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Income Tax Appellate Tribunal, MUMBAI BENCHES “K”, MUMBAI
Before: Shri Mahavir Singh & Shri Rajesh Kumar
O R D E R Per Rajesh Kumar, Accountant Member
The aforesaid appeal has been filed by the Revenue against the impugned order, dated 30.11.2016, passed by the CIT(A)- 55, Mumbai, for the assessment year 2011-12.
The Revenue has raised the following grounds of appeal:
1. Whether CIT(A) was correct in deleting the penalty levied u/s 271G by holding that the assesses had made substantial compliance, failing to note that under TNMM adopted by the assessee, the profit of the international transaction has to be furnished, whereas the assessee has only furnished the entity level margins which consists of overall profits on AE and significant non-AE transactions.
2. Whether the decision of the CIT(A) is not vitiated for the reason that the CIT(A) has not given any finding on how the assessee has complied with clause (d), (g),(h) and (m) of Rule 10D(1), that have been specifically invoked by the TPO.
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Whether the CIT(A) was not incorrect in stating that the TPO should have asked for copies of profit and loss accounts and balance sheets of AE's to make an overall comparison with the gross profitability levels of the assessee with AE's to ascertain diversion of profits, if any, ignoring the finding of the IT AT in the case of Aztec software Technology Services Ltd vs ACIT(ITA No 584/Bang/2006), in which it has been held that there in no legal requirement for the AO to primefacie demonstrate tax avoidance before invoking the provisions of section 92 and 92CA of the Act.
4. The Ld. CIT(A) erred in holding that there was reasonable cause for non-compliance of sec.92D r/w Rule 10D(1) without specifying the cause of such noncompliance or demonstrating how the same was reasonable.
5. 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 assesses effectively prevented the TPO to make any determination as recorded by the TPO in para 6 of the order u/s 92CA(3).
6. The appellant prays that the order of the Ld.CIT(A) on the above grounds be set aside and that of the AO be restored.
3. The only issue raised by the Revenue in all these grounds is with respect to the deletion of penalty imposed by the Assessing Officer u/s. 271G of the Act without appreciating the fact that under Transactional Net Margin Method (TNMM) adopted by the assessee, the profit of international transaction has to be furnished, whereas the assessee has only furnished the entity level margins, which consists of overall profits on AE and significant non-AE transactions.
The facts in brief are that during the year under consideration, the assessee has a turnover of ` 636.14 crores out of which export sales amounted to ` 238.35 crores. The sale transactions with AE were ` 28.3 crores. Thus, assessee’s turnover with AE accounted for 12% of the export sale. The assessee in its Transfer Pricing study report has followed TNMM method for the purpose of benchmarking. The operating profit/operating
3 IT(TP)A No.2142/Mum/2017 M/s. Di;ipkumar V Lakhi cost has been used as Profit Level Indicator (PLI). For the purpose of comparison, the assessee has compared its entity level margins (14.72%) with that of comparable companies margin (9.55%) and claimed that the transactions are at arm’s length. The entry level margins of assessee included its combined profit in transactions with AEs and non-AEs. The TPO called upon the assessee to submit segmental profitability separately from AE and non-AE segment. Accordingly, the details had been called for by the TPO within the meaning of section 92D(3) of the Income tax Act, 1961. The details are relevant within the provisions sub clauses (d), (g) and (h) of Rule 10D(1) of the I.T.Rules. The assessee failed to submit the details and, therefore, TPO came to the conclusion that it is a fit case for levy of penalty u/s 271G of the I.T.Act. He thus, levied penalty of ` 56,72,162/- being 2% of the international transaction with the AE by holding and observing as under: a)The TPO has called for specific details within the meaning of section 92D(3) of Income Tax Act, 1961. b)The details were not filed within 30 days or at any time subsequently. c)The details were essential for benchmarking the transaction of assessee with AE. d)The assessee could also not provide any alternate method of benchmarking the transaction based on material available on record. e)In the absence of material the TPO was forced to accept the transactions to be at arm's length after initiating penalty proceedings under section 271G of Income Tax Act, 1961.
Aggrieved by the order of the TPO, assessee preferred appeal before the CIT(A), who deleted the penalty by observing as under:
I have gone through the above and found that the facts of the above case laws are similar to the facts of the assessee'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
4 IT(TP)A No.2142/Mum/2017 M/s. Di;ipkumar V Lakhi compliance made by the assessee and the reasonable cause showed by the assessee and above all, when there is no adjustment made in the ALP. In nutshell, the levy of penalty of Rs.56,72,162/- under section 271G of I.T.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
In view of the fact that levy of penalty under section 271G of I.T.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 I.T.Act, 1961 is hereby deleted.
The learned AR, at the outset, submitted that the case of the assessee is squarely covered by the decision of the co-ordinate Bench of the Tribunal with identical facts, vide order dated 25.10.2017, in the case of ACIT vs. D Navinchandra Exports Pvt. Ltd. in for A.Y. 2011-12, wherein identical issue has been decided in favour of the assessee. The learned AR prayed in view of the said decision of the co-ordinate Bench, the order of the CIT(A) be confirmed.
Per contra, learned DR relied on the order of the TPO and grounds of appeal before us.
Having perused the material on record and after hearing both the parties vis-à-vis the decision of the co-ordinate Bench of the Tribunal in the case of ACIT vs. D Navinchandra Exports Pvt. Ltd. (supra), we observe the identical issue has been decided by the Bench in favour of the assessee. The operative part of the decision is as under:
“18. We find that the CIT(A) after deliberating at length on the nature of the business of manufacturing and trading of diamonds, therein concluded that in the backdrop of the intricacies involved in the said business it was practically difficult for the assessee to furnish the 5 IT(TP)A No.2142/Mum/2017 M/s. Di;ipkumar V Lakhi information in the manner the same was called for by the TPO. We find that the CIT(A) in the backdrop of an indepth study of the nature of activities involved in 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 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, therefore, the Profit & loss a/c of the assessee reflected a mixture of purchases and sales both from the AEs and the non-AEs. We are persuaded to be in agreement with the view of 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 by the assessee. We find that 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. 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 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. We find that 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, 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 of diamonds, had though explained to the TPO the practical difficulty in furnishing 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, and instead of determining the arms length price in respect of the international transactions of the assessee with its AEs, 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 assessee had proceeded with the matter and imposed penalty under Sec. 271G in the hands of the assessee. We are of the considered view that in light of the aforesaid
6 IT(TP)A No.2142/Mum/2017 M/s. Di;ipkumar V Lakhi 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 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 had clearly revealed diversion of profits, if any, by the assessee to its AEs. 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. We are of the considered view that 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, as observed by us at length hereinabove, 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 evaluate the price of each diamond. We also cannot be oblivious of the fact that 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. We have deliberated on the aforesaid peculiar facts involved in the business of diamond trading 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 AEs, the same would had 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 had revealed the aberrations in the international transactions.
We further find that as stands gathered from the records, the nature and level of business of the assessee during the year under consideration had increased almost two fold. We find that while for the gross profits of the assessee had also increased from 7.42% for A.Y. 2010-11 to 8.71% for the year under consideration, viz. A.Y. 2011-12, the Net profit had also witnessed a growth from 3.9% in the immediate preceding year to 4.9% during the year under consideration. We further find that as observed by the CIT(A) that in the preceding year, i.e A.Y. 2010-11 the TPO did not propose any adjustment in the ALP. We are not inspired by the fault finding approach adopted by the TPO without
7 IT(TP)A No.2142/Mum/2017 M/s. Di;ipkumar V Lakhi understanding the intricacies of the diamond manufacture and trading business, 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 Sheets of the AEs and comparing the financial ratios in general, had rather hushed through the matter and imposed penalty under Sec. 271G of Rs. 2,15,98,527/- on the assessee. We also find that 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. We thus are of the considered view that 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 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 requisite details as were called for by him on account of practical difficulties as had been deliberated by us at length hereinabove, but however, in the backdrop of our aforesaid observations, we are of the considered view that the failure to the said extent on the part of the assessee to comply with the direct ions 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 Sec. 273B of the ‘Act’. We thus in the backdrop of our aforesaid observations find ourselves to be in agreement with the view taken by the CIT(A,) and finding no reason to dislodge his well reasoned order, therefore, uphold the same. We thus uphold the order of the CIT(A) and the resultant deletion of the penalty of Rs. 2,15,98,527/- imposed by the TPO. 21.The appeal of the revenue is dismissed.”
Since the facts of the assessee’s case are materially same with the decision as discussed hereinabove. We, therefore, respectfully following the said decision of the co-ordinate Bench, which has been rendered under identical facts and circumstances, we are inclined to uphold the decision of the learned CIT(A) deleting the penalty.
In the result, the appeal of the Revenue is dismissed. Order pronounced in the open court on 02.08 2018