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Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
Before: Shri Mahavir Singh & Shri G Manjunatha
O R D E R Per G Manjunatha, AM : This appeal filed by the revenue is directed against the order of the CIT(A)-55, Mumbai dated 28-06-2017 and it pertains to AY 2012-13. The revenue has raised the following grounds of appeal:-
“(i) "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 of the Act in the assessee's case even when the assessee had clearly failed in maintaining the documentation as required u/s. 920(3) of the Act. " (ii) "Whether on the facts and circumstances of the case and in law, the decision of the Ld. ClT(A) is not vitiated for the reason that the CIT(A) has not given any findings how the assessee has complied with the clause (d),
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(g), (h) and (m) of rule 10D(1), that has been specifically invoked by the TPO." -* (iii) "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was not incorrect in stating that the TPO should have asked for copies of profit and loss accounts and balance sheets of AEs to make an overall comparison with the gross profitability levels of the assessee with the AEs to ascertain diversion f profits, if any ignoring the finding of the IT AT in the case of Aztec Software Technology services Ltd. vs. ACIT (ITA No. 5S4/Bang./2006) in which it has been held that there is no legal requirement for the Assessing Officer to prima fasciae de'-ionstrate fax avoidance before invoking the provisions of section 92 and 92CA of the Act" (iv) "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that there was reasonable cause for noncompliance of sec. 920 r.w.r. 10D(1) without specifying the cause of such non-compliance or demonstrating how the same was reasonable." (v) "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the penalty for the reason that no adjustment was made to the ALP, failing to note that by not producing the material documents necessary to determine the ALP under any of the prescribed methods u/s. 92C(1), the assessee effectively prevented the TPO to make determination as recorded by the TPO in para 5 of the order u/s. 92CA(3)." (vi) "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was right in arriving at the conclusion that the TPO could have tried to work out the gross profits and net profits by averaging the purchase prices and the expenses in p/oporf/o/i of export sates of each one of the segments to arrive at average profitability of each segment and then to compare the same with the average profitability of other public companies whose details were available in public domain when it was not possible to do so in the absence of proper documentation. "
The brief facts of the case are that the assessee is engaged in the business of purchasing rough diamonds and manufacturing cut and polished diamonds. During the financial year relevant to AY 2012-13, the assessee has entered into international transactions with its associate enterprises. The assessee has applied PSM (profit split method) for benchmarking international transactions with the AE. The assessee has justified PSM by comparing profits actually made by the assessee to the profits that should have been earned,
3 ITA 5876/Mum/2017 based on the PSM. During the course of assessment proceedings, a reference was made u/s 92C(1) of the Income-tax Act, 1961 for computation of arm’s length price in relation to the international transactions. During the proceedings before the TPO, assessee was called upon to file necessary documents maintained in respect of transfer pricing study conducted to benchmark its international transactions. The assessee has filed necessary documents in support of PSM method. The TPO, after considering relevant information furnished by the assessee has not made any adjustment u/s 92CA(3) in respect of international transactions with its AE. However, he further observed that in view of the fact that the assessee has even failed to file basic information, no adjustment was made to the value of international transaction and from the material on record, it cannot be concluded, whether the international transactions are at ALP or not.
Thereafter, the TPO initiated penalty proceedings u/s 271G for failure to furnish relevant documentation as required to be produced under the provisions of Rule 10D of the I.T. Rules, 1962. Accordingly, a show cause notice dated 28-01-2016 was served and called upon the assessee to explain as to why penalty shall not be levied for non furnishing of documents that was specifically called for during the assessment proceedings. The assesse furnished its reply on 27-06-2016 and argued that it was unable to ascertain
4 ITA 5876/Mum/2017 the corresponding cost when the assessee is in the business of importing rough diamonds and manufacture cut and polished diamonds. The assessee further contended that considering the technicalities involved and the nature of trade and practice prevailing in industry, each diamond pocket looses its individual identity when it gets mixed in the lots purchased from AE as well as non AEs.
Therefore, considering the nature of trade, it is not possible for the assessee to prepare separate accounts for trading and manufacturing activities. The TPO, after considering relevant submissions of the assessee and also relying upon various judicial precedents, held that as per the provisions of clauses (d)(g)(h)(i) & (j) of Rule 10D(1), the assessee is required to maintain complete documentation in respect of international transactions with its AE and also further documentation to facilitate the TPO to compute arm’s length price.
Although, the assessee has furnished certain documents in respect of method selected for benchmarking these international transactions, but it has arrived at PSM on adhoc basis without specifying how such bifurcation has been made between transactions with AE as well as non AEs. The TPO further observed that though the assessee applied PSM method, it has failed to produce basic requirement under the method, i.e. the profits earned by the AE and assessee from each transaction so that profit could be split having reasonable basis as mandated under rule 10D(1)(d). As regards CUP method, the assessee has 5 ITA 5876/Mum/2017 failed to make a quantitative and qualitative reconciliation in respect of AE / non AE sale or purchase. The assessee has failed to substantiate the choice of most appropriate method and maintaining proper documentation, that is sufficient to make the charge. Thus, he came to the conclusion that the reason given for not maintaining complete documentation as required by the TPO does not come under the provisions of section 273B. Therefore, opined that it is a fit case for levy of penalty u/s 271G for failure to comply with clauses (d)(g)(h)(i) & (j) of Rule 10D(1). Accordingly, he levied penalty of 2% of total international transactions which worked out to Rs.1.5 crores. Aggrieved by the penalty order, assessee preferred appeal before the CIT(A).
Before the CIT(A), the assessee has filed elaborate written submissions, which has been reproduced at para 7 on pages 8 to 30 of order of Ld.CIT(A).
The sum and substance of the arguments of the assessee before the Ld.CIT(A) are that it is not a case of TPO / AO that the assessee could not file any details.
But, the TPO was of the opinion that documents as required under the provisions of Rule 10D(1) are not furnished in order to compute arm’s length price of international transactions, ignoring the fact that when the assessee has filed complete documentation in respect of method chosen for computing ALP and such method has been accepted without making any adjustment, there is no reason for the TPO to come to the conclusion that the assessee has 6 ITA 5876/Mum/2017 failed to comply with the provisions of Rule 10D(1) of I.T. Rules, 1962. The Ld.CIT(A), after considering relevant submissions of the assessee and also by relying upon various judicial precedents held that levy of penalty u/s 271G of the I.T. Act, 1961 under the given facts and circumstances of the case is neither fair nor reasonable, and therefore, it is not justified under the facts of the case because considering nature of diamond trade, the assessee has made substantial compliance and also showed reasonable cause for not fulfilling the requirement of the TPO in light of provisions of Rule 10D(1). Therefore, the AO was incorrect in levying penalty u/s 271G of the I.T. Act, 1961. The relevant observations of the Ld.CIT(A) are as under:-
“8.15 I have gone through the above and found that the facts of the above case laws are similar to the facts of the appellant's case. In view of the above, I am of the opinion that levy of penalty u/s.271G of the I.T.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 appellant and the reasonable cause showed by the appellant and above all, when there is no adjustment made in the ALP. In nutshell, the levy of penalty of Rs.1,50,00,000/- under section 271G of LT.Act, 1961 is hereby deleted. In this regard, reliance is also placed on following decisions: 1) ITO V/S. Nets Soft India Ltd. -2013/35/Taxmann.Com/579/Mumbai ITAT 2) ACIT V/S. Gillette India Ltd.—2015/54/Taxmann.Com/313/Jaipur ITAT 8.16 In view of the fact that levy of penalty under section 271G of LT.Act, 1961 is itself deleted, other objections raised by the assessee before the TPO and in appeal are not considered relevant and are not discussed. In nutshell, levy of penalty under section 271G of LT.Act, 1961 is hereby deleted.”
The Ld.DR submitted that the Ld.CIT(A) was erred in deleting penalty levied u/s 271G of the Act, even when the assessee had clearly failed in maintaining the documentation as required u/s 92D(3) of I.T. Act, 1961. The 7 ITA 5876/Mum/2017 Ld.DR further submitted that the Ld.CIT(A) was erred in not considering facts brought out by the TPO in light of provisions of Rule 10D(1)(ii)(b) & (m) and also brought out clear facts in the light of documentation furnished by the assessee to come to the conclusion that requirement of law has not been complied with. Therefore, it is a fit case for levy of penalty u/s 271G of the Act.
The Ld.DR further submitted that the Ld.CIT(A) was not correct in stating that the TPO should have asked for copies of P&L account and balance-sheets of AE to make an overall comparison with the gross profitability with the levels of the assessee with the AEs to ascertain diversion of profits, if any ignoring the findings of the ITAT in the case of Aztec Technology Services Ltd vs ACIT (ITA No.584) to prima facie demonstrate tax avoidance before invoking the provisions of sections 92 and 92C of the Act.
The Ld.AR, on the other hand, strongly supporting the order of the Ld.CIT(A) submitted that it is not a case of the TPO that the assessee has not furnished any documentation in respect of the method selected for benchmarking international transactions. In fact, the assessee has filed complete list of documents in respect of profits split method and the TPO has accepted documents filed by the assessee and not made any adjustment u/s 92CA in respect of international transactions. The Ld.AR further submitted that when the TPO has asked for specific documentation in respect of CUP
8 ITA 5876/Mum/2017 method, the assessee could not furnish certain documents as required by the TPO, therefore, it cannot be said that the assessee has not furnished any document in respect of international transactions. The Ld.AR further submitted that considering the nature of diamond industry and its complexity, it is difficult to maintain each item-wise documentation because each diamond pocket loses its individual identity when it gets mixed in the lots purchased from AE as well as non AE. Therefore, the Ld.CIT(A) has rightly apprised the facts in the light of complexity of the trade to come to the conclusion that it is not a fit case for levy of penalty u/s 271G and his order should be upheld. In this regard, he relied upon the decision of Hon’ble Delhi High Court in the case of CIT vs Leroy Somer And Controls (India) P. Ltd (2014) 360 ITR 532 (Del). The Ld.AR for the assessee has also relied upon the decision of ITAT, Mumbai Bench in the case of ACIT vs D. Navinchandra Exports (P) Ltd (2017) 87 taxmann.com 306.
We have heard both the parties, perused the materials available on record and gone through the orders of authorities below. The AO levied penalty u/s 271G for failure to comply with the provisions of Rule 10D(1)
(d)(g)(h)(i)(j) & (m) of I.T. Rules, 1962. According to the AO, the assessee even failed to file basic documentation in respect of profits split method selected for benchmarking its international transactions. The AO further observed that in 9 ITA 5876/Mum/2017 respect of CUP method, the assessee could not file segment-wise profit & loss account in order to compare the profitability of each segment and compare the same with transactions with its AE. Therefore, he opined that the assessee has failed to comply with provisions of Rule 10D(1) and hence, it is a fit case for levy of penalty u/s 271G. It is the contention of the assessee that it is not a case of AO that no documentation was furnished in respect of method selected for benchmarking its international transactions, because the AO has accepted profits split method selected by the assessee to benchmark its international transactions with its AE without making any adjustment u/s 92CA of the Income-tax Act, 1961. The AO is on the point that the assessee could not file complete documentation as required u/r 10D(1) in respect of other methods selected by the AO / TPO, i.e. CUP. When the assessee is maintaining documentation in respect of PSM, it is difficult for the assessee to arrange or produce documents as required by the AO in respect of any other method selected for benchmarking international transactions with its AE. Therefore, the AO / TPO was incorrect in coming to the conclusion that the assessee has not complied with provisions of Rule 10D(1) and it is a fit case for levy of penalty u/s 271G of the Act.
Having heard both the sides and considered material on record, we find that the assessee has filed certain documents required by the TPO in order to 10 ITA 5876/Mum/2017 compute ALP of international transactions, this is evident from the fact that the TPO did not make any adjustment u/s 92C of the Income-tax Act, 1961.
The dispute arose only when the TPO has asked the assessee to furnish further documentation in light of another method selected for benchmarking international transactions of the assessee with its AE. When we go through the reasons given by the assessee for not complying with the provisions of Rule 10D(1), in light of industry specific, ie. diamond trading industry, we find that it was unable to ascertain the corresponding cost when the rough diamond has been cut and polished, it loses its individual identity and gets mixed in the lots purchased from AE as well as non AE. Therefore, considering the nature of trade, it is not possible for the assessee to prepare separate accounts for trading and manufacturing activities so as to compare its international transactions with its AE segment-wise. Therefore, assessee has chosen profits split method in order to benchmark its international transactions with AE. We further noted that the department has accepted profits split method adopted by the assessee to benchmark its international transaction in the past and during the year under consideration as there is no adjustment is made u/s 92C of the Income-tax Act, 1961. When there is no adjustment is made u/s 92CA in respect of international transactions with its AE, the AO was erred in levying penalty u/s 271G for not furnishing segmental profitability of AE transactions
11 ITA 5876/Mum/2017 and non AE transactions even though the assessee has made out a case that it is difficult to furnish segment-wise P&L Account of AE segment and non AE segment considering the nature of industry and its complexity. Therefore, we are of the considered view that the AO was erred in levying penalty u/s 271G of the Income-tax Act, 1961.
Coming to the case laws relied upon by the assesse. The assessee has relied the decision of Hon’ble Delhi High Court in the case of CIT vs Leroy Somer And Controls (India) P. Ltd (supra). The Hon’ble Delhi High Court, after considering relevant facts and also provisions of section 271G held that when the assessee has furnished specific information or documentation, the other documentation or information relating to data base or transactions entered into by third parties may collation or collection from time to time, therefore, when the assessee has furnished details, the AO was erred in levying penalty u/s 271G for non compliance with provisions of Rule 10D without specifying which particular documentation was not furnished by the assessee. The relevant observations of the Court are as under:-
“Held, dismissing the appeal, that the order passed by the Assessing Officer merely recorded that there was failure to file rule 10D documentation without specifying or stating which document or information was not furnished in spite of the notice calling for the information or document under section ,92D(3). In the absence of the basic details or facts, the order of the penalty under section 271G could not be sustained.”
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An identical issue has been considered by the co-ordinate bench of Mumbai Bench “K” in the case of ACIT vs D Navinchandra Exports (P) Ltd (supra). The Tribunal, after considering facts and difficulties of industry specific held that where TPO directed assessee diamond merchant to furnish segmental profitability for AE transactions and non AE transactions, since practically difficult in furnishing segmental profitability for AE segment and non AE segment, so expressed by diamond industry, penalty u/s 271G was not called for. The relevant observations of the Tribunal are as under:-
“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. The Commissioner (Appeals) had observed that as the assessee had purchased a mix of imported rough and polished diamonds from AEs and non-AEs, and had also sold/exported rough and polished diamonds to AEs as well as the non- AEs, the Profit & loss account of the assessee reflected a mixture of purchases and sales both from the AEs and the non-AEs. The view of the Commissioner (Appeals) was to be agreed that now when the rough/polished diamonds were traded on lot wise basis, 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 by the assessee. The export bills of the cut and polished diamonds exported to the AEs and the non-AEs 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 cut and polished diamonds purchased and sold locally and/or purchased from abroad but sold locally. 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. 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, wherein the 13 ITA 5876/Mum/2017 aforesaid aspects involved in the diamond manufacturing business were explained. [Para 18] • 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 arm's length price of the international transactions of the assessee, either by 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, or in the alternative could have asked for the copies of the profit & loss accounts and the balance sheets of the AEs in order to make an overall comparison with the gross profitability levels of the assessee with its AEs, which would have clearly revealed diversion of profits, if any, by the assessee to its AEs. It cannot be comprehended as to on what basis the TPO expected the assessee to have carried out the benchmarking by following CUP method. 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 in light of the peculiar nature of the trade of the assessee would not be possible. 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 evaluate the price of each diamond even otherwise in the diamond trade line, 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. The insistence of the TPO that the assessee should have followed CUP method was misconceived and impractical. If the TPO would have carried out a comparison of the profit & loss account and balance sheets of the AEs, the same would have 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 have revealed the aberrations in the international transactions. [Para 1 9] The nature and level of business of the assessee during the year under consideration had increased almost two fold. While for the gross profits of the assessee had also increased from 7.4 per cent for assessment year 2010-1 1 to 8.7 per cent for the year under consideration, viz. assessment year 201 1-12, the Net profit had also witnessed a growth from 3.9 per cent in the immediate preceding year to 4.9 per cent during the year under consideration. As observed by the Commissioner (Appeal) that in the preceding year, i.e assessment year 2010-1 1 the TPO did not propose any adjustment in the ALP. There is the fault finding approach adopted by the TPO without understanding the intricacies of the diamond manufacture and trading business, he instead of determining the arm's length price by asking for the Profit & loss account and Balance Sheets of the AEs and comparing the financial ratios in general, had rather hushed through the matter and imposed penalty under section 27 1G on the assessee. The assessee to the extent possible in the backdrop of the nature of its trade had furnished several details on several occasions from time to time with the TPO. Thus, the assessee had substantially complied with the directions of the TPO and placed on his record the requisite information, to the extent the same was practically possible in 14 ITA 5876/Mum/2017 light of the very nature of its trade. Though the assessee may not have effected absolute compliance to the directions of the TPO and furnished all the requisite details as were called for by him on account of practical difficulties failure to the said extent on the part of the assessee to comply with the directions of the TPO can safely be held to be backed by a reasonable cause, which thus would bring the case of the assessee with the sweep of section 273B. Thus, in the backdrop of aforesaid observations the view taken by the Commissioner (Appeals) was to be agreed. [Para 20]”
In this view of the matter and respectfully following the case laws discussed hereinabove, we are of the considered view that there is no error in the finding recorded by the Ld.CIT(A) while deleting penalty levied u/s 271G of the I.T. Act, 1961. Hence, we are inclined to uphold the findings of Ld.CIT(A) and dismiss the appeal filed by the revenue.
In the result, appeal filed by the revenue is dismissed.
Order pronounced in the open court on 10 -04-2019.