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Case Law Details

Case Name : ACIT Vs Eurostar Diamonds India Pvt Ltd. (ITAT Mumbai)
Appeal Number : ITA No. 5643/MUM/2016
Date of Judgement/Order : 03/01/2024
Related Assessment Year : 2011-12

ACIT Vs Eurostar Diamonds India Pvt Ltd. (ITAT Mumbai)

The Income Tax Appellate Tribunal (ITAT) Mumbai delivered a notable judgment in the case of ACIT vs Eurostar Diamonds India Pvt Ltd. concerning the levy of penalty under section 271G of the Income-tax Act, 1961 (the Act). This case revolves around the failure of the taxpayer to furnish certain information required for Transfer Pricing (TP) documentation. Here’s a detailed analysis:

Facts of the Case: Eurostar Diamonds India Pvt Ltd., the assessee, had engaged in various international transactions, which were benchmarked using the Transactional Net Margin Method (TNMM). During the assessment proceedings for the Assessment Year 2011-12, the Transfer Pricing Officer (TPO) requested the assessee to furnish a separate Profit Level Indicator (PLI) for Associated Enterprise (AE) and Non-AE transactions. The assessee attempted to provide the requested segment-wise sales, purchase, and expense data. Although the TPO did not make any Transfer Pricing adjustments citing the complexity of the diamond industry, a penalty under section 271G was levied for not furnishing the required information.

Issue at Hand: The central issue was whether a penalty under section 271G is justifiable when the TPO has not made any adjustments to the Arm’s Length Price (ALP) and the assessee made substantial compliance with the TP documentation requirements.

Decision and Rationale: The ITAT observed that the assessee made a genuine attempt to comply with the TPO’s request by segregating and submitting the required data. Notably, the TPO accepted the ALP determination without proposing any adjustments. The ITAT referenced several precedents where penalties under section 271G were deleted under similar circumstances, emphasizing that such penalties were neither fair nor reasonable when there’s substantial compliance and no ALP adjustment.

Legal Implications: This decision underscores a few critical points in the realm of Transfer Pricing documentation and penalties:

  • Substantial Compliance: It highlights the recognition of substantial compliance efforts by taxpayers in providing requested information, even in complex industries like diamond trading.
  • No Adjustment, No Penalty: The ruling supports the notion that levying a penalty under section 271G may not be justified when the TPO does not make any ALP adjustments, particularly when the taxpayer shows reasonable cause and attempts to comply with the documentation requirements.
  • Reasonableness and Fairness: The judgment reflects the judiciary’s approach towards ensuring that penalties are imposed only when genuinely warranted, ensuring fairness and reasonableness in tax administration.

Conclusion: The ITAT Mumbai’s decision in dismissing the revenue’s appeal and deleting the penalty under section 271G against Eurostar Diamonds India Pvt Ltd. sets a significant precedent. It reassures taxpayers that efforts towards compliance, especially in complex and substantial transactions, are recognized and that penalties should be levied judiciously, keeping in mind the principles of fairness and reasonableness. This case contributes to the evolving jurisprudence on Transfer Pricing documentation and penalties under the Income-tax Act, 1961.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal is filed by the revenue against order of Learned Commissioner of Income-Tax (Appeals)-56, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 24.06.2016 for the A.Y.2011-12.

2. Brief facts of the case are, assessee has entered into international transactions as under and benchmarked the transaction by adopting TNMM Method: –

S. No. Description Amount in Rs. Benchmarking
1 Purchase of rough diamond 5,590,675 TNMM
2 Purchase of polished diamond 391,958,131 TNMM
3 Sale of rough diamond 118,572,194 TNMM
4 Sale of polished diamond 169,244,715 TNMM
5 Sales of Jewellery 933,645 TNMM
Total 686,299,360

3. During the course of assessment proceedings, the Transfer Pricing Officer asked the assessee to furnish separate profit level indicator (PLI) in AE and Non-AE segment-wise either profit and loss account and / or some other evidences to show that the international transactions were at Arm’s Length Price. The assessee had made an attempt to segregate the segment wise figures of sales, purchase and expenses and submitted the segment wise data on AE and Non-AE sales and worked out the OP/Sales Margins. The above said data was submitted before Transfer Pricing Officer. The Transfer Pricing Officer has not discussed anything in his report and considering the difficulties in the diamond industry and complication involved in polished and non-polished diamonds, the Transfer Pricing Officer has accepted the ALP and not proposed any adjustment. However, proceeded to levy penalty under section 271G of the Act, for the reason that assessee has not furnished required informations.

4. Based on the above facts on record and none appeared on behalf of the assessee from the date of initiation of the appeal proceedings in this case. Considering the fact that this appeal is filed by the revenue in the year 2016 and none appeared on behalf of the assessee, we proceeded to hear the case with the assistance of Ld. DR.

5. DR brought to our notice relevant facts on record and supported the order of the Transfer Pricing Officer in levy of penalty.

No Section 271G Penalty Without Transfer Pricing Adjustment

6. Considered the submissions of Ld. DR and material placed on record, we observe from the record that the assessee has not filed the segment wise results of purchase and sales of polished and unpolished diamonds relating to international transactions. However, on the query raised by the Transfer Pricing Officer assessee has made an attempt to segregate the figures of sales and purchases segment-wise and submitted the same before Transfer Pricing Officer. The Transfer Pricing Officer has considered the same or atleast not discussed anything in his order. However, proceeded to levy the penalty under section 271G of the Act and at the same time has not proposed any Arm’s Length Price adjustment. In the similar facts on record, there are several decisions where various Coordinate Bench of this Tribunal has deleted the penalties. We observe that Ld. CIT(A) has relied on the decision of Annapurna Business Solutions v. ACIT [52 SOT 0140] and DCIT v. Magick Woods Exports (2012) 32 CCH 0422; in which the relevant Coordinate Bench has deleted the penalty under section 271G of the Act. Even in this case Ld. CIT(A) has deleted penalty under section 271G of the Act with the observation that levy of penalty under section 271G of the Act is neither fair nor reasonable and it is not justified in the present facts of the case viz., the nature of diamond trade, substantial compliance made by the assessee and the reasonable cause submitted before Transfer Pricing Officer and above all when there is no adjustment made in the Arm’s Length Price, the levy of penalty under section 271G is hereby deleted. After considering the facts on record and findings of the Ld. CIT(A) we do not find any reason to interfere with the findings of the Ld. CIT(A). Accordingly, ground raised by the revenue is dismissed.

7. In the result, the appeal filed by the revenue is dismissed.

Order pronounced in the open court on 03rd January, 2024.

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