The Supreme Court upheld the Delhi High Court’s ruling, deleting the ₹64.43 crore penalty under Section 271G of the Income Tax Act

In a significant relief to Ericsson India Private Limited, the Supreme Court of India has upheld the deletion of the penalty imposed under Section 271G of the Income Tax Act, 1961. The penalty, which was earlier imposed by the tax authorities for failure to provide necessary documentation related to international transactions, was removed by the Delhi High Court, and the Supreme Court has now confirmed that ruling. The crux of the case revolved around whether the Transfer Pricing Officer (TPO) had the jurisdiction to issue the penalty notice on December 5, 2014, following a default by Ericsson on March 25, 2014. At the time of the alleged default, the TPO did not have the authority to impose penalties under Section 271G. This power was conferred upon the TPO only after the Finance Act of 2014, effective from October 1, 2014. Get a Copy of Handbook To Income Tax Rules, Click here Ericsson India had filed its returns for the Assessment Year 2011-12, which included a transfer pricing report. On February 18, 2014, the TPO issued a notice to Ericsson to provide certain documents by March 25, 2014. However, the company did not comply with this deadline. Subsequently, a second notice was issued by the TPO on December 5, 2014, after the new provisions came into effect, alleging default and proposing a penalty. This led to the imposition of a substantial penalty of ₹64.43 crore on January 16, 2015. Ericsson argued that the TPO lacked jurisdiction to initiate penalty proceedings on December 5, 2014, because the default occurred before the TPO gained the legal authority to impose such penalties. Get a Copy of Handbook To Income Tax Rules, Click here Ericsson’s defence relied on the Supreme Court’s rulings in Brij Mohan vs. Commissioner of Income Tax and Varkey Chacko vs. Commissioner of Income Tax, which asserts that penalties must be based on the law that was in force when the default or offence occurred. Since the default happened before October 1, 2014, the TPO did not have the requisite power to impose the penalty. The Delhi High Court had concluded that the “event of default” occurred on March 25, 2014, well before the amendment empowering the TPO to impose penalties. As a result, the penalty imposed by the TPO in 2015 was deemed without jurisdiction. The court had thus quashed the penalty order, ruling in favour of Ericsson India. The Special Leave Petition filed by the Additional Commissioner of Income Tax, challenged the decision of the Delhi High Court. However, in its hearing on September 10, 2024, the bench comprising Justice Abhay S. Oka and Justice Augustine George Masih dismissed the petition, citing a precedent set in the case of Virkey Chacko v. Commissioner of Income Tax. Get a Copy of Handbook To Income Tax Rules, Click here Section 271G of the Income Tax Act pertains to the imposition of penalties for failure to furnish documents or information as required under Section 92D, particularly in relation to international or specified domestic transactions. In this case, Ericsson India was initially penalized by the income tax department for non-compliance. However, both the Delhi High Court and the Supreme Court found that the conditions necessary to impose the penalty under Section 271G were not met. The Supreme Court’s decision reinforces the importance of procedural fairness in imposing penalties under the Income Tax Act, especially when it comes to transfer pricing requirements.