TMI Blog2018 (11) TMI 1729X X X X Extracts X X X X X X X X Extracts X X X X ..... th 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 uphold the order of the CIT(A) and the resultant deletion of the penalty imposed by the TPO. - Decided in favour of assessee. - ITA No. 5628/Mum/2016, ITA No. 5626/Mum/2016, ITA No. 5627/Mum/2016, ITA No. 5304/Mum/2016 - - - Dated:- 1-11-2018 - SRI MAHAVIR SINGH, JM AND SRI RAMIT KOCHAR, AM For the Appellant : Shri Anand Mohan, CIT DR, Shri Rignesh K. Das, DR For the Respondent : Shri K.A. Vaidyalingan, AR ORDER PER BENCH: These appeals by the Revenue are arising out of the orders of Commissioner of Income Tax (Appeals)-56, Mumbai [in short CIT(A)], in appeal No. CIT(A)-56/TP/ACIT-5(2)(1) 6(4)/2015-16 2016-17/110-I, 109-K, 120-K,113-F vide even date 21.06.2016, 28.06.2016 30.05.2016. The Assessments were framed by the Dy. Commissioner of Income Tax, Ward 5(2)(1), Mumbai (in short DCIT/ AO ) for the A.Y. 2011-12 vide order dated 20.03.2015, 27.03.2015, 30.03.2015 under section 143(3) read with section 92CA(4) of the Income Tax Act, 1961 (hereinafter the Act ). 2. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. CIT(A) deleting the penalty on the ground that TPO has not examined segment-wise unaudited profit and loss account prepared and submitted by the assessee during the penalty proceedings disregarding the fact that the assessee did not submit any supporting documents to support the segmental results and had admitted himself in the covering letter that the segments had been prepared to the extent possible on the basis of certain assumptions which were also not spelt out, and the TPO, in his order under section 271G at para 28(pg.14), has given a finding that segmental results of AE and non-Ae on the basis of pro-rata allocation of cost to AEs and non-AEs based on the sales made to AEs and non-AEs respectively is not correct and cannot be relied for the purpose of benchmarking. (vi) Whether on the facts and in the circumstances of the case and in law, the order of the ld. CIT(A) deleting the penalty on the ground there is no adjustment made in the ALP even though adjustment to ALP is not a precondition for levy of penalty u/s271G. 3. Briefly sated facts are that the assessee is engaged in importing exporting and locally purchasing roughed diamonds, getting them cut and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31.1. But, in the instant case, assessee has not made a reasonable cause for failure to maintain documentation prescribed under Rule 10D(1). On the other hand, the assessee had deliberately and willfully withheld information/document pertaining to segmental accounts in respect of purchases and sales made with AEs and non-AEs, and by doing so had prevented the TPO from performing any comparability analysis (which was actually an obligation of the assessee as per Rule 100 Clause (g) and _(h)b and further thwarted any effort by the TPO to determine the ALP in a fair manner as envisaged under section 92C. Therefore, assessee cannot take shelter under the beneficial clause in section 27. Therefore, assessee cannot take shelter under the beneficial clause in section 273B. In this context, reliance is placed on the decision of the Hon ble jurisdictional Mumbai High Court in the case of Shatrunjay Diamonds (261 ITR 258; 2003) wherein court has held that 'The purpose behind the legislature enacting Section 404 (2) (b) was to provide for shifting of burden on the assessee in cases where the transactions are not at arm's length. The purchases are made by the assessee from its s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellant the detailed analysis is discussed herein below: The TPO levied penalty u/s.2710 on the ground that the appellant failed to furnish information called for. The TPO mentioned that the appellant inappropriately applied the TNM Method and despite the major irregularities in the entity level TNMM, the appellant adopted this method. Finally, the TPO rejected all the objections and held that appellant did not provide any basis for comparing the transactions of AE with another AF and/or non-AE and appellant failed to provide any alternative method for benchmarking the international transactions and the failure of the appellant resulted in and forced the TPO to accept the arms-length price as it is and thus preventing the TPO from examining and determining the arms-length price of various international transactions and hence levied penalty under section 271C of l.T. Act, 1961 of ₹ 6,89,53,467/- @12% of international transactions. On the other hand, the appellant submitted that it maintained necessary books and furnished various information and documents as required by Rule 10D and submitted segment-wise PLI during the penalty proceedings. The appellant further sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... small distributors then sell the goods to actual cutters/ manufacturers. India is. a major centre of cutting and polishing. These perform very little Junction in the entire process of diamond business and undertake no value addition activity. They also undertake very little risks and the time involved in their business cycle is comparatively very 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 takes 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 ultimate yield of polished 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... done from contract laborer. After polishing, it sells these diamonds to various customers including foreign entities. In addition to the foregoing descriptions it is essential to know as to what happens in the Manufacturing Trading of Diamond Business. Rough diamonds are mined from various places all over the world and they vary from a size of 0.05 carat to 10 carat usually and the price of rough diamonds vary 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. It also remains a fact that no two rough diamonds in the lot are likely to be of the same size, shape, colour and weight which leads to anomalous situations when these are cut and polished. The process of cutting consists of pruning the edges, flattening the top and shaping the sides as to give the rough stone a final shape and then polish it. The entire process of cutting and polishing results in diamonds of different shapes and sizes depending upon the structure of the rough diamonds and the skills of the cutters and polishers of diamonds. Thus a lot of 100 carat of rough diamond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant had entered into following international transactions: . Total value of transactions of diamonds entered by the assessee with AEs and NonAEs were as follows: The Profit and Loss account and the printed accounts show that assessee mainly exported total polished diamonds worth ₹ 185 crores to AEs out of total turnover of ₹ 429 crores and the balance of ₹ 244 crores to non-AE parties. Thus the P L Account reflects a mixture of sales of polished diamonds to both AEs as well as non AEs. It is also observed from the records that assessee had imported rough polished diamonds worth ₹ 158 crores out of its total consumption of rough diamonds of ₹ 367 crores. Assessee also made an attempt to segregate segment wise figures of sales, purchases and expenses and worked out and submitted a segment wise, that is, local sales, non-AE sales and AF sales and worked out the OP/Sales margins and furnished the same to the TPO. It appears from the penalty order dated 30/07/2015 that the TPO has not examined this segment wise unaudited P L Account and has gone ahead with passing of a stereo typed penalty order as being done by other TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing penalty proceedings to arrive at average profitability of each segment and then to compare the same with the average profitability of other ten public/private companies whose details were made available in TP Study Report. In this regard, the TPO had another option of asking 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 appellant 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 Ps. 6,89,53,467/- under section 271G of l.T. Act, 1961. Another issue on which the TPO has laid stress is that the appellant could have followed the internal CUP method to work out the arm's length price in respect of its exports. Unless lots of diamonds exported to an AE and a Non-AE are of similar size, colour, shape and clarity, it will be difficult to compare the prices generally under CUP method except a rough estimate can be made in general. Hence 1epingj in view the nature of the trade and the lots of diamonds exported by the appellant to AEs and Non-AEs during the assessment ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding ALP in the case of International Transaction and further submitted that the TPC) 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 filed and submitted. Thus, it appears that the appellant had made substantial compliance with the requirements Ci filing all major information called for by the TPO for determination of the ALP and accordingly, the ALP was accepted by the TPO. Further, the appellant relied on the Hon'ble High Court of Delhi in the case of CIT vs. M/s. Leroy Somer Controls (India) Pvt. Ltd. which observed as under: .. The assessee also cited the below mentioned decision of Hon ble ITAT which is as under: I have gone through the above and found that the facts of the above case laws are similar to the facts of the appellant's case. In view of the above, I am of the opinion that levy of penalty u/s.271G of the I.T.Act,1961 is neither fair nor reasonable and therefore it is not justified in facts of the case, viz., the nature of diamond trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 2,15,98,527/- imposed by the TPO. 21.The appeal of the revenue is dismissed. 8. When this was pointed out to the learned CIT Departmental Representative, he only relied on the orders of the lower authorities i.e. AO /TPO. He also relied on the decision of Hon ble Bombay High court in the case of CIT vs. Shatrunjay Diamonds (2003) 261 ITR 258 (Bom) which is in relation to the issue of disallowance u/s 40A(2)(b) of the Act. 9. After hearing both the sides and going through the facts and circumstances of the case, we are of the view that the co-ordinate Bench has elaborately dealt with this issue and finally held that the assessee has substantially complied with the directions of the TPO and placed on record the requisite information as observed by CIT(A). The Revenue could not dislo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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