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2013 (11) TMI 1620 - AT - Income TaxTransfer pricing adjustment in respect of export sales made by the assessee to its Associated Enterprise (AE)- Held that - D.R. has not raised any material contention to dispute the propositions put forth by the ld. counsel for the assessee duly supported by the working furnished by him showing that the ALP of the international transactions of the assessee company with its AEs of export of cut and polished diamonds would be within the range of safe harbor limit of 5% as stipulated in the proviso to section 92-C of the Act going by any of the two methods adopted for the purpose of comparability analysis. He, however, has contended that this working furnished by the assessee for the first time before the Tribunal in support of its two alternative stands requires verification and the A.O/TPO may therefore be given an opportunity to verify the said working. We find merit in this contention of the ld. D.R. Accordingly, the matter is restored to the file of the A.O./TPO with a direction to verify the working furnished by the assessee in support of its case that the ALP as worked out by any of the two methods being within the safe harbor limit of 5% that the price charged by the assessee, no TP adjustment is required to be made in respect of the transactions of the assessee company with its AEs of import and export of cut and polished diamonds. On verification, if it is found that the difference is less than 5% as claimed by the assessee, the A.O. shall not make any TP adjustment in respect of transactions of the assessee with its AEs of export of cut and polished diamonds. Ground No. 1, 2, 4 & 5 of the assessee s appeal for A.Y. 2008-09 are accordingly treated as allowed as indicated above. Addition made by the Assessing Officer/TPO by way of transfer pricing adjustment on account of notional interest on outstanding AE debtors - Held that - The assessee in this regard has submitted that the relevant copies of invoices were filed by the assessee before the A.O. showing that the credit period allowed was 180 days to both the AEs and non-AEs. He has submitted that the A.O., however, brushed aside the same on the basis of finding given by the TPO that the assessee has granted excess credit period to its AEs by 85 days vis-a-vis credit granted to third parties and made the addition on this issue without giving the assessee an opportunity to establish its claim on further evidence that the credit period allowed to both AEs and non-AEs was at par. He has submitted that the assessee is in a position to establish its claim on this issue and urged that one more opportunity may be given to the assessee for this purpose. Since the ld. D.R. has not raised any objection in this regard, we set aside this issue to the file of the A.O. for deciding the same afresh after giving an opportunity to the assessee to establish its claim on further evidence that the credit period offered by it to AEs as well as non-AEs was at par. Ground No. 3 of assessee s appeal is accordingly treated as allowed for statistical purpose. Disallowance made u/s 40A(2)(b) of the Act to the total income of the assessee on account of labour charges paid to M/s Aakash Diamonds - Held that - s the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to that of A.Y. 2005-06, we respectfully follow the order of the Tribunal for A.Y. 2005-06 and restore this matter to the file of the A.O. for deciding the same afresh as per the same direction as given in A.Y. 2005-06. Disallowance made on account of assessee s claim for additional depreciation on plant and machinery - Held that - Hon ble Apex Court decision in the case of Gem India Manufacturing Co. (2000 (12) TMI 7 - SUPREME Court) wherein it was held that cutting and polishing of diamonds does not amount to manufacturing or production of goods and disallowed the claim of the assessee for additional depreciation in plant and machinery u/s 32(1)(iia) of the Act is directly applicable in the present case involving a similar issue and respectfully following the same, we uphold the impugned order of the A.O. disallowing the assessee s claim for additional depreciation u/s 32(1)(iia) of the Act Addition made to the total income of the assessee on account of difference in value of closing stock as shown by the assessee in the stock statement submitted to the bank and as shown by the assessee in the books of account - Held that - It is noted that the quantity of rough diamonds and polished diamonds shown in both the statement is same and there is only a difference in the valuation of the said quantity which is higher in the case of statement given to the bank than the one shown by the assessee in its books of accounts. In our opinion, the burden in this regard is on the assessee to prove which of these two values is correct by providing the relevant details regarding the basis adopted for the said valuation. Since this has not been done by the assessee, we are of the view that this issue needs to be set aside to the A.O. to give one more opportunity to the assessee to explain the basis of valuation. Accordingly, this issue is set aside to the file of A.O. with a direction to the assessee to furnish the relevant details in order to explain the basis of valuation of the closing stock adopted by it. The A.O. shall verify the details furnished by the assessee in this regard and decide the issue accordingly. Disallowance of 60% of residential telephone expenses - CIT(A) restricted the said disallowance to 30% - Held that - No record was maintained by the assessee to show that the expenses incurred on residential telephones of the partners were wholly and exclusively for the purpose of its business. As rightly held by the A.O., personal use of residential telephones by the partners in the absence of such record could not be ruled out and some reasonable disallowance for such personal use was very much warranted. Although, such disallowance made by the A.O. at 60% of the total telephone expenses was excessive and unreasonable, we are of the view that the ld. CIT(A) is quite fair and reasonable to restrict the same to 30% of the residential telephone expenses. Having regard to all the facts of the case, we are of the view that there is no case of any further relief to the assessee on this issue
Issues Involved:
1. Transfer pricing adjustment for export sales to Associated Enterprises (AEs). 2. Notional interest on outstanding AE debtors. 3. Disallowance under Section 40A(2)(b) for labor charges. 4. Additional depreciation on plant and machinery. 5. Difference in closing stock valuation. 6. Disallowance of residential telephone expenses. Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustment for Export Sales to AEs: The assessee, a partnership firm engaged in cutting and polishing diamonds, filed appeals against transfer pricing adjustments made for A.Y. 2006-07 and 2008-09. The primary issue was the addition of Rs. 6,48,72,712/- as transfer pricing adjustment for export sales to AEs. The Transfer Pricing Officer (TPO) rejected the Profit Split Method adopted by the assessee and instead used the Transactional Net Margin Method (TNMM) with Return on Capital Employed (ROCE) as the Profit Level Indicator (PLI). The TPO excluded several comparables selected by the assessee and added new ones, determining an average ROCE of 8.93% against the assessee's 6.92%, leading to a TP adjustment. The assessee argued that the adjustment should be limited to international transactions with AEs and not the entire business, and that the OP/TC method should be used consistently with previous years. The Tribunal found merit in the assessee's contention, noting that if the difference in ROCE is applied only to transactions with AEs, the adjustment falls within the 5% safe harbor limit, negating the need for a TP adjustment. The matter was remanded to the TPO for verification. 2. Notional Interest on Outstanding AE Debtors: The TPO noted that the assessee granted an excess credit period to its AEs compared to third parties and proposed an adjustment for notional interest at 12%. The assessee contended that the credit period for both AEs and non-AEs was 180 days and that the TPO's finding was incorrect. The Tribunal directed the Assessing Officer (AO) to verify the assessee's claim and delete the adjustment if the credit terms were indeed equivalent. 3. Disallowance under Section 40A(2)(b) for Labor Charges: The AO disallowed labor charges paid to M/s Aakash Diamonds, a related party, citing unreasonably high rates compared to other parties. The Tribunal noted that similar issues in earlier years were remanded for fresh examination of comparable rates. Following this precedent, the Tribunal remanded the issue for the AO to benchmark labor rates against third-party data. 4. Additional Depreciation on Plant and Machinery: The AO disallowed additional depreciation claimed under Section 32(1)(iia), citing the Supreme Court's decision in CIT vs. Gem India Manufacturing Co., which held that cutting and polishing diamonds do not constitute manufacturing. The Tribunal upheld this disallowance, aligning with the Supreme Court's ruling. 5. Difference in Closing Stock Valuation: The AO added Rs. 66 lakhs to the assessee's income due to a discrepancy between stock valuation in bank statements and books of account. The Tribunal remanded the issue to the AO, directing the assessee to provide a basis for the valuation and the AO to verify the same. 6. Disallowance of Residential Telephone Expenses: The AO disallowed 60% of residential telephone expenses for personal use, which the CIT(A) reduced to 30%. The Tribunal upheld the CIT(A)'s decision, finding it reasonable given the lack of records proving exclusive business use. Conclusion: The Tribunal provided relief to the assessee on several issues by remanding them for further verification and directed the AO/TPO to reassess based on provided evidence and consistent methods. The appeal for A.Y. 2006-07 was partly allowed for statistical purposes, and the appeal for A.Y. 2008-09 was partly allowed.
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