9911796707
TMI Blog2018 (11) TMI 1729X X X X Extracts X X X X X X X X Extracts X X X X ..... leting the penalty levied by AO under section 271G of the Act for violation of the provisions of section 92D(3) of the Act read with rule 10D(1) of the Income Tax Rules, 1962 (hereinafter the Rules). As the assessee failed to furnish the documents. For this Revenue has raised the identical worded grounds in all these four appeals. Facts and circumstances are exactly identical, hence, we will take the facts from ITA No. 5628/Mum/2016 for AY 2011-12 in the case of Interjewel Pvt. Ltd. and decide this common issue of all the appeals. For this Revenue has raised following grounds in ITA No. 5628/Mum/2016 for AY 2011-12: - "(i) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was right in deleting the penalty under section 271G when the assessee failed to furnish documentation as required under the rule 10D(1) and sub section (3) of the sec 92D of the I.T. Act in respect of the international transactions entered into by it? (ii) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the penalty under section 271G without appreciating that the benchmarking of the entity level profit by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial year 2010-11 relevant to AY 2011-12, the assessee has entered into following international transactions with its AE:- Sl No. Nature of the international transactions Amount in (Rs.) 1. Purchase of rough diamonds 125,53,36,515 2. Sales of Rough diamonds 38,27,73 3. Purchase of polished diamonds 33,43,86,459 4. Sale of Polished diamonds 185,41,22,630 Total 344,76,73,342 4. Accordingly, the TPO/AO made adjustment as the assessee failed to furnish the AE and non AE wise segment details. The TPO/ AO made adjustment and also initiated the penalty proceedings under section 271G of the Act for contravention of provision of section 92D(3) of the Act read with rule 10D(1) of the Rules by observing in Para 4.1 as under:- "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 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and produce documentation as called for by the TPO. Therefore, the assessee's Instant case is a fit case for levy of penalty uls 271G for failure to furnish Information or document in respect of segmental accounts relating to transactions made with AEs and non AEs for determination of arms length price of international transactions as required by the TPO under Rule 10D(1) and Rule 10D(3). 32. Following facts becomes evident: a) The TPO has called for specific details pertaining to segmental profitability between AE and non-AE segments within the meaning of section 920(3) of Income Tax Act, 1961. b) The details were called for during transfer pricing proceedings and assessee was given opportunity to submit the same on 4-12-2014 but the same was not furnished within 30 days 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MM Method as the most appropriate method and no adjustment. were made in the preceding years. The TPO should have considered the peculiar nature bI diamond trade and should have appreciated the difficulties in adopting CUP method, the appellant furnished all the particulars on the basis of which the TPO could come to the conclusion regarding the ALP in the case of international transaction and therefore were no adjustments made. In these circumstances, the penalty u/s.271G should not be levied. 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 and its auditors 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 diamon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uster, size, color, clarity, purity, cluster, cartage etc. In fact, no two diamonds can have same price. Also no two diamond businessmen may value the same piece of diamond at the same price as valuation also depends upon the perception of individual businessman. In view of this, one can say that normally there are no comparable pieces and prices of diamonds. Also at each stage in diamond business i.e. from mine owners to distributors to manufacturer/exporter and ultimately to customer or distributor of polished diamonds, the goods are assorted - re-assorted, mixed-remixed quite a 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 ver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iamonds 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 cOloj.ir 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 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 di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchased 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 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 zealise 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enalty proceedings was not even examined and a comparison of the P & L Accounts and the Balance Sheets of the AEs was also not made by the TPO. If the segment wise P & L Account submitted by the appellant even during the penalty proceedings had been made and / or P & L account of AEs had been cased and examined during TP proceedings, these details would have revealed the gross profit margins and levels of profitability earned by the AEs in their businesses since the AEs were the ultimate beneficiaries of these international transactions and any abnormal variation in their gross profitability would have revealed the aberrations in international 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- under section 271G of l.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/Taxniann.Com/579/Mumbaj ITAT 2) ACIT V/S. Gillette India Ltd.-2015/54/Taxmann.Com/3l3fjaipur 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 considered relevant and are not discussed." Aggrieved, now Revenue is in appeal before Tribunal. 7. At the outset, the learned Counsel for the assessee stated that the issue is squarely covered by Tribunal's decision of this co-ordinate Bench in the 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-à-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 identic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly high carat value, therein making the tracing out and identification of the polished diamond physically possible and convenient. We find that the aforesaid practical difficulties in providing the details being faced by the industry can be well gathered from the letter of the GJEPC to the CIT-Transfer Pricing, Mumbai, wherein the aforesaid aspects involved in the diamond manufacturing business were explained. 19. We find that the assessee had in the backdrop of the very nature of its business, viz. manufacturing of diamonds, had though explained to the TPO the practical difficulty in furnishing segment wise Profit &loss account of the AE segment and the non-AE segment, however, 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 prac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nesses, and as such any abnormal variation in their gross profitability would had revealed the aberrations in the international transactions. 20. We further find that as stands gathered from the records, the nature and level of business of the assessee during the year under consideration had increased almost two fold. We find that while for the gross profits of the assessee had also increased from 7.42% for A.Y. 2010-11 to 8.71% for the year under consideration, viz. A.Y. 2011-12, the Net profit had also witnessed a growth from 3.9% in the immediate preceding year to 4.9% during the year under consideration. We further find that as observed by the CIT(A) that in the preceding 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 Rs. 2,15,9 ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
