Penalties – Section 270A, Section 271(AA)

For under reporting of income – Section 270A

Section 270A provides for levy of penalty @ 50% of tax payable (including surcharge and education cess), for under-reporting of income.

However, additions made in conformity with ALP, determined by TPO would not be considered underreported income if : –

• Assessee has maintained information and documents, as per section 92D ;
• Declared the international transactions under Chapter X ; and
• Disclosed all materials facts relating to the transaction.

Example : –

Sancheti Limited imports raw material from its Al Aribi UAE,  at Rs. 5 lakhs during the P.Y. 2019-20. Sancheti Limited has maintained documents for such international transaction as per Section 92D and included such transactions in income-tax return and Form No.3CEB at Rs. 5 lakhs. However, it received royalty income for the use of brand from another WOS in US, to the extent of Rs. 10,00,000 but did not report another  Rs. 5,00,000 received from UK subsidiary as this  amount was received in its bank account in the UAE.  During assessment proceedings, the TPO determined the ALP of such transaction at Rs. 3 lakhs.

Calculate the amount of penalty to be levied on ICO for misreporting of income u/s 270A (Assume a tax rate of 30%) ?

Solution : –

Addition of Rs. 2 lakhs for imports raw material from its Al Aribi UAE , made by AO in conformity with the ALP determined by the TPO would not be considered as under-reported income of Sancheti Limited , as Sancheti Limited had already disclosed such transaction in Form No. 3CEB and the income-tax return. Thus, no penalty will be levied on ICO u/s 270A.

However,   non- reporting of royalty income of   Rs. 5,00,000 received from UK subsidiary ,   r in its bank account in the UAE, it shall be liable for levy of penalty @ 50% of tax payable, for under-reporting of income. Assuming a tax rate of 30%, the penalty shall be Rs. 75,000.

Penalty for misreporting of income – Section 270A

Failure to report any international transaction, or deemed international transaction [as referred to in Section 92B(2)], or specified domestic transaction , which are covered under

Transfer Pricing provisions under Chapter X would constitutes ‘misreporting of income’ u/s 270A(9), and would attract penalty @ 200% of tax payable (including surcharge and   cess) due to misreporting of income.

Example : –

BALMS India provided certain consultancy services to its foreign parent Charms UK. However, even though it followed an accrual basis of accounting, it failed to report such transaction in Form 3CEB and income-tax return on the ground that the payment was not received. During assessment proceedings, the AO identified such transaction, and made additions of Rs. 10 lakhs in accordance with ALP determined by TPO.

Determine the penalty leviable on BALMS India u/s 270A , assuming it has no other income  and tax rate of 25% ?

Solution : –

Failure to report international transaction would constitute misreporting of income. It would attract penalty of 200% of tax payable  under Section 270A. Calculation of penalty is given hereunder : –

Particulars	Amount (Rs.)
Additions made by TPO	10,00,000
Tax at 25% [A]	2,50,000
Health Education Cess (4%*2,50,000) [B]	10,000
Total tax payable [A+B]	2,60,000
Penalty for misreporting of income [2,60,000*200%]	5,20,000

Penalty for failure to keep and maintain information and documentation – Section 271AA

Section 271AA empowers the AO or Commissioner (Appeals)  to levy a penalty @ 2% of the value of each international transaction on a person who   : –

• Fails to keep and maintain any such document and information, which are required to be kept, under Section 92D(1) and Section 92D(2)

Note : – As per Rule 10D(5), Transfer Pricing information and documents should be kept and maintained for a period of 8 years from the end of relevant assessment year.

• Fails to report such international transaction which is required to be reported; or
• Maintains or furnishes any incorrect information or document .

Note : – Failure to furnish TP report in Form No 3CEB may attract penalty of Rs. 1,00,000 u/s 271BA.  Penalty u/s 271AA shall be in addition to penalty u/s 271BA.

Computation of penalty for failure to keep and maintain information and documentation

Penalty @ 2% shall be computed on the arm’s length price of  the international transaction. Actual transaction price should not be considered to compute such penalty.

Example : –

Defiance Limited supplies raw material to Dragon China,  at Rs. 15 lakhs during the P.Y. 2019-20.    During assessment proceedings, the TPO determined the ALP of such transaction at Rs. 18 lakhs. However, Defiance Limited   failed to keep required information and documents for such international transaction as per  Section 92D.  Calculate the amount of penalty to be levied determined by Assessing Officer or Commissioner (Appeal) ? What would be the penalty  if the ALP of such transaction at Rs. 8 lakhs ?

Solution : –

ICO would be liable to pay penalty @ 2% of the ALP of international transaction amounting Rs. 36,000 (18,00,000 * 2%) it it failed to keep required information and documents for such international transaction as per  Section 92D. However, if the ALP of such transaction at Rs. 8 lakhs , the penalty shall be Rs. 30,000 (15,00,000 * 2%).

Penalty for failure to report international transaction

Failure to report international transaction would attract penalty under both the Sections 270A and 271AA (i.e., 200% of tax payable , and 2% of value of international transaction).

Example : –

Sumanth Limited, provides certain services to its foreign AE Joseph Jane & Co. UK. It failed to report such international transaction in income-tax return and Form No. 3CEB. During Assessment, the AO has identified such transaction and made additions of Rs. 5 lakhs in accordance with arm’s length price determined by TPO.

1. Whether ICO is liable to pay penalty under both the sections 270A and  271AA ?
2. Calculate the amount of penalty ?

Solution : –

Sumanth Limited would be liable to penalty@ 200% [of tax payable] and @ 2% [of value of international transaction] under both the sections 270A and 271AA, respectively.

Calculation of penalty is given hereunder : –

Particulars	Amount (Rs.)
Addition made by Transfer Pricing Officer	5,00,000
Tax payable on such misreporting of income @ 25% [5,00,000 * 25%]	1,25,000
Add: Health and Education Cess [1,25,000 * 4%]	5,000
Total tax payable on misreporting of income	1,30,000
Penalty on misreporting of income under Section 270A [1,30,000 * 200%]	2,60,000
Penalty u/s 271AA [5,00,000 * 2%]	10,000
Total Penalty [2,60,000+ 10,000]	2,70,000

Penalty@ 2% shall be levied on value of each international transaction for which default is made by assessee u/s 271AA.

Example : –

Churana Limited India, has effected following transactions during the P.Y. 2019 – 20 : –

1. Reports international transaction in Form No. 3CEB and income-tax return. However, addition of Rs. 15 lakhs is made by AO as per the ALP determined by the TPO.
2. Furnished some incorrect information in Form No. 3CEB for international transaction (Arms’ length price of such international transaction is Rs. 5 lakhs)
3. Failed to report international transaction in Form No. 3CEB and income tax return. Thereafter such transaction is identified by AO and he made additions of Rs. 30 lakhs (i.e. Arms’ length price). Tax payable due to such misreporting income is Rs. 9.27 lakhs.

Calculate the amount of penalty payable by Churana Limited on aforesaid transactions ?

Solution : –

Penalty @ 2% is payable on each transaction , wherein the assessee made some default [as referred to in Section 270AA] and not on aggregate value of all international transactions undertaken by the assessee. Thus, no penalty would be levied for transaction reported under point A.

Calculation of penalty is given hereunder:

Particulars	Amount (Rs.)
Arm’s length price of transaction at Point C	30,00,000
Penalty @ 2% u/s 271AA [30,00,000 * 2%]	60,000
Penalty @ 200% of tax payable on transaction at point C [9,27,000 * 200%] [A]	18,54,000
Total penalty payable on aforesaid defaults [A] + [B]	19,14,000

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