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Facts
The assessee, engaged in diamond trading, entered into international transactions with its Associated Enterprise (AE). The Assessing Officer (AO) initiated penalty proceedings under Section 271G for alleged failure to furnish required information for determining Arm's Length Price (ALP). The AO levied a penalty of Rs. 16,13,66,235/-.
Held
The Tribunal held that the penalty under Section 271G was unsustainable. It was observed that the assessee had maintained sufficient information and furnished a transfer pricing study report, and the AO/TPO had not made any adjustments to the ALP. The Tribunal relied on its own previous decision for an earlier assessment year on identical facts.
Key Issues
Whether the penalty under Section 271G is leviable when the assessee has provided substantial information and no adjustment was made to the Arm's Length Price by the authorities, and if the penalty order correctly considered all facts and prior precedents.
Sections Cited
271G, 10D, 92D, 92CA, 250, 10B
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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
(Assessment Year: 2013-14) Deputy Commissioner of Income Tax Arjav Diamonds (India) Pvt. Ltd. - 5(1)(1) Cc, 9010A Bharat Diamond Bourse, Deputy Commissioner of Income-Tax, Bandra Kurla Complex, Bandra East, Vs. Circle 5(1)(1), R.No.568, Aaykar Mumbai-400051. Bhavan, M.K. Road, Mumbai - 400020. PAN/GIR No. AAGCA2472D (Appellant) : (Respondent) Assessee by : Shri. Fenil Bhat Respondent by : DR. K. R. Subhash, (CIT-DR) Date of Hearing : 10.03.2025 Date of Pronouncement : 29.05.2025 O R D E R Per Kavitha Rajagopal, J M: This appeal has been filed by the revenue, challenging the order of the learned Commissioner of Income Tax (Appeals), Mumbai (‘ld.CIT(A)’ for short), passed u/s.250 of the Income Tax Act, 1961 (‘the Act'), pertaining to the Assessment Year (‘A.Y.’ for short) 2013-14.
The assessee has raised the following grounds of appeal: “(i) "Whether, on the facts and circumstances of the case and as per law, the Ld. CIT (A) is justified in deleting the penalty of Rs. 16,13,66,235/-levied u/s 271G of the IT Act, 1961 when the statutory requirement of Rule 10B(1)(e), stating the methodology for benchmarking transactions using TNMM, states that the net profit margin from the controlled international transaction and the uncontrolled international transactions should be separately provided by the assessee and their statutory requirement has not been fulfilled by the assessee?"
(ii) "Whether the deletion of penalty u/s 271G of the Act can be sustained without considering the fact that it is a statutory requirement to maintain the details as contemplated under Rule 10D (1)(d), Rule 10D (1)(g), Rule 10D (1)(h) and Rule 10D (1)(m) of the Rules by the assessee?" (iii) "Whether, on the facts and circumstances of the case and as per law, the Ld. CIT (A) is justified in deleting the penalty of Rs. 16,13,66,235/-levied u/s 271G of the Act, when the requisite information which was mandatorily to be provided by the assessee as obligatory compliance of the Rules has been violated?" (iv) "Whether, on the facts and circumstances of the case and as per law, the Ld. CIT (A) is justified in deleting the penalty of Rs. 16,13,66,235/-levied u/s 271G of the Act, by considering the peculiarity of the industry in which the assessee operates instead of considering the facts of the present case regarding requirement of maintenance and furnishing of information to justify TNMM for benchmarking transactions?" (v) "Whether, on the facts and circumstances of the case, the Ld. CIT (A) was correct in ignoring the decision of the Hon'ble jurisdictional High Court laid down in the case of Shatrunjay Diamonds (261 ITR 258) which dealt with similar case of an assessee engaged in trading of wholesale diamonds, in which it was held that discharge of statutory obligation to maintain authentic data accurately was a mandatory requirement of law?" (vi) "Whether, on the facts and circumstances of the case, the Ld. CIT(A) was correct in relying on the judgment in the case of the assessee for A.Y.2012-13, which was rendered by Hon'ble ITAT relying on the judgment in the case of Navin Chandra Exports Pvt Ltd (ITA No.6304/Mum/2016), which has been rendered on facts distinguishable from the case of the assessee?" (vii) The appellant prays that the order of the CIT(A) on the grounds be set aside and confirm the order of the AO. (viii) The appellant craves leave to add, amend or alter all or any of the grounds of appeal
.”
3. The brief facts are that the assessee is engaged in the business of purchase of rough and polished diamonds, processing of rough diamonds and sale of rough and polished diamonds. The assessee’s case was selected for scrutiny where the Ld. AO observed that the assessee has entered into various international transactions with its AE as per (A.Y. 2013-14) Arjav Diamonds (India) Pvt. Ltd. its form 10CEB and the Ld. AO made a reference to the Ld. TPO u/s. 92CA(1) of the Act for determination of Arm’s Length Price (ALP) with reference to the international transactions entered into by the assessee with its AE’s during the year under consideration. Notice u/s. 92CA(2) of the Act was issued dated 29.03.2016 , 16.06.2016 and u/s. 92CA(2) r.w.s 92D(3) of the Act dated 25.07.2016 and 02.08.2016 requiring the assessee to furnish detail/documents pertaining to the Arm’s Length Price of the international transactions. The Ld. TPO/AO made no adjustment in the assessment proceedings due to lack of material available on record for which determination of ALP could not be made. The Ld. AO also specifically stated that the international transaction are not at Arm’s Length Price. The Ld. TPO/AO initiated the penalty proceeding u/s. 271G of the Act for failure to furnish on the part of the assessee the documentary evidences for determination of the ALP of the international transaction. Subsequently the Ld. AO passed the penalty order u/s. 271G of the Act dated 28.04.2017 for failure to furnish the information or document in respect of segmental accounts relating to transaction made with AE’s and non-AE’s for determination of the international transaction under rule 10D(1) and rule 10D(3) amounting to Rs. 16,13,66,235/- being 2% of the total internation transaction amounting to Rs. 8,06,83,11,746/-.
4. Aggrieved the assessee was in appeal before the first appellate authority who vide order dated 27.08.2024 deleted the penalty levied by Ld. AO by relying on the order of the Tribunal in assessee’s case for A.Y. 2012-2013 where on identical facts, the penalty levied u/s. 271G was deleted.
(A.Y. 2013-14) Arjav Diamonds (India) Pvt. Ltd.
The revenue is in appeal against the order of Ld. CIT(A) in deleting the impugned addition.
We have heard the rival submission and perused the materials available on records. It is observed that the assessee has entered into various international transaction with its AE’s during the year under consideration which are tabulated here in under: Sr. Nature of Transaction Amount Method No. (in Rs.) Applied 1 Purchase of Rough Diamonds 804,99,20,946 TNMM 2 Purchase of Polished Diamonds 1,68,02,000 TNMM 3 Sale of Polished Diamonds 15,88,800 TNMM 4 Guarantee taken for Working 86,40,000,000 NA Capital Finance 5 Excess of Share Application Money 32,127 Other Method Returned 6 Equity Share Issued 81,59,97,000 Other Method 7. The Ld. TPO/AO observed that the assessee’s total turnover during the year was 1,791.54 crores, whereas the sale to AE was Rs. 0.16 Cr where the assessee’s total purchase was Rs. 1,661.28 crores in which the purchase from AE was Rs. 806.67 crores. The Ld. TPO/AO further observed that the assessee has bench marked all the international transactions at entity level by applying TNMM method by comparing its profit margin with the profits earned by third parties engaged in similar transactions. It is also observed that the assessee has not furnished the segmental profitability between its AE’s and non-AE’s for each of its transaction and has also not ascertained the costs separately to the sale made to AE under different segments. The assessee has also calculated entity level operating profit and compared the same with industry average and operating margin of the comparables. During the assessment proceeding, the assessee has failed to provide the segmental profits under each activity pertaining (A.Y. 2013-14) Arjav Diamonds (India) Pvt. Ltd. to sale of polished diamonds/ rough diamonds as well as purchase of polished diamonds/ rough diamonds with the AE and whether or not the same was at Arm’s Length. The assessee has also failed to produce the complete break up of both the purchase and sale transactions in terms of quality as well as the price along with documentary evidence. The Ld. TPO/AO rejected the assessee’s contention and held that neither TNMM nor CUP method to be applied as a Most Appropriate Method (MAM) and also in the failure of details of profits earned by the AE, which is also not made available, the TPO rejected PSM method as well. The Ld. AO on the above grounds levied the impugned penalty u/s. 271G of the Act for violation of rule 10D(1) r.w.s 92D and rule 10D(3) of the I.T. rules. The Ld. CIT(A) on the other hand deleted the penalty by relying on the decision of the Tribunal in assessee’s own case for A.Y. 2012-13 in ITA No. 1569/MUM/2018.
The learned Departmental Representative (ld. DR for short) for the revenue contended that the assessee has failed to furnish the complete details along with documentary evidences for determining the Arm’s Length Price of the international transaction entered into by the assessee with its AE. Ld. DR further stated that the segmental details of the AE’s and non-AE’s including the profitability was not provided by the assessee and therefore the Ld. AO has rightly invoked section 271G and has levied the penalty. The Ld. DR relied on the order of the ld. AO.
The learned Authorised Representative (ld. AR for short) on the other hand controverted the said fact and stated that the assessee has maintained its book of accounts and had bench marked the international transaction by applying TNMM (A.Y. 2013-14) Arjav Diamonds (India) Pvt. Ltd. method. Further, the Ld. AR contended that the transfer pricing study report along with all the relevant information were very much before the Ld. TPO. The Ld. AR further stated that it is practically not possible to maintain the segment wise profitability made to AE’s and non-AE’s in case of manufacturing rough and polished diamonds and further stated that CUP method is not the most appropriate method in such cases where the sale invoice of AE’s and non-AE’s contains various types of goods which are sold at different prices depending upon the quality and the quantity. The Ld. AR relied on the order of the Tribunal’s own case for A.Y. 2012-13 and on identical facts the penalty levied by the Ld. TPO/AO was deleted and stated that principle of consistency ought to be followed.
In the above factual matrix of the Act, it is evident that the coordinate bench in assessee’s case for A.Y. 2012-13 has dealt with this issue extensively and had deleted the impugned penalty by relying on the decision of the coordinate bench in the case of DCIT V. M/s. Leo Schachter Diamonds Ltd. The relevant extract of the decision of the Tribunal in assessee’s own case for A.Y. 2012-13 is citied herein under for ease of reference: “5. We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon.On a careful reading of the penalty order passed under section 271G of the Act, it is evident, the TPO has proceeded to impose penalty under the aforesaid provision alleging that the assessee has failed to furnish certain information/documents which prevented him from determining the arm's length price properly. However, on a perusal of the orders passed by the Departmental Authorities as well as the material placedon record, it is noticed that the assessee has maintained books of account and other information to benchmark the international transaction with AE by applying TNMM and the transfer pricing study report containing such benchmarking was furnished before the TPO along with various other details. In fact, in paragraph 2. of his order the TPO has accepted that the information called for was produced by (A.Y. 2013-14) Arjav Diamonds (India) Pvt. Ltd. the assessee. However, the Transfer Pricing Officer wanted the assessee to furnish certain segmental details of AE and non-AE transactions including profitability. It is evident, the assessee has also furnished further details including gross profit working of AE and non-AE transactions with sample bills. However, the TPO was still unsatisfied with the compliance made by the assessee and observed that the assessee should have furnished the profitability at net margin level. It is observed, before the TPO the assessee has made submissions explaining why it is not possible for a person engaged in manufacturing and sale of rough and polished diamond to maintain segment wise profitability of sales made to the AE and non- AEs. It was explained by the assessee that CUP method could not be applied as invoice of sale with AE and non-AE include different types of goods sold at different price. It is further observed, in the preceding year also, the assessee had benchmarked international transaction with AE by applying TNMM which was accepted by the Revenue. It is relevant to observe, the TPO has ultimately accepted the benchmarking doneby the assessee under TNMM method. On going through the provisions of section 92D and rule 10D, we find that the assessee is required to maintain certain information/documents which may be required by the Transfer Pricing Officer for determining arm's length price. In the present case, it is not a fact that the assessee has not maintained any information as required under section 92D(1) r/w rule 10D(1). The facts on record clearly indicate that the assessee, Indeed, has maintained a number of information/documents as required under the statutory provisions. In fact, the assessee has furnished segmental profitability at gross level. No specific discrepancy has been pointed out by the TPO with regard to the information furnished by the assessee including segmental profitability. Further, the assessee has also explained why it is not possible to furnish certain information sought by the TPO qua applicability of internal CUP method. In this regard, detailed written submission has been filed by the assessee before the TPO which has been properly evaluated by learned Commissioner (Appeals) and the difficulty in maintaining the information sought by the TPO has been well explained and analysed. It is also necessary to observe, ultimately the TPO has accepted the benchmarking done by the assessee under TNMM and no variation/adjustment was made by him to the ALP Even, assuming that the assessee has not maintained documents as required or was unable to support the benchmarking done by it under TNMM, nothingprevented the TPO In discarding the benchmarking done by the assessee and determining the ALP of the international transaction with the AE Independently by applying any one of the prescribed method. When the statutory provisions confer enough power on the TPO to benchmark the international transaction as per the provisions of the Act, the allegation of the TPO that due non furnishing of documents by the assessee he was prevented from determining the arm's length price under CUP or PS method is unacceptable. Therefore, when the TPO has accepted the benchmarking of the assessee, the imposition of penalty under section 271G of the Act is unsustainable. The decisions relied upon by the learned Authorised Representative dealing with identical issue of imposition of penalty under section 271G of the Act are squarely (A.Y. 2013-14) Arjav Diamonds (India) Pvt. Ltd. applicable to the facts of the present appeal. As regards the decision cited by learned Departmental Representative, on careful reading we have found it to be not applicable to the issue in dispute in the present appeal. In fact, similar view has been expressed by the Coordinate Bench in case of DCIT V/s M/s. Leo Schachter Diamonds India Pvt. Ltd.(supra). In view of the aforesaid, we do not find any. infirmity in the order of learned Commissioner (Appeals) in deleting the penalty imposed under section 271G of the Act. Grounds are dismissed.”
On perusal of the said order, it is observed that the coordinate bench has deleted the impugned penalty on the ground that it was not a case where the assessee has failed to maintain any information as per Section 92D(1) r.w.r. 10D(1) but it is observed that the assessee has various information/documents in its possession and has also furnished segmental profitability at entity level which was not disputed by the ld. AO/TPO. It is also evident that in both the years, the ld. TPO has not made any adjustment to the ALP benchmarked by the assessee which the Tribunal has categorically held that the ld. TPO could have rejected the benchmarking done by the assessee for determining the ALP which very well implies that the ld. AO/TPO has also not done anything to make variation/adjustments to the ALP of the international transaction entered into by the assessee with its AEs.
Pertinently, it is observed that Section 271G of the Act provides for penalty for failure to furnish information or document as required by Sub Section (3) of Section 92D which infact specifies that the ld. AO or the Commissioner Appeals during the proceeding before them, within a period of 30 days (10 days post amendment which is also extendable as per the proviso) from the date of receipt of the notice require every person who has entered into an international transaction or specified domestic transaction to furnish any information or document referred in clause (i) of sub (A.Y. 2013-14) Arjav Diamonds (India) Pvt. Ltd. section (1). Further, clause (i) of sub section (1) of 92D states that every person who has entered into an international transaction/specified domestic transaction shall keep and maintain such information and document in respect thereof as may be prescribed in Rule 10D. On perusal of Rule 10D, it is seen that there are various information and documents that are to be kept and maintained by the assessee which are enumerated in clause (a) to clause (m). In the present case in hand, though the assessee has furnished various information, data/documents which are related to the AEs, the ld. AO has failed to determine the ALP of the international transactions of the assessee and has merely stated that he was prevented from making variations/adjustments to the benchmarking done by the assessee due to lack of complete information, data/document. This in our view is not a justifiable reason for not determining the ALP, where the ld. AO/TPO has failed to categorically state what information and documents were not maintained by the assessee as per Rule 10D and has further not made any discussion pertaining to the available informations. In such failure on the part of the revenue, we deem it fit to hold that there is no infirmity in the order of ld. CIT(A) and in no change in facts and circumstances of the case in A.Y. 2012-13, where the Tribunal has deleted the impugned penalty, we hereby are inclined to dismiss the grounds of appeal
raised by the revenue.