DCIT 5(2)(1), MUMBAI V. K. GIRDHARILAL INTERNATIONAL LTD., MUMBAI

ITA 6446/MUM/2016

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 6043 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 11 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-10-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 03-11-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JAYANT KUMAR LD
• Assessee Lawyers: DR K SIVARAM; AS H ANK DUNDU
• Keywords: Transfer pricing; International transaction; Reasonable cause

Judgement Text

1 ITA NO.6446/MUM/2016 M/S. GIRDHARILAL INTERNATIONAL LTD. ASSESSMENT YEAR-2011-12 IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI , , BEFORE HONBLE SHRI SAKTIJIT DEY, JM AND HONBLE SHRI MANOJ KUMAR AGGARWAL, AM ./ IT(TP)A. NO.6446/MUM/2016 ( / ASSESSMENT YEAR: 2011-12 D CIT - 5(2)(1) ROOM NO.571, AAYKAR BHAVAN, M.K. ROAD MUMBAI-400 020 / VS. M/S. K. GIR DHARILAL INTERNATIONAL LTD. 101, PRASAD CHAMBERS 10 TH FLOOR, OPERA HOUSE MUMBAI-400 004. ./ ./PAN/GIR NO. AACCK-6101-F ( # $ /APPELLANT ) : ( %&$ / RESPONDENT ) # $'/ APPELLANT BY : SHRI JAYANT KUMAR-LD. CIT-DR %&$' / RESPONDENT BY : DR. K.SIVARAM AND SHRI S H AS H ANK DUNDU / DATE OF HEARING : 15/07/2019 / DATE OF PRONOUNCEMENT : 03/10/2019 / O R D E R MANOJ KUMAR AGGARWAL (ACCOUNTANT MEMBER): - 1. BY WAY OF THIS APPEAL, THE REVENUE IS CONTESTIN G THE CORRECTNESS OF DECISION OF LEARNED COMMISSIONER OF INCOME TAX (APP EALS)-56, MUMBAI, [IN SHORT REFERRED TO AS CIT(A)], APPEAL NO. CIT(A)-56/ACIT 5(2)(1)/2015- 2 ITA NO.6446/MUM/2016 M/S. GIRDHARILAL INTERNATIONAL LTD. ASSESSMENT YEAR-2011-12 16/112-K DATED 20/07/2016 IN DELETING THE PENALTY OF RS.12.7 9 CRORES FOR ASSESSMENT YEAR 2011-12 AS LEVIED BY LEARNED AO U/S 271G VIDE ORDER DATED 30/07/2015. 2.1 FACTS LEADING TO IMPOSITION OF PENALTY ARE THAT ASSESSEE BEING RESIDENT CORPORATE ASSESSEE IS STATED TO BE ENGAGED IN THE B USINESS OF MANUFACTURING OF CUT AND POLISHED DIAMONDS STUDDED JEWELLERY. CERTAIN INTERNATIONAL TRANSACTIONS CARRIED OUT BY THE ASSES SEE WITH ITS ASSOCIATE ENTERPRISES (AE) DURING THE YEAR UNDER CONSIDERATIO N, WERE REFERRED TO LEARNED TRANSFER PRICING OFFICER (TPO) FOR DETERMIN ATION OF ARMS LENGTH PRICES. THESE TRANSACTIONS WERE IN THE NATURE OF PU RCHASE / SALE OF ROUGH AS WELL AS POLISHED DIAMONDS AND SALE OF DIAMOND STUDD ED JEWELLERY. THE APPROXIMATE SALE TO AE WAS 23% OF ASSESSEES TURNOV ER WHEREAS PURCHASES WERE APPROX. 56% OF TOTAL PURCHASES. THE ASSESSEE BENCH- MARKED THE SAME USING ENTITY LEVEL TNMM. ALTHOUGH L D. TPO ACCEPTED THE TRANSACTIONS TO BE AT ARMS LENGTH PRICE, BUT INITI ATED PENALTY U/S 271G IN VIEW OF THE FACT THAT THE ASSESSEE WAS UNABLE TO SU BMIT INTERNAL TNMM BY WORKING OUT THE PROFITABILITY OF AE AND NON-AE SEGM ENT. 2.2 THE ASSESSEE EXPLAINED THAT OWING TO ITS NATURE OF BUSINESS, IT WAS NOT PRACTICAL TO IDENTIFY AND BIFURCATE THE STOCK, COST AND REVENUE BETWEEN AE AND NON-AE SEGMENT AND WORK OUT PROFITABILITY OF THE TWO SEGMENTS SEPARATELY. HOWEVER, CONCLUDING THAT THE ASSESSEE F AILED TO MAINTAIN DOCUMENTATION AS REQUIRED UNDER CLAUSE (G) AND (H) OF RULE 10D (1), THE AFORESAID PENALTY WAS INITIATED. 3 ITA NO.6446/MUM/2016 M/S. GIRDHARILAL INTERNATIONAL LTD. ASSESSMENT YEAR-2011-12 2.3 DURING PENALTY PROCEEDINGS, REITERATING THE SAM E, THE ASSESSEE SUBMITTED THAT THERE WAS NO UNIFORMITY IN PRODUCT C LASSIFICATION OF ROUGH DIAMONDS AND ASSORTMENT & MIXING OF ROUGH DIAMONDS WOULD MAKE IT INFEASIBLE / IMPOSSIBLE TO TRACK THE SOURCE AND COS T OF EACH PIECE OF ROUGH DIAMOND AND THEREFORE, THE PROFITABILITY OF THE TWO SEGMENT SEPARATELY COULD NOT BE WORKED OUT. HOWEVER, DISREGARDING THE SAME, LD. AO LEVIED PENALTY OF RS.12.79 CRORES U/S 271G, BEING 2% OF VALUE OF I NTERNATIONAL TRANSACTIONS. 3.1 BEFORE LEARNED FIRST APPELLATE AUTHORITY, IT WA S AGAIN EXPLAINED THAT THE ROUGH DIAMONDS WERE PROCURED FROM BOTH AES AND NON- AES. THE FINISHED PRODUCT OF CUT AND POLISHED DIAMONDS WOULD PASS THR OUGH A LENGTHY MANUFACTURING PROCESS INCLUDING ASSORTMENT / RE-ASS ORTMENT OF ROUGH DIAMONDS AND AT INITIAL STAGES, IT WOULD NOT BE POS SIBLE TO FORECAST THE FINAL OUTCOME OF ROUGH DIAMONDS. DURING THE PROCESS OF M ANUFACTURING, A SEMI MANUFACTURED DIAMOND WOULD BE ASSORTED MANY TIMES A ND HANDLED BY MANY CRAFTSMEN. VARIOUS DIRECT AND INDIRECT EXPENDI TURE WOULD BE INCURRED AT VARIOUS STAGES OF MANUFACTURING PROCESS AND THE ROUGH DIAMOND WOULD ULTIMATELY LOSE ITS IDENTITY AS TO SOURCE OF PURCHA SE DUE TO INHERENT NATURE OF DIAMOND MANUFACTURING PROCESS. THEREFORE, DUE TO PE CULIAR NATURE OF THE PRODUCT AND CONSTANT MIXING AND RE-MIXING OF DIAMON DS OBTAINED FROM AES AND NON-AES, IT WOULD NOT BE FEASIBLE TO MAINTAIN R ECORDS TO DETERMINE SEGMENTAL PROFITABILITY TO WORK OUT INTERNAL TNMM. RELIANCE WAS PLACED ON SEVERAL JUDICIAL PRONOUNCEMENTS, AS EXTRACTED IN TH E IMPUGNED ORDER, TO SUBMIT THAT THE PENALTY WAS UNJUSTIFIED. 4 ITA NO.6446/MUM/2016 M/S. GIRDHARILAL INTERNATIONAL LTD. ASSESSMENT YEAR-2011-12 3.2 THE LEARNED CIT(A), CONCURRING WITH ASSESSEES SUBMISSIONS, DELETED THE PENALTY BY OBSERVING AS UNDER: - 6. DECISION: I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE, CONTENTIONS OF THE TPO AND SUBMISSIONS OF THE APPELLANT & THE DETAILED ANALYSIS IS DISCUSSED HEREIN BELOW: THE TPO LEVIED PENALTY U/S.271G ON THE GROUND THAT THE APPELLANT FAILED TO FURNISH INFORMATION CALLED FOR. THE TPO MENTIONED THAT THE APPELLANT IN APPROPRIATELY APPLIED THE TNM METHOD AND DESPITE THE MAJOR IRREGULARITIES IN THE ENTITY LEVE L TNMM, THE APPELLANT ADOPTED THIS METHOD. FINALLY, THE TPO REJECTED ALL THE OBJECTIONS AND HE LD THAT APPELLANT DID NOT PROVIDE ANY BASIS FOR COMPARING THE TRANSACTIONS OF AE WITH ANOTHER AE AN D/OR NON-AE AND APPELLANT FAILED TO PROVIDE ANY ALTERNATIVE METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS AND THE FAILURE OF THE APPELLANT RESULTED IN AND FORCED THE TPO TO ACCEPT THE ARMS-LENGTH PRICE AS IT IS AND THUS PREVENTING THE TPO FROM EXAMINING AND DETERMINING T HE ARMS-LENGTH PRICE OF VARIOUS INTERNATIONAL TRANSACTIONS AND HENCE LEVIED PENALTY UNDER SECTION 271G OF I.T.ACT, 1961 OF RS. 12,79,00,2157- @ 2% OF INTERNATIONAL TRANSACTIONS. BEFORE DECIDING THE ISSUE WHETHER LEVY OF PENALTY I S JUSTIFIED OR NOT, IT IS ESSENTIAL TO KNOW AND UNDERSTAND THE NATURE OF DIAMOND MANUFACTURE AND TR ADING BUSINESS TO APPRECIATE THE BASIC ISSUES. APPELLANT IN THEIR SUBMISSIONS HAVE DESCRIB ED NATURE OF DIAMOND TRADE, ITS PECULIARITIES AS FOLLOWS: 'THE NATURE OF THE DIAMOND INDUSTRY AND ITS PECULIA R FEATURES ARE GIVEN IN THE SCHEDULE A AND ARE BRIEFLY ENUMERATED IN THE FLOWCHART PROVI DED (BASED ON MEMORANDUM SUBMITTED BY GJEPC TO THE TAX AUTHORITIES). THE FLO WCHART CLEARLY DEMONSTRATES THE PECULIAR NATURE OF THE DIAMOND BUSINESS AND THE KEY CHALLENGES IN MAINTAINING THE RECORDS TO EXTRACT SEPARATELY THE COST AND PROFIT F ROM EACH TRANSACTION WITH AES AND NON-AES. THE SCHEDULE-A- THE NATURE & PECULIAR FEAT URES OF THE DIAMOND INDUSTRY I. LARGE CATEGORY OF ROUGH DIAMONDS II. MULTIPLE MANUFACTURING PROCESSES III. HUMONGOUS NUMBER OF CATEGORY OF POLISHED DIAMO NDS AND THEIR CONSTANT MIXING & RE MIXING IV. SALE OF POLISHED DIAMONDS INCLUDING DIAMONDS OF SUBSTANTIALLY LOW SIZE FROM 0.01 CARAT TO 0.10 CARAT A. TO SUMMARISE THE ABOVE, IN RESPECT OF MANUFACTU RING OPERATIONS, THE ROUGH DIAMONDS ARE PROCURED FROM BOTH AES AND NON-AES. TH E FINISHED PRODUCT OF CUT AND POLISHED DIAMONDS PASSES THROUGH A LENGTHY MANUFACT URING PROCESS INCLUDING ASSORTMENT / RE-ASSORTMENT OF ROUGH DIAMONDS AS OBS ERVED FROM THE AFORESAID FLOWCHART. THUS, AT THE INITIAL STAGE IT IS NOT POS SIBLE TO FORECAST THE FINAL OUTCOME OF ROUGH DIAMOND. DURING THE PROCESS OF MANUFACTURING, A SEMI MANUFACTURED DIAMOND IS ASSORTED MANY TIMES AND HANDLED BY MANY CRAFTSMEN. VARIOUS DIRECT AND INDIRECT EXPENSES ARE INCURRED DURING THE COURSE OF MANUFACT URING. RESULTANT, A ROUGH DIAMOND LOSES ITS IDENTITY AS TO SOURCE OF PURCHASES DUE TO INHERENT NATURE OF DIAMOND MANUFACTURING PROCESS. 5 ITA NO.6446/MUM/2016 M/S. GIRDHARILAL INTERNATIONAL LTD. ASSESSMENT YEAR-2011-12 B. THE APPELLANT HUMBLY SUBMITS THAT DUE TO THE PECULIAR NATURE OF THE PRODUCT AND CONSTANT MIXING AND RE-MIXING OF THE DIAMONDS OBTAI NED FROM AE/NON-AE, IT FACES CONSTANT CHALLENGE OF IDENTIFYING THE ORIGIN OF THA T ROUGH DIAMOND FROM WHICH THE FINISHED CUT AND POLISHED DIAMOND IS OBTAINED. DUE TO SUCH FACTORS, IT IS THEREFORE NOT FEASIBLE TO MAINTAIN RECORDS TO DETERMINE SEGMENTAL PROFITABILITY TO WORK OUT INTERNAL TNMM. BRIEF MENTION OF SUCH FACTORS ARE GIVEN BELOW : > VARIOUS CATEGORIES OF ROUGH DIAMONDS PURCHASED AND UTILIZED FOR MANUFACTURING. THERE IS NO UNIFORMITY IN PRODUCT CLASSIFICATION OF ROUGH DIAMONDS. FURTHER, ASSORTMENT & MIXING OF ROUGH DIAMONDS RESULT IN NON-FEASIBILIT Y TO TRACK THE SOURCE OF COST OF EACH PIECE OF ROUGH DIAMOND. > THERE IS NO DEFINED STANDARD INPUT OUTPUT RATI O IN MANUFACTURING OF POLISHED DIAMONDS FROM ROUGH DIAMONDS. FURTHER, MANUFACTURIN G PROCESSES RESULT IN MULTIPLE PIECES OF POLISHED DIAMONDS FROM SINGLE PIECE OF RO UGH DIAMOND BASED ON YIELD VARIED FROM 10% TO 55%. DIAMOND MANUFACTURING IS A MULTI-T IER LABOUR INTENSIVE PROCESS WHERE DIFFERENT LEVEL OF SKILLED LABOUR IS EMPLOYED AND N O STANDARD LABOUR HOURS UTILIZED RESULTING IN NON-FEASIBILITY TO COMPUTE STANDARD LA BOUR COST FOR POLISHED DIAMONDS MANUFACTURED. FURTHER, DUE TO CONTINUOUS MIXING OF ROUGH DIAMONDS DURING MANUFACTURING PROCESS RESULTED IN NON-FEASIBILITY T O MAINTAIN RECORDS OF COST FOR EACH PIECE OF TINY POLISHED DIAMONDS. > HUMONGOUS NUMBER OF CATEGORY OF POLISHED DIAMO NDS (APPROXIMATELY 12000 CATEGORIES HAVING DIFFERENT PRICE RANGE) AND CONSTA NT MIXING & RE MIXING OF NUMEROUS PIECES OF POLISHED DIAMONDS BASED ON ASSORTMENT AND MARKET REQUIREMENT RESULTS IN NON-FEASIBILITY OF MAINTAINING RECORDS TO IDENTIFY ORIGIN SOURCE OF COST. FURTHER, THE DIAMONDS ARE NOT TRADED IN SINGLE UNIT BUT IN LOTS COMPRISING OF NUMBER OF DIAMONDS OF DIFFERENT VARIETIES AND VALUES. THE COMPANY DEALS IN VARIETY OF POLISHED DIAMONDS I NCLUDING DIAMONDS' OF VERY LOW RANGE FROM 0.01 CARAT TO 0.10 CARAT MANUFACTURED FR OM DIFFERENT LOT OF ROUGH DIAMONDS RESULTS IN NON-FEASIBILITY OF MAINTAINING RECORDS T O IDENTIFY ORIGIN SOURCE OF COST. ALSO, THE SIZE OF THE DIAMONDS IN CERTAIN CASES IS AS SMALL A S GRAIN OF SUGAR, THERE IS NO STANDARD MECHANISM AND THE BAR-CODING CONCEPT CANNOT BE APPL IED.' IN ADDITION TO THE FOREGOING DESCRIPTIONS IT IS ESS ENTIAL TO KNOW AS TO WHAT HAPPENS IN THE MANUFACTURING & TRADING OF DIAMOND BUSINESS. ROUGH DIAMONDS ARE MINED FROM VARIOUS PLACES ALL OVER THE WORLD AND THEY VARY FROM A SIZE OF 0.05 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 I S LIKELY TO HAVE ROUGH DIAMONDS VARYING IN SIZE, SHAPE, COLOUR AND WEIGHT. IT ALSO REMAINS A FACT THAT NO TWO ROUGH DIAMONDS I N THE LOT ARE LIKELY TO BE OF THE SAME SIZE, SHAPE, COLOUR AND WEIGHT WHICH LEADS TO ANOMALOUS S ITUATIONS WHEN THESE ARE CUT AND POLISHED. THE PROCESS OF CUTTING CONSISTS OF PRUNIN G 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 DIFFER ENT SHAPES AND SIZES DEPENDING UPON THE STRUCTURE OF THE ROUGH DIAMONDS AND THE SKILLS OF T HE CUTTERS AND POLISHERS OF DIAMONDS. THUS A LOT OF 100 CARAT OF ROUGH DIAMONDS MAY USUALLY YIEL D 27% TO 29% CUT AND POLISHED DIAMONDS OF VARYING SIZES AND SHAPES AND COLOURS AND WEIGHTS (CARATS). DIAMONDS ARE WEIGHED IN CARATS 6 ITA NO.6446/MUM/2016 M/S. GIRDHARILAL INTERNATIONAL LTD. ASSESSMENT YEAR-2011-12 AND ONE GRAM IS EQUAL TO 5 CARATS. THUS DIAMONDS GE T CUT AND POLISHED LOT WISE AND EVEN IF EACH LOT OF ROUGH DIAMONDS IS PRESORTED BEFORE GIVI NG IT FOR CUTTING AND POLISHING, THE POLISHED DIAMONDS ARE LIKELY TO VARY IN SIZE, SHAPE, SIZE, C OLOUR 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 MANUFAC TURERS 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 CO NTINUOUSLY REQUIRED TO SORT OUT ROUGH DIAMONDS BEFORE GIVING FOR CUTTING AND POLISHING WH ICH 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, COLOUR S, SHAPES AND WEIGHT BEFORE SELLING /EXPORTING POLISHED DIAMONDS. IT IS ALSO WORTH MENTIONING HERE THAT NORMALLY POLI SHED DIAMONDS OF HIGHER CARAT WEIGHT COMMANDS 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 EAC H DIAMANTINE WHO VALUES THE DIAMOND AND A BROAD PRICE RANGE CAN BE FIXED FOR DIAMONDS OF PA RTICULAR SIZE, SHAPE, COLOUR AND WEIGHT AT A PARTICULAR POINT OF TIME. MOREOVER, DIAMONDS ARE SO LD IN LOTS OF CARATS UNLESS ONE DIAMOND IS OF ONE CARAT OR TWO CARATS IN WEIGHT WITH UNIQUE FEATU RES AND SHAPE AND SIZE. THUS DETERMINING THE PRICE OF A DIAMOND AND /OR DIAMONDS IS A DIFFIC ULT ISSUE AND EVEN IF THE DIAMONDS ARE PHYSICALLY EVALUATED, PRICES WILL VARY FROM VALUER TO VALUER. THIS ASPECT OF DIAMOND TRADE IS EXHAUSTIVELY EXPLAI NED BY THE GJEPC INDIA IN ITS LETTER DATED 21/7/2015 ADDRESSED TO THE CIT-TRANSFER PRICING, MU MBAI. THE TPO BASICALLY WANTED THE APPELLANT TO FURNISH S EPARATE PROFIT LEVEL INDICATOR (PLI), THAT IS, AE AND NON-AE SEGMENT WISE EITHER THE P & L ACCOUNT S AND/OR SOME OTHER EVIDENCE TO SHOW THAT THE INTERNATIONAL TRANSACTIONS WERE AT ARMS-LE NGTH PRICE. IN THE CURRENT SCENARIO, IT IS DIFFICULT TO IDENTIF Y AND SAY WHETHER A POLISHED DIAMOND CAME OUT OF ANY PARTICULAR LOT OF ROUGH DIAMONDS OR THE OTHE R AND/OR OUT OF THE POLISHED DIAMONDS LOCALLY PURCHASED BY THE APPELLANT. ON UNDERSTANDING OF EXP ORT BILLS OF CUT AND POLISHED DIAMONDS EXPORTED TO AES AND NON AES REVEALS THAT DIAMONDS O F VARYING SIZE, QUALITY, COLOUR AND CARAT WEIGHT WERE EXPORTED AS IS EVIDENT FROM THE PRICE P ER CARAT CHARGED IN EACH BILL. AND MAY BE SIMILAR SITUATION MUST HAVE EXISTED IN RESPECT OF C UT AND POLISHED DIAMONDS PURCHASED AND SOLD LOCALLY AND/ OR PURCHASED FROM ABROAD BUT SOLD LOCALLY. THEREFORE, IT IS EXTREMELY DIFFICULT EVEN FOR THE D IAMOND TRADER AND MANUFACTURER TO IDENTIFY WHICH ROUGH DIAMOND GOT CONVERTED INTO WHICH POLISH ED DIAMOND SPECIFICALLY UNLESS THE SINGLE PIECE ROUGH DIAMOND HAPPENED TO BE OF EXCEPTIONALLY HIGH CARAT VALUE AND WEIGHT MAKING THE TRACING OUT AND IDENTIFICATION OF THE POLISHED DIAM OND 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 O F THE LOT. THEREFORE, 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 W HICH IT WAS CUT AND POLISHED. THE TPO ASKED FOR DETAILS OF PLI- PROFIT LEVEL INDICATOR, T HAT IS, SEGMENT WISE PROFIT AND LOSS ACCOUNT OF 7 ITA NO.6446/MUM/2016 M/S. GIRDHARILAL INTERNATIONAL LTD. ASSESSMENT YEAR-2011-12 THE AE SEGMENT AND NON-AE SEGMENT IN RESPECT OF EXP ORT OF GOODS AS WELL AS LOCAL SALES TO ARRIVE AT ARMS-LENGTH PRICE IN RESPECT OF INTERNATI ONAL TRANSACTIONS. APPELLANT EXPLAINED THE DIFFICULTIES TO THE TPO IN VARIOUS LETTERS DESCRIBE D EARLIER, HOWEVER, THE TPO MERELY ACCEPTED THE ARMS-LENGTH PRICE AS IT IS AND INITIATED THE PE NALTY PROCEEDINGS UNDER SECTION 271G OF I.T.ACT, 1961. THE TPO COULD HAVE TRIED TO WORK OUT THE GROSS PROFITS AND NET PROFITS BY AVERAGING THE PURCHASE PRICES AND THE EXPENSES IN P ROPORTION OF EXPORT SALES OF EACH ONE OF THE THREE SEGMENTS, AS HAS BEEN DONE BY THE APPELLA NT DURING PENALTY PROCEEDINGS TO ARRIVE AT AVERAGE PROFITABILITY OF EACH SEGMENT AND THEN TO C OMPARE THE SAME WITH THE AVERAGE PROFITABILITY OF OTHER PUBLIC/PRIVATE COMPANIES WHO SE DETAILS WERE MADE AVAILABLE IN TP STUDY REPORT. IN THIS REGARD, THE TPO HAD ANOTHER OPTI ON OF ASKING 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 APPELLANT WITH AES TO A SCERTAIN DIVERSION OF PROFITS, IF ANY, IN BROAD MANNER. HOWEVER, THIS WAS NOT DONE BY THE TPO AND T HE TPO WENT AHEAD WITH THE LEVY OF PENALTY OF RS.12,79,00,215/- UNDER SECTION 271G OF I.T. ACT, 1961. IN THE INSTANT CASE, IN SUBMISSIONS BEFORE THE TPO DURING PENALTY PROCEEDIN GS IT WAS POINTED OUT THAT THE APPELLANT'S MARGINS ARE HIGHER THAN MARGINS OF THE AES. THE TPO HAS GONE STRAIGHT TO FAULT FINDING BUSINESS WITHOUT UNDERSTANDING THE INTRICACIES OF DIAMOND MANUFACTURE AND TRADING BUSINESS AND INSTEA D OF DETERMINING THE ARMS 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.12,79,00,215/- ON THE APPELLANT. PRIMA FACIE, THE LEVY OF PENALTY UNDER SECTION 271G OF I. T. ACT, 1961 IS NEITHER FAIR NOR REASONABLE AND IS ALSO NOT JUSTIFIED IN FACTS OF THE CASE MAINLY T HE INTRICACIES OF THE DIAMOND TRADE AND LACK AND NON-AVAILABILITY OF KNOWLEDGE IN PUBLIC DOMAIN ABOU T THE MANUFACTURE OF DIAMOND TRADE. THE APPELLANT HAS ALSO SUBMITTED THAT WHEN THE APPE LLANT HAD FURNISHED ALL THE PARTICULARS ON THE BASIS OF WHICH THE TPO COULD HAVE COME TO THE C ONCLUSION REGARDING ALP IN THE CASE OF INTERNATIONAL TRANSACTION AND FURTHER SUBMITTED THA T THE TPO HAD NOT ASKED FOR ONLY ONE SPECIFIC DETAIL BUT SEVERAL DETAILS ON SEVERAL OCC ASIONS FROM TIME TO TIME. EVEN THE EXPLANATION FOR THE SPECIFIC DETAILS OF SEGMENTAL AE, NON-AE TRANSACTIONS WERE ALSO FILED AND SUBMITTED. THUS, IT APPEARS THAT THE APPELLANT HAD MADE SUBSTA NTIAL COMPLIANCE WITH THE REQUIREMENTS OF FILING ALL MAJOR INFORMATION CALLED FOR BY THE TPO FOR DETERMINATION OF THE ALP AND ACCORDINGLY, THE ALP WAS ACCEPTED BY THE TPO. FURTHER, THE APPEL LANT RELIED ON THE HON'BLE HIGH COURT OF DELHI IN THE CASE OF CIT VS. M/S. LEROY SOMER & CON TROLS (INDIA) PVT. LTD. WHICH OBSERVED AS UNDER: 'THE DECISION AND OBSERVATION OF THE HON'BLE HIGH C OURT OF DELHI IN INCOME TAX APPEAL NO. 410/2012 (DECIDED ON 30.08,2013 IN THE CASE OF CIT-2 VS. M/S. LEROY SOMER & CONTROLS (INDIA) PVT. LTD.), WHICH CONFIRMED THE IT AT 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 PROVISI ONS 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 VIRTUA LLY UNLIMITED, SECTION 271G HAS TO BE INTERPRETED REASONABLY AND IN A RATIONAL MANN ER..................................... WHEN THERE IS GENERAL AND SUBSTANTIVE COMPLIANCE OF THE PROVISIONS OF RULE 10D, IT IS SUFFICIENT.............................THE DOCUMENT ATION OR INFORMATION SHOULD BE ONE SPECIFIED IN 8 ITA NO.6446/MUM/2016 M/S. GIRDHARILAL INTERNATIONAL LTD. ASSESSMENT YEAR-2011-12 RULE 10D, WHICH HAS BEEN FORMULATED IN TERMS OF SEC TION 92D(1) OF THE ACT. LOOKING FROM ANY QUARTER AND ANGLE, THE APPEAL OF THE REVEN UE IS MISCONCEIVED, TOTALLY LACKING IN MERITS AND IS, THEREFORE, DISMISSED'. THE APPELLANT HAS ALSO CITED THE BELOW MENTIONED DE CISION OF HON'BLE ITAT WHICH IS AS UNDER: THE FOLLOWING OBSERVATIONS OF HON'BLE ITAT BENCH 'B ', CHENNAI IN THE CASE OF DCITVS. MAGICK 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 NEC ESSARY TO BE CONSIDERED. '12. MOREOVER, IN SPITE OF ALL THESE THINGS, THE TP O 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. 13. 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 M ORE FAILURES ON THE PART OF THE ASSESSEE, THE PENALTY MAY END UP ALMOST IN A CAPITA L PUNISHMENT. WHEN THE PENALTY PROVISION IS VERY SEVERE, IT SHOULD BE APPLIED WITH GREAT CAUTION AND ONLY IF CIRCUMSTANCES SUFFICIENTLY JUSTIFY INVOKING THE PEN AL PROVISION'. I HAVE GONE THROUGH THE ABOVE AND FOUND THAT THE FA CTS OF THE ABOVE CASE LAWS ARE SIMILAR TO THE FACTS OF THE APPELLANT'S CASE. IN VIEW OF THE A BOVE, I AM OF THE OPINION THAT LEVY OF PENALTY U/S.271G OF THE I.T.ACT,1961 IS NEITHER FAIR NOR RE ASONABLE AND THEREFORE IT IS NOT JUSTIFIED IN FACTS OF THE CASE, VIZ., THE NATURE OF DIAMOND TRAD E, SUBSTANTIAL COMPLIANCE MADE BY THE APPELLANT AND THE REASONABLE CAUSE SHOWED BY THE AP PELLANT AND ABOVE ALL, WHEN THERE IS NO ADJUSTMENT MADE IN THE ALP, THUS, THE LEVY OF PENAL TY OF RS. 12,79,00,2157- UNDER SECTION 271G OF I.T.ACT, 1961 IS HEREBY DELETED. IN THIS REGARD, RELIANCE IS ALSO PLACED ON FOLLOWIN G DECISIONS: 1) ITO V/S. NETS SOFT INDIA LTD. -2013/35/TAXMANN. COM/579/MUMBAI ITAT 2) ACIT V/S. GILLETTE INDIA LTD.-2015/54/TAXMANN.C OM/313/JAIPUR ITAT IN VIEW OF THE FACT THAT LEVY OF PENALTY UNDER SECT ION 271G OF I.T.ACT, 1961 IS ITSELF DELETED, OTHER OBJECTIONS RAISED BY THE APPELLANT BEFORE THE TPO AND IN APPEAL ARE NOT CONSIDERED RELEVANT AND ARE NOT DISCUSSED. IN THE RESULT, THE APPEAL OF THE APPELLANT IS ALLOW ED. AGGRIEVED REVENUE IS IN FURTHER APPEAL BEFORE US. 4. WE HAVE HEARD AND CONSIDERED THE RIVAL SUBMISSIO NS AND DELIBERATED ON JUDICIAL PRONOUNCEMENTS AS CITED BEFORE US. 5. UPON DUE CONSIDERATION, THE UNDISPUTED POSITION THAT EMERGES IS THAT THE ASSESSEE HAS CARRIED OUT CERTAIN INTERNATIONAL TRANSACTIONS DURING THE YEAR WITH ITS AE AND BENCHMARKED THE SAME USING TNM M METHOD IN ITS 9 ITA NO.6446/MUM/2016 M/S. GIRDHARILAL INTERNATIONAL LTD. ASSESSMENT YEAR-2011-12 TRANSFER PRICING STUDY WHICH HAS BEEN ACCEPTED BY L D. TPO. THE ONLY BASIS OF LEVYING IMPUGNED PENALTY AGAINST THE ASSES SEE IS THE FACT THAT THE ASSESSEE DID NOT FURNISH INTERNAL TNMM BY PROVIDING SEGMENTAL PROFITABILITY OF AE AND NON-AE TRANSACTIONS. THE SAME STOOD EXPLA INED BY THE INHERENT NATURE OF BUSINESS BEING CARRIED OUT BY THE ASSESSE E WHICH HAS ALREADY BEEN ENUMERATED BY US IN THE PRECEDING PARAGRAPHS. THE LD. FIRST APPELLATE AUTHORITY, WHILE DELETING THE PENALTY, RELIED UPON THE BINDING JUDICIAL DECISION OF HONBLE DELHI HIGH COURT RENDERED IN CIT VS. M/S. LEROY SOMER & CONTROLS (INDIA) PVT. LTD. (37 TAXMANN.COM 407) AND OTHER DECISION OF THE TRIBUNAL RENDERED ON SIMILAR FACTUAL MATRIX. WE ALSO FIND THAT SIMILAR FACTUAL MATRIX STOOD COVERED IN ASSESSEES CASE BY THE RECENT DECISION OF COORDINATE BENCH OF THIS TRIBUNAL RENDERED IN DCIT V/S LEO SCHACHTER DIAMONDS INDIA PVT. LTD. (ITA NO.5931/MUM/2017 ORDE R DATED 28/02/2019) WHICH IN TURN, INTER-ALIA, PLACED RELIANCE ON THE DECISION RENDERED IN DCIT V/S FIRESTONE INTERNATIONAL PVT. LTD. (ITA NO. 5304/MUM/2016 DATED 01/12/2018) AND THE DECISION OF JAIPUR TRIBUNAL IN ACIT V/S GILLETTE INDIA LTD. (54 TAXMANN.COM 313). SIMILAR IS THE RATIO OF FOLLOWING DECISIONS: - 1. ACIT VS. SSL-TTK (2012) 52 SOT 20 (URO) (CHENNAI )(TRIB.) 2. ITO VS. NETSOFT INDIA LTD. (2014) 150 ITD 454 (M UM.)(TRIB.) 3. ACIT VS. D. NAVINCHANDRA EXPORTS (P.) LTD. (2017 ) 87 TAXMANN.COM 306 (MUM)(TRIB.) 4. ACIT VS. M/S. DILIPKUMAR V. LAKHI [ITA NO.2142/M /2017, A.Y. 2011-12 DATED 02.08.2018 (MUM.)(TRIB.) 5. DY.CIT VS. INTERJEWEL PVT. LTD. [ITA NO.5628/M/2 016, AY 2011-12 DATED 01/11/2018] 10 ITA NO.6446/MUM/2016 M/S. GIRDHARILAL INTERNATIONAL LTD. ASSESSMENT YEAR-2011-12 THE REVENUE IS UNABLE TO POINT OUT ANY DISTINGUISHI NG FEATURES AND ALSO UNABLE TO PLACE ON RECORD ANY CONTRARY JUDGMENT TO DISLODGE THE RATIO OF THESE DECISIONS. IN VIEW OF THE AFORESAID POSITION, WE FIND NO INFIR MITY IN THE IMPUGNED ORDER IN DELETING THE PENALTY U/S 271G. 6. RESULTANTLY, THE APPEAL STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 03 RD OCTOBER, 2019. SD/- SD/- (SAKTIJIT DEY) (MANOJ KUMAR AGGARWAL) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 03/10/2019 SR.PS:-JAISY VARGHESE 56 786 / COPY OF THE ORDER FORWARDED TO : 1. # $ / THE APPELLANT 2. %&$ / THE RESPONDENT 3. !! ( # ) / THE CIT(A) 4. !! / CIT CONCERNED 5. N O%P , !#P , / DR, ITAT, MUMBAI 6. O QRS / GUARD FILE / BY ORDER, / (DY./ASSTT.REGISTRAR) , / ITAT, MUMBAI.