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TMI Blog2018 (11) TMI 1594X X X X Extracts X X X X X X X X Extracts X X X X ..... MI 1778 - ITAT MUMBAI] we confirm the order of CIT(A) and dismiss this appeal of Revenue. - ITA No. 5626, 5627, 5628, 5304/Mum/2016 (Assessment Year 2011-12) - - - Dated:- 1-11-2018 - Sri Mahavir Singh And Sri Ramit Kochar, JJ. Appellant by: Shri Anand Mohan, Shri Rignesh K. Das, DR Respondent by: Shri K.A. Vaidyalingan, AR ORDER PER BENCH: These appeals by the Revenue are arising out of the orders of Commissioner of Income Tax (Appeals)-56, Mumbai [in short CIT(A)], in appeal No. CIT(A)-56/TP/ACIT-5(2)(1) 6(4)/2015-16 2016-17/110-I, 109-K, 120-K,113-F vide even date 21.06.2016, 28.06.2016 30.05.2016. The Assessments were framed by the Dy. Commissioner of Income Tax, Ward 5(2)(1), Mumbai (in short DCIT/ AO ) for the A.Y. 2011-12 vide order dated 20.03.2015, 27.03.2015, 30.03.2015 under section 143(3) read with section 92CA(4) of the Income Tax Act, 1961 (hereinafter the Act ). 2. The only common issue in these four appeals of Revenue is against the order of CIT(A) deleting the penalty levied by AO under section 271G of the Act for violation of the provisions of section 92D(3) of the Act read with rule 10D(1) of the Income Tax Rules, 1962 (he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... documents to support the segmental results and had admitted himself in the covering letter that the segments had been prepared to the extent possible on the basis of certain assumptions which were also not spelt out, and the TPO, in his order under section 271G at para 28(pg.14), has given a finding that segmental results of AE and non-Ae on the basis of pro-rata allocation of cost to AEs and non-AEs based on the sales made to AEs and non-AEs respectively is not correct and cannot be relied for the purpose of benchmarking. (vi) Whether on the facts and in the circumstances of the case and in law, the order of the ld. CIT(A) deleting the penalty on the ground there is no adjustment made in the ALP even though adjustment to ALP is not a precondition for levy of penalty u/s271G. 3. Briefly sated facts are that the assessee is engaged in importing exporting and locally purchasing roughed diamonds, getting them cut and polished and finally export or locally selling the cut and polished diamonds. During the Financial year 2010-11 relevant to AY 2011-12, the assessee has entered into following international transactions with its AE:- Sl No. Natu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al accounts in respect of purchases and sales made with AEs and non-AEs, and by doing so had prevented the TPO from performing any comparability analysis (which was actually an obligation of the assessee as per Rule 100 Clause (g) and _(h)b and further thwarted any effort by the TPO to determine the ALP in a fair manner as envisaged under section 92C. Therefore, assessee cannot take shelter under the beneficial clause in section 27. Therefore, assessee cannot take shelter under the beneficial clause in section 273B. In this context, reliance is placed on the decision of the Hon ble jurisdictional Mumbai High Court in the case of Shatrunjay Diamonds (261 ITR 258; 2003) wherein court has held that 'The purpose behind the legislature enacting Section 404 (2) (b) was to provide for shifting of burden on the assessee in cases where the transactions are not at arm's length. The purchases are made by the assessee from its sister concern. In such cases, the intricacies of the transactions are required to be explained by the assessee. . .. requirement under rule 10D(1) clauses g and h' and Rule 10D( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pite the major irregularities in the entity level TNMM, the appellant adopted this method. Finally, the TPO rejected all the objections and held that appellant did not provide any basis for comparing the transactions of AE with another AF and/or non-AE and appellant failed to provide any alternative method for benchmarking the international transactions and the failure of the appellant resulted in and forced the TPO to accept the arms-length price as it is and thus preventing the TPO from examining and determining the arms-length price of various international transactions and hence levied penalty under section 271C of l.T. Act, 1961 of ₹ 6,89,53,467/- @12% of international transactions. On the other hand, the appellant submitted that it maintained necessary books and furnished various information and documents as required by Rule 10D and submitted segment-wise PLI during the penalty proceedings. The appellant further submitted that CUP method could not be applied as each invoice of sale to AE and Non-AEs include different types of goods sold for different price and due to peculiar character of the goods sold, the appellant did not consider the CUP method as the most appro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertake very little risks and the time involved in their business cycle is comparatively very less. (d) These rough diamonds are then cut and polished into finished polished diamonds by employing man power and deploying sophisticated machineries, either directly or through job workers. The entire cutting and polishing activity involves various functions such as assorting, cleaving, kerfing, boiling, bruiting, shaping, grading etc. The whole cycle from the purchase of rough diamonds till the final output of polished diamonds takes minimum of one month to maximum of two to two and half months. The cutting and polishing activity gives value addition. Also the person involved undertakes risks as ultimate yield of polished diamonds and the quality of the same depends on various factors like purity, size, shape of rough diamonds, skill of the workers, etc. (e) The polished diamonds so manufactured are then sold either directly or through distributors spread across the globe to various customers who are mainly jewellery manufacturers. D. Peculiarities of Products and Business: (a) In the diamond business world over, there are estimated to be 8000 to 10000 different qualities of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Rough diamonds are mined from various places all over the world and they vary from a size of 0.05 carat to 10 carat usually and the price of rough diamonds vary on the composition of each lot of diamond consisting of various sizes, shapes and colours and weight and each lot is likely to have rough diamonds varying in size, shape, colour and weight. It also remains a fact that no two rough diamonds in the lot are likely to be of the same size, shape, colour and weight which leads to anomalous situations when these are cut and polished. The process of cutting consists of pruning the edges, flattening the top and shaping the sides as to give the rough stone a final shape and then polish it. The entire process of cutting and polishing results in diamonds of different shapes and sizes depending upon the structure of the rough diamonds and the skills of the cutters and polishers of diamonds. Thus a lot of 100 carat of rough diamonds may usually yield 27% to 29% cut and polished diamonds of varying sizes and shapes and colours and weights (carats). Diamonds are weighed in carats and one gram is equal to 5 carats. Thus diamonds get cut and polished lot wise and even if each lot of rou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t assessee mainly exported total polished diamonds worth ₹ 185 crores to AEs out of total turnover of ₹ 429 crores and the balance of ₹ 244 crores to non-AE parties. Thus the P L Account reflects a mixture of sales of polished diamonds to both AEs as well as non AEs. It is also observed from the records that assessee had imported rough polished diamonds worth ₹ 158 crores out of its total consumption of rough diamonds of ₹ 367 crores. Assessee also made an attempt to segregate segment wise figures of sales, purchases and expenses and worked out and submitted a segment wise, that is, local sales, non-AE sales and AF sales and worked out the OP/Sales margins and furnished the same to the TPO. It appears from the penalty order dated 30/07/2015 that the TPO has not examined this segment wise unaudited P L Account and has gone ahead with passing of a stereo typed penalty order as being done by other TPOs even though the facts of the case were materially little different and has levied penalty under section 271G of l.T. Act, 1961. In this scenario, it is difficult to identify and say whether a polished diamond came out of any particular lot of rough d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nother option of asking for the copies of P L Accounts and the Balance Sheets of the AEs to make an overall comparison with the gross profitability levels of the appellant with AEs to ascertain diversion of profits, if any, in broad manner. However, this was not done by the TPO and the TPO went ahead with the levy of penalty under section of Ps. 6,89,53,467/- under section 271G of l.T. Act, 1961. Another issue on which the TPO has laid stress is that the appellant could have followed the internal CUP method to work out the arm's length price in respect of its exports. Unless lots of diamonds exported to an AE and a Non-AE are of similar size, colour, shape and clarity, it will be difficult to compare the prices generally under CUP method except a rough estimate can be made in general. Hence 1epingj in view the nature of the trade and the lots of diamonds exported by the appellant to AEs and Non-AEs during the assessment year, following internal CUP method is not practicable. 'ITO has invoked specifically rule 10D(1)(d), (g), (h) and (m) of l.T. Rules, 1962 to substantiate the levy of penalty under section 271G of I.T. Act, 1961, however, a segment wise profit and los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AE transactions were also filed and submitted. Thus, it appears that the appellant had made substantial compliance with the requirements Ci filing all major information called for by the TPO for determination of the ALP and accordingly, the ALP was accepted by the TPO. Further, the appellant relied on the Hon'ble High Court of Delhi in the case of CIT vs. M/s. Leroy Somer Controls (India) Pvt. Ltd. which observed as under: .. The assessee also cited the below mentioned decision of Hon ble ITAT which is as under: I have gone through the above and found that the facts of the above case laws are similar to the facts of the appellant's case. In view of the above, I am of the opinion that levy of penalty u/s.271G of the I.T.Act,1961 is neither fair nor reasonable and therefore it is not justified in facts of the case, viz., the nature of diamond trade, substantial compliance made by the appellant and the reasonable cause showed by the appellant and above all, when there is no adjustment made in the ALP. Thus, the levy of penalty of ₹ 6,89,53,467/- under section 271G of l.T.Act, 1961 is hereby de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture of purchases and sales both from the AEs and the non-AEs. We are persuaded to be in agreement with the view of the CIT(A) that now when the rough/polished diamonds were traded on lot wise basis, therefore, 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 by the assessee. We find that the export bills of the cut and polished diamonds exported to the AEs and the non-AEs revealed that the diamonds of varying size, quality, colour and carat weight were exported as was evident from the price per carat charged in each bill, and similar would have been the position in respect of cut and polished diamonds purchased and sold locally and/or purchased from abroad but sold locally. We are of the considered view that in the backdrop of the aforesaid peculiar nature of the trade of the assessee, it could safely or rather inescapably be concluded that it was extremely difficult to identify which rough diamond got converted into which polished diamond, unless the single piece rough diamond happened to be of exceptionally high carat value, therein making the tracing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e lot had diamonds of variety of size, colour, shape and clarity, the prices would vary from diamond to diamond and lot to lot, and further, now when the entire lot of diamonds had a common price tag per carat for the whole lot, therefore, it was not possible to evaluate the price of each diamond. We also cannot be oblivious of the fact that even otherwise in the diamond trade line, unless a diamond would weigh half carat or more or one carat or more, the same would not be priced separately in the bill because it was not practical to price diamonds of weights of lower than half carat or one carat separately weight wise per diamond in the lot. We have deliberated on the aforesaid peculiar facts involved in the business of diamond trading and are of the considered view that the insistence of the TPO that the assessee should have followed CUP method was misconceived and impractical. We are in agreement with the CIT(A) that if the TPO would had carried out a comparison of the Profit loss account and Balance Sheets of the AEs, the same would had revealed the gross profit margins and levels of profitability earned by the AEs in their businesses, and as such any abnormal variation in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s well reasoned order, therefore, uphold the same. We thus uphold the order of the CIT(A) and the resultant deletion of the penalty of ₹ 2,15,98,527/- imposed by the TPO. 21.The appeal of the revenue is dismissed. 8. When this was pointed out to the learned CIT Departmental Representative, he only relied on the orders of the lower authorities i.e. AO /TPO. He also relied on the decision of Hon ble Bombay High court in the case of CIT vs. Shatrunjay Diamonds (2003) 261 ITR 258 (Bom) which is in relation to the issue of disallowance u/s 40A(2)(b) of the Act. 9. After hearing both the sides and going through the facts and circumstances of the case, we are of the view that the co-ordinate Bench has elaborately dealt with this issue and finally held that the assessee has substantially complied with the directions of the TPO and placed on record the requisite information as observed by CIT(A). The Revenue could not dislodge the findings of CIT(A). Hence, according to us, there is a reasonable cause in not complying with the provisions of section 92D(3) of the Act. Respectfully, following the co-ordinate Bench decision in the case of Dilipkumar V. Lakhi (supra), we confirm ..... X X X X Extracts X X X X X X X X Extracts X X X X
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