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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI RAJENDRA, AM & SHRI RAVISH SOOD, JM
आदेश / O R D E R
PER RAVISH SOOD, JUDICIAL MEMBER:
The present appeals filed by the revenue are directed against the respective orders passed by the Commissioner of Income tax (Appeals)-55, Mumbai [for short CIT(A)] in the case of the aforementioned respective assesses, viz. M/s D. Navinchandra Gems Pvt. Ltd., dated. 28.04.2016; M/s D. Navinchandra Exports Pvt. Ltd.; M/s Akshar Impex Pvt. Ltd.; and M/s Dhanera Diamonds, each dated. 29.04.2016, which in itself arises from the respective orders passed by the Transfer Pricing Officers (for short ‘TPO’), dated. 24/29.07.2015, imposing penalty under sec. 271G of the Income-tax act, 1961 (for short ‘Act’). That as the penalty was imposed by the TPO in the backdrop of certain common facts under Sec. 271G, which thereafter had been deleted by the CIT(A)-55, Mumbai on the basis of the same reasoning, therefore, the said appeals are taken up and being disposed of by way of a consolidate order. We first take up the in the case of M/s D. Navinchandra Exports Pvt. Ltd. The revenue assailing the order passed by the CIT(A)-55, Mumbai, had raised before us the following grounds of appeal:-
1. Whether the Ld. CIT(A) was correct in deleting the penalty levied u/s 271G by holding that the assessee had made substantial compliance, failing to note that under TNMM adopted by the ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 4 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 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 Ld. CIT(A) is not vitiated for the reasons that the Ld. CIT(A) has not given any finding on how the assessee has complied with clause (d), (g), (h) and (m) of Rule 100(1), that have been specifically invoked by the TPO.
3. Whether the Ld. CIT(A) was not correct 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 Hon 'ble ITA T in the case of Aztec Software Technology Services Ltd. vs. ACIT (ITA No. 584/Bang/2006), in which it has been held that there is no legal requirement for the AO to prima fade demonstrate tax avoidance before invoking the provisions of section 92 and 92CA of the Act. 4. "The Id. Ld. CIT(A) erred in holding that there was reasonable cause for non compliance of sec. 920 r/w Rule 190(1) without specifying the cause of such non compliance 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 assessee effectively prevented the TPO to make any determination as recorded by the TPO in para 5 of the order u/s 92CA (3) .
6. Whether the order of Ld. C!T(A) is not vitiated due to inherent contradictions in the order, as the CIT(A) states at para (C) at page 23 of the order that only likes are to be compared whereas, at para 10, page 25, the Ld. CIT(A) blames the TPO for not having compared average realization per carat of AE and non-AE, when penalty has in fact been imposed as assessee failed to make intensive comparison of AE and non- AE prices.
7. Whether the Ld. CIT(A) was correct in holding that the TPO could have worked out the profitability of AE segment by allocating all costs of expenses to AE and non-AE segment in the ratio of AE sales to non AE sales failing to note that such a determination of profitability will give a notional PLI that is same for both AE and non AE segments and is on an assumption that assessee earns same rate of profits on AE and non-AE transactions without establishing its actual profitability on AE transactions. The Appellant craves leave to add, to amend and / or to alter any of the grounds of appeal, if need be. . The Appellant, therefore, prays that on the grounds stated above, the order of the CIT (A)-55, Mumbai may be set aside and that of the Assessing Officer restored.
ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 5 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 2. Briefly stated, the facts of the case are that a reference u/s 92CA(1) of the ‘Act’, dated 14.10.2013 was received by the Transfer Pricing Officer (for short ‘TPO’) from the DCIT-5(1), Mumbai (for short ‘A.O’) for determination of Arms Length Price (hereinafter referred to as ‘ALP’) with regard to the following international transactions which were reported by the assessee in Form 3CEB: S.No. Nature of International Transactions Amount in (Rs.) 1. Purchase of rough diamonds 51,61,89,878 2. Export of rough diamonds 1,12,87,163 3. Export of finished/polished diamonds 55,16,14,316 4. Purchase of polished Diamonds 8,34,997 Total 107,99,26,354
During the course of the proceedings it was noticed by the TPO that the assessee during the year under consideration had a total turnover of Rs.532.97 Crores, out of which export sales amounted to Rs.493.79 Crores. That out of total export sales the assessee had carried out sales to the AEs of Rs.56.29 Crores. The TPO further observed that the assessee had made total purchases of Rs.478.80 Crores during the year, which comprised of imports made by the assessee of Rs.442.04 Crores. The TPO deliberating on the records observed that the assessee had during the year under consideration carried out purchase of rough/polished diamonds from the AEs to the extent of Rs. 59.70 Crores. Thus, in the backdrop of the aforesaid facts it was gathered by the TPO that the sales of the assessee to its AE’s were to the extent of 10.5% of its turnover, while for the purchases made from them were to the tune of 10.8% of the total purchases. The TPO observed that the Transfer pricing study report (for short ‘TPSR’) of the assessee revealed that it had followed the ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 6 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 Transaction Net Margin Method (for short ‘TNMM’) for the purpose of benchmarking the international transactions carried out with its AEs. The Operating profit/Operating cost was adopted by the assessee as the Profit Level Indicator (for short ‘PLI’). The TPO observed that the assessee resorting to comparison on the basis of entity level margins (6.13%) as against that of comparable companies margin (3.4%), had thus in the backdrop of the said comparison claimed that its international transactions were at arms length. The TPO observed that the entity level margins of the assessee included its combined profits in transactions with the Associate Enterprises (for short ‘AEs’) and non Associate Enterprises (for short ‘non-AEs’).
The TPO in order to verify as to whether the transactions entered into by the assessee with its AEs were at arms length with that entered into by the third party in comparable situation with independent parties, therein issued a notice u/s 92CA(2) along with a questionnaire to the assessee on 24.07.2014, therein calling upon it to submit documents mentioned as per Rule 10D(1) and 10D(3) of the Income tax Rules, 1962 along with other specific details. That on change of incumbent a fresh notice was issued by the TPO vide his letter dated 23.09.2014 and the assessee was directed to furnish the documents specified under Sec. 92D and Sec. 92E of the ‘Act’. The TPO further examining the details and documents available on record, called upon the assessee to submit the segmental profitability for AE transactions and non-AE transactions. The assessee expressed its inability to furnish details in the manner the same were called upon by the TPO, for the reason that it had not maintained separate books of accounts for AE and non-AE segments. The TPO in the absence of the segmental breakup of the AE and non-AE transactions, therein concluded that it was prevented from benchmarking various transactions and for the said failure of the assessee to furnish the ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 7 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 requisite details issued a show cause notice to the assessee, calling upon it to explain as to why penalty under Sec. 271G may not be imposed on it.
The TPO in the course of the penalty proceedings observed that the arms length price (for short ‘ALP’) in relation to an international transaction was to be determined as per either of the methods contemplated in Sec. 92C(1) r.w Rule 10B, which in the backdrop of the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or other relevant factors as the Board may prescribe, namely: (i). Comparable Uncontrolled Price method; (ii). Resale Price Method; (iii).Cost Plus Method; (iv). Profit Split Method; (v). Transactional Net Margin Method; (vi). Such other method as may be prescribed by the Board.
That in the backdrop of the fact that the assessee himself had selected the TNMM as the most appropriate method, the TPO therefore deliberated on Rule 10B(1)(e) which prescribed the methodology for determining the ALP as per the said method. The TPO observed that in order to find out as to whether the transactions entered into by the assessee with its AEs were at arms length with that entered into by the third party in comparable situation with independent parties, the separate segmental results in assesses transactions with AEs and non AEs would be indispensably required. The TPO also not inspired by the benchmarking carried out by the assessee on the basis of entity level margins, therein observed that in such a case the loss in transactions with AE segment could easily be set off with the profits of ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 8 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 the non-AE segment. The TPO thus holding a conviction that a correct benchmarking could not be carried out unless the assessee submits correct margins in respect of transactions with AEs and non-AEs. Thus, in the absence of the segmental details in respect of AE and non-AE segments having been furnished by the assessee, it was observed by the TPO that the non-availability of the said data therein rendered the entire exercise of benchmarking the transactions futile. The TPO in order to drive home his aforesaid view that entity level benchmarking does not lead to correct results and the same will not stand the test of Rule 10B(1)(e) relied on the orders of the Tribunal in the case of (i). UCB India Vs. ACIT 121 ITD 131 (Mum); (ii). Aztec Software & Technology Services Ltd. (2007) 107 ITD 141 (Bang) (SB) and OECD TP guidelines. Thus, the TPO in the backdrop of his aforesaid observations called upon the assessee to furnish the requisite details in terms of Sec. 92D(3). However, the assessee once again expressed its inability to furnish the requisite information for certain reasons, viz. (i). that no separate books of accounts for AE and non-AE transactions were maintained; (ii). functions performed and assets deployed for transactions with AE and non-Ae were the same; and (iii). that even the comparable did not have segmental disclosures etc. The assessee failed to file the details till the date of passing of the order by the TPO on 20.01.2015, as a result whereof the latter failed to properly benchmark the transactions.
That on the failure on the part of the assessee to furnish the requisite details, the TPO after a lapse of a period of one month after the details were called for issued a show cause notice to the assessee, therein calling upon it explain as to why penalty under Sec. 271G may not be imposed on it for its failure to furnish the said requisite details. The assessee submitted its replies vide letters dated. 09.07.2015 and 22.07.2015. The TPO deliberating on Sec. 92 of the ‘Act’ which deals ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 9 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 with maintenance, keeping of information and documents by persons entering into international transactions, therein observed that as per Sec. 92D(1) every person who had entered into an international transaction remained under a statutory obligation to keep and maintain such information and documents as are prescribed in Rule 10D. The TPO further observed that as per Sec. 92D(3) powers were vested with him to call for details in respect of international transactions and other relevant details from the assessee.
The assessee in its reply to the show cause notice issued by the TPO as to why penalty under Sec. 271G may not be imposed on it, therein objected to the same, as under: (1). That as per the assessee the maintaining of the details as per Clause (g) and (h) of Rule 10D was not called for in the case of the assessee, as the same would have been required only if the assessee would had followed CUP method for benchmarking the transactions; (2). That as per the assessee the Rule 10D nowhere required the assessee to have PLI working of AE segment and non AE segment and only prescribed the details of documents which were required to be maintained. It was the contention of the assessee that the aforesaid rule did not prescribe the method by which TNMM method operates. (3). That as per the assessee it was not possible to maintain the accounts of AE and non-AE separately considering the nature of trade. It was the claim of the assessee that it was not possible to bifurcate the purchase cost, the overhead expenses and the stocks between the transactions with AE and non-AE. (4). That it was further averred by the assessee that in the preceding year too the assessee had benchmarked the transactions as per ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 10 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 TNMM, which was accepted by the department and no adjustment was made by the department. (5). That it was submitted by the assessee that now when the data of comparable company was based on entity level margin, therefore, that was all the more a reason that the assesses own margins in respect of its transactions with AE was not required to be compared with its transactions with the non-AEs. (6). The assessee to fortify and support the benchmarking of the transactions carried out by it, therein relied on the order of the ITAT, Hyderabad in the case of Annapurna Business Solutions Vs. ACIT, Circle 6(1) (17 taxmann.com 125). (7). The assessee further averred that as it had vide its reply dated. 22.07.2015 submitted segmental details of AE and non-AE transactions, therefore, no penalty for non-furnishing of the requisite details was liable to be imposed on it under Sec. 271G. (8). The assessee further placed reliance on the judgment of the Hon’ble High Court of Delhi in the case of Cargill India Pvt. Ltd. Vs. Dy. CIT [300 ITR 223 (Del)] and the order of the ITAT , Chennai in the case of SSL –TTK Ltd. [ITA No. 544/Mds/2011- A.Y. 2006-07]. (9). Alternatively, it was submitted by the assessee that even if penalty was to be imposed in its hands, then the same was liable to be restricted to the higher figure of the sale and purchase and not on the aggregate of the same.
The TPO after deliberating on the explanation of the assessee that no penalty under Sec. 271G was liable to be imposed in its hands, however, did not find favour with the same for the following reasons:
ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 11 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 (1). That as regards the contention of the assessee that the requirement of maintaining details as per Rule 10D(g) and Rule 10D(h) and segmental reporting of the AE and non-AE transactions was required only if the transactions would have been benchmarked by the assessee adopting CUP basis, and there was no such requirement now when the assessee had benchmarked the transactions on TNMM basis, however, did not find favour with the TPO. The TPO observed that a perusal of Rule 10B(1)(e) wherein the methodology for benchmarking the transactions as per TNMM basis was prescribed, clearly provided that in order to find out as to whether the transactions entered into by the assessee with its AEs were at arms length with that entered into by the third party in comparable situation with independent parties, the separate segmental results of the assesses transactions with AEs and non-AEs were mandatorily required and could not be dispensed with. Rather, the TPO observed that the requirement to maintain the details as contemplated under Rule 10D(1)(g) and Rule 10D(1)(h) were relevant for all five methods of benchmarking prescribed under Rule 10B(1) of the Income-tax rules, 1962. (2). That as regards the claim of the assessee that Rule 10D nowhere required the assessee to have PLI working of AE and non-AE segment, the TPO observed that the aforesaid rule only prescribed the details of documents to be maintained and did not prescribe the method by which TNMM method operates. (3). That as regards the contention of the assessee that considering the nature of its trade it was neither possible for the assessee to maintain separate accounts for AE transactions and non-AE transactions, nor possible for it to bifurcate the purchase cost, the overhead expenses and the stocks between the AE and the non-AE, ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 12 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 the TPO taking support of the judgment of the Hon’ble High Court of Bombay in the case of Shatrnaj Diamonds (261 ITR 258) which was in context of discharge of the statutory obligation cast upon the assessee as per Sec. 40A(2)(b) for establishing that the price paid to the related parties was not excessive as against that paid for similar services to the independent parties, therein concluded that the assessee had failed to discharge its onus to benchmark the transactions properly on the basis of authentic data related to its transactions with the AEs. It was further observed by the TPO that the assessee had also failed to furnish benchmarking by any other prescribed method of benchmarking contemplated under Sec. 92C(1) of the ‘Act’. The TPO concluded that in the absence of the segmental reporting of the AE and non-AE transactions he was precluded from benchmarking the transactions properly. (4). That as regards the observation of the TPO that there was no adjustment in its case by the TPO in the preceding years and the TNMM method was accepted by the department without any adjustment, it was observed by the TPO that as the penalty proceedings initiated under Sec. 271G were in context of not providing information which was called for by the TPO, which precluded him from properly benchmarking the transactions, therefore, making of adjustments was not a condition precedent for levying the said penalty. (5). That as regards the contention of the assessee that as the benchmarking was on the basis of the data of the comparable entity on entity level margin, therefore there was no need for segmental reporting of the AE and non-AE transactions, it was observed by the TPO that as correct benchmarking could not be carried out on the basis of entity level margin, therefore, that was all the more a reason ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 13 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 that the segmental reporting of the AE and non-AE transactions of the assessee was required. (6). That as regards the reliance placed by the assessee on the order of the ITAT, Hyderabad in the case of Annapurna Business solutions (supra), it was observed by the TPO that unlike the facts involved in the case of the present assessee, in the said case the information furnished by the assessee was sufficient for the authorities to conclude that the transactions of the assessee with its AE were within arms length. (7). That as regards the thrust of the assessee on the fact that as it had provided segmental details of the AE and non-AE transactions, therefore, no penalty under Sec. 271G was called for in its hands, the TPO observed that as the assessee had allocated the majority costs including the raw material cost on the basis of sales, therefore, there was hardly any variance between the margins shown in the case of the AE and non-AE transactions. The TPO thus not inspired by the basis of benchmarking adopted by the assessee, thus, declined to rely on the same. (8). That as regards the reliance placed by the assessee on the judgment of the Hon’ble High Court of Delhi in the case of Cargill India Pvt. Ltd. Vs. Dy. CIT [300 ITR 223 (Del)], the TPO observed that in the said case the Tribunal had dealt with sub-clauses (e) and (k) of Rule 10D(1) and Rule 10D(3), which were distinguishable as against the facts involved in the case of the present assessee who was directed to file specific documents, i.e segmental profitability of accounts for AE and non-AE transactions which were relevant for Rule 10D(1) and sub-clauses (d), (g) and (h).
ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 14 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 (9). That as regards reliance placed by the assessee on the order of the ITAT, Chennai in the case of SSL-TTK Ltd., the TPO observed that as in the said case the assessee had provided information about 12 items out of 16 items mentioned in Rule 10D, therefore, unlike the case of the present assessee, in the said case the ALP was determined on the basis of substantial compliance by the assessee, and as such the facts of the said case were distinguishable as against those of the case of the present assessee. (10). The TPO further deliberated on the alternative contention of the assessee that even if the penalty under Sec. 271G was to be imposed, the same be restricted to the higher figure out of the sale and purchases and not on the basis of the aggregate of the same. The TPO rejected the said contention of the assessee by observing that as per the mandate of Sec. 271G the penalty was to be levied on a sum equal to two percent of the value of the international transactions, therefore, the said contention of the assessee did not merit acceptance. The TPO on the basis of his aforesaid observations concluded that as the assessee had failed to comply with the statutory obligation cast upon it and furnish the requisite details as were called for by him for correctly benchmarking the international transactions of the assessee with its AEs, therefore, imposed a penalty under Sec. 271G of Rs. 2,15,98,527/- i.e @2% of the aggregate value of the international transactions of Rs. 107,99,26,354/- in the hands of the assessee.
Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) after deliberating on the contentions of the assessee in the backdrop of the facts of the case, therein observed that the TPO had imposed penalty under Sec. 271G for the reason that the assessee had failed to furnish the information as was called by him. The CIT(A) observed that the TPO while levying the penalty had therein concluded ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 15 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 that the assessee had inappropriately applied the TNMM which suffered from serious irregularities. It was observed by the CIT(A) that the assessee by not providing the requisite details therein not only failed to substantiate the basis for comparing the transactions of the AE with another AE and/or non-AE, but had also failed to provide any other basis for benchmarking its international transactions with the AEs. The CIT(A) observed that the TPO had observed that the aforesaid failure of the assessee to provide requisite data/information as called for by him in order to facilitate correct benchmarking of the international transactions of the assessee with its AEs, he could not examine and determine the arms length price and had to accept it as reflected by the assessee in its TPSR. The CIT(A) observed that the TPO on the basis of his aforesaid observations had imposed a penalty of Rs. 2,15,98,527/- @2% of the international transactions on the assessee.
The CIT(A) deliberated at length on the submissions raised by the assessee before him. The CIT(A) in all fairness in order to appreciate the contentions of the assessee, therein gave a thoughtful consideration to the nature of the diamond business, and observed as under: “ (B). The Nature of Diamond Business world over: Diamond business involves following major stages: (a). Extracting of rough diamonds by diamond mine owners. In the world, majority of diamond mines are located in Africa, Russia, Australia etc. These mines are mainly owned by a handful of companies who enjoy near monopoly over supply of rough diamonds. DTC (i.e Diamond trading Co., a major arm of De Beers, a major mine owner in Africa) is a major supplier of rough ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 16 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 diamonds in the world. The supply cycle, the terms of supply, quantity and quality of supply etc. are controlled and decided by it. Other major suppliers are Argyle, BHP Diamonds, Rio Tinto Diamonds etc. They also are in a position to dictate major terms of supply of rough diamonds. As in any other extraction activity, diamond extraction involves a lots of risks and requires deployment of huge manpower, sophisticated machineries and huge capital. Possibility of entire transaction activity resulting into a failure is also very high. (b). Extracted rough diamonds are then sold to major distributors in Antwerp, Israel etc. who are sight holders. These distributors then in turn resell these rough diamonds to small distributors. (c). These small distributors then sell the goods to actual cutters/manufacturers. India is a major centre of cutting and polishing. These distributors perform very little function in the entire process of diamond business and undertake no value addition activity. They also undertake very little risks and at the time involved in their business cycle is comparatively less. (d). These rough diamonds are then cut and polished into finished polished diamonds by employing man power and deploying sophisticated machineries, either directly or through job workers. The entire cutting and polishing activity involves various functions such as assorting, cleaving, kerfing, boiling, bruiting, shaping, grading etc. The whole cycle from the purchase of rough diamonds till the final output of polished diamonds take minimum of one month to maximum of two to two and half months. The cutting and polishing activity gives value addition. Also the person involved undertakes risks as ultimately yield of polished ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 17 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 diamonds and the quality of the same depends on various factors like purity , size, shape of rough diamonds, skill of the workers etc. (e). The polished diamonds so manufactured are then sold either directly or through distributors spread across the globe to various customers who are mainly jewellery manufacturers. D. Peculiarities of Products and Business: (a). In the diamond business world over , there are estimated to be 8000 to 10000 different qualities of diamonds. The price of a diamond depends on various factors such as shine, luster, size, color, clarity, purity, cluster, cartage etc. In fact, no two diamonds can have same price. Also no two diamonds businessman may value the same piece of diamond at the same price as valuation also depends upon the perception of individual businessman. In view of this one can say that normally there are no comparable prices and prices 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 , mixed-remixed quite a number of times and hence each piece of diamond looses its identity as to the source. (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 and sale of diamonds can be compared with any other transaction.
ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 18 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 (ii). It is not possible and practicable to find out exact cost of transaction and hence resultant mark up or net profit margin of particular transaction. (c). Also diamond business world over is being done mainly in the form of partnership company, partnership concern or private limited companies. There are very few publicly listed companies in India and abroad. So it is not just difficult but rather impossible to have very wide reliable, comparable, detailed and publicly available data base. E. The nature of Assesses Business : The assessee company is mainly engaged in the business of importing and locally purchasing rough diamonds, getting them cut and polished, and exporting or locally selling the same. It also procured polished diamonds and exports the same without carryin out any material function. As per the knowledge of the Directors of the assessee company the foreign entities are mainly engaged in trading of diamonds. Assessee company is purchasing rough diamonds from various entities including foreign entities. In then gives these rough diamonds to cutters/polishers for processing into finished goods i.e polished diamonds. It got this operation done from contract labourer. After polishing, it sells these diamonds to various customers including foreign entities.”
The CIT(A) further observed that the rough diamonds are mined from various places all over the world and they vary from size of 0.3 carat to 10 carat usually and the price of rough diamonds varied on the composition of each lot of diamond consisting of various sizes, shapes and colours and weight and each lot is likely to have rough diamonds varying in size, shape, colour and weight. The CIT(A) further ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 19 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 observed that no two rough diamonds in the lot are likely to be of the same size, shape, colour and weight which thus leads to anomalous situations when these are cut and polished. It was further observed by the CIT(A) that the entire process of cutting and polishing results in diamonds of different shapes and sizes depending on the structure of the rough diamonds and the skills of the cutters and polishers of diamonds. That in the backdrop of the aforesaid observations the CIT(A) held that even if each lot of rough diamond is sorted before giving it for cutting and polishing, the polished diamonds are likely to vary in size, shape, colour and weight. The CIT(A) further deliberating on the peculiar nature of the trade, therein observed that normally diamonds are exported and sold locally in lots and/or by weight of similar size and colour because these diamonds are then used by diamond jewellery manufacturers in the manufacture of diamond jewellery which requires diamonds of similar size, shape and colour while designing and making jewellery, except for in a case where one unique piece may be required to be embedded in a ring or in the centre of a necklace. Thus, in the backdrop of the aforesaid facts the CIT(A) observed that a diamond manufacturer is continuously required to sort out rough diamonds before giving for cutting and polishing which is done in stages, as well as sort out polished diamonds when the lots of cut and polished diamonds are received from the cutters and polishers to make lots of similar sizes, colours, shapes and weight before selling/exporting the same. The CIT(A) in the backdrop of the aforesaid facts, coupled with certain other facts, viz. diamonds of higher carat weight command higher prices if other factors like size, colour and shape are same and/or similar and if there is variation, then the price will again vary; there is no standard price for a diamond in the world, because price varies with each diamantaire who values the diamond and only a broad price range can ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 20 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 be fixed for diamonds of particular size, shape colour and weight at a particular point of time; and diamonds are sold in lots of carats unless one diamond is one carat or two carats in weight with unique features and shape and size. Thus, in the backdrop of his aforesaid observations as regards the nature of the diamond manufacturing business, the CIT(A) concluded that determining the price of a diamond and/or diamonds is a difficult issue and even if the diamonds are physically evaluated, the prices will vary from valuer to valuer. The CIT(A) also took cognizance of the letter by the GJEPC to the CIT-Transfer Pricing, Mumbai, wherein the aforesaid aspects involved in the diamond manufacturing business were explained.
The CIT(A) observed that the TPO had as a matter of fact required the assessee to furnish separate profit level indicator (PLI), that is, 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. 107,99,26,354/- of the assessee with its AEs, viz. (i). Purchase of rough diamonds; (ii). Export of rough diamonds; (iii). Export of polished diamonds; and (v). Purchase of polished diamonds, were at arms length price. The CIT(A) 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. The CIT(A) further perused the lot wise details of rough diamonds and polished diamonds, and therein concluded that 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 CIT(A) further observed that the export bills of the cut and polished diamonds ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 21 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 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. That on the basis of the aforesaid factual position as so emerged, the CIT(A) observed that a similar position would had prevailed in respect of cut and polished diamonds purchased and sold locally and/or purchased from abroad but sold locally. The CIT(A) on the basis of his aforesaid observations concluded that the crux of the matter was 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 making the tracing out and identification of the polished diamond physically possible and convenient. Thus, the CIT(A)observed that it was extremely difficult for a diamond trader to identify each rough diamond piece wise, unless the rough diamond is of exceptionally high carat value by weight and similarly, it was also difficult to identify each cut and polished diamond vis-à-vis the original rough diamond from which it was cut and polished.
The CIT(A) in the backdrop of the very nature of the business of the assessee, viz. manufacturing of diamonds, therein observed that the assessee had 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. The CIT(A) not impressed with the manner in which the assessee had proceeded with the matter, therein observed that the TPO had the option of determining the arms length price of the international ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 22 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 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 ,in order to ascertain diversion of profits, if any, in a broad manner, either of which options available before the TPO were however not exhausted. The CIT(A) was also not impressed with the observation of the TPO that the assessee had failed to carry out the benchmarking by following CUP method. The CIT(A) observed that as a comparison by internal CUP method could only be made if two lots of diamonds were similar in size, colour, shape and clarity, failing which the prices were bound to vary from one diamond to another diamond. The CIT(A) observed 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. The CIT(A) further appreciated the difficulty as to how the price of each diamond could be evaluated when the price was one and had a common price tag per carat for the whole lot. The CIT(A) further observed that even otherwise now when 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. Thus, in the backdrop of the aforesaid facts it was observed by the CIT(A) that the insistence of the TPO that the assessee should have followed CUP method was misconceived and impractical. The CIT(A) observed that if the TPO should have carried out a comparison of the Profit & loss account and Balance Sheets of the AEs, as the same would had revealed the gross profit margins and levels of profitability earned by ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 23 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 the AEs in their businesses, and as such any abnormal variation in their gross profitability would had revealed the aberrations in the international transactions.
The CIT(A) further observed that the nature and level of business of the assessee during the year under consideration had increased almost two fold, while for the gross profits had also increased from 7.42% for A.Y. 2010-11 to 8.71% for the year under consideration, viz. A.Y. 2011-12 and the Net profit of the assessee had also witnessed a growth from 3.9% in the immediate preceding year to 4.9% during the year under consideration. The CIT(A) also observed that in the preceding year, i.e A.Y. 2010-11 the TPO did not propose any adjustment in the ALP. The CIT(A) was also not inspired by the fault finding approach adopted by the TPO, without understanding the intricacies of the diamond manufacture and trading business. The CIT(A) observed that the TPO 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. The CIT(A) further deliberated on the contentions of the assessee that the TPO had not asked for only one specific detail, but several details on several occasions from time to time, which as claimed by the assessee were provided to him. The CIT(A) further observed that the assessee had made substantial compliance with the requirements of filing of major information that was called for by the TPO for determination of the ALP and accordingly the same was accepted by him without making any adjustments. The CIT(A) in the backdrop of the aforesaid facts, viz. the nature of diamond trade; substantial compliance made by the assessee; and the reasonable cause shown by the assessee for not furnishing certain details, r.w the fact that the TPO had not made any adjustment to the ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 24 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 ALP, therefore, concluded that the penalty under Sec. 271G of Rs. 2,15,98,527/- imposed on the assessee was liable to be deleted. The CIT(A) in the backdrop of his aforesaid observations, therein relying on the order of the ITAT, Mumbai in the case of ITO Vs. Nets Soft India Ltd. [2013/35/taxmann.com/579] and the order of the ITAt, Jaipur in the case of ACIT Vs. Gillette India Ltd. [2015/54/taxmann.com/313/Jaipur], therein deleted the penalty of Rs. 2,15,98,527/- imposed by the TPO under Sec. 271G.
Aggrieved, the revenue had assailed before us the order of the CIT(A) deleting the penalty of Rs. 2,15,98,527/- by the TPO. We find that despite having been intimated of the hearing of the appeal the respondent assessee had neither put up an appearance before us, nor any application seeking an adjournment had been filed. We thus being left with no other alternative, therefore, proceed in terms of Rule 25 of the Appellate Tribunal Rules, 1963 and dispose of the appeal after hearing the appellant revenue. The ld. Departmental representative (for short ‘D.R’) submitted that the TPO finding the assessee as being in default had rightly imposed the penalty under Sec. 271G. It was submitted by the ld. D.R that as there was no reasonable cause leading to the failure on the part of the assessee as regards furnishing the requisite details with the TPO, therefore, the penalty under Sec. 271G had rightly been imposed. The ld. D.R submitted that as the CIT(A) had erred in deleting the penalty imposed by the TPO under Sec. 271G, therefore, the order passed by the CIT(A) may be set aside and that of the TPO be restored.
We have heard the ld. D.R and perused the orders of the lower authorities. We have given a thoughtful consideration to the facts involved in the case before us and are of the considered view that it remains as a matter of fact borne from the records that the TPO had ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 25 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 imposed penalty under Sec. 271G for the reason that the assessee had failed to furnish the information as was called for by him. We find that the TPO held a conviction that the assessee had not only inappropriately applied the TNMM which patently suffered from serious irregularities, as the assessee had merely allocated the expenses on the basis of sales, in the backdrop of which the working of the margins involved in the transactions of the assessee with its AEs and non-AEs did hardly witness any variance. 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 another AE and/or non-AE, but had also failed to provide any other basis for benchmarking its international transactions with the AEs. 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 AEs, he could not examine and determine the arms length price and had to accept it as reflected by the assessee in its TPSR. 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. 107,99,26,354/- of the assessee with its AEs, viz. (i). Purchase of rough diamonds; (ii). Export of rough diamonds; (iii). Export of polished diamonds; and (v). Purchase of polished diamonds, were at arms length price.
ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 26 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 17. 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 with that entered into by the third party in comparable situation with independent parties, had therein 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, and further directed it to furnish the documents specified under Sec. 92D and Sec. 92E of the ‘Act’. We find that the TPO after examining the 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, therein concluded that it was prevented from benchmarking various transactions, and for the said failure of the assessee to furnish the requisite details had initiated penalty proceedings under Sec. 271G in the hands of the assessee. We find that the TPO not finding favour with the explanation of the assessee that no penalty under Sec. 271G was liable to be imposed, therein proceeded with and imposed a penalty of Rs. 2,15,98,527/- i.e @2% of the aggregate value of the international transactions of Rs. 107,99,26,354/- 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, therein concluded 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. We ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 27 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 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 ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 28 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 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 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 ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 29 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 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 ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 30 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 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 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 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 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 ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 31 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 of the CIT(A) and the resultant deletion of the penalty of Rs. 2,15,98,527/- imposed by the TPO.
The appeal of the revenue is dismissed. (निर्धारण वषा / Assessment Year:2011-12) 22. We shall now take up the appeal of the revenue in the case of M/s D. Nainchandra Gems Ltd., Mumbai, marked as ITA No. 6303/Mum/2016. The revenue assailing the deletion of the penalty imposed by the TPO under Sec. 271G by the CIT(A), had therein raised before us the following grounds of appeal:
“1. Whether the Ld. CIT(A) was correct in deleting the penalty levied u/s 271G by holding that the assessee 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 Ld. CIT(A) is not vitiated for the reasons that the Ld. CIT(A) has not given any finding on how the assessee has complied with clause (d), (g), (h) and (m) of Rule 100(1), that have been specifically invoked by the TPO.
3. Whether the Ld. CIT(A) was not correct 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 Hon 'ble ITA T in the case of Aztec Software Technology Services Ltd. vs. ACIT (ITA No. 584/Bang/2006), in which it has been held that there is no legal requirement for the AO to prima fade demonstrate tax avoidance before invoking the provisions of section 92 and 92CA of the Act. 4. "The Id. 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 non compliance 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 assessee effectively prevented the TPO to make any determination as recorded by the TPO in para 5 of the order u/s 92CA (3).
ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 32 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 6. Whether the order of Ld. C!T(A) is not vitiated due to inherent contradictions in the order, as the CIT(A) states at para (C) at page 20 of the order that only likes are to be compared whereas, at para 10, page 23, the Ld. CIT(A) blames the TPO for not having compared average realization per carat of AE and non-AE, when penalty has in fact been imposed as assessee failed to make intensive comparison of AE and non- AE prices.
7. Whether the Ld. CIT(A) was correct in holding that the TPO could have worked out the profitability of AE segment by allocating all costs of expenses to AE and non-AE segment in the ratio of AE sales to non AE sales failing to note that such a determination of profitability will give a notional PLI that is same for both AE and non AE segments and is on an assumption that assessee earns same rate of profits on AE and non-AE transactions without establishing its actual profitability on AE transactions. The Appellant craves leave to add, to amend and / or to alter any of the grounds of appeal
, if need be. . The Appellant, therefore, prays that on the grounds stated above, the order of the CIT (A)-55, Mumbai may be set aside and that of the Assessing Officer restored.
23. Briefly stated, the facts of the case are that a reference u/s 92CA(1) of the ‘Act’, dated 14.10.2013 was received by the Transfer Pricing Officer (for short ‘TPO’) from the DCIT-5(1), Mumbai (for short ‘A.O’) for determination of Arms Length Price (hereinafter referred to as ‘ALP’) with regard to the following international transactions which were reported by the assessee in Form 3CEB:
S.No. Nature of International Transactions Amount in (Rs.) 1. Purchase of rough diamonds 81,88,75,317 2. Export of rough diamonds 4,73,961 3. Export of finished/polished diamonds 12,11,89,860 4. Purchase of polished Diamonds 6,23,30,571 Total 100,28,69,709 During the course of the proceedings it was noticed by the TPO that the assessee during the year under consideration had a total turnover of Rs. 259.10 Crores, out of which export sales amounted to ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 33 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 Rs.222.35 Crores. That out of total export sales the assessee had carried out sales to the AE’s of Rs.12.16 Crores. The TPO further observed that the assessee had made total purchases of Rs.219.70 Crores during the year, which comprised of imports made by the assessee of Rs.129.02 Crores. The TPO deliberating on the records observed that the assessee had during the year under consideration carried out purchase of rough/polished diamonds from the AE’s to the extent of Rs. 88.11 Crores. Thus, in the backdrop of the aforesaid facts it was gathered by the TPO that the sales of the assessee to its AE’s were to the extent of 4% of its turnover, while for the purchases made from the AE’s were to the tune of 40% of the total purchases. The TPO observed that the Transfer pricing study report (for short ‘TPSR’) of the assessee revealed that it had followed the Transaction Net Margin Method (for short ‘TNMM’) for the purpose of benchmarking the international transactions carried out with its AE’s. The Operating profit/Operating cost was adopted by the assessee as the Profit Level Indicator (for short ‘PLI’). The TPO observed that the assessee had for the purpose of comparison compared its entity level margins (5.81%) with that of comparable companies margin (3.44%), and in the backdrop of the said comparison claimed that the transactions were at arms length. The TPO observed that the entity level margins of the assessee included its combined profits in transactions with the Associate Enterprises (for short ‘AEs’) and non Associate Enterprises (for short ‘non-AEs’).
The TPO in order to verify as to whether the transactions entered into by the assessee with its AEs were at arms length with that entered into by the third party in comparable situation with independent parties, therein issued a notice u/s 92CA(2) along with a questionnaire to the assessee on 24.07.2014, therein calling upon it to submit documents mentioned as per Rule 10D(1) and 10D(3) of the ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 34 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 Income tax Rules, 1962 along with other specific details. That on change of incumbent a fresh notice was issued by the TPO vide his letter dated 23.09.2014, wherein the assessee was directed to furnish the documents specified under Sec. 92D and Sec. 92E of the ‘Act’. The TPO further examined the details and documents available on record and called upon the assessee to submit the segmental profitability for AE transactions and non-AE transactions. The assessee expressed its inability to furnish details in the manner the same were called upon by the TPO, for the reason that it had not maintained separate books of accounts for AE and non-AE segments. The TPO in the absence of the segmental breakup of the AE and non-AE transactions, therein observed that in the absence of the requisite details he was prevented from benchmarking various transactions. The TPO for the said failure of the assessee to furnish the requisite details issued a show cause notice to the assessee, therein calling upon him to explain as to why penalty under Sec. 271G may not be imposed on it.
The TPO in the course of the penalty proceedings observed that the arms length price (for short ‘ALP’) in relation to an international transaction was to be determined as per either of the methods contemplated in Sec. 92C(1) r.w Rule 10B, which in the backdrop of the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or other relevant factors as the Board may prescribe, namely: (i). Comparable Uncontrolled Price method; (ii). Resale Price Method; (iii).Cost Plus Method; (iv). Profit Split Method; (v). Transactional Net Margin Method; (vi). Such other method as may be prescribed by the Board.
ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 35 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 That in the backdrop of the fact that the assessee himself had selected the TNMM as the most appropriate method, the TPO therefore deliberated on Rule 10B(1)(e) which prescribed the methodology for determining the ALP as per the said method. The TPO observed that in order to find out as to whether transactions entered into by the assessee with its AEs were at arms length with that entered into by the third party in comparable situation with independent parties, the separate segmental results of the assesses transactions with AEs and non AEs were indispensably required. The TPO also not inspired by the benchmarking carried out by the assessee on the basis of entity level margins, observed that in such a case the loss in transactions with AE segment could easily be set off with the profits of the non-AE segment. The TPO thus held a conviction that a correct benchmarking could not be carried out unless the assessee submits correct margins in respect of transactions with AEs and non-AEs. Thus, in the absence of the segmental details in respect of AE and non-AE segments having been furnished by the assessee, it was observed by the TPO that the non-availability of the said data therein rendered the entire exercise of benchmarking the transactions futile. The TPO in order to drive home his aforesaid view that entity level benchmarking does not lead to correct results and the same will not stand the test of Rule 10B(1)(e), relied on the orders of the Tribunal in the case of (i). UCB India Vs. ACIT 121 ITD 131 (Mum); (ii). Aztec Software & Technology Services Ltd. (2007) 107 ITD 141 (Bang) (SB) and OECD TP guidelines. Thus, the TPO in the backdrop of his aforesaid observations called upon the assessee to furnish the requisite details in terms of Sec. 92D(3). However, the assessee once again expressed its inability to furnish the requisite information for certain reasons, viz. (i). that no separate books of accounts for AE and non-AE transactions were maintained; (ii). functions performed and assets deployed for transactions with AE ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 36 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 and non-Ae were the same; and (iii). that even the comparable did not have segmental disclosures etc. The assessee failed to file the details till the date of passing of the order by the TPO on 20.01.2015, as a result whereof the latter failed to properly benchmark the transactions.
That on the failure on the part of the assessee to furnish the requisite details, the TPO after a lapse of a period of one month after the details were called for issued a show cause notice to the assessee, therein calling upon it explain as to why penalty under Sec. 271G may not be imposed on it for its failure to furnish the said requisite details. The assessee submitted its replies vide letters dated. 09.07.2015 and 22.07.2015. The TPO deliberating on Sec. 92 of the ‘Act’ which deals with maintenance, keeping of information and documents by persons entering into international transactions, therein observed that as per Sec. 92D(1) every person who had entered into an international transaction remains under a statutory obligation to keep and maintain such information and documents as are prescribed in Rule 10D. The TPO further observed that as per Sec. 92D(3) powers were vested with him to call for details in respect of international transactions and other relevant details from the assessee.
The TPO after deliberating on the explanation of the assessee, therein did not find favour with the same and concluded that as the assessee had failed to comply with the statutory obligation cast upon it and furnish the requisite details as were called for by him for correctly benchmarking the international transactions of the assessee, therefore, imposed a penalty under Sec. 271G of Rs. 2,00,57,394/- i.e @2% of the aggregate value of the international transactions of Rs. 100,28,69,709/- in the hands of the assessee.
ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 37 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 28. Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) after deliberating on the contentions of the assessee in the backdrop of the facts of the case, therein perused the nature of the business of manufacturing and trading of diamonds of the assessee, as well as certain other aspects, viz. (i) that the assessee had substantially complied with the directions of the TPO and had furnished requisite details, to the extent the same was practically possible in the backdrop of the very nature of its trade; (ii). it was not practicable for the assessee to have benchmarked its transactions by following CUP method; (iii). the TPO keeping in view the practical difficulties in the backdrop of the nature of trade of the assessee should have made a comparison of the Profit & loss a/c, Balance sheets of the AEs, which would have revealed overall gross profit margins vis-à-vis the gross profit margins earned in their businesses to reveal levels of profitability; and (iv). that the TPO had not made any adjustment to the arms length price in the case of the assessee for the immediate preceding year, therefore, concluded that no penalty under Sec. 271G was liable to be imposed in the hands of the assessee. The CIT(A) on the basis of his aforesaid observations deleted the penalty of Rs. 2,00,57,394/- imposed by the TPO under Sec. 271G.
The revenue being aggrieved with the order of the CIT(A) deleting the penalty of Rs. 2,00,57,394/- imposed by the TPO under Sec. 271G in the hands of the assessee, had carried the matter in appeal before us. We find that as the facts and the issue involved in the present case before us are the same as were involved in the appeal of the revenue in the case of the sister concern of the assessee, viz. M/s Navinchandra Exports Pvt. Ltd., Mumbai, for A.Y. 2011-12, marked as therefore, our order passed while disposing of the said appeal, viz. ITA No. 6304/Mum/2016, shall apply mutatis mutandis in the present case before us, viz. ITA No. 6303/Mum/2016.
ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 38 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 We thus in terms of our observations recorded while disposing of the aforesaid appeal in therein dismiss the Grounds of appeal Nos. 1 to 7 raised by the revenue before us.
The appeal of the revenue is dismissed in terms of our aforesaid observations. (निर्धारण वषा / Assessment Year:2011-12) 31. We shall now take up the appeal of the revenue in the case of M/s Dhanera Diamonds, Mumbai, marked as ITA No. 6310/Mum/2016. The revenue assailing the deletion of the penalty imposed by the TPO under Sec. 271G by the CIT(A), had therein raised before us the following grounds of appeal:
“1. Whether the Ld. CIT(A) was correct in deleting the penalty levied u/s 271G by holding that the assessee 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 Ld. CIT(A) is not vitiated for the reasons that the Ld. CIT(A) has not given any finding on how the assessee has complied with clause (d), (g), (h) and (m) of Rule 100(1), that have been specifically invoked by the TPO.
3. Whether the Ld. CIT(A) was not correct 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 Hon 'ble ITA T in the case of Aztec Software Technology Services Ltd. vs. ACIT (ITA No. 584/Bang/2006), in which it has been held that there is no legal requirement for the AO to prima fade demonstrate tax avoidance before invoking the provisions of section 92 and 92CA of the Act.
4. The Id. Ld. CIT(A) erred in holding that there was reasonable cause for non compliance of sec. 92D r/w Rule 19D(1) without specifying the cause of such non compliance 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 ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 39 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 ALP under any of the prescribed methods u/s 92C(1), the assessee effectively prevented the TPO to make any determination as recorded by the TPO in para 5 of the order u/s 92CA (3).
6. Whether the order of Ld. C!T(A) is not vitiated due to inherent contradictions in the order, as the CIT(A) states at para (C) at page 23 of the order that only likes are to be compared whereas, at para 10, page 25, the Ld. CIT(A) blames the TPO for not having compared average realization per carat of AE and non-AE, when penalty has in fact been imposed as assessee failed to make intensive comparison of AE and non- AE prices.
7. Whether the Ld. CIT(A) was correct in holding that the TPO could have worked out the profitability of AE segment by allocating all costs of expenses to AE and non-AE segment in the ratio of AE sales to non AE sales failing to note that such a determination of profitability will give a notional PLI that is same for both AE and non AE segments and is on an assumption that assessee earns same rate of profits on AE and non-AE transactions without establishing its actual profitability on AE transactions.
2. The Appellant craves leave to add, to amend and / or to alter any of the grounds of appeal
, if need be.
3. The Appellant, therefore, prays that on the grounds stated above, the order of the CIT (A)-55, Mumbai may be set aside and that of the Assessing Officer restored.
32. Briefly stated, the facts of the case are that a reference u/s 92CA(1) of the ‘Act’, dated 02.03.2014 was received by the Transfer Pricing Officer (for short ‘TPO’) from the DCIT-CC-1(1), Mumbai (for short ‘A.O’) for determination of Arms Length Price (hereinafter referred to as ‘ALP’) with regard to the following international transactions which were reported by the assessee in Form 3CEB:
S.No. Name of the A.E International Amount in (Rs.) Transaction 1. Sheen Diam DMCC 101109932 Export Sale 2. Dhanera Diamonds Ltd. Export Sale 147372625 3. Sheen Diam DMCC Import 84643865 333126422 Total ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 40 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 During the course of the proceedings it was noticed by the TPO that the assessee during the year under consideration had a total turnover of Rs. 606.34 Crores, out of which export sales to the AEs amounted to Rs.24.85 Crores. The TPO further observed that the assessee had during the year under consideration also imported rough diamonds worth Rs. 8.46 Crores from its AEs. The TPO observed that the Transfer pricing study report (for short ‘TPSR’) of the assessee revealed that it had followed the Transaction Net Margin Method (for short ‘TNMM’) for the purpose of benchmarking the international transactions carried out with its AE’s, and had submitted a list of 10 diamond manufacturing and trading companies with the OP/TC margins and had arrived at an average mean margin of 3.44% against its own OP/TC of 4.81%. The TPO observed that the assessee in the backdrop of the aforesaid comparison claimed that the transactions were at arms length. The TPO observed that the entity level margins of the assessee included its combined profits in transactions with the Associate Enterprises (for short ‘AEs’) and non Associate Enterprises (for short ‘non-AEs’).
The TPO in order to verify as to whether the transactions entered into by the assessee with its AEs were at arms length with that entered into by the third party in comparable situation with independent parties, therein issued a notice u/s 92CA(2) along with a questionnaire to the assessee on 22.05.2012, therein calling upon it to submit documents mentioned as per Rule 10D(1) and 10D(3) of the Income tax Rules, 1962, along with other specific details. The TPO further examining the details and documents available on record, called upon the assessee to submit the segmental profitability for AE transactions and non-AE transactions. The assessee expressed its inability to furnish details in the manner the same were called upon by the TPO, for the reason that it had not maintained separate books ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 41 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 of accounts for AE and non-AE segments. The TPO in the absence of the segmental breakup of the AE and non-AE transactions, therein concluded that he was prevented from properly benchmarking various transactions. Thus, the TPO for the said failure of the assessee to furnish the requisite details issued a show cause notice to the assessee, therein calling upon the assessee to explain as to why penalty under Sec. 271G may not be imposed on it.
The TPO in the course of the penalty proceedings observed that the arms length price (for short ‘ALP’) in relation to an international transaction was to be determined as per either of the methods contemplated in Sec. 92C(1) r.w Rule 10B, which in the backdrop of the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or other relevant factors as the Board may prescribe, namely: (i). Comparable Uncontrolled Price method; (ii). Resale Price Method; (iii). Cost Plus Method; (iv). Profit Split Method; (v). Transactional Net Margin Method; (vi). Such other method as may be prescribed by the Board.
That in the backdrop of the fact that the assessee himself had selected the TNMM as the most appropriate method, the TPO therefore deliberated on Rule 10B(1)(e) which prescribed the methodology for determining the ALP as per the said method. The TPO observed that in order to find out as to whether transactions entered into by the assessee with its AEs were at arms length with that entered into by the third party in comparable situation with independent parties, the separate segmental results of the assesses transactions with AEs and ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 42 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 non AEs would be indispensably required. The TPO also not inspired by the benchmarking carried out by the assessee on the basis of entity level margins, therein observed that in such a case the loss in transactions with AE segment could easily be set off with the profits of the non-AE segment. The TPO thus held a conviction that a correct benchmarking could not be carried out unless the assessee submits correct margins in respect of transactions with AEs and non-AEs. Thus, in the absence of the segmental details in respect of AE and non-AE segments having been furnished by the assessee, it was observed by the TPO that the non-availability of the said data had therein rendered the entire exercise of benchmarking the transactions futile. The TPO in order to drive home his aforesaid view that entity level benchmarking does not lead to correct results and the same will not stand the test of Rule 10B(1)(e) relied on the orders of the Tribunal in the case of (i). UCB India Vs. ACIT 121 ITD 131 (Mum); (ii). Aztec Software & Technology Services Ltd. (2007) 107 ITD 141 (Bang) (SB) and OECD TP guidelines. Thus, the TPO in the backdrop of his aforesaid observations called upon the assessee to furnish the requisite details in terms of Sec. 92D(3). However, the assessee once again expressed its inability to furnish the requisite information for certain reasons, viz. (i). that no separate books of accounts for AE and non-AE transactions were maintained; (ii). functions performed and assets deployed for transactions with AE and non-Ae were the same; and (iii). that even the comparable did not have segmental disclosures etc.
That on the failure on the part of the assessee to furnish the requisite details the TPO issued a show cause notice, dated. 23.03.2015 to the assessee, therein calling upon it explain as to why penalty under Sec. 271G may not be imposed on it for its failure to furnish the said requisite details. The assessee submitted its replies ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 43 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 vide letters dated. 14.07.2015 and 22.07.2015. The TPO deliberating on Sec. 92 of the ‘Act’ which deals with maintenance, keeping of information and documents by persons entering into international transactions, therein observed that as per Sec. 92D(1) every person who had entered into an international transaction remained under a statutory obligation to keep and maintain such information and documents as prescribed in Rule 10D. The TPO further observed that as per Sec. 92D(3) powers were vested with him to call for details in respect of international transactions and other relevant details from the assessee.
The TPO after deliberating on the explanation of the assessee, therein did not find favour with the same and concluded that as the assessee had failed to comply with the statutory obligation cast upon it and furnish the requisite details as were called for by him for correctly benchmarking the international transactions of the assessee. The TPO in the backdrop of his aforesaid observations imposed a penalty under Sec. 271G of Rs. 66,62,528/- i.e @2% of the aggregate value of the international transactions of Rs. 33,31,26,422/- in the hands of the assessee.
Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) after deliberating on the contentions of the assessee in the backdrop of the facts of the case, therein perused the nature of the business of manufacturing and trading of diamonds of the assessee, as well as certain other aspects, viz. (i) that the assessee had substantially complied with the directions of the TPO and had furnished requisite details, to the extent the same was practically possible in the backdrop of the very nature of its trade; (ii). it was not practicable for the assessee to have benchmarked its transactions by following CUP method; (iii). the TPO keeping in view the practical ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 44 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 difficulties in the backdrop of the nature of trade of the assessee should have made a comparison of the Profit & loss a/c, Balance sheets of the AEs, which would have revealed overall gross profit margins vis-à-vis the gross profit margins earned in their businesses to reveal levels of profitability; and (iv). that the TPO had not made any adjustment to the arms length price in the case of the assessee for the immediate preceding year, therefore, concluded that no penalty under Sec. 271G was liable to be imposed in the hands of the assessee. The CIT(A) on the basis of his aforesaid observations deleted the penalty of Rs. 66,62,528/- imposed by the TPO under Sec. 271G.
The revenue being aggrieved with the order of the CIT(A) deleting the penalty of Rs. 66,62,528/- imposed by the TPO under Sec. 271G in the hands of the assessee, had carried the matter in appeal before us. We find that as the facts and the issue involved in the present case before us are the same as were involved in the appeal of the revenue in the case of M/s Navinchandra Exports Pvt. Ltd., Mumbai, for A.Y. 2011-12, marked as therefore, our order passed while disposing of the said appeal, viz. ITA No. 6304/Mum/2016, shall apply mutatis mutandis in the present case before us, viz. ITA No. 6310/Mum/2016. We thus in terms of our observations recorded while disposing of the aforesaid appeal in ITA No. 6304/Mum/2016, therein dismiss the Grounds of appeal
Nos. 1 to 7 raised by the revenue before us. The Grounds of appeal No. 2 and 3 (separately marked as such) after the aforementioned substantial grounds, being general in nature are also dismissed as not pressed.
39. The appeal of the revenue is dismissed in terms of our aforesaid observations.
ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 45 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2 (निर्धारण वषा / Assessment Year:2011-12) 40. We shall now take up the appeal of the revenue in the case of M/s Akshar Impex Pvt. Ltd., Mumbai, marked as ITA No. 6292/Mum/2016. The revenue assailing the deletion of the penalty imposed by the TPO under Sec. 271G by the CIT(A), had therein raised before us the following grounds of appeal:
“1. Whether the Ld. CIT(A) was correct in deleting the penalty levied u/s 271G by holding that the assessee 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.
Whether the decision of the Ld. CIT(A) is not vitiated for the reasons that the Ld. CIT(A) has not given any finding on how the assessee has complied with clause (d), (g), (h) and (m) of Rule 100(1), that have been specifically invoked by the TPO.
3. Whether the Ld. CIT(A) was not correct 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 Hon 'ble ITA T in the case of Aztec Software Technology Services Ltd. vs. ACIT (ITA No. 584/Bang/2006), in which it has been held that there is no legal requirement for the AO to prima fade demonstrate tax avoidance before invoking the provisions of section 92 and 92CA of the Act. 4. "The Id. 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 non compliance 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 assessee effectively prevented the TPO to make any determination as recorded by the TPO in para 5 of the order u/s 92CA (3).
6. Whether the order of Ld. C!T(A) is not vitiated due to inherent contradictions in the order, as the CIT(A) states at para (C) at page 20 of the order that only likes are to be compared whereas, at para 10, page 23, the Ld. CIT(A) blames the TPO for not having compared average realization per carat of AE and non-AE, when ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 46 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 penalty has in fact been imposed as assessee failed to make intensive comparison of AE and non- AE prices.
7. Whether the Ld. CIT(A) was correct in holding that the TPO could have worked out the profitability of AE segment by allocating all costs of expenses to AE and non-AE segment in the ratio of AE sales to non AE sales failing to note that such a determination of profitability will give a notional PLI that is same for both AE and non AE segments and is on an assumption that assessee earns same rate of profits on AE and non-AE transactions without establishing its actual profitability on AE transactions.
8. The Appellant craves leave to add, to amend and / or to alter any of the grounds of appeal
, if need be.
9. The Appellant, therefore, prays that on the grounds stated above, the order of the CIT (A)-55, Mumbai may be set aside and that of the Assessing Officer restored.
41. Briefly stated, the facts of the case are that a reference u/s 92CA(1) of the ‘Act’, dated 24.07.2014 was received by the Transfer Pricing Officer (for short ‘TPO’) from the DCIT-5(1), Mumbai (for short ‘A.O’) for determination of Arms Length Price (hereinafter referred to as ‘ALP’) with regard to the following international transactions which were reported by the assessee in Form 3CEB:
S.No. Nature of International Amount in (Rs.) Method used Transactions 1. Sale of Polished Diamonds 739,010,016 TNMM Total 739,010,016 During the course of the proceedings it was noticed by the TPO that the assessee during the year under consideration had a total turnover of Rs. 252 Crores, out of which AE sales amounted to Rs.73 Crores. The TPO observed that the Transfer pricing study report (for short ‘TPSR’) of the assessee revealed that it had followed the Transaction Net Margin Method (for short ‘TNMM’) for the purpose of benchmarking the international transactions carried out with its AE’s. The Operating profit/Operating cost was adopted by the assessee as ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 47 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 the Profit Level Indicator (for short ‘PLI’). The TPO observed that the assessee had observed that its entity level margins of 3.10% was broadly comparable with that of non-AE segment, and in the backdrop of the said comparison claimed that the transactions were at arms length. The TPO observed that the entity level margins of the assessee included its combined profits in transactions with the Associate Enterprises (for short ‘AEs’) and non Associate Enterprises (for short ‘non-AEs’).
The TPO in order to verify as to whether the transactions entered into by the assessee with its AEs were at arms length with that entered into by the third party in comparable situation with independent parties issued a notice u/s 92CA(2) along with a questionnaire to the assessee on 24.07.2014, therein calling upon it to submit documents mentioned as per Rule 10D(1) and 10D(3) of the Income tax Rules, 1962 along with other specific details. That on change of incumbent a fresh notice was issued by the TPO vide his letter dated 16.09.2014. The TPO further examining the details and documents available on record, called upon the assessee to submit the segmental profitability for AE transactions and non-AE transactions, and in case if the same was not available then to furnish per carat realization for AE and non-AE. The assessee expressed its inability to furnish details in the manner the same were called upon by the TPO, for the reason that it had not maintained separate books of accounts for AE and non-AE segments. The assessee further submitted that only a wide range of profit was available for per carat realization and not actual figures. The TPO in the absence of the aforesaid information concluded that he was prevented from benchmarking various transactions. The TPO in the backdrop of the aforesaid failure of the assessee to furnish the requisite details issued a show cause notice to ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 48 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 the assessee, therein calling upon the assessee to explain as to why penalty under Sec. 271G may not be imposed on it.
The TPO in the course of the penalty proceedings observed that though CUP was a preferred method, subject to availability of documentation, the same was however wrongly rejected by the assessee on unacceptable grounds. The TPO also observed that the entity level TNMM adopted by the assessee was not acceptable. The TPO observed that now when the assessee had known transactions between itself and an independent parties, which were found to be similar to the transactions with the AEs, therefore, the assessee ought to have maintained the requisite documents as the same had a direct bearing on determining of the ALP adopted by the assessee in respect of the controlled transactions with its AEs. The TPO observed that the failure of the assessee to maintain the requisite documents had thus ruled out the applicability of CUP method, and thus the assessee had clearly violated the provisions of clauses (g) and (h) of Rule 10D. The TPO further observed that even otherwise the assessee had wrongly applied the TNMM method by resorting to entity level margin for benchmarking its international transactions. The TPO observed that in order to find out as to whether transactions entered into by the assessee with its AEs were at arms length with that entered into by the third party in comparable situation with independent parties, the separate segmental results of the assesses transactions with AEs and non AEs would be indispensably required. The TPO also not inspired by the benchmarking carried out by the assessee on the basis of entity level margins, therein observed that in such a case the loss in transactions with AE segment could easily be set off with the profits of the non-AE segment. The TPO thus holding a conviction that a correct benchmarking could not be carried out unless the assessee submits correct margins in respect of transactions with AEs and non-AEs.
ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 49 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 Thus, in the absence of the segmental details in respect of AE and non-AE segments having been furnished by the assessee, it was observed by the TPO that the non-availability of the said data therein rendered the entire exercise of benchmarking the transactions futile.
That on the failure on the part of the assessee to furnish the requisite details, the TPO issued a Show cause notice (for short ‘SCN’), dated. 13.07.201, to the assessee, therein calling upon it explain as to why penalty under Sec. 271G may not be imposed on it for non- documentation of data relevant to determination of ALP, which thus had resulted to violations of clauses (g) & (h) of Rule 10D of the Income-tax Rules, 1962. The assessee submitted its replies vide letters dated. 20.07.2015 and 22.07.2015. The TPO deliberating on Sec. 92 of the ‘Act’ which deals with maintenance, keeping of information and documents by persons entering into international transactions, therein observed that as per Sec. 92D(1) every person who had entered into an international transaction remains under a statutory obligation to keep and maintain such information and documents as are prescribed in Rule 10D. The TPO further observed that as per Sec. 92D(3) powers were vested with him to call for details in respect of international transactions and other relevant details from the assessee.
The TPO after deliberating on the explanation of the assessee, therein did not find favour with the same and concluded that as the assessee had deliberately and wilfully withheld information alongwith substantiating documents pertaining to profits in respect of transactions with AEs and non-AEs, which were indispensably required for correctly benchmarking the international transactions of the assessee with its AEs, therefore, imposed a penalty under Sec. 271G of Rs. 1,47,80,200/-, i.e @2% of the aggregate value of the ACIT Vs. D. Navinchandra Exports Pvt. Ltd-ITA. 6304/Mum/2016 50 ACIT vs. D. Navinchandra Gems Pvt. Ltd – ITA 6303/Mum/2016 Dy. CIT Vs. M/s Dhanera Diamonds- ITA 6310/Mum/2016 Dy. CIT Vs. M/s Akshar Impex Pvt. Ltd. –ITA 6292/Mum/2016 international transactions of Rs. 739,010,016/- in the hands of the assessee.
Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) after deliberating on the contentions of the assessee in the backdrop of the facts of the case, therein perusing the nature of the business of manufacturing and trading of diamonds of the assessee, as well as certain other aspects, viz. (i) that the assessee had substantially complied with the directions of the TPO and had furnished requisite details, to the extent the same was practically possible in the backdrop of the very nature of its trade; (ii). it was not practicable for the assessee to have benchmarked its transactions by following CUP method; (iii). the TPO keeping in view the practical difficulties in the backdrop of the nature of trade of the assessee should have made a comparison of the Profit & loss a/c, Balance sheets of the AEs, which would have revealed overall gross profit margins vis-à-vis the gross profit margins earned in their businesses to reveal levels of profitability; and (iv). that the TPO had not made any adjustment to the arms length price in the case of the assessee for the immediate preceding year, therefore, concluded that no penalty under Sec. 271G was liable to be imposed in the hands of the assessee. The CIT(A) on the basis of his aforesaid observations deleted the penalty of Rs. 1,47,80,200/- imposed by the TPO under Sec. 271G.
The revenue being aggrieved with the order of the CIT(A) deleting the penalty of Rs. 1,47,80,200/- imposed by the TPO under Sec. 271G in the hands of the assessee, had therein carried the matter in appeal before us. We find that as the facts and the issue involved in the present case before us are the same as were involved in the appeal of the revenue in the case of M/s Navinchandra Exports Pvt. Ltd., Mumbai, for A.Y. 2011-12, marked as ITA No. 6304/Mum/2016,