2019 (8) TMI 796 - AT - Income Tax

Penalty u/s 271G - failure to furnish documentation as required under the Rule 10D(1) and Section 92D(3) - CIT(A) taken view that when the rough/polished diamonds were traded on lot wise basis, it was difficult to identify and say whether a polished diamond came out of a particular lot of rough diamonds or the other and/or out of the polished diamonds purchased locally or imported by the assessee - HELD THAT - We find that the assessee to the extent possible in the backdrop of the nature of its business had furnished several details on number of occasions with the TPO. We thus are of the considered view that the assessee had substantially complied with the directions of the TPO and had 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 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 would bring its case within the realm of Sec. 273B. 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. Accordingly, we uphold the deletion of the penalty by the CIT(A) - appeal of the revenue is dismissed

Issues Involved:
1. Deletion of penalty under Section 271G due to failure to furnish required documentation.
2. Justification of benchmarking entity level profit instead of international transactions.
3. Willful failure to furnish segmental accounts.
4. Difficulty in linking purchases with sales for computing net margin.
5. Potential redundancy of Rule 10D.
6. Profit comparison between AE and non-AE without financials of AE.
7. No adjustment made in ALP as a precondition for penalty.

Detailed Analysis:

1. Deletion of Penalty under Section 271G:
The Tribunal examined whether the CIT(A) was correct in deleting the penalty under Section 271G when the assessee failed to furnish documentation as required under Rule 10D(1) and Section 92D(3) of the Income Tax Act. The Tribunal noted that the TPO had observed the assessee did not maintain proper documentation to apply the TNM Method, CUP Method, or any other prescribed method. However, the CIT(A) found that the penalty was neither fair nor reasonable, considering the nature of the diamond trade, substantial compliance by the assessee, and the absence of any adjustment to the ALP by the TPO.

2. Benchmarking Entity Level Profit:
The Tribunal discussed whether the CIT(A) was justified in deleting the penalty without appreciating that benchmarking entity level profit cannot substitute the requirements of benchmarking international transactions. The TPO had required the assessee to provide segmental accounts for AE and non-AE transactions, which the assessee failed to do. The CIT(A) found that the nature of the diamond trade made it difficult to maintain such segmental accounts.

3. Willful Failure to Furnish Segmental Accounts:
The Tribunal considered whether the CIT(A) was right in deleting the penalty despite the assessee's willful failure to furnish segmental accounts. The TPO had initiated penalty proceedings under Section 271G due to the assessee's failure to provide segmental accounts, which hindered the TPO from performing a comparability analysis. The CIT(A) concluded that the practical difficulties in the diamond trade justified the assessee's inability to furnish the required details.

4. Difficulty in Linking Purchases with Sales:
The Tribunal evaluated whether the CIT(A) erred in accepting the assessee's plea that it was difficult to link purchases with sales for computing net margin. The CIT(A) acknowledged the inherent difficulties in the diamond trade, where it is challenging to trace which rough diamond was converted into which polished diamond. This practical difficulty was considered a reasonable cause for the assessee's inability to furnish the required details.

5. Redundancy of Rule 10D:
The Tribunal examined whether the CIT(A) was justified in deleting the penalty on the ground of difficulty, which could render Rule 10D redundant. The CIT(A) found that the specific nature of the diamond trade made it impractical to comply with Rule 10D in the manner required by the TPO. The Tribunal agreed with this reasoning, noting that the TPO should have considered alternative methods for determining the ALP.

6. Profit Comparison without Financials of AE:
The Tribunal considered whether the CIT(A) was justified in deleting the penalty when the assessee pointed out that the profit of AE was less than the profit of the assessee, despite not submitting the financials of the AE. The CIT(A) found that the practical difficulties in the diamond trade justified the assessee's inability to furnish detailed financials of the AE.

7. No Adjustment Made in ALP:
The Tribunal discussed whether the CIT(A) was correct in deleting the penalty on the ground that no adjustment was made in the ALP. The CIT(A) noted that no adjustment was made to the ALP by the TPO, which indicated that the international transactions were at arm's length. This was considered a reasonable cause for deleting the penalty.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to delete the penalty of ?90,98,948/- imposed under Section 271G, considering the practical difficulties in the diamond trade and the substantial compliance by the assessee. The appeal of the revenue was dismissed.

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