2021 (7) TMI 208 - AT - Income Tax

Tribunal Upholds CIT(A) Decision on Penalty Deletion under Income Tax Act

The Tribunal upheld the CIT(A)'s decision to delete the penalty imposed under Section 271G of the Income Tax Act, recognizing the practical difficulties ... Penalty u/s. 271G - non-compliance of sec.92D read with Rule 10D(1) - time period allowed to the assessee for furnishing of the requisite details - assessee failing to note that under TNMM adopted by the assessee, the profit of the international transaction has to be furnished, whereas the assessee has only furnished the entity level margins which consists of overall profits on AE and significant non-AE transactions - HELD THAT:- The last date for filing of the documents/information as were called for by the TPO lapsed on 30.10.2016. As such, the ‘SCN’ Dated 31.10.2016 was subsequent to the lapse of the time period that was allowed by the TPO for furnishing of the requisite information/documents by the assessee. CIT(A) had misconceived the factual position, and observed, that as the time period allowed to the assessee for furnishing of the requisite details as were called for by the TPO u/s 92D(3) had not expired on the date on which the SCN u/s 271G was issued i.e on 31.10.2016, therefore, the penalty could not have been validly imposed. As the SCN, dated 31.10.2016 was issued by the TPO after the lapse of the time period that was allowed for furnishing of the requisite information/documents that were called for by him vide his aforementioned notices issued u/s 92D(3), therefore, no infirmity does arise therefrom. We thus, not being able to concur with the aforesaid view so arrived at by the CIT(A) therein vacate the same. Penalty u/s 271G - Considering the peculiar nature of the assessee’s business of manufacturing and export of cut & polished diamonds, no penalty u/s 271G could have validly been imposed - the issue is squarely covered by the orders of M/S D. NAVINCHANDRA GEMS PVT. LTD., M/S AKSHAR IMPEX PVT. LTD. AND M/S DHANERA DIAMONDS [2017 (11) TMI 1307 - ITAT MUMBAI] wherein it has been held that no penalty u/s 271G considering the nature of the business of manufacturing and export of cut & polished diamonds could validly be imposed - Thus Tribunal after exhaustively deliberating on the nature of the business of the assessee before them, viz. manufacturing of diamonds, had concluded that penalty u/s 271G could not have been imposed on the assessee the aforesaid order of the Tribunal had thereafter been approved by the Hon’ble High Court of Gujarat [2018 (7) TMI 2099 - GUJARAT HIGH COURT] - Decided against revenue. Issues Involved:1. Deletion of penalty levied under Section 271G of the Income Tax Act, 1961.2. Compliance with Rule 10D(1) requirements.3. Reasonable cause for non-compliance with Section 92D read with Rule 10D(1).4. Initial burden of proof on the assessee as per the Hon'ble Bombay High Court decision.5. Determination of Arm's Length Price (ALP) and the impact of non-production of necessary documents.Detailed Analysis:1. Deletion of Penalty Levied under Section 271G:The revenue challenged the CIT(A)'s decision to delete the penalty imposed under Section 271G of the Act. The TPO had imposed the penalty because the assessee allegedly failed to maintain or produce documents required under Rule 10D, thus hindering the determination of the ALP of specified domestic transactions. The CIT(A) vacated the penalty on two grounds: the penalty was initiated before the statutory 30-day period for furnishing information had expired, and on merits, the assessee could not have possibly complied with the obligations for which it was penalized.2. Compliance with Rule 10D(1) Requirements:The TPO argued that the assessee did not maintain documents as mandated by Rule 10D, including the segmental profitability of AE and non-AE transactions. The TPO contended that the assessee's use of the Transactional Net Margin Method (TNMM) at an entity level was inappropriate and did not comply with Rule 10D(1)(g) & (h) and Rule 10C(2)(d). The assessee argued that due to the peculiar nature of its business, it was not feasible to provide the required segmental details.3. Reasonable Cause for Non-Compliance:The assessee claimed that the nature of its business made it practically impossible to provide the segmental profitability details required by the TPO. The CIT(A) accepted this argument, noting that the assessee's business involved the manufacturing and trading of diamonds, which inherently made it difficult to segregate transactions with AEs and non-AEs. The Tribunal concurred, citing previous judicial pronouncements that recognized these practical difficulties and provided relief under Section 273B, which allows for reasonable cause.4. Initial Burden of Proof on the Assessee:The revenue argued that the CIT(A) ignored the ratio laid down by the Hon'ble Bombay High Court in the case of M/s. Shatrunjay Diamonds, which held that the initial burden was on the assessee to justify the ALP of its transactions. The Tribunal did not find merit in this argument, given the peculiar nature of the assessee's business and the practical difficulties involved.5. Determination of ALP and Impact of Non-Production of Documents:The TPO's position was that the assessee's failure to provide segmental profitability details prevented the proper determination of the ALP. The assessee countered that it had substantially complied with the requirements and that TNMM was the most appropriate method given the nature of its business. The Tribunal noted that the CIT(A) had rightly vacated the penalty, considering the practical difficulties faced by the assessee and the substantial compliance achieved.Conclusion:The Tribunal upheld the CIT(A)'s decision to delete the penalty imposed under Section 271G, recognizing the practical difficulties faced by the assessee in the diamond manufacturing and trading business. The Tribunal found that the assessee had substantially complied with the requirements and that the failure to provide certain details was backed by a reasonable cause. The appeal filed by the revenue was dismissed.