TaxTMI 
TaxTMI 
2021 (5) TMI 100
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.... the assessee has compiled with clause (d), (g), (h) and (m) of Rule 10D(1), that have been specifically invoked by the TPO. (iii) The Ld. CIT(A) erred in holding that there was reasonable cause for non-compliance of Section 92D read with Rule 10D(1) without specifying the cause of such non-compliance or demonstrating how the same was reasonable. (iv) Whether the Ld. CIT(A) was correct in ignoring the ratio laid down in the decision of the Hon'ble High Court in the case of M/s. Shatrunjay Diamonds (261 ITR 258) holding that the initial burden was cast upon the assessee? (v) The Ld. CIT(A) erred in deleting the penalty for the reason that no adjustment was made to the ALP, failing to note that by not producing the material documents necessary to determine the ALP under any of the prescribed methods u/s 92C(1) of the Act, the assessee effectively prevented the TPO to make any determination as recorded by the TPO in the order u/s. 92CA (3) of the Act. (vi) The appellant prays that the order of the Ld. CIT(A) on the above grounds be set aside and that of the AO be restored." 3. Brief facts of the case are that :- The assessee is engaged in ....
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....rofit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. (2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length puce, in the manner as may be prescribed: 7. Rule 10B describes the five methods for determination of arms length price for international transaction as per section 92C of income Tax Act,1961. in the instant case, the assessee has himself selected TNMM as most appropriate method for the purpose of benchmarking its international transaction. TNMM method is prescribed under Rule 10B(1)(e) as under: (e) transactional net margin method, by which, - (i) the net profit margin realised by the enterprise from fin international transaction 55c [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transac....
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....r discussed certain case laws in this connection. That in the case of UCB India vs. ACIT 317 ITR 292 (AT)/121 no 13l(Mum). It has been held that when AE sale is only small part of total segment, entity level benchmarking is not acceptable. Hon'ble ITAT has relied on the ratio of Azetec Software & Technology Services Ltd. [2007] 107 ITD 141(Bang)(SB) and OECD TP guidelines and has held that the international transaction have to be evaluated, on standalone basis and then compared with similar analysis undertaken on independent transactions. Comparison of the operating profit of the taxpayer as a whole, with the overall operating profits of certain other companies, without any adjustments would not satisfy the requirements of evaluating an international transaction The ITAT therefore concluded that the taxpayer was in error in comparing the operational margin ac entity level and such an approach was rejected. That the decision in the case of UCB India vs. ACIT 317 ITR 292 (AT)/121 ND 131(Mum) has been followed by the Hon'ble Bangalore bench of ITAT in the case of Toyota Kirloskar Auto Parts P. Ltd. reported in 52Taxmann 171 (Bangalore Trib) (2014) on the issue of royalty. 8....
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..... The Assessing Officer further observed that he segmental accounts are required to find out whether the transactions entered into by the assessee with its AE are at arm's length with that entered into with independent third parties in comparable situation. That therefore, the separate segmental results in assessee's transactions with AE and non-AE are a must. That because in combined entity level margins the loss in transactions with AE segment can be easily set off with the profits with non-AE segment, in such a situation the benchmarking will not be correct. That there is no way by which correct benchmarking can be done unless and until the assessee submits the correct margins in respect of transactions with AE and non-AE. That non-furnishing of data in this regard can make the whole exercise of benchmarking the transactions futile. 11. The Assessing Officer found that during the course of transfer pricing proceedings, it was found by the TPO that the assessee had not maintained proper documentation to apply the TNM method, CUP method or any other prescribed methods. II was also seen that the assessee had both AE and non- AE transactions during the year, but no separa....
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.... nature, terms and conditions relating to any uncontrolled transaction with third parties which may be of relevance to the pricing of the international transactions (or specified domestic transactions, as the case may be], (h) a record of the analysis performed to evaluate comparability of uncontrolled transactions with the relevant international transaction 56(or specified domestic transaction] ; (i) (j) (k) (l) (m) any other information, data or document, including information or data relating to the associated enterprise, which may be relevant for determination of the arm's length price 10D(2)......... (3) The information specified in [sub-rules (1) and (2A)] shall be supported by authentic documents, which may include the following : a) official publications, reports, studies and data bases from the Government of the country of residence of the associated enterprise, or of any other country; b) reports of market research studies carried out and technical publications brought out by institutions of national or international repute; c) price publications including stock exchange....
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....be of relevance to the pricing of the international transactions. But he found that the assessee failed to comply with the above said provision in clause (g) of Rule 10D(1). That this is evident from the assessee's submission dated 22-02-2016, wherein at page 4 of the Report on Transfer Price Study and Related Documentation the assessee had submitted as follows: a. In the diamond business world over, there are estimated to be 5000 to 10000 different qualities of diamonds The price of a diamond depend on various factors such as shine, luster, Size, color, clarity, purity, cluster; cartage, etc. In fact, no two diamonds can have same price as valuation also depends upon the perception of individual businessman. 16. The Assessing Officer observed that the above purports that normally there are no comparable; pieces and price of diamonds. Also at each stage in diamond business i.e. from mine owners to distributors to manufacturer/exporter and ultimately to customer or distributor of polished diamonds, the goods are assorted-re-assorted, mixed- remixed quite number of times and hence each piece of diamond loses its identity as to the source" 17. The Assessing Officer ....
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....ssee's contention as under :- "Considering, the nature of the business and the product involved and the need to assort and re-assort rough and polished diamonds at each stage it was explained that it is not possible nor feasible not only for the company but for the entire trade and industry to give separate transaction wise profit with AE and non-AEs. On the subject, representations were also made by the apex body i.e. Gem & Jewellery Export Promotion Council to DIT-1. Copy of the letter dated 21.7.2015 on the subject is enclosed and the same is self explanatory vis-a-vis the business, product, records, profitability, consistency and the difficulties etc. In our case, AE, non-AE segmental accounts on rational and recognized basis were duly filed and it seems that same are overlooked while initiating penalty proceedings. We have to re-request you to consider the following submission already duly made during JP assessment before levying any penalty." 22. Thereafter the Assessing Officer proceeded to reject the assessee's contention and passed a very elaborate order inter alia relying upon Hon'ble Bombay High Court decision in The Commissioner of Income Tax vs....