2025 (1) TMI 1062 - AT - Income Tax

Penalty u/s 271AA - Assessee failed to maintain documents specified u/s. 92D read with Rule 10D of the IT Rules - HELD THAT - Hon ble Delhi High Court in CIT vs Leroy Somer Controls India (P) Ltd 2013 (9) TMI 761 - DELHI HIGH COURT held that before levying penalty u/s. 271AA 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 then proceed with penalty proceedings. Penalty u/s. 271AA cannot be levied without specifying the required documents failed to be maintained/furnished by the assessee. Thus the issue is no more res-integra. Further it is noticed that penalty order was passed in perfunctory manner without giving requisite show-cause notice and without affording proper opportunity of hearing to the assessee. AO had merely show caused the assessee to file details/documents maintained as per rule 10D of Income-tax Rules without specifying any particular clause itself. No merit in levying penalty u/s. 271AA of the Act holding that the assessee have not maintained proper documents. Even otherwise international transaction entered upon by the assessee with its AE had been held to be at arm s length by the Ld TPO. Thus penalty order is not sustainable in law. Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether the penalty imposed under Section 271AA of the Income Tax Act, 1961, for failure to maintain documentation as required under Section 92D read with Rule 10D, was justified.
• Whether the Assessing Officer (AO) provided sufficient reasoning and evidence to support the imposition of the penalty.
• Whether the transactions in question were conducted at an arm's length price, thereby negating the need for penalty imposition.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification of Penalty under Section 271AA

• Relevant legal framework and precedents: Section 271AA of the Income Tax Act mandates penalties for failure to maintain documentation as specified under Section 92D. Relevant precedents include decisions from various ITAT benches and the Delhi High Court, emphasizing the need for specific failures to be identified before imposing penalties.
• Court's interpretation and reasoning: The court determined that the AO did not specify which documents were not maintained, nor did the Transfer Pricing Officer (TPO) find any discrepancies in the documentation submitted by the assessee.
• Key evidence and findings: The TPO did not recommend any penalty, indicating that the transactions were at arm's length. The AO's penalty order lacked specific references to missing documentation.
• Application of law to facts: The court applied the legal requirement that penalties under Section 271AA require clear identification of documentation failures, which was absent in this case.
• Treatment of competing arguments: The Revenue argued for upholding the penalty based on non-maintenance of documents, while the assessee contended that all required documentation was provided and accepted by the TPO.
• Conclusions: The court concluded that the penalty was unjustified due to the lack of specific findings of failure to maintain documentation as required by law.

Issue 2: Transactions at Arm's Length Price

• Relevant legal framework and precedents: Arm's length pricing is a key concept in transfer pricing, ensuring that transactions between related parties are conducted as if they were between unrelated parties.
• Court's interpretation and reasoning: The court noted that the TPO did not make any adjustments to the transactions, affirming that they were conducted at arm's length.
• Key evidence and findings: The TPO's order and the Form 3CEB submitted by the assessee supported the conclusion that transactions were at arm's length.
• Application of law to facts: The absence of any adjustments by the TPO was interpreted as evidence that the transactions were at arm's length, negating the basis for penalty.
• Treatment of competing arguments: The Revenue's argument for penalties was weakened by the TPO's acceptance of the transactions as compliant with arm's length principles.
• Conclusions: The court upheld that the transactions were at arm's length, supporting the decision to delete the penalties.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "The AO has levied penalty under Section 271AA of the Act for Rs. 5,36,25,808/- without bringing on record details of documents as required under Section 92D of the Act which were not submitted before TPO and on transactions which were considered to be at arms-length by TPO."
• Core principles established: Penalties under Section 271AA require specific identification of documentation failures, and transactions accepted as arm's length by the TPO cannot justify such penalties.
• Final determinations on each issue: The court determined that the penalties were unjustified due to the lack of specific documentation failures and the affirmation of arm's length pricing by the TPO.

The judgment concludes with the dismissal of the Revenue's appeals, reinforcing the principle that penalties under Section 271AA require clear and specific justification, which was absent in this case. The court emphasized the importance of adhering to procedural requirements and the necessity for the AO to provide detailed reasoning when imposing penalties.