ASST. CIT 32 (2), MUMBAI V. M/S KAPU GEMS, MUMBAI

ITA 6713/MUM/2019

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 7550 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 7 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-06-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: H
• Assessment Year: 2015-2016
• Appeal Filed On: 30-10-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Search and seizure; International transaction; Question of law; Reasonable cause
• Section: 273B; 92D; 92E

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “H” MUMBAI BEFORE SHRI ABY T. VARKEY (JUDICIAL MEMBER) AND SHRI OM PRAKASH KANT (ACCOUNTANT MEMBER) ITA No. 6713/MUM/2019 Assessment Year: 2015-16 Asst. Comm. of Income Tax 32(2), 720, 7 th floor, Kautilya Bhavan, C-41 to C-43, G Block BKC, Bandra East, Mumbai-400051. Vs. M/s Kapu Gems, E Tower, EC-3021, Bharat Diamond Bourse, Bandra Kurla Complex, Bandra East, Mumbai-400051. PAN No. AADFK 3266 D Appellant Respondent Revenue by : Mr. Ashish Deharia, DR Assessee by : Mr. K.A. Vaidyalingan, CA Date of Hearing : 07/06/2022 Date of pronouncement : 14/06/2022 ORDER PER OM PRAKASH KANT, AM This appeal has been filed by the Revenue challenging the finding of the Ld. Commissioner of Income-tax (Appeals)-56, Mumbai [in short ‘the Ld. CIT(A)’] in order dated 20/08/2019 for assessment year 2015-16, wherein, he is has deleted the penalty levied by the Assessing Officer for non-maintenance of details in terms of section 92D Act’) r.w. Rule 10D of 2. Brief facts, qua issue in dispute that the assessee is engaged in the business of importing rough diamonds, thereafter selling/exporting finished diamonds to overseas markets to various customers including Associated Enterprises (AE assessee. During transfer pricing proceedings the Pricing Officer asked the assessee to furnish document in respect of segment profitability between the AE but the assessee expressed difficulty in view of the trade practices. It was submitted by the assessee that it was not practically possible to track each and every diamond during polishing and the diamond imported from the AE mixed. The assessee submitted that there was reasonable cause for not complying for not maintaining the segmental details of AE terms of section 92D(3) of the Income Tax Act, 1961 (in short 10D of Income Tax Rules, 1962 (in short Brief facts, qua issue in dispute that the assessee is engaged in the business of importing rough diamonds, cutting & polish thereafter selling/exporting finished diamonds to overseas markets to various customers including Associated Enterprises (AE assessee. During transfer pricing proceedings the asked the assessee to furnish document in respect of segment profitability between the AE but the assessee expressed difficulty in view of the trade practices. It was submitted by the assessee that it was not practically possible to track each and every diamond during the process of cutting and polishing and the diamond imported from the AEs and non mixed. The assessee submitted that there was reasonable cause for for not maintaining the segmental details of AE M/s Kapu Gems ITA No. 6713/M/2019 2 , 1961 (in short ‘the , 1962 (in short ‘the Rules’). Brief facts, qua issue in dispute that the assessee is engaged in cutting & polishing and thereafter selling/exporting finished diamonds to overseas markets to various customers including Associated Enterprises (AEs) of the assessee. During transfer pricing proceedings the Ld. Transfer asked the assessee to furnish documents maintained in respect of segment profitability between the AEs and non-AEs, but the assessee expressed difficulty in view of the trade practices. It was submitted by the assessee that it was not practically possible to the process of cutting and and non-AEs get mixed. The assessee submitted that there was reasonable cause for for not maintaining the segmental details of AEs and non-AEs transactions the penalty under section 271G of the “8. In view of the above facts, it can be concluded that the TPO had called for specific details pertaining to segmental profitability between AE and non 92D(3) of the I.T. Act, 1961. The details were essential for benchmarking the transaction of assessee with AE. The assessee could also not provide any alternate method of benchmarking the transaction based on materia of material the TPO was forced to accept the transactions to be at arm’s length after initiating penalty proceedings u/s 271G of the I.T. Act, 1961.” 3. The Ld. CIT(A), however deleted the penalty in view of the decision of the coordinate bench in various cases. The relevant part of the order of the Ld. CIT(A) is reproduced as under: “6. Penalty under section 271G is imposed after establishing a specific default which is information presc Transfer Pricing Officer under section 92D(3) of I.T. Act. If a default is established then which reasonable cause for default is to be established. transactions. The Ld. Assessing Officer accordingly, levied the penalty under section 271G of the Act concluding as under: In view of the above facts, it can be concluded that the TPO had called for specific details pertaining to segmental profitability between AE and non-AE segments within the meaning of section 92D(3) of the I.T. Act, 1961. The details were essential for benchmarking the transaction of assessee with AE. The assessee could also not provide any alternate method of benchmarking the transaction based on material available on record. In the absence of material the TPO was forced to accept the transactions to be at arm’s length after initiating penalty proceedings u/s 271G of the ” Ld. CIT(A), however deleted the penalty in view of the on of the coordinate bench in various cases. The relevant part of the order of the Ld. CIT(A) is reproduced as under: Penalty under section 271G is imposed after establishing a specific default which is non-production of documents and information prescribed under Rule 10D when called for Transfer Pricing Officer under section 92D(3) of I.T. Act. If a default is established then escape route is section 273B as per which reasonable cause for default is to be established. M/s Kapu Gems ITA No. 6713/M/2019 3 accordingly, levied concluding as under: In view of the above facts, it can be concluded that the TPO had called for specific details pertaining to segmental profitability segments within the meaning of section 92D(3) of the I.T. Act, 1961. The details were essential for benchmarking the transaction of assessee with AE. The assessee could also not provide any alternate method of benchmarking the l available on record. In the absence of material the TPO was forced to accept the transactions to be at arm’s length after initiating penalty proceedings u/s 271G of the Ld. CIT(A), however deleted the penalty in view of the on of the coordinate bench in various cases. The relevant part of the order of the Ld. CIT(A) is reproduced as under: Penalty under section 271G is imposed after establishing a production of documents and ribed under Rule 10D when called for by Transfer Pricing Officer under section 92D(3) of I.T. Act. If a escape route is section 273B as per 7. The appellant also cited ord case against the 5(1)(2), Mumbai vs. M/s. D Navinchandra No. 6303 and 6304/Mum/2016) dated 25.10.2017, DCIT vs. Inter Jewel Pvt. Ltd; (ITA No. 5628/M 01.11.2018 and DCIT 2643/Mum/2017) dated 27.12.2018.” 4. Before us the Ld. order of the Ld. Assessing Officer on the part of the assessee, the length price of the transaction and accordingly no adjustment was made. He accordingly submitted that the assessee has failed to substantiate reasonable details. 5. The Ld. counsel order of the Ld. CIT(A). He also relied on the decision of the Hon’ble Gujarat High Court in the case of Ltd., wherein the order of the The appellant also cited orders of Hon. ITAT and to make a case against the imposition of penalty. They include (a) ACIT 5(1)(2), Mumbai vs. M/s. D Navinchandra Exports Pvt. Ltd. (ITA No. 6303 and 6304/Mum/2016) dated 25.10.2017, DCIT Inter Jewel Pvt. Ltd; (ITA No. 5628/Mum/2016) dated 01.11.2018 and DCIT-5(2)( 2) vs. Laxmi Diamond Ltd. (ITA No. 2643/Mum/2017) dated 27.12.2018.” Ld. Departmental Representative relied on Assessing Officer and submitted that due to failure on the part of the assessee, the Ld. TPO could not examine the arm’s length price of the transaction and accordingly no adjustment was made. He accordingly submitted that the assessee has failed to reasonable cause for not maintaining the required counsel of the assessee on the other hand relied on the order of the Ld. CIT(A). He also relied on the decision of the Hon’ble Gujarat High Court in the case of CIT vs. Navindhandra Exports P , wherein the order of the Tribunal, Mumbai Bench M/s Kapu Gems ITA No. 6713/M/2019 4 ers of Hon. ITAT and to make a imposition of penalty. They include (a) ACIT- Exports Pvt. Ltd. (ITA No. 6303 and 6304/Mum/2016) dated 25.10.2017, DCIT-5(2)(1) um/2016) dated Laxmi Diamond Ltd. (ITA No. mental Representative relied on the and submitted that due to failure not examine the arm’s length price of the transaction and accordingly no adjustment was made. He accordingly submitted that the assessee has failed to cause for not maintaining the required of the assessee on the other hand relied on the order of the Ld. CIT(A). He also relied on the decision of the Hon’ble Navindhandra Exports P. Bench, deleting the penalty u/s 271G in case of diamond trader upheld. 6. We have heard rival submission of the parties on the issue in dispute and perused the relevant the issue in dispute in the case of the assessee is whether in case of the diamond manufacturer, 271G of the Act for non between AEs and non Bench of the Tribunal Private Limited in IT has after a detailed discussion, held that there was reasonable cause for non-maintaining the Tribunal (supra) is reproduced as under: “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 t it remains as a matter of fact borne from the records that the TPO 271G in case of diamond trader/manufacturer, has been We have heard rival submission of the parties on the issue in dispute and perused the relevant material on recor the issue in dispute in the case of the assessee is whether in case of the diamond manufacturer, can any penalty be levied under section for non-maintenance of segment profitability and non-AEs transactions. We find that coordinate Tribunal in the case of Navin Chandra exports Private Limited in ITA No. 6304/Mum/2016 and other appeals has after a detailed discussion, held that there was reasonable cause maintaining the said details. The relevant finding of the is reproduced as under: 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 the records that the TPO M/s Kapu Gems ITA No. 6713/M/2019 5 /manufacturer, has been We have heard rival submission of the parties on the issue in on record. We find that the issue in dispute in the case of the assessee is whether in case of can any penalty be levied under section maintenance of segment profitability transactions. We find that coordinate Navin Chandra exports and other appeals has after a detailed discussion, held that there was reasonable cause details. The relevant finding of the 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 he considered view that it remains as a matter of fact borne from 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 conv 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 involve the assessee with its AEs and non 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 assess 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 other basis for benchmarking its international transact 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 aggreg to Rs. 107,99,26,354/ 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 rnational 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 sessee, had as a matter of fact required the assessee to furnish separate profit level indicator (PLI), either by furnishing the AE AE segment wise Profit & loss account, and/or some other evidence to show that the international transactions aggreg to Rs. 107,99,26,354/- of the assessee with its AEs, viz. (i). M/s Kapu Gems ITA No. 6713/M/2019 6 had imposed penalty under Sec. 271G for the reason that the assessee had failed to furnish the information as was called for by iction 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 d in the transactions of 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 ee by not providing the requisite details, had thus not only failed to substantiate the basis for comparing the transactions of the AE AE, but had also failed to provide any ions 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 rnational 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 sessee, had as a matter of fact required the assessee to furnish separate profit level indicator (PLI), either by furnishing the AE AE segment wise Profit & loss account, and/or some other evidence to show that the international transactions aggregating 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 with a questionnaire issued to the assessee had in order to verify as to whether the 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 specifi 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 transactions. However separate books of accounts for AE and non 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 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 h 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/ 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 transactions entered into by the assessee with its AEs were at arms length with that entered into by the third party e 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 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 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/ M/s Kapu Gems ITA No. 6713/M/2019 7 Purchase of rough diamonds; (ii). Export of rough diamonds; (iii). Export of polished diamonds; and (v). Purchase of polished 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 transactions entered into by the assessee with its AEs were at arms length with that entered into by the third party e 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 ed 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 , as the assessee had not maintained 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 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 ands 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 of Rs. 107,99,26,354/ 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 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 activitie 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 perusal of the very nature of the business 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 AEs and non-AEs, and had also sold/exported rough and polished diamonds to AEs as well as the non a/c of the assessee reflected a mixture of purchases and sales both from the AEs and the non 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 diam 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 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 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 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 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 M/s Kapu Gems ITA No. 6713/M/2019 8 the international transactions 18. We find that the CIT(A) after deliberating at length on the nature of the business of manufacturing and trading of diamonds, 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 find that the CIT(A) in the backdrop of an indepth s 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 perusal 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 and polished diamonds from AEs, and had also sold/exported rough and polished AEs, therefore, the Profit & loss a/c of the assessee reflected a mixture of purchases and sales both . 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 onds 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 AEs revealed that the diamonds of varying size, quality, colour and cara 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 co 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, 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 though explained to the TPO the practical difficulty in furnis wise Profit & loss account of the AE segment and the non segment, however, the TPO insisted for the same and invoked Rule 10D of the Income arms length price in respect of the international tr 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 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 Transfer Pricing, Mumbai, wherein the aforesaid aspects involved in the diamond manufacturing business were 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 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 M/s Kapu Gems ITA No. 6713/M/2019 9 t 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 nsidered 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 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 Transfer Pricing, Mumbai, wherein the aforesaid aspects involved in the diamond manufacturing business were 19. We find that the assessee had in the backdrop of the very nature of its business, viz. manufacturing of diamonds, had though hing segment wise Profit & loss account of the AE segment and the non-AE segment, however, the TPO insisted for the same and invoked Rule tax Rules, 1962, and instead of determining the ansactions 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 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 internati transactions of the assessee, either by making some comparison of realisation of prices in respect of export sales to AEs and non by comparing prices of diamonds of similar size, quality and weight to the best extent possible, or in the alternativ 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 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 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 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 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, 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 internati transactions of the assessee, either by making some comparison of realisation of prices in respect of export sales to AEs and non 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 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 M/s Kapu Gems ITA No. 6713/M/2019 10 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 e 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 , 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 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 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 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 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 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 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 for the gross profits of the assessee had also increased from 7.42% for A.Y. 2010- A.Y. 2011-12, the Net profit had also witnessed a growth from 3.9% in the immediate under consideration. We further find that as observed by the CIT(A) that in the preceding year, i.e A.Y. 2010 propose any adjustment in the ALP. We are not inspired by the fault finding approach adopted by the TPO without und 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 ra 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% -11 to 8.71% for the year under consideration, viz. 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, M/s Kapu Gems ITA No. 6713/M/2019 11 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 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 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 that while for the gross profits of the assessee had also increased from 7.42% 11 to 8.71% for the year under consideration, viz. 12, the Net profit had also witnessed a growth from ng the year under consideration. We further find that as observed by the 11 the TPO did not propose any adjustment in the ALP. We are not inspired by the erstanding 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 tios in general, had rather hushed through the matter and imposed penalty under Sec. 271G of Rs. 2,15,98,527/ the assessee to the extent possible in the backdrop of the nature of its trade had furnished several details o 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 po 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 o 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 direc 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 t reason to dislodge his well reasoned order, therefore, uphold the same. We thus uphold the order deletion of the penalty of Rs. 2,15,98,527/ 6.1 Against the order of the preferred appeal before the Hon’ble Gujarat High Court. The Hon’ble had rather hushed through the matter and imposed penalty under Sec. 271G of Rs. 2,15,98,527/- on the 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. rder of the Tribunal (supra), the preferred appeal before the Hon’ble Gujarat High Court. The Hon’ble M/s Kapu Gems ITA No. 6713/M/2019 12 had rather hushed through the matter and imposed penalty under on the assessee. We also find that the assessee to the extent possible in the backdrop of the nature of n 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 ssible 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 f 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 tions 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 he view taken by the CIT(A,) and finding no reason to dislodge his well reasoned order, therefore, uphold the of the CIT(A) and the resultant imposed by the TPO.” (supra), the Revenue preferred appeal before the Hon’ble Gujarat High Court. The Hon’ble High Court in Tax Appeal of the Revenue observing as under: “(5.1) Considering Tribunal was satisfied that there is substantial Section 92CA(3) of the Income Tax Act and of the assessee had increased from 2010-11 to 8.71% for the year had also witnessed growth business of the assessee well as the learned the PO was not of the Income Tax Act. We are in complete agreement with the view taken by the learned Tribunal. The findings of the fact recorded by the learned Tribunal are on appreciation of on record. No substantial question of law arises. 6.2 Since identical issue of non profitability for AEs and non of penalty under section 271G of the case before us, respectfully following the finding of the coordinate Bench of the Tribunal in the instant case there was reasonable cause for non Appeal No. 788 of 2018 has dismissed the appeal observing as under: Considering the material on record, when the Tribunal was satisfied that there is substantial compliance of Section 92CA(3) of the Income Tax Act and when the Gross Profit of the assessee had increased from 7.42% for Assessment Year 11 to 8.71% for the year under consideration, the Net Profit had also witnessed growth from 3.9% to 4.9% and looking to the business of the assessee in diamond, both the learned CIT(A) as well as the learned Tribunal have rightly observed and held that the PO was not justified in levying the penalty under Section 271G Income Tax Act. We are in complete agreement with the taken by the learned Tribunal. The findings of the fact recorded by the learned Tribunal are on appreciation of on record. No substantial question of law arises.” Since identical issue of non-maintenance of segmen profitability for AEs and non-AEs transactions and consequent penalty under section 271G of the Act is involved in the instant case before us, respectfully following the finding of the coordinate Tribunal and Hon’ble Gujarat High Court, in the instant case there was reasonable cause for non M/s Kapu Gems ITA No. 6713/M/2019 13 No. 788 of 2018 has dismissed the appeal when the learned compliance of when the Gross Profit 7.42% for Assessment Year the Net Profit from 3.9% to 4.9% and looking to the in diamond, both the learned CIT(A) as Tribunal have rightly observed and held that nder Section 271G Income Tax Act. We are in complete agreement with the taken by the learned Tribunal. The findings of the fact recorded by the learned Tribunal are on appreciation of material maintenance of segment transactions and consequent levy involved in the instant case before us, respectfully following the finding of the coordinate and Hon’ble Gujarat High Court, we hold that in the instant case there was reasonable cause for non-maintaining the details, which were requi and accordingly we do not find any error in the order of Ld. CIT(A) and uphold the order grounds raised by the 7. In the result, the ap Order pronounced in the open Court on Sd/- (ABY T. VARKEY JUDICIAL MEMBER Mumbai; Dated: 14/06/2022 Dragon Legal/Rahul Sharma, Sr. P.S. Copy of the Order forwarded to 1. The Appellant 2. The Respondent. 3. The CIT(A)- 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. //True Copy// the details, which were required in terms of Rule 10D of the we do not find any error in the order of Ld. CIT(A) uphold the order of the Ld. CIT(A) on the issue grounds raised by the Revenue are accordingly dismissed. In the result, the appeal filed by the Revenue is dismissed. ounced in the open Court on 14/06/2022. Sd/- ABY T. VARKEY) (OM PRAKASH KANT JUDICIAL MEMBER ACCOUNTANT forwarded to : BY ORDER, (Sr. Private Secretary ITAT, Mumbai M/s Kapu Gems ITA No. 6713/M/2019 14 10D of the Rules we do not find any error in the order of Ld. CIT(A) of the Ld. CIT(A) on the issue-in-dispute. The accordingly dismissed. dismissed. /06/2022. OM PRAKASH KANT) MEMBER Sr. Private Secretary) ITAT, Mumbai