TaxTMI 
TaxTMI 
2018 (12) TMI 1589
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....to furnish information or documents in respect of segmental amount relating to transaction made with AEs and non-AEs for determination of arms length price of international transactions as required by TPO under Rule 10D(1) and Rule 10D(3). 4. The penalty so imposed was deleted by CIT(A) after observing as under: "I have considered the facts of the case and submissions of the assesses, The AO/TPO levied penalty u/s.271G on the ground that the assessee failed to furnish information called for. The TPO mentioned that the assessee inappropriately applied the TNMM Method, non maintenance of records has frustrated the department and despite the major irregularities in the entity level TNMM, the assessee adopted this method. Finally, the TPO rejected all the objections and held that assessee did not provide any basis for comparing the transactions of AE with another AE and/or non-AE and assessee failed to provide any alternative method for benchmarking the international transactions and the failure of the assessee resulted in and forced the TPO to accept the arms-length price as it is and thus preventing the TPO from examining and determining the arms-length price of various i....
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....n involves o lot of risks and requires deployment of huge manpower, sophisticated machineries and huge capital. Possibility of entire extraction activity resulting into a failure is also very high, (b) Extracted rough diamonds are then sold to major distributors in Antwerp, Israel, etc. who are sight holders. These distributors then in turn resell these rough diamonds to small distributors. (c) These small distributors [hen sell (he goods to actual cutters/manufacturers. India is a major centre of cutting and polishing. These distributors perform very little function in the entire process of diamond business and undertake no value addition activity. They also undertake very little risks and the time involved in their business cycle is comparatively very less. (d) These rough diamonds are then cut and polished into finished polished diamonds by employing man power and deploying sophisticated machineries, either directly or through jab workers. The entire cutting and polishing activity involves various functions such as assorting, cleaving, kerfing, bailing, bruiting, shaping, grading etc. The whole cycle from the purchase of rough diamonds till th....
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.... them cur and polished, and exporting or locally selling the some. It also procured polished diamonds and exports the same without carrying out any material function As per the knowledge of the Directors of the assessee company the foreign entities are mainly engaged in trading of diamonds. Assessee company is purchasing rough diamonds from various entities including foreign entities. It then gives these rough diamonds to cutters/polishers for processing into finished goads, i.e. polished diamond^ It got this operation done from contract labour and awn factories. After polishing, it sells these diamonds to various customers including foreign entities. (ii) The company is also engaged in the distribution of electricity/power generated through its own windmills and separate records are maintained m respect power division. (iii) It is also engaged in the business of sale of studded jewellery for which the separate records are maintained and filed. The main business is dealing in loose diamonds as per (i) above. (C) In addition to the foregoing descriptions it is essential to know as to what happens in the manufacture and trading of the diamond busin....
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....e 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 from valuer to valuer. D) This aspect of diamond trade is also explained by the GJEPC India in its letter dated 21/7/2015 addressed to the CIT-Transfer Pricing, Mumbai 7. The TPO basically wanted the assessee to furnish separate profit level indicator(PLI) ,that is, AR and non-AL segment wise either the P & L Accounts and/or some other evidence to show that the international transactions were at arms-length price. Assessee had entered into following four international transactions : S.No Nature of the international transaction Amount in (Rs) 1 Import of rough diamonds 371,63,72,160 2 Export of Rough did mends 7,54,58,156 3 Impor....
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....es not indicate the size of the diamond in each lot of export bill. Bills of exports to AEs and non-AEs also indicate similar trend and method of billing and invoicing exports. In this scenario, it is difficult to identify and say whether a polished diamond came out of this lot of rough diamonds or the other and/or out of the polished diamonds locally purchased by the assessee. Perusal of export bills of cut and polished diamonds exported to AEs and non AEs reveals that diamonds of varying size and quality and colour and carat weight were exported as is evident from the price per carat charged in each bill. And may be similar situation must have existed in respect of cut and polished diamonds purchased and sold locally and/or purchased from abroad but sold locally, 9. Crux of the matter is that it is extremely difficult for even the diamond trader and manufacturer to identify which rough diamond got converted into which polished diamond specifically unless the single piece rough diamond happened to be of exceptionally high carat .value making the tracing out and identification of the polished diamond physically possible and convenient. Only indication about thy si....
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....her diamond and if one lot has variety of diamonds varying m size, colour, shape and clarity, prices will vary from diamond to diamond and lot-to-lot. And then the question again arises how do you evaluate price of each diamond when the invoice is one and has a common price tag of XYZ dollars per carat for the whole lot. And by industry practice, unless a diamond is weighing half carat or more or one carat or more, these are not priced separately in the bill because it is not practical to price diamonds of weights lower than half carat or one carat separately weight-wise per diamond in the lot, Hence unless lots of diamonds exported to an AE and a Non-AE are of similar size, colour, shape and clarity, it will be difficult to compare the prices generally under CLIP method except a rough estimate can be made in general. Hence insistence of the TPQ to follow internal CUP method was also not a practical suggestion keeping in view the nature of the trade and the lots of diamonds exported by the assessee to AEs and Non-AEs during the assessment year. In nutshell, TPO's insistence and directions to follow internal CUP method were nut fair and reasonable and practicable. ....
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....d by the TPQ. Further, the assesses relied on the Hon'ble High Court of Delhi in the case of GIT vs. M/s. Leroy Somer & Controls (India) Pvt. Ltd. which observed as under: "The decision and observation of the Hon'ble High Conn of Delhi in Income Tax Appeal No. 410/2012 (decided on 30082013 in the case of CiT-2 vs. M/s. Leroy Somer & Controls (India) Pvt. Ltd.), which confirmed the ITAT decision and dismissed the revenue appeal on the subject of penalty u/s. 271G supports this stand fully. Inter alia, the Hon'ble High Court after discussing the provisions of 92D, 271G& Rule 10D states as under: "The tribunal has rightly concluded that with such a brood rule, which requires documentation and information voluminous and virtually unlimited. Section 271G has to be interpreted reasonably and m a rational manner.................................... When there is general and - substantive compliance of the provisions of Rule 100, it is sufficient . .......... ...The documentation or information should be one specified in Rule 10D, which has been formulated m terms of section 92D{1) of the Act Looking from any quarter and angle, the appeal of the Revenu....