2018 (8) TMI 1778 - AT - Income Tax

Penalty levied u/s 271G - assessee has only furnished the entity level margins, which consists of overall profits on AE and significant non-AE transactions and not the profit of international transaction as per Transactional Net Margin Method (TNMM) adopted by the assessee - HELD THAT - As decided in M/S D. NAVINCHANDRA GEMS PVT. LTD., M/S AKSHAR IMPEX PVT. LTD. AND M/S DHANERA DIAMONDS 2017 (11) TMI 1307 - ITAT MUMBAI the assessee had substantially complied with the directions of the TPO and placed on his record the requisite information, to the extent the same was practically possible in light of the very nature of its trade. We though are not oblivious of the fact that the assessee may not have effected absolute compliance to the directions of the TPO and furnished all the requisite details as were called for by him on account of practical difficulties as had been deliberated by us at length hereinabove, but however, in the backdrop of our aforesaid observations, we are of the considered view that the failure to the said extent on the part of the assessee to comply with the directions of the TPO can safely be held to be backed by a reasonable cause, which thus would bring the case of the assessee with the sweep of Sec. 273B of the Act . - Decided against revenue

Issues Involved:
1. Deletion of penalty levied under Section 271G.
2. Compliance with specific clauses of Rule 10D(1).
3. Requirement of profit and loss accounts and balance sheets for comparison.
4. Reasonable cause for non-compliance with Section 92D read with Rule 10D(1).
5. Impact of non-production of necessary documents on determination of ALP.

Detailed Analysis:

1. Deletion of Penalty Levied Under Section 271G:
The primary issue raised by the Revenue was the deletion of the penalty imposed by the Assessing Officer under Section 271G of the Income Tax Act. The Revenue contended that the assessee failed to furnish segmental profitability separately from AE and non-AE segments, which was essential under the Transactional Net Margin Method (TNMM) for benchmarking international transactions. The Tribunal upheld the CIT(A)'s decision to delete the penalty, noting that the assessee had made substantial compliance and that the nature of the diamond trade made it practically difficult to furnish the required details. The Tribunal referenced a similar decision in the case of ACIT vs. D Navinchandra Exports Pvt. Ltd., where it was concluded that the peculiar nature of the diamond trade justified the difficulty in providing the requested information.

2. Compliance with Specific Clauses of Rule 10D(1):
The Revenue argued that the CIT(A) did not address how the assessee complied with clauses (d), (g), (h), and (m) of Rule 10D(1), which were specifically invoked by the Transfer Pricing Officer (TPO). The Tribunal found that the CIT(A) had reasonably concluded that the penalty was not justified, considering the substantial compliance made by the assessee and the practical difficulties inherent in the diamond trade.

3. Requirement of Profit and Loss Accounts and Balance Sheets for Comparison:
The Revenue contended that the CIT(A) incorrectly stated that the TPO should have asked for copies of profit and loss accounts and balance sheets of AEs for comparison. The Tribunal, however, agreed with the CIT(A)'s view that such documents could have been used to make an overall comparison with the gross profitability levels of the assessee with its AEs, which would have revealed any diversion of profits. The Tribunal emphasized that the practical difficulties in the diamond trade made it challenging to provide segmental profitability.

4. Reasonable Cause for Non-Compliance with Section 92D Read with Rule 10D(1):
The CIT(A) held that there was a reasonable cause for the assessee's non-compliance with Section 92D read with Rule 10D(1), considering the nature of the diamond trade and the substantial compliance made by the assessee. The Tribunal upheld this view, noting that the failure to provide the required details was backed by a reasonable cause, bringing the case within the scope of Section 273B, which provides relief from penalty if there is a reasonable cause for non-compliance.

5. Impact of Non-Production of Necessary Documents on Determination of ALP:
The Revenue argued that by not producing the necessary documents to determine the ALP under any prescribed methods, the assessee effectively prevented the TPO from making any determination. The Tribunal, however, found that the TPO could have determined the ALP by making some comparison of prices of similar diamonds or by examining the profit and loss accounts and balance sheets of the AEs. The Tribunal concluded that the TPO's insistence on segmental profitability was impractical given the nature of the diamond trade.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the penalty imposed under Section 271G. The Tribunal emphasized the practical difficulties in the diamond trade and the substantial compliance made by the assessee, which constituted a reasonable cause for non-compliance with the specific requirements under Rule 10D(1). The Tribunal also highlighted that the TPO could have employed alternative methods to determine the ALP, considering the peculiar nature of the diamond trade.

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