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TMI Blog2019 (10) TMI 290X X X X Extracts X X X X X X X X Extracts X X X X ..... O) for determination of Arm's Length Prices. These transactions were in the nature of purchase / sale of rough as well as polished diamonds and sale of diamond studded jewellery. The approximate sale to AE was 23% of assessee's turnover whereas purchases were approx. 56% of total purchases. The assessee bench-marked the same using entity level TNMM. Although Ld. TPO accepted the transactions to be at Arm's Length Price, but initiated penalty u/s 271G in view of the fact that the assessee was unable to submit internal TNMM by working out the profitability of AE and non-AE segment. 2.2 The assessee explained that owing to its nature of business, it was not practical to identify and bifurcate the stock, cost and revenue between AE and non-AE segment and work out profitability of the two segments separately. However, concluding that the assessee failed to maintain documentation as required under Clause (g) and (h) of Rule 10D (1), the aforesaid penalty was initiated. 2.3 During penalty 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 / i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d determining the arms-length price of various international transactions and hence levied penalty under section 271G of I.T.Act, 1961 of Rs. 12,79,00,2157- @ 2% of international transactions. Before deciding the issue whether levy of penalty is justified or not, it is essential to know and understand the nature of diamond manufacture and trading business to appreciate the basic issues. Appellant in their submissions have described nature of diamond trade, its peculiarities as follows: "The nature of the diamond industry and its peculiar features are given in the Schedule A and are briefly enumerated in the flowchart provided (based on Memorandum submitted by GJEPC to the Tax Authorities). The flowchart clearly demonstrates the peculiar nature of the diamond business and the key challenges in maintaining the records to extract separately the cost and profit from each transaction with AEs and non-AEs. The Schedule-A- The Nature & Peculiar Features of the Diamond Industry 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 includi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t mixing & re mixing of numerous pieces of polished diamonds based on assortment and market requirement results in non-feasibility of maintaining records to identify origin source of cost. Further, the diamonds are not traded in single unit but in lots comprising of number of diamonds of different varieties and values. The Company deals in variety of polished diamonds including diamonds' of very low range from 0.01 carat to 0.10 carat manufactured from different lot of rough diamonds results in non-feasibility of maintaining records to identify origin source of cost. Also, the size of the diamonds in certain cases is as small as grain of sugar, there is no standard mechanism and the Bar-coding concept cannot be applied." 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 appellant to furnish separate profit level indicator (PLI), that is, AE and non-AE segment wise either the P & L Accounts and/or some other evidence to show that the international transactions were at arms-length price. In the current scenario, it is difficult to identify and say whether a polished diamond came out of any particular lot of rough diamonds or the other and/or out of the polished diamonds locally purchased by the appellant. On understanding of export bills of cut and polished diamonds exported to AEs and non AEs reveals that diamonds of varying size, quality, colour and carat weight 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 fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pointed out that the appellant's margins are higher than margins of the AEs. 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 Rs. 12,79,00,215/- on the appellant. Prima facie, 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-availability of knowledge in public domain about the manufacture of diamond trade. The appellant has also submitted that when the appellant had furnished all the particulars on the basis of which the TPO 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 filed and submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of the assessee. If there are more failures on the part of the assessee, the penalty may end up almost in a capital 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". 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 trade, substantial compliance made by the appellant and the reasonable cause showed by the appellant and above all, when there is no adjustment made in the ALP, Thus, the levy of penalty of Rs. 12,79,00,2157- under section 271G of I.T.Act, 1961 is hereby deleted. In this regard, reliance is also placed 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 del ..... X X X X Extracts X X X X X X X X Extracts X X X X
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