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Income Tax Appellate Tribunal, “K” Bench, Mumbai
Before: Shri M. Balaganesh & Shri Ravish Sood
O R D E R
PER RAVISH SOOD, JM
1. The present appeal filed by the revenue is directed against the order passed by the CIT(A)-56, Mumbai, dated 29.07.2016, which in turn arises from the order passed by the A.O under Sec. 271G of the Income Tax Act, 1961 (for short „Act‟), dated 30.06.2015 for A.Y. 2011-12. The revenue has assailed the impugned order on the following grounds of appeal:
1. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) was right in deleting the penalty u/s 271G when the assessee failed to furnish documentation as required under the Rule 10D(1) and sub section (3) of the section 92D of the I.T. Act in respect of international transactions entered into by it ?
P a g e | The ACIT-19(2) Vs. M/s Jasani 2. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) was justified in deleting the penalty u/s 271G without appreciating that the benchmarking of the entity level profit by the assessee cannot substitute the requirements of benchmarking of the international transactions to determine the arm length price ? 3. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) was right in deleting the penalty u/s 271G when there was a willful failure of the assessee to furnish segmental accounts pertaining to transactions made with AEs and non-AEs ? 4. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) erred in deleting the penalty u/s 271G by accepting the assessee's plea that it was difficult to link the purchases with the sales for computing net margin in respect of International transactions without appreciating that there is no exception to the requirement of maintaining documents and carrying out analysis by the most appropriate method to show that the international transactions entered into are at arm's length and that several methods have been prescribed for this purpose ? 5. Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) deleting the penalty on the ground of difficulty was justified, since it renders the provisions of Rule 10D redundant in cases like that of the assessee which can never be the intention of the legislature ? 6. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) was Justified in deleting the penalty on the ground that assessee has pointed out that the profit of AE is less than the profit of assessee, disregarding the fact that no financials of AE company were submitted by the assessee. ? 7. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) was correct in deleting the penalty on the ground there is no adjustment made in the ALP even though adjustment to ALP is not a precondition for levy of penalty u/s 271G ? 8. The appellant prays that the order of the Learned CIT(A) on the above grounds be set side and that of the AO be restored.
The appellant craves leave to amend or alter any ground or add a new ground which may be necessary. The appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored.”
Briefly stated, the assessee firm which is engaged in the business of importing and locally purchasing rough diamonds, getting them cut and polished, and finally exporting or locally selling the cut and polished diamonds had filed its return of income for A.Y. 2011-12 on 28.09.2011, declaring its total income at Rs.27,97,05,690/-. The return of income filed by the assessee was processed as such under Sec.143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2).
P a g e | The ACIT-19(2) Vs. M/s Jasani 3. During the course of the assessment proceedings the A.O referred the matter to the Joint Commissioner of Income Tax, Transfer Pricing Officer-2(2), Mumbai (for short „TPO‟) for determining the „Arms Length Price‟ (for short „ALP‟) of the international transactions of the assessee during the year under consideration. It was observed by the TPO, that the assessee during the year under consideration had entered into the following international transactions with its Associated Enterprise (for short „AE‟) viz. M/s Indigems N.V., Belgium:
Sr. No. Nature of international transaction(s) Amount in Rs.
Import of Rough Diamonds 19,21,75,511 2. Export of Rough Diamonds 7,79,09,391 3. Export of Polished diamonds 18,48,62,501 Total 45,49,47,403 The TPO in the course of the proceedings observed that the assessee had not maintained proper documentation to apply the TNM Method, CUP Method or any other prescribed method. It was observed by the TPO, that though the assessee had during the year carried out both AE and non-AE transactions, but no separate profitability of AE transactions and non-AE transactions was maintained by it. Also, it was observed by him, that as the assessee had not maintained qualitative details of the AE and Non-AE transactions, therefore, the CUP method could not be applied for benchmarking its international transactions. Observing, that the assessee had failed to maintain the documents as required under clause (g) of Rule 10D(1), and had further also failed to maintain a record of the analysis performed to evaluate comparability of uncontrolled transactions with the relevant international transaction as required under clause (h) of Rule 10D(1), the TPO initiated penalty proceedings under Sec. 271G of the Act.
The TPO issued a „Show Cause‟ notice (for short „SCN‟), dated 11.06.2015, and called upon the assessee to explain as to why penalty P a g e | The ACIT-19(2) Vs. M/s Jasani under Sec.271G may not be imposed for its failure to comply with the provisions of Sec.92D(3) and Rule 10D(1). The reply filed by the assessee, in order to impress upon the TPO that no penalty under Sec. 271G was liable to be imposed on it, however, did not find favour with him. Also, the TPO held a conviction that the assessee had failed to come up with a reasonable cause for explaining the failure on its part to maintain the documents prescribed under Rule 10D(1). It was observed by the TPO that the assessee had deliberately and wilfully withheld the information/documents pertaining to segmental accounts in respect of purchases and sales made with its AE & Non- AEs, for which reason he was prevented from performing any comparability analysis to determine the ALP in a fair manner, as envisaged in Sec.92C of the Act. Accordingly, the TPO was of the view that the assessee who had wilfully withheld the information/documents which were required for determining of the ALP could not be allowed to take shelter of Sec.273B of the Act. On the basis of his aforesaid observations, the TPO being of the view that the assessee had violated the statutory requirement contemplated under Rule 10D(1), clause (g) and clause (h), and Rule 10D(3) r.w.s. 92D, and had failed to maintain and produce the documents as were called for by him, therefore, imposed a penalty of Rs.90,98,948/- under Sec.271G of the Act.
Aggrieved, the assessee carried the matter in appeal before the CIT(A).The CIT(A) after deliberating on the contentions advanced by the assessee, was of the considered view that the penalty under Sec.271G levied on the assessee was neither fair nor reasonable. It was observed by the CIT(A), that keeping in view the nature of the business of diamond trade, substantial compliances made by the assessee, reasonable cause shown for its inability to furnish certain details called for by the TPO, and also the fact that no adjustment was P a g e | The ACIT-19(2) Vs. M/s Jasani made to the ALP by the TPO, the levy of penalty under Sec. 271G was not found to be justified. On the basis of his aforesaid observations the CIT(A) deleted the penalty of Rs.90,98,948/- imposed by the TPO under Sec.271G of the Act.
The revenue being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. Departmental Representative (for short „D.R‟) relied on the order passed by the TPO under Sec.271G of the Act. It was submitted by the ld. D.R, that as the assessee had deliberately and wilfully withheld information/documents pertaining to its segmental accounts in respect of the purchases and sales made with AE and Non-AEs, and by so doing had prevented the TPO from performing any comparability analysis for determining the ALP in a fair manner as envisaged under Sec.92C, therefore, it was rightly visited with penalty under Sec. 271G of the Act. It was submitted by the ld. D.R, that the CIT(A) was in error in setting aside the penalty which was rightly imposed by the TPO under Sec.271G of the Act.
Per contra, the ld. Authorized Representative (for short „A.R‟) for the assessee relied on the order passed by the CIT(A). In order to impress upon us that the assessee was not liable to be visited with any penalty under Sec.271G, the ld. A.R had drawn support from the orders of the coordinate benches of the Tribunal viz. (i) ACIT-19(1), Mumbai Vs. Dilip Kumar V. Lakhi (IT) (TP)A. No. 2142/Mum/2017, dated 02.08.2018; and (ii) DCIT-5(2)(2) Vs. Laxmi Diamond Pvt. Ltd. (ITA No. 2643 of 2017, dated 27.12.2018). It was submitted by the ld. A.R, that involving identical facts as were there in the case of the present assessee viz. manufacturing and trading of diamond, the Tribunal in the aforementioned cases had quashed the penalty that was imposed by the TPO under Sec.271G of the Act.
P a g e | The ACIT-19(2) Vs. M/s Jasani 8. We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements relied upon by them. As is discernible from a perusal of the orders of the lower authorities, the TPO had imposed penalty under Sec. 271G of the Act, for the reason, that the assessee had failed to comply with the provisions of Sec. 92D(3) and Rule 10D(1). In fact, the TPO had observed that there were primarily two fold non-compliances on the part of the assessee viz. (i). that, the assessee who as per clause (g) of Rule 10D(1) was required to maintain a record of the uncontrolled transactions taken into account for analysing 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, had however, failed to do so; and (ii). that, the assessee who as per clause (h) of Rule 10D(1) was required to maintain a record of the analysis performed to evaluate the comparability of uncontrolled transactions with the relevant international transactions, had however, failed to effect compliance to the said statutory requirement. Further, it was observed by the TPO, that the assessee despite specific directions had also failed to submit segmental accounts of the sales and purchases with its AE and non- AEs alongwith the carat price. Accordingly, it was observed by the TPO, that the assessee had not maintained proper documentation to apply the TNM method, CUP method or any other prescribed methods. To sum up, it was observed by the TPO, that though the assessee had both AE and non-AE transactions during the year, but no separate profitability of AE transactions and non-AE transactions was maintained by it.
P a g e | The ACIT-19(2) Vs. M/s Jasani 9. We have deliberated on the orders of the lower authorities and find that the TPO in the course of the penalty proceedings was driven by the fact that the assessee by not providing the requisite details, had thus, not only failed to substantiate the basis for comparing the transactions of the AE with the non-AEs, but had also failed to provide any other basis for benchmarking its international transactions with the AE. We find that the TPO had in his penalty order observed that due to the failure of the assessee to provide requisite data/information, as was called for by him in the course of the proceedings to facilitate correct benchmarking of the international transactions of the assessee with its AE, he could not examine and determine the arms length price and had to accept it as reflected by the assessee in its TP study report We find that the TPO in order to benchmark the international transactions of the assessee, had as a matter of fact required the assessee to furnish separate profit level indicator (PLI), either by furnishing the AE and non-AE segment wise Profit & loss account, and/or some other evidence to show that the international transactions aggregating to Rs. 45,49,47,403/- of the assessee with its AEs, viz. (i). import of rough diamonds (Rs. 19,21,75,511/-); (ii). Export of rough diamonds (Rs. 7,79,09,391/-); and (iii). Export of polished diamonds (Rs. 18,48,62,501/-), were at arms length price.
We find that the TPO pursuant to the notice u/s 92CA(2) along with a questionnaire issued to the assessee, had in order to verify as to whether the transactions entered into by the assessee with its AEs were at arms length, had called upon the assessee to submit documents mentioned as per Rule 10D(1) and 10D(3) of the Income tax Rules, 1962 along with other specific details. Also, the TPO had directed the assessee to furnish the documents specified under Sec. 92D and Sec. 92E of the Act. We find that the TPO after examining the P a g e | The ACIT-19(2) Vs. M/s Jasani details and documents available on record, had therein called upon the assessee to submit the segmental profitability for AE transactions and non-AE transactions. However, as the assessee had not maintained separate books of accounts for AE and non-AE segments, therefore, it expressed its inability to furnish the details in the manner the same were called for by the TPO. We find that the TPO in the absence of the segmental breakup of the AE and non-AE transactions, as was required by him, therein concluded that the failure of the assessee to furnish the requisite details had prevented him from benchmarking the international transactions of the assessee. Accordingly, the TPO for the failure of the assessee to furnish the requisite details initiated penalty proceedings under Sec. 271G of the Act. As the TPO did not found favour with the explanation of the assessee that no penalty under Sec. 271G was liable to be imposed in its hands, therefore imposed a penalty of Rs. 90,98,948/- i.e @ 2% of the aggregate value of the international transactions of Rs. 45,49,47,403/- in the hands of the assessee.
We find that the CIT(A) after deliberating at length on the nature of the business of manufacturing and trading of diamonds, had observed, that in the backdrop of the intricacies involved in the said business it was practically difficult for the assessee to furnish the information in the manner the same was called for by the TPO. In fact, the CIT(A) in the backdrop of an in depth study of the nature of the business of manufacturing and trading of diamonds, had in a very well reasoned manner culled out the peculiar nature of the trade of the assessee. We are of the considered view that a careful perusal of the very nature of the business of manufacturing and trading of diamonds therein glaringly reveals that certain information which was called for by the TPO could not be furnished by the assessee. We find that the CIT(A) had observed that as the assessee had purchased a P a g e | The ACIT-19(2) Vs. M/s Jasani mix of imported rough diamonds from AE and non-AEs, and had also sold/exported rough and polished diamonds to AE as well as the non- AEs, therefore, the Profit & loss a/c of the assessee reflected a mixture of purchases and sales both from the AE and the non-AEs. We are persuaded to be in agreement with the view taken by the CIT(A), that now when the rough/polished diamonds were traded on lot wise basis, therefore, it was difficult to identify and say whether a polished diamond came out of a particular lot of rough diamonds or the other and/or out of the polished diamonds purchased locally or imported by the assessee. As observed by the CIT(A), the export bills of the rough and polished diamonds exported to the AE and the non-AE revealed that the diamonds of varying size, quality, 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 rough 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 of rough diamond happened to be of exceptionally high carat value, therein making the tracing 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 diamond 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.
We find that the assessee had in the backdrop of the very nature of its business, viz. manufacturing and trading of diamonds, had though explained to the TPO the practical difficulties in furnishing P a g e | The ACIT-19(2) Vs. M/s Jasani segment wise Profit & loss account of the AE segment and the non-AE segment, however, the TPO insisted for the same and invoked Rule 10D of the Income-tax Rules, 1962. In fact, the TPO instead of determining the arms length price in respect of the international transactions of the assessee with its AE, rather went ahead and levied penalty under Sec. 271G in the hands of the assessee. We are not impressed with the manner in which the TPO had proceeded with the matter and imposed penalty under Sec. 271G on the assessee. We are of the considered view, that in light of the aforesaid practical difficulties which were being faced by the diamond industry, the TPO should have exercised the viable option of determining the arms length price of the international transactions of the assessee, either by making some comparison of realisation of prices in respect of export sales to AE and non-AEs by comparing prices of diamonds of similar size, quality and weight to the best extent possible, or in the alternative could have asked for the copies of the Profit & loss accounts and the Balance sheets of the AE in order to make an overall comparison with the gross profitability levels of the assessee with its AE, which would had clearly revealed diversion of profits, if any, by the assessee to its AE. We are further unable to comprehend that as to on what basis the TPO expected the assessee to have carried out the benchmarking by following CUP method. In our considered view, as the comparison by internal CUP method could only be made if two lots of diamonds were similar in size, colour, shape and clarity, which we are afraid, in light of the peculiar nature of the trade of the assessee would not be possible. We find ourselves to be in agreement with the CIT(A) that if one lot had diamonds of variety of size, colour, shape and clarity, the prices would vary from diamond to diamond and lot to lot, and further, now when the entire lot of diamonds had a common price tag per carat for the whole lot, therefore, it was not possible to P a g e | The ACIT-19(2) Vs. M/s Jasani evaluate the price of each diamond. We also cannot be oblivious of the fact that even otherwise in the diamond industry unless a diamond would weigh half carat or more or one carat or more the same would not be priced separately in the bill, because it was not practical to price diamonds of weights of lower than half carat or one carat separately weight wise per diamond in the lot. We have deliberated on the aforesaid peculiar facts involved in the business of diamond industry and are of the considered view that the insistence of the TPO that the assessee should have followed CUP method was misconceived 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 AE, the same would had revealed the gross profit margins and levels of profitability earned by the AE in their businesses and any abnormal variation in their gross profitability would had revealed the aberrations in the international transactions.
We are not inspired by the fault finding approach adopted by the TPO without understanding the intricacies involved in the business of the diamond industry and are of the considered view, that he instead of determining the arms length price by asking for the Profit & loss a/c and Balance Sheet of the AE and comparing the financial ratios in general, had rather hushed through the matter and imposed penalty under Sec. 271G of Rs. 90,98,948/- on the assessee. We also find that the assessee to the extent possible in the backdrop of the nature of its business had furnished several details on number of occasions with the TPO. We thus are of the considered view that the assessee had substantially complied with the directions of the TPO and had placed on his record the requisite information to the extent the same was practically possible in light of the very nature of its trade. We though are not oblivious of the fact that the assessee may not have effected absolute compliance to the directions of the TPO and furnished all the