2021 (10) TMI 167 - AT - Income Tax

Penalty u/s. 271G - assessee did not provide any basis for comparing the transactions and it failed to provide any alternative method to benchmark the transactions which had prevented determination of ALP of these transactions - HELD THAT - The assessee has maintained primary books of account / documents in respect of its business activity. The international transactions carried out by the assessee with its AEs has also been well documented which is supported by benchmarking done by the assessee under TNMM method - the assessee has made substantial compliances before Ld. Transfer Pricing officer and furnished all possible information, data and documents. The only lapse is that the 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.

Summary

Issues Involved:
1. Imposition of penalty under Section 271G of the Income Tax Act.
2. Determination of Arm's Length Price (ALP) for international transactions with Associated Enterprises (AEs).
3. Practical difficulties in maintaining and furnishing segmental profitability details in the diamond industry.
4. Compliance with documentation requirements under Rule 10D of the Income Tax Rules, 1962.

Issue-wise Detailed Analysis:

1. Imposition of Penalty under Section 271G:
The core issue revolves around the penalty of ?2818.16 Lacs levied by the Assessing Officer (AO) under Section 271G for the Assessment Year 2012-13. The penalty was imposed due to the assessee's failure to furnish segmental profitability details for AE and non-AE transactions as required by the Transfer Pricing Officer (TPO). The CIT(A) deleted the penalty, citing the practical difficulties faced by the assessee in maintaining such details due to the nature of the diamond trade. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had made substantial compliance with the documentation requirements and that the TPO's insistence on segmental details was not practical.

2. Determination of Arm's Length Price (ALP):
The assessee, engaged in the manufacturing and marketing of cut and polished diamonds, carried out international transactions with its AEs. The TPO asked for segmental profitability details to determine the ALP, which the assessee could not furnish due to the heterogeneous nature of the goods. The Tribunal noted that the TPO had the option to determine the ALP independently by applying any prescribed method but failed to do so. The Tribunal emphasized that the blame for the TPO's failure to determine the ALP could not be placed on the assessee.

3. Practical Difficulties in the Diamond Industry:
The Tribunal acknowledged the practical difficulties in the diamond industry, where it is challenging to trace which rough diamond got converted into which polished diamond. The CIT(A) highlighted that continuous sorting and valuation of diamonds are required, and prices vary significantly based on size, color, shape, and weight. The Tribunal agreed that it was impractical for the assessee to maintain segmental profitability details and that the TPO's insistence on using the internal CUP method was unreasonable.

4. Compliance with Rule 10D:
The Tribunal observed that the assessee had maintained primary books of account and documented its international transactions with AEs. The assessee had made substantial compliance with the documentation requirements under Rule 10D, providing all possible information, data, and documents. The Tribunal referred to the Delhi High Court's decision in CIT vs. M/s. Leroy Somer & Controls (India) Pvt. Ltd., which stated that general and substantive compliance with Rule 10D is sufficient. The Tribunal also cited various decisions of the ITAT, which supported the view that penalties under Section 271G should not be imposed where the assessee has shown reasonable cause for non-compliance.

Conclusion:
The Tribunal dismissed the Revenue's appeal and upheld the CIT(A)'s decision to delete the penalty under Section 271G. The Tribunal emphasized that the practical difficulties in the diamond industry justified the assessee's inability to furnish segmental profitability details and that substantial compliance with documentation requirements was sufficient. The Tribunal's decision was consistent with previous rulings in similar cases, reinforcing the principle that penalties should not be imposed where reasonable cause is demonstrated.