2019 (10) TMI 290 - AT - Income Tax

Penalty u/s 271G - assessee was unable to submit internal TNMM by working out the profitability of AE and non-AE segment - assessee failed to maintain documentation as required under Clause (g) and (h) of Rule 10D (1) - TPO accepted the transactions to be at Arm s Length Price - HELD THAT - due to peculiar nature of the product and constant mixing and re-mixing of diamonds obtained from AEs and non-AEs, it would not be feasible to maintain records to determine segmental profitability to work out internal TNMM. The undisputed position that emerges is that the assessee has carried out certain international transactions during the year with its AE and benchmarked the same using TNMM method in its Transfer Pricing Study which has been accepted by Ld. TPO. The only basis of levying impugned penalty against the assessee is the fact that the assessee did not furnish internal TNMM by providing segmental profitability of AE and non-AE transactions. The same stood explained by the inherent nature of business being carried out by the assessee which has already been enumerated by us in the preceding paragraphs. The Ld. first appellate authority, while deleting the penalty, relied upon the binding judicial decision of Hon ble Delhi High Court rendered in CIT Vs. M/s. Leroy Somer Controls (India) Pvt. Ltd. 2013 (9) TMI 761 - DELHI HIGH COURT and other decision of the Tribunal rendered on similar factual matrix. We also find that similar factual matrix stood covered in assessee s case by the recent decision of coordinate bench of this Tribunal rendered in DCIT V/s Leo Schachter Diamonds India Pvt. Ltd 2019 (3) TMI 690 - ITAT MUMBAI - no infirmity in the impugned order in deleting the penalty u/s 271G. - Decided in favour of assessee.

Summary

Issues Involved:
1. Imposition of penalty under Section 271G of the Income Tax Act, 1961.
2. Feasibility of maintaining segmental profitability records for AE and non-AE transactions in the diamond industry.
3. Compliance with Transfer Pricing documentation requirements under Rule 10D.

Issue-wise Detailed Analysis:

1. Imposition of Penalty under Section 271G:
The revenue contested the deletion of a penalty amounting to ?12.79 Crores for the Assessment Year 2011-12, which was levied by the Assessing Officer (AO) under Section 271G. The penalty was imposed due to the assessee's failure to submit internal TNMM by working out the profitability of AE and non-AE segments. The Transfer Pricing Officer (TPO) accepted the transactions at Arm's Length Price but initiated the penalty due to the lack of segmental profitability documentation.

2. Feasibility of Maintaining Segmental Profitability Records:
The assessee, engaged in the manufacturing of cut and polished diamonds, explained the impracticality of identifying and bifurcating stock, cost, and revenue between AE and non-AE segments. The inherent nature of the diamond manufacturing process, including the assortment and re-assortment of rough diamonds, makes it infeasible to track the source and cost of each piece of rough diamond. The CIT(A) concurred with the assessee’s submission, highlighting the peculiarities of the diamond industry, such as the lack of uniformity in product classification, multiple manufacturing processes, and constant mixing and re-mixing of diamonds. These factors made it challenging to maintain records to determine segmental profitability.

3. Compliance with Transfer Pricing Documentation Requirements:
The CIT(A) noted that the TPO could have worked out the gross and net profits by averaging purchase prices and expenses in proportion to export sales, as done by the assessee during penalty proceedings. The TPO’s failure to adopt alternative methods for benchmarking the international transactions and the lack of adjustment in the Arm's Length Price (ALP) indicated substantial compliance by the assessee. The CIT(A) relied on judicial pronouncements, such as the Delhi High Court’s decision in CIT vs. M/s. Leroy Somer & Controls (India) Pvt. Ltd., which emphasized reasonable and rational interpretation of Section 271G. The Tribunal also referenced similar cases, including DCIT vs. Leo Schachter Diamonds India Pvt. Ltd. and ACIT vs. Gillette India Ltd., where penalties were deleted due to the impracticality of maintaining detailed segmental records in the diamond industry.

Conclusion:
The Tribunal upheld the CIT(A)’s decision to delete the penalty, finding no infirmity in the order. The revenue’s appeal was dismissed, and the judgment emphasized the need for reasonable compliance with Transfer Pricing documentation requirements, especially considering the unique challenges faced by the diamond industry. The Tribunal referenced multiple judicial decisions supporting the deletion of penalties under similar circumstances, reinforcing the principle that severe penalties should be applied with caution and only when justified by the facts.