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Facts
The assessee filed its return of income for AY 2016-17, and the case was selected for scrutiny. The TPO referred certain international and specified domestic transactions for Arm's Length Price (ALP) determination, and upon finding partial compliance with information requests, levied a penalty of Rs.8.8 crore under Section 271G of the Income Tax Act for not furnishing all details. The assessee appealed to the CIT(A), who subsequently deleted the penalty.
Held
The Tribunal upheld the CIT(A)'s decision, ruling that a penalty under Section 271G is only leviable for failure to furnish specific information or documents as required by Section 92D(3) read with Rule 10D, not for inadequate benchmarking or if the submitted information is unacceptable to the TPO. As the TPO failed to identify the specific documents or information not furnished by the assessee, the initiation of penalty proceedings for not benchmarking was deemed misplaced.
Key Issues
Whether a penalty under Section 271G of the Income Tax Act can be imposed for non-benchmarking of international/domestic transactions, or solely for the failure to furnish specific information or documents as mandated by Section 92D(3) read with Rule 10D.
Sections Cited
271G, 92CA(2), 92D(3), 92D, 139(1), 92F(iv), Rule 10D, Rule 10B
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Income Tax Appellate Tribunal, AHMEDABAD “D” BENCH, AHMEDABAD
Before: SHRI SIDDHARTHA NAUTIYAL & SHRI NARENDRA PRASAD SINHA
O R D E R PER NARENDRA PRASAD SINHA, ACCOUNTANT MEMBER:
This appeal is filed by the Revenue against the order of National Faceless Appeal Centre (NFAC), Delhi (in short “the CIT(A)”) dated 12.08.2024 for the Assessment Year (A.Y.) 2016-17 in the penalty proceeding under Section 271G of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).
The brief facts of the case are that the assessee had filed its return of income for the A.Y. 2016-17 on 25.11.2016 declaring total income of Rs.301,28,45,510/-. The case was selected for complete scrutiny under CASS. The Assessing Officer noticed that the assessee had entered into (Assessment Year: 2016-17) DCIT vs. Atul Limited Page 2 of 11 certain international transactions and specified domestic transactions with its associated enterprises (AEs) which were referred to Transfer Pricing Officer (TPO) for determination of Arm’s Length Price (ALP) of these transactions. Accordingly, a notice under Section 92CA(2) & 92D(3) of the Act along with questionnaire was issued by the TPO requiring the assessee to produce all the evidences in support of computation of ALP of international transactions as well as the specified domestic transactions, along with transfer pricing study report. The assessee had made only part compliance to the requirements of the TPO and all the details as requisitioned were not furnished. Therefore, a notice under Section 271G of the Act was issued to the assessee by the TPO requiring an explanation as to why penalty at the rate of 2% of international transactions and specified domestic transactions should not be imposed. The TPO was not satisfied with the explanation of the assessee given in response to the show cause notice. After considering the reply of the assessee, the TPO had passed the penalty order under Section 271G of the Act on 23.03.2022 levying penalty of Rs.8,80,51,068/- being 2% of the value of international transactions and specified domestic transactions of the assessee.
The assessee has preferred an appeal against this penalty order before the Ld. CIT(A), who had deleted the penalty vide the impugned order.
4. The Revenue is now in appeal before us. following grounds have been taken in this appeal: -
1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the penalty of Rs.8,80,51,068/- made by the TPO in respect of benchmarking international transactions/ Specified Domestic transactions?"
2. Whether in the facts of the case and in law, the Ld. CIT(A) erred in ignoring the fact that the assessee had failed to benchmark the transactions properly with its AE as per law thereby falling to discharge the primary onus cast upon it by the Act?"
3. Whether on the facts and in the circumstances of the case and in law, the decision of the Ld. CIT(A) erred in holding that there is no question of tax evasion by ignoring the fact that the transfer pricing is concerned with the determination of Arm's Length Price of the international transactions carried out by the assessee?
Whether in the facts of the case and in law, the Ld. CIT(A) is justified in allowing the appeal of the assessee by ignoring the fact that the assessee was provided with sufficient time to submit the details as required u/s.92D r.w.r. 10D of the Income Tax Rules 1962.?
5. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary."
It is, therefore, prayed that the order of Ld. CIT(A) may be set aside and that of the Assessing Officer be restored?"
Shri Sher Singh, Ld. CIT-DR submitted that the assessee had failed to benchmark the international transactions and specified domestic transactions with its AEs in accordance with the Rules and, therefore, it had failed to discharge the primary onus cast upon it as per the statute. According to the Ld. CIT DR, the TPO had rightly imposed the penalty under Section 271G of the Act for maintaining insufficient and inadequate data and also for not furnishing all the information as called for under Section 92D(3) of the Act. Further that the assessee has also not complied with the provisions of Rule 10B of the Income Tax Rules. The Ld. CIT- DR, therefore, strongly supported the penalty order of the TPO.
(Assessment Year: 2016-17) DCIT vs. Atul Limited Page 4 of 11 6. Per contra, Shri Bavin Marfatia, Ld. AR of the assessee submitted that the assessee had furnished all the documents and details as requisitioned by the TPO. He submitted that the penalty under Section 271G of the Act can be initiated only when the assessee fails to furnish any information or documents and not in the case where the information submitted by the assessee is not acceptable to the TPO. The Ld. AR submitted that the assessee had submitted all the details and documents in respect of all the issues raised by the TPO which was also acknowledged in the penalty order. The Ld. AR assailed the penalty order on the ground that the TPO had not specified as to which information or document was not provided by the assessee, for which the penalty was leviable. He submitted that the Ld. CIT(A) had correctly appreciated the facts of the case and rightly deleted the penalty imposed by the TPO. He, therefore, strongly supported the order of the Ld. CIT(A).
We have carefully considered the rival submissions. The penalty under Section 271G of the Act can be levied if the person, who has entered into an international transaction or specified domestic transaction, fails to furnish any such information or documents as required under Section 92D(3) of the Act to the Assessing Officer or the TPO. Therefore, it was necessary for the AO/TPO to first bring on record as to which information or documents as required under Section 92D(3) of the Act were not furnished by the assessee. From the penalty order, it is found that the TPO did not specifically mention the documents and information as required under Section 92D(3) of the Act, which were not furnished by the assessee. Rather the TPO had acknowledged that the assessee had made submissions to all the notices and furnished the details as required.
In case of transaction listed at Sr. No.1, it is noticed that you have applied uncontrolled comparable prices (CUP) for bench mark this transaction. However, on going through the details it is noticed that your bench marked transaction with another AEs i.e. M/s. Atul China Limited. It is a settled law that transactions between the related parties cannot be taken as based for bench marking of the transaction by following the CUP method. In view of the above, show cause as to why the bench marking done by you should not be rejected. In view of the above, also show cause as to why penalty u/s.271G should not be imposed on you for not bench marking the transactions as per the provisions of I.T. Act as well as the rules framed by the Govt. of India in this regard.
7.1 For the specified domestic transaction also, show cause notice under Section 271G of the Act was issued to the assessee for not conducting appropriate benchmarking of the transactions as envisaged by the statutory provisions of the Act. It is thus found that the penalty under Section 271G of the Act was imposed in the present case not for non- furnishing of information and documents as required under Section 92D(3) of the Act but for not benchmarking the international as well as specified domestic transactions as per the provisions of the Act. The initiation of penalty proceedings under Section 271G of the Act for this reason is, therefore, found to be misplaced.
7.2 It is found that the Ld. CIT(A) had meticulously gone through the various aspects of the initiation of penalty under Section 271G of the Act and given the following findings :-
4.2 The reasons mentioned by the Ld. TPO have carefully examined in view of the provisions of section 271G of the I.T. Act. The penalty u/s.271G is levied if any person who entered into international transaction or specified domestic transaction failed to furnish any such information or document as required by sub-section 3 of section 92D of the I.T. Act. The Ld. TPO has not specified in her show cause notice es to which information and documents required were not furnished by the appellant during the TP audit. The allegation of the Ld. TPO that the appellant did not comply with the notice u/s. 92D(3) dated 06.09.2018 within the prescribed time is not factually correct and part submission was made on due date of compliance. 4.3 The appellant also pointed out that the notice u/s.92D(3) dated 06.09.2018 is not legal as the time limit fixed for compliance was 24.09.2018 which is less than 30 days as stipulated in Section 92D(3) of the IT Act and there are ruling in favour of the appellant where penalty levied u/s.271G was deleted solely on this ground. The appellant relied on the decision of JSW Energy Ltd. vs. DCIT (ITA 1223/Mum/2019 order dated 12.08.2022). I have examined the Ld. TPO order u/s 92CA(3) of the Act and find that the Ld. TPO has stated in para 2 that the appellant's AR in response to notices attended from time to time and furnished the information asked for. Even in para 4 of TP order the Ld. TPO noted that the AR of the appellant filed a transfer pricing study report and such other documents as were required together with detail submission to justify the Arm's Length Price computed in respect of the international transactions. Therefore, sufficient accomplice were made with respect to notice uls.92D(3) of the IT Act. The other reasons mentioned by the Ld. TPO are general in nature and did not point out which specific information/documents which were requisitioned by the Ld. TPO and were not furnished by the appellant during the TP audit. The Ld. TPO also accepted the TP study report in respect of all the international and specified domestic transaction except the two transactions for which penalty notice was issued. Therefore, I hold that the Ld. TPO was not correct in levying penalty on entire value of international and specified domestic transaction. If at all, penalty is leviable, then only in respect of two transactions which according to Ld. TPO the appellant failed to furnish information/documents and for which show cause notice was issued. The penalty cannot be levied on other transactions where TP study report of the appellant was accepted and no show cause notice was issued. 4.4 Further, I examined the issue of levy of penalty u/s.271G of the Act in respect of two transactions where show cause notice was issued. The first transaction pertains to purchase of goods from Amal Ltd. In this case, the Ld. TPO rejected the CUP method applied by the appellant and adopted TNMM method as most appropriate method (MAM). The appellant filed objection before Hon'ble DRP and Hon'ble DRP accepted the CUP as MAM. The only modification made by the Hon'ble DRP that the appellant applied CUP by taking average of transaction on yearly basis whereas the Hon'ble DRP directed to apply CUP by taking average of transaction on monthly basis. The appellant furnished transaction-wise listing of purchase from Amal Ltd. (AE) and third parties along with copies of invoices during the TP audit. Therefore, the appellant submitted that the comparability criterion as set out in Rule 10B(2) and Rule 10B(3) are completely met. The appellant also submitted that penalty uls.271G of the Act can be initiated only when the assessee failed to furnish any information or document and not when the information/documents submitted is found un-acceptable by the Ld. TPO. The Ld. TPO has not pointed out in her penalty order which information and documents could not be furnished by the appellant which warrants levy of penalty u/s.271G of the Act. Therefore, I find merit in the submission of the appellant that it has provided all the information/details and documents relevant to the transactions and benchmarking of the same. Therefore, penalty levied u/s.271G in this transaction is not sustainable. 4.5 The second transaction on which penalty u/s.271G was initiated pertains to Purchase of raw-material from Atul USA Inc. The appellant during the course of TP audit submitted transaction wise listing of purchase from Atul USA Inc. and third party along with copy of invoices. In this case a third party is its AE Atul China, however, the appellant has stated that Atul China Ltd. is not manufacturing the material and the material was actually purchased from a non- AE and the details of purchase by Atul China was provided during the course of TP audit. Thus, the appellant argued that the CUP was ultimately applied with the transaction with non-AE and all the information documents were provided. The appellant also submitted that penalty u/s. 271G of the Act can be initiated only when the assessee failed to famish any information or document and not when the information submitted is found not acceptable by the Ld. TPO. The Ld. TPO has not pointed out in her penalty order which information and documents could not furnished by the appellant which warrants levy of penalty u/s.271G of the Act. Therefore, I find merit in the submission of the appellant that it has provided all the information/details and documents relevant to the transactions and benchmarking of the same. Therefore, penalty levied u/s.271G is not sustainable. 4.6 I also perused the case laws relied by the appellant during penalty proceeding and found the same are squarely applicable in the facts and circumstances of the case. The Ld. TPO has not distinguished how the case laws relied upon by the appellant is not applicable in the case of the appellant. Further, the following case laws relied by the appellant during appellate proceedings supports the appellant contention: (1) Edelweiss Financial Services Ltd. [ITA No. 5718/M/2017 order dated 22.10.2019) (2) JSW Energy Ltd. [ITA 1223/Mum/2019 order dated 12.08.2022] 4.7 In view of above, I hold that penalty levied by the Ld. TPO is not sustainable in the facts and circumstances of the case. The related grounds of appeals are allowed.
7.3 The Revenue has been unable to controvert the findings of the Ld. CIT(A). The Hon’ble Delhi High Court in the case of M/s. Leroy Somer & Controls (India) Pvt. Ltd., 37 taxmann.com 407 (Delhi) has held that before levying penalty under Section 271G of the Act, the Revenue must first mention the documents or information which was required to be maintained, but not maintained or not furnished by the assessee and then proceed with penalty proceedings by observing as under:
14. Sub-rule (4) further states that the documents specified in subrules (1) and (2), as far as possible, be contemporaneous and should be latest by the specified date referred to in Section 92F(iv), i.e., due date in Explanation 2 below Section 139(1). Thus, indicating the documentation/information may be floating, transient and changeable. Constant assimilation may be required. Besides, data information can also vary. The tribunal has rightly concluded that with such a broad rule, which requires documentation and information voluminous and virtually unlimited, Section 271G has to be interpreted reasonably and in a rational manner. Information or documentation, which is assessee specific or specific to the associated enterprises, should be readily available, whereas other documentation or information relates to data bases or transactions entered into by third parties may require collation/collection from time to time. There cannot be any end or limit to the documentation or information relating to data bases or third parties. When there is general and substantive compliance of the provisions of Rule 10D, it is sufficient. The Legislature was conscious of this fact and, therefore, had specifically stipulated in Section 92D(3) that the Assessing Officer or Commissioner (Appeals) may require a person to furnish any information or document in respect thereof and on failure of the said person to furnish the documentation within the specified time, penalty under Section 271G can be imposed. Thus, for imposing penalty the Revenue must first mention the document and information, which was required to be furnished but was not furnished by the assessee within the specified time. The documentation or information should be one specified in Rule 10D, which has been formulated in terms of Section 92D(1) of the Act. Looking from any quarter and angle, the appeal of the Revenue is misconceived, totally lacking in merits and is, therefore, dismissed. [Emphasis supplied] 7.4 As already mentioned earlier the TPO did not point out any specific default in maintenance of information/documents in respect of international transactions and specified domestic transactions made by the assessee. The information and documents to be kept and maintained are prescribed in Rule 10D of the IT Rules, which is as under:
Information and documents to be kept and maintained under section 92D. 10D. (1) Every person who has entered into an international transaction or a specified domestic transaction shall keep and maintain the following information and documents, namely:— (a) a description of the ownership structure of the assessee enterprise with details of shares or other ownership interest held therein by other enterprises;
(b) a profile of the multinational group of which the assessee enterprise is a part along with the name, address, legal status and country of tax residence of each of the enterprises comprised in the group with whom international transactions or specified domestic transactions, as the case may be, have been entered into by the assessee, and ownership linkages among them;
(c) a broad description of the business of the assessee and the industry in which the assessee operates, and of the business of the associated enterprises with whom the assessee has transacted;
(d) the nature and terms (including prices) of international transactions or specified domestic transactions entered into with each associated enterprise, details of property transferred or services provided and the quantum and the value of each such transaction or class of such transaction;
(e) a description of the functions performed, risks assumed and assets employed or to be employed by the assessee and by the associated enterprises involved in the international transaction or the specified domestic transaction;
(f) a record of the economic and market analyses, forecasts, budgets or any other financial estimates prepared by the assessee for the business as a whole and for each division or product separately, which may have a bearing on the international transactions or the specified domestic transactions entered into by the assessee;
(g) a record of uncontrolled transactions taken into account for analysing their comparability with the international transactions or the specified domestic transactions entered into, including a record of the nature, terms and conditions relating to any uncontrolled transaction with third parties which may be of relevance to the pricing of the international transactions or specified domestic transactions, as the case may be;
(h) a record of the analysis performed to evaluate comparability of uncontrolled transactions with the relevant international transaction or specified domestic transaction;
(i) a description of the methods considered for determining the arm's length price in relation to each international transaction or specified domestic transaction or class of transaction, the method selected as the most appropriate method along with explanations as to why such method was so selected, and how such method was applied in each case; (j) a record of the actual working carried out for determining the arm's length price, including details of the comparable data and financial information used in applying the most appropriate method, and adjustments, if any, which were made to account for differences between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions; (k) the assumptions, policies and price negotiations, if any, which have critically affected the determination of the arm's length price; (l) details of the adjustments, if any, made to transfer prices to align them with arm's length prices determined under these rules and consequent adjustment made to the total income for tax purposes;
(m) any other information, data or document, including information or data relating to the associated enterprise, which may be relevant for determination of the arm's length price.
7.5 It is, thus, found that the documents to be kept and maintained in respect of international transactions or specified domestic transactions fall into thirteen different categories as mentioned in Rule 10D. When the AO is initiating penalty proceeding u/s.271G of the Act for non-maintenance of documents and information, he is duty bond to point out as to which particular document(s) as specified in Rule 10D was not maintained by the assessee. The specific default of the assessee in non-maintenance of document/information has not been brought on record by the TPO in the penalty order. Rather the penalty was imposed in the present case for not benchmarking the international as well as specified domestic transactions as per the (Assessment Year: 2016-17) DCIT vs. Atul Limited Page 11 of 11 provisions of the Act, which is not permissible under the provisions of section 271G of the Act. Therefore, we do not find any infirmity in the order of the ld. CIT(A) deleting the penalty levied u/s 271G of the Act. The grounds as raised by the Revenue are devoid of merit and are rejected.
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open Court on this 10th October, 2025.