2019 (6) TMI 1419 - AT - Income Tax

Diamond Industry Penalty Deleted Under Income Tax Act Section 271G

The Dy. Commissioner of Income-tax 5 (1) (1), Mumbai Versus Blue Star Diamonds Pvt. Ltd.

The Tribunal upheld the CIT(A)'s decision to delete the penalty under section 271G of the Income Tax Act, considering the practical difficulties faced by ... Penalty u/s 271G - assessee had clearly failed in maintaining the documentation as required under section 92D(3) - CIT-A deleted the penalty - HELD THAT:- As decided in M/S. DILIPKUMAR V LAKHI, [2018 (8) TMI 1778 - ITAT MUMBAI] 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 details as were called for by him on account of practical difficulties as had been deliberated by us at length hereinabove, but however, in the backdrop of our aforesaid observations, we are of the considered view that the failure to the said extent on the part of the assessee to comply with the directions of the TPO can safely be held to be backed by a reasonable cause, which thus would bring the case of the assessee with the sweep of Sec. 273B of the ‘Act’. - Decided against revenue. Issues Involved:1. Deletion of penalty under section 271G of the Income Tax Act.2. Compliance with documentation requirements under section 92D(3) of the Income Tax Act.3. Determination of Arm's Length Price (ALP) for international transactions.4. Practical difficulties in maintaining segmental accounts in the diamond industry.Detailed Analysis:1. Deletion of Penalty under Section 271G:The primary issue in this appeal is whether the CIT(A) was correct in deleting the penalty imposed under section 271G of the Income Tax Act. The penalty was originally levied by the Assessing Officer (AO) for the assessee’s failure to maintain documentation as required by section 92D(3). The Tribunal upheld the CIT(A)'s decision, referencing the practical difficulties faced by the diamond industry in maintaining such documentation.2. Compliance with Documentation Requirements:The Revenue argued that the assessee failed to maintain documentation required under section 92D(3). The assessee contended that it had maintained all necessary documents and information to substantiate that transactions with Associated Enterprises (AE) were at arm’s length. The Tribunal noted that the CIT(A) had considered the practical difficulties in maintaining segmental results for AE and non-AE transactions due to the nature of the diamond industry, where mixing and remixing of diamonds make it challenging to identify the source and exact cost of the product sold.3. Determination of Arm's Length Price (ALP):The Transfer Pricing Officer (TPO) had asked the assessee to furnish segmental profitability for AE and non-AE transactions. The assessee expressed its inability to do so due to the nature of its business. The Tribunal observed that the CIT(A) had concluded that the peculiar nature of the diamond trade made it practically difficult for the assessee to furnish the required information. The Tribunal agreed with the CIT(A) that the TPO should have considered alternative methods to determine the ALP, such as comparing the gross profitability levels of the assessee with its AEs.4. Practical Difficulties in Maintaining Segmental Accounts:The Tribunal acknowledged the practical difficulties faced by the diamond industry in maintaining segmental accounts. The CIT(A) had noted that the diamond industry involves purchasing and selling a mix of rough and polished diamonds from both AEs and non-AEs, making it difficult to segregate transactions. The Tribunal concurred with the CIT(A) that the TPO’s insistence on segmental results was impractical given the nature of the diamond trade.Conclusion:The Tribunal upheld the CIT(A)’s decision to delete the penalty under section 271G, citing the practical difficulties faced by the diamond industry in maintaining segmental accounts and the consistent view taken by the Tribunal in similar cases. The appeal of the Revenue was dismissed, and the order of the CIT(A) was confirmed.Order Pronouncement:The appeal of the Revenue was dismissed, and the order was pronounced in the open court on 13.06.2019.