TaxTMI 
TaxTMI 
2019 (3) TMI 690
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....to the return filed by the assessee, the same was selected for scrutiny and reference made to Transfer Pricing Officer (TPO) by the Ld. AO u/s.92CA(1) of the Act for the purpose of determining the arm's length price in respect of purchase and sale transactions of the assessee with its Associated Enterprises (AEs). The audit report in form 3ECB was duly submitted by the assessee along with the return of income and also before the Ld. TPO. The Ld. TPO in the order passed u/s.92CA(3) of the Act dated 20/09/2015 observed that the authorised representatives of the assessee appeared and filed details as required from time to time. He also observed that the details and documents furnished in relation to the international transactions with the AEs vis-à-vis computation of ALP were discussed and examined. The Ld. TPO observed that considering the facts and circumstances of the case, the assessee's submission and documents furnished, the value of international transactions with AEs are considered at ALP. 3.1. During the course of proceedings before the Ld. TPO, the assessee was asked to submit internal Transaction Net Margin Method (TNMM) to work out the profitability of AE and Non....
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....asible (i.e. using the Revenues as allocation key). The same was provided during the course of TP assessment proceedings. It seems that the Learned TPO has inadvertent/y ignored the said submission of the assessee (since the TPO had not rebutted the segmental analysis submitted by the assessee) and continued with hypothesis that segmental information was not available and hence, initiated the penalty proceedings. We request your goodself to verify the assessment records and accordingly, the proceedings may be dropped. In this context, the Assessee places reliance on the findings of the Honorable Delhi /TAT in case of Cargill India (P) Ltd v/s Deputy Commissioner of Income-tax, Cir. 3(1), New Delhi [2008J 110 /TD 616 (DELHI) wherein the following was observed- It is clear from the consideration of r. 100 and its various sub-rules, that documents and information prescribed under the rule is voluminous and it could only be in rarest cases that all the clauses of sub-rules would be attracted. It is not possible to casually ask for information under all the clauses. One or more clauses of sub-Rule (1) are applicable and not all clauses of the rule in a given case. It w....
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....ished. In this context, the assessee placed reliance on the judicial pronouncement in case of M/s. ThyssenKrupp Industries India Private Limited v/s the Addl. Commissioner of Income-tax Range 3(3) Mumbai, ITA No.6460/Mum/2012: AY 2008-09 The relevant extract is stated below: "It is relevant to note that sub-clause (i) of rule 10B(1)(e), which is first step in the computation of ALP under TNMM, talks of ascertaining the with margin realised by the enterprise from an international transaction entered into with an associated enterprise. We have noticed the definition of 'International transaction' above as a transaction between two or more associated enterprises. A bare perusal of this provision divulges that this step contemplates the determination of actual profit realized on transaction between two AEs. It is this profit margin which is scrutinized for determining as to whether or not it is at arm's length. The margin with which such margin earned by the assessee is compared with for determining the ALP, can be internally available from comparable transaction(s) or from externally available cases, if the enterprise has entered into similar tra....
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....he total export turnover of the assessee is INR 290.69 crores of which the export sales to non-AEs is only INR 16.21 crores (approx. 5% only) which is very miniscuie as compared to the export sales of the assessee. Hence the segment of AE vis-a-vis non-AE is not comparable due to volume differences. Further, the non-AE sales consists of several sales invoices (retail sales) wherein comparatively the lots of diamonds sold consists of few pieces than that sold to AEs. Due to the insignificant volume and inherent limitations of the product sold, it was considered prudent by the assessee to benchmark its international transactions at the entity level and consider companies engaged in manufacturing of cut and polished diamonds for comparability analysis. Accordingly, the Company considered external TNMM as the most appropriate method for benchmarking its international transactions and every detail as per clause g and h to Rule 10D(1) were furnished during the assessment proceedings which was duly accepted by the Learned TPO. Therefore, it is humbly submitted that there is no question of non-maintenance of documents and no penalty should be levied for the same. Further, the asse....
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....7. Further, the assessee has also filed a rectification petition vide its letter dated 10.07.2015 during the course of penalty proceedings and has reiterated that the segmental results for AE and non-AE transaction to the extent feasible (i.e. using the Revenues as allocation key) was provided during the course of TP assessment proceedings. But, TPO has inadvertently ignored the said submission of the assessee and initiated the penalty proceedings. 3.3. The assessee further replied as under:- '"The assessee humbly submits that every diamond is unique in nature. Value of a cut and polished diamond is essentially dependent upon the 4 Cs viz. Cut, Clarity, Colour, Carat. Due to the inherent diversity in each of the above Cs it is difficult to uniformly classify diamonds. Leo India deals in various kinds of diamonds which vary according to their qualities, shapes, sizes. Hence, it is very difficult / not practical to determine the per-carat cost price and sale price for AEs or Non-AEs as a whole." 3.4. The Ld. AO observed that assessee had adopted TNMM as the most appropriate method for benchmarking its transactions with AEs. While adopting the same, assessee has ben....
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.....05.2016. The Assessments were framed by the Dy. Commissioner of Income Tax, Ward 5(2)(1), Mumbai (in short „DCIT/ AO‟) for the A.Y. 2011-12 vide order dated 20.03.2015, 27.03.2015, 30.03.2015 under section 143(3) read with section 92CA(4) of the Income Tax Act, 1961 (hereinafter „the Act‟). 2. The only common issue in these four appeals of Revenue is against the order of CIT(A) deleting the penalty levied by AO under section 271G of the Act for violation of the provisions of section 92D(3) of the Act read with rule 10D(1) of the Income Tax Rules, 1962 (hereinafter the Rules). As the assessee failed to furnish the documents. For this Revenue has raised the identical worded grounds in all these four appeals. Facts and circumstances are exactly identical, hence, we will take the facts from ITA No. 5628/Mum/2016 for AY 2011-12 in the case of Interjewel Pvt. Ltd. and decide this common issue of all the appeals. For this Revenue has raised following grounds in ITA No. 5628/Mum/2016 for AY 2011-12 : - "(i) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was right in deleting the penalty under section 271G when....
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....er on the facts and in the circumstances of the case and in law, the order of the ld. CIT(A) deleting the penalty on the ground there is no adjustment made in the ALP even though adjustment to ALP is not a precondition for levy of penalty u/s271G." 3. Briefly sated facts are that the assessee is engaged in importing & exporting and locally purchasing roughed diamonds, getting them cut and polished and finally export or locally selling the cut and polished diamonds. During the Financial year 2010-11 relevant to AY 2011-12, the assessee has entered into following international transactions with its AE:- Sl No. Nature of the international Transactions Amount in (Rs.) 1. Purchase of rough diamonds 125,53,36,515 2. Sales of Rough diamonds 38,27,73 3. Purchase of polished diamonds 33,43,86,459 4. Sale of Polished diamonds 185,41,22,630 Total 344,76,73,342 4. Accordingly, the TPO/AO made adjustment as the assessee failed to furnish the AE and non AE wise segment details. The TPO/ AO made adjustment and also initiated the penalty proceedings under section 271G of the Act for contravention of provision of sect....
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....ure enacting Section 404 (2) (b) was to provide for shifting of burden on the assessee in cases where the transactions are not at arm's length. The purchases are made by the assessee from its sister concern. In such cases, the intricacies of the transactions are required to be explained by the assessee. ....................................................... ..................................................................... .................................................................... requirement under rule 10D(1) clauses "g" and "h' and Rule 10D(3) read with section 92D to maintain and produce documentation as called for by the TPO. Therefore, the assessee's Instant case is a fit case for levy of penalty uls 271G for failure to furnish Information or document in respect of segmental accounts relating to transactions made with AEs and non AEs for determination of arms length price of international transactions as required by the TPO under Rule 10D(1) and Rule 10D(3). 32. Following facts becomes evident: a) The TPO has called for specific details pertaining to segmental profitability between AE and non-AE se....
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....s-length price of various international transactions and hence levied penalty under section 271C of l.T. Act, 1961 of Rs. 6,89,53,467/- @12% of international transactions. On the other hand, the appellant submitted that it maintained necessary books and furnished various information and documents as required by Rule 10D and submitted segment-wise PLI during the penalty proceedings. The appellant further submitted that CUP method could not be applied as each invoice of sale to AE and Non-AEs include different types of goods sold for different price and due to peculiar character of the goods sold, the appellant did not consider the CUP method as the most appropriate method. It is also mentioned that the department accepted TNMM Method as the most appropriate method and no adjustment. were made in the preceding years. The TPO should have considered the peculiar nature bI diamond trade and should have appreciated the difficulties in adopting CUP method, the appellant furnished all the particulars on the basis of which the TPO could come to the conclusion regarding the ALP in the case of international transaction and therefore were no adjustments made. In these circumstances, t....
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....monds till the final output of polished diamonds takes minimum of one month to maximum of two to two and half months. The cutting and polishing activity gives value addition. Also the person involved undertakes risks as ultimate yield of polished diamonds and the quality of the same depends on various factors like purity, size, shape of rough diamonds, skill of the workers, etc. (e) The polished diamonds so manufactured are then sold either directly or through distributors spread across the globe to various customers who are mainly jewellery manufacturers. D. Peculiarities of Products and Business: (a) In the diamond business world over, there are estimated to be 8000 to 10000 different qualities of diamonds. The price of a diamond depends on various factors such as shine, luster, size, color, clarity, purity, cluster, cartage etc. In fact, no two diamonds can 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 stag....
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....e lot are likely to be of the same size, shape, colour and weight which leads to anomalous situations when these are cut and polished. The process of cutting consists of pruning the edges, flattening the top and shaping the sides as to give the rough stone a final shape and then polish it. The entire process of cutting and polishing results in diamonds of different shapes and sizes depending upon the structure of the rough diamonds and the skills of the cutters and polishers of diamonds. Thus a lot of 100 carat of rough diamonds may usually yield 27% to 29% cut and polished diamonds of varying sizes and shapes and colours and weights (carats). Diamonds are weighed in carats and one gram is equal to 5 carats. Thus diamonds get cut and polished lot wise and even if each lot of rough diamonds is pre- sorted before giving it for cutting and polishing, the polished diamonds are likely to vary in size, shape, size, colour and weight. Normally diamonds are exported and sold locally in lots and/or by weight of similar size and cOloj.ir because these diamonds are then used by diamond jewellery manufacturers in the manufacture of diamond jewellery which requires diamonds of similar size, sha....
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....imported rough & polished diamonds worth Rs. 158 crores out of its total consumption of rough diamonds of Rs. 367 crores. Assessee also made an attempt to segregate segment wise figures of sales, purchases and expenses and worked out and submitted a segment wise, that is, local sales, non-AE sales and AF sales and worked out the OP/Sales margins and furnished the same to the TPO. It appears from the penalty order dated 30/07/2015 that the TPO has not examined this segment wise unaudited P & L Account and has gone ahead with passing of a stereo typed penalty order as being done by other TPOs even though the facts of the case were materially little different and has levied penalty under section 271G of l.T. Act, 1961. In this scenario, it is difficult to identify and say whether a polished diamond came out of any particular lot of rough diamonds or the other and/or out of the polished diamonds locally purchased by the appellant. On understanding of export bills of cut and polished diamonds exported to AEs and non AEs reveals that diamonds of varying size, quality, colour and carat weight were exported as is evident from the price per carat charged in each bill. And may be si....
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....ty under section of Ps. 6,89,53,467/- under section 271G of l.T. Act, 1961. Another issue on which the TPO has laid stress is that the appellant could have followed the internal CUP method to work out the arm's length price in respect of its exports. 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 CUP method except a rough estimate can be made in general. Hence 1epingj in view the nature of the trade and the lots of diamonds exported by the appellant to AEs and Non-AEs during the assessment year, following internal CUP method is not practicable. 'ITO has invoked specifically rule 10D(1)(d), (g), (h) and (m) of l.T. Rules, 1962 to substantiate the levy of penalty under section 271G of I.T. Act, 1961, however, a segment wise profit and loss account prepared and submitted by the appellant I during the penalty proceedings was not even examined and a comparison of the P & L Accounts and the Balance Sheets of the AEs was also not made by the TPO. If the segment wise P & L Account submitted by the appellant even during the penalty proceedings had been....
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....#39;ble High Court of Delhi in the case of CIT vs. M/s. Leroy Somer & Controls (India) Pvt. Ltd. which observed as under: ..................................................................... ....................... The assessee also cited the below mentioned decision of Hon‟ble ITAT which is as under: ..................................................................... ................................. I have gone through the above and found that the facts of the above case laws are similar to the facts of the appellant's case. In view of the above, I am of the opinion that levy of penalty u/s.271G of the I.T.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 appellant and the reasonable cause showed by the appellant and above all, when there is no adjustment made in the ALP. Thus, the levy of penalty of Rs. 6,89,53,467/- under section 271G of l.T.Act, 1961 is hereby deleted. In this regard, reliance is also placed on following decisions: 1) ITO V/S. Nets Soft India Ltd. - 2013/35/Taxniann.Com/5....
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....aded to be in agreement with the view of the CIT(A) that now when the rough/polished diamonds were traded on lot wise basis, therefore, it was difficult to identify and say whether a polished diamond came out of a particular lot of rough diamonds or the other and/or out of the polished diamonds purchased locally by the assessee. We find that the export bills of the cut and polished diamonds exported to the AEs and the non-AEs revealed that the diamonds of varying size, quality, colour and carat weight were exported as was evident from the price per carat charged in each bill, and similar would have been the position in respect of cut and polished diamonds purchased and sold locally and/or purchased from abroad but sold locally. We are of the considered view that in the backdrop of the aforesaid peculiar nature of the trade of the assessee, it could safely or rather inescapably be concluded that it was extremely difficult to identify which rough diamond got converted into which polished diamond, unless the single piece rough diamond happened to be of exceptionally high carat value, therein making the tracing out and identification of the polished diamond physically possible and conv....
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.... prices would vary from diamond to diamond and lot to lot, and further, now when the entire lot of diamonds had a common price tag per carat for the whole lot, therefore, it was not possible to evaluate the price of each diamond. We also cannot be oblivious of the fact that even otherwise in the diamond trade line, unless a diamond would weigh half carat or more or one carat or more, the same would not be priced separately in the bill because it was not practical to price diamonds of weights of lower than half carat or one carat separately weight wise per diamond in the lot. We have deliberated on the aforesaid peculiar facts involved in the business of diamond trading and are of the considered view that the insistence of the TPO that the assessee should have followed CUP method was misconceived and impractical. We are in agreement with the CIT(A) that if the TPO would had carried out a comparison of the Profit & loss account and Balance Sheets of the AEs, the same would had revealed the gross profit margins and levels of profitability earned by the AEs in their businesses, and as such any abnormal variation in their gross profitability would had revealed the aberrations in the int....