ASST CIT 32(2), MUMBAI vs. M/S KAPU GEMS , MUMBAI

The grounds of appeal read as under :

Brief facts of the case are that :-

The Assessing Officer referred to provisions of concerned section as under :

The Assessing Officer was of the opinion that as per above rule, the net profit margin realized by the assessee from international transactions has to be ascertained in relation to cost incurred or sale or any other relevant base. That this net profit margin can be compared with the net profit margin realized by the assessee itself in its transaction with unrelated parties or with the transactions entered into by the unrelated parties in comparable uncontrolled transactions. That so the first step is that, the assessee's net profit margin needs to be calculated with respect to international transactions entered into by it.

The Assessing Officer held that the order to find out whether the transactions entered in to by the assessee with its AE are at arms length with that entered in to by the third party in comparable situation with independent parties, the separate segmental results in assessee's transactions with AE and non-AE are a must. Because in combined entity level margins the loss in transactions with AE segment can be easily set off with the profits with non-AE segment. That in such a situation the benchmarking will not be correct. That there is no way by which correct benchmarking can be done unless and until the assessee submits the correct margins in respect of transactions with AE and non-AE. And non availability of data in this regard can make the whole exercise of benchmarking the transactions futile.

Thereafter the Assessing Officer discussed certain case laws in this connection. That in the case of UCB India vs. ACIT 317 ITR 292 (AT)/121 no 13l(Mum). It has been held that when AE sale is only small part of total segment, entity level benchmarking is not acceptable. Hon'ble ITAT has relied on the ratio of Azetec Software & Technology Services Ltd. [2007] 107 ITD 141(Bang)(SB) and OECD TP guidelines and has held that the international transaction have to be evaluated, on standalone basis and then compared with similar analysis undertaken on independent transactions. Comparison of the operating profit of the taxpayer as a whole, with the overall operating profits of certain other companies, without any adjustments would not satisfy the requirements of evaluating an international transaction The ITAT therefore concluded that the taxpayer was in error in comparing the operational margin ac entity level and such an approach was rejected. That the decision in the case of UCB India vs. ACIT 317 ITR 292 (AT)/121 ND 131(Mum) has been followed by the Hon'ble Bangalore bench of ITAT in the case of Toyota Kirloskar Auto Parts P. Ltd. reported in 52Taxmann 171 (Bangalore Trib) (2014) on the issue of royalty.

Hence the Assessing Officer opined that accordingly even if the TPO made adjustments by using the entity level margins the same will not stand the test of Rule 10B(1)(e) of IT Rules.

The Assessing Officer opined that the proper segmental profitability details called for by the TPO were not filed by the assessee till the date of passing of order u/s 92CA(3) by the TPO till 31-10-2016 and in the absence of details, TPO was prevented from properly benchmarking the transaction.

The Assessing Officer further observed that he segmental accounts are required to find out whether the transactions entered into by the assessee with its AE are at arm's length with that entered into with independent third parties in comparable situation. That therefore, the separate segmental results in assessee's transactions with AE and non-AE are a must. That because in combined entity level margins the loss in transactions with AE segment can be easily set off with the profits with non-AE segment, in such a situation the benchmarking will not be correct. That there is no way by which correct benchmarking can be done unless and until the assessee submits the correct margins in respect of transactions with AE and non-AE. That non-furnishing of data in this regard can make the whole exercise of benchmarking the transactions futile.

The Assessing Officer found that during the course of transfer pricing proceedings, it was found by the TPO that the assessee had not maintained proper documentation to apply the TNM method, CUP method or any other prescribed methods. II was also seen that the assessee had both AE and non- AE transactions during the year, but no separate profitability or AE transaction and non-AE transaction had been maintained. Similarly, the qualitative details of AE and non-AE transactions have not been maintained so that CUP method could be applied. Hence, the TPO was constrained from benchmarking the transactions properly and has to admit the transactions of assessee to be at arm's length in its order. Hence, it was found that the assessee had failed to maintain the documentation as required under clause (g) and clause (hi) of Rule 10D(1) of the Income Tax Rules, 1962. Taking the above into consideration, penalty proceedings u/s 271G of the Income Tax Act. 1961 were initiated by the TPO vide notice dated 31-10-2016 and the same was mentioned at para 6 of the transfer pricing order passed u/s 92CA(3) dated 3l-10-2016.

Thereafter Assessing Officer referred to section 92D & 92(3) and Rule 10D. Section 92D of Income Tax Act, 1961 deals with maintenance, keeping of information and document by persons entering into an international transaction. Section 92D(1) of Income Tax Act, 1961 prescribes that:

The details of documents in this regard are prescribed in rule 10D of income Tax rules. Section 92C(3) deals with powers of officer to call for details in respect of international transaction and other relevant details. Rule 10D of the Income Tax Rules reads as under :-

Hence the Assessing Officer opined that the assesses is required to maintain as per sub rule 1(d), the details of property transferred 'or services provided and the quantum and value of each such transaction or class of transaction and as per Sub-Rule l(d), it is required to maintain data or document, including information or data relating to the associated enterprise, which may be relevant for determination of the arm's length price. That accordingly, the TPO had with notice u/s 92CA(2) dated 24-12-2015, required the assessee to submit the following information/documents:

The Assessing Officer noted that in this context, under clause (g) of Rule 10D(l), the assessee is required to maintain a record of uncontrolled transactions taken into account for analyzing their comparability with the international transactions entered into, including a record of the nature, terms and conditions relating to any uncontrolled transactions with third parties which may be of relevance to the pricing of the international transactions. But he found that the assessee failed to comply with the above said provision in clause (g) of Rule 10D(1). That this is evident from the assessee's submission dated 22-02-2016, wherein at page 4 of the Report on Transfer Price Study and Related Documentation the assessee had submitted as follows: a. In the diamond business world over, there are estimated to be 5000 to 10000 different qualities of diamonds The price of a diamond depend on various factors such as shine, luster, Size, color, clarity, purity, cluster; cartage, etc. In fact, no two diamonds can have same price as valuation also depends upon the perception of individual businessman.

The Assessing Officer observed that the above purports that normally there are no comparable; pieces and price 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 number of times and hence each piece of diamond loses its identity as to the source"

The Assessing Officer held that by giving the above reasoning, the assessee ha a failed to comply with the clause (9) of Rule 10D(1) that mandatorily requires maintenance of comparable third party transactions that may be of relevance to determining the arms length price of international transactions.

The Assessing Officer reiterated that under clause (h) of Rule 10D(1), the assessee is required to maintain a record of the analysis performed to evaluate comparability of uncontrolled transaction with the relevant international transaction. But the assessee had failed to comply with the said provision. To support this the Assessing Officer observed that in submission dated 22-06- 2016, wherein at page 4 of the Report on Transfer Price Study and Related Documentation the assessee had submitted as follows:- “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 of sale or diamonds can be compared with another Transaction. (ii) It is not possible and practicable to find out the exact cost of transaction and hence resultant markup or net profit margin of particular transaction. ' c) Also diamond business world over is being done in the form of partnership firm, proprietary concern or private limited companies There are way few public listed companies in India and abroad so it is not difficult but rather impossible to have reliable, comparable and publically available database."

That by giving the above reasoning, the assessee had failed to comply with the clause (h) of Rule 100(1) that mandatorily requires assessee to maintain a record of the analysis performed to evaluate comparability of uncontrolled transaction with the relevant international transaction.

Hence the Assessing Officer held that in this case the assessee has failed to maintain the full record in respect of transactions entered in to with the Associated enterprises (AEs) i.e. controlled transactions and chose entered into with non-Associated Enterprises (non-AEs) i.e. uncontrolled transaction. That eventually it has failed to submit segmental results of profit in respect of transactions with Associated Enterprises and non-Associated Enterprises, which is an essential requirement as per the provisions of rule 10D(1) of IT Rules.

The Assessing Officer noted the assessee’s contention as under :-

Thereafter the Assessing Officer proceeded to reject the assessee’s contention and passed a very elaborate order inter alia relying upon Hon'ble Bombay High Court decision in The Commissioner of Income Tax vs. Shatrunjay Diamonds 261 ITR 258.

The Assessing Officer concluded that the TPO has called for specific details pertaining to segmental profitability between AE and non-AE segments within the meaning of section 92D(3) of the income tax Act, 1961. The details were called for during transfer pricing proceedings and assessee was given opportunity to submit the same but the same was not furnished within 30 days or even till passing of transfer pricing order or at any time subsequently. The details were essential for benchmarking the transaction of the assessee with AE. The assessee could also not provide any alternate method of benchmarking the transaction based on material available on record. In the absence of material the TPO was forced accept the transactions to be at arm’s length after initiating penalty proceedings under section 271G of the Income Tax Act, 1961. Accordingly the Assessing Officer levied the penalty of Rs. 6,63,87,700/- under section 271G.

Against the above order, assessee appealed before learned CIT(A). Learned CIT(A) referred the provisions of section 271G and 273B of the Act. Thereafter without discussing the fact of the case, the Assessing Officer’s finding, leave alone dealing with then, he laconically deleted the penalty by holing as under:-

Against the above order assessee is in appeal before us.

We have heard both the counsel and perused the records. Learned Counsel of the assessee made elaborate submission. He relied upon ITAT decisions wherein such penalty has been deleted. He also submitted the Hon'ble Bombay High Court decision in the case of Shatrunjay Diamonds (supra) is not applicable.

Per contra, learned Departmental Representative submitted that learned CIT(A) has passed a totally non-speaking order and laconic order which is not at all sustainable.

Upon careful consideration, we find that learned CIT(A) has failed to discharge the duty cast upon him. He is passing a quasi judicial order. It was incumbent upon him to pass a proper speaking order while deleting a huge penalty of Rs. 6.63 crores levied by the Assessing Officer which is a detailed order and also relies upon Hon'ble Bombay High Court decision. It is settled law that rules of natural justice are applicable to even administrative order and they are applicable to both the parties in a dispute. On this plank itself the order of learned CIT(A) is not sustainable. Moreover the issue of case laws will arise after learned CIT(A) duly deals with facts and issues, which he has failed to do.

In this connection we refer to the decision of Hon'ble Supreme Court in the case of Kapurchand Shrimal (131 ITR 451), where Hon'ble Supreme Court held that it is the duty of the appellate authority to correct the error in the order of the authorities below and remit the matter with or without direction unless probable by law. Hence in the interest of justice, we vacate the order of learned CIT(A) and set aside the issue to the learned CIT(A). The learned CIT(A) shall pass a proper and speaking order after giving the assessee proper opportunity of being heard. Assessee is at liberty to canvas the issue at it deems fit.

In the result, appeal by the Revenue stand allowed for statistical purpose.