2022 (5) TMI 972 - AT - Income Tax

Penalty levied u/s. 271G - assessee failure to provide documents maintained by the assessee in support of AE and non-AE segment of its business - TNMM adopted by the assessee, the profit of the international transaction has to be furnished, whereas the assessee has only furnished the entity level margins which consists of overall profits on AE and significant non-AE transactions - failure on the part of the assessee to provide documents maintained by the assessee in support of AE and non-AE segment of its business - CIT- A deleted the addition - HELD THAT - As decided in own case 2021 (10) TMI 167 - ITAT MUMBAI assessee failed to furnish the segmental profitability of the AE and non-AE transactions which would be explained by the fact that it was practically difficult to maintain these details considering the nature of assessee s business. It could also be seen that finally the transactions have been accepted to be at arm's length. If the Transfer Pricing Officer was not satisfied with the benchmarking of the assessee under TNMM, nothing prevented him from rejecting assessee' benchmarking and proceed to determine the ALP independently by applying any one of the prescribed methods. The blame for failure on the part of the Transfer Pricing Officer to determine the arm's length price cannot be fastened with the assessee. Similar issue of penalty u/s 271G for diamond industry has been adjudicated in assessee s favor in various decisions of this Tribunal. The coordinate bench of Mumbai Tribunal in the case of D. Navinchandra Exports (P.) Ltd. 2017 (11) TMI 1307 - ITAT MUMBAI held that considering the practical difficulties in furnishing the segment wise details of AE segment and non-AE segment transactions in diamond industry, no penalty under Sec. 271G could justifiably be imposed for failure to furnish the said information - we confirm the impugned order deleting the penalty u/s 271G. - Decided in favour of assessee.

Issues Involved:
1. Deletion of penalty levied under Section 271G of the Income Tax Act, 1961.
2. Compliance with Rule 10D(1) of the Income Tax Rules, 1962.
3. Determination of arm's-length price (ALP) using the Transactional Net Margin Method (TNMM).
4. Practical difficulties in maintaining segmental profit for AE and non-AE transactions in the diamond industry.
5. Reasonable cause for non-compliance with Section 92D read with Rule 10D(1).

Issue-wise Detailed Analysis:

1. Deletion of Penalty Levied under Section 271G:
The primary issue revolves around whether the CIT(A) was correct in deleting the penalty levied under Section 271G of the Act. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had made substantial compliance with the requirements despite the complexities involved in the diamond trade. The Tribunal emphasized that the penalty under Section 271G is severe and should be applied with caution. The Tribunal found that the assessee had provided necessary documents and explanations, and the Transfer Pricing Officer (TPO) should have considered the peculiar nature of the diamond trade before imposing the penalty.

2. Compliance with Rule 10D(1):
The Revenue contended that the CIT(A) failed to address how the assessee complied with clauses (d), (g), (h), and (m) of Rule 10D(1). The Tribunal observed that the TPO did not utilize the available details and documents to determine the ALP. The Tribunal highlighted that the assessee had maintained primary books of account and furnished various information and documents as required by Rule 10D. The Tribunal agreed with the CIT(A) that the assessee had made substantial compliance with the requirements, and the TPO's insistence on segmental profit details was impractical given the nature of the diamond trade.

3. Determination of ALP Using TNMM:
The Tribunal noted that the assessee applied the TNMM as the most appropriate method for determining the ALP of international transactions. The TPO rejected the assessee's segmental results and insisted on segmental profitability based on actual direct costs. The Tribunal found that the TPO should have considered alternative methods or made comparisons using available data. The Tribunal emphasized that the TPO's approach was not reasonable or practical given the complexities of the diamond trade.

4. Practical Difficulties in Maintaining Segmental Profit:
The Tribunal acknowledged the practical difficulties faced by the assessee in maintaining segmental profit for AE and non-AE transactions. The Tribunal detailed the nature of the diamond trade, including the various stages from rough diamond extraction to polished diamond sales. The Tribunal highlighted that the diamond trade involves numerous variables such as size, shape, color, and clarity, making it challenging to maintain precise segmental profit details. The Tribunal agreed with the CIT(A) that the peculiar nature of the diamond trade should have been considered by the TPO.

5. Reasonable Cause for Non-Compliance:
The Tribunal found that the assessee had demonstrated a reasonable cause for non-compliance with Section 92D read with Rule 10D(1). The Tribunal noted that the assessee had furnished substantial information and documents despite the practical difficulties. The Tribunal cited various judicial precedents, including the Delhi High Court's decision in CIT vs. M/s. Leroy Somer & Controls (India) Pvt. Ltd., which supported the view that substantial compliance with Rule 10D is sufficient. The Tribunal concluded that the penalty under Section 271G was not justified given the reasonable cause shown by the assessee and the substantial compliance made.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to delete the penalty levied under Section 271G of the Act. The Tribunal emphasized the practical difficulties in the diamond trade and the substantial compliance made by the assessee. The Tribunal found that the TPO's insistence on segmental profit details was impractical and that the penalty was not justified. The appeal of the Revenue was dismissed.

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