2014 (11) TMI 904 - AT - Income Tax

Selection of comparables - Goldiam Jewellery Limited Whether the amount of loan taken can be construed as a related party transaction in determining the percentage of RPL to total sales - Held that - The term Related party transactions refers to any transaction between related parties - It will encompass only such transactions between the related profits which directly affect the overall profitability in one way or the other - the transaction of accepting or advancing loan per se has no effect on the profitability - the mere fact that no interest was, in fact, paid on this loan is sufficient enough for not inflating the amount of related party transactions with any hypothetical interest amount - the loan taken cannot be considered as part of related party transactions and no hypothetical interest can be calculated for the purposes of inclusion in the total RPTs - If, however, in a case some amount of actual interest is paid or received on the loans accepted or given, that would form part and parcel of the RPTs for the purposes of computing the percentage of RPTs to the Total revenue - there is no actual payment of interest on the loan taken - as such, no hypothetical interest can be included in the RPTs - if the amount of loan taken from GIL at ₹ 13.30 crore is reduced from total RPTs of Goldiam Jewellery Limited at ₹ 19.32 crore, the percentage of RPTs to the total revenue would obviously fall within 25% filter the company is to be taken as comparable. Su- Raj Diamond Industries Limited Held that - Su-Raj Diamond Industries Limited cannot be taken as comparable to the assessee because it is operating in the retail segment, whereas the assessee is operating in wholesale business of diamond studded jewellery - There can be no comparison of the volume and profit rate in respect of whole sellers and retailers - Su-Raj Diamond Industries Limited is liable to be excluded from the final list of comparables. Forever Precious Jewellery & Diamonds Limited Held that - As the revenue has embarked upon PLI of RoCE and the details relating to segmental operating profit and segmental amount of capital employed of Forever Precious Jewellery & Diamonds Limited are not ascertainable - apart from dealing in diamond studded jewellery, is also dealing in other products such as silver jewellery etc. - The figure of sales as per quantitative details also does not match with the total sales as per Trading account - Since the segmental operating profit and segmental capital employed in respect of diamond jewellery of this case are not available, this case cannot be considered as comparable. Change of PLI from OP / TC or OP / Sales to RoCE Whether the RoCE is a correct PLI - Held that - When there is no identifiable capital employed and separate amount of profit in respect of transactions with the AEs in the situation like the one which is prevailing, then how the assessee s RoCE can be precisely worked out, is anybody s guess - computation of separate capital employed or profitability in respect of transactions with AEs is not practical due to commonality of both the sets of transactions with the AEs and non-AEs, the correctness of the applicability of RoCE as PLI under the TNMM cannot be countenanced - the adoption of RoCE cannot be approved. Transfer pricing adjustment of total transaction instead of international transaction Held that - It is only income arising from international transactions, being a transaction between associated enterprises, which is required to be computed having regard to arm s length price - In other words, transfer pricing adjustment is warranted only qua the transactions with associated enterprises and not non-AEs - the transfer pricing adjustment has been made in relation to the total transactions of the assessee breaching the limit of transactions with the AEs - as the matter of computation of ALP in the present case has been restored to the file of AO / TPO for a fresh decision, the authorities are directed to restrict the TP adjustment in the fresh proceedings only to the transactions with the AEs Decided in favour of assessee.

Summary

Issues Involved:
1. Inclusion of specific comparable cases in the final list.
2. Change of Profit Level Indicator (PLI) from Operating Profit to Total Cost (OP/TC) or Operating Profit to Sales (OP/Sales) to Return on Capital Employed (RoCE).
3. Extent of transfer pricing adjustment, whether it should be restricted to international transactions only.

Issue-wise Detailed Analysis:

1. Inclusion of Specific Comparable Cases:
The first issue pertains to the inclusion of three specific cases in the final list of comparables: Goldiam Jewellery Limited, Su-Raj Diamond Industries Limited, and Forever Precious Jewellery & Diamonds Limited.

Goldiam Jewellery Limited:
The assessee argued that Goldiam Jewellery Limited should be excluded because its Related Party Transactions (RPTs) constituted 35.10% of total revenue, exceeding the 25% filter set by the TPO. The TPO, however, excluded the loan transactions from the RPTs, reducing the percentage to within the acceptable limit. The Tribunal upheld this exclusion, stating that only revenue nature transactions should be considered for RPTs, and loan transactions, being capital in nature, should not be included.

Su-Raj Diamond Industries Limited:
The assessee contended that Su-Raj Diamond Industries Limited should not be considered comparable because it operated in the retail segment, whereas the assessee operated in wholesale. Additionally, the TPO included figures from both studded and plain gold jewellery, while the assessee dealt only in studded jewellery. The Tribunal agreed, excluding Su-Raj Diamond Industries Limited due to its retail operations and the inclusion of non-comparable product segments.

Forever Precious Jewellery & Diamonds Limited:
The assessee argued that the figures used by the TPO for Forever Precious Jewellery & Diamonds Limited were inconsistent, and segmental data for diamond jewellery were not available. The Tribunal found that the lack of segmental data and the involvement in multiple product segments made this case non-comparable, leading to its exclusion.

2. Change of Profit Level Indicator (PLI):
The second issue involved the change of PLI from OP/TC or OP/Sales to RoCE by the TPO. The assessee argued that the PLI of OP/TC was accepted in earlier years and cited several Tribunal decisions where OP/TC or OP/Sales was used in the jewellery industry.

The Tribunal noted that while RoCE is a recognized PLI under Rule 10B(1)(e), its application in this case was impractical due to the common pool of capital employed for both AE and non-AE transactions. The Tribunal emphasized the lack of segmental accounts and the difficulty in precisely calculating RoCE for AE transactions. Consequently, the Tribunal directed that the PLI of OP/TC or OP/Sales should be applied.

3. Extent of Transfer Pricing Adjustment:
The last issue was whether the transfer pricing adjustment should be restricted to international transactions only. The Tribunal clarified that transfer pricing adjustments must be confined to international transactions as per Section 92C(1) and Section 92B of the Income-tax Act. The Tribunal directed the authorities to restrict the TP adjustment to transactions with AEs in the fresh proceedings.

Conclusion:
The Tribunal's judgment addressed the inclusion of comparable cases, the appropriateness of the PLI, and the scope of transfer pricing adjustments. Goldiam Jewellery Limited was retained as a comparable, while Su-Raj Diamond Industries Limited and Forever Precious Jewellery & Diamonds Limited were excluded. The Tribunal rejected the use of RoCE as PLI, directing the use of OP/TC or OP/Sales. Finally, the Tribunal mandated that transfer pricing adjustments be limited to international transactions. The appeal was allowed for statistical purposes, with directions for fresh determination of ALP by the AO/TPO.