TaxTMI 
TaxTMI 
2026 (9) TMI 1337
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....ons and disallowances made in the final Assessment Order dated 16th July 2024: (a) A transfer pricing adjustment of Rs. 66,96,52,179/- in respect of royalty paid by the Petitioner to Gemological Institute of America, Inc. ("GIA US") (b) Disallowance of deduction of Rs. 4,18,81,000/- claimed by the Petitioner under section 80G of the Act in respect of its contribution to Corporate Social Responsibility ("CSR") activities. (c) Disallowance of deduction of education cess of Rs. 2,03,60,933/-. 3. As per the Petitioner, it is an Indian company engaged in the business of grading diamonds, coloured stones, gems, pearls and other precious stones. GIA US is an associated enterprise of the Petitioner. GIA US has created intangible property such as trademarks, slogans, proprietary gemstone grading knowledge, process know-how, database management systems, proprietary equipment, standard reports, training material and process for graders. For providing diamond grading services to its clients, the Petitioner uses the intangible property developed and owned by GIA US and pays a royalty to GIA US. During the previous year relevant to A.Y. 2020-21, the Petitioner paid ....
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....Subsequently, the Finance Act, 2022 introduced Explanation 3 in Section 40(a)(ii) of the Act with retrospective effect from 1st April 2005, providing that the term "tax" shall include and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax. This explanation was inserted after the return was filed by the Petitioner on 13th February 2021. 7. Be that as it may, the Petitioner's case was selected for scrutiny and a reference was made to the Transfer Pricing Officer ("TPO") under Section 92CA(3) for determination of Arm's Length Price of the international transactions entered into by the Petitioner with its associated enterprises, including the transaction of payment of royalty by the Petitioner to GIA US. The TPO in his order dated 19th July 2023 did not accept the claim of the Petitioner for the payment of royalty at the higher rate of 65% and held that the Arm's Length Rate of royalty should be restricted to 53.50% as per the earlier APA, as application for renewal of APA was pending. Accordingly, he proposed an adjustment of Rs. 66,96,52,179/-. 8. Keeping in mind the recommendations of the TPO, the Assessing Officer passed a draf....
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.... June 2025 as required under Section 92CD(1) of the Act. However, till date, the Assessing Officer has not passed an order either giving effect to the Tribunal's order dated 21st November 2025 or to the modified Return of Income. He took us through the provisions of Sections 92CC and 92CD of the Act wherein the scheme of APA is encompassed and submitted that, once an APA is signed and a modified return is filed pursuant thereto, the Assessing Officer has to pass an order modifying the total income having regard to the APA. When we enquired with Mr. Sharma, the learned Counsel appearing for the Respondents as to why the Assessing Officer has not yet given effect to the order passed by the Tribunal, or passed an order on the modified return filed by the Petitioner pursuant to the APA, Mr. Sharma pointed out that, in view of Section 92CD(5) of the Act, the Assessing Officer has to pass an order under Section 92CD(3) within a period of one year from the end of the Financial Year in which the modified return under sub-Section (1) is furnished and, therefore, the Assessing Officer has time upto 31st March 2027 to pass the order on the Petitioner's modified return. Mr. Mistri, in Rejoinde....
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....e relying upon a binding judicial precedent, then certainly such an issue cannot invite any penal consequences, just because the view was subsequently reversed." 11. Mr. Mistri, the learned Counsel for the Petitioner, accordingly, submitted that none of the issues raised in the impugned order justified a levy of penalty. He submitted that the entire scheme of the APA, which seeks to reduce litigation will be rendered ineffective and irrelevant if the Officer is permitted to levy penalty on a claim or a position settled in the APA. Primarily on this ground, the jurisdiction of Respondent No. 1 to levy penalty was challenged. He submitted that the issue of allow-ability of a deduction under Section 80G of the Act in respect of CSR expenditure is well settled and supported by umpteen number of decisions of the Tribunal, which are binding on the Assessing Officer and, therefore, he had no jurisdiction to make the said disallowance and consequently levy penalty. He submitted that the Assessing Officer had no jurisdiction to levy penalty on account of deduction disclaimed by the Petitioner when the claim was originally made relying upon a decision of this Court and thereafter given up....
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....account of three issues, namely, (1) transfer pricing adjustment of Rs. 66,96,52,179/-in respect of the payment of royalty to GIA US; (2) disallowance of deduction under Section 80G of the Act in respect of CSR expenditure and (3) disallowance of Education Cess. We will deal with issues (2) and (3) first. 15. Insofar as deduction under Section 80G of the Act is concerned, the same may not detain us any further. In view of the Tribunal's decision dated 21st November 2025 deleting the aforesaid addition, the penalty on this count cannot survive. Even otherwise, in our view, the officer had no jurisdiction to initiate or levy penalty on an issue contrary to binding decisions of the Tribunal. Hence, levy of penalty on this issue cannot be sustained. 16. Insofar as the disallowance of Education Cess is concerned, the aforesaid claim was made in the Return of Income filed on 13th February 2021 based on the decision of this Court in Sesa Goa Ltd. (supra), which is dated 28th February 2020. Merely because the claim was given up on account of the subsequent retrospective amendment would not attract penal consequences. Both, the retrospective amendment, as we....
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....Once an item of income or expenditure as per the return and the Assessment Order is the same, there can be no question of penalty on account of such item. In this view of the matter, the penalty on this ground is also unsustainable. Though, as per Mr. Sharma's submission, the Assessing Officer may have time upto 31st March 2027 to pass an Assessment Order on the basis of the modified return filed by the Petitioner, that cannot mean that the impugned penalty order can be allowed to remain in force. 18. Now, if we turn to the provisions of Section 270A of the Act, we find that penalty under this Section is attracted on the under-reported income. Section 270A(2) provides that a person shall be considered to have under-reported his income, if: a) the income assessed is greater than the income determined in the return processed under clause (a) of sub-section(1) of section 143; b) the income assessed is greater than the maximum amount not chargeable to tax, where no return of income has been furnished 17[or where return has been furnished for the first time under section 148]; c) the income reassessed is greater than the income assessed or reassessed immedi....
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....nder-reporting of income in consequence of misreporting of income. In respect of the remaining two issues, penalty was levied at the rate of 50% by treating them to be cases of under-reporting of income. In our considered view, none of the aforesaid clauses can conceivably apply in the present case. Even insofar as clause (a) above is concerned, there is no question of misrepresentation of facts or suppression of facts as all necessary facts were disclosed and were in the knowledge of the tax authorities. The mere fact that the royalty of a higher amount computed at 65% of the operating profits was claimed to be the Arm's Length Rate, but was eventually settled at 53.5%, would not mean that there was any misrepresentation or suppression of facts. 22. We are conscious of the fact that in the present case the APA between the Petitioner and the CBDT was signed on 27th March 2025 and though the impugned penalty order under Section 270A of the Act was passed on 28th March 2025, the 1st Respondent may not have been aware of the recently signed APA. Nevertheless, in view of the clear mandate of the statutory provisions discussed above, the impugned penalty order under Section 270A cann....