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Facts
The Assessing Officer (AO) initiated penalty proceedings under Section 271G of the Income Tax Act against the assessee for failure to furnish information regarding specified domestic transactions with its sister concern. The assessee claimed to have provided all available information, but the AO contended that the benchmarking requirements were not met. The CIT(A) deleted the penalty, finding substantial compliance and reasonable cause. The Revenue appealed this decision.
Held
The Tribunal held that while the assessee might not have provided all requested documents, they had provided substantial compliance, and the peculiar nature of the diamond trade made it extremely difficult to furnish the exact details required. The Tribunal also noted that no transfer pricing adjustment was made by the AO, and relied on previous judgments where similar issues were decided in favor of the assessee. Therefore, the levy of penalty under Section 271G was considered unjustified.
Key Issues
Whether the penalty levied under Section 271G for failure to furnish information regarding specified domestic transactions is justified, especially considering the nature of the diamond trade and the assessee's substantial compliance and reasonable cause.
Sections Cited
143(3), 271G, 271AA, 92BA, 92D, 92CA, 10D, 273B, 40A(2)(b)
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Income Tax Appellate Tribunal, DELHI BENCH “G”: NEW DELHI
Before: SHRI M. BALAGANESH & SHRI YOGESH KUMAR U.S.
O R D E R PER M. BALAGANESH, A. M.: 1. The appeals in & 2359/Del/2019 for AY 2014-15, arise out of the order of the Commissioner of Income Tax (Appeals), Karnal [hereinafter referred to as ‘ld. CIT(A)’, in short] dated 19.07.2017 against the order of assessment passed u/s 271G and 271AA of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 29.06.2017 by the Assessing Officer, ITO, Ward-4, Panipat (hereinafter referred to as ‘ld. AO’).
2. The only issue to be decided in this appeal is as to whether the ld CIT(A) was justified in confirming the action of the ld AO in levying & 2359/Del/2019 M/s. S. N. Exports penalty of Rs. 39,50,116/- u/s 271G of the Act in the facts and circumstances of the instant case
3. None appeared on behalf of the assessee despite issuance of notice on several occasions. Hence, we proceed to dispose of this appeal on hearing of the ld DR and based on the materials available on record. The return of income for AY 2014-15 was filed by the assessee firm on 30.11.2014 declaring total income of Rs. 3,49,960/-. The scrutiny assessment was completed u/s 143(3) of the Act on 26.12.2016 determining the total income at Rs. 9,08,980/-. The assessee was engaged in the business of manufacturing and trading of home furnishing handloom items. The assessee had declared gross turnover of Rs. 17,70,85,123/- which includes domestic sales of Rs. 17,22,17,139/- and job work of Rs. 48,67,984/-. The ld AO noticed that the assessee had made turnover of Rs. 16,07,95,699/- to M/s. Sheena Exports (a partnership firm) having common partners with that of the assessee. Accordingly, the ld AO concluded that assessee had made Specified Domestic Transactions (SDT) with its sister concern by making turnover of Rs. 16,07,95,699/- thereby requiring benchmarking of the same in terms of Section 92BA of the Act. The ld AO chose not to refer the matter to the ld TPO for determining the Arm’s Length Price (ALP). The ld AO during the course of proceedings sought for complete details of information and documents which are required to be kept and maintained u/s 92D(1) of the Act in accordance with Rule 10D of the Income Tax Rules with regard to the sale transactions to M/s Sheena Exports. The ld AO required 13 details in this regard from the assessee. The assessee furnished the copy of account of M/s. Sheena Exports as appearing in its books, sale invoices and bank statements. This prompted the ld AO to initiate penalty proceedings u/s 271G of the Act for which a & 2359/Del/2019 M/s. S. N. Exports show cause notice was issued on 26.12.2016. The assessee filed detailed submissions in response to the show cause notice. The assessee pleaded that the entire transactions carried out with sister concern M/s. Sheena Exports were duly furnished by the assessee during the course of assessment proceedings and the same were accepted by the ld AO in the scrutiny assessment proceedings. Hence, there is no grievance left for revenue in not furnishing certain documents and information as called for in the questionnaire issued by the ld AO. The assessee had indeed submitted the copy of account, bank statement together with the copies of bills and invoices. The ld AO however disregarded this contention in the penalty proceedings and observed that even though aforesaid documents were produced, still the assessee had not benchmarked the sale transaction with M/s. Sheena Exports by using the prescribed method in Rule 10D of the Income Tax Rules. Accordingly, the ld AO proceeded to levy penalty u/s 271G of the Act at the rate of 2% of value of specified domestic transactions for failure to furnish information or documents u/s 92D of the Act. This action of the ld AO was upheld by the ld CIT(A).
4. From the above narration of facts, it is crystal clear that even though the documents or information called for by the ld AO in the manner required by the ld AO were not furnished by the assessee, still the assessee had provided all the requisite details and information that were available with it before the ld AO to prove the genuinity of sales made to its sister concern together with the pricing thereon. Even though the assessee had not benchmarked the same using any of the prescribed methods under Rule 10D of the Income Tax Rules, still the ld AO had also not thought it relevant or necessary to benchmark the same at his own volition to determine the ALP on sale transactions to M/s Sheena & 2359/Del/2019 M/s. S. N. Exports Exports. It is not in dispute that the ld AO had not referred the matter to ld TPO for determining the ALP of sale transactions with M/s. Sheena Exports. It is pertinent to note that the ld AO had not made any addition pertaining to sale transactions with Sheena Exports. It categorically goes to prove that the sales made by the assessee to Sheena Exports have been accepted as genuine, the pricing thereon is accepted as genuine and conclusive. Hence, mere non furnishing of information and documents in the manner sought by the ld AO cannot lead to automatic levy of penalty u/s 271G of the Act. There is absolutely no loss to the exchequer in non furnishing of the information or documents in the manner sought by the ld AO. Further, we find when there is no transfer pricing (TP) adjustment made in respect of a particular transaction, there cannot be any levy of penalty u/s 271G of the Act. Reliance in this regard is placed on the decision of the Coordinate Bench of Mumbai Tribunal in the case of DCIT Vs. Firestone International Pvt. Ltd in for AY 2011-12 dated 01.12.2018 wherein it was held as under:- “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’).
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 Page | 4 & 2359/Del/2019 M/s. S. N. Exports 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 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 penalty under section 271G without appreciating that the benchmarking of the entity level profit by the assessee cannot substitute the requirement of benchmarking of the international transactions to determine the arm’s length price.
(iii) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the penalty under section 271G by accepting the assessee’s plea that it was difficult to link the purchase with the sales for computing net margin in respect international transactions without appreciating that there is no exception to the requirement of maintain documents and carrying out analysis by the most appropriate method to show that the international transactions entered into are at arm’s length and that several methods have been prescribed for this purpose.
(iv) 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 of difficulty is justified, since it renders the provisions of Rule 10D redundant in cases like that of the assessee which can never be the intention of the legislature.
& 2359/Del/2019 M/s. S. N. Exports (v) 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 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.”
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 Nature of the international Amount in (₹) No. Transactions 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
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 Page | 6 & 2359/Del/2019 M/s. S. N. Exports 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 conduct of the assessee is in contravention to the provision of section 92D(3) of the I.T. Act, 1961 and hence, the penalty proceedings under section 271G of the I.T. Act, 1961 has been initiated in this case. The notice initiating the penalty has already been issued by the TPO on 12.01.2015.”
The AO levied the penalty for non-furnishing of the information by observing in Para 31 to 33 as under: - “31 The assessee had also contended in its submission that penalty u/s 271G cannot be levied if there was reasonable cause for failure to furnish information called for by the TPO. From the above contention, it is clear that, finally, assessee has taken shelter u/s 273B of the Income Tax Act 1961 wherein the law states that: "no penalty shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the said provisions if he proves that there was reasonable cause for the said failure."
31.1. But, in the instant case, assessee has not made a reasonable cause for failure to maintain documentation prescribed under Rule 10D(1). On the other hand, the assessee had deliberately and willfully withheld information/document pertaining to segmental 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 & 2359/Del/2019 M/s. S. N. Exports (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(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).
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.
& 2359/Del/2019 M/s. S. N. Exports 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 alternate method of benchmarking the transaction based on material available on record. e) In the absence of material the TPO was forced to accept the transactions to be at arm’s length after initiating penalty proceedings under section 271G of Income Tax Act, 1961.
Accordingly, I reject the various contentions raised by the assessee and hold that this is a fit case for levy of penalty under section 271G. The total value of relevant international transactions in this case is Rs.344,76,73,342/-. The value of 2% of International transaction comes out to be Rs.6,89,53,467/-. Hence, I hereby levy a penalty of a sum of Rs.6,89,53,467/-.”
Aggrieved, assessee preferred the appeal before CIT(A).
The CIT(A) deleted the penalty by stating that the assessee has made substantial compliance and going by the nature of the diamond trading, the assessee could show reasonable cause. For this he observed in Para 6 as under: - “6. Decision:
& 2359/Del/2019 M/s. S. N. Exports 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.271G 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 271G of l.T. Act, 1961 of Rs. 6,89,53,467/- @2% 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 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.
& 2359/Del/2019 M/s. S. N. Exports 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 the world, majority of diamond mines are located in Africa, Russia, Australia, etc. These mines are mainly owned by a handful of companies who enjoy near monopoly over supply of rough diamonds. DTC (i.e. Diamond trading Co., a distributing arm of De Beers, a major mine owner in Africa) is a major supplier of rough diamonds in the world, The supply cycle, the terms of supply, quantity and quality of supply etc. are controlled and decided by it. Other major suppliers are Argyle, BHP Diamonds, Rio Tinto Diamonds, etc. They also are in a position to dictate major terms of supply of rough diamonds. As in any other extraction activity, diamond extraction involves a lot of risks and requires deployment of huge manpower, sophisticated machineries and huge capital. Possibility of entire extraction activity resulting into failure is also very high.
(b) Extracted rough diamonds are then sold to major distributors in Antwerp, 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 & 2359/Del/2019 M/s. S. N. Exports 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, 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 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- Page | 12 & 2359/Del/2019 M/s. S. N. Exports 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 net profit margin of particular transaction. Also diamond business world over is being done mainly in the form of partnership company, partnership concern or private limited companies. There are very few publicly listed companies in India and abroad. So it is not just difficult but rather impossible to have very wide reliable, comparable, detailed and publicly available database.
E. The nature of Assessee’s Business.
The assessee company is engaged in the business of importing and locally purchasing rough diamonds, getting them cut and polished, and exporting or locally selling the same. It also procured polished diamonds arid exports the same without carrying out any material function. As per the knowledge of the Directors of the assessee company the foreign entities are mainly engaged in trading of diamonds. Assesse company is purchasing rough diamonds from various entities including foreign entities. It then gives 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 Page | 13 & 2359/Del/2019 M/s. S. N. Exports 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 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, colour and shape are same and/or similar and if there is variation, prices will again vary. Moreover, there is no standard price for a diamond in the & 2359/Del/2019 M/s. S. N. Exports world, because price varies with each diamantaire who values the diamond and a broad price range can be fixed for diamonds of particular size, shape, colour and weight at a particular point of time. Moreover, diamonds are sold in lots of carats unless one diamond is of one carat or two carats in weight with unique features and shape and size. Thus determining the price of a diamond and /or diamonds is a difficult issue and even if the diamonds are physically evaluated, prices will vary from valuer to valuer.
This aspect of diamond trade is exhaustively explained by the GJEPC India in its letter dated 21/7/2015 addressed to the CIT- Transfer Pricing, Mumbai.
The TPO basically wanted the appellant to furnish separate profit level indicator (PLI), that is, AE and non-AE segment wise either 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 Rs. 185 crores to AEs out of total turnover of Rs. 429 crores and the balance of Rs. 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 Rs. 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 & 2359/Del/2019 M/s. S. N. Exports 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 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 and exporting to realise a better price per carat of the lot. Therefore, it is extremely difficult for the trader to identify each rough diamond piecewise unless the rough diamond is exceptionally of high carat value by weight and similarly, it is also difficult to identify each cut and polished diamond vis-â-vis the original rough diamond from which it was cut and polished.
The TPO asked for details of PLI Profit level Indicator, that is, segment wise profit and Loss Account of the Ae segment and non-AE segment in respect of export of goods as well as local & 2359/Del/2019 M/s. S. N. Exports sales to arrive at arms-length price in respect of international transactions. Appellant explained the difficulties to the TPO in various letters described earlier, however, the TPO merely accepted the arms-length price as it is and initiated 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, 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 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 & 2359/Del/2019 M/s. S. N. Exports 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 different and the type and level of transactions would have differed, yet the nature of business remained the same and hence all other ingredients of each diamond being different and four "C" s, that is Cut, Carat, Clarity and Colour remained and were applicable. Even otherwise, the TPO has gone straight to fault finding business without understanding the intricacies of diamond manufacture and trading business and instead of determining the arms length price by asking for P & L 'Accounts and Balance Sheets of the AEs and then comparing the financial ratios in general, gone ahead and levied penalty of Rs. 6,89,53,467/- on the assessee. Prima fade, the levy of penalty under section 271G of I.T. Act, 1961 is neither fair nor reasonable and is also not justified in facts of the case mainly the intricacies 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 Page | 18 & 2359/Del/2019 M/s. S. N. Exports 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 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 taxmann.com 579 (Mumbai ITAT) 2) ACIT V/S. Gillette India Ltd.-(2015) 54 taxmann.com 3l3 (Jaipur 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.
& 2359/Del/2019 M/s. S. N. Exports
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 for AY 2011-12 vide order dated 25.10.2017, which was further followed in the case of ACIT vs. Dilipkumar V. Lakhi, in for AY 2011-12 vide order dated 02.08.2018 reads as under “8. Having perused the material on record and after hearing both the parties vis-à-vis the decision of the co-ordinate Bench of the Tribunal in the case of ACIT vs. D Navinchandra Exports Pvt. Ltd. (supra), we observe the identical issue has been decided by the Bench in favour of the assessee. The operative part of the decision is as under:
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 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, & 2359/Del/2019 M/s. S. N. Exports 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 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.
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 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 & 2359/Del/2019 M/s. S. N. Exports 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 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 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 their gross profitability would had revealed the aberrations in the international transactions.
We further find that as stands gathered from the records, the nature and level of business of the assessee & 2359/Del/2019 M/s. S. N. Exports 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 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 Rs. 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 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 Rs. 2,15,98,527/- imposed by the TPO.
21.The appeal of the revenue is dismissed.”
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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.
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 the order of CIT(A) and dismiss this appeal of Revenue.
Resultant, all others appeals of Revenue are identical and hence, dismissed.
In the result, all the appeals of Revenue are dismissed.”
5. Similar view was also taken by the Coordinate Bench of Jaipur Tribunal in the case of ACIT Vs. Gillette India Ltd reported in 54 taxmann.com 313 dated 16.01.2015. In view of the same, we hold that this is not a fit case for levy of penalty u/s 271G of the Act. Accordingly, grounds raised
by the assessee are allowed. u/s 271AA) for AY 2014-15
6. This penalty is levied for failure to kept and maintain information and documents in respect of certain transaction @2% of value of specific domestic transaction. For the reasons adduced by us in the aforesaid levy of penalty u/s 271G of the Act, we hold that & 2359/Del/2019 M/s. S. N. Exports