Transfer pricing documentation penalty under section 271G: substantial compliance and reasonable cause can defeat penalty in diamond trade records.

Penalty under section 271G was discussed in the context of transfer pricing documentation under rule 10D, where the assessee had furnished the material relevant to the benchmarking method adopted and the arm's length price was accepted without adjustment. The remaining segment-wise or alternative-method details were treated as practically difficult to maintain in the diamond trade because goods lose distinct identity during processing and trading. The analysis emphasised substantial compliance and reasonable cause under section 273B, and noted that penalty should not survive where the required information is not specifically identified or the relevant material already available with the assessee has been furnished. On that basis, deletion of penalty was upheld.

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Issues: Whether penalty under section 271G of the Income-tax Act, 1961 was justified for alleged failure to furnish transfer pricing documentation under rule 10D, where the assessee had substantially complied with the documentation requirements but could not furnish certain segment-wise details because of the nature and complexity of diamond trade.

Analysis: The assessee had furnished the documents relevant to the method adopted for benchmarking its international transactions, and the transfer pricing officer had accepted the arm's length price without making any adjustment. The additional information sought was linked to other methods and segment-wise profitability details which were found to be practically difficult to maintain in the diamond business, where lots and individual diamonds lose distinct identity during processing and trading. The record showed substantial compliance with the documentation requirements, and the failure to furnish the remaining particulars was held to be backed by reasonable cause within the scope of section 273B. The view was supported by earlier decisions dealing with the same line of business and with the principle that penalty under section 271G cannot be sustained when the required information is not specifically identified or the assessee has already furnished the relevant material available with it.

Conclusion: Penalty under section 271G was not leviable and the deletion of penalty was upheld.

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