2017 (11) TMI 1307 - 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 profit of the international transaction as requiring under TNMM adopted by the assessee - Held that - in light of the aforesaid practical difficulties which were being faced by the diamond industry, the TPO should have exercised the viable option of determining the arms length price of the international transactions of the assessee, either by making some comparison of realisation of prices in respect of export sales to AEs and non-AEs by comparing prices of diamonds of similar size, quality and weight to the best extent possible, or in the alternative could have asked for the copies of the Profit & loss accounts and the Balance sheets of the AEs in order to make an overall comparison with the gross profitability levels of the assessee with its AEs, which would had clearly revealed diversion of profits, if any, by the assessee to its AEs. We are further unable to comprehend that as to on what basis the TPO expected the assessee to have carried out the benchmarking by following CUP method. We are of the considered view that as the comparison by internal CUP method could only be made if two lots of diamonds were similar in size, colour, shape and clarity, which we are afraid, as observed by us at length hereinabove, in light of the peculiar nature of the trade of the assessee would not be possible. We find ourselves to be in agreement with the CIT(A) that if one lot had diamonds of variety of size, colour, shape and clarity, the prices would vary from diamond to diamond and lot to lot, and further, now when the entire lot of diamonds had a common price tag per carat for the whole lot, therefore, it was not possible to evaluate the price of each diamond 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 . We thus in the backdrop of our aforesaid observations find ourselves to be in agreement with the view taken by the CIT(A,) and finding no reason to dislodge his well reasoned order, therefore, uphold the same. We thus uphold the order of the CIT(A) and the resultant deletion of the penalty imposed by the TPO. - Decided in favour of assessee.

Issues Involved:
1. Deletion of penalty levied under Section 271G of the Income-tax Act, 1961.
2. Substantial compliance by the assessee.
3. Requirement of segmental profitability for AE and non-AE transactions.
4. Applicability of Transaction Net Margin Method (TNMM) and Comparable Uncontrolled Price (CUP) method.
5. Determination of Arms Length Price (ALP).
6. Practical difficulties in the diamond trading business.
7. Reasonable cause for non-compliance under Section 273B.

Issue-wise Analysis:

1. Deletion of Penalty Levied Under Section 271G:
The TPO imposed penalties under Section 271G due to the assessee's failure to furnish required details for benchmarking international transactions. The CIT(A) deleted these penalties, noting that the TPO did not make any ALP adjustments and that the assessee had made substantial compliance. The Tribunal upheld the CIT(A)’s decision, emphasizing that the TPO did not exhaust alternative methods for determining ALP and instead hastily imposed penalties.

2. Substantial Compliance by the Assessee:
The CIT(A) and Tribunal recognized the assessee's efforts to comply with the TPO's requests to the extent practically possible, given the nature of the diamond business. The Tribunal noted that the assessee provided significant documentation and information, which the TPO accepted without making any adjustments to the ALP.

3. Requirement of Segmental Profitability for AE and Non-AE Transactions:
The TPO required the assessee to furnish segmental profitability for AE and non-AE transactions to determine the ALP. The assessee argued practical difficulties in maintaining separate accounts for AE and non-AE segments due to the nature of the diamond business. The Tribunal acknowledged these difficulties and found that the TPO’s insistence on segmental profitability was impractical.

4. Applicability of TNMM and CUP Method:
The TPO criticized the assessee for not using the CUP method, which he considered more appropriate. However, the CIT(A) and Tribunal found that the TNMM was correctly applied by the assessee. The Tribunal noted that the CUP method was impractical for the diamond industry due to the unique characteristics of diamonds, which vary significantly in size, color, and quality.

5. Determination of ALP:
The Tribunal highlighted that the TPO failed to determine the ALP using alternative methods, such as comparing the Profit & Loss accounts and Balance Sheets of AEs. The Tribunal found that the TPO’s approach was flawed and that he should have used available data to make a reasonable determination of the ALP.

6. Practical Difficulties in the Diamond Trading Business:
The Tribunal extensively discussed the peculiarities of the diamond business, including the difficulty in tracing individual diamonds from rough to polished states and the variations in diamond prices based on multiple factors. These practical difficulties justified the assessee's inability to provide certain detailed information.

7. Reasonable Cause for Non-compliance Under Section 273B:
The Tribunal concluded that the assessee's failure to fully comply with the TPO’s requests was backed by reasonable cause due to the inherent difficulties in the diamond business. This brought the case within the purview of Section 273B, which provides relief from penalties if there is a reasonable cause for non-compliance.

Conclusion:
The Tribunal dismissed the revenue's appeals and upheld the CIT(A)’s orders deleting the penalties imposed under Section 271G. The decisions were based on the practical difficulties faced by the assessee in the diamond trading business, substantial compliance with the TPO’s requests, and the TPO’s failure to use alternative methods to determine the ALP.

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