TaxTMI 
TaxTMI 
2022 (5) TMI 972
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.... assessee has only furnished the entity level margins which consists of overall profits on AE and significant non-AE transactions. ii. Whether the decision of the 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 10 D (1), that have been specifically invoked by the TPO. iii. Whether the CIT(A) was not incorrect in stating that the TPO should have asked for copies of profit and loss accounts and balance sheets of AE's to make an overall comparison with the gross profitability levels of the assessee with AE's to ascertain diversion of profits, if any ignoring the findings of the ITAT in the case of Aztec Software Technology Services Ltd. vs ACIT(ITA No. 584/Bang/2006), in which it has been held that there is no legal requirement for the AO to prima facie demonstrate tax avoidance before invoking the provisions of section 92 and 92CA of the Act. (iv)(a) 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 thae cause of such noncompliance or demonstrating how the same....
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....I have considered the facts of the case and submissions of the assessee. The A0/TO levied penalty u/s. 271G on the ground that the assessee failed to furnish information called for. The TO 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 TO 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 armslength price of various international transactions and hence levied penalty under section 271G of IT. Act, 1961 of Rs.43,32,56,335/- @ 2% 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 duri....
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....ributors then in turn resell these rough diamonds to small distributors. (c) These small distributors then sell the 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 job workers. The entire cutting and polishing activity involves various functions such as assorting, cleaving, kerfing, boiling, bruiting, shaping, grading etc. The whole cycle from the purchase of rough diamonds 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 diamon....
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....he manufacture and trading of the diamond business. Rough diamonds are mined from various places all over the world and they vary from a size of 0.3 carat to 10 carat usually and the price of rough diamonds vary on the composition of each lot of diamond consisting of various sizes, shapes and colours and weight and each lot is likely to have rough diamonds varying in size, shape, colour and weight. It also remains a fact that no two rough diamonds in the 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....
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..... Purchase of Cut, Polished & Rough Diamonds 6,72,75,80,074/- Total 21,66,28,16,756/- Total value of transactions of diamonds entered by the assessee with AEs and non-AEs were as follows: A perusal of the correlation of the imported rough diamonds and polished diamonds and total purchases reveals that the assessee's total turnover during the year was R.2166 Crores, whereas sale to AE was Rs.1494 Crores. The assessee's total purchase during the year was Rs.2947 Crores, whereas purchase from AE was Rs.672 Crores. Thus assessee had a mix of imported rough from AEs and non AEs and also sold/exported polished diamonds to AEs as well as non-AEs. Thus the P&L Account reflects a mixture of purchases and sales both from AEs as well as non AEs. In this connection, categorization details of rough diamonds and polished diamonds were also perused and analysed to understand and verify the facts and following observations can be made: Correlation of Rough and Polished Diamonds Firstly every import or purchase of rough diamond at Surat factory passes through assortment. Upon assortment, the quantity of rough diamonds under each impo....
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....no loss in any transaction for the simple reason that while effecting the sale, the goods have to be assorted in more than 20 sieves by the buyers during the goods selection process and only such ardently selected goods are negotiated for sale and the deal gets finalized on mutually terms including price and payment timeline. Hence, if the high value selection gets sold out from the a particular sub-category, it may show handsome margin and like-wise if the case is otherwise, such particular transaction may figure loss howsoever, at the end of the day, there will be a situation of symmetrical and consistent profit as per pricing system followed from time to time. The above stated explanation has been verified, perused and analysed from the stock records detailing category-wise import/consumption of rough diamonds and category-wise categorization of polished diamonds showing the costs of the goods sold for a particular invoice at its daily weighted average cost for the month of April, 2011. 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 u....
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.... and not with an orange. As discussed earlier, a comparison by internal CUP method can be made only if two lots of diamonds are similar in size, colour, shape and clarity and unless they are similar, prices will vary from one diamond to another diamond and if one lot has variety of diamonds varying in 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 CUP method except a rough estimate can be made in general. Hence insistence of the TPO to follow internal CUP method was also not a practical suggestion keeping in view the nature of the ....
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.... 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 broad rule, which requires documentation and information voluminous and virtually unlimited, Section 271G has be interpreted reasonably and in rational manner............When there is general and substantive compliance of the provisions of Rule 10D, it is sufficient............................The documentation or information should be one specified in Rule 10D, which has been formulated in terms of section 92D(1) of the Act. Looking from any quarter and angle, the appeal of the Revenue is misconceived, totally lacking in merits and is, therefore, dismissed". The assessee also cited the below mentioned decision of Hon'ble ITAT which is as under: "The following observations of Hon'ble ITAT Bench "B", Chennai in the case of DCIT vs. Magick Woods Exports (2012) 32 CCH 0422 Chen Trib, which had concluded that penalty us. 271G cannot be imposed where assessee proves that there was reasonable cause for particular failure is also necessary to be....
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....se of the assessee for assessment year 2012-13 has been allowed in favour of the assessee by the Tribunal in ITA No. 649/Mum/2018. 7. We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. We find that in assessment year 2012-13 also the penalty was levied due to failure on the part of the assessee to provide documents maintained by the assessee in support of AE and non-AE segment of its business, but the Tribunal (supra) has deleted the penalty observing as under: "6. After due consideration of factual matrix, it could be gathered that the assessee has maintained primary books of account / documents in respect of its business activity. The international transactions carried out by the assessee with its AEs has also been well documented which is supported by benchmarking done by the assessee under TNMM method. Further, the assessee has made substantial compliances before Ld. Transfer Pricing officer and furnished all possible information, data and documents. The only lapse is that the assessee failed to furnish the segmental profitability of the AE and non-AE transactions which would be explained by the fact th....
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.... 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 convenient. W....
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....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 internation....