2010 (10) TMI 1256 - AT - Income Tax

Summary

Issues Involved:
1. Reduction of trading addition and applicability of Section 145(3).
2. Sustaining the addition on account of arm's length price (ALP).

Detailed Analysis:

1. Reduction of Trading Addition and Applicability of Section 145(3):
The Department objected to the reduction of the trading addition by Rs. 10,66,430 by reducing the GP rate by 2%, while the assessee contested the applicability of Section 145(3) and the sustaining of the trading addition of Rs. 10,68,433 by directing to apply a GP rate of 22% on declared export sales.

The assessee, engaged in the business of manufacturing and trading jewelry and precious stones, declared a GP rate of 19.93% on a turnover of Rs. 5.15 crores for the year under consideration, compared to a GP rate of 26.63% on a turnover of Rs. 4.17 crores in the previous year. The AO rejected the books of account and estimated a GP rate of 24%, leading to an addition of Rs. 20,98,800. The CIT(A) reduced the GP rate to 22%.

The Tribunal found that the assessee maintained regular books of account, and no significant defects were found by the AO, except for the lower GP rate compared to the previous year. The Tribunal noted that the purchases were genuine, and the rejection of books was not justified. The Tribunal referenced a similar case for the assessment year 2005-06, where the trading addition was deleted, and the rejection of books was deemed unjustified. Consequently, the Tribunal directed the deletion of the trading addition sustained by the CIT(A) and rejected the Department's ground.

2. Sustaining the Addition on Account of Arm's Length Price (ALP):
The AO noted that the assessee had entered into international transactions with an AE, M/s Sunshine Exim Traders Ltd., and adopted the Transactional Net Margin Method (TNMM) for calculating the ALP. However, the AO held that the TNMM was not applicable due to the absence of comparable data and used the profit split method instead, resulting in an addition of Rs. 11,20,786.

The CIT(A) confirmed the AO's order, stating that the provisions of Sections 92 and 92A to 92F were applicable from the assessment year 2002-03 onwards. The Tribunal, however, found that the AO had committed an error by applying the profit split method and not considering the comparable cases cited by the assessee. The Tribunal referenced the case of Addl. CIT vs. Tej Diam, where the TNMM was deemed applicable.

The Tribunal concluded that the assessee was correct in adopting the TNMM, as the net profit margins realized from international transactions were computed in relation to costs incurred, sales effected, or assets employed. The Tribunal found that the AO had not provided sufficient reasoning for rejecting the TNMM and applying the profit split method. Consequently, the Tribunal directed the deletion of the addition made on the basis of the ALP.

Conclusion:
The Tribunal dismissed the Department's appeal and allowed the assessee's appeal, directing the deletion of the trading addition and the addition made on the basis of the ALP.