TaxTMI 
TaxTMI 
2021 (7) TMI 208
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.... only furnished the entity level margins which consists of overall profits on AE and significant non-AE transactions. (2) Whether on the facts and in circumstances of the case the decision of the Ld. CIT(A) is not vitiated for the reason that the CIT(A) has not given any finding on how the assessee has complied with clause (d), (g), (h) and (m) of Rule 10D (1), that have been specifically invoked by the TPO. (3) Whether on the facts and in circumstances of the case the Id. CIT(A) erred in holding that there was reasonable cause for non-compliance of sec.92D read with Rule 10D(1) without specifying the cause of such non-compliance or demonstrating how the same was reasonable. (4) Whether on the facts and in circumstances of the case the Id. CIT(A) was correct in ignoring the ratio laid down in the decision of Hon'ble Bombay High Court in the case of M/s. Shatrunjay Diamonds (261 ITR 258) holding that the initial burden was cast upon the assessee? (5) Whether on the facts and in circumstances of the case the Id. CIT(A) erred in deleting the penalty for the reason that non adjustment was made to the ALP, failing to note that by not producing the material documents necessar....
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....tional transactions and specified domestic transaction as referred in Form No. 3CEB and its TP Review Report. 29.08.2016 Notice u/s 92D(3) was again issued to the assessee, wherein the assessee was directed, viz. (i) that the TNMM benchmarking be reworked out at segmental level considering operating profits at segmental level and that with AEs and parties mentioned u/s 40A(a)(b) of the Act; (ii) that in case the benchmarking as mentioned hereinabove could not be carried out then, to put forth an explanation that as to why TNMM method employed for the abovementioned transactions may not be rejected, and a fresh benchmarking be carried out as per any other method out of the methods prescribed under the Act; and (iii) that in case of certain inter unit transfers, if the benchmarking as per 10% mark up as per the excise rule was to be adopted, then, it has to be demonstrated that non-inter unit uncontrolled market comparable transactions mark up did also fit to that range as required in its case. 28.10.2016 Notice u/s 92D(3) was again issued by the TPO wherein it was pointed that after rejection of TNMM as MAM, the benchmarking process may alternatively be supported by segregatin....
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....on to maintain documents giving various details about the international transactions, viz. nature and terms; FAR analysis; record of forecasts budgets etc.; documents explaining and justifying the selection of the most appropriate method considering the factors specified in Rule 10C; and also the documents related to uncontrolled transactions to establish comparability and ALP of th international transactions [or specified domestic transaction] by applying such most appropriate method. After referring at length to the relevant statutory provisions, it was observed by the TPO that the assessee had not kept and maintained the documents as mandated by Rule 10D. It was further observed by him that the assessee had not maintained proper documents to justify selection of CUP or TNMM as the most appropriate method. It was observed by the TPO that if TNMM was to be considered as the most appropriate method then, as per the mandate of Rule 10C(2)(d), the assessee should have considered the degree of comparability existing between the international transactions [or specified domestic transactions] and uncontrolled transaction, and should have maintained documents in this regard as per the ma....
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....le 10D(1), and not furnished the documents before the TPO, therefore, it had rendered itself exigible for levy of penalty u/s 271G of the Act. As regards the claim of the assessee that it was not practically possible to provide the separate profitability for its transactions with AE & non-AE, the same was rejected by the TPO, for the reason, that the said contention clearly militated against the provision of Rule 10B(1)(e) that prescribed the manner for determination of net profit margin from the international transactions [or specified domestic transactions]. In fact, it was observed by the TPO that if there was a practical difficulty in working out the profit from international transaction [or specified domestic transaction], then TNMM should not have been considered as the most appropriate method at all. Being of the view, that having considered TNMM as the most appropriate method, the TPO was of the view that the assessee could not be allowed to change the manner of determination of ALP under TNMM as was prescribed under Rule 10B(1)(e). Also, the plea of the assessee that considering the peculiar nature of its trade it was practically not possible to provide separate profitabil....
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....of A.O vide which penalty was imposed on the assessee u/s 271G of the Act. It was submitted by the ld. D.R that as the assessee had failed in its statutory obligation to maintain or furnish the requisite information as per the mandate of Sec. 92D r.w. Rule 10D, therefore, the TPO had rightly imposed penalty u/s 271G of the Act. It was submitted by the ld. D.R that as the CIT(A) had wrongly vacated the penalty imposed by the TPO u/s 271G, therefore, his order be set aside and that of the A.O be restored. 8. Per contra, the ld. Authorized Representative (for short 'A.R') for the assessee relied on the order of the CIT(A). It was submitted by the ld. A.R that the ITAT, 'K' bench, Mumbai in the case of ACIT-5(1)(2), Mumbai, Vs. M/s D. Navinchandra Exports Pvt. ltd., Mumbai, ITA No. 6304/Mum/2016 had concluded that no penalty u/s 271G could validly be imposed in the case of an assessee engaged in the business of manufacturing and export of cut & polished diamonds. It was, thus, submitted by the ld. A.R that the issue herein involved was squarely covered by the order of the ITAT, 'K' bench, Mumbai, in the case of ACIT-5(1)(2), Mumbai, Vs. M/s D. Navinchandra Exports Pvt. ltd., Mumbai, I....
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....ng the specified domestic transactions that were entered into with its AEs during the year under consideration. Observing, that the assessee had failed to submit segmental accounts of profitability for its AE & non-AE transactions, the TPO was of the view that the non-furnishing of the said information had thwarted the department from evaluating the correctness of the ALP of the said specified domestic transactions. It was observed by the TPO that the assessee had wrongly benchmarked the transactions using TNMM at an entity level, for the reason, that the same had given the combined profits of the transactions of the assessee with its AEs and non-AEs. It was observed by the TPO that as the assessee was adopting TNMM as the most appropriate method as per Sec. 92C, therefore, it was obligated to determine the net profit margin of its specified domestic transactions with the AEs for determining the ALP of the said transactions u/s 92C as per rule 10B(1)(e). As observed by us hereinabove, the TPO noticed that the assessee had not maintained and also not furnished the documentation from which the profit margin of the AEs could be determined. It was further observed by him that the quali....
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....fied domestic transaction to furnish any information or document in respect thereof, as may be prescribed under sub-section (1), within a period of thirty days from the date of receipt of a notice issued in this regard: Provided that the Assessing Officer or the Commissioner (Appeals) may, on an application made by such person, extend the period of thirty days by a further period not exceeding thirty days." (emphasis supplied by us) On a perusal of the aforesaid statutory provision, we find, that the same therein contemplates that the A.O or CIT(A), in the course of any proceeding under the Act, require any person who had entered into an international transaction or specified domestic transaction to furnish any information or documents in respect thereof, as may be prescribed under sub-section (1), within a period of 30 days from the date of receipt of a notice issued in this regard. As per the 'proviso' to subsection (3) of Sec. 92D, on an application made by the assessee, the aforementioned period of thirty days may be extended by a further period not exceeding thirty days. In our considered view, as per Sec. 92D(3) an assessee may be called upon to furnish the requisite inf....
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....e of the business of manufacturing and export of cut & polished diamonds could validly be imposed. As stated by the ld. A.R, and rightly so, the issue had been deliberated at length by the ITAT, Mumbai 'K' Mumbai in the case of ACIT-5(1)(2), Mumbai Vs. M/s D Navinchandra Exports Pvt. Ltd., ITA No. 6306/Mum/2016, dated 25.10.2017. In its aforesaid order, the 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, observing as under: "16. We have heard the ld. D.R and perused the orders of the lower authorities. We have given a thoughtful consideration to the facts involved in the case before us and are of the considered view that it remains as a matter of fact borne from the records that the TPO had imposed penalty under Sec. 271G for the reason that the assessee had failed to furnish the information as was called for by him. We find that the TPO held a conviction that the assessee had not only inappropriately applied the TNMM which patently suffered from serious irregularities, as the assessee had merely allocated the expense....
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.... assessee had not maintained separate books of accounts for AE and non-AE segments, therefore, it expressed its inability to furnish the details in the manner the same were called for by the TPO. We find that the TPO in the absence of the segmental breakup of the AE and non-AE transactions, therein concluded that it was prevented from benchmarking various transactions, and for the said failure of the assessee to furnish the requisite details had initiated penalty proceedings under Sec. 271G in the hands of the assessee. We find that the TPO not finding favour with the explanation of the assessee that no penalty under Sec. 271G was liable to be imposed, therein proceeded with and imposed a penalty of Rs. 2,15,98,527/- i.e @2% of the aggregate value of the international transactions of Rs. 107,99,26,354/- in the hands of the assessee. 18. We find that the CIT(A) after deliberating at length on the nature of the business of manufacturing and trading of diamonds, therein concluded that in the backdrop of the intricacies involved in the said business it was practically difficult for the assessee to furnish the information in the manner the same was called for by the TPO. We find that ....
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....f the very nature of its business, viz. manufacturing of diamonds, had though explained to the TPO the practical difficulty in furnishing segment wise Profit & loss account of the AE segment and the non-AE segment, however, the TPO insisted for the same and invoked Rule 10D of the Income-tax Rules, 1962, and instead of determining the arms length price in respect of the international transactions of the assessee with its AEs, rather went ahead and levied penalty under Sec. 271G in the hands of the assessee. We are not impressed with the manner in which the assessee had proceeded with the matter and imposed penalty under Sec. 271G in the hands of the assessee. We are of the considered view that in light of the aforesaid practical difficulties which were being faced by the diamond industry, the TPO should have exercised the viable option of determining the arms length price of the international transactions of the assessee, either by making some comparison of realisation of prices in respect of export sales to AEs and non-AEs by comparing prices of diamonds of similar size, quality and weight to the best extent possible, or in the alternative could have asked for the copies of the Pr....
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...., viz. A.Y. 2011-12, the Net profit had also witnessed a growth from 3.9% in the immediate preceding year to 4.9% during the year under consideration. We further find that as observed by the CIT(A) that in the preceding year, i.e A.Y. 2010-11 the TPO did not propose any adjustment in the ALP. We are not inspired by the fault finding approach adopted by the TPO without understanding the intricacies of the diamond manufacture and trading business, and are of the considered view that he instead of determining the arms length price by asking for the Profit & loss a/c and Balance Sheets of the AEs and comparing the financial ratios in general, had rather hushed through the matter and imposed penalty under Sec. 271G of Rs. 2,15,98,527/- on the assessee. We also find that the assessee to the extent possible in the backdrop of the nature of its trade had furnished several details on several occasions from time to time with the TPO. We thus are of the considered view that the assessee had substantially complied with the directions of the TPO and placed on his record the requisite information, to the extent the same was practically possible in light of the very nature of its trade. We though....