2022 (6) TMI 666 - AT - Income Tax

Penalty u/s 271G - non-maintenance of details in terms of section 92D(3) of IT Act r.w. Rule 10D of Income Tax Rules, 1962 - CIT-A deleted the penalty levy - whether in case of the diamond manufacturer, can any penalty be levied under section 271G of the Act for non-maintenance of segment profitability between AEs and non-AEs transactions? - HELD THAT - We find that coordinate Bench of the Tribunal in the case of Navin Chandra exports Private Limited 2017 (11) TMI 1307 - ITAT MUMBAI and other appeals has after a detailed discussion, held that there was reasonable cause for non-maintaining the said details. Also confirmed by HC 2018 (7) TMI 2099 - GUJARAT HIGH COURT Since identical issue of non-maintenance of segment profitability for AEs and non-AEs transactions and consequent levy of penalty under section 271G of the Act is involved in the instant case before us, respectfully following the finding of the coordinate Bench of the Tribunal and Hon ble Gujarat High Court, we hold that in the instant case there was reasonable cause for non-maintaining the details, which were required in terms of Rule 10D of the Rules and accordingly we do not find any error in the order of Ld. CIT(A) and uphold the order of the Ld. CIT(A) on the issue-in-dispute. The grounds raised by the Revenue are accordingly dismissed.

Issues Involved:
1. Non-maintenance of segment profitability details between Associated Enterprises (AEs) and non-AEs.
2. Imposition of penalty under Section 271G of the Income Tax Act, 1961.
3. Reasonable cause for non-compliance with Rule 10D of the Income Tax Rules, 1962.

Issue-Wise Detailed Analysis:

1. Non-maintenance of Segment Profitability Details Between AEs and Non-AEs:
The assessee, engaged in the business of importing, cutting, polishing, and selling diamonds, was asked by the Transfer Pricing Officer (TPO) to furnish documents related to segment profitability between AEs and non-AEs. The assessee expressed difficulty in maintaining such details due to trade practices, stating it was impractical to track each diamond during the process. Consequently, the TPO concluded that the absence of these details hindered the benchmarking of transactions with AEs.

2. Imposition of Penalty Under Section 271G:
The TPO levied a penalty under Section 271G of the Income Tax Act, 1961, due to the assessee's failure to provide the required segment profitability details. The TPO emphasized that these details were essential for determining the arm's length price of transactions with AEs. The Ld. Assessing Officer supported this penalty, arguing that the assessee's non-compliance prevented a proper examination of the transactions.

3. Reasonable Cause for Non-compliance with Rule 10D:
The Ld. Commissioner of Income-tax (Appeals) [CIT(A)] deleted the penalty, citing various decisions from coordinate benches. The CIT(A) emphasized that penalty under Section 271G is imposed for specific defaults, such as non-production of prescribed documents under Rule 10D. If a default is established, Section 273B provides an escape route if reasonable cause for the default is demonstrated. The CIT(A) noted that the nature of the diamond business made it practically difficult to maintain the required segmental details, thus constituting a reasonable cause.

Tribunal's Findings:
The Tribunal reviewed the rival submissions and relevant material. It referenced the decision in the case of Navin Chandra Exports Private Limited, where it was held that there was a reasonable cause for non-maintaining segment profitability details. The Tribunal observed that the diamond industry faces practical difficulties in maintaining such details due to the nature of the trade. The Tribunal concurred with the CIT(A) that the assessee's inability to furnish the required details was backed by a reasonable cause, thus falling within the scope of Section 273B.

Gujarat High Court's Decision:
The Tribunal's decision was upheld by the Hon'ble Gujarat High Court, which dismissed the Revenue's appeal. The High Court agreed with the Tribunal's findings, noting that the assessee had substantially complied with the requirements and that the increase in gross and net profits indicated no substantial question of law.

Conclusion:
The Tribunal upheld the CIT(A)'s order, concluding that the assessee had a reasonable cause for not maintaining the segment profitability details as required by Rule 10D. Consequently, the penalty under Section 271G was not justified. The appeal filed by the Revenue was dismissed, and the order was pronounced in open court on 14/06/2022.

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