Penalty under section 271AA cannot apply to pre-existing records when later documentation duties were introduced and the explanation is plausible.

Penalty under section 271AA was not leviable where the obligation relied on was introduced by insertion of clause (iii) with effect from 01.07.2012, because pre-existing transfer pricing records could not be tested against a later-expanded documentation requirement. The assessee's explanation that the international transaction value difference arose from insurance and freight components, with supply recorded on FOB basis and documentation on CIF basis, was accepted as plausible. The provision being penal in nature, its application required a fair and objective exercise of discretion, and penalty was therefore not automatic. The assessee was exonerated.

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Issues: Whether penalty under section 271AA of the Income-tax Act, 1961 was leviable on the assessee for the relevant assessment year in view of the timing of insertion of clause (iii) and the explanation offered for the transaction value difference.

Analysis: The penalty was founded on clause (iii) of section 271AA(1), which was inserted with effect from 01.07.2012. The records relied upon were maintained prior to that date, so the expanded obligation under the substituted provision could not be applied to the assessee's earlier documentation. The explanation that the difference in the value of the international transaction arose from insurance and freight components, with supply on FOB basis and recording on CIF basis, was also found to be plausible. Penalty under section 271AA is not automatic and requires a fair, objective exercise of discretion.

Conclusion: Penalty under section 271AA was held not leviable and the assessee was exonerated.

Ratio Decidendi: A penalty provision of a strict nature cannot be applied to pre-existing records on the basis of an obligation introduced later, and where the assessee offers a plausible explanation for the transaction difference, imposition of penalty is not automatic.

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