TMI Blog2019 (3) TMI 690X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT vs. Gillette India Ltd [2015 (1) TMI 918 - ITAT JAIPUR] which is also applicable to the facts of the instant case. In view of the aforesaid observations and respectfully following the aforesaid judicial precedents, we do not find any infirmity in the order of Ld. CIT(A) deleting the penalty u/s.271G of the Act in the peculiar facts and circumstances of the instant case before us. We would like to make it clear that the said decision shall not stand as a precedent for other cases. Accordingly, the grounds raised by Revenue are dismissed. - ITA No.5931/Mum/2017 - - - Dated:- 28-2-2019 - SHRI SAKTIJIT DEY AND SHRI M. BALAGANESH, AM For The Revenue : Shri Jeevan Lal Lavidiya For The Assessee : Shri K. Shivram / Shri Shashank Dundu ORDER PER M. BALAGANESH (A.M): This appeal filed by Revenue is directed against the order of Commissioner of Income Tax (Appeals) 57, [hereinafter referred to as the ld CIT(A)] Mumbai dated 27/07/2015 in the matter of penalty order passed u/s.271G of the Income Tax Act, 1961. 2. The only issue to be decided in this appeal is as to whether the Ld. CIT(A) was justified in deleting the penalty levied u/s.271G of the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant stock record. As prayed by the assessee to tax only the net profit on the said bogus purchases, the ld. AO in the final assessment computed profit at 3.20% of the alleged bogus purchases and made addition of ₹ 3,17,174/- to the returned income and completed the assessment thereon. Later, the Ld. AO in the course of penalty proceedings u/s.271G of the Act observed as under:- S. No. Nature of transaction FY 20 10-11 Method used by Assessee FY 2009-10 I Manufacturing of diamonds 1 Import of polished diamonds 1,95,61,82,850 TNMM 1,89,89,76,724 2 Export of cut and polished 2,45,78,79,851 TNMM 1,31,53,34,076 Total 4,41,40,62,701 3,21,43,10,800 II Purchase of assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of s. 92D which are prescribed in various clauses of r. 10D(1). Documents and information prescribed are required to be maintained to help to determine ALP and are to be filed to support ALP by the taxpayer in response to notice under s. 92CA(2). If on consideration of evidence produced by the taxpayer the TPO is satisfied that ALP has been properly and correctly determined by the taxpayer, it is the end of the matter. There is no question of issuing further notice under any provision to the taxpayer. However, if complete information is not furnished, or otherwise, TPO is of the view that more information on specified points is required from the taxpayer, the TPO can issue notice under sub-s. (3) of s. 92D. TPO can also issue notice under s. 92CA(3), depending upon the facts of the case and the information needed. Only in case of failure of the taxpayer to support its ALP by filing necessary evidence, question of requiring taxpayer to furnish prescribed information would arise. ( emphasis supplied ) For the captioned year, the Company is characterized as a manufacturer and exporter of cut and polished diamonds and Transactional Net Margin Method ('TNMM') is sel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AEs and on the other hand, we need to find out the profit margin from similar transactions with non-AEs with which comparison is to be made. Both these figures should come from separate watertight compartments. No overlapping is permissible in the composition of such compartments. In other words, neither the first compartment of profit margin from AE transactions should include profit margin from the transactions with non-AEs, nor the second compartment should have profit margin from the transactions with the AEs. If such an overlapping takes place, then the entire working is vitiated, thereby obliterating the finer line of distinction of the profit margin to be compared and the profit margin to be compared with. ( emphasis supplied ) In the aforesaid case, the Hon'ble Mumbai ITAT held that if the assessee has entered into similar transactions with third parties as similar to AEs, then the profit realized from such transactions with third parties is a good measure to benchmark the margin from international transaction. Having said that, the ITAT also stated that the profitability from the AE and non-AE transactions needs to be identified separately and cannot be o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accepted by the Learned TPO. Under said circumstances non-maintenance of AE and Non-AE profitability has not affected the ALP. Therefore, penalty for non-maintenance is not justified. In this context, the Company relies on judgment of the Hon'ble Chennai IT AT in case of DCIT Vs Magick Woods Exports (P.) Ltd. (25 taxmann.com 20). It is discussed herein above that it is not possible to trace the cost of each piece of diamond sold to AEs and Non-AEs due to which AE and Non-AE wise profit and loss cannot be drawn. Under said circumstances the principle of maxim lex non cogit ad impossibila as -laid down by the Hon‟ble Supreme Court in the case of Supd of Taxes, Dhubri and Others v M/s .... (1975 CTR (S.C.) 172) shall be considered which means that the law does not compel a man to do that which he cannot possibly perform. The said principle shall be the guiding force as regards understanding and interpreting the requirements of the said Rule 10D. As per provisions of section 273B of the Act, no penalty under section 271G shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the said provisions if he proves that ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on merits and also by placing reliance on certain Co-ordinate Bench decisions of this Tribunal. 4. Aggrieved, the Revenue is in appeal before us. 4.1. The Ld. DR vehemently argued that assessee has not submitted basic data for determining the segmental profitability of AE and Non-AEs in the instant case. The assessee ought to have maintained basic records for such a precious material which is crucial for its survival itself in the business carried on by the assessee. Since no details were furnished by the assessee before the Ld. TPO, the Ld. TPO did not have any other option but to accept the transactions of the assessee to be at arm s length. 5. We have heard rival submissions. We find that in the similar facts and circumstances, the Co-ordinate Bench of this Tribunal in assessee s own case for the A.Yrs 2010-11 and 2012-13 had held that since there was no TP adjustment, there cannot be any levy of penalty u/s.271G of the Act. We also find that assessee had duly replied before the TPO in respect of queries raised by the TPO which are enclosed in pages 119 to 124 of the paper book. We find from pages 166 to 169 of the paper book that the Ld. TPO had accepted the stand of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithout appreciating that the benchmarking of the entity level profit by the assessee cannot substitute the requirement of benchmarking of the international transactions to determine the arm‟s length price. (iii) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the penalty under section 271G by accepting the assessee‟s plea that it was difficult to link the purchase with the sales for computing net margin in respect international transactions without appreciating that there is no exception to the requirement of maintain documents and carrying out analysis by the most appropriate method to show that the international transactions entered into are at arm‟s length and that several methods have been prescribed for this purpose. (iv) 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 of difficulty is justified, since it renders the provisions of Rule 10D redundant in cases like that of the assessee which can never be the intention of the legislature. (v) Whether on the facts and in the circumstances of the case and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r:- 4.1 During the course of T.P. proceedings, the assessee was asked to furnish AE and non-AE wise segmental details. However, the assessee failed to furnish the same and reported that it has not maintained the details separately it won‟t be possible to furnish AE and non-AE segmental profitability. This conduct of the assessee is in contravention to the provision of section 92D(3) of the I.T. Act, 1961 and hence, the penalty proceedings under section 271G of the I.T. Act, 1961 has been initiated in this case. The notice initiating the penalty has already been issued by the TPO on 12.01.2015. 5. The AO levied the penalty for non-furnishing of the information by observing in Para 31 to 33 as under: - 31 The assessee had also contended in its submission that penalty u/s 271G cannot be levied if there was reasonable cause for failure to furnish information called for by the TPO. From the above contention, it is clear that, finally, assessee has taken shelter u/s 273B of the Income Tax Act 1961 wherein the law states that: no penalty shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the said provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or even till passing of transfer pricing order u/s 92CA(3) on 19-01-2015 or at any time subsequently. c) The details were essential for benchmarking the transaction of assessee with AE. d) The assessee could also not provide any alternate method of benchmarking the transaction based on material available on record. e) In the absence of material the TPO was forced to accept the transactions to be at arm‟s length after initiating penalty proceedings under section 271G of Income Tax Act, 1961. 33. Accordingly, I reject the various contentions raised by the assessee and hold that this is a fit case for levy of penalty under section 271G. The total value of relevant international transactions in this case is ₹ 344,76,73,342/-. The value of 2% of International transaction comes out to be ₹ 6,89,53,467/-. Hence, I hereby levy a penalty of a sum of ₹ 6,89,53,467/-. Aggrieved, assessee preferred the appeal before CIT(A). 6. The CIT(A) deleted the penalty by stating that the assessee has made substantial compliance and going by the nature of the diamond trading, the assessee could show reasonable cause. For this he observed in Par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in their submissions have described nature of diamond trade, its peculiarities and Appellant's business as follows: (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 rough diamonds. As in any other extraction activity, diamond extraction involves a lot of risks and requires deployment of huge manpower, sophisticated machineries and huge capital. Possibility of entire extraction activity resulting into failure is also very high. (b) Extracted rough diamonds are then sold to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iamonds 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. So it is not just difficult but rather impossible to have very wide reliable, comparable, detailed and publicly available database. E. The nature of Assessee‟s Business. The assessee company is 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 arid exports the same without carrying 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. Assesse company is purchasing r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 commands 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 price varies with each diamantaire who values the diamond and a broad price range can be fixed for diamonds of particular size, shape, colour and weight at a particular point of time. Moreover, diamonds are sold in lots of carats unless one diamond is of one carat or two carats in weight with unique features and shape and size. Thus determining the price of a diamond and /or diamonds is a difficult issue and even if the diamonds are physically evaluated, prices will vary from valuer to valuer. This aspect of diamond trade is exhaustively explained by the GJEPC India in its letter dated 21/7/2015 addressed to the CIT-Transfer Pricing, Mumbai. The TPO basically wanted the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be of exceptionally high carat value and weight making the tracing out and identification of the polished diamond physically possible and convenient. Only indication about the size may come from the market price realised per carat unless each diamond is subjected to pre checking as done by the trader and manufacturer before selling and exporting to realise a better price per carat of the lot. Therefore, it is extremely difficult for the trader to identify each rough diamond piecewise unless the rough diamond is exceptionally of high carat value by weight and similarly, it is also difficult to identify each cut and polished diamond vis- -vis the original rough diamond from which it was cut and polished. The TPO asked for details of PLI Profit level Indicator, that is, segment wise profit and Loss Account of the Ae segment and non-AE segment in respect of export of goods as well as local sales to arrive at arms-length price in respect of international transactions. Appellant explained the difficulties to the TPO in various letters described earlier, however, the TPO merely accepted the arms-length price as it is and initiated the penalty proceedings under section 271G of I.T. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nternational transactions, if any. In this regard it is worth noting here that nature and level of business of the appellant during the current year has remained the same as it was last year that is A.Y. 2010-11 and the TPO did not propose any adjustments in the arms length prices for A.Y. 2010-11. Even though each assessment year is different and the type and level of transactions would have differed, yet the nature of business remained the same and hence all other ingredients of each diamond being different and four C s, that is Cut, Carat, Clarity and Colour remained and were applicable. 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 arms 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 ₹ 6,89,53,467/- on the assessee. Prima fade, the levy of penalty under section 271G of I.T. Act, 1961 is neither fair nor reasonable and is also not justified in facts of the case mainly the intricacies of the diamond trade and lack and non-avail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of ACIT vs Navinchandra Exports Pvt. Ltd. in ITA No. 6304/Mum/2016 for AY 2011-12 vide order dated 25.10.2017, which was further followed in the case of ACIT vs. Dilipkumar V. Lakhi, in ITA No. 2142/Mum/2017 for AY 2011-12 vide order dated 02.08.2018 reads as under 8. Having perused the material on record and after hearing both the parties vis- -vis the decision of the co-ordinate Bench of the Tribunal in the case of ACIT vs. D Navinchandra Exports Pvt. Ltd. (supra), we observe the identical issue has been decided by the Bench in favour of the assessee. The operative part of the decision is as under: 18. We find that the CIT(A) after deliberating at length on the nature of the business of manufacturing and trading of diamonds, therein concluded that in the backdrop of the intricacies involved in the said business it was practically difficult for the assessee to furnish the information in the manner the same was called for by the TPO. We find that the CIT(A) in the backdrop of an indepth study of the nature of activities involved in the business of manufacturing and trading of diamonds, had in a very well reasoned manner culled out the peculiar nature of the trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceding 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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