TaxTMI 
TaxTMI 
2021 (10) TMI 167
X X X X Extracts X X X X
X X X X Extracts X X X X
....ces, the copies of which have been placed on record. 3. We have carefully heard the rival submissions and deliberated upon the case laws placed before us. Our adjudication to the subject matter of appeal would be as given in succeeding paragraphs. 4. Facts leading to imposition of penalty are that assessee being resident corporate assessee is stated to be engaged in manufacturing and marketing of cut and polished diamonds. Since the assessee carried out certain international transactions with its Associated Enterprises (AE) during the year, the same were referred to Ld. Transfer Pricing Officer-1(2), Mumbai (TPO) for determination of Arm's Length Price (ALP). During these proceedings, various details were called from the assessee and the assessee submitted the details of cost of sales of different categories / class of cut and polished diamonds sold to AE and non-AE against each sale on the basis of cost ascertained from cost records maintained by the assessee for each category /class of goods. However, after examination, Ld. TPO asked the assessee to furnish segmental profitability for AE and non-AE transactions. The assessee furnished two different segmental workings and be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ugh 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 the size may come from the market price realised per carat unless each diamond is subjected to pre checking as done by the trader and manufacturer before selling and exporting to realise a better price per carat of the lot. In nutshell, it is extremely difficult for the trader to identify each rough diamond piecewise unless the rough diamond is exceptionally of high carat value by weight and similarly, it is also difficult to identify each cut and polished diamond vis-a-vis the original rough diamond from which it was cut and polished. 10. The TPO asked for details of PLI- Profit Level Indicator, that is, segment wise Profit & Loss Account of the AE segment and non-AE segment in respect of export of goods as well as local sales to arrive at arms-length price in respect of international transactions. The assessee submitted segment wise result of AE & Non AE at GP level. Assessee explained the difficulties to the TPO in various communication described earlier, however, the TPO insisted for the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 not fair and reasonable and practicable. 12. The TPO has invoked specifically rule 10D(1)(d), (g), (h) (i) and (j) of IT Rules, 1962 to substantiate the levy of penalty, however, the TPO has not made use of the details and documents to determine the arm's length price when the lot wise details of exported cut and polished diamonds were available with him. Moreover when the type of details and documents are not available in public domain, the TPO should have utilised the details and documents made available by the assessee to arrive at a fair and reasonable opinion regarding the determination of arm's length price in respect of international transaction vis-a-vis the other transactions of import of rough diamonds and locally purchased rough diamonds and export of polished diamonds to non AEs abroad. Moreover, a comparison of the P & L Accounts and the Balance Sheets of the AEs would have revealed the overall gross profit margins vis-a-vis the gross profit margins earned by the AEs in their businesses to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ary to be considered. "Moreover, in spite of all these things, the TPO has not suggested any adjustment in the ALP reported by the assessee. When that is the case, the default if at all any in the hands of the assessee, turns out to be a technical default. The levy of penalty under section 271G is to be considered in the above circumstances. The penalty prescribed under section 271G is very severe. The quantum of penalty is 2 percent of the value of the international transaction for each failure on the part of the assessee. If there are more failures on the part of the assessee, the penalty may end up almost in a capital punishment. When the penalty provision is very severe, it should be applied with great caution and only if circumstances sufficiently justify invoking the penal provision". 14. I have gone through the above and found-that the facts of the above case laws are similar to the facts of the assessee's case. In view of the above, I am of the opinion that levy of penalty u/s.271G of the l.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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... was practically difficult for the assessee to furnish the information in the manner the same was called for by the TPO. We find that the CIT(A) in the backdrop of an indepth study of the nature of activities involved in the business of manufacturing and trading of diamonds, had in a very well reasoned manner culled out the peculiar nature of the trade of the assessee. We are of the considered view that a careful perusal of the very nature of the business of manufacturing and trading of diamonds therein glaringly reveals that certain information which was called for by the TPO could not be furnished by the assessee. We find that the CIT(A) had observed that as the assessee had purchased a mix of imported rough and polished diamonds from AEs and non-AEs, and had also sold/exported rough and polished diamonds to AEs as well as the non-AEs, therefore, the Profit & loss a/c of the assessee reflected a mixture of purchases and sales both from the AEs and the non-AEs. We are persuaded 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 Profit & loss accounts and the Balance sheets of the AEs in order to make an overall comparison with the gross profitability levels of the assessee with its AEs, which would had clearly revealed diversion of profits, if any, by the assessee to its AEs. We are further unable to comprehend that as to on what basis the TPO expected the assessee to have carried out the benchmarking by following CUP method. We are of the considered view that as the comparison by internal CUP method could only be made if two lots of diamonds were similar in size, colour, shape and clarity, which we are afraid, as observed by us at length hereinabove, in light of the peculiar nature of the trade of the assessee would not be possible. We find ourselves to be in agreement with the CIT(A) that if one lot had diamonds of variety of size, colour, shape and clarity, the 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 pr....