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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI NABIN KUMAR PRADHAN
Aforesaid appeal has been filed by the Revenue challenging the order dated 01.11.2017, passed by the learned Commissioner of Income Tax (Appeals)–55, Mumbai, deleting the penalty imposed under section 271G of the Income–tax Act, 1961 (for short "the Act") for the assessment year 2012–13.
2 Arjav Diamond India Pvt. Ltd.
Brief facts are, the assessee, an Indian company, is engaged in the business of purchasing rough diamonds, processing of rough diamonds and sale (including export) of rough and polished diamond. Noticing that during the year under consideration the assessee has entered into international transactions with its overseas Associated Enterprises (AEs) the Assessing Officer made a reference to the Transfer Pricing Officer (TPO) to determine the Arm’s Length Price (ALP) of such transaction. In the course of proceedings under section 92CA of the Act, the Transfer Pricing Officer called upon the assessee to furnish various information, documents/details to demonstrate that the international transaction entered with AE are at arm's length. In response to the query raised by the Assessing Officer, assessee furnished various details called for along with books of account and transfer pricing study report, wherein, the assessee had benchmarked the international transaction by applying Transactional Net Margin Method (TNMM) as the most appropriate method at entity level. Noticing that assessee also had undertaken transactions with non– AEs/third parties, called upon the assessee to furnish separate profitability of AE and non–AE transactions. In response assessee furnished further details before the TPO. After examining the documents/details furnished by the assessee, the TPO observed that assessee has not furnished profitability of AE and non–AE transactions at net margin level. Further he observed, separate stock record for AE
3 Arjav Diamond India Pvt. Ltd. and non–AE transactions were not furnished. Thus, he held that TNMM is not the most appropriate method to benchmark the transaction. In such circumstances, according to him, Comparable Uncontrolled Price (CUP) method or Profit Split Method (PSM) could be the most appropriate method. However, he observed that in absence of complete details, neither CUP nor PSM could be applied to determine the ALP. Alleging that non furnishing of required details by the assessee prevented him from determining the ALP, the TPO ultimately accepted the transactions with AEs to be at ALP without proposing any adjustment. However, alleging that the assessee has not maintained information/documents required under section 92D(1) r/w rule 10D for enabling him to determine the ALP, the Transfer Pricing Officer initiated proceeding for imposition of penalty under section 271G of the Act and ultimately imposed penalty for an amount of ` 16,14,61,108/–. While deciding assessee’s appeal challenging the imposition of penalty as aforesaid, learned Commissioner (Appeals) being satisfied with the submissions of the assessee deleted the penalty.
Shri Anand Mohan, Learned Departmental Representative, strongly relying upon the reasoning of the Transfer Pricing Officer submitted, onus is entirely on the assessee to prove that the price charged to the related parties is at arm’s length. He submitted,
4 Arjav Diamond India Pvt. Ltd. though, the assessee applied TNMM as the most appropriate method to benchmark the international transaction, however, he has not made proper segment wise documentation to support the benchmarking. Therefore, in absence of necessary documents the TPO was prevented from determining the ALP and was compelled to accept the benchmarking done by the assessee under the TNMM. Thus, he submitted, since there is violation of provisions contained under section 92C(1) r/w sub–section (3) of the Act, the assessee was liable to be visited with penalty under section 271G of the Act. In support he relied upon the decision of the Hon’ble jurisdictional high court in case of CIT V/s Shatrunjay Diamonds (2003) 261 ITR 258(Bom).
The learned Authorised Representative submitted, the assessee has not only maintained the books of account but various other details for benchmarking the international transaction under TNMM. He submitted, most of the documents/information called for by the TPO was furnished before him in the course of proceedings. He submitted, before the TPO the assessee has also explained the difficulty of applying CUP method and also the reason for which segment wise details called for could not be submitted. He submitted, the assessee has made substantial compliance to the queries made by the TPO. Therefore, only because some segment wise details could not be furnished by the assessee, penalty under section 271G of the Act
5 Arjav Diamond India Pvt. Ltd. cannot be imposed. More so, when the TPO has ultimately accepted the ALP of the international transaction shown by the assessee. In support of his contention, learned Authorised Representative relied upon the following decisions:–
Dilipkumar V. Lakhi, IT(TP)A no.2142/Mum./ 2017, dated i) 02.08.2018; ii) Kiran Gems Pvt. Ltd., ITA no.5626/Mum./2016, dated 01.11.2018; iii) CIT v/s D. Navinchandra Exports P. Ltd., Mum./2016, etc. dated. 25.10.2017; iv) DCIT v/s Blue Star Diamonds Pvt. Ltd., ITA no.6553/Mum./ 2017, dated 13.06.2019; v) DCIT v/s Leo Schachter Diamonds India P. Ltd., ITA no. 5931/Mum./2017, dated 28.02.2019; vi) DCIT v/s Laxmi Diamonds Pvt. Ltd., ITA no.2643/Mum./ 2017, dated 27.12.2018; and vii) DCIT v/s Interjewel Pvt. Ltd. & Ors., ITA no.5628/Mum./2016, etc., dated 01.11.2018.
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 placed
6 Arjav Diamond India Pvt. Ltd. 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 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 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 done
7 Arjav Diamond India Pvt. Ltd. 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. 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, nothing
8 Arjav Diamond India Pvt. Ltd. prevented 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 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.
9 Arjav Diamond India Pvt. Ltd.
In the result, Revenue’s appeal is dismissed. Order pronounced in the open Court on 30.12.2019