Principal Commissioner Of Income Tax (Central), Surat v. M/S D Navinchandra Exports Pvt Ltd

C/TAXAP/788/2018 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 788 of 2018 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE M.R. SHAH andHONOURABLE MR.JUSTICE A.Y. KOGJE ====================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ?allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ?copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ? ====================================== PRINCIPAL COMMISSIONER OF INCOME TAX (CENTRAL), SURAT Versus M/S D NAVINCHANDRA EXPORTS PVT LTD ======================================Appearance: MR MANISH BHATT, SENIOR ADVOCATE with MRS MAUNA M BHATT(174) for the APPELLANT(s) No. 1for the RESPONDENT(s) No. 1 ====================================== CORAM: HONOURABLE MR.JUSTICE M.R. SHAHandHONOURABLE MR.JUSTICE A.Y. KOGJE Date : 09/07/2018 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE M.R. SHAH) [1.0]Feeling aggrieved and dissatisfied with the impugned order dated 25/10/2017 passed by the learned Income Tax Appellate Tribunal, “K” Bench, Mumbai (hereinafter referred to as “the learned Tribunal”) in ITA No.6304/Mum/2016 for the Assessment Year 2011-12 by which the learned Tribunal has dismissed the said Appeal preferred by the revenue and has confirmed the order passed by the learned CIT(A) deleting the penalty imposed by the TPO imposed under Section 271G of the Income Tax Act, revenue has preferred the present Tax Appeal with the following proposed question of law; “Whether the Appellate Tribunal has erred in law and on facts in deleting the penalty of Rs.2,15,98,527/- levied under Section 271G of the Income Tax Act?” [2.0]The facts leading to the present Tax Appeal in nutshell are as under; [2.1]The assessee’s case was referred by the learned Assessing Officer for determining the Arm’s Length Price (ALP) in respect of the international transactions on the assessee for the Assessment Year 2011-12. TPO vide order under Section 92CA(3) held international transactions of the assessee to be as Arm Length Price and did not disturb the value of the said transactions. However, the TPO noticed that the assessee expressed its inability to provide segmental profits, AE and non-AE Segments and contented that the TNNM was the only suitable method for diamond Company, and therefore, the TPO initiated the penalty proceedings under Section 271G of the Income Tax Act for failure to produce the documents, which are required to be mentioned under Section 92D(3) with regard to the international transactions. Thereafter, TPO levied the penalty under Section 271G upon the assessee amounting to Rs.2,15,98,527/- vide its penalty order dated 24/07/2015. Aggrieved by the levy of penalty under Section 271G of the Income Tax Act, assessee preferred Appeal before the learned CIT(A). Learned CIT(A) vide order dated 29/04/2016 allowed the appeal of the assessee and deleted the penalty levied under Section 271G of the Income Tax Act by holding that the levy of penalty under Section 271G of the Income Tax Act was neither fair nor reasonable, and therefore, it was not justified in the facts of the case, viz, the nature of diamond trade, substantial compliance made by the assessee and reasonable cause showed by the assessee. On Appeal before learned Tribunal by the revenue, by the impugned order the learned Tribunal has dismissed the Appeal preferred by the revenue and has confirmed the order passed by the learned CIT(A) deleting the penalty levied under Section 271G of the Income Tax Act. Feeling aggrieved and dissatisfied with the impugned order passed by the learned Tribunal deleting the penalty levied under Section 271G of the Income Tax Act, revenue has preferred the present Appeal with the aforesaid proposed question of law. [3.0]We have heard Shri Manish Bhatt, learned Senior Advocate appearing on behalf of the revenue at length. He has taken us to the order passed by the learned TPO as well as the orders passed by the learned CIT(A) and the learned Tribunal. [4.0]Shri Manish Bhatt, learned Senior Advocate appearing on behalf of the appellant – Department has vehemently submitted that while confirming the order passed by the learned CIT(A) deleting the penalty levied under Section 271G, learned Tribunal has failed to appreciate that in the instant case, the assessee failed to provide any information /documents in respect of segmental accounts with regard to the transactions made in the AS and non AEs. It is submitted that therefore in such a situation provisions of Section 271G of the Income Tax Act shall be applicable. It is submitted that therefore the learned Tribunal ought to have allowed the Appeal preferred by the revenue and ought to have confirmed the order passed by the TPO of penalty under Section 271G of the Income Tax Act. [5.0]Having heard Shri Manish Bhatt, learned Senior Advocate appearing on behalf of the revenue and considering the order passed by the learned Tribunal confirming the order passed by the learned CIT(A) deleting the penalty under Section 271G of the Income Tax Act, what is noticed by the learned Tribunal in paragraph 19 is as under; “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 Section 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 Section 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 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.” [5.1]Considering the material on record, when the learned 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 2010-11 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 TPO was not justified in levying the penalty under Section 271G 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 material on record. No substantial question of law arises. [6.0]In view of the above and for the reasons stated hereinabove, present Appeal fails and the same deserves to be dismissed and is accordingly dismissed. (M.R. SHAH, J.) (A.Y. KOGJE, J.) siji