ITAT Deletes Rs 5.46 Crore Penalty Under Section 271G After Transfer Pricing Addition Was Quashed

The Income Tax Appellate Tribunal (ITAT), Mumbai, has upheld the order of the CIT(A) deleting a penalty of Rs 5.46 crore levied on Essar Power Gujarat Ltd for alleged failure to furnish transfer pricing documentation relating to transactions with Global Supplies FZE, UAE.

Essar Power Gujarat Ltd filed its return of income for Assessment Year 2009-10, declaring an income of Rs 1.14 crore. The assessment was subsequently reopened under Section 147 based on information received from the Directorate of Revenue Intelligence (DRI) alleging over-invoicing of imported equipment purchased through Global Supplies FZE, UAE. The AO concluded that the purchases made through Global Supplies FZE were overvalued and proposed a transfer pricing adjustment of Rs 73.74 crore, representing 27% of the transaction value of Rs 273.13 crore.

The Transfer Pricing Officer has also, at the same time, levied a penalty of Rs 5.46 crore under Section 271G of the Income Tax Act, alleging that the assessee has failed to furnish the invoices and relevant documentation that is required under Section 92D read with Rule 10D relating to international transactions. The CIT(A) deleted the entire transfer pricing adjustment and the penalty levied under Section 271G.

The ITAT examined all the evidence on record, and after considering the facts and submissions, it upheld the deletion of the penalty, observing that there remained no sustainable transfer pricing addition against the assessee and there was no justification for continuation of penalty proceedings under Section 271G.

Accordingly, ITAT held that where the transfer pricing adjustment forming the basis of penalty proceedings under Section 271G is deleted in quantum proceedings and such deletion attains finality, the consequential penalty cannot survive. Once the foundation of the penalty is removed, the penalty proceedings themselves become unsustainable in law.