Loading judgment…
Facts
The assessee, Dharmanandan Diamonds Pvt. Ltd., filed its Return of Income for A.Y. 2018-19. During Transfer Pricing (TP) proceedings, the TPO found that the assessee failed to furnish information/documents required under Section 92D and subsequently levied a penalty of 2% of international transactions under Section 271G. The assessee argued that it was practically difficult to provide separate segmental profitability for AE and non-AE transactions due to the high volume and complex nature of the diamond industry. Despite no ALP adjustment being made, the TPO imposed the penalty, viewing the non-submission as deliberate.
Held
The Income Tax Appellate Tribunal (ITAT) upheld the Ld. CIT(A)'s decision to delete the penalty levied under Section 271G. The Tribunal found the issue to be recurring, consistent with previous ITAT decisions for the diamond industry, which acknowledged practical difficulties in furnishing specific segmental details. Emphasizing that Section 271G penalties are discretionary and apply only to substantive and unjustifiable non-compliance, the ITAT concluded that the assessee demonstrated substantial compliance and a reasonable cause for the non-compliance.
Key Issues
Whether the Ld. CIT(A) was correct in deleting the penalty levied under Section 271G for non-furnishing of transfer pricing documents, considering the assessee's claim of practical difficulties in the diamond industry and evidence of substantial compliance.
Sections Cited
271G, 92D, 10D(1), 92, 92CA, 92C(1), 92CA(3), 273B, 10D
AI-generated summary — verify with the full judgment below
Detected automatically from the text. The count shows how many other judgments on BharatTax rely on the same authority.
Before: SHRI NARENDER KUMAR CHOUDHRY & SHRI PRABHASH SHANKAR
Date of Hearing 30.09.2025 Date of Pronouncement 03.11.2025 आदेश / O R D E R PER PRABHASH SHANKAR [A.M.] :- The present appeal arising from the appellate order dated 13.03.2025 is preferred by the Revenue against the order passed by the Learned Commissioner of Income-tax, Appeal, CIT(A) 55, Mumbai [hereinafter referred to as “CIT(A)”] pertaining to a penalty order passed u/s. 271G of the Income-tax Act, 1961 [hereinafter referred to as “Act”] dated 26.03.2022 as passed by the DCIT/ACIT(TP)- 1(2)(1) Mumbai for the Assessment Year [A.Y.] 2018-19. P a g e | 2 A.Y. 2018-19 Dharmanandan Diamonds Pvt. Ltd.
The grounds of appeal
are as under: (i) “Whether the CIT (A) was correct in deleting the penalty levied u/s. 271G of the Act, by holding that the assessee had made substantial compliance, failing to note that under TNMM adopted by the assessee, the profit of the international transaction has to be furnished, whereas the assessee has only furnished the entity level margins which consists of overall profits on AE AMD significant non-AE transactions.” (ii) “Whether the decision of the CIT (A) is not vitiated for the reason that the CIT(A) has not given any finding on how the assessee has complied with clause (d), (g), (h) AMD (m) of Rule
10. D (1), that have been specifically invoked by the ???.” (iii) “Whether the CIT (A) was not incorrect in stating that the TPO should have asked for copies of profit AMD loss accounts AMD balance sheets of AE’s to make an overall comparison with the gross profitability levels of the assessee with AE’s to ascertain diversion of profits, if any ignoring the finding of the ITAT in the case of Aztec Software Technology Services Ltd. vs. ACIT (ITA No. 584/Bang/2006), in which it has been held that there is no legal requirement for the AO to prima facie demonstrate tax avoidance before invoking the provisions of section 92. AMD
92. CA of the Act.” (iv) “The Ld. CIT (A) erred in holding that there was reasonable cause for non-compliance of sec. 92D read with Rule 10D(1) without specifying the cause of such non-compliance OR demonstrating how the same was reasonable.” (v) “Whether the Ld. CIT (A) was correct in ignoring the ratio laid down in the decision of Hon’ble Bombay High Court in the case of M/s. Shatrunjay Diamonds (261 ITR 258) holding that the initial burden was cast upon the assessee?” (vi) “The Ld. CIT (A) erred in deleting the penalty for the reason that noadjustment was made to the ALP, failing to note that by not producing the material documents necessary to determine the ALP under any of the prescribed methods u/s. 92. C (1) of the Act, the assessee effectively P a g e |
3. A.Y. 2018-19 Dharmanandan Diamonds Pvt. Ltd. prevented the T?? to make any determination as recorded by the TPO in the order u/s. 92. CA (3) of the Act.”
3. Briefly stated facts of the case are that the assessee filed its Return of income forthe year declaring total income of Rs. 138,54,77,520/-.The TPO after relying on Rule 10D held that it had failed to furnish information/document called for u/s 92 D of the Act during TP proceedings and penalty u/s 271G was initiated. Subsequently, the TPO levied penalty u/s 271G at the rate of 2% of international transactions amounting to Rs. 97,48,36,693/-.
4. In the subsequent appeal, the ld.CIT(A) observed that the TPO had called upon the assessee to furnish separate segmental results in respect of transactions with the AE and non-AE along with segmental profitability. The assessee however, expressed its inability to furnish the segmental profitability due to the volume of transactions. The TPO observed that due to lack of such information, it was difficult to benchmark the transactions properly. Therefore, the TPO did not carry out any adjustment to ALP for the above stated reason citing lack of adequate information. The TPO noted that the assessee was maintaining complete audited books of accounts including details of all costs and AE and non -AE purchase and sales details. He was of the opinion that the claim of the assessee that due to the inherent nature of the diamond P a g e | 4 A.Y. 2018-19 Dharmanandan Diamonds Pvt. Ltd. industry, computing the cost of goods sold to AE and non AE separately was not possible, was not found convincing. The TPO was also of the opinion that while the assessee had maintained complete accounts and made a deliberate attempt not to furnish the same during the TP proceedings and prevented the revenue from making any determination of ALP by not furnishing the required documents. He was of the opinion that even though no ALP adjustment was made in the case due to absence of relevant information, the same was attributable to deliberate non submission of relevant details and information by the assessee. Based on the detailed discussion, the TPO accordingly, imposed penalty @2% of the international transactions.
The ld.CIT(A) observed that the issue involved was recurring in nature and was duly covered by the decisions of ld. CIT(A) and Hon’ble ITAT in assessee’s own case for AY 2012-13 and AY 2013-14. The assessee had claimed that it had submitted all available documents before the AO including segmental accounts of AE and non-AE, based on the working of apportionment of the cost between the AE and non- AE segments and had also submitted the working of cost based on daily weighted average cost of polished diamond manufactured and purchased and submitted that the TPSR was also prepared accordingly.
P a g e | 5 A.Y. 2018-19 Dharmanandan Diamonds Pvt. Ltd. In this regard, it relied upon the order of the Hon’ble jurisdictional ITAT, Mumbai in dated 19.05.2022 for AY 2013-14 and ITA No. 649/Mum/2018for AY 2012-13 Relevant portions of the order in AY 012-13 were quoted as below:
“6. After due consideration of factual matrix, it could be gathered that 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. We find that 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 thecase of D. Navinchandra Exports (P.) Ltd. (87 Taxmann.com 306) held that considering the practical difficulties in furnishing thesegment 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. The relevant observations were as under: - “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 P a g e | 6 A.Y. 2018-19 Dharmanandan Diamonds Pvt. Ltd. of an in depth 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/polisheddiamonds were traded on lot wise basis, 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 P a g e | 7 A.Y. 2018-19 Dharmanandan Diamonds Pvt. Ltd. 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 nonAEs 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 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. 201011 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 P a g e | 8 A.Y. 2018-19 Dharmanandan Diamonds Pvt. Ltd. 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 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 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." This decision has been followed subsequently in various other decision of the tribunal rendered on similar factual matrix. Few of the recent decisions are DCIT V/s Decent Dia Jewels Private Ltd. (117 Taxmann.com 358; 13/03/2020) and DCIT V/s Kama Schachter Jewellery P.Ltd. (127 Taxmann.com 677; 08/02/2021). We find that fact in the appeal before us are quite identical to facts in all these decisions. Therefore, respectfully following these decisions, we confirm the impugned order deleting the penalty u/s 271G”. 5.1 The ld.CIT(A) further observed that the facts involved in the instant year were similar to the ones in AYs 2012-13 and 2013-14. In addition, the assessee had also relied upon the recent judgment of P a g e | 9 A.Y. 2018-19 Dharmanandan Diamonds Pvt. Ltd. Hon’ble jurisdictional ITAT in the case of Eurostar Diamond India Pvt Ltd. in ITA No: 5643/Mum/2016 dated 03.01.2024 for AY 2011-12 claiming it to be on the similar subject and decided on similar lines. Since facts were identical in the instant year as well, the ld.CIT(A) holding that jurisdictional Hon’ble ITAT in assessee’s own case was binding on him directed the AO to delete the penalty levied u/s 271G of the Act
Before us,the ld.AR has relied on the appellate order as also on ITAT orders in assessee’s own case in AY 2012-13/2013-14(supra).The ld.CIT-DR on the other hand made oral as well as written submission claiming that the impugned order is legally unsustainable.She placed reliance on the TPO order stating that the assessee failed to furnish the requisite contemporaneous documents anddid not cooperate with the statutory process. The TPO recorded that the assessee had prevented the Revenue from making any arm’s length determination due to non- furnishing of information.The levy of penalty under Section 271G represents a separate and distinct consequence for the specific default of failing to furnish information or documents as required under sub- section (3) of Section 92D. Reliance has been placed on CIT vs Shatrunjay Diamonds(supra), in which hon’ble Bombay High Court P a g e | 10 A.Y. 2018-19 Dharmanandan Diamonds Pvt. Ltd. categorically held that when transactions are undertaken with related parties, the burden of proof rests squarely on the assessee to produce necessary documents to demonstrate that the transactions are at arm’s length. Reliance is also placed on ITAT decisions in DCIT vs Starlite, and ACIT vs Golawala Diamonds wherein Tribunal categorically rejected the argument that following the rules laid down in the statute is not possible in the diamond business. Penalty proceedings stand on a different footing altogether and cannot be equated with assessment proceedings.
We have carefully considered the facts on records and have also considered the rival submission. It is evident that the issue in hand is a recurring one having been consistently held in favour of the assessee by the Tribunal where on exactly on similar grounds penalty imposed u/s 271G of the Act deleted by the ld.CIT(A) was upheld by the coordinate bench of Mumbai ITAT. Besides, in a plethora of decisions by the Tribunal in case of assesses engaged in diamond penalty u/s 271G of the Act have been deleted. The ld.CIT(DR) has vehemently argued that the assessee deliberately avoided giving details to avoid TP adjustments. However, the citations relied upon are not applicable to penalty proceedings u/s 271G of the Act especially where the assessee has been able to demonstrate that substantial compliance was indeed made to the P a g e | 11 A.Y. 2018-19 Dharmanandan Diamonds Pvt. Ltd. notice u/s 92D of the Act.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.
7.2 Moreover, penalty u/s 271G of the Act is discretionary, not automatic and mandatory. It is imposed only where there is substantive and unjustifiable non-compliance. The intention behind the section is not to penalize every minor failure, but to ensure genuine, prompt, and complete compliance to facilitate proper and fair evaluation of transfer pricing arrangements and to deter non-compliance or attempts to conceal facts. Courts have repeatedly held that penalties should not be levied merely for technical or procedural lapses, especially when bona fide compliance is demonstrated.Several courts have interpreted these rules and sections to mean that penalties under section 271G of the Act should only be imposed when there is a substantive and unjustifiable default-not for mere technical lapses, especially when substantial compliance is demonstrated.Reliance in this regard was placed on the decisions in the cases of CIT vs. Leroy Somer & Controls-360 ITR 532(Del)and CIT vs. SSL TTK ltd. in TCA No.770(Mad).These decisions P a g e | 12 A.Y. 2018-19 Dharmanandan Diamonds Pvt. Ltd. confirm that the objective of section 271G is fulfilled, if the main documentation and transfer pricing study are produced, aligning with the spirit of Rule 10D(3) and section 92D(3). It is submitted that several Tribunal decisions following the above High Court decisions have upheld this principle.Levy of penalty under section 271G is discretionary and not mandatory. Whether penalty should be imposed is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances as has been held by the Hon'ble Supreme Court in the case of Hindustan Steel Ltd. v. State of Orissa [(1972) 83 ITR 26 (SC). The discretionary power under the penalty provisions is not arbitrary and has to be guided by well- established principles depending upon the facts and circumstances of each case.
7.3 We thus, in the backdrop of our aforesaid observations find ourselves to be in agreement with the view taken by the ld.CIT(A). Also, we respectfully follow the coordinate bench decisions of ITAT, Mumbai(supra) where on identical facts and circumstances, similar penalty order u/s 271G of the Act has been deleted. We thus, uphold the order of the CIT(A) and the resultant deletion of the penalty of imposed by the TPO.
P a g e | 13 A.Y. 2018-19 Dharmanandan Diamonds Pvt. Ltd. 8. In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 03/11/2025. NARENDER KUMAR CHOUDHRY PRABHASH SHANKAR (न्याययक सदस्य /JUDICIAL MEMBER) (लेखाकार सदस्य/ACCOUNTANT MEMBER)