Sections 271AA and 271G of the Income Tax Act, 1961, govern penalties for non-compliance in reporting and documentation requirements related to international transactions. These provisions aim to ensure transparency and compliance in transfer pricing regulations, which are critical for cross-border transactions involving associated enterprises. Below is a comprehensive guide to the penalties and provisions under these sections.

---

1. Applicability of Section 271AA

Section 271AA applies to taxpayers engaged in international or specified domestic transactions that fail to:

• Maintain proper documentation as required under Section 92D(1) and Section 92D(2).
• Report the transactions correctly in their income tax returns.
• Furnish required information or documentation during an assessment.

Key Documentation Requirements:

• Transaction details with associated enterprises.
• Functional analysis, including nature and terms of the transaction.
• Economic analysis, such as benchmarking studies.

---

2. Penalties Under Section 271AA

a) Amount of Penalty

1. Failure to Maintain Documentation: 2% of the value of each international or specified domestic transaction.
2. Failure to Furnish Information: 2% of the value of each international or specified domestic transaction.

Nature of Default	Penalty (₹)
Failure to maintain proper documentation	2% of the value of the transaction
Failure to furnish information upon request	2% of the value of the transaction

---

3. Applicability of Section 271G

Section 271G applies to taxpayers and associated enterprises that fail to furnish information or documents required under Section 92D(3) within the prescribed time during a transfer pricing assessment.

Key Requirements:

• Detailed transactional information.
• Justification of the arm’s length price (ALP).
• Supporting documents, including agreements and invoices.

---

4. Penalties Under Section 271G

a) Amount of Penalty

• Penalty of 2% of the value of each international or specified domestic transaction.

b) Applicability

• Applies irrespective of whether the non-compliance was deliberate or due to negligence.

Nature of Default	Penalty (₹)
Failure to furnish required information	2% of the value of the transaction
Non-compliance with transfer pricing assessments	2% of the value of the transaction

---

5. Exceptions to Penalty Under Sections 271AA and 271G

a) Reasonable Cause Defense

• No penalty shall be imposed if the taxpayer demonstrates that the failure occurred due to reasonable cause. Examples include:
  • Technical or system failures.
  • Genuine misunderstandings of documentation requirements.

b) Good Faith Efforts

• Penalty may be avoided if the taxpayer shows proactive efforts to comply with documentation and reporting requirements.

---

6. Procedure for Imposing Penalty

1. Detection of Default:
   • The Assessing Officer (AO) or Transfer Pricing Officer (TPO) identifies non-compliance during an assessment.
2. Issuance of Notice:
   • A show-cause notice is issued to the taxpayer, seeking an explanation for the default.
3. Evaluation by Tax Authority:
   • The AO or TPO evaluates the explanation and supporting evidence provided by the taxpayer.
4. Imposition of Penalty:
   • If the explanation is unsatisfactory, a penalty order is issued under Section 271AA or Section 271G.

---

7. Importance of Sections 271AA and 271G

• Ensures Compliance: Promotes adherence to transfer pricing regulations.
• Enhances Transparency: Encourages accurate and complete reporting of international transactions.
• Deters Negligence: Discourages taxpayers from neglecting documentation and reporting requirements.

---

8. Key Takeaways for Taxpayers

• Maintain comprehensive documentation for all international and specified domestic transactions.
• Adhere to prescribed timelines for furnishing information during assessments.
• Proactively address any shortcomings in documentation to avoid penalties.
• Seek professional advice to ensure compliance with transfer pricing regulations.

---

Conclusion

Sections 271AA and 271G underscore the importance of compliance and transparency in international transactions. By maintaining robust documentation and adhering to reporting obligations, taxpayers can avoid significant penalties and support effective tax administration. Demonstrating reasonable cause and good faith efforts can further mitigate risks under these provisions.

For more information and related blogs, click here.

---

Additional Resources

Learn more about Tax Provisions on the official Income Tax India website.

Want to consult a professional? Contact us: 09463224996

For more information and related blogs, click here.