TMI Blog2019 (4) TMI 1978X X X X Extracts X X X X X X X X Extracts X X X X ..... We further noted that the department has accepted profits split method adopted by the assessee to benchmark its international transaction in the past and during the year under consideration as there is no adjustment is made u/s 92C - When there is no adjustment is made u/s 92CA in respect of international transactions with its AE, the AO was erred in levying penalty u/s 271G for not furnishing segmental profitability of AE transactions and non AE transactions even though the assessee has made out a case that it is difficult to furnish segment-wise P L Account of AE segment and non AE segment considering the nature of industry and its complexity. Therefore, we are of the considered view that the AO was erred in levying penalty u/s 271G of the Income-tax Act, 1961. - Decided against revenue. - ITA No. 5876/Mum/2017 - - - Dated:- 10-4-2019 - SHRI MAHAVIR SINGH (JUDICIAL MEMBER) AND SHRI G MANJUNATHA (ACCOUNTANT MEMBER) For the Appellant : Shri Ajay Malik For the Respondent : Shri Vijay Mehta / Anuj Kisnadwala ORDER Per G Manjunatha, AM : This appeal filed by the revenue is directed against the order of the CIT(A)-55, Mumbai dated 28-06-2017 and it pertai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofitability of each segment and then to compare the same with the average profitability of other public companies whose details were available in public domain when it was not possible to do so in the absence of proper documentation. 2. The brief facts of the case are that the assessee is engaged in the business of purchasing rough diamonds and manufacturing cut and polished diamonds. During the financial year relevant to AY 2012-13, the assessee has entered into international transactions with its associate enterprises. The assessee has applied PSM (profit split method) for benchmarking international transactions with the AE. The assessee has justified PSM by comparing profits actually made by the assessee to the profits that should have been earned, based on the PSM. During the course of assessment proceedings, a reference was made u/s 92C(1) of the Income-tax Act, 1961 for computation of arm s length price in relation to the international transactions. During the proceedings before the TPO, assessee was called upon to file necessary documents maintained in respect of transfer pricing study conducted to benchmark its international transactions. The assessee has filed necess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and assessee from each transaction so that profit could be split having reasonable basis as mandated under rule 10D(1)(d). As regards CUP method, the assessee has failed to make a quantitative and qualitative reconciliation in respect of AE / non AE sale or purchase. The assessee has failed to substantiate the choice of most appropriate method and maintaining proper documentation, that is sufficient to make the charge. Thus, he came to the conclusion that the reason given for not maintaining complete documentation as required by the TPO does not come under the provisions of section 273B. Therefore, opined that it is a fit case for levy of penalty u/s 271G for failure to comply with clauses (d)(g)(h)(i) (j) of Rule 10D(1). Accordingly, he levied penalty of 2% of total international transactions which worked out to ₹ 1.5 crores. Aggrieved by the penalty order, assessee preferred appeal before the CIT(A). 4. Before the CIT(A), the assessee has filed elaborate written submissions, which has been reproduced at para 7 on pages 8 to 30 of order of Ld.CIT(A). The sum and substance of the arguments of the assessee before the Ld.CIT(A) are that it is not a case of TPO / AO that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the Ld.CIT(A) was erred in deleting penalty levied u/s 271G of the Act, even when the assessee had clearly failed in maintaining the documentation as required u/s 92D(3) of I.T. Act, 1961. The Ld.DR further submitted that the Ld.CIT(A) was erred in not considering facts brought out by the TPO in light of provisions of Rule 10D(1)(ii)(b) (m) and also brought out clear facts in the light of documentation furnished by the assessee to come to the conclusion that requirement of law has not been complied with. Therefore, it is a fit case for levy of penalty u/s 271G of the Act. The Ld.DR further submitted that the Ld.CIT(A) was not correct in stating that the TPO should have asked for copies of P L account and balance-sheets of AE to make an overall comparison with the gross profitability with the levels of the assessee with the AEs to ascertain diversion of profits, if any ignoring the findings of the ITAT in the case of Aztec Technology Services Ltd vs ACIT (ITA No.584) to prima facie demonstrate tax avoidance before invoking the provisions of sections 92 and 92C of the Act. 6. The Ld.AR, on the other hand, strongly supporting the order of the Ld.CIT(A) submitted that it is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of method selected for benchmarking its international transactions, because the AO has accepted profits split method selected by the assessee to benchmark its international transactions with its AE without making any adjustment u/s 92CA of the Income-tax Act, 1961. The AO is on the point that the assessee could not file complete documentation as required u/r 10D(1) in respect of other methods selected by the AO / TPO, i.e. CUP. When the assessee is maintaining documentation in respect of PSM, it is difficult for the assessee to arrange or produce documents as required by the AO in respect of any other method selected for benchmarking international transactions with its AE. Therefore, the AO / TPO was incorrect in coming to the conclusion that the assessee has not complied with provisions of Rule 10D(1) and it is a fit case for levy of penalty u/s 271G of the Act. 8. Having heard both the sides and considered material on record, we find that the assessee has filed certain documents required by the TPO in order to compute ALP of international transactions, this is evident from the fact that the TPO did not make any adjustment u/s 92C of the Income-tax Act, 1961. The dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g which particular documentation was not furnished by the assessee. The relevant observations of the Court are as under:- Held, dismissing the appeal, that the order passed by the Assessing Officer merely recorded that there was failure to file rule 10D documentation without specifying or stating which document or information was not furnished in spite of the notice calling for the information or document under section ,92D(3). In the absence of the basic details or facts, the order of the penalty under section 271G could not be sustained. 10. An identical issue has been considered by the co-ordinate bench of Mumbai Bench K in the case of ACIT vs D Navinchandra Exports (P) Ltd (supra). The Tribunal, after considering facts and difficulties of industry specific held that where TPO directed assessee diamond merchant to furnish segmental profitability for AE transactions and non AE transactions, since practically difficult in furnishing segmental profitability for AE segment and non AE segment, so expressed by diamond industry, penalty u/s 271G was not called for. The relevant observations of the Tribunal are as under:- A careful perusal of the very nature of the busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... native 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 have clearly revealed diversion of profits, if any, by the assessee to its AEs. It cannot be comprehended as to on what basis the TPO expected the assessee to have carried out the benchmarking by following CUP method. As the comparison by internal CUP method could only be made if two lots of diamonds were 'similar in size, colour, shape and clarity, which in light of the peculiar nature of the trade of the assessee would not be possible. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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