Transfer Pricing / Section 270A Penalty · F2J-C-2853
GIA India Laboratory Pvt. Ltd. v. Assessment Unit, Income Tax Department/NFAC & Ors.
VALIDATED · ACTUAL COURT DOCUMENTSource transparency: The local PDF is an actual court document retained from the complete public source. The official court portal is recorded separately. Verify the official record and subsequent history before reliance.
Holding (ratio)
An APA-driven reduction in expenditure is not misreporting where the material facts were disclosed and the modified return implemented the agreement. The related CSR and education-cess claims also could not sustain the penalty on the facts.
Scope limits
The holding is confined to the issues actually decided in the retained judgment; no view is attributed to the court on questions expressly left open or remanded.
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Complete searchable judgment text
2026:BHC-OS:20360-DB CNR No : HCBM020132492025
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GIA India Laboratory Pvt.Ltd. vs. Assessment Unit
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO. 2604 OF 2026
GIA India Laboratory Pvt. Ltd. … Petitioner
V/s.
The Assessment Unit, Income Tax Department,
National Faceless Assessment Centre,
New Delhi & Ors. … Respondents
_______________________________________
Mr. J.D. Mistri, Senior Advocate a/w. Mr. Gunjan Kakad i/b. Atul K. Jasani for the
Petitioner
Mr. Akhileshwar Sharma (through V.C.) for the Respondents
_______________________________________
CORAM : B.P. COLABAWALLA AND
FARHAN P. DUBASH, JJ.
DATE : 9th SEPTEMBER 2026
P.C. :
1. Rule. Respondents waive service. With the consent of the parties, Rule
made returnable forthwith and heard finally.
2. This Petition challenges an order dated 28th March 2025, passed by
Assessment Unit, Income Tax Department, under Section 270A of the
Income-tax Act, 1961 ("the Act") for the Assessment Year (AY) 2020-21
levying a penalty of Rs.47,88,81,423/- on the Petitioner, which was
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subsequently reduced to Rs. 35,11,79,712/- by an order dated 21 st August,
2026 passed under Section 154 read with Section 270A of the Act. The
Petitioner submits that the penalty has been levied on account of the
following three additions and disallowances made in the final Assessment
Order dated 16th July 2024:
(a) A transfer pricing adjustment of Rs. 66,96,52,179/- in respect of royalty
paid by the Petitioner to Gemological Institute of America, Inc. (“GIA
US”)
(b) Disallowance of deduction of Rs. 4,18,81,000/- claimed by the
Petitioner under section 80G of the Act in respect of its contribution to
Corporate Social Responsibility (“CSR”) activities.
(c) Disallowance of deduction of education cess of Rs. 2,03,60,933/-.
3. As per the Petitioner, it is an Indian company engaged in the business of
grading diamonds, coloured stones, gems, pearls and other precious stones.
GIA US is an associated enterprise of the Petitioner. GIA US has created
intangible property such as trademarks, slogans, proprietary gemstone
grading knowledge, process know-how, database management systems,
proprietary equipment, standard reports, training material and process for
graders. For providing diamond grading services to its clients, the Petitioner
uses the intangible property developed and owned by GIA US and pays a
royalty to GIA US. During the previous year relevant to A.Y. 2020-21, the
Petitioner paid royalty of Rs. 378,49,90,577/- to GIA US. The Petitioner
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also incurred expenditure of Rs. 8,37,62,000/- on account of CSR activities
and also had claimed a deduction of education cess paid of Rs.
2,03,60,933/- in the Return of Income.
4. The Petitioner filed its Return of Income for A.Y. 2020-21 on 13th February
2021 claiming a deduction of Rs. 378,49,90,577/- on account of royalty
paid to GIA US. The amount of royalty was computed at 65% of the
operating profits of the India Graded Segment of the Petitioner. The said
royalty was disclosed in the Return of Income and in Form No. 3CEB,
which is the prescribed form for reporting international transactions entered
into by an Assessee with its associated enterprises.
5. Earlier, for the determination of the Arm’s Length Rate of royalty, the
Petitioner had entered into an Advance Pricing Agreement (“APA”) dated
7th May 2018 with the Central Board of Direct Taxes (“CBDT”) under
Section 92CC of the Act for A.Y. 2010-11 to A.Y. 2018-19, wherein the
Arm’s Length Rate of royalty was agreed to be 53.50% of the operating
profit of the India Graded Segment of the Petitioner.
6. The Petitioner applied for renewal of the APA on 28 th March 2018. In view
of the significant investment in technology by GIA US and other increased
technological benefits offered to the Petitioner, the Petitioner claimed that
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the Arm’s Length Rate of royalty should be 65% of the operating profits of
the India Graded Segment. Pending the finalisation of the APA for the
renewal period of A.Y. 2019-20 to A.Y. 2023-24, the Petitioner paid royalty
of Rs. 378,49,90,577/- to GIA US at 65% [of the Operating Profit of the
India Graded Segment] in respect of the year ended 31 st March 2020 and
claimed a deduction thereof in the Return of Income for A.Y. 2020-21. The
Petitioner also claimed deduction of Rs. 4,18,81,000/- under Section 80G of
the Act being 50% of the CSR expenditure expended during the year under
consideration totalling to Rs. 8,37,62,000/-. Apart from this, the Petitioner
also claimed a deduction for Education Cess of Rs. 2,03,60,933/- relying on
the decision of this Court in the case of Sesa Goa Ltd. vs. JCIT [(2020)117
taxmann.com 96], wherein this Court held that Education Cess and Higher
Secondary Education Cess are eligible for deduction in computing income
chargeable under head of ‘profits and gains of business or profession’.
Subsequently, the Finance Act, 2022 introduced Explanation 3 in Section
40(a)(ii) of the Act with retrospective effect from 1 st April 2005, providing
that the term “tax” shall include and shall be deemed to have always
included any surcharge or cess, by whatever name called, on such tax. This
explanation was inserted after the return was filed by the Petitioner on 13 th
February 2021.
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7. Be that as it may, the Petitioner’s case was selected for scrutiny and a
reference was made to the Transfer Pricing Officer (“TPO”) under Section
92CA(3) for determination of Arm’s Length Price of the international
transactions entered into by the Petitioner with its associated enterprises,
including the transaction of payment of royalty by the Petitioner to GIA US.
The TPO in his order dated 19th July 2023 did not accept the claim of the
Petitioner for the payment of royalty at the higher rate of 65% and held that
the Arm’s Length Rate of royalty should be restricted to 53.50% as per the
earlier APA, as application for renewal of APA was pending. Accordingly,
he proposed an adjustment of Rs. 66,96,52,179/-.
8. Keeping in mind the recommendations of the TPO, the Assessing Officer
passed a draft Assessment Order dated 25 th September 2023, wherein he
made an addition of Rs. 66,96,52,179/-. Apart from this, in the Draft
Assessment Order, the Assessing Officer also disallowed deduction under
Section 80G in respect of the CSR expenditure by relying on Explanation 2
to Section 37(2) of the Act which denies deduction of CSR expenditure in
computing income under the head “profits and gains of business or
profession”. During the course of the assessment proceedings, the Petitioner
disclaimed deduction in respect of Education Cess in view of the
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retrospective amendment to Section 40(a)(ii) of the Act and, accordingly,
the said claim was also disallowed in the draft Assessment Order. These
additions were confirmed by DRP in its directions dated 12 th June 2024 and
the Assessing Officer passed the final Assessment Order dated 16 th July
2024 making the aforesaid additions.
9. The Petitioner filed an Appeal to the Tribunal against the final Assessment
Order challenging the transfer pricing adjustment to royalty and the denial
of deduction under Section 80G of the Act. During the pendency of the
Appeal, the renewal application of the Petitioner was finalised and the APA
was signed on 27th March 2025, wherein the Arm’s Length Rate of the
royalty was finally settled at 53.50%. Pursuant to this, the Petitioner filed a
modified Return of Income under Section 92CD of the Act on 30 th June
2025. The Tribunal vide its order dated 21st November 2025 noted that the
APA had been signed and that the Petitioner had filed a modified return
pursuant to the APA offering a higher income, and accordingly, directed the
Assessing Officer to give effect to the APA. The Tribunal also allowed the
deduction under Section 80G of the Act.
10. As noted earlier, the APA was signed on 27 th March 2025. Mr. Mistri,
learned Senior Advocate appearing for the Petitioner, on instructions further
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states that the critical assumptions in the APA, and more particularly the
raising of an invoice by the Petitioner and realization of the invoice amount
within 90 days has been complied with and an amount of Rs.66,36,95,028/-
has been received by the Petitioner from GIA US on 11 th June 2025
[difference being on account of unrelated minor adjustments as per the
APA]. Mr. Mistri, in response to our query, stated that the modified Return
of Income was filed by the Petitioner pursuant to the APA on 30 th June
2025 as required under Section 92CD(1) of the Act. However, till date, the
Assessing Officer has not passed an order either giving effect to the
Tribunal’s order dated 21st November 2025 or to the modified Return of
Income. He took us through the provisions of Sections 92CC and 92CD of
the Act wherein the scheme of APA is encompassed and submitted that,
once an APA is signed and a modified return is filed pursuant thereto, the
Assessing Officer has to pass an order modifying the total income having
regard to the APA. When we enquired with Mr. Sharma, the learned
Counsel appearing for the Respondents as to why the Assessing Officer has
not yet given effect to the order passed by the Tribunal, or passed an order
on the modified return filed by the Petitioner pursuant to the APA, Mr.
Sharma pointed out that, in view of Section 92CD(5) of the Act, the
Assessing Officer has to pass an order under Section 92CD(3) within a
period of one year from the end of the Financial Year in which the modified
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return under sub-Section (1) is furnished and, therefore, the Assessing
Officer has time upto 31st March 2027 to pass the order on the Petitioner’s
modified return. Mr. Mistri, in Rejoinder, submitted that the time to pass the
Order Giving Effect (OGE) to the Tribunal’s order as per Section 153(5) of
the Act is three months from the end of the month in which the Tribunal’s
order is received by the Principal Chief Commissioner or Chief
Commissioner or Principal Commissioner or Commissioner and, therefore,
the Assessing Officer was required to pass an order within such time. He
submitted that, in any event, the impugned penalty order, which was passed
without taking into account the APA, the modified return or the Tribunal’s
order, cannot survive and must be quashed. Insofar as the penalty referable
to the deduction under Section 80G is concerned, Mr. Mistri submitted that
the Tribunal in a number of cases has held that the deduction under Section
80G cannot be denied to CSR expenditure and relied on the decision of the
Tribunal in the Petitioner’s own case for A.Y. 2020-21, albeit rendered
subsequently. Insofar as the issue of education cess is concerned, he relied
on the decision of this Court in Sesa Goa’s case (supra). Mr. Mistri fairly
pointed out that subsequently, in JCIT vs. Sesa Goa Ltd. [(2023) 155
taxmann.com 342 (SC)], based on a concession given by the Assessee
therein in view of the subsequent amendments in the Act, the decision of
this Court was set aside by the Hon’ble Supreme Court and the Appeal
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against it was allowed. However, he submitted that at the time when the
return was filed and claim was made, the decision of this Court held the
field and making a claim by relying on it can never be regarded as under-
reporting of income in consequence of misreporting of income and,
therefore, the provisions of Section 270A cannot be attracted on these facts.
In this regard, he relied on the decision of this Court in the case of GM
Modular (P.) Ltd. vs. PCIT [(2026) 185 taxmann.com 495] wherein at para
21, it was held thus:
“21. Thirdly, the issue of disallowance under Section 36(1)(va) of the IT Act
was settled in favour of the Petitioner at the time the Petitioner filed its
return of income. The Petitioner’s claim was supported by a binding
decision of this Court (Jurisdictional High Court) in the case of Ghatge
Patil Transports Ltd (supra). It was only subsequently that the Hon’ble
Supreme Court settled the position of law in Checkmate Services Pvt.
Ltd. (supra) and reversed the view taken by this Court. When a claim is
made relying upon a binding judicial precedent, then certainly such an
issue cannot invite any penal consequences, just because the view was
subsequently reversed.”
11. Mr. Mistri, the learned Counsel for the Petitioner, accordingly, submitted
that none of the issues raised in the impugned order justified a levy of
penalty. He submitted that the entire scheme of the APA, which seeks to
reduce litigation will be rendered ineffective and irrelevant if the Officer is
permitted to levy penalty on a claim or a position settled in the APA.
Primarily on this ground, the jurisdiction of Respondent No. 1 to levy
penalty was challenged. He submitted that the issue of allow-ability of a
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deduction under Section 80G of the Act in respect of CSR expenditure is
well settled and supported by umpteen number of decisions of the Tribunal,
which are binding on the Assessing Officer and, therefore, he had no
jurisdiction to make the said disallowance and consequently levy penalty.
He submitted that the Assessing Officer had no jurisdiction to levy penalty
on account of deduction disclaimed by the Petitioner when the claim was
originally made relying upon a decision of this Court and thereafter given
up on account of a subsequent retrospective amendment. The Petitioner has
filed an Appeal against the said penalty order out of abundant caution with a
view to save limitation and, without prejudice to the rights and contentions
raised in this Petition. Mr. Mistri states that if this Petition is allowed, the
Appeal will be withdrawn within a period of two weeks.
12. Per contra, Mr. Sharma, submitted that for A.Y. 2010-11 to A.Y. 2018-19,
the Petitioner, despite paying higher rate of royalty finally agreed in the
APA that the Arm’s Length Rate of royalty would be 53.50% of the
operating profit of the India Graded Segment of the Petitioner. Pending the
finalisation of a fresh APA post A.Y. 2018-19, there was no justification
for the Petitioner to pay royalty to GIA US at 65% in respect of the year
ended 31st March 2020 and claim a deduction thereof in the Return of
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GIA India Laboratory Pvt.Ltd. vs. Assessment Unit
Income for A.Y. 2020-21. The APA under Section 92CC for AY 2019-20 to
2023-24 was executed between the CBDT and the Petitioner on 27 th March
2025 at New Delhi. The Assessment Unit, being aware of the APA having
been executed on the previous day passed the impugned order on 28 th
March 2025. No ill motive can be attributed upon the Assessment Unit for
passing the impugned order. The Petitioner having filed a modified return,
the Assessing Officer will pass an order modifying the total income of the
Petitioner having regard to and in accordance with the APA. Thereafter, the
penalty order could be rectified on the issue of royalty.
13. Mr. Sharma further submitted that the Petitioner, fully aware that the merits
of the penalty order can be adjudicated in Appeal, has already filed, an
Appeal against the impugned order. He submits that the Writ Court may
examine the decision making process and pass appropriate directions.
However, the merits of the penalty order on the issue of disallowance of
deduction of Rs.4,18,81,000/- claimed by the Petitioner under Section 80G
of the Act in respect of its contribution to Corporate Social Responsibility
(“CSR”) activities and the disallowance of deduction of education cess of
Rs.2,03,60,933/- may be left to be decided by the Appellate Authority.
14. We have heard the Learned Counsel for the parties and have also perused
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the papers and proceedings in the above Writ Petition. From the record we
find that penalty under Section 270A of the Act has been levied on account
of three issues, namely, (1) transfer pricing adjustment of Rs. 66,96,52,179/-
in respect of the payment of royalty to GIA US; (2) disallowance of
deduction under Section 80G of the Act in respect of CSR expenditure and
(3) disallowance of Education Cess. We will deal with issues (2) and (3)
first.
15. Insofar as deduction under Section 80G of the Act is concerned, the same
may not detain us any further. In view of the Tribunal’s decision dated 21 st
November 2025 deleting the aforesaid addition, the penalty on this count
cannot survive. Even otherwise, in our view, the officer had no jurisdiction
to initiate or levy penalty on an issue contrary to binding decisions of the
Tribunal. Hence, levy of penalty on this issue cannot be sustained.
16. Insofar as the disallowance of Education Cess is concerned, the aforesaid
claim was made in the Return of Income filed on 13 th February 2021 based
on the decision of this Court in Sesa Goa Ltd. (supra), which is dated 28th
February 2020. Merely because the claim was given up on account of the
subsequent retrospective amendment would not attract penal consequences.
Both, the retrospective amendment, as well as the reversal of this Court’s
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decision based on the retrospective amendment, were subsequent to the
furnishing of the Return of Income by the Petitioner. The action of the
Assessing Officer in levying a penalty on this ground is contrary to the
decision of this Court in the case of GM Modular (P.) Ltd. vs. PCIT [(2026)
185 taxmann.com 495 ] and, therefore, cannot be sustained.
17. Insofar as the issue of levy of penalty on account of the transfer pricing
adjustment is concerned, we are of the view that the levy of penalty on an
issue which is settled in accordance with the provisions of the Act cannot
result in penal proceedings. As per Section 92CD(1), where any person has
entered into an APA, and prior to the date of entering into the agreement,
any Return of Income has been furnished for the Assessment Year to which
the agreement applies, such person shall furnish, within a period of three
months from the end of the month in which the said agreement was entered
into, a modified return in accordance with and limited to the said APA.
Therefore, the Act permits, or rather mandates, the person entering into an
APA (the Petitioner) to furnish a modified return in accordance with the
APA. The Petitioner has done precisely that. It has furnished a modified
return on 30th June 2025, which is within the period of three months from
the end of the month in which the APA was signed, namely, 27 th March
2025. Once this is the position, Section 92CD(3) comes into play, which
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provides that if the Assessment or Reassessment for an Assessment Year
relevant to a previous year to which the agreement applies has been
completed before the expiry of the period allowed for furnishing of a
modified return under sub-Section (1), the Assessing Officer shall, in a case
where the modified return is filed in accordance with the provisions of sub-
Section (1), pass an order modifying the total income of the relevant
Assessment Year having regard to and in accordance with the agreement. In
the present case, therefore, the Assessing Officer is under a statutory
mandate to pass an order modifying the total income of the Petitioner for
A.Y. 2020-21 having regard to and in accordance with the APA. Once this
is done, the result would be that the deduction claimed in the Return of
Income on account of royalty payment to GIA US and that allowed in the
Assessment Order would be the same. Once an item of income or
expenditure as per the return and the Assessment Order is the same, there
can be no question of penalty on account of such item. In this view of the
matter, the penalty on this ground is also unsustainable. Though, as per Mr.
Sharma’s submission, the Assessing Officer may have time upto 31 st March
2027 to pass an Assessment Order on the basis of the modified return filed
by the Petitioner, that cannot mean that the impugned penalty order can be
allowed to remain in force.
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18. Now, if we turn to the provisions of Section 270A of the Act, we find that
penalty under this Section is attracted on the under-reported income.
Section 270A(2) provides that a person shall be considered to have under-
reported his income, if:
a) the income assessed is greater than the income determined in the return
processed under clause (a) of sub – section(1) of section 143;
b) the income assessed is greater than the maximum amount not chargeable to
tax, where no return of income has been furnished 17[or where return has been
furnished for the first time under section 148];
c) the income reassessed is greater than the income assessed or reassessed
immediately before such reassessment;
d) the amount of deemed total income assessed or reassessed as per the
provisions of section 115JB or section 115JC, as the case may be, is greater
than the deemed total income determined in the return processed under clause
(a) of sub - section (1) of section 143;
e) the amount of deemed total income assessed as per the provisions of section
115JB or section 115JC is greater than the maximum amount not chargeable to
tax, where [no return of income has been furnished or where return has been
furnished for the first time under section 148];
f) the amount of deemed total income reassessed as per the provisions of
section 115JB or section 115JC, as the case may be, is greater than the deemed
total income assessed or reassessed immediately before such reassessment;
g) the income assessed or reassessed has the effect of reducing the loss or
converting such loss into income.
19. The above mentioned clauses (a) to (f) above are clearly inapplicable in the
present case. Even insofar as clause (g) is concerned, the same is not
attracted since the income assessed or reassessed does not have the effect of
reducing the loss or converting such loss into income, which has been
reported in the modified return filed by the Petitioner.
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20. Section 270A(8) provides that where under-reported income is in
consequence of any misreporting, the penalty referred to in sub-Section (1)
shall be equal to two hundred per cent of the amount of tax payable on
under-reported income. The cases of misreporting are enumerated in
Section 270A(9) of the Act as under :-
(a) misrepresentation or suppression of facts;
(b) failure to record investments in the books of account;
(c) claim of expenditure not substantiated by any evidence;
(d) recording of any false entry in the books of account;
(e) failure to record any receipt in books of account having
bearing on total income; and
(f) failure to report any international transaction or any
transaction deemed to be an international transaction or any
specified domestic transaction, to which the provisions of
Chapter X apply.
21. Mr. Mistri pointed out that the penalty has been levied in the instant case at
the rate of 200% insofar as the transfer pricing adjustment to royalty is
concerned by treating it to be a case of under-reporting of income in
consequence of misreporting of income. In respect of the remaining two
issues, penalty was levied at the rate of 50% by treating them to be cases of
under-reporting of income. In our considered view, none of the aforesaid
clauses can conceivably apply in the present case. Even insofar as clause
(a) above is concerned, there is no question of misrepresentation of facts or
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suppression of facts as all necessary facts were disclosed and were in the
knowledge of the tax authorities. The mere fact that the royalty of a higher
amount computed at 65% of the operating profits was claimed to be the
Arm’s Length Rate, but was eventually settled at 53.5%, would not mean
that there was any misrepresentation or suppression of facts.
22. We are conscious of the fact that in the present case the APA between the
Petitioner and the CBDT was signed on 27th March 2025 and though the
impugned penalty order under Section 270A of the Act was passed on 28 th
March 2025, the 1st Respondent may not have been aware of the recently
signed APA. Nevertheless, in view of the clear mandate of the statutory
provisions discussed above, the impugned penalty order under Section
270A cannot be sustained.
23. We also find force in the submission of Mr. Mistri that the entire scheme of
APA which has been introduced in the Act with a view to reduce litigation
will be rendered ineffective and irrelevant if consequential proceedings /
levies such as penalty can be levied by an Officer on account of a reduction
in the claim of expenditure pursuant to a position settled by agreement in
the APA by treating it as a case of under-reporting of income. In our
considered view, the levy of penalty in such a manner is completely
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contrary to the scheme of the Act and is, therefore, wholly unsustainable.
Even otherwise, if the order is permitted to remain in force, it will result in
manifest injustice, which warrants our interference.
24. For all the above reasons, we quash the impugned order dated 28 th March
2025 passed under Section 270A of the Act by the Assessment Unit.
Consequently, the order of rectification dated 21st August 2026 passed under
Section 154 read with Section 270A of the Act, by which the quantum of
penalty was reduced from Rs. 47,88,81,423/- to Rs. 35,11,79,712/- will not
survive.
25. Rule is made absolute in the aforesaid terms and the Writ Petition is also
disposed of in terms thereof. However, there shall be no order as to costs.
26. In view of this order, Mr. Mistri undertakes that the Appeal filed by the
Petitioner will be withdrawn within a period of two weeks of this order
being uploaded on the High Court website. The said undertaking is
accepted. In the event this order is challenged by the Revenue and is set
aside, the Appeal filed by the Petitioner before the CIT (A) shall stand
revived and thereafter, be heard on merits and in accordance with law.
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GIA India Laboratory Pvt.Ltd. vs. Assessment Unit
27. This order will be digitally signed by the Private Secretary/Personal
Assistant of this Court. All concerned will act on production by fax or email
of a digitally signed copy of this order.
( FARHAN P. DUBASH, J. ) ( B. P. COLABAWALLA, J. )
Jyoti Pawar
Digitally signed
by SHUBHAM
SHUBHAM SHESHRAO
SHESHRAO GADHAVEPATIL
GADHAVEPATIL Date:
2026.09.17
11:46:22 +0530
Page 19 of 19
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Order dated 9th September 2026
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