No Penalty Lies for Non-Reporting of PE-Unrelated Transactions

No Penalty Lies for Non-Reporting of PE-Unrelated Transactions and CIT(A) Cannot Enhance on New Grounds

Issue

Issue I (Section 271AA Penalty): Whether a transfer pricing penalty under Section 271AA for non-reporting of an international transaction is sustainable when the transaction was executed directly by the foreign head office without any effective nexus to its Indian Project Office/Permanent Establishment (PE), and no profits were attributed to the PE.
Issue II (Power of Enhancement): Whether the Commissioner (Appeals), under Section 251(1)(b), has the jurisdiction to enhance a Section 271AA penalty by introducing entirely new transactions that were never considered or examined by the Assessing Officer during the initial penalty proceedings.

Facts

The assessee is a steel manufacturing and exporting company incorporated in the Republic of Korea, maintaining a Project Office/PE in India.
During the assessment year 2021-22, the assessee executed an international transaction involving the direct sale of raw materials from Korea to its Indian Associated Enterprise (AE).
The transaction did not route through, originate from, or have any effective operational nexus with the assessee’s PE in India. The Revenue did not attribute any profits from this transaction to the Indian PE, nor did it make any additions to the returned income.
The Transfer Pricing Officer (TPO) flagged this transaction as non-reported in Form 3CEB, prompting the Assessing Officer (AO) to initiate and levy a penalty under Section 271AA(1).
On appeal against this penalty, the Commissioner (Appeals) enhanced the penalty amount by suo motu incorporating two completely new transactions—guarantee fees and trade affairs services—which the AO had never examined or included in the penalty show-cause notice.

Decision

In favor of Assessee (Penalty Deleted): Held that since the raw material sale was executed directly from Korea with zero nexus to the Indian PE, and no corresponding income addition or profit attribution was made in India, the assessee demonstrated “reasonable cause” under Section 273B for not reporting the transaction in its Indian Form 3CEB. The Section 271AA penalty is deleted.
In favor of Assessee (Enhancement Set Aside): Held that the CIT(A)’s powers of enhancement under Section 251(1)(b) are restricted to the subject matter of the assessment or penalty initiated by the AO. The CIT(A) cannot discover a completely new source of default or introduce new transactions to scale up a penalty.
In favor of Assessee (Enhancement Set Aside): Because the AO’s penalty proceedings were restricted solely to the raw material transaction, the CIT(A) exceeded his jurisdiction by bringing the guarantee fees and trade affairs services into the penalty fold. The enhancement is invalid and deleted.

Key Takeaways

No Nexus, No Penalty: International transactions executed directly between a foreign head office and an Indian entity, which have no connection to the foreign company’s Indian Permanent Establishment, do not attract non-reporting penalties under Section 271AA if reasonable cause is established.

Limits on CIT(A)’s Enhancement Powers: While the Commissioner (Appeals) has coterminous powers of enhancement, they cannot travel beyond the scope of the AO’s inquiry to unearth entirely new items, transactions, or sources of income that were never part of the original dispute.

IN THE ITAT MUMBAI BENCH ‘J’

Posco Holdings Inc

Deputy Commissioner of Income-tax, Int Tax

Beena Pillai, Judicial Member
and BIJAYANANDA PRUSETH, Accountant Member

IT Appeal No. 658 (Mum) of 2026
SA No. 29 (MUM) of 2026
[Assessment year 2021-22]

MAY 25, 2026

Ravi Sawana and Ms. Prativa Agarwal, ARs for the Appellant. Krishna Kumar, SR. DR. for the Respondent.

ORDER

Beena Pilla, Judicial Member.- Present appeal filed by the assessee arises out of order dated 26/12/2025 passed by the Learned Commissioner of Income Tax (Appeals) – 57, Mumbai [hereinafter referred to as “the Ld.CIT(A)”] for AY 2021-22, on following grounds of appeal:

“1. The Ld. AO has, in the facts and circumstances of the case and in law, erred by levying penalty on the Appellant w/s 27lAA of the Act.

2. The Ld. CIT(A), has, in the facts and circumstances of the case and in law, erred by upholding and enhancing the penalty levied by the Ld. AO.

3. The Ld. AO, in the facts and circumstances of the case and in law, has erred by levying penalty under section 27lAA of the Income-tax Act, 1961 (‘the Act), even when the Ld. AO himself, as well as the Learned Transfer Pricing Officer, has made no additions to the total income of the Appellant in the quantum assessment / transfer pricing assessment, as the case may be, in respect of the transactions which were not reported by the Appellant in the Form 3CEB.

4. The Ld. AO, in the facts and circumstances of the case and in law, erred in issuing show cause notice u/s 271AA of the Act without stating the specific clause under sub-section (1) of section 271AA of the Act, under which penalty proceedings were initiated, thereby vitiating the entire penalty proceedings and rendering the penalty order non-est and void ab initio.

5. The Ld. CIT(A) has, in the facts and circumstances of the case, erred in holding that penalty u/s 271AA of the Act is applicable even if there was no loss of revenue to the exchequer:

6. The Ld. CIT(A) has, in the facts and circumstances of the case and in law, erred in holding that non-taxability of a transaction under the provisions of the Act or the applicable Double Taxation Avoidance Agreement does not negate applicability of the provisions of section 92E of the Act which is in direct contradiction to the settled judicial precedents of the Hon’ble Jurisdictional High Court.

7. The Ld. AO, in the facts and circumstances of the case and in law, has erred in holding that since the Appellant had a permanent establishment in India during the relevant assessment year, the Appellant was liable to report transactions it entered into by the Appellant with its associated enterprise, even if:

(i)

the Indian permanent establishment had no nexus with such transactions,

(ii)

such transaction did not contain an element of income taxable in India under the provisions of the Act, read with the applicable double taxation avoidance agreement.

(iii)

No income was attributed, or even attributable, to the Indian permanent establishment from such transactions during the relevant assessment year.

8. The Ld. AO has, in the facts and circumstances of the case and in law, erred in holding that transaction of sale of goods by the Appellant to its associated enterprise, i.e., its Indian subsidiary, during the relevant assessment year was taxable in terms of explanation 2A of section 9(1)

(i)

of the Act, while the Ld. AO himself has not made any such inference in the quantum assessment vide assessment order issued u/s 143(3) of the Act.

9. The Id. AO’s reliance on the judgement of the Hon’ble Delhi ITAT, in the case of DCIT v. Convergys Customer Management Group Inc. [ITA No. 3529/DEL/2015 and ITA No. 3530/DEL/2015], is entirely misplaced, since the said judgement was pronounced by the Hon’ble Delhi ITAT on facts and circumstances which are not in pari-materia with the facts and circumstances of the Appellant’s case.

10. Without prejudice to the above, the Ld. AO has, in the facts and circumstances of the case and in law, erred by levying penalty u/s 271AA of the Act, by ignoring the provisions of section 273B of the Act which prohibit imposition of penalty u/s 27IAA of the Act, in case of existence of reasonable cause for violation of the provisions of section 271AA of the Act.

11. The Ld. CIT(A) has, in the facts and circumstances of the case and in law, erred in holding that reasonable cause did not exist for Appellant’s alleged failure to adhere to the provisions of section 271AA and hence the Appellant was not eligible to be sheltered by the provisions of section 273B of the Act.

12. The Ld. CIT(A) has, in the facts and circumstances of the case, erred in brushing-aside the judgement of the Hon’ble ITAT in the case of LM Wind Power AS v. ACIT (Delhi- Trib.), wherein the Hon’ble ITAT, in identical facts and circumstances, has held that non-reporting of non-taxable transactions u/s 92E of the Act would not warrant applicability of penalty w/s 271AA of the Act.

The Appellant further craves leave to add, alter, amplify, modify, or delete all or any of the aforementioned grounds at or before the hearing.”

2. Brief facts of the case are as under:

The assessee, is domiciled in the Republic of Korea and is engaged in the business of manufacturing and export of wide range of steel products including hot rolled sheets, plate, wire rod, cold rolled sheets, galvanized sheets and stainless steel. The assessee filed its return of income for AY 2021-22 on 14.03.2022, declaring a total income of Rs. 7,71,08,714/-.

2.1. The return of income filed by the assessee was selected for scrutiny and the case was referred to the Ld.TPO for analysis and determination of assessee’s income on an arm’s length basis. The Ld. TPO, in the order dated 30.10.2023 passed under section 92CA of the Act, held the value of Arm’s Length Price of the international transactions declared by the assessee did not warrant any disturbance and thus no adjustment was made thereto.

2.2. However, the Ld. TPO noted that during the year under consideration, the assessee undertook certain international transactions with its AE, POSCO Maharashtra Steel Pvt.Ltd. The assessee had not declared transactions pertaining to sale of raw materials to POSCO Maharashtra Steel Pvt.Ltd., during financial year relevant to assessment year under consideration. The Ld.TPO thus requested the Ld.AO to verify the facts in this regard and levy penalty u/s 271AA of the Act.

2.3. The Ld.AO thereafter passed a final assessment order, wherein no additions were made to the income of the assessee. However, penalty proceedings were initiated u/s 271AA of the Act for the alleged non-reporting of certain transactions by the assessee.

2.4. Pursuant to said penalty proceedings, the Ld.AO passed order dated 28.06.2024 u/s 271AA of the Act, levying a penalty of INR 49,35,25,762/- for an alleged failure to report transactions pertaining to sale of raw materials to its AE worth INR 2467,62,88,079/-. The penalty amount being 2% of the value of international transaction allegedly un-reported.

Aggrieved by the penalty order, the assessee, preferred appeal before the Ld.CIT(A)

2.5. The Ld. CIT(A) vide order impugned order not only upheld the penalty levied by the Ld. AO on the assessee but also enhanced the said penalty. The details of such enhancement are tabulated as under:

Sr. No.	Particulars of transactions considered unreported and thus liable for penalty u/s 271AA of the Act	Amount of transaction (INR) (A)	Additional Penalty @ 2% of amounts mentioned in Column (A) (INR) (B)
1.	Guarantee Fees	3,26,86,403/-	6,53,728/-
2.	Payment of trade affairs services	34,89,281/-	69,786/-
	Total	3,61,75,684/-	7,23,514/-

Aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before this Tribunal.

3. Ground No.1 raised by the assessee is on levy of penalty under section 271AA for non-disclosure of sale of raw materials to POSCO Maharashtra.

3.1. The Ld. AR submitted that the sale transaction referred to by the Revenue amounting to INR 2,467.6 crores pertains to sale of raw materials by the assessee to POSCO Maharashtra Steel Private Limited. It was submitted that the said transaction was not derived from the Project Office of the assessee in India.

3.1.1. The Ld.AR further submitted that the aforesaid transaction is not taxable in India either under the provisions of the Incometax Act, 1961 or under the India-Korea DTAA and, therefore, the same was not required to be reported in Form No. 3CEB by the assessee.

3.2. The Ld. AR further submitted that the applicability of transfer pricing provisions under Chapter X presupposes existence of income chargeable to tax under the normal provisions of the Act. Referring to sections 4 and 5 of the Act, it was submitted that only total income chargeable to tax can be brought within the scope of transfer pricing provisions.

3.3. The Ld. AR submitted that the provisions of Chapter X of the Act, including the reporting requirements prescribed therein, would apply only to such international transactions which are chargeable to tax in India. In support of this proposition, reliance was placed on the decisions of the Hon’ble Bombay High Court in Vodafone India Services Pvt. Ltd. v. Union of India and Shell India Markets Pvt. Ltd. v. ACIT.

3.4. It was, therefore, contended that once the provisions of Chapter X themselves were not applicable to the impugned transaction, initiation of penalty proceedings under section 271AA of the Act was wholly unsustainable. The Ld. AR accordingly submitted that the assessee was under no obligation to report the aforesaid transaction and, therefore, no penalty could be levied under section 271AA of the Act. He placed reliance on following decisions in support of this contention:

3.5. The Ld. AR placed reliance on the decision of the Hon’ble Bombay High Court in Equinox Business Parks (P.) Ltd. v. UOI [2015] (Bombay), wherein the Hon’ble Court recognised that where an issue involves interpretational uncertainty and the assessee acts on a bona fide understanding of law, penal consequences ought not to be imposed mechanically. It was thus submitted that in the present case also, the assessee having acted under a bona fide belief that the impugned transaction was not reportable under Chapter X of the Act, penalty u/s 271AA of the Act was not leviable.

3.6. Ld.AR relied upon the decision of Hon’ble Delhi Tribunal in case of Nihon Parkerizing (India) Pvt. Ltd. v. ACIT, reported in , wherein it was held that the provisions of section 271AA are subject to section 273B of the Act and where the legal position regarding reporting of a transaction as an international transaction lacked clarity at the relevant point of time, the assessee had a reasonable cause for non-disclosure of the same in Form No. 3CEB. The Tribunal accordingly upheld deletion of penalty levied under section 271AA of the Act.

3.7. Further reliance was placed on the decision of the Hon’ble Delhi High Court in case of Haier Appliances India Ltd. v. Dy. CIT, OSD (Delhi – Trib.)/(ITA No. 5235/Del/2011 and others, vide judgment dated 16.03.2015) wherein the Hon’ble Court upheld the finding of the Tribunal that non-disclosure of a particular transaction as an international transaction in Form No.3CEB was supported by reasonable cause, especially in a situation where the issue itself was debatable and pending consideration before a Special Bench of this Tribunal. It was submitted that the Hon’ble High Court accepted the view that where the legal position itself lacked certainty, penal consequences under section 271AA could not be sustained.

3.8. The Ld.AR submitted that the transaction under consideration, namely sale of raw materials by the assessee to its Indian AE, is not taxable in India either under the provisions of the Income-tax Act, 1961, in the absence of any business connection, or under the India-Korea DTAA in the absence of a Permanent Establishment (“PE”) in India. It was further submitted that even the Revenue authorities have neither made any addition to the income returned by the assessee nor attributed any profits arising from such transaction to the Project Office-PE of the assessee in India.

3.9. The Ld. AR further submitted that the transaction under consideration has also been accepted to be at Arm’s Length Price (“ALP”) in the case of the assessee’s Indian AE. Reliance was also placed on the decision of the Coordinate Bench of the Tribunal in LM Wind Power AS v. ACIT (Delhi – Trib.), wherein under similar facts, the issue was decided in favour of the assessee.

3.10. In view of the aforesaid judicial precedents and the facts of the present case, the Ld. AR submitted that there existed a reasonable cause within the meaning of section 273B of the Act for non-disclosure of the sale transaction with POSCO Maharashtra Steel Private Limited in Form No. 3CEB. It was submitted that the assessee was under a bona fide belief that the said transaction was not chargeable to tax in India either under the provisions of the Income-tax Act, 1961 or under the India-Korea DTAA and, consequently, the provisions of Chapter X of the Act were not applicable to such transaction. Therefore, according to the Ld. AR, non-reporting of the said transaction cannot be regarded as a deliberate default so as to warrant levy of penalty under section 271AA of the Act.

3.11. On the contrary, the Ld. DR submitted that the transaction in question had admittedly been disclosed by the Indian entity and, therefore, the contention of the assessee that the transaction was not reportable cannot be accepted. It was further submitted that the Indian entity constituted the Project Office/pE of the assessee in India and, therefore, the plea advanced by the assessee that there existed no PE in India was untenable.

3.12. The Ld.DR thus contended that the assessee was under a statutory obligation to disclose the transaction relating to sale of raw materials to POSCO Maharashtra Steel Private Limited in Form No. 3CEB and failure to do so rightly attracted penalty proceedings under section 271AA of the Act.

We have perused the submissions advanced by both sides in light of records placed before us.

4. We have considered the rival submissions and perused the material available on record. It is an undisputed fact that the international transaction relating to sale of raw materials was undertaken directly by POSCO Holdings Inc. from its factory situated in Korea to POSCO Maharashtra Steel Private Limited and was not derived from the Project Office/pE of the assessee in India. The Revenue has also not brought any material on record to demonstrate that the said transaction had any effective nexus with the Project Office of the assessee in India.

4.1. We further note that the Revenue authorities themselves have neither made any addition to the income returned by the assessee nor attributed any profits arising from the said transaction to the Project Office/pE of the assessee in India. The transaction has also been accepted to be at Arm’s Length Price (“ALP”) in the case of the Indian AE. These facts clearly support the bona fide belief entertained by the assessee that the transaction was not chargeable to tax in India either under the provisions of the Act or under the India-Korea DTAA and, consequently, was not required to be reported in Form No. 3CEB.

4.2. We also find merit in the contention of the assessee that where the applicability of Chapter X itself was debatable and the assessee had acted under a bona fide understanding of law, penalty under section 271AA could not be imposed mechanically. The judicial precedents relied upon by the assessee, including the decision of Hon’ble Delhi Bench of this Tribunal in LM Wind Power A/S v. ACIT,(supra) support the proposition that existence of reasonable cause would take the case outside the ambit of penal provisions. Accordingly, considering the entirety of the facts and circumstances of the case, we are of the view that the assessee had demonstrated a reasonable cause for non-reporting of the impugned transaction and, therefore, levy of penalty under section 271AA of the Act is unsustainable.

Accordingly, Ground.no.1 raised by the assessee stands allowed.

5. Ground no.2 is on enhancement of penalty by the Ld.CIT(A), in relation to Guarantee Fees and Payment of Trade affairs services.

5.1. The Ld.AR submitted that while the Ld.AO levied penalty under section 271AA(1) of the Act only in respect of the alleged non-reporting of the transaction relating to sale of raw materials, the Ld. CIT(A), while disposing of the appeal, proceeded to enhance the penalty by bringing within its scope additional transactions, namely guarantee fees and payment of trade affairs services, which were never made part of the original penalty proceedings by the Ld.AO.

5.2. The Ld. AR submitted that penalty under section 271AA(1) of the Act is transaction specific and, therefore, the jurisdiction of the Ld. CIT(A) while exercising powers of enhancement could not travel beyond the transactions which formed the subject matter of penalty proceedings before the Ld.AO. It was contended that the Ld. CIT(A) could either sustain, reduce or enhance penalty only in relation to transactions which were examined by the Ld.AO or formed part of the penalty order. However, according to the Ld. AR, the Ld. CIT(A) could not introduce altogether new transactions for the purpose of levy of penalty.

5.3. In support of the aforesaid proposition, reliance was placed on the decision of the Hon’ble Supreme Court in CIT v. Rai Bahadur Hardutroy Motilal Chamaria [1967] 66 ITR 443 and the Full Bench decision of the Hon’ble Delhi High Court in CIT v. Sardari Lal & Co. [2001] 251 ITR 864 (Delhi), wherein the scope and ambit of enhancement powers vested with the appellate authority were explained. The Ld. AR submitted that the principles laid down therein regarding enhancement of assessment would equally apply to enhancement of penalty proceedings.

5.4. The Ld.AR further submitted that in the present case, the Ld.AO considered only the transaction relating to sale of raw materials as allegedly not reported by the assessee. It was submitted that even the reference made to the Ld.TPO for determination of Arm’s Length Price was confined only to the said transaction. According to the Ld.AR, the Ld. CIT(A) exceeded his jurisdiction in levying penalty in respect of the transactions relating to guarantee fees and payment of trade affairs services, which were neither examined by the Ld.AO nor formed part of the original penalty proceedings.

5.5. Without prejudice to the aforesaid contention, the Ld. AR submitted that the same arguments advanced in relation to the transaction of sale of raw materials would equally apply to the transactions relating to guarantee fees and payment of trade affairs services. It was submitted that the guarantee fee transaction had already been accepted to be at Arm’s Length Price by the Ld.TPO in the assessment proceedings of the Indian AE, namely POSCO Maharashtra Steel Private Limited, both for Assessment Year 202021 as well as for the year under consideration.

5.6. It was further submitted that the transaction relating to provision of trade affairs services had also been accepted by the Ld.TPO to be at ALP in the assessment proceedings of the Indian AE for the year under consideration. Accordingly, the Ld.AR submitted that even on merits, levy of penalty under section 271AA of the Act was unsustainable.

5.7. On the contrary, the Ld. DR submitted that the Ld. CIT(A) is duly empowered under section 251(1)(b) of the Act to enhance the penalty while disposing of an appeal arising from penalty proceedings. It was contended that the powers of the appellate authority are co-terminus with that of the Ld.AO and, therefore, the Ld.CIT(A) was well within his jurisdiction in examining the entire issue relating to non-reporting of international transactions and enhancing the penalty in respect of other transactions which, according to the Revenue, were also liable for reporting under the provisions of Chapter X of the Act.

We have perused the submissions advanced by both sides in light of records placed before us.

6. We note that the Ld.AO, while initiating and levying penalty under section 271AA(1) of the Act, had confined the penalty proceedings only to the alleged non-reporting of the international transaction relating to sale of raw materials. Admittedly, no penalty proceedings were initiated by the Assessing Officer in respect of the transactions relating to guarantee fees and payment of trade affairs services.

6.1. The issue that arises for consideration is whether the Ld. CIT(A), while exercising powers under section 251(1)(b) of the Act, could enhance the penalty by bringing within its scope altogether new transactions which neither formed part of the original penalty proceedings nor were considered by the Ld.AO while levying penalty.

6.2. It is no doubt true that the Ld. CIT(A) is vested with powers of enhancement under section 251(1)(b) of the Act. However, such powers cannot be exercised to introduce a completely new source or subject matter which was never examined by the Ld.AO in the penalty proceedings. Hon’ble Supreme Court in Rai Bahadur Hardutroy Motilal Chamaria (supra) held that the appellate authority cannot travel beyond the subject matter considered by the Ld.AO for the purpose of enhancement. Similar principles have also been reiterated in the Full Bench of Hon’ble Delhi High Court in case of Sardari Lal & Co (supra).

6.3. In the present case, the subject matter of penalty proceedings before the Ld.AO was restricted only to the transaction relating to sale of raw materials. Even the reference made to the Ld.TPO was confined to the said transaction. Therefore, in our considered opinion, the Ld. CIT(A) exceeded the scope of his jurisdiction in enhancing the penalty by bringing within its ambit the transactions relating to guarantee fees and payment of trade affairs services, which were never considered by the Ld.AO while levying penalty under section 271AA(1) of the Act.

Accordingly, the enhancement made by the Ld.CIT(A) in respect of the aforesaid transactions is unsustainable and is directed to be deleted.

Accordingly, Ground.no.2 raised by the assessee stands allowed.

7. All other grounds raised by the assessee are rendered academic in view of our adjudication of the issue on merits and, therefore, do not call for separate adjudication.

8. As the appeal of the assessee has been decided on merits in favour of the assessee, the Stay Application filed by the assessee has become infructuous and is accordingly dismissed.

In the result, appeal filed by assessee stands allowed and stay application filed by assessee stands dismissed as infructuous.