DCIT 5(2)(2), MUMBAI V. LAXMI DIAMOND P.LTD, MUMBAI

ITA 2643/MUM/2017

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 8787 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 8 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-12-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 11-04-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JAYANT KUMAR
• Assessee Lawyers: K A VAIDYALINGAM
• Keywords: Business income; Transfer pricing; International transaction; Reasonable cause

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL K, BENCH MUMBAI BEFORE SHRI R.C. SHARMA, AM & SHRI PAWAN SINGH, JM ./ ITA NO.2643/MUM/2017 ( [ [ / ASSESSMENT YEAR :2011-12) DCIT 5(2)(2) ROOM NO. 571, AAYAKAR BHAVAN M.K ROAD 400020 VS. LAXMI DIAMOND P. LTD., EW-2200, G-BLOCK BHARAT DIAMOND BOURSE, BKC, BANDRA (E), MUMBAI 400051. ./ ./ PAN/GIR NO. : AABCL1815G ( / APPELLANT ) .. ( / RESPONDENT ) /REVENUE BY : SHRI JAYANT KUMAR [ /ASSESSEE BY : SHRI K.A. VAIDYALINGAM / DATE OF HEARING : 16.10.2018 / DATE OF PRONOUNCEMENT: 27.12.2018 / O R D E R PER R.C.SHARMA (A.M) : THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF CIT(A)-57 MUMBAI, DATED 31.01.2017, FOR THE ASSESSMENT YEAR 2011-12, IN THE MATTER OF IMPOSITION OF PENALTY U/S 271G OF THE IT ACT. 2. RIVAL CONTENTIONS HAVE BEEN HEARD AND WE HAVE PERUSED. FACTS IN BRIEF ARE THAT THE ASSESSEE IS MAINLY ENGAGED IN DIAMONDS BUSINESS FOCUSING ON THE MANUFACTURING & TRAINING SEGMENT OF THE DIAMOND INDUSTRY. THE ASSESSEE (M/S LAXMI DIAMOND PVT LTD) IS A FLAGSHIP ENTITY OF THE M/S LAXMI DIAMOND P. LTD., MUMBAI ITA NO. 2643/MUM/2017 2 GROUP. IT WAS A PARTNERSHIP FIRM TILL 12.04.06. FROM 13.04.2006 IT HAS BEEN REGISTERED AS PVT LTD COMPANY UNDER PART OF IX OF THE COMPANIES ACT 1956. 3. DURING THE COURSE OF ASSESSMENT NO TRANSFER PRICING ADJUSTMENT WAS MADE BY THE A.O LEVIED PENALTY U/S 271G OF THE ACT ON THE PLEA THAT ASSESSEE FAIL TO FURNISH INFORMATION OR DOCUMENTS IN RESPECT OF SEGMENTAL AMOUNT RELATING TO TRANSACTION MADE WITH AES AND NON-AES FOR DETERMINATION OF ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS AS REQUIRED BY TPO UNDER RULE 10D(1) AND RULE 10D(3). 4. THE PENALTY SO IMPOSED WAS DELETED BY CIT(A) AFTER OBSERVING AS UNDER: I HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS OF THE ASSESSES, THE AO/TPO LEVIED PENALTY U/S.271G ON THE GROUND THAT THE ASSESSEE FAILED TO FURNISH INFORMATION CALLED FOR. THE TPO 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 TPO 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 ARMS-LENGTH PRICE OF VARIOUS INTERNATIONAL TRANSACTIONS AND HENCE LEVIED PENALTY UNDER SECTION 271G OF THE IT ACT, 1961 OF RS. 24,71,28,75Q/- @ 2% OF INTERNATIONAL TRANSACTIONS. ON THE OTHER HAND, THE ASSESSEE SUBMITTED THAT IT MAINTAINED NECESSARY BOOKS AND FURNISHED VARIOUS INFORMATION AND DOCUMENTS AS REQUIRED BY RULE 1UD AND SUBMITTED SEGMENT-WISE PLI DURING THE PENALTY PROCEEDINGS. THE ASSESSEE FURTHER SUBMITTED THAT CUP METHOD COULD NOT BE APPLIED AS EACH INVOICE OF SALE TO AE AND NON-AES INCLUDE DIFFERENT TYPES OF GOODS SOLD FOR DIFFERENT PRICE AND DUE TO PECULIAR CHARACTER OF THE GOODS SOLD, THE ASSESSEE DID NOT CONSIDER THE CUP METHOD AS THE MOST APPROPRIATE METHOD. IT IS ALSO MENTIONED THAT THE DEPARTMENT ACCEPTED TNMM METHOD AS THE MOST M/S LAXMI DIAMOND P. LTD., MUMBAI ITA NO. 2643/MUM/2017 3 APPROPRIATE METHOD AND NO ADJUSTMENTS WERE MADE IN THE PRECEDING YEARS. THE AO/TPO SHOULD HAVE CONSIDERED THE PECULIAR NATURE OF DIAMOND TRADE AND SHOULD HAVE APPRECIATED THE DIFFICULTIES IN ADOPTING CUP METHOD, THE ASSESSEE FURNISHED ALL THE PARTICULARS ON THE BASIS OF WHICH THE AO COULD COME TO THE CONCLUSION REGARDING THE ALP IN :HE CASE OF INTERNATIONAL TRANSACTION AND THERE WERE NO ADJUSTMENTS MADE. IN THESE CIRCUMSTANCES, THE PENALTY U/S.271G SHOULD NOT BE LEVIED. (A) BEFORE DECIDING THE ISSUE OF LEVY OF PENALTY WHETHER JUSTIFIED OR NOT, IT IS ESSENTIAL TO KNOW AND UNDERSTAND THE NATURE OF DIAMOND MANUFACTURE AND TRADING BUSINESS TO APPRECIATE THE BASIC ISSUES. ASSESSEE AND ITS AUDITORS IN THEIR SUBMISSIONS HAVE DESCRIBED NATURE OF DIAMOND TRADE, ITS PECULIARITIES AND ASSESSEE'S BUSINESS AS FOLLOWS: (B) '(C)THE NATURE OF DIAMOND BUSINESS WORLD OVER: DIAMOND BUSINESS INVOLVES FOLLOWING MAJOR STAGES: (A) EXTRACTING OF ROUGH DIAMONDS BY DIAMOND MINE OWNERS, IN THE WORLD, MAJORITY OF DIAMOND MINES ARE LOCATED IN AFRICA, RUSSIA, AUSTRALIA, ETC. THESE MINES ARE MAINLY OWNED BY A HANDFUL OF COMPANIES WHO ENJOY NEAR MONOPOLY OVER SUPPLY OF ROUGH DIAMONDS. DTC (I.E. DIAMOND TRADING CO., A DISTRIBUTING ARM OF DE BEERS, A MAJOR MINE OWNER IN AFRICA) IS A MAJOR SUPPLIER OF ROUGH DIAMONDS IN THE WORLD THE SUPPLY CYCLE, THE TERMS OF SUPPLY, QUANTITY AND QUALITY OF SUPPLY ETC. ARE CONTROLLED AND DECIDED BY IT. OTHER MAJOR SUPPLIERS ARE ARGYLE, BHP DIAMONDS, RIO TINTO DIAMONDS, ETC. THEY ALSO ARE IN A POSITION TO DICTATE MAJOR TERMS OF SUPPLY OF FAUGH DIAMONDS. AS IN ANY OTHER EXTRACTION ACTIVITY, DIAMOND EXTRACTION INVOLVES O LOT OF RISKS AND REQUIRES DEPLOYMENT OF HUGE MANPOWER, SOPHISTICATED MACHINERIES AND HUGE CAPITAL. POSSIBILITY OF ENTIRE EXTRACTION ACTIVITY RESULTING INTO A FAILURE IS ALSO VERY HIGH, (B) EXTRACTED ROUGH DIAMONDS ARE THEN SOLD TO MAJOR DISTRIBUTORS IN ANTWERP, ISRAEL, ETC. WHO ARE SIGHT HOLDERS. THESE DISTRIBUTORS THEN IN TURN RESELL THESE ROUGH DIAMONDS TO SMALL DISTRIBUTORS. (C) THESE SMALL DISTRIBUTORS [HEN SELL (HE 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 JAB WORKERS. THE ENTIRE CUTTING AND POLISHING ACTIVITY INVOLVES VARIOUS FUNCTIONS SUCH AS ASSORTING, CLEAVING, KERFING, BAILING, 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 QUALIFY OF THE SAME DEPENDS ON VARIOUS M/S LAXMI DIAMOND P. LTD., MUMBAI ITA NO. 2643/MUM/2017 4 FACTORS LIKE PURITY, SIZE, SHAPE AF ROUGH DIAMONDS, SKILL OF THE WORKERS, ETC (E) THE POLISHED DIAMONDS SO MANUFACTURED ARE THEN SOLD EITHER DIRECTLY OR THROUGH DISTRIBUTORS SPREAD ACROSS THE GLOBE TO VARIOUS CUSTOMERS WHO TIRE MAINLY JEWELLERY MANUFACTURERS. D. PECULANTIES OF PRODUCTS AND BUSINESS: (A) IN THE DIAMOND BUSINESS WORLD OVER, THERE ARE ESTIMATED TO BE 8000 TO 10000 DIFFERENT QUALITIES OF DIAMONDS THE PRICE OF A DIAMOND DEPENDS ON VARIOUS FACTORS SUCH AS SHINE, LUSTER, SIZE, COLOR, CLARIFY, PURITY, CLUSTER, CARTAGE ETC. IN FACT, NO TWO DIAMONDS CAN HAVE SAME PRICE. ALSO NO TWO DIAMOND BUSINESSMEN MAY VALUE THE SAME PIECE OF DIAMOND AT THE SAME PRICE AS VALUATION ALSO DEPENDS UPON THE PERCEPTION OF INDIVIDUAL BUSINESSMAN. IN VIEW OF THIS, ONE CAN SAY THAT NORMALLY THERE ARE NO COMPARABLE PIECES AND PRICES OF DIAMONDS. ALSO AT EACH STAGE I.E DIAMOND BUSINESS I.E FROM MINE OWNERS TO DISTRIBUTORS TO MANUFACTURER/EXPORTER AND ULTIMATELY TO CUSTOMER OR DISTRIBUTOR OF POLISHED DIAMONDS, DIE GOODS ARE ASSORTED - RE-ASSORTED, MIXED-REMIXED QUITE O NUMBER OF TIMES AND HENCE EACH PIECE OF DIAMOND LOSES ITS IDENTITY AS TO THE SOURCE. B) DIAMONDS ARE SOLD BY THEIR GENERIC NAME AND NOT BY ANY BRAND. THIS PRODUCT LACKS HOMOGENEITY. THUS. (I) PRIMA FACIE NO TRANSACTION OF PURCHASE OR SALE OF DIAMONDS CAN BE COMPARED WITH ANY OTHER TRANSACTION, (II) IT IS NOT POSSIBLE AND PRACTICABLE TO FIND OUT EXACT COST OF TRANSACTION AND HENCE RESULTANT MARK UP OR NET PROFIT MARGIN OF PARTICULAR TRANSACTION. C) ALSO DIAMOND BUSINESS WORLD OVER IS BEING DONE MAINLY IN THE FORM OF PARTNERSHIP COMPANY, PARTNERSHIP CONCERN OR PRIVATE LIMITED COMPANIES. THERE ARE VERY FEW PUBLICLY LISTED COMPANIES IN INDIA AND ABROAD. SI) IT IS NOT JUST DIFFICULT BUT RATHER IMPOSSIBLE TO HAVE VERY WIDE RELIABLE, COMPARABLE, DETAILED AND PUBLICLY AVAILABLE DATABASE, E. THE NATURE OF ASSESSCE'S BUSINESS: (I) THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF IMPORTING AND LOCALLY PURCHASING ROUGH DIAMONDS, GETTING THEM CUR AND POLISHED, AND EXPORTING OR LOCALLY SELLING THE SOME. IT ALSO PROCURED POLISHED DIAMONDS AND EXPORTS THE SAME WITHOUT CARRYING OUT ANY MATERIAL FUNCTION AS PER THE KNOWLEDGE OF THE DIRECTORS OF THE ASSESSEE COMPANY THE FOREIGN ENTITIES ARE MAINLY ENGAGED IN TRADING OF DIAMONDS. ASSESSEE COMPANY IS PURCHASING ROUGH DIAMONDS FROM VARIOUS ENTITIES INCLUDING FOREIGN ENTITIES. IT THEN GIVES THESE ROUGH M/S LAXMI DIAMOND P. LTD., MUMBAI ITA NO. 2643/MUM/2017 5 DIAMONDS TO CUTTERS/POLISHERS FOR PROCESSING INTO FINISHED GOADS, I.E. POLISHED DIAMOND IT GOT THIS OPERATION DONE FROM CONTRACT LABOUR AND AWN FACTORIES. AFTER POLISHING, IT SELLS THESE DIAMONDS TO VARIOUS CUSTOMERS INCLUDING FOREIGN ENTITIES. (II) THE COMPANY IS ALSO ENGAGED IN THE DISTRIBUTION OF ELECTRICITY/POWER GENERATED THROUGH ITS OWN WINDMILLS AND SEPARATE RECORDS ARE MAINTAINED M RESPECT POWER DIVISION. (III) IT IS ALSO ENGAGED IN THE BUSINESS OF SALE OF STUDDED JEWELLERY FOR WHICH THE SEPARATE RECORDS ARE MAINTAINED AND FILED. THE MAIN BUSINESS IS DEALING IN LOOSE DIAMONDS AS PER (I) ABOVE. (C) IN ADDITION TO THE FOREGOING DESCRIPTIONS IT IS ESSENTIAL TO KNOW AS TO WHAT HAPPENS IN THE 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 ABOUT 30% OF 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 DIAMONDS ARE EXPORTED AND SOLD LOCALLY IN LOTS AND/OR BY WEIGHT OF SIMILAR SIZE AND COLOUR BECAUSE THESE DIAMONDS ARE THEN USED BY DIAMOND JEWELLERY MANUFACTURERS IN THE MANUFACTURE OF DIAMOND JEWELLERY WHICH REQUIRES DIAMONDS OF SIMILAR SIZE SHAPE AND COLOUR WHILE DESIGNING AND MAKING JEWELLERY EXCEPT FOR ONE UNIQUE PIECE WHICH MAY BE REQUIRED FOR THE RING OR FOR CENTRE OF THE NECKLACE. HENCE A DIAMOND MANUFACTURER IS CONTINUOUSLY REQUIRED TO SORT OUT ROUGH DIAMONDS BEFORE GIVING FOR CUTTING AND POLISHING WHICH IS DONE IN STAGES AND ALSO SORT OUT POLISHED DIAMONDS WHEN THE LOTS OF CUT AND POLISHED DIAMONDS ARE RECEIVED FROM THE CUTTERS AND POLISHERS TO MAKE LOTS OF SIMILAR SIZES, M/S LAXMI DIAMOND P. LTD., MUMBAI ITA NO. 2643/MUM/2017 6 COLOURS, SHAPES AND WEIGHT BEFORE SELLING /EXPORTING POLISHED DIAMONDS. IT IS ALSO WORTH MENTIONING HERE THAT NORMALLY POLISHED DIAMONDS OF HIGHER CARAT WEIGHT COMMAND HIGHER PRICES IF OTHER FACTORS LIKE SIZE, COLOUR AND SHAPE ARE SAME AND/OR SIMILAR AND IF THERE IS VARIATION, PRICES WILL AGAIN VARY. MOREOVER, THERE IS NO STANDARD PRICE FOR A DIAMOND IN THE WORLD, BECAUSE PRICE VARIES WITH EACH DIAMANTAIRE WHO VALUES THE DIAMOND AND A BROAD PRICE RANGE CAN BE FIXED FOR DIAMONDS OF PARTICULAR SIZE, SHAPE, COLOUR AND WEIGHT AT A PARTICULAR POINT OF TIME. MOREOVER, DIAMONDS ARE SOLD IN LOTS OF CARATS UNLESS ONE DIAMOND IS OF ONE CARAT OR TWO CARTS IN WEIGHT WITH UNIQUE FEATURES AND SHAPE AND SIZE. THUS DETERMINING THE PRICE OF A DIAMOND AND /OR DIAMONDS IS A DIFFICULT ISSUE AND EVEN IF THE DIAMONDS ARE PHYSICALLY EVALUATED, PRICES WILL VARY FROM VALUER TO VALUER. D) THIS ASPECT OF DIAMOND TRADE IS ALSO EXPLAINED BY THE GJEPC INDIA IN ITS LETTER DATED 21/7/2015 ADDRESSED TO THE CIT-TRANSFER PRICING, MUMBAI 7. THE TPO BASICALLY WANTED THE ASSESSEE TO FURNISH SEPARATE PROFIT LEVEL INDICATOR(PLI) ,THAT IS, AR AND NON-AL SEGMENT WISE EITHER THE P & L ACCOUNTS AND/OR SOME OTHER EVIDENCE TO SHOW THAT THE INTERNATIONAL TRANSACTIONS WERE AT ARMS-LENGTH PRICE. ASSESSEE HAD ENTERED INTO FOLLOWING FOUR INTERNATIONAL TRANSACTIONS : TOTAL VALUE OF TRANSACTIONS OF DIAMONDS ENTERED BY THE ASSESSES WITH AES AND NON-AES WERE AS FOLLOWS: A PERUSAL OF THE COMPARISON OF THE IMPORTED ROUGH DIAMONDS AND POLISHED DIAMONDS AND TOTAL PURCHASES REVEALS THAT ASSESSEE PURCHASED ROUGH DIAMONDS OF RS. 372 CRORES FROM AES OUT OF TOTAL PURCHASE OF ROUGH DIAMONDS OF RS, 745 CRORES. IT PURCHASE POLISHED DIAMONDS FROM AE OF RS. 354 CRORES ONE OF THE TOTAL PURCHASES OF POLISHED DIAMONDS OF RS. 1083 CRORES. IT EXPORTED/SOLD RS. 7.54 CRORES OF ROUGH DIAMONDS AND RS. 502 CRORES OF POLISHED DIAMONDS TO AE OF S.NO NATURE OF THE INTERNATIONAL TRANSACTION AMOUNT IN (RS) 1 IMPORT OF ROUGH DIAMONDS 371,63,72,160 2 EXPORT OF ROUGH DID MENDS 7,54,58,156 3 IMPORT OF POLISHED DIAMONDS 354,10,02,991 4 EXPORT OF POLISHED DIAMONDS 502,36,04,511 TOTAL 1235,64,37,818 M/S LAXMI DIAMOND P. LTD., MUMBAI ITA NO. 2643/MUM/2017 7 OUT OF THE TOTAL SALES OF RS. 1884 CRORES OF POLISHED DIAMONDS . THUS ASSESSEE HAD A MIX OF IMPORTED ROUGH AND POLISHED DIAMONDS 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. 8. IN THIS CONNECTION, LOT WISE DETAILS OF ROUGH DIAMONDS AND POLISHED DIAMONDS WERE ALSO PERUSED AND ANALYZED TO UNDERSTAND AND VERIFY THE FACTS AND FOLLOWING OBSERVATIONS CAN BE MADE: COMPARISON BETWEEN ROUGH AND POLISHED DIAMONDS: BILLS FOR THE IMPORTED ROUGH DIAMONDS MENTION ONLY THE SERIAL NUMBER, DATE, BILL NUMBER, SUPPLIER'S NAME, DESCRIPTION OF GOODS AS ROUGH DIAMONDS WEIGHT IN CARATS AND THE AMOUNT. FOR EXAMPLE, BIT] NUMBER 434 DATED 28,04.2010 OF DTC MENTIONS 42458.30 CARATS VALUED AT USS 1886125.63 GIVING AVERAGE PRICE PER CARAT OF (JS$ 44.42 AND BILL NUMBER 174 DATED 20.01.2011 OF DTC MENTIONS 77139.02 CARATS VALUED AT US$ 3241957.60 GIVING AVERAGE PRICE PER CARAT OF US$ 42.02 H THUS GIVING US DETAILS OF VARIETY OF ROUGH DIAMONDS IN GENERAL AND ONLY INDICATION ABOUT THE SIZE AND COLOUR AND QUALITY COMING FROM THE AVERAGE PRICE PER CARAT OF THE LOT OF DIAMOND. SIMILARLY, THE EXPORT INVOICES MENTION ONLY WEIGHT IN CARATS, RATE, VALUE, CONV. RATE AMOUNT. IT IS ALSO WORTH NOTING THAT EACH BILL MENTIONS ONLY NUMBER, DATE, CUSTOMER'S NAME, COUNTRY, WEIGHT IN CARATS, VALUE IN US DOLLARS AND IN RUPEES AND AVERAGE RATE PER CARAT IN US DOLLARS AND INDIAN RUPEE HAS BEEN WORKED OUT LATER ON. ONLY INDICATION ABOUT THE SIZE AND CUT AND COLOUR COMES FROM THE PRICE PER CARAT CHARGED BY THE ASSESSEE AND EVEN THAT DOES NOT INDICATE THE SIZE OF THE DIAMOND IN EACH LOT OF EXPORT BILL. BILLS OF EXPORTS TO AES AND NON-AES ALSO INDICATE SIMILAR TREND AND METHOD OF BILLING AND INVOICING EXPORTS. IN THIS SCENARIO, IT IS DIFFICULT TO IDENTIFY AND SAY WHETHER A POLISHED DIAMOND CAME OUT OF THIS LOT OF ROUGH DIAMONDS OR THE OTHER AND/OR OUT OF THE POLISHED DIAMONDS LOCALLY PURCHASED BY THE ASSESSEE. PERUSAL OF EXPORT BILLS OF CUT AND POLISHED DIAMONDS EXPORTED TO AES AND NON AES REVEALS THAT DIAMONDS OF VARYING SIZE AND QUALITY AND COLOUR AND CARAT WEIGHT WERE EXPORTED AS IS EVIDENT FROM THE PRICE PER CARAT CHARGED IN EACH BILL. AND MAY BE SIMILAR SITUATION MUST HAVE EXISTED IN RESPECT OF CUT AND POLISHED DIAMONDS PURCHASED AND SOLD LOCALLY AND/OR PURCHASED FROM ABROAD BUT SOLD LOCALLY, 9. 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 M/S LAXMI DIAMOND P. LTD., MUMBAI ITA NO. 2643/MUM/2017 8 PHYSICALLY POSSIBLE AND CONVENIENT. ONLY INDICATION ABOUT THY 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 TPQ ASKED FOR DETAILS OF PLI- PROFIC LEVEL INDICATOR , THAT IS, SEGMENT WISE PROFIT AND LOSS ACCOUNT OF THE AE SEGMENT AND NON-AE SEGMENT IN RESPECT OF EXPORT OF GOODS AS WELL AS LOCAL SALES TO ARRIVE AT ARM'S-LENGTH PRICE IN RESPECT OF INTERNATIONAL TRANSACTIONS. ASSESSES EXPLAINED THE DIFFICULTIES TO THE TPO IN VARIOUS LETTERS DESCRIBED EARLIER, HOWEVER, THE TPO INSISTED FOR THE SAME AND THEN INVOKED RULE 10D OF I.T.RULESL962 AND DID NOT DETERMINE THE ARM'S LENGTH PRICE IN RESPECT OF THE INTERNATIONAL TRANSACTIONS, BUT WENT AHEAD WITH THE LEVY OF PENALTY UNDER SECTION 271G OF I.T. ACT, 1961. IN THIS REGARD, THE TPO HAD ANOTHER OPTION OF EITHER MAKING SOME COMPARISON OF REALIZATION 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 AND/OR SHOULD HAVE ASKED FOR THE COPIES OF P& L ACCOUNTS AND THE BALANCE SHEETS OF THE AES TO MAKE AN OVERALL COMPARISON WITH THE GROSS PROFITABILITY LEVELS OF THE ASSESSEE WITH AES TO ASCERTAIN DIVERSION OF PROFITS, IF ANY, IN BROAD MANNER. HOWEVER, THIS WAS NOT DONE BY THE TPO AND THE TPO WENT AHEAD WITH THE LEVY OF PENALTY UNDER SECTION OF RS. 24,7L R 2S,75Q/- AT THE RATE OF 2% OF INTERNATIONAL TRANSACTIONS OF RS, 1235,64.37,8 W- UNDER SECTION 271G OF IT,ACT,1961. 11. ANOTHER ISSUE ON WHICH THE TPO HAS LAID STRESS IS THAT THE ASSESSEE COULD HAVE FOLLOWED THE INTERNAL CUP METHOD TO WORK OUT THE ARM'S LENGTH PRICE IN RESPECT OF ITS EXPORTS. HOWEVER, THE BASIC ISSUE REMAINS, THAT IS, AN APPLE HAS TO BE COMPARED WITH AN APPLE 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 M 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 M/S LAXMI DIAMOND P. LTD., MUMBAI ITA NO. 2643/MUM/2017 9 SIMILAR SIZE, COLOUR, SHAPE AND CLARITY, IT WILL BE DIFFICULT TO COMPARE THE PRICES GENERALLY UNDER CLIP METHOD EXCEPT A ROUGH ESTIMATE CAN BE MADE IN GENERAL. HENCE INSISTENCE OF THE TPQ 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 NUT FAIR AND REASONABLE AND PRACTICABLE. 12 THE TPQ HAS INVOKED SPECIFICALLY RULE 10D(1)(D), (G), (H) AND (M) OF I.T. RULES 1962 TO SUBSTANTIATE THE LEVY OF PENALTY UNDER SECTION 271G OF I.T. ACT, 1961, HOWEVER, A COMPARISON OF THE F & I, ACCOUNTS AND THE BALANCE SHEETS OF THE AES WOULD HAVE REVEALED THE GROSS PROFIT MARGINS AND LEVELS OF PROFITABILITY EARNED BY THE AES IN THEIR BUSINESSES SINCE THE AE WERE THE ULTIMATE BENEFICIARIES OF THESE INTERNATIONAL TRANSACTIONS AND ANY ABNORMAL VARIATION IN THEIR GROSS PROFITABILITY WOULD HAVE REVEALED THE ABERRATIONS IN INTERNATIONAL TRANSACTIONS, IF ANY. IN THIS REGARD IT IS WORTH NOTING HERE THAT NATURE AND LEVEL OF BUSINESS OF THE ASSESSES DURING THE CURRENT YEAR HAS INCREASED FROM RS. 1440 CRORES IN THE EARLIER YEAR TO RS. 1396 IN THE PRESENT YEAR I.E, A RISE OF RS. 456 CRORES BY ALMOST 31%. THE NET PROFIT AFTER TAX HAS ALSO GONE UP TO RS. 47 CRORES FROM RS. 37 CRORES IN THE EARLIER A Y 2010-11, FT IS ALSO SEEN FROM A,V. 2010-11 RECORDS THAT THE TPO DID NOT PROPOSE ANY ADJUSTMENTS IN THE ARM'S LENGTH PRICES FOR A.Y. 2010-11.EVEN OTHERWISE, THE TPO HAS GONE STRAIGHT TO FAULT FINDING BUSINESS WITHOUT UNDERSTANDING THE INTRICACIES OF DIAMOND MANUFACTURE AND TRADING BUSINESS AND INSTEAD OF DETERMINING THE ARM'S LENGTH PRICE BY ASKING FOR P & L ACCOUNTS AND BALANCE SHEETS OF THE AES AND THEN COMPARING THE FINANCIAL RATIOS IN GENERAL, GONE AHEAD AND LEVIED PENALTY OF RS.24 R 71,28,7SQ/-ON THE ASSESSEE. PRIMA FACIE, THE LEVY OF PENALTY UNDER SECTION 271C OF I.T ACT , 1961 IS NEITHER FAIR NOR REASONABLE AND ALSO NOT JUSTIFIED IN FACTS OF THE CASE MAINLY THE INTRICACIES OF THE DIAMOND TRADE AND NON-AVAILABILITY OF KNOWLEDGE IN PUBLIC DOMAIN ABOUT THE MANUFACTURE OF DIAMOND TRADE. 13. THE ASSESSEE HAS ALSO SUBMITTED THAT WHEN THE ASSESSEE HAD FURNISHED ALL THE PARTICULARS ON THE BASIS OF WHICH THE AO COULD HAVE COME TO THE CONCLUSION REGARDING ALP IN THE CASE OF INTERNATIONAL TRANSACTION AND FURTHER SUBMITTED THAT THE TPO HAD NOT ASKED FOR ONLY ONE SPECIFIC DETAIL BUT SEVERAL DETAILS ON SEVERAL OCCASIONS FROM TIME TO TIME. EVEN THE EXPLANATION FOR THE SPECIFIC DETAILS OF SEGMENTAL AE, NON-AE TRANSACTIONS WERE ALSO FIFED AND SUBMITTED. THUS, IT APPEARS THAT THE ASSESSEE HAD MADE SUBSTANTIAL COMPLIANCE WITH THE REQUIREMENTS OF FILING ALL MAJOR INFORMATION CALLED FOR BY THE TPO FUR DETERMINATION OF THE ALP AND ACCORDINGLY, THE ALP WAS ACCEPTED BY THE TPQ. FURTHER, THE ASSESSES RELIED ON THE HON'BLE HIGH COURT OF DELHI IN THE CASE OF GIT VS. M/S. LEROY SOMER & CONTROLS (INDIA) PVT. LTD. WHICH OBSERVED AS UNDER: M/S LAXMI DIAMOND P. LTD., MUMBAI ITA NO. 2643/MUM/2017 10 'THE DECISION AND OBSERVATION OF THE HON'BLE HIGH CONN OF DELHI IN INCOME TAX APPEAL NO. 410/2012 (DECIDED ON 30082013 IN THE CASE OF CIT-2 VS. M/S. LEROY SOMER & CONTROLS (INDIA) PVT. LTD.), WHICH CONFIRMED THE ITAT DECISION AND DISMISSED THE REVENUE APPEAL ON THE SUBJECT 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 BROOD RULE, WHICH REQUIRES DOCUMENTATION AND INFORMATION VOLUMINOUS AND VIRTUALLY UNLIMITED. SECTION 271G HAS TO BE INTERPRETED REASONABLY AND M A RATIONAL MANNER.................................... WHEN THERE IS GENERAL AND - SUBSTANTIVE COMPLIANCE OF THE PROVISIONS OF RULE 100, IT IS SUFFICIENT . .......... ...THE DOCUMENTATION OR INFORMATION SHOULD BE ONE SPECIFIED IN RULE 10D, WHICH HAS BEEN FORMULATED M TERMS OF SECTION 92D{1) OF THE ACT LOOKING FROM ANY QUARTER AND ANGLE, THE APPEAL OF THE REVENUE IS MISCONCEIVED, TOTALLY SACKING 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. MAGIC WOODS EXPORTS (2012) 32 CCH 0422 CHEN TRIB, WHICH HAD CONCLUDED THAT PENALTY U/S. 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 TPQ 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 271C 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 ASSESSES. IF THERE ARE MORE FAILURES ON THE PART OF THE ASSESSEE, THE PENALTY MAY END UP ALMOST IN A CAPITA! 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 LT,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 MADE BY THE ASSESSEE AND THE REASONABLE CAUSE SHOWED BY THE ASSESSEE AND ABOVE ALL WHEN THERE IS NO ADJUSTMENT MADE IN THE ALP. IN NUTSHELL, THE LEVY OF PENALTY OF RS, 24,71,28,7507- UNDER SECTION 271G OF LT. ACT, 1961 IS HEREBY DELETED. IN THIS REGARD, RELIANCE IS ALSO PLACED ON FOLLOWING DECISIONS: M/S LAXMI DIAMOND P. LTD., MUMBAI ITA NO. 2643/MUM/2017 11 1) ITO VS NETS SOFT INDIA LTD. 2013/35 TAXMANN.COM/579/MUMBA 2) ACIT VS. GILLETTE INDIA LTD.20L5/54 TAXMANN.COM/3L3/JAIPUR ITAT 15. EN VIEW OF THE FACT THAT LEVY OF PENALTY UNDER SECTION 271G OF LT. ACT, 1961 IS ITSELF DELETED, OTHER OBJECTIONS RAISED BY THE ASSESSEE BEFORE THE TPO AND IN APPEAL ARC NOT CONSIDERED RELEVANT AND ARE NOT DISCUSSED. IN NUTSHELL, LEVY OF PENALTY UNDER SECTION 271G OF LT. ACT, 1961 IS HEREBY DELETED. 5. AGAINST THE ORDER OF THE CIT(A) THE REVENUE IS IN FURTHER APPEAL BEFORE US. 6. WE HAVE CONSIDERED RIVAL CONTENTIONS AND CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND FOUND THAT THE CIT(A) HAS DELETED THE PENALTY BY OBSERVING THAT KEEPING IN VIEW NATURE OF DIAMOND BUSINESS IN WHICH THE ASSESSEE IS ENGAGED, IT HAS SUSTAINABLY COMPLIED WITH THE REQUIREMENT OF FILING DOCUMENTS WITH RESPECT TO SEGMENTAL AMOUNT RELATING TO TRANSACTIONS WITH AE & NON-AES FOR DETERMINATION OF ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION. ACCORDINGLY THE CIT(A) OBSERVED THAT WHEN THERE IS NO ADJUSTMENT MADE IN THE ARMS LENGTH PRICE, PENALTY SO IMPOSED IS NOT JUSTIFIED. THE CIT(A) HAS ALSO RELIED ON VARIOUS JUDICIAL PRONOUNCEMENT HAVING SIMILAR FACTS, WHEREIN PENALTY HAS BEEN DELETED U/S 271G OF THE ACT, WHEN NO ADJUSTMENT IN ARMS LENGTH PRICE WAS MADE. DETAILED FINDINGS SO RECORDED BY THE CIT(A) HAVE NOT BEEN CONTROVERTED BY LD. DR, ACCORDINGLY WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LD. CIT(A). M/S LAXMI DIAMOND P. LTD., MUMBAI ITA NO. 2643/MUM/2017 12 7. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 27.12.2018 SD/- SD/- ( PAVAN SINGH ) ( R.C. SHARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED 27.12.2018 K RAVI KUMAR ( P.S.) / COPY OF THE ORDER FORWARDED TO : / BY ORDER, / ( ASSTT.REGISTRAR) , / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A), MUMBAI. 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. [ / GUARD FILE. //TRUE COPY//