TaxTMI 
TaxTMI 
2022 (5) TMI 972
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....ins 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 was reasonable. (iv) (b) the Id. CIT(A) was correct in ignoring the ....
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....ed 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 during the penalty proceedings. The appellant further submitted that CUP method could not b....
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....s 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 diamonds, skill of the workers, etc. (e) The polished diamonds so manufactured are then sold either directly or through distributors spread ....
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....n 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 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 diamo....
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....f 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 import is fragmented into different lots depending upon the size, shape, quality, purity and parity and each assorted lot is assigned cost attributable to it out of respective individual import of which such lot is a part of. Upon completion of production process, quantity of....
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....rms 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 unless the single piece rough 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 s....
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...., 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 trade and the lots of 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. The TPO has invoked specifically rule 10D(1)(d), (g), (h) (I) and G) of IT Ru....
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.... 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 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 penalt....
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....ntained 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 that it was practically difficult to maintain these details considering the nature of assessee's business. It could also be seen that finally the transactions have been accepted to be at arm's length. If the Transfer Pricing Officer was not satisfied with the benchmarking of the assessee under TNMM, nothing prevented him from rejecting assessee' benchmarking and proceed to determine th....
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....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. We find that the aforesaid practical difficulties in providing the details being faced by the industry can be well gathered from the letter of the GJEPC to the CIT-Transfer Pricing, Mumbai, wherein the aforesaid aspects involved in the diamond manufacturing business were explained. 19. We find that the assessee had in the backdrop of the very nature of its business, viz. manufacturing of diamonds, had th....
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....ely 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 international transactions. 20. We further find that as stands gathered from the records, the nature and level of business of the assessee during the year under consideration had increased almost two fold. We find that while for the gross profits of the assessee had also increased from 7.42% for A.Y. 2010-11 to 8.71% for the year under consideration, viz. A.Y. 2011-12, the Net profit had also witnessed a growth from 3.9% i....