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Income Tax Appellate Tribunal, MUMBAI BENCH “B”, MUMBAI
Before: SHRI RAJESH KUMAR & SHRI RAM LAL NEGI
Per Rajesh Kumar, Accountant Member:
The present appeal has been preferred by the assessee against the order dated 18.02.2019 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2012-13.
The only issue raised by the assessee in the various grounds of appeal is against the confirmation of penalty of Rs.1,25,62,633/- by Ld. CIT(A) as levied by the AO under section 271G of the Act.
The facts in brief are that a reference under section 92CA(1) of the Act dated 09.03.2015b was made by the AO to TPO in order to determine the Arm Length Price with regard to transactions reported in form No.3CEB filed by the assessee qua
2 M/s. N.M. Shah & Bros. international transactions of purchase and sale of raw material as well as finished goods from and to its overseas group entity. The assessee made detailed submissions from time to time before the TPO as and when called upon and TPO proposed no adjustment to the Arm Length Price of international transactions entered into by the assessee with its overseas entity, however, initiated penalty proceedings under section 271G for failure of the assessee to furnish the required documentations. The TPO held that assessee has prevented the Revenue from making any determination of Arm Length Price by not furnishing the required documents and thus the assessee has failed to maintain and furnish the basic information pertaining to AE and non AE transactions and consequently the TPO was prevented from any determination of Arm Length Price. For the want of information/details no adjustment was made to the international transaction by observing that from the material available on record it can not be concluded whether international transactions are at Arm Length Price or not. The TPO required the assessee to file the audited segmental of AE and non AE vide questionnaire issued under section 92CE(3) read with section 92D(3) dated 19.11.2015 which was replied by the assessee by furnishing the details on 15.12.2015 and on 04.01.2016 by submitting that assessee has purchased all diamonds from its AE to the tune of Rs.62,81,31,651/- out of the total purchase of Rs.1,19,28,19,140/-. The assessee further submitted that it has sold rough diamonds to the tune of Rs.16,94,18,305/- to third parties without manufacturing. The assessee also furnished the copies of invoices of purchases before the AO and thus submitted that entire sale of rough
3 M/s. N.M. Shah & Bros. diamonds made to the third parties during the year were out of rough diamonds purchased from the AE. According to the TPO the assessee has not prepared the audited segmental of AE and non AE based on actual transactions with the AE and non AE and thus the assessee has failed to prove that the diamonds sold to third parties were exclusively from rough diamonds purchased from the AEs. The assessee is carrying on the business of trading of rough diamonds. During the penalty proceedings a show cause notice under section 271G of the Act was issued to the assessee on 27.01.2016 calling upon the assessee as to why the penalty should not be levied for failure to furnish the documents called for under section 92CA read with section 92D(3) of the Act which was followed by another show cause notice dated 16.06.2016 calling upon the assessee as to why the penalty should not be levied for failure to comply with the provisions of section 92D(3) read with rule 10D(1) which was replied by the assessee vide written submission dated 19.07.2016 which are extracted by the TPO in para 7 of the penalty order. The TPO thereafter rejected the submissions of the assessee and came to conclusion that assessee has failed to follow the rules with regard to maintenance of records and finally levied a penalty of Rs.1,25,62,633/- by holding that assessee has failed to furnish the information or documents in respect of segmental accounts relating to transactions made with the AEs and non AEs for determination of Arm Length Price of international transactions as required by TPO under prescribed rule and thus levied a penalty equal to 2% of value of international transactions with the AE by passing order dated 29.07.2016.
Aggrieved assessee preferred an appeal before the Ld. CIT(A) challenging the penalty order passed by the TPO, however, the Ld. CIT(A) also dismissed the appeal of the assessee by observing and holding as under: 4. Conclusion: a. Non furnishing of AE & Non-AE audited segmental accounts; It is seen from appellant's submission that appellant has claimed that it has not entered into any sales transaction with any of its AEs and the international transaction with AEs were only in respect of import/purchase of rough diamonds only. Appellant further submitted that segmental profit and loss account was prepared and submitted only in respect of sale of imported rough diamonds of Rs.169418305/-. The operating margin is calculated based on the sales made to non-AEs in respect for purchase of rough diamonds of Rs. 15.4 Crores from AEs and that there is in fact no sales to AEs in order to prepare a segmental account. The appellant has submitted only calculation of operating profit margin on sale of rough diamonds of Rs.16,94,18,305/-. The bench marking for ALP was required to be done for the entire transaction with the A.E i.e. 62.81 crore, but in this case appellant has taken only Rs.15.47 crores in the calculation of OPM. Further assessee has not considered reduction in variation of closing stock of Rs.74,80,387/-
The TPO has correctly concluded that assessee's contention that since it does not have sales transaction with the AE, the assessee is not required to maintain segmental in respect of transaction with AE or non AE, is misconstrued. The purpose of drawing segmental result is to determine separately what is profit or loss on account of purchase or sales or both transaction with the AE and with non AE. It does not mean that the assessee should have simultaneously done both transaction of purchase and sale. If the assessee has transaction of purchases with the AE and sales are to non AE, then what is the operating profit margin, earned by the assessee vis-a-vis the profit earned in a situation when both purchase and sale are with non AE. Thus in the instant case the assessee has failed to produce segmental P/L A/c AE and non AE wise. b. Non furnishing of relevant details from benchmarking under CUP The appellant has used TNMM method at entity level to benchmark the transactions. The rule 10B(1)( e) indicates that for the purpose of application of TNMM, profit from the International Transactions alone has to be considered. The appellant has not furnished satisfactory details with evidence for the application of TNMM and has thus violated the rule 10B(1)(e). In the instant case CUP method should have been adopted to benchmark the assessee's transaction. However the qualitative details of AEs and non-AEs transactions and separate records of different quality have not been maintained by the appellant.
The TPO has correctly concluded that the appellant, has applied TNMM deliberately and prevented the department from the benchmarking under CUP by c. Non furnishing of information or documents in respect of segmental accounts relating to transactions made with AEs and Non AEs under Rule 10D(1)and10D(3)
The appellant has failed to furnish information under Rule 10D(1) and supporting authentic documentation under Rule 100(3). The assessee has contended that failure to comply with clause(g)(h)(i)(j) of Rule 10D(1) is due to peculiarities of the diamond industry and the industry practice of not maintaining separate record of stock relating to trading and manufacturing activities as also AE and Non AE sources. From the facts and circumstances of the case, it is clear that appellant has failed to furnish information called for under Rule 10D(1) by not providing complete segmental accounts with regard to purchase made from AEs and non AEs segments and sales made to AEs and non-AEs segments. Similarly appellant has also failed to furnish the supporting authentic documentation required under Rule 10D(3). Thus the appellant has clearly violated documentation requirements under Rule10D(1) and Rule 10D(3).
Based on above discussion and analysis, the penalty imposed by the TPO for u/s 271 G of the Act for violation of Rule 10D(1) and 10D(3) thereof, ie 2 % of the value of the International Transactions comes out to ( 2% on Rs.62,81,31,651/-) Rs.1,25,62,633/- is hereby confirmed and the grounds of appeal on these issues are dismissed .Thus Appeal for the AY 2012-13 is Dismissed.
5. Thus appeal filed by the appellant is Dismissed u/s.250 r.w.s 251 of the Income Tax Act 1961.”
The Ld. A.R. vehemently submitted before the Bench that assessee has maintained proper records as prescribed under section 92D of the Act. The Ld. A.R. submitted that segmental reporting is not possible when there is no sales to AEs and therefore there is no failure on the part of the assessee to furnish the documents before the TPO. The Ld. A.R. submitted that whatever the TPO required the assessee to furnish was duly furnished. The Ld. A.R. submitted that the segmental audited accounts of AE and non AE are not possible to prepare. The Ld. A.R. also submitted that the TPO has accepted the Arm Length Price of international transactions as per the assessee’s version and also accepted the method used for bench marking the international transactions and consequently proposed no 6 M/s. N.M. Shah & Bros. adjustment to the international transactions. The Ld. A.R. also submitted that in case the TPO has not accepted the method for bench marking the transactions, the TPO could have gone for independent bench marking of international transactions with the AEs. The Ld. A.R. submitted that assessee has maintained all primary books of accounts/documents in respect of its business transactions with AEs and non AEs and it is due to practical difficulty in preparing the segment-wise profit and loss with AEs and non AEs in diamond industry and therefore the same could not furnished before the TPO as desired. Without prejudice to the above, the Ld. A.R. submitted that if the TPO was not satisfied with the bench marking of international transactions under TNMM, the TPO could have rejected the assessee’s bench marking and determined the Arm Length Price of international transactions with the AEs independently by applying any of the prescribed methods, however, TPO has accepted the bench marking of the assessee under TNMM. The Ld. A.R. argued that when the TPO has accepted the bench marking of international transactions and also the method of bench marking the imposition of penalty under section 271G of the Act can not be levied and has to be deleted. In defence of his argument, the Ld. A.R. relied on a series of decisions as under: 1. CIT v. Decent Dia Jewels (P.) Ltd. [2020] 117 taxmann.com 358 (Mumbai - Trib.) 2. Dty. CIT v. Leo Schachter Diamonds India (P.) Ltd. [2020] 116 taxmann.com 994 (Mumbai - Trib.) 3. ACIT v. D. Navinchandra Exports (P.) Ltd. [2017] 87 taxmann.com 306 (Mumbai -Trib.) 4. Dty. CIT v. K. Girdharilal International Ltd [2019] 111 taxmann.com 322 (Mum-Trib) 5. Dty. CIT v. Asian Star Company Ltd [2020] 116 taxmann. com 448 (Mumbai - Trib.) 6. Dty. CIT v. Ankit Gems (P.) Ltd [2019] 106 taxmann.com 243 (Mumbai - Trib.)
7 M/s. N.M. Shah & Bros.
The Ld. A.R. submitted that in view of the ratio laid down in the above decisions, the penalty levied under section 271G of the Act may kindly be deleted. The Ld. A.R. also without prejudice submitted that there was reasonable cause for not maintaining the segment wise information in respect of AE and non AEs. The Ld. A.R. submitted that there was a practical difficulty in furnishing the profit and loss account of AE segment and non AE segment and therefore the same could not be furnished. The Ld. A.R. submitted that there is a practical difficulty in furnishing the segmental with AE and non AE in the diamond industry and therefore same constitute a reasonable cause and penalty as levied by the AO and confirmed by Ld. CIT(A) may kindly be deleted. In defence of his arguments, the Ld. A.R. relied on the following decisions:
1. 1. D. Navinchandra Exports (P.) Ltd. (Supra).
2. Dilipkumar V. Lakhi [IT Appeal No. 2142 (M) of 2017, dated 2-8-2018] page 549-556 3. Dy. CIT v. Firestone International (P.) Ltd. [IT Appeal No. 5304 (Mum.) of 2016, dated 1-12-2018] 4. Dy. CIT v. Interjewel (P.) Ltd. [IT Appeal No. 5628 (M) of 2016, dated 1-11- 2018]page 557- 585
7. The Ld. D.R., on the other hand, relied heavily on the order of authorities below by submitting that assessee has not submitted and furnished the details as required by the TPO to determine the Arm Length Price of international transactions with its AE as the assessee has failed to furnish the segmental audited accounts of AE and non AE which prevented the TPO from making any adjustment to the international transactions and thus the TPO has to accept Arm Length Price and also the method followed in bench marking the international transactions as submitted by the assessee. The Ld. D.R.
8 M/s. N.M. Shah & Bros. submitted that the assessee is under obligation to maintain its accounts in a prescribed format so that the information which placed before the TPO in that format and only then the TPO can make analysis and determine whether the Arm Length Price of international transactions by the assessee is correct or not. But in the present case the assessee has failed to maintain these records in terms of the provisions of the Act under section 92D(3) of the Act. The Ld. D.R., therefore, prayed that the appeals of the assessee may kindly be dismissed and order of Ld. CIT(A) may kindly be affirmed.
We have heard the rival submissions and perused the material on record including the order of TPO passed under section 271G of the Act as well as the appellate order passed by Ld. CIT(A). We find that in this case the assessee has entered into international transactions with its AE of import of rough diamonds which were sold to the third parties. The assessee has not maintained segmental accounts of transactions with AE and non AE, however, the TPO has accepted the Arm Length Price of international transactions as submitted by the assessee and also the method of bench marking i.e. TNMM with certain observations that assessee has not maintained the documentation in terms of provisions of section 92D(3) of the Act and therefore he was not in a position to propose any adjustment to Arm Length Price to the international transactions and has to accept the version of the assessee and thus levied a penalty equal to 2% of the value of international transactions with the AE under section 271G of the Act. The primary argument of the Ld. A.R. is that since the TPO has accepted the bench marking of the assessee under TNMM to be 9 M/s. N.M. Shah & Bros. at Arm Length Price, the imposition of penalty under section 271G of the Act for non furnishing of segmental audited statement of AE and non AE was wrong and against the provisions of law. We find merit in the argument of the assessee as the TPO could have gone for its own determination of ALP of the international transactions by following one of the methods prescribed under the Act, however, the TPO has not done so. Therefore, we find merit in the contentions of the assessee that once the TPO has accepted the bench marking of the assessee to be at Arm Length, the penalty under section 271G of the Act can not be levied. The case of the assessee finds support from the decision of the co-ordinate Bench of the Tribunal in the case of CIT v. Decent Dia Jewels (P.) Ltd. (supra) wherein the Tribunal has held that where the TPO having accepted the bench marking of the assessee under TNMM, the imposition of penalty under section 271G of the Act was to be deleted under similar facts. The operative part is extracted as under: “7. We have considered rival submissions in the light of the decisions relied upon and perused the material on record. The material on record makes it clear that the assessee has maintained primary books of account/documents in respect of its business activity. The fact that the documents relating to transaction with the AE have also been maintained by the assessee is evident from the transfer pricing study report, wherein, the transaction with the AE has been benchmarked under TNMM. This shows that the assessee has maintained documents/books of account as required under the statute. It is also evident, in the course of proceedings before the Transfer Pricing Officer, the assessee has made substantial compliance by furnishing transfer pricing study report as well as many other documents. What the assessee has failed to furnish is, the segmental profitability of the AE and non-AE transactions. The inability to furnish the aforesaid details was also well explained by the assessee before the Transfer Pricing Officer and learned Commissioner (Appeals) by demonstrating the practical difficulty in maintaining those details considering the nature of business carried on. Notably, though, the Transfer Pricing Officer has alleged that non-furnishing of segmental profitability makes it difficult for him to correctly ascertain the arm's length price, however, ultimately the Transfer Pricing Officer has accepted the transaction with the AE 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 determining the arm's length price of the transaction with the 10 M/s. N.M. Shah & Bros. AE 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. As could be seen, under identical facts and circumstances, the Tribunal in Ankit Gems (P.) Ltd. (supra] observed as under:-
"5. We have considered rival submissions and perused 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 Transfer Pricing Officer 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 placed on 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 Transfer Pricing Officer along with various other details. However, the Transfer Pricing Officer was of the view that the international transaction with AE should be benchmarked by applying CUP method and called upon the assessee to furnish segment-wise details of AE and non- AE sales, ft is observed, before the Transfer Pricing Officer the assessee has made submissions explaining why it is not possible for a person engaged in manufacturing and sale of diamond and diamond jewellery to maintain segment-wise details of sales made to the AE and non-AEs for the purpose of applying CUP method. It was explained by the assessee that CUP method could not be applied as invoice of sale of AE and non-AE include different types of goods sold at different price. U is further observed, in the preceding years also, the assessee had benchmarked international transaction with AE by applying TNMM which was accepted by the Revenue. Lt is relevant to observe, the Transfer Pricing Officer has ultimately accepted the benchmarking done by 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. Further, the assessee has also explained why it is not possible to furnish certain information sought by the Transfer Pricing Officer qua applicability of CUP method. In this regard, detailed written submission has been filed by the assessee before the Transfer Pricing Officer which has been properly evaluated by the learned Commissioner (Appeals) and the difficulty in maintaining the information sought by the Transfer Pricing Officer has been well explained and analysed. It is also necessary to observe, ultimately the Transfer Pricing Officer had accepted the benchmarking done by the assessee under TNMM and no variation/adjustment was made by 11 M/s. N.M. Shah & Bros. him to the arm's length price. Even, assuming that the assessee has not maintained documents as required or was unable to support the benchmarking done by it under TNMM, nothing prevented the Transfer Pricing Officer in discarding the benchmarking done by the assessee and determining the arm's length price of the international transaction with the AE independently by applying anyone of the prescribed method. When the statutory provisions confer enough power on the Transfer Pricing Officer to benchmark the international transaction as per the provisions of the Act, the allegation of the Transfer Pricing Officer that by non-furnishing of documents by the assessee he was prevented from determining the arm's length price under CUP method is unacceptable. Therefore, when the Transfer Pricing Officer has accepted the benchmarking of the assessee, the imposition of penalty under section 271C 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 applicable to the facts of the present appeal. 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 27 IG of the Act. Grounds are dismissed."
Similarly, in the case of Dty. CIT v. Leo Schachter Diamonds India (P.) Ltd. (supra) the Bench has held that no penalty is leviable where the TPO has accepted the bench marking of the assessee under TNMM under similar facts. In this case also the assessee has furnished all the details before the TPO qua the transactions with the AEs and non AEs and assessee has submitted that it is not practically possible to maintain such records in the diamond industry. The Bench held that if the TPO was not satisfied with the bench marking of the assessee under TNMM nothing prevented him from rejecting the assessee’s bench marking and determining the Arm Length Price with the AE independently by applying any one of the prescribed methods. The Bench held that assessee has complied with all the directions of the TPO and placed on record the requisite information. The Bench further held that according to us there was a reasonable cause in not complying with provisions of section 92D of the Act due to practical difficulties.
Since the facts before us are quite similar to the facts of the decisions as cited above wherein the co-ordinate Benches of the Tribunal has held that penalty can not be levied under section 271G where the assessee has furnished requisite information before the AO though not furnishing segmental audited statement of AE and non AE due to practical difficulties in the diamond industries and the TPO having accepted the Arm Length Price of the assessee and also the method of determining Arm Length Price i.e. TNMM, in our opinion, the order of Ld. CIT(A) is wrong and can not be sustained. Accordingly, we set aside the order of Ld. CIT(A) and direct the TPO to delete the penalty.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 12.03.2021.