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2019 (10) TMI 290

..... and (h) of Rule 10D (1) - TPO accepted the transactions to be at Arm’s Length Price - HELD THAT:- due to peculiar nature of the product and constant mixing and re-mixing of diamonds obtained from AEs and non-AEs, it would not be feasible to maintain records to determine segmental profitability to work out internal TNMM. The undisputed position that emerges is that the assessee has carried out certain international transactions during the year with its AE and benchmarked the same using TNMM method in its Transfer Pricing Study which has been accepted by Ld. TPO. The only basis of levying impugned penalty against the assessee is the fact that the assessee did not furnish internal TNMM by providing segmental profitability of AE and non-AE transactions. The same stood explained by the inherent nature of business being carried out by the assessee which has already been enumerated by us in the preceding paragraphs. The Ld. first appellate authority, while deleting the penalty, relied upon the binding judicial decision of Hon’ble Delhi High Court rendered in CIT Vs. M/s. Leroy Somer & Controls (India) Pvt. Ltd. [2013 (9) TMI 761 - DELHI HIGH COURT] and other decision of th .....

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..... lty proceedings, reiterating the same, the assessee submitted that there was no uniformity in product classification of rough diamonds and assortment & mixing of rough diamonds would make it infeasible / impossible to track the source and cost of each piece of rough diamond and therefore, the profitability of the two segment separately could not be worked out. However, disregarding the same, Ld. AO levied penalty of ₹ 12.79 Crores u/s 271G, being 2% of value of international transactions. 3.1 Before learned first appellate authority, it was again explained that the rough diamonds were procured from both AEs and non-AEs. The finished product of cut and polished diamonds would pass through a lengthy manufacturing process including assortment / re-assortment of rough diamonds and at initial stages, it would not be possible to forecast the final outcome of rough diamonds. During the process of manufacturing, a semi manufactured diamond would be assorted many times and handled by many craftsmen. Various direct and indirect expenditure would be incurred at various stages of manufacturing process and the rough diamond would ultimately lose its identity as to source of purchase d .....

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..... stry I. Large category of rough diamonds II. Multiple manufacturing processes III. Humongous number of category of polished diamonds and their constant mixing & re mixing IV. Sale of polished diamonds including diamonds of substantially low size from 0.01 carat to 0.10 carat a. To summarise the above, in respect of manufacturing operations, the rough diamonds are procured from both AEs and non-AEs. The finished product of cut and polished diamonds passes through a lengthy manufacturing process including assortment / re-assortment of rough diamonds as observed from the aforesaid flowchart. Thus, at the initial stage it is not possible to forecast the final outcome of rough diamond. During the process of manufacturing, a semi manufactured diamond is assorted many times and handled by many craftsmen. Various direct and indirect expenses are incurred during the course of manufacturing. Resultant, a rough diamond loses its identity as to source of purchases due to inherent nature of diamond manufacturing process. b. The Appellant humbly submits that due to the peculiar nature of the product and constant mixing and re-mixing of the diamonds obtained from AE/non-AE, it faces constant .....

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..... t 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 diamonds may usually yield 27% to 29% cut and polished diamonds of varying sizes and shapes and colours and weights (carats). Diamonds are weighed in carats and one gram is equal to 5 carats. Thus diamonds get cut and polished lot wise and even if each lot of rough diamonds is presorted before giving it for cutting and polishing, the polished diamonds are likely to va .....

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..... eight were exported as is evident from the price per carat charged in each bill. And may be similar situation must have existed in respect of cut and polished diamonds purchased and sold locally and/ or purchased from abroad but sold locally. Therefore, it is extremely difficult even for the diamond trader and manufacturer to identify which rough diamond got converted into which polished diamond specifically unless the single piece rough diamond happened to 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-a-vis the original rough diamond from which it was cut and polished. The TPO asked for details .....

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..... hat 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 filed and submitted. Thus, it appears that the appellant had made substantial compliance with the requirements of 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 decision and observation of the Hon'ble High Court of Delhi in Income Tax Appeal No. 410/2012 (decided on 30.08,2013 in the case of CIT-2 vs. M/s. Leroy Somer & Controls (India) Pvt. Ltd.), which confirmed the ITAT decision and dismissed the revenue appeal on the subject of penalty u/s. 271G supports this stand fully. Inter alia, the Hon'ble High Court after discussing the provisions of 92D, 271G & Rule 10D states as under: "The tribunal has rightly concluded that with such a broad rule, which requires documentation and information voluminous a .....

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..... on following decisions: 1) ITO V/S. Nets Soft India Ltd. -2013/35/Taxmann.Com/579/Mumbai ITAT 2) ACIT V/S. Gillette India Ltd.-2015/54/Taxmann.Com/313/Jaipur ITAT In view of the fact that levy of penalty under section 271G of I.T.Act, 1961 is itself deleted, other objections raised by the appellant before the TPO and in appeal are not considered relevant and are not discussed. In the result, the appeal of the appellant is Allowed. Aggrieved revenue is in further appeal before us. 4. We have heard and considered the rival submissions and deliberated on judicial pronouncements as cited before us. 5. Upon due consideration, the undisputed position that emerges is that the assessee has carried out certain international transactions during the year with its AE and benchmarked the same using TNMM method in its Transfer Pricing Study which has been accepted by Ld. TPO. The only basis of levying impugned penalty against the assessee is the fact that the assessee did not furnish internal TNMM by providing segmental profitability of AE and non-AE transactions. The same stood explained by the inherent nature of business being carried out by the assessee which has already been enumerated by us .....

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