TMI Blog2018 (12) TMI 1589X X X X Extracts X X X X X X X X Extracts X X X X ..... ment in arms length price was made. Detailed findings so recorded by the CIT(A) have not been controverted by Ld. DR, accordingly we do not find any reason to interfere with the order of the Ld. CIT(A). - decided against revenue - IT A No.2643/Mum/2017 - - - Dated:- 27-12-2018 - Shri R.C. Sharma, AM And Shri Pawan Singh, JM For the Assessee : Shri K.A. Vaidyalingam For the Revenue : Shri Jayant Kumar ORDER PER R.C.SHARMA (A.M): This is an appeal filed by the Revenue against the order of CIT(A)-57 Mumbai, dated 31.01.2017, for the assessment year 2011-12, in the matter of imposition of penalty u/s 271G of the IT Act. 2. Rival contentions have been heard and we have perused. Facts in brief are that the Assessee is mainly engaged in diamonds business focusing on the Manufacturing Training segment of the diamond industry. The assessee (M/s Laxmi Diamond Pvt Ltd) is a Flagship entity of the Group. It was a partnership Firm till 12.04.06. From 13.04.2006 it has been registered as Pvt Ltd Company under part of IX of the Companies Act 1956. 3. During the course of assessment no transfer pricing adjustment was made by the A.O levied penalty u/s 271G o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the penalty U/S.271G should not be levied. (A) Before deciding the issue of levy of penalty whether justified or not, it is essential to know and understand the nature of diamond manufacture and trading business to appreciate the basic issues. Assessee and its auditors in their submissions have described nature of diamond trade, its peculiarities and assessee's business as follows: (B) (c)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 distributing arm of De Beers, a major mine owner in Africa) is a major supplier of rough 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 faugh diamonds. As in any other ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ond business i.e from mine owners to distributors to manufacturer/exporter and ultimately to customer or distributor of polished diamonds, die goods are assorted - re-assorted, mixed-remixed quite o number of times and hence each piece of diamond loses 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 or sale of diamonds can be compared with any other transaction, (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. Si) it is not just difficult but rather impossible to have very wide reliable, comparable, detailed and publicly available database, E. The nature of Assessce's Business: (i) The assessee company is engaged in the business of importing and locally purchasing rough diamonds, getting them cur and polish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore giving it for cutting and polishing , the polished diamonds are likely to vary in size, shape, size, colour and weight. 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 one unique piece which may be required for the ring or for centre of the necklace. Hence a diamond manufacturer is continuously required to sort out rough diamonds before giving for cutting and polishing which is done in stages and also 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 polished diamonds. It is also worth mentioning here that normally polished 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, prices will again vary. Moreover, there is no standard price for a diamond in the world, because pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of purchases and sales both from AEs as well as non AEs. 8. In this connection, lot wise details of rough diamonds and polished diamonds were also perused and analyzed to understand and verify the facts and following observations can be made: Comparison between Rough and Polished Diamonds: Bills for the imported Rough Diamonds mention only the serial number, date, bill number, supplier's name, description of goods as Rough Diamonds weight in carats and the amount. For example, bit] number 434 dated 28,04.2010 of DTC mentions 42458.30 carats valued at USS 1886125.63 giving average price per carat of (JS$ 44.42 and bill number 174 dated 20.01.2011 of DTC mentions 77139.02 carats valued at US$ 3241957.60 giving average price per carat of US$ 42.02H thus giving us details of variety of rough diamonds in general and only indication about the size and colour and quality coming from the average price per carat of the lot of diamond. Similarly, the export invoices mention only weight in carats, rate, value, conv. rate amount. It is also worth noting that each bill mentions only number, date, customer's name, country, weight in carats, value in US dollars and in rupe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mine the arm's length price in respect of the international transactions, but went ahead with the levy of penalty under section 271G of I.T. Act, 1961. In this regard, the TPO had another option of either making some comparison of realization 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 and/or should have asked for the copies of P L Accounts and the Balance Sheets of the AEs to make an overall comparison with the gross profitability levels of the assessee with AEs to ascertain diversion of profits, if any, in broad manner. However, this was not done by the TPO and the TPO went ahead with the levy of penalty under section of ₹ 24,7lr2S,75Q/- at the rate of 2% of international transactions of Rs, 1235,64.37,8 W- under section 271G of IT,Act,1961. 11. Another issue on which the TPO has laid stress is that the assessee could have followed the internal CUP method to work out the arm's length price in respect of its exports. However, the basic issue remains, that is, an apple has to be compared with an apple and not with an orange. As discussed earlier, a compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the arm's length prices for A.Y. 2010-11.Even otherwise, the TPO has gone straight to fault finding business without understanding the intricacies of diamond manufacture and trading business and instead of determining the arm's length price by asking for P L Accounts and Balance Sheets of the AEs and then comparing the financial ratios in general, gone ahead and levied penalty of ₹ 24r 71,28,7SQ/-on the assessee. Prima facie, the levy of penalty under section 271C of I.T Act, 1961 is neither fair nor reasonable and also not justified in facts of the case mainly the intricacies of the diamond trade and non-availability of knowledge in public domain about the manufacture of diamond trade. 13. The assessee has also submitted that when the assessee had furnished all the particulars on the basis of which the AO could have come to the conclusion regarding ALP in the case of International Transaction and further submitted that the TPO had not asked for only one specific detail but several details on several occasions from time to time. Even the explanation for the specific details of segmental AE, Non-AE transactions were also fifed and submitted. Thus, it appears ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... failures on the part of the assessee, the penalty may end up almost in a capita! punishment. When the penalty provision is very severe, it should be applied with great caution and only if circumstances sufficiently justify invoking the penal provision . 14. I have gone through the above and found that the facts of the above case laws are similar to the facts of the assessee's case. In view of the above, I am of the opinion that levy of penalty u/s.271G of the LT,Act,1961 is neither fair nor reasonable and therefore it is not justified in facts of the case, viz., the nature of diamond trade, substantial compliance made by the assessee and the reasonable cause showed by the assessee and above all when there is no adjustment made in the ALP. In nutshell, the levy of penalty of Rs, 24,71,28,7507- under section 271G of LT. Act, 1961 is hereby deleted. In this regard, reliance is also placed on following decisions: 1) ITO vs Nets Soft India Ltd. 2013/35 Taxmann.Com/579/Mumba 2) ACIT vs. Gillette India Ltd.-20l5/54 Taxmann.Com/3l3/Jaipur ITAT 15. En view of the fact that levy of penalty under section 271G of LT. Act, 1961 is itself deleted, other objections ..... X X X X Extracts X X X X X X X X Extracts X X X X
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