TMI Blog2022 (5) TMI 972X X X X Extracts X X X X X X X X Extracts X X X X ..... MM, nothing prevented him from rejecting assessee' benchmarking and proceed to determine the ALP independently by applying any one of the prescribed methods. The blame for failure on the part of the Transfer Pricing Officer to determine the arm's length price cannot be fastened with the assessee. Similar issue of penalty u/s 271G for diamond industry has been adjudicated in assessee s favor in various decisions of this Tribunal. The coordinate bench of Mumbai Tribunal in the case of D. Navinchandra Exports (P.) Ltd. [ 2017 (11) TMI 1307 - ITAT MUMBAI ] held that considering the practical difficulties in furnishing the segment wise details of AE segment and non-AE segment transactions in diamond industry, no penalty under Sec. 271G could justifiably be imposed for failure to furnish the said information - we confirm the impugned order deleting the penalty u/s 271G. - Decided in favour of assessee. - ITA No. 4232/MUM/2019 - - - Dated:- 19-5-2022 - Shri Om Prakash Kant (Accountant Member) And Shri Rahul Chaudhary (Judicial Member) For the Revenue : Dr. Yogesh Kamat, CIT-DR For the Assessee : Rashmikant C. Modi/Ketki Rajeshirke, ARs ORDER PER OM PRAK ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... monds and also sale of cut/polished diamonds and rough diamonds to its Associated Enterprises (AEs) situated overseas. For determination of the arm s-length price of those transactions, the assessee applied Transactional Net Margin Method (TNMM) as the most appropriate method. The assessee submitted two different working of segmental result for AE and non-AE transactions. In one working, the assessee has allocated expenses in the ratio of the sales except manufacturing expenses, which has been allocated in the ratio of Carat sold to AE and non-AE. According to the Ld. TPO this has resulted into lower amount of expenses to AE transactions, which according to him was an absurd situation. In the second working the assessee has identified the margins based on the grouping of finished products into sub-categories, based on quantity of diamonds, which has been rejected by the Ld. TPO on the ground that being inconsistent with the approach for allocation of other expenses and hence cannot be considered for the purpose of benchmarking. The Ld. TPO asked the assessee to submit the segment profitability separately for the AE and non-AE segment on the basis of the actual direct cost. In vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peculiar nature of diamond trade and should have appreciated the difficulties in adopting CUP method, the assessee furnished all the particulars on the basis of which the AO could come to the conclusion regarding the ALP in the case of international transaction and there were no adjustments made. In these circumstances, the penalty us.271G should not be levied. (A) Before deciding the issue of levy of penalty whether justified or not, it is essential to know and understand the nature of diamond manufacture and trading business to appreciate the basis issues. Assessee and its auditors in their submissions have described nature of diamond trade, its peculiarities and assessee's business as follows: (B) (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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 very few publicly listed companies in India and abroad. So it is not jus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tre 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 command 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 carts 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 with valuer to valuer. (D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at particular lot is apportioned and added to the assigned cost (as stated above) of each lot of rough diamonds consumed. After the completion of the production process, the goods are subjected to stringent quality control process and upon the passing and approval from Quality Control department, the said finished goods are sent to Polished diamonds Assortment Department where the said goods are sub-divided into Class A-1 to Class A-5 and Class B-1 to Class B-4 sub-categories or more of such categories as is considered expedient and desirable looking strictly in to the production line. Finished goods having passed through the stated assortment process as above are transferred to Mumbai Sales office. Upon receipt of finished goods in Mumbai sales office, the said goods are incorporated in respective inventory record and opening balance of the finished goods of the respective Class is automatically revised with the incorporation of the new inward receipt. Quantity and value of each Sale of goods is subtracted from the respective Class of goods by allocating opening per carat weighted daily average cost under that Class of goods. Further, consistently weighted average co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter price per carat of the lot. In nutshell, 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 Loss Account of the A 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. The assessee submitted segment wise result of AE Non AE at GP level. Assessee explained the difficulties to the TP in various communication described earlier, however, the TPO insisted for the same and then invoked rule 10Dof IT. Rules 1962 and did not determine the arms length price in respect of the international transactions, but went ahead with the levy of penalty under section 271G of IT. Act, 1961. In this regard, the TPO had another option of either making some comparison of realisation of prices in respect of export sales to AEs and non-AEs by comparing prices of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts to determine the arm's length price when the lot wise details of exported cut and polished diamonds were available with him. Moreover when the type of details and documents are not available in public domain, the TP should have utilised the details and documents made available by the assessee to arrive at a fair and reasonable opinion regarding the determination of arm's length price in respect of international transaction vis- -vis the other transactions of import of rough diamonds and locally purchased rough diamonds and export of polished diamonds to non AEs abroad. Moreover, a comparison of the P L Accounts and the Balance Sheets of the AEs would have revealed the overall gross profit margins vis- -vis the gross profit margins earned by the AEs in their businesses to reveal levels of profitability. The assessee has also submitted that when the assessee had furnished all the particulars on the basis of which the AO 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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... international transaction for each failure on the 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 assessee's case. In view of the above, I am of the opinion that levy of penalty u/s.271G of the IT. 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 assessee and the reasonable cause showed by the assessee and above all, when there is no adjustment made in the ALP. In nutshell, the levy of penalty of Rs. 43,32,56,335/- under section 271G of IT. Act, 1961 is hereby deleted.In view of the fact that levy of penalty under section 271G of IT. Act, 1961 is itself deleted, other objections raised by the assessee before the TO and in appeal are not considered relevant and are not discussed. In nutshell, levy of pen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure on the part of the Transfer Pricing Officer to determine the arm's length price cannot be fastened with the assessee. 7. We find that similar issue of penalty u/s 271G for diamond industry has been adjudicated in assessee s favor in various decisions of this Tribunal. The coordinate bench of Mumbai Tribunal in the case of D. Navinchandra Exports (P.) Ltd. (87 Taxmann.com 306) held that considering the practical difficulties in furnishing the segment wise details of AE segment and non-AE segment transactions in diamond industry, no penalty under Sec. 271G could justifiably be imposed for failure to furnish the said information. The relevant observations were 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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.2,15,98,527/- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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