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TMI Blog2013 (11) TMI 520X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be restricted to the extent of international transactions with AE. On the facts and in the circumstances of the case and in law, the Id. TPO erred in and the Hon'ble DRP further erred in considering the entire turnover of the company while calculating adjustment. 3. Violation of provisions of Rule 10B(2) and 10B(3) and arbitrary rejection of comparables selected by the appellant and considered Goenka Diamonds & Jewels Ld as a comparable to the appellant. On the facts and in the circumstances of the case and in law, the Id. TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Id. TPO in adding new comparable company i.e., Goenka Diamonds & Jewels Ltd which differ in functions undertaken, assets employed and risk assumed as compared to Appellant. On the facts in circumstances of the case and in law, the Id. TPO as well as the Hon'ble DRP erred in not appreciating that the above action is contrary to the provisions of Rule IOB(2) &(3) of the Rules. 4. Exclusion of foreign exchange gain on cancellation of forward contracts from the calculation of operating profit On the facts and in the cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cordingly, penalty proceedings ought not to be initiated against the Appellant. Accordingly, we request your Honour to kindly direct the Id. AO to drop the penalty proceedings. 11. Incorrect Levy of interest under section 234B, 234C and 220(2) of the Act Without prejudice to the above or any other grounds, if the transfer pricing adjustment is sustained then the Id. AO has erred in levying interest under Section 234B and 234C of the Act to the extent the addition is made based on the updated financial data for the comparable companies." The other grounds raised by the assessee are argumentative in nature. 3 The assessee is a partnership firm and engaged in the business of manufacturing and import and export of cut and polished diamonds and precious stones. The assessee has two Associates Enterprises (AE) namely M/s Doshi Impex Ltd, Hongkong and M/s Doshi Diamonds, Hongkong. The AEs are engaged in trading of diamonds. During the year under consideration, the assessee had international transactions with the AEs, the details of which are given in para 6 of the TP order as under: Sl. No. Transaction FY 2007-08 Method adopted by the assessee FY 2006-07 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eated as part of their main business of manufacturing of diamonds. Accordingly, the foreign exchange gain of Rs. 5.20 crores was treated by the TPO as not forming part of the main business activities and hence, excluded from the operating profit earned from the export and import of diamonds for the purpose of determining the ALP. Apart from this, the TPO also did not exclude the loss due to fire. The assessee claimed working capital adjustments, credit risk adjustment and manufacturing cost adjustment which were also denied by the TPO. After excluding the foreign exchange gain, the assessee's operating profit comes to loss; therefore, the TPO worked out the assessee's operating profit to total cost at - 0.75% and operating profit/sales at - 0.76%. Since the arithmetical means of the operating profits/total cost of the 4 comparables was determined at 4.77%, therefore, the TPO made an adjustment of Rs. 11,57,16,845/- being short fall of assessee OP in comparison to ALP. 3.7 Before the DRP, the assessee raised various objections. The DRP, after considering the submissions made by the assessee granted partial relief by including one comparable selected by the assessee namely; Uni-Gem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Dy. CIT v. Indo American Jewellery Ltd. [2010] 41 SOT 1 (Mum.). 6.2 The ld Sr counsel has further contended that the said company carried out abnormal diamond trading activity during the FY 2007-08 as can be verified from the disclosure in notes to accounts. The ld Sr counsel has further contented that though the TPO has purported to have taken the segmental data relating to rough diamonds and polished diamonds; however, he has artificially bifurcated the revenue and expenses which is not supported by the accounts of the said company. He has further contended that the TPO has allocated some un-allocable expenses but no basis of the same has been given as it shows from the table at page 293 of the paper book. The ld Sr counsel has contended that there is a discrepancy in the figures/data worked out by the TPO for working out the segmental operating profit of GDJL. The figures of net sales and operating cost taken by the TPO are not correct. Thus, the ld Sr counsel has submitted that the company GDJL should be rejected as comparables because it has not declared the segmental financial, it is a SEZ unit; it has acquired foreign entity as source of diamonds; therefore, there i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. Accordingly, we set aside this issue to the record of the Assessing Officer/TPO to verify these aspects as observed in this order and then decide this issue as per law. 7.1 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 provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e considered Rs. 5,20,70,149 as operating income on account of foreign exchange gain arising on forward contracts. The assessee contended that the exchange gain arising on cancellation of forward contracts are to be considered as part of operating profit since it is an integral part of the business of buying and selling of the diamonds and hence, is an operating income. The TPO did not accept the claim of the assessee for the reason that the exchange gain earned are against cancellation of forward contracts and the assessee has separately disclosed as profits and gains from foreign exchange fluctuations, which are not included in purchases and sales. Further, the TPO was of the view that this constitutes speculative and therefore, the same cannot be treated as part of the main business activity of manufacturing of diamonds of the assessee. 8.2 The DRP concurred with the view of the TPO on the ground that the foreign exchange earning are against cancellation of forward contracts and not integral part of the assessee's business. 9. Before us, the ld Sr counsel for the assessee has submitted that the assessee earned foreign exchange on cancellation of forward contracts which are con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as well as the relevant material on record. The assessee has entered into forward contracts for the purpose of hedging of foreign currency exposure on export and import of diamonds with AEs. Therefore, the hedging of foreign currency has nexus with the export and import activity of the assessee and the exposure of the assessee in relation to the export and import. The OECD guidelines in para 2.82 are as under; "2.82 Whether foreign exchange gains and losses should be included or excluded from the determination of the net profit indicator raises a number of difficult comparability issues. First, it needs to be considered whether the foreign exchange gains and losses are of a trading nature (e.g. exchange gain or loss on a trace receivable or payable) and whether or not the tested party is responsible for them. Second, any hedging of foreign currency exposure on the underlying trade receivable or payable also needs to be considered and treated in the same way in determining the net profit. In effect, if a transactional net margin applied to a transaction in which the foreign exchange risk is borne by the tested party, foreign exchange gains or losses should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20/- should be excluded as exceptional item of loss. However, the claim of the assessee was not accepted by the TPO on the ground that fire took place on 6.9.2006 which pertains to Financial Year 2006-07 and not FY 2007-08 which is under consideration and further the assessee is following accrual systems of account; therefore, loss of stock on account of fire pertains to FY 2006-07 should be taken into account that year itself. The TPO further observed that in the P&L account, nowhere it has been mentioned that this amount has been deducted as written of due to fire. 13.2 Before the DRP, the assessee contended that the survey report was received during the FY 2007-08 and therefore, the actual loss due to fire could be calculated only after receiving the survey report and accordingly, the same was deducted in the FY 2007-08. The DRP did not accept the contention of the assessee on the similar reason as given by the TPO. 14. Before us, the ld Sr counsel for the assessee has submitted that the loss due to fire is not a normal business operating loss; therefore, it cannot be taken into consideration for the purpose of determination of ALP. Since the claim was settled by the Insurance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20. After considering the rival submissions and perusing relevant material on record it is seen that Chapter-X of the Act contains special provisions relating avoidance of tax. Section 92, which is the substantive section of Chapter, provides that: Any income arising from an international transaction shall be computed having regard to the arm's length price'. The term "international transaction" has been defined in section 92B as "...... a transaction between two or more associated enterprises, either or both of whom are non-residents.......... ". The term associated enterprise' has been defined in section 92A. A conjoint reading of these provisions divulges that the transfer pricing adjustment is required to be made only in respect of transactions between the AEs. In the provisions as are applicable to the assessment year under consideration, it is wholly impermissible to apply such provisions in respect of transactions with non-AEs. We, therefore, overturn the impugned order on this score. The assessee is directed to supply necessary figures for the purposes of the proper determination of this aspect of the matter." 17.2 Accordingly, the Assessing Officer is directed to make the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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