Document Fragment View
Fragment Information
Showing contexts for: Profit Split Method in Dcit Cc - 2(3), Mumbai vs M/S. Asian Star Co. Ltd., Mumbai on 10 April, 2019Matching Fragments
2. The brief facts of the case are that the assessee is engaged in the business of purchasing rough diamonds and manufacturing cut and polished diamonds. During the financial year relevant to AY 2012-13, the assessee has entered into international transactions with its associate enterprises. The assessee has applied PSM (profit split method) for benchmarking international transactions with the AE. The assessee has justified PSM by comparing profits actually made by the assessee to the profits that should have been earned, ITA 5876/Mum/2017 based on the PSM. During the course of assessment proceedings, a reference was made u/s 92C(1) of the Income-tax Act, 1961 for computation of arm's length price in relation to the international transactions. During the proceedings before the TPO, assessee was called upon to file necessary documents maintained in respect of transfer pricing study conducted to benchmark its international transactions. The assessee has filed necessary documents in support of PSM method. The TPO, after considering relevant information furnished by the assessee has not made any adjustment u/s 92CA(3) in respect of international transactions with its AE. However, he further observed that in view of the fact that the assessee has even failed to file basic information, no adjustment was made to the value of international transaction and from the material on record, it cannot be concluded, whether the international transactions are at ALP or not.
6. The Ld.AR, on the other hand, strongly supporting the order of the Ld.CIT(A) submitted that it is not a case of the TPO that the assessee has not furnished any documentation in respect of the method selected for benchmarking international transactions. In fact, the assessee has filed complete list of documents in respect of profits split method and the TPO has accepted documents filed by the assessee and not made any adjustment u/s 92CA in respect of international transactions. The Ld.AR further submitted that when the TPO has asked for specific documentation in respect of CUP ITA 5876/Mum/2017 method, the assessee could not furnish certain documents as required by the TPO, therefore, it cannot be said that the assessee has not furnished any document in respect of international transactions. The Ld.AR further submitted that considering the nature of diamond industry and its complexity, it is difficult to maintain each item-wise documentation because each diamond pocket loses its individual identity when it gets mixed in the lots purchased from AE as well as non AE. Therefore, the Ld.CIT(A) has rightly apprised the facts in the light of complexity of the trade to come to the conclusion that it is not a fit case for levy of penalty u/s 271G and his order should be upheld. In this regard, he relied upon the decision of Hon'ble Delhi High Court in the case of CIT vs Leroy Somer And Controls (India) P. Ltd (2014) 360 ITR 532 (Del). The Ld.AR for the assessee has also relied upon the decision of ITAT, Mumbai Bench in the case of ACIT vs D. Navinchandra Exports (P) Ltd (2017) 87 taxmann.com 306.
7. We have heard both the parties, perused the materials available on record and gone through the orders of authorities below. The AO levied penalty u/s 271G for failure to comply with the provisions of Rule 10D(1)
(d)(g)(h)(i)(j) & (m) of I.T. Rules, 1962. According to the AO, the assessee even failed to file basic documentation in respect of profits split method selected for benchmarking its international transactions. The AO further observed that in ITA 5876/Mum/2017 respect of CUP method, the assessee could not file segment-wise profit & loss account in order to compare the profitability of each segment and compare the same with transactions with its AE. Therefore, he opined that the assessee has failed to comply with provisions of Rule 10D(1) and hence, it is a fit case for levy of penalty u/s 271G. It is the contention of the assessee that it is not a case of AO that no documentation was furnished in respect of method selected for benchmarking its international transactions, because the AO has accepted profits split method selected by the assessee to benchmark its international transactions with its AE without making any adjustment u/s 92CA of the Income-tax Act, 1961. The AO is on the point that the assessee could not file complete documentation as required u/r 10D(1) in respect of other methods selected by the AO / TPO, i.e. CUP. When the assessee is maintaining documentation in respect of PSM, it is difficult for the assessee to arrange or produce documents as required by the AO in respect of any other method selected for benchmarking international transactions with its AE. Therefore, the AO / TPO was incorrect in coming to the conclusion that the assessee has not complied with provisions of Rule 10D(1) and it is a fit case for levy of penalty u/s 271G of the Act.
8. Having heard both the sides and considered material on record, we find that the assessee has filed certain documents required by the TPO in order to ITA 5876/Mum/2017 compute ALP of international transactions, this is evident from the fact that the TPO did not make any adjustment u/s 92C of the Income-tax Act, 1961. The dispute arose only when the TPO has asked the assessee to furnish further documentation in light of another method selected for benchmarking international transactions of the assessee with its AE. When we go through the reasons given by the assessee for not complying with the provisions of Rule 10D(1), in light of industry specific, ie. diamond trading industry, we find that it was unable to ascertain the corresponding cost when the rough diamond has been cut and polished, it loses its individual identity and gets mixed in the lots purchased from AE as well as non AE. Therefore, considering the nature of trade, it is not possible for the assessee to prepare separate accounts for trading and manufacturing activities so as to compare its international transactions with its AE segment-wise. Therefore, assessee has chosen profits split method in order to benchmark its international transactions with AE. We further noted that the department has accepted profits split method adopted by the assessee to benchmark its international transaction in the past and during the year under consideration as there is no adjustment is made u/s 92C of the Income-tax Act, 1961. When there is no adjustment is made u/s 92CA in respect of international transactions with its AE, the AO was erred in levying penalty u/s 271G for not furnishing segmental profitability of AE transactions ITA 5876/Mum/2017 and non AE transactions even though the assessee has made out a case that it is difficult to furnish segment-wise P&L Account of AE segment and non AE segment considering the nature of industry and its complexity. Therefore, we are of the considered view that the AO was erred in levying penalty u/s 271G of the Income-tax Act, 1961.