The TPO accepted my pricing but the AO has still levied a s.271AA penalty. On what, and what can I say against it?
s.271AA penalises the documentation, not the pricing, so it survives an accepted transfer price. It runs at two per cent of the value of each international transaction or specified domestic transaction for failing to keep and maintain the s.92D information and documents, for failing to report the transaction, or for maintaining or furnishing incorrect information; s.271AA(2) adds a flat Rs 5,00,000 for not furnishing the master file. Two defences do real work: s.273B lists s.271AA, so reasonable cause answers it, and the officer must specify which prescribed document was not maintained.
s.271AA opens "Without prejudice to the provisions of section 270A or section 271 or section 271BA, if any person in respect of an international transaction or specified domestic transaction" does one of the listed things. The limbs are: "fails to keep and maintain any such information and document as required by sub-section (1) or sub-section (2) of section 92D"; "fails to report such transaction which he is required to do so"; and "maintains or furnishes an incorrect information or document". The consequence is "a sum equal to two per cent of the value of each international transaction or specified domestic transaction entered into by such person".
Read the quantum carefully. It is two per cent of the value of the transaction, not of the adjustment and not of the tax — so it is indifferent to whether the arm's length price was accepted, and on a high-volume, low-margin business it can exceed any conceivable tax on the transaction. That is what makes it the sharpest instrument in the transfer pricing penalty set.
s.271AA(2) is a separate charge for the master file: "If any person fails to furnish the information and the document as required under sub-section (4) of section 92D, the prescribed income-tax authority referred to in the said sub-section may direct that such person shall pay, by way of penalty, a sum of five hundred thousand rupees." Note who levies it — the prescribed authority under s.92D(4), not the Assessing Officer who makes the assessment.
Keep the neighbouring penalties distinct, because show-cause notices routinely cite the wrong one. On the commentary fetched, s.271BA is Rs 1,00,000 for failure to furnish the accountant's report under s.92E, that is Form 3CEB; s.271G is two per cent of the value of the international transaction for failure to furnish a document or information called for, and may be levied by the Assessing Officer, the Commissioner (Appeals) or the Transfer Pricing Officer; and the adjustment itself, if it results in under-reported or misreported income, is dealt with by s.270A. s.271AA(1) is levied by the Assessing Officer or the Commissioner (Appeals).
Two defences carry the weight. The first is statutory: s.273B provides that notwithstanding the provisions concerned, "no penalty shall be imposable on the person or the assessee if he proves that there was" reasonable cause for the failure, and its list expressly includes "section 271AA" alongside s.271A, s.271B, s.271BA and s.271G. So a documented, credible explanation for the failure is a complete answer, not mitigation.
The second is the specificity requirement, and it is where these penalties actually collapse. In DCIT v. Priya Blue Industries (P.) Ltd. the Ahmedabad Tribunal upheld deletion of a penalty of over Rs 5 crore levied across eight years because the order contained "no discussion as to why such penalty has been initiated by the AO or which were the documents/information as required" — the officer had not identified which of the documents prescribed by s.92D read with rule 10D was missing. The Tribunal also gave weight to the TPO having accepted the transactions at arm's length without any adjustment and without initiating penalty, and to the absence of a proper show-cause notice.
That last point matters for how a reply is written. The defect the Tribunal seized on is one the assessee can create a record of at the reply stage, by asking the officer to identify the clause of rule 10D relied on and the document called for and not produced. An officer who answers has to particularise; one who does not has left the order open to the Priya Blue objection.
Practitioners treat transfer pricing risk as adjustment risk, and s.271AA is not that: it is priced off the gross value of the transactions, so a group with large intra-group flows and no dispute about pricing can face a penalty larger than any tax at stake. It also has a longer reach than most, because the documentation obligation under s.92D and rule 10D is annual and independent of whether a reference to the TPO was ever made. The good news is that the two answers to it — reasonable cause under s.273B, and making the officer specify the default — are both available at the reply stage, before the order is passed.
You took a cash loan and now face penalty equal to the whole amount. Is there any relief?
Must penalty be imposed just because the law permits it?
My agents keep the difference between the price they charge customers and the net price they pay me — do I have to deduct TDS on money that never passed through my hands?
Our audit report was late because the statutory auditor was late. Can the officer still levy the s.271B penalty?
CPC has raised a s.272B penalty of ten thousand rupees for each of 196 deductees whose PANs were invalid in my TDS statement. The deductees gave me those numbers. Is that reasonable cause?
The show-cause notice came a year after the AO referred the matter to the JCIT. Which date starts the s.275(1)(c) clock?
The CIT(A) order came two years ago but the appeal is still in the Tribunal. Is the penalty already time-barred?
We refunded share application money in cash. Is that a repayment of a deposit under s.269T?
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