2013 (11) TMI 520 - AT - Income Tax

Transfer pricing adjustments - Rejection of comparable - Segmental financial not reported - Whether, a company whose more than 80% of the revenue of the said company is from the trading activity can be compared with assessee - Held that - Data available on record do not give segmental results of DGJL. The TPO has considered the segmental data and source of which is stated to be capitaline. Since the bifurcation of revenue and expenses are not based as per the accounts reported by the company; therefore, the authenticity of such bifurcated data is not free from doubt. Further, there is no dispute that the DGJL has a SEZ unit which is having benefit of concessional levy, duty taxes etc. Though, it is not clear from the records whether the diamond unit or Gold jewellery unit or both are SEZ unit; however, these are crucial and import aspect for considering the company as comparable. The TPO as well as DRP have not addressed this specific objection raised by the assessee. When substantial revenue of the said company is from trading activity and segmental results are not available on record and further the said company is having a SEZ unit; therefore, in the facts and circumstances, these aspects are required a proper verification and examination. As regards the exceptional result, this issue is now settled by various decisions of this Tribunal that the factors for determining inclusion or exclusion of any case in the list of comparables are specifically provided under Rule 10B(2). Therefore, unless and until there are specific reasons and factors as provide under the Rule 10B, an entity cannot be excluded or eliminated from the list of comparables solely on the basis of high profit making or loss making entity because no such factor finds place either in Rule 10B(2) or 10B (3) of IT Rules. Exclusion of foreign exchange gain - Foreign currency exposure - Export and import of diamonds with AEs - Forward contracts - Held that - It is clear that in case of hedging of foreign currency exposure on the underlining trade receivable or payable the profit of loss will be treated in the same way in determining the net profit - In view of the facts that the assessee has entered into forward contracts for the purpose of hedging of foreign currency exposure on the export and import of diamond, the gain or loss arising of the said, will be treated as part and parcel of the operating profit. Working capital adjustment - Held that - Initially the assessee works out the working capital adjustment in respect of the assessee s own results. Therefore, the TPO rejected the claim of the assessee on working capital adjustment. However, before the DRP, the assessee has revised the working capital adjustment in respect of the comparable margin. The DRP has rejected the claim of the assessee without even noticing the specific explanation and objections raised by the assessee that the assessee has revised its working capital adjustments with regard to the risk undertaken by the uncontrolled comparable companies - It is apparent from the record that the observations of the DRP while rejecting the claim of the assessee is contrary to the fact on record because vide letter dated 16.9.2011, the assessee recalculated the working capital adjustment with regard to the comparable companies. Therefore, after excluding the comparable company namely DGDJ, if any adjustment is made then the working capital adjustment has to be considered. Accordingly, this issue is set aside to the record of the TPO/Assessing Officer for considering the revised computation of working capital adjustment as produced by the assessee before the DRP - Decided in favour of assessee. There is no dispute on the point that the transfer pricing adjustment is required to be made only in respect of the transactions between the assessee and the AE and not in respect of the total transaction of the assessee including the transactions with non AEs - Assessing Officer is directed to make the TP adjustment, if any only in respect of the transactions between the assessee and the AEs and not on the total turnover of the assessee - Following decision of Petro Araldite (P.) Ltd v. DCIT 2013 (8) TMI 403 - ITAT MUMBAI - Decided partly in favour of assessee.

Issues Involved:
1. Transfer Pricing Adjustment
2. Adjustment Extent to International Transactions with AE
3. Violation of Provisions of Rule 10B(2) and 10B(3) and Rejection of Comparables
4. Exclusion of Foreign Exchange Gain
5. Denial of Working Capital Adjustment
6. Rejection of Loss Due to Fire
7. Denial of Plus/Minus 5% Benefit
8. Diversion of Revenue
9. Requisite Conditions Under Section 92C(3) - Not Satisfied
10. Initiation of Penalty Proceedings
11. Incorrect Levy of Interest Under Sections 234B, 234C, and 220(2)

Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee challenged the adjustment of Rs. 10,81,72,606 to its total income based on the provisions of Chapter X of the Act. The TPO computed the arm's length price (ALP) of international transactions and proposed adjustments. The DRP provided partial relief, reducing the adjustment to Rs. 10,81,72,606 from Rs. 11,57,16,845.

2. Adjustment Extent to International Transactions with AE:
The assessee argued that adjustments should be restricted to transactions with Associated Enterprises (AE) and not the entire turnover. The Tribunal agreed, directing the AO to make adjustments only for transactions between the assessee and the AEs, as per the precedent set in Petro Araldite (P.) Ltd v. DCIT.

3. Violation of Provisions of Rule 10B(2) and 10B(3) and Rejection of Comparables:
The inclusion of Goenka Diamonds & Jewels Ltd (GDJL) as a comparable was contested. The Tribunal found that GDJL did not report segmental results and had substantial income from trading activities. The Tribunal remanded the issue back to the AO/TPO for proper verification and examination of GDJL's segmental data and SEZ benefits.

4. Exclusion of Foreign Exchange Gain:
The assessee included Rs. 5,20,70,149 as operating income from foreign exchange gain on forward contracts. The TPO and DRP excluded this, treating it as non-operating income. The Tribunal held that since the forward contracts were for hedging foreign currency exposure on export and import of diamonds, the gain should be considered part of the operating profit.

5. Denial of Working Capital Adjustment:
The assessee's initial claim for working capital adjustment was rejected by the TPO. The DRP also dismissed the revised computation. The Tribunal remanded the issue to the AO/TPO to consider the revised computation of working capital adjustment submitted by the assessee.

6. Rejection of Loss Due to Fire:
The TPO and DRP rejected the assessee's claim of Rs. 1,04,61,120 loss due to fire, stating it pertained to FY 2006-07. The Tribunal remanded the issue to the AO/TPO for fresh consideration, noting the need for clarity on the actual claim and grievance.

7. Denial of Plus/Minus 5% Benefit:
The Tribunal did not provide a specific finding on this issue, implying it depends on the outcome of other grounds.

8. Diversion of Revenue:
The assessee did not press this ground, and it was dismissed as not pressed.

9. Requisite Conditions Under Section 92C(3) - Not Satisfied:
The assessee did not press this ground, and it was dismissed as not pressed.

10. Initiation of Penalty Proceedings:
The Tribunal deemed this issue premature and rejected it in limine.

11. Incorrect Levy of Interest Under Sections 234B, 234C, and 220(2):
This issue was considered consequential, and no specific finding was provided.

Conclusion:
The appeal was partly allowed, with remand directions for specific issues to the AO/TPO for further verification and proper determination as per law. The Tribunal emphasized the need for adjustments to be limited to transactions with AEs and recognized the inclusion of foreign exchange gains as part of operating profit.

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