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2025 (5) TMI 616 - AT - Income TaxLevy of penalty u/s. 271AA - assessee failed to report transaction of issue of shares to its associated enterprises in Form 3CEB - assessee has failed to comply with the mandatory provisions of reporting of international transactions - HELD THAT - As undisputed fact that the assessee during the period relevant to assessment year under appeal had allotted shares to its parent company i.e. Sarens NV Belgium. As per the provisions of section 92D of the Act every person who enters into an international transaction is required to maintain and document information in respect of any transactions as specified under Rule 10D of the Income Tax Rules 1962. The assessee has placed on record Form 3CEB. A perusal of the same reveals that the assessee has given a complete list of Associates Enterprises with whom the assessee entered into international transaction during the period relevant to AY 2015-16. The assessee has also given detailed descriptions of transactions entered into with its AE s during the relevant period except for issuance of share capital against outstanding trade payables of the parent company. The assessee is a wholly owned subsidiary of Sarens NV Belgium the shares have been issued by the assessee to its parent company at par. No addition/adjustment was made by the AO on account of any international transaction and the return of income was accepted by the AO. Hence in our considered view it is not a fit case for levy of penalty u/s. 271AA therefore penalty levied u/s. 271AA of the Act is deleted. Appeal of the assessee is allowed.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal are:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Whether the allotment of shares to the parent company constitutes an 'international transaction' under section 92B of the Income Tax Act The relevant legal framework is section 92B of the Income Tax Act, which defines 'international transaction' as a transaction between two or more associated enterprises, including transfer of tangible or intangible property, provision of services, lending or borrowing money, and any other transaction having a bearing on profits, income, losses or assets. The assessee contended that the allotment of shares was made in lieu of capitalization of trade payables under a specific window allowed by the Reserve Bank of India and does not fall within the ambit of 'international transaction' as defined under section 92B. The Tribunal noted that the shares were issued at par to the parent company, which is an associated enterprise. The issuance was in exchange for trade payables and not a transfer of property or services or lending/borrowing. The Court examined the nature of the transaction and found that issuance of shares in exchange for trade payables does not constitute an international transaction requiring transfer pricing analysis. This interpretation aligns with the principle that only transactions impacting profits or income in a manner contemplated under section 92B are covered. The allotment of shares in this context was a capital restructuring rather than a commercial transaction affecting profits or income. Thus, the Tribunal concluded that the share allotment does not qualify as an international transaction under section 92B. Issue 2: Obligation to report the share allotment transaction in Form 3CEB Section 92D mandates maintenance and documentation of information in respect of international transactions, as specified under Rule 10D of the Income Tax Rules, and requires filing of Form 3CEB certified by a Chartered Accountant. The assessee filed Form 3CEB disclosing all international transactions with associated enterprises except the issuance of shares to its parent company. The Department argued that the failure to report this transaction violated mandatory reporting requirements. The Tribunal observed that since the share allotment was not an international transaction within the meaning of section 92B, the obligation to report it in Form 3CEB does not arise. The Tribunal placed reliance on the fact that the assessee had otherwise complied with reporting requirements for other transactions. Hence, the Tribunal held that the non-reporting of share allotment in Form 3CEB was not a breach of mandatory provisions, as the transaction was not required to be reported. Issue 3: Levy of penalty under section 271AA for failure to report international transaction Section 271AA prescribes penalty for failure to furnish information or documents relating to international transactions or specified domestic transactions as required under section 92D. The Assessing Officer levied penalty on the ground that the assessee failed to report the share allotment transaction in Form 3CEB. The Tribunal noted that the AO accepted the return of income without making any addition or adjustment on account of international transactions and did not refer the case to the Transfer Pricing Officer under section 92CA. The Tribunal reasoned that if the transaction was not an international transaction and no adjustment was made by the AO, penalty under section 271AA would not be leviable. The Tribunal emphasized that penalty provisions are attracted only when there is non-compliance in respect of transactions that fall within the ambit of international transactions. In considering the Department's argument, the Tribunal found it unpersuasive since the underlying premise of the penalty-non-reporting of an international transaction-was not established. Therefore, the Tribunal held that the penalty under section 271AA was unsustainable and deserved to be deleted. Issue 4: Effect of acceptance of return by AO without reference to TPO or transfer pricing adjustments The Tribunal observed that the AO accepted the return of income filed by the assessee without making any addition or adjustment on account of international transactions and did not refer the matter to the Transfer Pricing Officer under section 92CA. This acceptance indicated that the AO did not consider the share allotment transaction as an international transaction warranting transfer pricing scrutiny or adjustment. The Tribunal reasoned that this acceptance by the AO further supports the conclusion that the transaction was not an international transaction and that penalty for non-reporting under section 271AA cannot be imposed. 3. SIGNIFICANT HOLDINGS The Tribunal held:
Core principles established include:
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