Transoceanic Financial Engineering Pvt. Ltd. Vs ITO (ITAT Mumbai)
Can a Penalty Survive When the Underlying Addition Is Set Aside for Fresh Adjudication?
The Controversy
The Mumbai Tribunal quashed a penalty of ₹18,17,200 under section 271(1)(c) because the transfer pricing adjustment forming its foundation had already been set aside for fresh adjudication.
The important distinction is that the earlier adjustment had not been deleted after a final finding in the assessee’s favour. The quantum issues had been restored for reconsideration without any opinion on their merits. Nevertheless, the Tribunal held that the penalty founded on that earlier adjustment could not survive. Any fresh penalty proceedings would require independent consideration under the law.
The Transfer Pricing Adjustment and Penalty
The assessee’s international transactions with its associated enterprise were subjected to transfer pricing examination for AY 2011-12.
The order records a transfer pricing adjustment of ₹9,08,60,000, involving software and assets purchased of ₹5,60,00,000 and operating licences of ₹3,48,60,000.
With reference to this adjustment, a penalty of ₹18,17,200 was levied under section 271(1)(c). The assessee challenged the penalty before the first appellate authority and subsequently approached the Tribunal against the NFAC order dated 15 October 2025.
The assessee’s central submission was that the earlier quantum determination underlying the penalty had ceased to stand after the Tribunal’s remand order.
What Happened in the Quantum Appeal?
In the earlier quantum proceedings, the assessee raised two principal objections. First, it contended that there was no international transaction of a revenue nature with its associated enterprise during the relevant financial year. Secondly, it complained that the DRP had failed to consider the submissions and evidence furnished against the transfer pricing adjustment.
By its order dated 28 January 2019 in ITA No. 675/Mum/2016, the Tribunal accepted that the submissions and supporting evidence required examination.
It observed that, where an assessee furnishes explanations and evidence to establish why a transfer pricing adjustment is unwarranted, the departmental authorities are duty-bound to consider those submissions and examine the evidence. Failure to do so violates the principles of natural justice.
Accordingly, the Tribunal restored all the issues to the DRP for de novo adjudication, after providing an adequate opportunity of hearing.
Crucially, the earlier Tribunal order expressly stated that it had not expressed any opinion on the merits. The remand therefore required a fresh determination; it did not conclusively establish that no adjustment could be made.
The Assessee’s Argument in the Penalty Appeal
Before the Tribunal in the present appeal, the assessee submitted that the penalty could not continue to rest on the earlier adjustment once that adjustment had been set aside.
Counsel further stated that, in the second round, the Assessing Officer had passed a fresh assessment order and initiated fresh penalty proceedings.
The penalty presently under appeal, however, arose from the earlier transfer pricing adjustment. The assessee therefore sought its quashing, leaving the consequences of the fresh assessment to be dealt with separately.
The Tribunal’s Reasoning
The Tribunal examined its earlier quantum order and found that the transfer pricing issues giving rise to the penalty had been restored for fresh adjudication.
Consequently, the adjustment underlying the impugned penalty was no longer a concluded determination. It had to be reconsidered in the remanded proceedings after examining the assessee’s submissions and evidence.
In these circumstances, the Tribunal held that the penalty founded upon that earlier adjustment could not be sustained. It accordingly set aside and quashed the impugned penalty order.
The appeal was allowed.
Fresh Proceedings Remain Independent
The Tribunal expressly clarified that it had expressed no opinion on the merits of the fresh assessment or the validity of the fresh penalty proceedings stated to have been initiated.
Those proceedings must be dealt with independently, in accordance with law and subject to the outcome of the fresh determination of the transfer pricing issue.
Thus, the relief concerns the earlier penalty order. It does not amount to a finding that the assessee is immune from penalty in the second round, nor does it affirm the legality of any fresh penalty.
Author’s Comments
A remand of the quantum issue and an exoneration on merits are different outcomes. This decision recognises that distinction while holding that the earlier penalty cannot remain supported by an adjustment that has been set aside.
The practical significance is clear. When quantum proceedings are remanded, practitioners should examine whether an existing penalty order continues to rely on the displaced determination. The fact that the Department may make an adjustment again does not, in this case, preserve the penalty imposed on the earlier adjustment.
Equally, a fresh assessment does not automatically settle the penalty question. Any fresh penalty must satisfy its own statutory requirements and be examined on the findings and circumstances emerging from that assessment.
The earlier quantum order also carries a useful reminder: submissions and evidence must be considered before an adverse determination is made. Providing an opportunity to file material has little value if that material is then left unexamined.
Once the old adjustment was set aside, the penalty built upon it could not be kept standing while a new foundation was being constructed.
Cases Discussed
- Transoceanic Financial Engineering Pvt. Ltd. v. ITO— ITAT Mumbai, ITA No. 675/Mum/2016, order dated 28 January 2019. Earlier quantum proceedings expressly reproduced and relied upon by the Tribunal. The case was restored to the Dispute Resolution Panel for fresh adjudication because the assessee’s submissions and evidence had not been properly examined. No final opinion on the transfer pricing issues was expressed.
FULL TEXT OF THE ORIGINAL ORDER OF ITAT MUMBAI
This appeal by the assessee is directed against the order dated 15 October 2025 passed by the National Faceless Appeal Centre, Delhi, in relation to the penalty levied under section 271(1)(c) of the Income-tax Act, 1961, for the assessment year 2011–12.
2. The penalty of ₹18,17,200 was levied with reference to the transfer-pricing adjustment of ₹9,08,60,000 made in respect of the assessee’s international transactions with its associated enterprise. The adjustment comprised the following:
| Sl. No. | Narration | ALP determined by TPO |
|---|---|---|
| 1 | Software and assets purchased | Rs.5,60,00,000 |
| 2 | Operating licences | Rs.3,48,60,000 |
| Arm’s Length Price (ALP) of assessee’s transaction with AE | Rs.9,08,60,000 | |
3. The learned counsel submitted that the transfer-pricing adjustment forming the basis of the impugned penalty had been set aside by the Tribunal, vide order dated 28 January 2019 in ITA No. 675/Mum/2016, and the matter restored for fresh adjudication. It was submitted that the Tribunal had directed that the assessee’s submissions and supporting evidence be considered in accordance with law. The learned counsel further submitted that, in the second round, the Assessing Officer had passed a fresh assessment order and initiated fresh penalty proceedings. In these circumstances, according to the learned counsel, the penalty presently under appeal, which arose from the earlier transfer-pricing adjustment, could not be sustained.
4. We have considered the rival submissions and perused the material on record. The transfer-pricing adjustment underlying the impugned penalty was the subject matter of the Tribunal’s order dated 28 January 2019 in ITA No. 675/Mum/2016. The relevant observations and findings of the Tribunal, which bear upon the issue before us, are reproduced below:
5. We have considered rival submissions and perused material on record. The argument of the learned Authorised Representative before us is twofold. Firstly, there is no international transaction of revenue nature between the assessee and the AE in the relevant financial year. Secondly, the submissions made by the assessee and evidences filed to justify its claim that there is no international transaction of revenue nature and also objecting to the transfer pricing adjustment made by the Transfer Pricing Officer were not considered by the DRP. In our considered opinion, if for justifying its claim that no transfer pricing adjustment was required to be made in the given facts and circumstances of the case, the assessee makes certain submissions and furnishes evidences to support such claim, the Departmental authorities are duty bound to not only consider the submissions of the assessee but examine the evidences submitted. Non–consideration of the submissions and evidences furnished by the assessee amounts to violation of rules of natural justice. Therefore, we are inclined to restore all the issues raised in the present appeal to the DRP for de novo adjudication after due opportunity of being heard to the assessee. Grounds raised are allowed for statistical purposes.
2. Before parting, we must make it clear that we have not expressed any opinion on the merits of the issues raised by the assessee in the present appeal.
5. It is evident from the aforesaid findings that the transfer-pricing issues giving rise to the impugned penalty were restored for fresh adjudication, without any expression of opinion on their merits. The adjustment on which the penalty under appeal was founded, therefore, did not remain a concluded determination and was required to be reconsidered in the remanded proceedings. The learned counsel has also placed before us that, in the second round, the Assessing Officer has passed a fresh assessment order and initiated fresh penalty proceedings.
6. In these circumstances, the penalty order presently under appeal, having been founded upon the earlier transfer-pricing adjustment which was set aside for fresh adjudication, cannot be sustained. We accordingly set aside and quash the impugned penalty order. We make it clear that we have expressed no opinion on the merits of the fresh assessment or on the validity of the fresh penalty proceedings stated to have been initiated by the Assessing Officer. Those proceedings shall be dealt with independently, in accordance with law and subject to the outcome of the fresh determination of the transfer-pricing issue.
7. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 1st October 2026.
