ASST. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-3, SURAT vs. ANTRIX DIAMOND EXPORTS PVT. LTD.,, MUMBAI

Since these three appeals of Revenue relate to one assessee, common and identical issues are involved, therefore these appeals have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity. The grounds as well as facts narrated in 2012-13 have taken into consideration for deciding these appeals en masse.

Grounds of appeal raised by the Revenue (in AY.2012-13) are as follows:

176 to 178/SRT/2022/AYs.2012-13 to 2014-15 Antrix Diamond Exports Pvt. Ltd. “[1] Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the penalty levied under 271G of the Act of Rs.5,23,62,122/- on account of failure to furnish information or documents as required by Sec. 92D(3) of the Act in respect of International Transactions of Rs.261,81,06,063/- and as called for by the TPO? [2] Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in allowing benefit of assessee that peculiar facts related to the diamond business pose practical difficulties in maintaining segmental detail ? [3] Whether on the facts and in the circumstances of the case and in law, the Ld. C1T(A) erred in holding that segregation of the transactions is allowed in TNMM method without appreciating the fact that each transactions is treated and benchmarked separately ? [4] It is, therefore, prayed that the order the Ld. CIT(A)-55, Mumbai may be set aside and that of the AO may be restored to the above extent. [5] The appellant craves leave to add, alter, amend and/or withdraw any ground(s) of appeal either before or during the course of hearing of the appeal.”

The facts necessary for disposal of the appeals are stated in brief. A reference under section 92CA(1) of the I.T. Act, 1961, in the case of M/s Antrix Diamond Exports Private Ltd. (hereinafter referred to as "the assessee") for AY 2012-13 for computation of arm's length price in relation to the international transactions was received from DCIT. Cir.5(1), Mumbai/Assessing Officer (hereinafter referred to as ‘AO’) on 31.07.2014. The AO has made this reference for determination of Arm's Length Price (hereinafter referred to as ‘ALP’) with reference to all the transactions reported in Form 3CEB filed by the assessee. A notice u/s 92CA(2) r.w.s. 92D(3) of the I.T. Act, 1961 was issued to the assessee on 09-09-2015 by then Jt.CIT(TP)-1(1) Mumbai. Thereafter, another notice u/s.92CA(2) r.w.s. 92D(3) of the I.T. Act, 1961 was issued by DCIT(TP)-1(1)(2), Mumbai [hereinafter referred to as the “Transfer Pricing Officer” or "TPO"] to the assessee on 18.01.2016. In all these notices, the assessee was required to submit information/explanations to support the arm's length price with reference to the international transactions entered into by the assessee with its various non-resident associated enterprises during the previous year 2011-12 relevant to A.Y. 2012-13.

In response to the notices issued, the authorized representative of the assessee attended and filed details. The transfer pricing documentation and 176 to 178/SRT/2022/AYs.2012-13 to 2014-15 Antrix Diamond Exports Pvt. Ltd. supporting details furnished by the assessee were examined during the course of the transfer pricing proceedings for determination of ALP of International transactions. The assessee is engaged in the business of manufacturing /converting of rough diamond into cut and polished diamonds. It is also engaged in the business of import/export of cut and polished diamond. A schedule of International transactions entered during the previous year 2011-12 relevant to A.Y. 2012-13 are as given below: Details of International Transactions: Associated Nature of Transportation Amount (Rs.) Method Enterprise Anaya Gems Inc. Sale of polished diamond 185,90,00,752 TNMM Anaya Gems Inc. Purchase of Polished Diamonds 75,91,05,311 TNMM Total 261,81,06,063 The assessee has applied TNMM to benchmark the above transactions. During the course of the TP proceedings, the assessee justified the TNMM by comparing its profits margins with the margins earned by third parties engaged in similar activities. However, it was noted that assessee did not furnish the correct amount of profit earned from the two international transactions entered into with the AE. Despite the fact that the assessee was requested to provide the actual profits earned on AE transactions, the assessee did not produce the same. Therefore, the assessee failed to establish during the proceedings u/s.92CA(3) that its transactions with the AE on account of sale of polished diamond as well as purchase of polished diamond were at arm's length. As the assessee has transactions both on purchase as well as sales, neither RPM nor Cost Plus Method can be applied in its case. The assessee was also requested to produce complete breakup of both the transactions in terms of quality as well as price and provide evidences in respect of the same. This information was also not produced by the assessee. As a result, none of the methods provided under the Act viz. the TNMM or the CUP method, could be applied in this case. Under the circumstances, during the proceedings u/s. 92CA(3), there was no material available on record based on which any determination of ALP could be undertaken under any of the prescribed methods. Therefore, no adjustment was made in the assessment proceedings though it was categorically

Based on the facts and circumstances of the case, it was held by the assessing officer that assessee has failed to provide any authentic information, data or document in respect of segmental accounts with regard to transactions made with AEs and non-AEs. Accordingly, AO observed that the assessee had failed to provide complete segmental accounts with regard to purchases made from AE and non-AE segments and sales made to AE and non-AE segments under different activities. Therefore, it is clearly evident that the assessee has failed to furnish information called for under Rule 10D(1), and has also failed to furnish the supporting authentic documentation required to be furnished under Rule 10D(3). Therefore, the assessee has clearly violated the lawful requirement under clauses “d”, “g”, “h”, “I” and “j” of rule 10D(1) read with section 92D and under rule 10D(3) to maintain and produce documentation as called for by the TPO. Therefore, AO held that assessee's instant case is a fit case for levy of penalty u/s 271G for failure to furnish information or document in respect of segmental accounts relating to transactions made with AEs and non-AEs for determination of arms’ length price of international transactions as required by the TPO under Rule 10D(1) and Rule 10D(3). The total value of relevant international transactions in assessee`s case was 261,81,06,063/-. The value of 2% of International transaction comes out to be Rs.5,23,62,122/-. Hence, a penalty of sum of Rs.5,23,62,122/- was imposed by the assessing officer.

Aggrieved by the order of Assessing Officer, the assessee carried the matter in appeal before the Ld. CIT(A), who has deleted the penalty under section 271G of the Act, observing as follows: “4. Decision: I have considered the orders of TPO and the submissions of the appellant. During transfer pricing proceedings, the TPO noticed that the assessee used TNMM as MAM for determining the ALP of the transaction of sale and purchase of diamonds to and from its AE. There was no segmental working of profits and operating cost was worked out pro rata. The TPO concluded that 176 to 178/SRT/2022/AYs.2012-13 to 2014-15 Antrix Diamond Exports Pvt. Ltd. benchmarking cannot be properly done in the absence of such information and also that other methods could not be applied. It was also concluded that it cannot be said whether the transactions are at arm's length or not. Therefore, penalty proceedings u/s.271G were initiated for failure of the assessee to furnish the required documentation. In the penalty proceedings, the TPO arrived at a conclusion that assessee's arguments regarding industry practice and difficulty in maintaining documentation on that account cannot constitute reasonable cause. The TPO found the contention of the assessee regarding many varieties of stock and its continuous mixing, resulting in stock losing identity contradictory with the claim that the each has a different price. It was therefore concluded that the assessee has failed to provide any authentic information, data or document in respect of segmental accounts with respect to transactions made with AEs and non-AEs, violating lawful requirement under clauses d, g, h, I and j of Rule 10D(1) rws 92D and under Rule 10D(3). Therefore penalty of Rs.5,23,62,122/- was levied at 2% of value of the international transaction. 4.1 Before me, it is contended that the detailed analysis undertaken by the assessee to justify the transaction with AE under TNMM method at entity level was submitted from time to time along with all the required details, which was further updated based on the available data related to other comparable as suggested by the learned TPO. It is thus submitted that all details required in such benchmarking were maintained and submitted. Further, peculiar reasons related to diamond business because of which it is not possible to apply internal TNMM as explained in submission before the TPO are also reiterated before me. 4.2 The Hon'ble jurisdictional Tribunal has decided similar issue in favour of the assessee in a recent decision in the case of ACIT, Circle-5(1)(2), Mumbai v. Dharmanandan Diamonds (P.) Ltd. [2021] 132 taxmann.com 209 (Mumbai - Trib.) pertaining to AY 2012-13. The Hon'ble bench held: "6. After due consideration of factual matrix, it could be gathered that the assessee has maintained primary books of account/documents in respect of its business activity. The international transactions carried out by the assessee with its AEs has also been well documented which is supported by benchmarking done by the assessee under TNMM method. Further, the assessee has made substantial compliances before Ld. Transfer Pricing officer and furnished all possible information, data and documents. The only lapse is that the assessee failed to furnish the segmental profitability of the AE and non-AE transactions which would be explained by the fact that it was practically difficult to maintain these details considering the nature of assessee's business. It could also be seen that finally the transactions have been accepted to be at arm's length. If the Transfer Pricing Officer was not satisfied with the benchmarking of the assessee under TNMM, nothing prevented him from rejecting assessee' benchmarking and proceed to determine the ALP independently by applying any one of the prescribed methods. The blame for failure on the part of the Transfer Pricing Officer to determine the arm's length price cannot be fastened with the assessee.

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 arm’s length price in respect of the international transactions of the assesses 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 176 to 178/SRT/2022/AYs.2012-13 to 2014-15 Antrix Diamond Exports Pvt. Ltd. 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 arm’s length price of the international transactions of the assessee, either by making some comparison of realisation of prices in respect of export sales to AEs and non-AEs by comparing prices of diamonds of similar size, quality and weight to the best extent possible, or in the alternative could have asked for the copies of the Profit & loss accounts and the Balance sheets of the AEs in order to make an overall comparison with the gross profitability levels of the assessee with its AEs, which would had clearly revealed diversion of profits, if any, by the assessee to its AEs. We are further unable to comprehend that as to on what basis the TPO expected the assessee to have carried out the benchmarking by following CUP method. We are of the considered view that as the comparison by internal CUP method could only be made if two lots of diamonds were similar in size, colour, shape and clarity, which we are afraid, as observed by us at length hereinabove, in light of the peculiar nature of the trade of the assessee would not be possible. We find ourselves to be in agreement with the CIT(A) that if one lot had diamonds of variety of size, colour, shape and clarity, the prices would vary from diamond to diamond and lot to lot, and further, now when the entire lot of diamonds had a common price tag per carat for the whole lot, therefore, it was not possible to evaluate the price of each diamond. We also cannot be oblivious of the fact that even otherwise in the diamond trade line, unless a diamond would weigh half carat or more or one carat or more, the same would not be priced separately in the bill because it was not practical to price diamonds of weights of lower than half carat or one carat separately weight wise per diamond in the lot. We have deliberated on the aforesaid peculiar facts involved in the business of diamond trading and are of the considered view that the insistence of the TPO that the assessee should have followed CUP method was misconceived and impractical. We are in agreement with the CIT(A) that if the TPO would had carried out a comparison of the Profit & loss account and Balance Sheets of the AEs, the same would had revealed the gross profit margins and levels of profitability earned by the AEs in their businesses, and as such any abnormal variation in their gross profitability would had revealed the aberrations in the international transactions.

We further find that as stands gathered from the records, the nature and level of business of the assessee during the year under consideration had increased almost two fold. We find that while for the gross profits of the assessee had also increased from 7.42% for A. Y. 2010-11 to 8.71% for the year under consideration, viz. A.Y. 2011-12, the Net profit had also witnessed a growth from 3.9% in the immediate preceding year to 4.9% during the year under consideration. We further find that as observed by the CIT(A) that in the preceding year, i.e. A.Y. 2010-11 the TPO did not propose any adjustment in the ALP. We are not inspired by the fault finding approach adopted by the TPO without 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 176 to 178/SRT/2022/AYs.2012-13 to 2014-15 Antrix Diamond Exports Pvt. Ltd. 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 of the CIT(A) and the resultant deletion of the penalty of Rs.2,15,98,527/- imposed by the TPO." This decision has been followed subsequently in various other decision of the tribunal rendered on similar factual matrix. Few of the recent decisions are Dy. CIT v. Decent Dia Jewels (P.) Ltd. [2020] 117 taxmann.com 358/183 ITD492andDy. CIT v. Kama Schachter Jewellery (P.) Ltd. [2021] 127 taxmann.com 677/189 ITD 21'. We find that fact in the appeal before us are quite identical to facts in all these decisions. Therefore, respectfully following these decisions, we confirm the impugned order deleting the penalty u/s 271 G." The issue is similarly decided in favour of the assessee in the case of Deputy Commissioner of Income-tax, Circle-5(1)(1) vs Ankit Gems (P.) Ltd Mumbai [2019] 106 taxmann.com 243 (Mumbai - Trib.) and Deputy Commissioner of Income-tax-CC-2(3), Mumbai vs Asian Star Company Ltd [2020] 116 taxmann.com 448 (Mumbai -Trib.). The coordinate bench of Mumbai Tribunal in the case of Asstt. CIT v. D. Navinchandra Exports (P.) Ltd. [2017] 87 taxmann.com 306 held that considering the practical difficulties in furnishing the segment wise details of AE segment and non-AE segment transactions in diamond industry, no penalty under Sec. 271G could justifiably be imposed for failure to furnish the said information. The said decision has been relied upon by the Hon'ble Tribunal in all 3 decisions mentioned above. 4.2 It is noted that although the TPO has rejected the TNMM as MAM in the case, no adjustment to the Arms Length Price of the transaction of sale and purchase of Diamonds to the AE has been done. Peculiar facts related to the diamond business pose practical difficulties in maintaining segmental details and the same constitutes a reasonable cause. The above mentioned decisions of the Hon'ble jurisdictional Tribunal and decisions relied upon by the learned Authorised Representative dealing with identical issue of imposition of penalty under section 271G of the Act are squarely applicable to the facts of the present appeal. Therefore, I find that imposition of penalty u/s 271G is not sustainable under the facts and circumstances as well as under the law and is hereby deleted.”

Aggrieved by the order of Ld. CIT(A), the Revenue is in appeal before us.

Learned Departmental Representative (Ld. DR) for the Revenue submitted that assessing officer has initiated penalty proceedings u/s 271G of the Act for failure of assessee to furnish the required documentation during the transfer pricing proceedings. Consequently, the TPO also levied penalty u/s.271G of the I.T. Act. The ld DR pointed out that Ld.CIT(A) was not justified in deleting the penalty of Rs.5,23,62,122/- on account of International Transactions of Rs.2,61,81,06,063/-. The Ld.CIT(A) was not justified in allowing benefit to assessee that peculiar facts related to the diamond business pose practical difficulties in maintaining segmental details. The ld DR pointed out that Ld. CIT(A) was erred in holding that segregation of the transactions is allowed in TNMM method without appreciating the fact that each transaction is treated and benchmarked separately. Based on these facts, ld DR for the Revenue prays the Bench that penalty imposed by the assessing officer under section 271G of the Act should be sustained.

On the other hand, Ld. Counsel for the assessee defended the order passed by the Ld. CIT(A).

We have heard both the parties and carefully gone through the submissions put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the facts of the case including the findings of the ld. CIT(A) and other material brought on record. We note that ld TPO arrived at a conclusion that assessee's arguments regarding industry practice and difficulty in maintaining documentation on that account cannot constitute reasonable cause. The TPO found the contention of the assessee regarding many varieties of stock and its continuous mixing, resulting in stock losing identity contradictory with the claim that the each has a different price. It was therefore concluded that the assessee has failed to provide any authentic information, data or document in respect of segmental accounts with respect to transactions made with AEs and non-AEs, violating lawful requirement under clauses d, g, h, I and j of Rule 10D(1) r.w.s. 92D and under Rule 10D(3). Therefore, penalty of Rs.5,23,62,122/- was levied at 2% of value of the international transaction. On appeal, the ld CIT(A) observed that although the TPO has rejected the TNMM as MAM in the case, no adjustment to 176 to 178/SRT/2022/AYs.2012-13 to 2014-15 Antrix Diamond Exports Pvt. Ltd. the Arm’s Length Price of the transaction of sale and purchase of Diamonds to the AE has been done. Peculiar facts related to the diamond business pose practical difficulties in maintaining segmental details and the same constitutes a reasonable cause. Therefore, ld CIT(A) relying on the decisions of the jurisdictional Tribunal and decisions relied upon by the learned Authorised Representative of assessee, held that imposition of penalty u/s 271G of the Act is not sustainable under the facts and circumstances as well as under the law. Hence, ld CIT(A) deleted the penalty. We have gone through the above order of ld CIT(A) and noted that there is no infirmity in the conclusion reached by ld CIT(A). That being so, we decline to interfere with the order of Id. CIT(A) in deleting the aforesaid penalty under section 271G of the Act. His order is, therefore, upheld and the grounds of appeal of the Revenue are dismissed.

In the result, these three appeals filed by the Revenue are dismissed.