High Court Holds APA-Settled Royalty Claim Cannot Attract Section 270A Penalty:

The Bombay High Court considered a writ petition filed by GIA India Laboratory Pvt. Ltd. challenging a penalty order dated March 28, 2025, passed under Section 270A of the Income Tax Act, 1961 for Assessment Year 2020-21. The penalty was initially levied at Rs.47,88,81,423 and was subsequently reduced to Rs.35,11,79,712 by an order dated August 21, 2026 under Section 154 read with Section 270A of the Act.

GIA India Laboratory Pvt. Ltd. Is engaged in grading diamonds, coloured stones, gems, pearls and other precious stones, paid royalty of Rs.378.49 crore to its associated enterprise, Gemological Institute of America Inc. (GIA US), for use of its intellectual property, technology, know-how, trademarks, databases, equipment and other proprietary resources. For AY 2020-21, the assessee claimed the royalty at 65% of the operating profits of its India Graded Segment. The royalty payment was duly disclosed in the return of income and Form 3CEB.

Earlier, an APA dated May 7, 2018 had determined the arm's length rate of royalty at 53.50% for AYs 2010-11 to 2018-19. The assessee had subsequently sought renewal of the APA and, pending its finalisation, claimed royalty at 65% for AY 2020-21.

The Transfer Pricing Officer, however, restricted the arm's length royalty rate to 53.50% and proposed an adjustment of Rs.66,96,52,179. The assessee had also claimed a deduction of Rs.4,18,81,000 under Section 80G towards CSR expenditure and deduction of Rs.2,03,60,933 towards education cess. The assessment authorities disallowed these claims and the additions were confirmed in the final assessment order dated July 16, 2024. During the pendency of the assessee's appeal before the Tribunal, the renewal of the APA was finalised.

The Tribunal, by order dated November 21, 2025, took note of the APA and directed the AO to give effect to it. The Tribunal also allowed the deduction under Section 80G. However, the AO had not yet passed an order giving effect to the Tribunal's order or the modified return when the writ petition was considered by the High Court.

The Court noted that the Tribunal had already deleted the corresponding addition by its order dated November 21, 2025. Therefore, the penalty on this count could not survive. The Court further held that the AO had no jurisdiction to initiate or levy penalty on an issue contrary to binding decisions of the Tribunal. Accordingly, the penalty relating to the Section 80G claim was held to be unsustainable.

The principal issue concerned the penalty arising from the Rs.66.96 crore transfer pricing adjustment relating to royalty. The Court noted that GIA India had complied with this statutory requirement by filing its modified return on June 30, 2025. The Court therefore held that the AO was under a statutory mandate to modify the assessee's total income in accordance with the APA. The Court noted that Section 270A applies to under-reported income and in the present case, the Court found that none of these circumstances were established. The High Court ultimately quashed the penalty order dated March 28, 2025 passed under Section 270A.

Consequently, the subsequent rectification order dated August 21, 2026, which had reduced the penalty from Rs.47,88,81,423 to Rs.35,11,79,712, also did not survive.