income on which the penalty can be levied. The Ld.AR further argued that section 270A(6)(d) grants the assessee immunity for penalty u/s. 270A related to the said transfer pricing adjustment. He further argued that section 270A(9) also grants immunity to the assessee from the levy of penalty u/s. 270A. The Ld. AR respectfully relied on the order of the Ld. CIT(A). The relevant paragraph of the impugned appellate order is reproduced below: “6.1 The facts of the case, statement of facts, grounds of appeal, various submissions filed by the appellant and the penalty order have been considered. Since all these grounds of appeal deal with the issue of levy of penalty u/s.270A of the Act, these grounds of appeal are being dealt with in a consolidated manner. 6.1.1 Grounds 1 to 4 pertain to levy of penalty of Rs.60,49,90,108/- u/s.270A of the Act. In this case, the appellant has filed appeal on 27.05.2025 against order u/s.270A dated 28.04.2025, vide which penalty of Rs.60,49,90,108/- has been imposed in the case of the appellant. On perusal of the impugned penalty order, it is noted that penalty proceedings had been initiated during the course of passing of assessment order u/s.143(3) r.w.s.144C(13) of the Act dated 28.10.2024. Vide this assessment order, the total income was assessed at Rs. 131,22,15,343/- on account of ALP adjustment of Rs.86,56,56,633/- made by the AO/TPO w.r.t international transactions of cloud computing support services with Alibaba Cloud Singapore. Consequently, the tax demand of Rs.30,24,95,054/- had been raised vide this assessment order, subsequent to the directions issued by the DRP in this regard. The AO based on such adjustments proposed by the TPO made corresponding additions in the assessment order, against which appeal has been filed by the appellant before Hon'ble ITAT, which is pending for disposal, as per the claims by the appellant. Meanwhile, the AO also imposed penalty u/s.270A of the Act of Rs.60,49,90,108/- vide the impugned penalty order on account of underreporting of income in consequence of misreporting on such TP adjustments, which was imposed at 200% of the underreported income. 6.1.2 The details filed by the appellant have been quoted above. On perusal of the impugned penalty order, it is noted that the AO at page 13 of the impugned penalty order has stated that adjustment has been made by the TPO on account of failure on the part of appellant to disclose all material facts pertaining to the transaction. Further, it is noted that the penalty order quotes the assessment order in which as per para 11, it has been stated that "As the assesse failed to report international transactions correctly, the penalty proceedings under the provisions of section 270A of the Act is initiated for underreporting of income in consequence of misreporting for the year under consideration.” The penalty order also quotes the relevant portion of TPO order in which it has been stated that the appellant has not objected to rejection of its benchmarking and accepted GP margin computation as proposed in Show cause notice, which is as under: "Assessee's submission has been perused. As seen above, assessee has not objected to the rejection of its benchmarking of the aforementioned international transaction of reselling of cloud services. Indeed, assessee has accepted the application of RPM as the MAM as well as also accepted the GP margin computation as proposed in the SCN by the TPO. As the assessee's GP margin post allocation of expenses is found to be with in the interquartile range, assessee's submissions are accepted. However, during judicial scrutiny, if any, if the appellate authorities take the divergent views, assessee's margins under this segment may be recomputed and adjustments be made, if any." It is noted that these above findings of TPO as quoted in the penalty order however do not state that there is any failure on the part of the appellant to disclose all material facts pertaining to the transaction. Hence, it is not clear as to how such a conclusion has been drawn by the AO based on the findings of the TPO being relied upon. It is further noted that the concluding portion of the penalty order again does not state anything regarding the relevant clause of section 270A(9) of the Act beingapplied for holding this a fit case for under reporting of income in consequence of misreporting 6.1.3 On perusal of the TPO order, it is seen that on page 15/16 of this order, the TPO has stated that the appellant was required to prepare, maintain and furnish documents/information as per section 92D(3) read with Rule 10D and that the segmental analysis was inaccurate by his own admission. The TPO while making the said adjustment has stated that "The AO may consider initiating penalty proceedings against the said adjustment". Thus, the TPO has also not specifically stated that this is a fit case of misreporting of income u/s 270A(9) of the Act. The appellant has submitted before this office that the segmental being relied upon by it as filed before the TPO were subsequently audited and placed before the Hon'ble DRP, which were however not accepted by DRP. On perusal of the order of the TPO, it is noted that the appellant had submitted its own benchmarking w.r.t transactions with its AE of cloud computing support services, using TNMM as MAM which however was not found suitable by the TPO. The TPO rejected the benchmarking in the case of the appellant and changed MAM to RPM. The TPO also modified the GP margin computation by modifying certain allocation of expenses between different segments. Thereafter, the TPO selected certain comparables and after issuing show cause to the appellant and considering its submissions, finally made an adjustment of Rs.91,47,99,952/- on account of rendering of cloud computing support services by the appellant. Thus, in the instant case, the TPO did not accept the TNMM method selected by the appellant as MAM and thereafter chose RPM and made the relevant adjustments. The directions of the DRP also supported the findings of the AO/TPO made in the draft assessment order and thereafter, the final assessment order was passed in the case of the appellant. The appellant has pointed out that the adjustments made in this case by the AO/ΤΡΟ are being disputed before the Hon'ble ITAT, and it is not a case where the said adjustments/findings of the TPO have been accepted by it. The appellant has claimed that this is a TP adjustment on which no penalty is to be imposed as per section 270A(6) (d) of the Act which is as under: "The under-reported income, for the purposes of this section, shall not include the following, namely:- ………………… (d)the amount of under-reported income represented by any addition made in conformity with the arm's length price determined by the Transfer Pricing Officer, where the assessee had maintained information and documents as prescribed under section 92D, declared the international transaction under Chapter X, and, disclosed all the material facts relating to the transaction; and ………………….” It is noted that the issues raised by the TPO are being adjudicated in appeal before the Hon'ble ITAT and factual/legal issues are involved in the appeal has not reached finality. As mentioned above, the allegation of the AO in the impugned penalty order is that the appellant had failed to disclose all material facts relating to the transactions, but this allegation remains unsubstantiated by the AO in the assessment order and in the penalty order and not specifically stated or proved in the order of the TPO. As discussed above, the allegation by the AO is not discussed further by him nor finds strength from the order of the TPO. 6.1.4 Further, on perusal of the final assessment order dated 28.10.2024 passed in the case of the appellant, it is noted that para 5 refers to the TP adjustment made by the TPO in the order. The AO has noted in para 11 of his assessment order that as the assessee failed to report the international transactions correctly, the penalty proceedings under the provisions of Section 270A are initiated for under-reporting of income in consequence of misreporting for the year under consideration. As per the copy of the penalty notice submitted by the appellant, the penalty notice mentions both the limbs of section 270A i.e underreporting of income and underreporting of income in consequence of misreporting thereof. 6.1.5 Claim that specific clause of Sec 270A(9) of the Act is not mentioned by the AO in the assessment order and in the penalty order and claim that the instant case is not covered under any of the clauses of sec 270A(9) of the Act: (i) The appellant has pointed out that it is necessary as per judicial decisions to mention the specific clause of section 270A(9) vide which penalty for under- reporting in consequence of misreporting is to be initiated and imposed. In this regard, the appellant had submitted copy of penalty notice issued u/s 274 r.w.s 270A of the Act dated 28.10.2024, assessment order dated 28.10.2024 based on which penalty proceedings emanated, and copy of penalty order u/s 270A of the Act dated 28.04.2025. The appellant has claimed that while initiation and levy of penalty, the AO failed to mention specific clause of Sec 270A(9) of the Act and the specific clause is also not stated in the impugned penalty order and hence claimed that based on judicial principles established in similar cases, the penalty levied by the AO in the instant case deserves to be deleted. (II) In this regard, the appellant had placed reliance on the decision rendered by Hon'ble jurisdictional ITAT, Mumbai in the case of Saltwater Studio LLP V NFAC Delhi [2023] wherein the bench deleted the penalty levied u/s 270A of the Act as the AO failed to spell out as to how assessee case falls within ken of instances given in clause (a) to (f) of subsection 270A. The relevant extract is reproduced below for (ii) reference: “13. The AO has levied the higher penalty of 200% of tax payable of misreporting income. Then in such a scenario, the AO has to bring the action/omission on the part of the assessee in the ken of sub-section (9) of section 270A of the Act which are given (supra), viz (a) to (f) of section 270A(9) of the Act. However, a reading of the reasons given by the AO to levy penalty for misreporting (supra) it is discerned that he has failed to spell out as to how the assessee's case/additions falls within the ken of instances given in clause (a) to(f) of sub-section (9) of section 270A of the Act. Since AO failed to bring the addition/disallowance he made in quantum assessment, under the ken of (a) to (f) of the sub-section (9) of section 270A of the Act, the penalty levied for misreporting @ 200% cannot be sustained because it is trite law that penalty provisions have to be strictly interpreted. And therefore, taking into consideration, the facts and circumstances of the case, we find that the levy of penalty by the AO u/s 270A of the Act suffers from the vice of non-application of mind as well as violates principles of natural justice. And therefore, the penalty levied on addition of sustained quantum addition of Rs. 67,970/- cannot survive. And therefore, it is directed to be deleted." (iii) In addition, the appellant also relied on the decision rendered by jurisdictional Hon'ble ITAT, Mumbai in case of the Manish Manohardas Asrani V. INT Tax [2025] 170 taxmann.com 792 (Mumbai - Trib.) wherein the Hon'ble ITAT Mumbai deleted the penalty basis the higher courts and tribunal decision on the matter of not specifying any particular limb or sub clause for levying the penalty. The relevant extract is placed below for reference: "As the AO issued the vague notice without specifying any particular limb or sub clause for levying the proposed penalty. There is no whisper at all in the notice issued u/s 270A read with section 274 of the Act about "misreporting of income" whereas the penalty has been levied ultimately for both 'under reporting' and 'misreporting of income @ 200% in terms of section270A(9) of the Act, for which show cause notice was never issued to the Assessee. And therefore in view of the judgment passed by the coordinate Bench of the Tribunal in the case of Jaina Marketing & Associates(supra), wherein the Co- ordinate Bench of the Tribunal not only analyzed the provisions of law but also considered the judgments of the Higher Courts and the Tribunal anddeleted the identical penalty as involved in this case, hence respectfully following the decision of the Tribunal, we are inclined to delete the penalty under consideration. Thus, the penalty is deleted and appeal filed by the Assessee is allowed (iv) Also, the appellant also relied on the decision rendered by jurisdictional Hon'ble ITAT, Mumbai in the case of Cococart Ventures Pvt Ltd vs ITO 14(1)(1). Mumbai in ITA no 3139/Mum/2025 dated 30.06.2025 for AY 2022-23 wherein the relevant extract of the pronouncement is reproduced below: 6.4 The moot question in the above facts is, whether the action of Ld.AO to levy penalty u/s 270A for underreporting in consequence of misreporting, is sustainable in the present facts of the case. In order to examine, it is necessary to consider the relevant provisions of Section 270(8) &(9) of the Act that reads as under: - "Penalty for under-reporting and misreporting of income. 270A (1)... (7) Notwithstanding anything contained in sub-section (6) or sub- section (8), where under-reported income is in consequence of any misreporting thereof by any person, the penalty referred to in sub- section (1) shall be equal to two hundred per cent of the amount of tax payable on under-reported income. (9) The cases of misreporting of income referred to in sub-section (8) shall be the following, namely:- (a) misrepresentation or suppression of facts, (b) to record investments in the books of account: (c)claim failure of expenditure not substantiated by any evidence; (d) recording of any false entry in the books of account, (elfailure to record any receipt in books of account having a bearing on total income, and failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply." 7. It is noted that, the Ld.AO levied a penalty of 200% of the tax payable. The Ld AO then has to establish a case under any ofthe limbs of sub-section (9) of section 270A of the Act. However, upon examining the reasons provided by the Ld.AO, it is apparent that he has failed to specify how the assessee's case falls under any of the instances given in clauses (a) to (f) of sub-section (9) of section 270A. Since the Ld.AO did not bring the suo moto withdrawal of the claim under section 801AC during the assessment proceedings, and it does not fall under any of the limbs of (a) to (f) of sub-section (9), it is a well-established principle that penalty provisions must be strictly interpreted. Considering the facts and circumstances of the case, we find no merit in the levy of penalty under section 270A of the Act. The penalty imposed for underreporting due to misreporting cannot be sustained.Accordingly grounds raised by the assessee stands allowed. In the result the appeal filed by the assessee stands allowed" (v) On perusal of section 270A(9) of the Act, it is noted that the section states that the case of misreporting of income referred to in sub-section 8 shall be the following: “(9) The cases of misreporting of income referred to in sub-section (8) shall be the following namely (a) misrepresentation or suppression of facts, (b) failure to record investments in the books of account; (c) claim of expenditure not substantiated by any evidence; (d) recording of any false entry in the books of account; (e) failure to record any receipt in books of account having a bearing on total income, and (f) failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply

We have heard the rival submissions and perused the material available on record. The sole issue before us is whether the Ld. CIT(A) was justified in deleting the penalty of Rs.60,49,90,108/- levied by the Ld. AO under section 270A of the Act on account of transfer pricing adjustment. It is an undisputed fact that the impugned addition arose exclusively from a transfer pricing adjustment made by the Ld. TPO in determining the ALP of the international transaction entered into by the assessee with its AE. The record further reveals that the assessee had disclosed the international transactions in Form No. 3CEB, maintained the prescribed documentation under section 92D of the Act, and the adjustment primarily arose on account of the rejection of the benchmarking methodology adopted by the assessee and the application of a different Most Appropriate Method by the Ld. TPO. Thus, the dispute essentially relates to the determination of the ALP and the selection of comparables and methodology. We further note that the Ld. CIT(A), after examining the assessment order, the penalty order, and the order of the Ld. TPO, has recorded a categorical finding that neither the assessment order nor the penalty order specifies the particular clause of section 270A(9) of the Act under which the alleged case of misreporting falls. The allegation regarding failure to disclose material facts has also not been substantiated by any specific finding in the order of the Ld. TPO. Further, there is no allegation that the assessee failed to report any international transaction or any specified domestic transaction within the meaning of clause (f) of section 270A(9). The penalty has thus been levied without identifying or establishing the existence of any of the circumstances enumerated in clauses (a) to (f) of section 270A(9) of the Act.

We also find that the Ld. CIT(A) has relied upon the decisions of the Coordinate Benches of the Tribunal, including Saltwater Studio LLP (supra), Manish Manohardas Asrani (supra), and Cococart Ventures Pvt. Ltd. (supra), wherein it has been consistently held that where the Assessing Officer fails to specify the relevant limb of section 270A(9) or demonstrate how the assessee's case falls within any of the clauses (a) to (f), the levy of penalty for misreporting cannot be sustained.

On contrary the Ld. DR placed reliance on the judgment of the Hon'ble Bombay High Court in Veena Estate Pvt. Ltd. v. CIT reported in (2024) 158 taxmann.com 341 (Bombay) and the decision in Maharaja Garage & Co. v. CIT reported in [2017] 85 taxmann.com 86 (Bombay). In our considered view, both the decisions are distinguishable on facts as well as on the statutory provisions involved and, therefore, do not advance the case of the revenue. In Veena Estate Pvt. Ltd. (supra), the controversy arose under section 271(1)(c) of the Act. The Hon'ble Bombay High Court held that where the assessee had fully participated in the penalty proceedings, understood the precise charge and had not raised any objection regarding the alleged defect in the notice at the appropriate stage, the plea regarding defect in the notice could not be entertained in the absence of any demonstrable prejudice. The judgment was rendered in the context of the scheme of section 271(1)(c) read with section 274 and primarily dealt with the issue of a defective notice. It did not concern the independent statutory framework introduced under section 270A, which specifically requires the revenue to establish that the case falls within one of the circumstances enumerated in clauses (a) to (f) of section 270A(9) before penalty at 200% can be levied for misreporting of income.

In the present case, the defect is not merely procedural or confined to the wording of the notice. The Ld. CIT(A) has recorded a categorical finding that neither the assessment order, nor the penalty order, nor even the order of the Ld. TPO identifies the specific clause of section 270A(9) allegedly attracted. Further, the revenue has failed to demonstrate that the assessee's case satisfies any of the conditions prescribed under clauses (a) to (f) of section 270A(9). It is also an admitted position that the assessee had duly reported the international transactions in Form No. 3CEB and the transfer pricing adjustment arose only because of a difference in benchmarking methodology and determination of the Most Appropriate Method. Therefore, the ratio of Veena Estate Pvt. Ltd. (supra), rendered in the context of section 271(1)(c), is inapplicable to the peculiar statutory requirements of section 270A(9).

Likewise, the decision in Maharaja Garage & Co. (supra) also arose in an entirely different factual and statutory context and did not involve the interpretation of section 270A(6)(d) or the mandatory requirements of section 270A(9) relating to transfer pricing adjustments. The said decision does not deal with a case where all international transactions were duly reported, transfer pricing documentation under section 92D was maintained, and the addition arose merely on account of rejection of the benchmarking methodology adopted by the assessee. Consequently, the ratio laid down therein has no application to the facts of the present case.

Accordingly, the authorities relied upon by the Ld. DR do not assist the revenue. On the contrary, the present case is governed by the specific provisions of section 270A(6)(d) read with section 270A(9), and the revenue having failed to establish that the case falls within any of the statutory instances of "misreporting of income", we find no infirmity in the order of the Ld. CIT(A) deleting the penalty. We, therefore, uphold the impugned appellate order and dismiss the grounds raised by the revenue.

In the result, the appeal of the revenue bearing ITA No.3496/Mum/2026 is dismissed. Order pronounced in the open court on 14TH day of August 2026.