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TMI Blog2021 (7) TMI 208X X X X Extracts X X X X X X X X Extracts X X X X ..... e SCN, dated 31.10.2016 was issued by the TPO after the lapse of the time period that was allowed for furnishing of the requisite information/documents that were called for by him vide his aforementioned notices issued u/s 92D(3), therefore, no infirmity does arise therefrom. We thus, not being able to concur with the aforesaid view so arrived at by the CIT(A) therein vacate the same. Penalty u/s 271G - Considering the peculiar nature of the assessee s business of manufacturing and export of cut polished diamonds, no penalty u/s 271G could have validly been imposed - the issue is squarely covered by the orders of M/S D. NAVINCHANDRA GEMS PVT. LTD., M/S AKSHAR IMPEX PVT. LTD. AND M/S DHANERA DIAMONDS [ 2017 (11) TMI 1307 - ITAT MUMBAI] wherein it has been held that no penalty u/s 271G considering the nature of the business of manufacturing and export of cut polished diamonds could validly be imposed - Thus Tribunal after exhaustively deliberating on the nature of the business of the assessee before them, viz. manufacturing of diamonds, had concluded that penalty u/s 271G could not have been imposed on the assessee the aforesaid order of the Tribunal had thereafter been ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ALP under any of the prescribed methods u/s. 92 C (1) of the Act, the assessee effectively prevented the TPO to make any determination as recorded by the TPO in the order u/s. 92CA (3) of the Act. 2. Briefly stated, the assessee company is engaged in the business of manufacturing and export of cut and polished diamonds. Reference u/s 92CA(1) of the Act, dated 18.12.2015 was made in the course of the assessment proceedings to the Dy.CIT, Transfer Pricing -2(2)(2), Mumbai, for computing the Arm s Length Price (for short ALP ) of the specified domestic transactions entered into by the assessee with its AE s during the year under consideration. 3. Notice u/s 92CA(2) along with a questionnaire was issued to the assessee on 17.02.2016, whereby it was directed to submit details/explanations to support the ALP of the specified domestic transactions as was computed in its audit report in Form 3CEB. Another notice u/s 92CA(2) along with a questionnaire was issued to the assessee on 10.08.2016, whereby it was once again called upon to submit details/explanations to support the ALP of its transactions with its AEs. On a perusal of the Form 3CEB, it was observed by the TPO t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mployed for the abovementioned transactions may not be rejected, and a fresh benchmarking be carried out as per any other method out of the methods prescribed under the Act; and (iii) that in case of certain inter unit transfers, if the benchmarking as per 10% mark up as per the excise rule was to be adopted, then, it has to be demonstrated that non-inter unit uncontrolled market comparable transactions mark up did also fit to that range as required in its case. 28.10.2016 Notice u/s 92D(3) was again issued by the TPO wherein it was pointed that after rejection of TNMM as MAM, the benchmarking process may alternatively be supported by segregating the transactions into AE Non-AE segment, whereby the margins of the said respective segments were to be compared. However, as the assessee did not submit the details in compliance to the aforesaid notice(s) that were issued by the TPO u/s 92D(3), therefore, a Show cause notice (for short SCN ), dated 31.10.2016 was issued by him, wherein the assessee was called upon to explain as to why penalty u/s 271G may not be imposed on it. Thereafter, another notice u/s 271G was issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iate method. After referring at length to the relevant statutory provisions, it was observed by the TPO that the assessee had not kept and maintained the documents as mandated by Rule 10D. It was further observed by him that the assessee had not maintained proper documents to justify selection of CUP or TNMM as the most appropriate method. It was observed by the TPO that if TNMM was to be considered as the most appropriate method then, as per the mandate of Rule 10C(2)(d), the assessee should have considered the degree of comparability existing between the international transactions [or specified domestic transactions] and uncontrolled transaction, and should have maintained documents in this regard as per the mandate of Rule 10D(1)(i). Also, the TPO was of the view that if TNMM was to be considered as the most appropriate method then, the assessee should have worked out the net profit margin realised from the international transactions [or specified domestic transactions] as per the mandate of Rule 10B(1)(e) and should have maintained a record of detailed workings in this regard as require by Rule 10(1)(j). It was further observed by him that as the assessee had claimed that TNMM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... net profit margin from the international transactions [or specified domestic transactions]. In fact, it was observed by the TPO that if there was a practical difficulty in working out the profit from international transaction [or specified domestic transaction], then TNMM should not have been considered as the most appropriate method at all. Being of the view, that having considered TNMM as the most appropriate method, the TPO was of the view that the assessee could not be allowed to change the manner of determination of ALP under TNMM as was prescribed under Rule 10B(1)(e). Also, the plea of the assessee that considering the peculiar nature of its trade it was practically not possible to provide separate profitability for transactions with AE non-AE, the same was rejected by the TPO on the ground that every businessman while working out the sale price of any item would necessarily take into consideration the cost incurred by him for the same. Adverting to the business of the assessee, it was observed by the TPO that even if there was mixing of various diamonds during the manufacturing process, the assessee would still have the relevant cost details for the final output, which h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder be set aside and that of the A.O be restored. 8. Per contra, the ld. Authorized Representative (for short A.R ) for the assessee relied on the order of the CIT(A). It was submitted by the ld. A.R that the ITAT, K bench, Mumbai in the case of ACIT-5(1)(2), Mumbai, Vs. M/s D. Navinchandra Exports Pvt. ltd., Mumbai, ITA No. 6304/Mum/2016 had concluded that no penalty u/s 271G could validly be imposed in the case of an assessee engaged in the business of manufacturing and export of cut polished diamonds. It was, thus, submitted by the ld. A.R that the issue herein involved was squarely covered by the order of the ITAT, K bench, Mumbai, in the case of ACIT-5(1)(2), Mumbai, Vs. M/s D. Navinchandra Exports Pvt. ltd., Mumbai, ITA No. 6304/Mum/2016. It was submitted by the ld. A.R that the Tribunal in its aforesaid order had after exhaustively deliberating on the peculiar nature of the business of manufacturing and trading of diamonds, had upheld the order of the CIT(A) who had vacated the penalty that was imposed by the A.O u/s 271G of the Act. It was submitted by the ld. A.R that the aforesaid order of the Tribunal in the case of D. Navinchandra Exports Pvt. Ltd. (su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as observed by the TPO that the assessee had wrongly benchmarked the transactions using TNMM at an entity level, for the reason, that the same had given the combined profits of the transactions of the assessee with its AEs and non-AEs. It was observed by the TPO that as the assessee was adopting TNMM as the most appropriate method as per Sec. 92C, therefore, it was obligated to determine the net profit margin of its specified domestic transactions with the AEs for determining the ALP of the said transactions u/s 92C as per rule 10B(1)(e). As observed by us hereinabove, the TPO noticed that the assessee had not maintained and also not furnished the documentation from which the profit margin of the AEs could be determined. It was further observed by him that the qualitative details of the AEs and Non-AEs transactions have also been maintained by the assessee, as a result whereof the CUP method could not be applied. On the basis of his aforesaid observations, we find that the TPO had concluded that the assessee had failed to keep and maintain the documents as were mandated by Rule 10D of the Income Tax Rules, 1962. As observed by us at length hereinabove, it was in the backdrop of his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding thirty days. (emphasis supplied by us) On a perusal of the aforesaid statutory provision, we find, that the same therein contemplates that the A.O or CIT(A), in the course of any proceeding under the Act, require any person who had entered into an international transaction or specified domestic transaction to furnish any information or documents in respect thereof, as may be prescribed under sub-section (1), within a period of 30 days from the date of receipt of a notice issued in this regard. As per the proviso to subsection (3) of Sec. 92D, on an application made by the assessee, the aforementioned period of thirty days may be extended by a further period not exceeding thirty days. In our considered view, as per Sec. 92D(3) an assessee may be called upon to furnish the requisite information or documents as prescribed in sub-section (1) of Sec. 92D, within a period of 30 days from the date of receipt of the notice. Now, in the case before us, the TPO vide his notice u/s 92D(3), dated 02.08.2016 had called upon the assessee to furnish the requisite information/documents within a period of 15 days. Another notice u/s 92D(3) r.w Rule 10D, dated 29.08.2016 was issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ively deliberating on the nature of the business of the assessee before them, viz. manufacturing of diamonds, had concluded that penalty u/s 271G could not have been imposed on the assessee, observing as under: 16. We have heard the ld. D.R and perused the orders of the lower authorities. We have given a thoughtful consideration to the facts involved in the case before us and are of the considered view that it remains as a matter of fact borne from the records that the TPO had imposed penalty under Sec. 271G for the reason that the assessee had failed to furnish the information as was called for by him. We find that the TPO held a conviction that the assessee had not only inappropriately applied the TNMM which patently suffered from serious irregularities, as the assessee had merely allocated the expenses on the basis of sales, in the backdrop of which the working of the margins involved in the transactions of the assessee with its AEs and non-AEs did hardly witness any variance. We have deliberated on the orders of the lower authorities and find that the TPO in the course of the penalty proceedings was driven by the fact that the assessee by not providing the requisite detai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, and for the said failure of the assessee to furnish the requisite details had initiated penalty proceedings under Sec. 271G in the hands of the assessee. We find that the TPO not finding favour with the explanation of the assessee that no penalty under Sec. 271G was liable to be imposed, therein proceeded with and imposed a penalty of ₹ 2,15,98,527/- i.e @2% of the aggregate value of the international transactions of ₹ 107,99,26,354/- in the hands of the assessee. 18. We find that the CIT(A) after deliberating at length on the nature of the business of manufacturing and trading of diamonds, therein concluded 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of the international transactions of the assessee with its AEs, rather went ahead and levied penalty under Sec. 271G in the hands of the assessee. We are not impressed with the manner in which the assessee had proceeded with the matter and imposed penalty under Sec. 271G in the hands of the assessee. We are of the considered view that in light of the aforesaid practical difficulties which were being faced by the diamond industry, the TPO should have exercised the viable option of determining the arms length price of the international transactions of the assessee, either by making some comparison of realisation of prices 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 carri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the TPO without understanding the intricacies of the diamond manufacture and trading business, and are of the considered view that he instead of determining the arms length price by asking for the Profit loss a/c and Balance Sheets of the AEs and comparing the financial ratios in general, had rather hushed through the matter and imposed penalty under Sec. 271G of ₹ 2,15,98,527/- on the assessee. We also find that the assessee to the extent possible in the backdrop of the nature of its trade had furnished several details on several occasions from time to time with the TPO. We thus are of the considered view that the assessee 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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