2019 (4) TMI 1978 - AT - Income Tax

Penalty u/s. 271G - non furnishing segmental profitability of AE transactions and non AE transactions - assessee had clearly failed in maintaining the documentation as required u/s. 92D(3) - profits split method adopted by the assessee to benchmark its international transaction - failure to comply with the provisions of Rule 10D(1) (d)(g)(h)(i)(j) (m) of I.T. Rules, 1962 - HELD THAT - When we go through the reasons given by the assessee for not complying with the provisions of Rule 10D(1), in light of industry specific, ie. diamond trading industry, we find that it was unable to ascertain the corresponding cost when the rough diamond has been cut and polished, it loses its individual identity and gets mixed in the lots purchased from AE as well as non AE. Therefore, considering the nature of trade, it is not possible for the assessee to prepare separate accounts for trading and manufacturing activities so as to compare its international transactions with its AE segment-wise. Assessee has chosen profits split method in order to benchmark its international transactions with AE. We further noted that the department has accepted profits split method adopted by the assessee to benchmark its international transaction in the past and during the year under consideration as there is no adjustment is made u/s 92C - When there is no adjustment is made u/s 92CA in respect of international transactions with its AE, the AO was erred in levying penalty u/s 271G for not furnishing segmental profitability of AE transactions and non AE transactions even though the assessee has made out a case that it is difficult to furnish segment-wise P L Account of AE segment and non AE segment considering the nature of industry and its complexity. Therefore, we are of the considered view that the AO was erred in levying penalty u/s 271G of the Income-tax Act, 1961. - Decided against revenue.

Summary

Issues Involved:
1. Deletion of penalty under Section 271G of the Income-tax Act, 1961.
2. Compliance with provisions of Rule 10D(1).
3. Justification of the Profit Split Method (PSM) for benchmarking international transactions.
4. Failure to furnish specific documentation as required by the Transfer Pricing Officer (TPO).
5. Determination of Arm's Length Price (ALP) without segment-wise profit and loss accounts.
6. Reasonable cause for non-compliance with Section 92D and Rule 10D(1).

Issue-wise Detailed Analysis:

1. Deletion of Penalty under Section 271G:
The primary issue was whether the CIT(A) was justified in deleting the penalty imposed under Section 271G. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had made substantial compliance by providing necessary documentation for the Profit Split Method (PSM). The Tribunal found that the penalty was neither fair nor reasonable given the nature of the diamond trade and the substantial compliance made by the assessee.

2. Compliance with Provisions of Rule 10D(1):
The Tribunal examined whether the assessee complied with the documentation requirements under Rule 10D(1). It was noted that the assessee had provided documentation for the PSM method but faced difficulties in providing segment-wise profit and loss accounts due to the nature of the diamond trade. The Tribunal found that the assessee's inability to furnish certain documents was justified given the complexities of the industry.

3. Justification of the Profit Split Method (PSM):
The assessee used the PSM for benchmarking its international transactions. The Tribunal observed that the TPO had accepted the PSM without making any adjustments under Section 92CA, indicating that the method was appropriate. The Tribunal also noted that the department had accepted the PSM in previous years, further supporting its validity.

4. Failure to Furnish Specific Documentation:
The TPO had initiated penalty proceedings under Section 271G for the assessee's failure to provide specific documentation as per Rule 10D(1). The Tribunal found that while the assessee had provided substantial documentation for the PSM, it faced practical difficulties in furnishing segment-wise details due to the nature of the diamond trade. The Tribunal concluded that the assessee's failure to provide certain documents did not warrant a penalty under Section 271G.

5. Determination of Arm's Length Price (ALP):
The TPO argued that the assessee's failure to provide segment-wise profit and loss accounts hindered the determination of the ALP. The Tribunal, however, noted that the TPO did not make any adjustments to the ALP, indicating that the documentation provided was sufficient. The Tribunal emphasized that the complexities of the diamond trade made it difficult to provide segment-wise details.

6. Reasonable Cause for Non-compliance:
The Tribunal considered whether the assessee had a reasonable cause for non-compliance with Section 92D and Rule 10D(1). It was noted that the diamond trade's nature made it challenging to maintain detailed segment-wise documentation. The Tribunal found that the assessee's explanation constituted a reasonable cause, thus falling within the provisions of Section 273B, which provides relief from penalties if there is a reasonable cause for non-compliance.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to delete the penalty under Section 271G, finding that the assessee had made substantial compliance and had a reasonable cause for any non-compliance. The Tribunal dismissed the revenue's appeal, concluding that the penalty was not justified given the facts and circumstances of the case.