DCIT-5(1)(2), MUMBAI vs. M/S DHARMANANDAN DIAMONDS PVT LTD.,, MUMBAI

This appeal by the Revenue is directed against order dated 27th of March, 2019 passed by the Ld. Commissioner of Income-Tax (Appeals)-55, Mumbai [in short ‘the Ld. CIT(A)’] in relation to penalty for non-maintenance of the documents for determination of M/s Dharmanandan Diamonds Pvt. Ltd. 2 ITA No. 4232/M/2019 arm’s-length price of international transactions for assessment year 2013-14. The grounds raised by the Revenue in its appeal are reproduced 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 and 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) and (m) of Rule

10. D (1), that have been specifically invoked by the TPO. iii. Whether the CIT(A) was not incorrect in stating that the TPO should have asked for copies of profit and loss accounts and 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 findings 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 and 92CA of the Act.

(iv)(a) The Id. CIT(A) erred in holding that there was reasonable cause for non-compliance of sec.92D read with M/s Dharmanandan Diamonds Pvt. Ltd. 3 ITA No. 4232/M/2019 Rule 10D(1) without specifying thae cause of such non- compliance or demonstrating how the same was reasonable. (iv) (b) the Id. 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.

M/s Dharmanandan Diamonds Pvt. Ltd. 4 ITA No. 4232/M/2019 amount of expenses to AE transactions, which according to him was an absurd situation. In the second working the assessee has identified the margins based on the grouping of finished products into sub-categories, based on quantity of diamonds, which has been rejected by the Ld. TPO on the ground that being inconsistent with the approach for allocation of other expenses and hence cannot be considered for the purpose of benchmarking. The Ld. TPO asked the assessee to submit the segment profitability separately for the AE and non-AE segment on the basis of the actual direct cost. In view of the failure on the part of the assessee to provide segmental profit result of AE and non-AE transactions, the Ld. TPO initiated penalty proceeding under section 271G of the Income Tax Act, 1961 (in short ‘the Act’) on the ground that assessee had failed to furnish the details called for vide notice under section 92D(3) of the Act dated 28/07/2016. The Ld. TPO rejected the submission of the assessee of difficulty in maintaining the segmental profit of AE and non-AE looking to the peculiar nature of diamond trade. The Ld. TPO vide

M/s Dharmanandan Diamonds Pvt. Ltd. 5 ITA No. 4232/M/2019 order dated 26th April, 2017 levied penalty of ₹43,32,56,335/-. On further appeal, the Ld. CIT(A) deleted the penalty observing as under:

“3.3 I have considered the facts of the case and submissions of the assessee. The A0/TO levied penalty u/s. 271G on the ground that the assessee failed to furnish information called for. The TO mentioned that the assessee inappropriately applied the TNMM Method, non maintenance of records has frustrated the department and despite the major irregularities in the entity level TNMM, the assessee adopted this method. Finally, the TO rejected all the objections and held that assessee did not provide any basis for comparing the transactions of AE with another AE and /or non-AE and assessee failed to provide any alternative method for benchmarking the international transactions and the failure of the assessee 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 IT. Act, 1961 of Rs.43,32,56,335/- @ 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

M/s Dharmanandan Diamonds Pvt. Ltd. 6 ITA No. 4232/M/2019 accepted TNMM Method as the most appropriate method and no adjustments were made in the preceding years. The A0/TPO should have considered the peculiar nature of diamond trade and should have appreciated the difficulties in adopting CUP method, the assessee furnished all the particulars on the basis of which the AO could come to the conclusion regarding the ALP in the case of international transaction and there were no adjustments made. In these circumstances, the penalty us.271G should not be levied.

(A) Before deciding the issue of levy of penalty whether justified or not, it is essential to know and understand the nature of diamond manufacture and trading business to appreciate the basis issues. Assessee and its auditors in their submissions have described nature of diamond trade, its peculiarities and assessee's business as follows:

(B) "(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

M/s Dharmanandan Diamonds Pvt. Ltd. 7 ITA No. 4232/M/2019 machineries and huge capital. Possibility of entire extraction activity resulting into a 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 distributors perform very little function in the entire process of diamond business and undertake no value addition 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. Pecularities of Products and Business:

M/s Dharmanandan Diamonds Pvt. Ltd. 8 ITA No. 4232/M/2019 (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-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. c) 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:

M/s Dharmanandan Diamonds Pvt. Ltd. 9 ITA No. 4232/M/2019 The assessee company is engaged in the business of import of rough and polished diamonds, processing the rough diamonds to cut and polish diamonds and sale of rough and polished diamonds both in local and international markets. The appellant's business is to export majority of diamonds from its manufacturing and locally procured stocks of diamonds.

(C) In addition to the foregoing descriptions it is essential to know as to what happens in the manufacture and trading of the diamond business. Rough diamonds are mined from various places all over the world and they vary from a size of 0.3 carat to 10 carat usually and the price of rough diamonds vary on the 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 M/s Dharmanandan Diamonds Pvt. Ltd. 10 ITA No. 4232/M/2019 similar size and colour 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 command 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 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 carts 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 with valuer to valuer.

(D) This aspect of diamond trade is also explained by the G]EPC India in its letter dated 21/7/2015 addressed to the CIT-Transfer Pricing, Mumbai.

The TPO basically wanted the assessee to furnish separate profit level indicator (PLI), that is, AE and non-AE segment wiseeither the P & L

M/s Dharmanandan Diamonds Pvt. Ltd. 11 ITA No. 4232/M/2019 Accounts and/or some other evidence to show that the international transactions were at arm’s-length price. Assessee had entered into following international transactions:

S. No. Nature of International Transactions Amount in (Rs.) 1. Sale of cut, polished diamonds & 14,93,52,36,682/- rough diamonds 2. Purchase of Cut, Polished & Rough 6,72,75,80,074/- Diamonds Total 21,66,28,16,756/- Total value of transactions of diamonds entered by the assessee with AEs and non-AEs were as follows:

A perusal of the correlation of the imported rough diamonds and polished diamonds and total purchases reveals that the assessee's total turnover during the year was R.2166 Crores, whereas sale to AE was Rs.1494 Crores. The assessee's total purchase during the year was Rs.2947 Crores, whereas purchase from AE was Rs.672 Crores. Thus assessee had a mix of imported rough from AEs and non AEs and also sold/exported polished diamonds to AEs as well as non-AEs. Thus the P&L Account reflects a mixture of purchases and sales both from AEs as well as non AEs. In this connection, categorization details of rough diamonds and polished diamonds were also perused and analysed to understand and verify the facts and following observations can be made:

Correlation of Rough and Polished Diamonds Firstly every import or purchase of rough diamond at Surat factory passes through assortment. Upon assortment, the quantity of rough diamonds under each import is fragmented into different lots

M/s Dharmanandan Diamonds Pvt. Ltd. 12 ITA No. 4232/M/2019 depending upon the size, shape, quality, purity and parity and each assorted lot is assigned cost attributable to it out of respective individual import of which such lot is a part of. Upon completion of production process, quantity of polished diamonds manufactured out of the particular lot under production, the manufacturing costs attributable to that particular lot is apportioned and added to the assigned cost (as stated above) of each lot of rough diamonds consumed. After the completion of the production process, the goods are subjected to stringent quality control process and upon the passing and approval from Quality Control department, the said finished goods are sent to Polished diamonds Assortment Department where the said goods are sub-divided into "Class A-1 to Class A-5" and "Class B-1 to Class B-4" sub-categories or more of such categories as is considered expedient and desirable looking strictly in to the production line. Finished goods having passed through the stated assortment process as above are transferred to Mumbai Sales office.

Upon receipt of finished goods in Mumbai sales office, the said goods are incorporated in respective inventory record and opening balance of the finished goods of the respective Class is automatically revised with the incorporation of the new inward receipt. Quantity and value of each Sale of goods is subtracted from the respective Class of goods by allocating opening per carat weighted daily average cost under that Class of goods.

Further, consistently weighted average cost for valuation of the inventory of stock of rough diamonds as well as polished diamonds over the years was adopted as the weighted average cost is the most balance and reliable method for the entity. Here, it is pertinent and sensible to note that though each of the sub-class has a defined

M/s Dharmanandan Diamonds Pvt. Ltd. 13 ITA No. 4232/M/2019 opening and closing stock value which is based on the daily weighted average cost valuation method at all times which gets adjusted upon every inward receipt of goods from production and against every outward issue of goods on sale, the closing value of inventory is adjusted at the opening per carat cost of production under respective sub-category. Although while presenting the cost of each and every export to AE or non-AE, there may be certain transactions showing loss but in factual position, there is no loss in any transaction for the simple reason that while effecting the sale, the goods have to be assorted in more than 20 sieves by the buyers during the goods selection process and only such ardently selected goods are negotiated for sale and the deal gets finalized on mutually terms including price and payment timeline. Hence, if the high value selection gets sold out from the a particular sub-category, it may show handsome margin and like-wise if the case is otherwise, such particular transaction may figure loss howsoever, at the end of the day, there will be a situation of symmetrical and consistent profit as per pricing system followed from time to time. The above stated explanation has been verified, perused and analysed from the stock records detailing category-wise import/consumption of rough diamonds and category-wise categorization of polished diamonds showing the costs of the goods sold for a particular invoice at its daily weighted average cost for the month of April, 2011.

Crux of the matter is that it is extremely difficult for even 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 making the tracing out and identification of the polished diamond physically possible and convenient. Only indication about

M/s Dharmanandan Diamonds Pvt. Ltd. 14 ITA No. 4232/M/2019 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. In nutshell, 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-à-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 & Loss Account of the A segment and non-AE segment in respect of export of goods as well as local sales to arrive at arms-length price in respect of international transactions. The assessee submitted segment wise result of AE & Non AE at GP level. Assessee explained the difficulties to the TP in various communication described earlier, however, the TPO insisted for the same and then invoked rule 10Dof IT. Rules 1962 and did not determine the arms length price in respect of the international transactions, but went ahead with the levy of penalty under section 271G of IT. Act, 1961. In this regard, the TPO had another option of either making some comparison of realisation of prices in respect of export sales to AEs and non-AEs by comparing prices of diamonds of similar size, quality and weight to the best extent possible and/or asked for the copies of P& L Accounts and the Balance Sheets of the AEs to make an overall comparison with the gross profitability levels of the assessee with AEs to ascertain diversion of profits if any in broad manner. However, this was not done by the TO and the TPO went ahead with the levy of penalty under section 271G of IT. Act, 1961 of Rs. 43,32,56,335/- at the rate of 2% of international transactions of Rs.21,66,28,16,756/-.

M/s Dharmanandan Diamonds Pvt. Ltd. 15 ITA No. 4232/M/2019 Another issue on which the TPO has laid stress is that the assessee could have followed the internal CUP method to work out the arm's length price in respect of its exports. However, the basic issue remains, that is, an apple has to be compared with an apple and not with an orange. As discussed earlier, a comparison by internal CUP method can be made only if two lots of diamonds are similar in size, colour, shape and clarity and unless they are similar, prices will vary from one diamond to another diamond and if one lot has variety of diamonds varying in size, colour, shape and clarity, prices will vary from diamond to diamond and lot to lot. And then the question again arises how do you evaluate price of each diamond when the invoice is one and has a common price tag of XYZ dollars per carat for the whole lot. And by industry practice, unless a diamond is weighing half carat or more or one carat or more, these are not priced separately in the bill because it is not practical to price diamonds of weights lower than half carat or one carat separately weight-wise per diamond in the lot. Hence 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 insistence of the TPO to follow internal CUP method was also not a practical suggestion keeping in view the nature of the trade and the lots of diamonds exported by the assessee to AEs and Non-AEs during the assessment year. In nutshell, TPO's insistence and directions to follow internal CUP method were not fair and reasonable and practicable.

The TPO has invoked specifically rule 10D(1)(d), (g), (h) (I) and G) of IT Rules, 1962 to substantiate the levy of penalty, however, the TPO has not made use of the details and documents to determine the M/s Dharmanandan Diamonds Pvt. Ltd. 16 ITA No. 4232/M/2019 arm's length price when the lot wise details of exported cut and polished diamonds were available with him. Moreover when the type of details and documents are not available in public domain, the TP should have utilised the details and documents made available by the assessee to arrive at a fair and reasonable opinion regarding the determination of arm's length price in respect of international transaction vis-à-vis the other transactions of import of rough diamonds and locally purchased rough diamonds and export of polished diamonds to non AEs abroad. Moreover, a comparison of the P & L Accounts and the Balance Sheets of the AEs would have revealed the overall gross profit margins vis-à-vis the gross profit margins earned by the AEs in their businesses to reveal levels of profitability.

The assessee has also submitted that when the assessee had furnished all the particulars on the basis of which the AO could have come to the conclusion regarding ALP in the case of International Transaction and further submitted that the TPO 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 assessee had made substantial compliance with the requirements of fling all major information called for by the TO for determination of the ALP and accordingly, the ALP was accepted by the TPO. Further, the assessee relied on the Hon'ble High Court of Delhi in the case of CIT vs. M/s. Leroy Somer &Controls (India) Pvt. Ltd. which observed as under:

"The decision and observation of the Hon'ble High Court of Delhi in Income Tax Appeal No. 410/2012 (decided on 30.08.2013 in the case

M/s Dharmanandan Diamonds Pvt. Ltd. 17 ITA No. 4232/M/2019 of CIT-2 vs. M/S. Leroy Somer & Controls (India) Put. Ltd.), which confirmed the ITAT decision and dismissed the revenue appeal on the subject of penalty u/s. 271G supports this stand fully. Inter alia, the Hon'ble High Court after discussing the provisions of 92D, 271G & Rule 10D states as under:

The tribunal has rightly concluded that with such a broad rule, which requires documentation and information voluminous and virtually unlimited, Section 271G has be interpreted reasonably and in rational manner............When there is general and substantive compliance of the provisions of Rule 10D, it is sufficient......................……The documentation or information should be one specified in Rule 10D, which has been formulated in terms of section 92D(1) of the Act. Looking from any quarter and angle, the appeal of the Revenue is misconceived, totally lacking in merits and is, therefore, dismissed The assessee also cited the below mentioned decision of Hon'ble ITAT which is as under:

"The following observations of Hon'ble ITAT Bench "B", Chennai in the case of DCIT vs. Magick Woods Exports (2012) 32 CCH 0422 Chen Trib, which had concluded that penalty us. 271G cannot be imposed where assessee proves that there was reasonable cause for particular failure is also necessary to be considered.

"Moreover, in spite of all these things, the TPO has not suggested any adjustment in the ALP reported by the assessee. When that is the case, the default if at all any in the hands of the assessee, turns out to be a technical default.

M/s Dharmanandan Diamonds Pvt. Ltd. 18 ITA No. 4232/M/2019 The levy of penalty under section 271G is to be considered in the above circumstances. The penalty prescribed under section 271G is very severe. The quantum of penalty is 2 percent of the value of the international transaction for each failure on the part of the assessee. If there are more failures on the part of the assessee, the penalty may end up almost in a capital punishment. When the penalty provision is very severe, it should be applied with great caution and only if circumstances sufficiently justify invoking the penal provision". I have gone through the above and found that the facts of the above case laws are similar to the facts of the assessee's case. In view of the above, I am of the opinion that levy of penalty u/s.271G of the IT. 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 assessee and the reasonable cause showed by the assessee and above all, when there is no adjustment made in the ALP. In nutshell, the levy of penalty of Rs. 43,32,56,335/- under section 271G of IT. Act, 1961 is hereby deleted.In view of the fact that levy of penalty under section 271G of IT. Act, 1961 is itself deleted, other objections raised by the assessee before the TO and in appeal are not considered relevant and are not discussed. In nutshell, levy of penalty under section 271G of I.T. Act, 1961 is hereby deleted.”

M/s Dharmanandan Diamonds Pvt. Ltd. 19 ITA No. 4232/M/2019

“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 the case of D. Navinchandra Exports (P.) Ltd. (87 Taxmann.com 306) held that considering the practical difficulties in furnishing the M/s Dharmanandan Diamonds Pvt. Ltd. 21 ITA No. 4232/M/2019 segment wise details of AE segment and non-AE segment transactions in diamond industry, no penalty under Sec. 271G could justifiably be imposed for failure to furnish the said information. The relevant observations were as under: -

M/s Dharmanandan Diamonds Pvt. Ltd. 22 ITA No. 4232/M/2019 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.

M/s Dharmanandan Diamonds Pvt. Ltd. 24 ITA No. 4232/M/2019 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.

M/s Dharmanandan Diamonds Pvt. Ltd. 26 ITA No. 4232/M/2019

Order pronounced in the open Court on 19/05/2022.