TMI Blog2018 (11) TMI 1729X X X X Extracts X X X X X X X X Extracts X X X X ..... owever, 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 thus would bring the case of the assessee with the sweep of Sec. 273B of the Act . We thus uphold the order of the CIT(A) and the resultant deletion of the penalty imposed by the TPO. - Decided in favour of assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... he order of the Ld. CIT(A) deleting the penalty on the ground that TPO has not examined segment-wise unaudited profit and loss account prepared and submitted by the assessee during the penalty proceedings disregarding the fact that the assessee did not submit any supporting 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. ………………………………………………. …………&hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in Para 6 as under: - "6. Decision: I have carefully considered the facts of the case, contentions of the TI'O and submissions of the appellant & the detailed analysis is discussed herein below: The TPO levied penalty u/s.2710 on the ground that the appellant failed to furnish information called for. The TPO mentioned that the appellant inappropriately applied the TNM Method and despite 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 variou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntwerp, Israel, etc. who are sight holders. These distributors then in turn resell these rough diamonds to small distributors. (c) These small distributors then sell the goods to actual cutters/ manufacturers. India is. a major centre of cutting and polishing. These perform very little Junction in the entire process of diamond business and undertake no value addition activity. They also undertake 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ives these rough diamonds to cutters/polishers for processing into finished goods. i.e. polished diamonds. It got this operation done from contract laborer. After polishing, it sells these diamonds to various customers including foreign entities. In addition to the foregoing descriptions it is essential to know as to what happens in the Manufacturing & Trading of Diamond Business. 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 st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the P & L Accounts and/or some other evidence to show that the international transactions were at arms-length price. Appellant had entered into following international transactions: ……………………………………………………………. Total value of transactions of diamonds entered by the assessee with AEs and NonAEs were as follows: The Profit and Loss account and the printed accounts show that 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the penalty proceedings under section 271G of I.T. Act, 1961. The TPO could have fried to work out the gross profits and net profits by averaging the purchase prices and the expenses in proportion of export sales of each one of the three segments, as has been done by the appellant during penalty proceedings to arrive at average profitability of each segment and then to compare the same with the average profitability of other ten public/private companies whose details were made available in TP Study Report. In this regard, the TPO had another 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, c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ricacies of the diamond trade and lack and non-availability of knowledge in public domain about the manufacture of diamond trade. The appellant has also submitted that when the appellant had furnished all the particulars on the basis of which the TPO could have come to the conclusion regarding ALP in the case of International Transaction and further submitted that the TPC) had not asked for only one specific detail but several details on several occasions from time to time. Even the explanation for the specific details of segmental AE, Non-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: ………………………………………………………………………& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded that in the backdrop of the intricacies involved in the said business it was practically difficult for the assessee to furnish the information in the manner the same was called for by the TPO. We find that the CIT(A) in the backdrop of an indepth study of the nature of activities involved in the business of manufacturing and trading of diamonds, had in a very well reasoned manner culled out the peculiar nature of the trade of the assessee. We are of the considered view that a careful perusal of the very nature of the business of manufacturing and trading of diamonds therein glaringly reveals that certain information which was called for by the TPO could not be furnished by the assessee. We find that the CIT(A) had observed that as the assessee had purchased a mix of imported rough and polished diamonds from AEs and non-AEs, and had also sold/exported rough and polished diamonds to AEs as well as the non-AEs, therefore, the Profit & loss a/c of the assessee reflected a mixture 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in respect of export sales to AEs and non-AEs by comparing prices of diamonds of similar size, quality and weight to the best extent possible, or in the alternative could have asked for the copies of the Profit & loss accounts and the Balance sheets of the AEs in order to make an overall comparison with the gross profitability levels of the assessee with its AEs, which would had clearly revealed diversion of profits, if any, by the assessee to its AEs. We are further unable to comprehend that as to on what basis the TPO expected the assessee to have carried out the benchmarking by following CUP method. We are of the considered view that as the comparison by internal CUP method could only be made if two lots of diamonds were similar in size, colour, shape and clarity, which we are afraid, as observed by us at length hereinabove, in light of the peculiar nature of the trade of the assessee would not be possible. We find ourselves to be in agreement with the CIT(A) that if one 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee had substantially complied with the directions of the TPO and 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 however, 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 direct ions of the TPO can safely be held to be backed by a reasonable cause, which thus would bring the case of the assessee with the sweep of Sec. 273B of the 'Act'. 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. 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 d ..... 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