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2018 (11) TMI 1594 - AT - Income TaxPenalty u/s 271G - contravention to the provision of section 92D(3) - reasonable cause - assessee failed to furnish documentation as required under the rule 10D(1) and sub section (3) of the sec 92D in respect of the international transactions entered into by it - whether benchmarking of the entity level profit by the assessee cannot substitute the requirement of benchmarking of the international transactions to determine the arm s length price? - HELD THAT - We are of the view that the co-ordinate Bench has elaborately dealt with this issue and finally held that the assessee has substantially complied with the directions of the TPO and placed on record the requisite information as observed by CIT(A). The Revenue could not dislodge the findings of CIT(A). Hence, according to us, there is a reasonable cause in not complying with the provisions of section 92D(3) of the Act. Respectfully, following the co-ordinate Bench decision in the case of Dilipkumar V. Lakhi 2018 (8) TMI 1778 - ITAT MUMBAI we confirm the order of CIT(A) and dismiss this appeal of Revenue.
Issues Involved:
1. Deletion of Penalty under Section 271G for Non-Furnishing of Documentation as Required under Rule 10D(1) and Section 92D(3) of the Income Tax Act. 2. Justification of Benchmarking Entity Level Profit Instead of International Transactions. 3. Difficulty in Linking Purchases with Sales for Computing Net Margin in International Transactions. 4. Justification of Deleting Penalty on Grounds of Difficulty. 5. Examination of Segment-wise Unaudited Profit and Loss Account. 6. Adjustment to Arm's Length Price (ALP) and its Role in Levy of Penalty under Section 271G. Detailed Analysis: 1. Deletion of Penalty under Section 271G for Non-Furnishing of Documentation as Required under Rule 10D(1) and Section 92D(3): The Revenue's appeal centered on the CIT(A)'s deletion of the penalty levied by the AO under Section 271G for the assessee's failure to furnish the required documentation under Rule 10D(1) and Section 92D(3). The AO had initiated penalty proceedings due to the assessee's inability to provide AE and non-AE segmental details, which were crucial for transfer pricing analysis. However, the CIT(A) found that the assessee had made substantial compliance by maintaining necessary books and providing various information, including segment-wise PLI during penalty proceedings. 2. Justification of Benchmarking Entity Level Profit Instead of International Transactions: The Revenue argued that the CIT(A) erred in accepting the assessee's benchmarking of entity-level profit instead of specific international transactions. The CIT(A) observed that the peculiar nature of the diamond trade made it difficult for the assessee to apply the CUP method, and the department had accepted the TNMM method in previous years without adjustments. The CIT(A) concluded that the assessee's approach was reasonable given the complexities of the diamond trade. 3. Difficulty in Linking Purchases with Sales for Computing Net Margin in International Transactions: The Revenue contended that the CIT(A) unjustifiably deleted the penalty by accepting the assessee's plea of difficulty in linking purchases with sales for computing net margin. The CIT(A) detailed the intricacies of the diamond trade, explaining that the process involves various stages and the final product's value depends on multiple factors, making it challenging to trace specific transactions. The CIT(A) emphasized that the assessee had provided all possible details to the TPO, who did not examine the segment-wise unaudited P&L account submitted during penalty proceedings. 4. Justification of Deleting Penalty on Grounds of Difficulty: The CIT(A) justified deleting the penalty by highlighting the substantial compliance made by the assessee and the reasonable cause shown. The CIT(A) referred to the peculiar nature of the diamond trade, where maintaining exact documentation for each transaction is impractical. The CIT(A) also noted that the TPO did not make any adjustments to the ALP, indicating that the transactions were at arm's length. 5. Examination of Segment-wise Unaudited Profit and Loss Account: The CIT(A) criticized the TPO for not examining the segment-wise unaudited P&L account prepared by the assessee. The CIT(A) observed that the TPO had not considered the peculiarities of the diamond trade and had passed a stereotyped penalty order without understanding the business's intricacies. The CIT(A) suggested that the TPO could have compared the profitability levels of the AEs and non-AEs to determine any profit diversion. 6. Adjustment to Arm's Length Price (ALP) and its Role in Levy of Penalty under Section 271G: The CIT(A) noted that no adjustments were made to the ALP, which supported the assessee's case. The CIT(A) emphasized that the penalty under Section 271G should not be levied when the assessee had made substantial compliance and shown reasonable cause. The CIT(A) relied on various judicial precedents to support this view. Conclusion: The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeals. The Tribunal agreed with the CIT(A) that the assessee had substantially complied with the TPO's directions and provided all possible information given the nature of the diamond trade. The Tribunal found that the CIT(A) had reasonably concluded that the penalty under Section 271G was not justified, considering the practical difficulties faced by the assessee and the lack of adjustments to the ALP. The Tribunal's decision was consistent with previous rulings in similar cases, reinforcing the principle that penalties should not be imposed when reasonable cause is shown.
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