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TMI Blog2019 (3) TMI 690X X X X Extracts X X X X X X X X Extracts X X X X ..... de to Transfer Pricing Officer (TPO) by the Ld. AO u/s.92CA(1) of the Act for the purpose of determining the arm's length price in respect of purchase and sale transactions of the assessee with its Associated Enterprises (AEs). The audit report in form 3ECB was duly submitted by the assessee along with the return of income and also before the Ld. TPO. The Ld. TPO in the order passed u/s.92CA(3) of the Act dated 20/09/2015 observed that the authorised representatives of the assessee appeared and filed details as required from time to time. He also observed that the details and documents furnished in relation to the international transactions with the AEs vis-à-vis computation of ALP were discussed and examined. The Ld. TPO observed that considering the facts and circumstances of the case, the assessee's submission and documents furnished, the value of international transactions with AEs are considered at ALP. 3.1. During the course of proceedings before the Ld. TPO, the assessee was asked to submit internal Transaction Net Margin Method (TNMM) to work out the profitability of AE and Non-AE segment. In this regard, the assessee submitted that it was not practical to identify ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id submission of the assessee (since the TPO had not rebutted the segmental analysis submitted by the assessee) and continued with hypothesis that segmental information was not available and hence, initiated the penalty proceedings. We request your goodself to verify the assessment records and accordingly, the proceedings may be dropped. In this context, the Assessee places reliance on the findings of the Honorable Delhi /TAT in case of Cargill India (P) Ltd v/s Deputy Commissioner of Income-tax, Cir. 3(1), New Delhi [2008J 110 /TD 616 (DELHI) wherein the following was observed- It is clear from the consideration of r. 100 and its various sub-rules, that documents and information prescribed under the rule is voluminous and it could only be in rarest cases that all the clauses of sub-rules would be attracted. It is not possible to casually ask for information under all the clauses. One or more clauses of sub-Rule (1) are applicable and not all clauses of the rule in a given case. It would all depend upon the facts and circumstances of the case more particularly the nature of international transactions carried or services involved. Under sub-s. (2) of s. 92CA, evidence in su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .6460/Mum/2012: AY 2008-09 The relevant extract is stated below: "It is relevant to note that sub-clause (i) of rule 10B(1)(e), which is first step in the computation of ALP under TNMM, talks of ascertaining the with margin realised by the enterprise from an international transaction entered into with an associated enterprise. We have noticed the definition of 'International transaction' above as a transaction between two or more associated enterprises. A bare perusal of this provision divulges that this step contemplates the determination of actual profit realized on transaction between two AEs. It is this profit margin which is scrutinized for determining as to whether or not it is at arm's length. The margin with which such margin earned by the assessee is compared with for determining the ALP, can be internally available from comparable transaction(s) or from externally available cases, if the enterprise has entered into similar transactions with third parties as are under consideration with the AE, then the profit realized from such transactions with third parties is a good measure to benchmark the margin from international transaction. Thus, on one hand we n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not comparable due to volume differences. Further, the non-AE sales consists of several sales invoices (retail sales) wherein comparatively the lots of diamonds sold consists of few pieces than that sold to AEs. Due to the insignificant volume and inherent limitations of the product sold, it was considered prudent by the assessee to benchmark its international transactions at the entity level and consider companies engaged in manufacturing of cut and polished diamonds for comparability analysis. Accordingly, the Company considered external TNMM as the most appropriate method for benchmarking its international transactions and every detail as per clause g and h to Rule 10D(1) were furnished during the assessment proceedings which was duly accepted by the Learned TPO. Therefore, it is humbly submitted that there is no question of non-maintenance of documents and no penalty should be levied for the same. Further, the assessee has also placed reliance on the following judicial precedents: The Company submits that the Learned TPO had passed the order and accepted the book value of international transaction to be at ALP. Under said circumstances it is humbly submitted that the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d during the course of TP assessment proceedings. But, TPO has inadvertently ignored the said submission of the assessee and initiated the penalty proceedings. 3.3. The assessee further replied as under:- '"The assessee humbly submits that every diamond is unique in nature. Value of a cut and polished diamond is essentially dependent upon the 4 Cs viz. Cut, Clarity, Colour, Carat. Due to the inherent diversity in each of the above Cs it is difficult to uniformly classify diamonds. Leo India deals in various kinds of diamonds which vary according to their qualities, shapes, sizes. Hence, it is very difficult / not practical to determine the per-carat cost price and sale price for AEs or Non-AEs as a whole." 3.4. The Ld. AO observed that assessee had adopted TNMM as the most appropriate method for benchmarking its transactions with AEs. While adopting the same, assessee has benchmarked the international transactions at entity level which is against the method prescribed in Rule 10B(e) of the IT rules. With these observations, the Ld. AO levied penalty of Rs. 8,82,81,250/- u/s.271G of the Act at 2% of international transactions of the assessee which was deleted by the Ld. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 (hereinafter the Rules). As the assessee failed to furnish the documents. For this Revenue has raised the identical worded grounds in all these four appeals. Facts and circumstances are exactly identical, hence, we will take the facts from ITA No. 5628/Mum/2016 for AY 2011-12 in the case of Interjewel Pvt. Ltd. and decide this common issue of all the appeals. For this Revenue has raised following grounds in ITA No. 5628/Mum/2016 for AY 2011-12 : - "(i) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was right in deleting the penalty under section 271G when the assessee failed to furnish documentation as required under the rule 10D(1) and sub section (3) of the sec 92D of the I.T. Act in respect of the international transactions entered into by it? (ii) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the penal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Nature of the international Transactions Amount in (Rs.) 1. Purchase of rough diamonds 125,53,36,515 2. Sales of Rough diamonds 38,27,73 3. Purchase of polished diamonds 33,43,86,459 4. Sale of Polished diamonds 185,41,22,630 Total 344,76,73,342 4. Accordingly, the TPO/AO made adjustment as the assessee failed to furnish the AE and non AE wise segment details. The TPO/ AO made adjustment and also initiated the penalty proceedings under section 271G of the Act for contravention of provision of section 92D(3) of the Act read with rule 10D(1) of the Rules by observing in Para 4.1 as under:- "4.1 During the course of T.P. proceedings, the assessee was asked to furnish AE and non-AE wise segmental details. However, the assessee failed to furnish the same and reported that it has not maintained the details separately it won‟t be possible to furnish AE and non-AE segmental profitability. This condu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ........................................................... requirement under rule 10D(1) clauses "g" and "h' and Rule 10D(3) read with section 92D to maintain and produce documentation as called for by the TPO. Therefore, the assessee's Instant case is a fit case for levy of penalty uls 271G for failure to furnish Information or document in respect of segmental accounts relating to transactions made with AEs and non AEs for determination of arms length price of international transactions as required by the TPO under Rule 10D(1) and Rule 10D(3). 32. Following facts becomes evident: a) The TPO has called for specific details pertaining to segmental profitability between AE and non-AE segments within the meaning of section 920(3) of Income Tax Act, 1961. b) The details were called for during transfer pricing proceedings and assessee was given opportunity to submit the same on 4-12-2014 but the same was not furnished within 30 days or even till passing of transfer pricing order u/s 92CA(3) on 19-01-2015 or at any time subsequently. c) The details were essential for benchmarking the transaction of assessee with AE. d) The assessee could also not provide any al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t price and due to peculiar character of the goods sold, the appellant did not consider the CUP method as the most appropriate method. It is also mentioned that the department accepted TNMM Method as the most appropriate method and no adjustment. were made in the preceding years. The TPO should have considered the peculiar nature bI diamond trade and should have appreciated the difficulties in adopting CUP method, the appellant furnished all the particulars on the basis of which the TPO could come to the conclusion regarding the ALP in the case of international transaction and therefore were no adjustments made. In these circumstances, the penalty u/s.271G should not be levied. Before deciding the issue whether levy of penalty is justified or not, it is essential to know and understand the nature of diamond manufacture and trading business to appreciate the basic issues. Appellant and its auditors in their submissions have described nature of diamond trade, its peculiarities and Appellant's business as follows: "(c) The Nature of Diamond Business world over: Diamond business involves following major stages: (a) Extracting of rough diamonds by diamond mine owners. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Business: (a) In the diamond business world over, there are estimated to be 8000 to 10000 different qualities of diamonds. The price of a diamond depends on various factors such as shine, luster, size, color, clarity, purity, cluster, cartage etc. In fact, no two diamonds can have same price. Also no two diamond businessmen may value the same piece of diamond at the same price as valuation also depends upon the perception of individual businessman. In view of this, one can say that normally there are no comparable pieces and prices of diamonds. Also at each stage in diamond business i.e. from mine owners to distributors to manufacturer/exporter and ultimately to customer or distributor of polished diamonds, the goods are assorted - re-assorted, mixed-remixed quite a number of times and hence each piece of diamond loses its identity as to the source. b) Diamonds are sold by their generic name and not by any brand. This product lacks homogeneity. Thus, (i) Prima facie no transaction of purchase or sale of diamonds can be compared with any other transaction. (ii) It is not possible and practicable to find out exact cost of transaction and hence resultant mark up or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 rough diamonds is pre- sorted before giving it for cutting and polishing, the polished diamonds are likely to vary in size, shape, size, colour and weight. Normally diamonds are exported and sold locally in lots and/or by weight of similar size and cOloj.ir because these diamonds are then used by diamond jewellery manufacturers in the manufacture of diamond jewellery which requires diamonds of similar size, shape and colour while designing and making jewellery except for one unique piece which may be required for the ring or for centre of the necklace. Hence a diamond manufacturer is continuously required to sort out rough diamonds before giving for cutting and polishing which is done in stages and also sort out polished diamonds when the lots of cut and polished diamonds are received from the cutters and polishers to make lots of similar sizes, colours, shapes and weight before selling /exporting polished diamonds. It is also worth mentioning here that normally polished diamonds of higher carat weight commands higher prices if other factors like size, colou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 diamonds or the other and/or out of the polished diamonds locally purchased by the appellant. On understanding of export bills of cut and polished diamonds exported to AEs and non AEs reveals that diamonds of varying size, quality, colour and carat weight were exported as is evident from the price per carat charged in each bill. And may be similar situation must have existed in respect of cut and polished diamonds purchased and sold locally and/ or purchased from abroad but sold locally. Therefore, it is extremely difficult even for the diamond trader and manufacturer to identify which rough diamond got converted into which polished diamond specifically unless the single piece rough diamond happened to be of exceptionally high carat value and weight making the tracing out and identification of the polished diamond physically possible and convenient. Only indication about the size may come from the market price realised per carat unless each diamond is subjected to pre checking as done by the trader and manufacturer before selling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D(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 loss account prepared and submitted by the appellant I during the penalty proceedings was not even examined and a comparison of the P & L Accounts and the Balance Sheets of the AEs was also not made by the TPO. If the segment wise P & L Account submitted by the appellant even during the penalty proceedings had been made and / or P & L account of AEs had been cased and examined during TP proceedings, these details would have revealed the gross profit margins and levels of profitability earned by the AEs in their businesses since the AEs were the ultimate beneficiaries of these international transactions and any abnormal variation in their gross profitability would have revealed the aberrations in international transactions, if any. In this regard it is worth noting here that nature and level of business of the appellant during the current year has remained the same as it was last year that is A.Y. 2010-11 and the TPO did not propose any adjustments in the arms length prices for A.Y. 2010-11. Even though each assessment year is dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 Rs. 6,89,53,467/- under section 271G of l.T.Act, 1961 is hereby deleted. In this regard, reliance is also placed on following decisions: 1) ITO V/S. Nets Soft India Ltd. - 2013/35/Taxniann.Com/579/Mumbaj ITAT 2) ACIT V/S. Gillette India Ltd.-2015/54/Taxmann.Com/3l3fjaipur ITAT In view of the fact that levy of penalty under section 271G of I.T. Act, 1961 is itself deleted, other objections raised by the appellant before the TPO and in appeal are considered relevant and are not discussed." Aggrieved, now Revenue is in appeal before Tribunal. 7. At the outset, the learned Counsel for the assessee stated that the issue is squarely covered by Tribunal‟s decision of this co-ordinate Bench in the case of ACIT vs Navinchandra Exports Pvt. Ltd. in ITA No. 6304/Mum/2016 for AY 2011-12 vide order dated 25.10.2017, which was further followed in the case of ACIT vs. Dilipkumar V. Lakhi, in ITA No. 2142/Mum/2017 for AY 2011-12 vide order dated 02.08.201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 out and identification of the polished diamond physically possible and convenient. We find that the aforesaid practical difficulties in providing the details being faced by the industry can be well gathered from the letter of the GJEPC to the CIT-Transfer Pricing, Mumbai, wherein the aforesaid aspects involved in the diamond manufacturing business were explained. 19. We find that the assessee had in the backdrop of the very nature of its business, viz. manufacturing of diamonds, had though explained to the TPO the practical difficulty in furnishing segment wise Profit &loss account of the AE segment and the non-AE segment, however, the TPO insisted for the same and invoked Rule 10D of the Income-tax Rules, 1962, and instead of determining the arms length price in respect of the international transactions of the assessee with its AEs, rather went ahead and levied penalty un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal. 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 their gross profitability would had revealed the aberrations in the international transactions. 20. We further find that as stands gathered from the records, the nature and level of business of the assessee during the year under consideration had increased almost two fold. We find that while for the gross profits of the assessee had also increased from 7.42% for A.Y. 2010-11 to 8.71% for the year under consideration, viz. A.Y. 2011-12, the Net profit had also witnessed a growth from 3.9% in the immediate preceding year to 4.9% during the year under consideration. We further find that as observed by the CIT(A) that in the preceding year, i.e A.Y. 2010-11 the TPO did not propose any adjustment in the ALP. We are not inspired by the fault finding approach adopted by the TPO without understanding the intricacies of the diamond manufacture and trading business, and are of the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te 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 the order of CIT(A) and dismiss this appeal of Revenue. 10. Resultant, all others appeals of Revenue are identical and hence, dismissed. 11. In the result, all the appeals of Revenue are dismissed. 5.1. We also find that the Ld. CIT(A) had placed reliance on the decision of the Jaipur Tribunal in the case of ACIT vs. Gillette India Ltd reported in 54 taxmann.com 313 dated 16/01/2015 which is also applicable to the facts of the instant case. In view of the aforesaid observations and respectfully following the aforesaid judicial precedents, we do not find any infirmity in the order of Ld. CIT(A) deleting the penalty u/s.271G of the Act in the peculiar facts and circumstances of the instant case before us. We would like to make it clear that the said decision shall not stand as a precedent for other cases. Accordingly, the grounds raised by Revenue are dismisse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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