APA-Settled Transfer Pricing Adjustment Cannot Trigger Section 270A Penalty: Bombay HC

GIA India Laboratory Pvt. Ltd. Vs Assessment Unit (Bombay High Court)

Summary: Bombay High Court quashed the penalty order passed under Section 270A of the Income-tax Act, 1961 against GIA India Laboratory Pvt. Ltd. for AY 2020-21. The original penalty of Rs. 47,88,81,423/- had subsequently been reduced to Rs. 35,11,79,712/- by an order under Section 154 read with Section 270A. Penalty arose from three matters: a transfer-pricing adjustment of Rs. 66,96,52,179/- relating to royalty paid to Gemological Institute of America, Inc. (“GIA US”); disallowance of a Rs. 4,18,81,000/- deduction claimed under Section 80G for CSR activities; and disallowance of education cess of Rs. 2,03,60,933/-.

The assessee had paid royalty to GIA US at 65% of operating profits of its India Graded Segment while renewal of its Advance Pricing Agreement (“APA”) was pending. Its earlier APA had fixed the arm’s-length royalty rate at 53.50%. The TPO consequently proposed the Rs. 66.96 crore adjustment. During pendency of the assessee’s appeal, however, the renewed APA was executed on 27 March 2025 and the arm’s-length rate was finally settled at 53.50%. The assessee thereafter filed a modified return under Section 92CD on 30 June 2025, and the Tribunal directed the Assessing Officer to give effect to the APA.