DCIT, Central Circle-4, Surat V. M/s. D. Navinchandra Exports Pvt. Ltd., Mumbai

ITA 445/SRT/2018

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 2147 (ITAT-SURAT)
• Duration Of Justice: 3 year(s) 10 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-04-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 24-04-2022
• Assessment Year: 2012-2013
• Appeal Filed On: 14-06-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: K A VAIDYALINGAN
• Keywords: Transfer pricing; Search and seizure; International transaction; Reasonable cause; Non compliance
• Section: 273B; 92; 92D; 92E; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, SURAT BENCH, SURAT BEFORE SHRI PAWAN SINGH, JUDICIAL MEMBER AND DR. ARJUN LAL SAINI, ACCOUNTANT MEMBER TPA No. 445/SRT/2018 (AY: 2012-13) (Hearing in Virtual Court) D.C.I.T. Central Circle-4, Room No. 508, 5 th Floor, Aayakar Bhavan, Majuragate, Surat-395001. Vs. M/s D. Navinchandra Exports Pvt. Ltd., 210, Prasad Chambers, Opera House, Mumbai-400004 PAN : AADCP6855C APPELLANT RESPONDENT Department by Shri H.P. Meena, CIT- DR Assessee by Shri K A Vaidyalingan, CA Date of hearing 25/04/2022 Date of pronouncement 25/04/2022 Order under section 254(1) of Income Tax Act PER PAWAN SINGH, JUDICIAL MEMBER: This appeal filed by the Revenue is directed against the order of the Commissioner of Income Tax (Appeals)-55, Mumbai [in short, ld. CIT(A)] dated 12/03/2018 for the Assessment Year (AY) 2012-13. The Revenue in its appeal has raised the following grounds of appeal: “1. Whether the Ld.CIT(A) was correct in deleting the penalty levied u/s.271G by holding that the assessee had made substantial compliance, failing to note that under TNMM adopted by the assessee, the profit of the international transaction has to be furnished, whereas the assessee has only furnished the entity level margins which consists of overall profits on AE and significant non- AE transactions. 2. Whether the decision of the Ld.CIT(A) is not vitiated for the reason that the Ld.CIT(A) has not given any finding on how the assessee has complied with TPA 445/SRT/2018 DCIT Vs M/s D. Navinchandra Exports P Ltd. 2 clause (d), (g), (h) and (m) of Rule 10D(1), that have been specifically invoked by the TPO. 3. Whether the Ld.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 finding 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 A.O. to prima facie demonstrate tax avoidance before invoking the provisions of section 92 and 92CA of the Act. 4. The Ld.CIT(A) has erred in holding that there was reasonable cause for non compliance of sec.92D r/w. Rule 10D(1) without specifying the cause of such non compliance or demonstrating how the same was reasonable. 5. The Ld.CIT(A) erred in deleting the penalty for the reason that no adjustment was made to the ALP, failing to note that by not producing the material documents necessary to determine the ALP under any of the prescribed methods u/s,92C(l), the assessee effectively prevented the TPO to make any determination as recorded by the TPO in para 5 of the order u/s.92CA(3). 6. Whether the order of Ld.CIT(A) is not vitiated due to inherent contradictions in the order, as the Ld.CIT(A) states at para (C) at page 20 of the order that only likes are to be compared whereas, at para 10, page 23, the Ld.CIT(A) blames the TPO for not having compared average realization per carat of AE and non- AE, when penalty has in fact been imposed as assessee failed to make intensive comparison of AE and non- AE prices. 7. Whether the Ld.CIT(A) was correct in holding that the TPO could have worked out the profitability of AE segment by allocating all costs of expenses to AE and non-AE segment in the ratio of AE sales to non AE sales failing to note that such a determination of profitability will give a notional PLI that is same for both AE and non-AE segments and is on an assumption that assessee earns same rate of profits on AE and non- AE transactions without establishing its actual profitability on AE transactions.” TPA 445/SRT/2018 DCIT Vs M/s D. Navinchandra Exports P Ltd. 3 2. At the outset of hearing, the learned AR of the assessee submits that the grounds of appeal raised by the Revenue are covered in favour of assessee and against the Revenue in assessee’s own case for the Assessment Year 2011-12 wherein similar penalty was levied against the assessee under Section 271G of the Income Tax Act, 1961 (in short, the Act) and on appeal before the ld. CIT(A), the same was deleted by the ld. CIT(A)-55, Mumbai. The Revenue challenged the order of ld. CIT(A) before the Tribunal, wherein the order of Ld. CIT(A) was upheld by Mumbai Benches of the Tribunal in ITA No. 6303/Mum/2016 order dated 25/10/2017, copy of decision of the Tribunal is placed on record. The learned AR for the assessee further submits that the order of the Tribunal is upheld by the Hon'ble Gujarat High Court in Tax Appeal No. 788 of 2018 dated 09/07/2018. The learned AR for assessee submits that the Hon'ble High Court while upholding the order of Tribunal held that the learned CIT(A) as well as learned Tribunal have rightly observed that the Transfer Pricing Officer was not justified in levying the penalty under Section 271G of the Act. The learned AR of the assessee submits that in other various decisions, the Tribunal held that where the assessee has made substantial compliance under the Transfer Pricing provisions, no penalty under Section 271G of the Act is leviable. The learned AR submits that the decision of the Tribunal and the decision of the Hon'ble High Court is placed on record and there is no variation in the facts for the year under consideration. The learned AR, accordingly, submits that the grounds of appeal raised by the Revenue are covered in favour of assessee. TPA 445/SRT/2018 DCIT Vs M/s D. Navinchandra Exports P Ltd. 4 3. On the other hand, the ld. CIT-DR for the Revenue after going through the order of the Mumbai Benches of the Tribunal for the Assessment Year 2011-12 dated 25/10/2017 and the decision of Hon'ble Gujarat High Court in Tax Appeal No. 788 of 2018 dated 09/07/2018 submits that he relied on the order of the Assessing Officer. 4. We have considered the rival submissions of both the parties and have gone through the orders of the lower authorities. We find that the Assessing Officer levied the penalty under Section 271G of the Act by taking a view that the assessee has not provided segmental wise data about the significant Associated Enterprises (AE) and Non- Associated Enterprises (non-AEs) transactions. We find that on similar set of facts, the Assessing Officer in Assessment Year 2011-12, levied the similar penalty, which was deleted by Ld. CIT(A) and the order of Ld. CIT(A) was upheld by Tribunal in ITA No. 6303/Mum/2016 order dated 25/10/2017. We further find that in the Assessment Year 2012-13, the assessing officer levied penalty under section 271G by taking view that the assessee has to report segmental profitability of AEs and Non- AEs. The Assessing officer levied penalty @ 2% of the international transaction. The assessing officer worked out penalty of Rs. 7.33 Crore in its order dated 29.07.2016. The learned CIT(A) deleted the penalty vide order dated 24/09/2016 by following the order of Tribunal in A.Y. 2011-12. We find that in A.Y. 2011-12, the Coordinate bench of Mumbai Tribunal passed following order: “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 TPA 445/SRT/2018 DCIT Vs M/s D. Navinchandra Exports P Ltd. 5 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 expenses on the basis of sales, in the backdrop of which the working of the margins involved in the transactions of the assessee with its AEs and non-AEs did hardly witness any variance. We have deliberated on the orders of the lower authorities and find that the TPO in the course of the penalty proceedings was driven by the fact that the assessee by not providing the requisite details, had thus not only failed to substantiate the basis for comparing the transactions of the AE with another AE and/or non-AE, but had also failed to provide any other basis for benchmarking its international transactions with the AEs. We find that the TPO had in his penalty order observed that due to the failure of the assessee to provide requisite data/information as was called for by him in the course of the proceedings to facilitate correct benchmarking of the international transactions of the assessee with its AEs, he could not examine and determine the arms length price and had to accept it as reflected by the assessee in its TPSR. We find that the TPO in order to benchmark the international transactions of the assessee, had as a matter of fact required the assessee to furnish separate profit level indicator (PLI), either by furnishing the AE and non-AE segment wise Profit & loss account, and/or some other evidence to show that the international transactions aggregating to Rs. 107,99,26,354/- of the assessee with its AEs, viz. (i). Purchase of rough diamonds; (ii). Export of rough diamonds; (iii). Export of polished diamonds; and (v). Purchase of polished diamonds, were at arms length price. 17. We find that the TPO pursuant to the notice u/s 92CA(2) along with a questionnaire issued to the assessee had in order to verify as to whether the TPA 445/SRT/2018 DCIT Vs M/s D. Navinchandra Exports P Ltd. 6 transactions entered into by the assessee with its AEs were at arms length with that entered into by the third party in comparable situation with independent parties, had therein called upon the assessee to submit documents mentioned as per Rule 10D(1) and 10D(3) of the Income tax Rules, 1962 along with other specific details, and further directed it to furnish the documents specified under Sec. 92D and Sec. 92E of the ‘Act’. We find that the TPO after examining the details and documents available on record, had therein called upon the assessee to submit the segmental profitability for AE transactions and non-AE transactions. However, as the 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 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 TPA 445/SRT/2018 DCIT Vs M/s D. Navinchandra Exports P Ltd. 7 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 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. 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. TPA 445/SRT/2018 DCIT Vs M/s D. Navinchandra Exports P Ltd. 8 19. We find that the assessee had in the backdrop of 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 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 TPA 445/SRT/2018 DCIT Vs M/s D. Navinchandra Exports P Ltd. 9 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 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% 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 TPA 445/SRT/2018 DCIT Vs M/s D. Navinchandra Exports P Ltd. 10 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 are not oblivious of the fact that the assessee may not have effected absolute compliance to the directions of the TPO and furnished all the requisite details as were called for by him on account of practical difficulties as had been deliberated by us at length hereinabove, but however, in the backdrop of our aforesaid observations, we are of the considered view that the failure to the said extent on the part of the assessee to comply with the directions of the TPO can safely be held to be backed by a reasonable cause, which thus would bring the case of the assessee with the sweep of Sec. 273B of the ‘Act’. We thus in the backdrop of our aforesaid observations find ourselves to be in agreement with the view taken by the CIT(A,) and finding no reason to dislodge his well reasoned order, therefore, uphold the same. We thus uphold the order of the CIT(A) and the resultant deletion of the penalty of Rs. 2,15,98,527/- imposed by the TPO. 21. The appeal of the revenue is dismissed.” 5. We further find that the aforesaid order of Mumbai Tribunal was upheld by the Hon'ble Gujarat High Court in Tax Appeal No. 788 of 2018 dated 09/07/2018 by taking a view that Ld. CIT(A) and Tribunal was satisfied that there is substantial compliance of Section 92CA(3) of the Income Tax Act, and that the Transfer pricing Officer was not justified in levying the penalty under Section 271G of the Act. Considering the decisions of the Tribunal and the Hon'ble Jurisdictional High Court on similar set of TPA 445/SRT/2018 DCIT Vs M/s D. Navinchandra Exports P Ltd. 11 facts, in A.Y. 2011-12, we do not find any illegality or infirmity in the order passed by the learned CIT(A) which we affirm. 6. In the result, this appeal of the Revenue stands dismissed. Order pronounced on 25/04/2022, in open court and result was also placed on notice board. Sd/- Sd/- (Dr. ARJUN LAL SAINI) (PAWAN SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Surat, Dated: 25/04/2022 *Ranjan Copy to: 1. Assessee – 2. Revenue - 3. CIT(A) 4. CIT 5. DR 6. Guard File By Order Sr. Private Secretary, ITAT Surat