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TMI Blog2021 (10) TMI 167X X X X Extracts X X X X X X X X Extracts X X X X ..... e benchmarking of the assessee under TNMM, nothing prevented him from rejecting assessee' benchmarking and proceed to determine the ALP independently by applying any one of the prescribed methods. The blame for failure on the part of the Transfer Pricing Officer to determine the arm's length price cannot be fastened with the assessee. Similar issue of penalty u/s 271G for diamond industry has been adjudicated in assessee s favor in various decisions of this Tribunal. The coordinate bench of Mumbai Tribunal in the case of D. Navinchandra Exports (P.) Ltd. [ 2017 (11) TMI 1307 - ITAT MUMBAI ] held that considering the practical difficulties in furnishing the segment wise details of AE segment and non-AE segment transactions in diamond industry, no penalty under Sec. 271G could justifiably be imposed for failure to furnish the said information - we confirm the impugned order deleting the penalty u/s 271G. - Decided in favour of assessee. - I.T.A. No.649/Mum/2018 - - - Dated:- 1-10-2021 - Hon ble Shri Mahavir Singh, VP And Hon ble Shri Manoj Kumar Aggarwal, AM For the Assessee : Shri Rashmikant Modi Ld. AR For the Revenue : Shri Sunil Deshpande Ld. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d it failed to provide any alternative method to benchmark the transactions which had prevented determination of ALP of these transactions. Therefore, the assessee would be liable for penalty u/s 271G as computed @2% of value of international transactions. Accordingly, the assessee was saddled with impugned penalty u/s 271G vide order dated 29/07/2016. 5. During appellate proceedings, the assessee assailed the penalty by way of elaborate written submissions and relied upon various favorable decisions of the Tribunal rendered for diamond industry. The Ld. CIT(A), after due consideration of factual matrix concurred with assessee s submissions and noted that continuous sorting of diamond would be required before cutting and polishing. Even after cutting and polishing, the diamonds would have to be segregated in lots of small sizes, colors, shapes and weight before sale. Normally polished diamonds of higher carat command higher prices if other factors like size, color and shape are same and if there is variation, the prices will again vary. Moreover, there is no standard price for diamond because prices would vary with each diamantaire who value the diamond and a broad price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... size, quality and weight to the best extent possible and/or asked 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 assessee 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 271G of I.T.Act, 1961 of ₹ 28,18,16,216/- at the rate of 2% of international transactions of ₹ 14,09,08,10,798/-. 11. Another issue on which the TPO has laid stress is that the assessee could have followed the internal CUP method to work out the arm's length price in respect of its exports. However, the basic issue remains, that is, an apple has to be compared with an apple and not with an orange. As discussed earlier, a comparison by internal CUP method can be made only if two lots of diamonds are similar in size, colour, shape and clarity and unless they are similar, prices will vary from one diamond to another diamond and if one lot has variety of diamonds varying in size, colour, shape and clarity, prices will vary from diamond to diamond and lot to lot. And then the question again a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the specific details of segmental AE, Non-AE transactions were also filed and submitted. Thus, it appears that the assessee had made substantial compliance with the requirements of 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 assessee 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 decision and observation of the Hon'ble High Court of Delhi in Income Tax Appeal No. 410/2012 (decided on 30.08.2013 in the case of ClT-2 vs. M/s. Leroy Somer Controls (India) Pvt. Ltd.), which confirmed the ITAT decision and dismissed the revenue appeal on the subject of penalty u/s. 271G supports this stand fully. Inter alia, the Hon'ble High Court after discussing the provisions of 92D, 271G Rule 10D states as under: The tribunal has rightly concluded that with such a broad rule, which requires documentation and information voluminous and virtually unlimited, Section 271G has to be interpreted reasonably and in a rational manner..................................... When there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the assessee has maintained primary books of account / documents in respect of its business activity. The international transactions carried out by the assessee with its AEs has also been well documented which is supported by benchmarking done by the assessee under TNMM method. Further, the assessee has made substantial compliances before Ld. Transfer Pricing officer and furnished all possible information, data and documents. The only lapse is that the assessee failed to furnish the segmental profitability of the AE and non-AE transactions which would be explained by the fact that it was practically difficult to maintain these details considering the nature of assessee s business. It could also be seen that finally the transactions have been accepted to be at arm's length. If the Transfer Pricing Officer was not satisfied with the benchmarking of the assessee under TNMM, nothing prevented him from rejecting assessee' benchmarking and proceed to determine the ALP independently by applying any one of the prescribed methods. The blame for failure on the part of the Transfer Pricing Officer to determine the arm's length price cannot be fastened with the assessee. 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect 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 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts 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 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 adjust ..... X X X X Extracts X X X X X X X X Extracts X X X X
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