9911796707
TMI Blog2014 (11) TMI 883X X X X Extracts X X X X X X X X Extracts X X X X ..... Industries Ltd. and Goldiam Jewellery Limited from the comparable for determination of mean PLI of the comparable entities. 3. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law and in facts in confirming the action of the AO/TPO in taking RoCE as the appropriate PLI instead of TNMM considered by the assessee as appropriate PLI in this case. 4. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law and in facts in rejecting the assessee's contention that the TPO had wrongly made addition of TP adjustment relatable to entire sales instead of limiting it to an amount corresponding to the international transaction only. 5. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law and in facts in confirming addition of Rs. 7,02,95,833/- made by AO/TPO towards adjustment on account of ALP of interest on debts receivable from Associated Enterprises (AEs). 6. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law and in facts in not admitting the additional evidence filed by the assessee under Rule 46A of the Income Tax Rules on the issue of interest on recoverable debts fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... polished diamonds located in SEEPZ as a unit notified as SEZ. It entered into following international transaction with its AEs. Sl.No. Particulars Amount (Rs.) 1. Purchase of raw materials (diamonds, gold and findings) 39,54,43,185 2. Sale of diamonds studded jewellery 47,87,31,461 The assessee has entered into international transactions with its AEs only with its SEEPZ undertaking in Mumbai. The final result for financial year 2007-08, in respect of jewellery manufacturing division and SEEPZ undertaking at Mumbai are as follows: Particulars Amount (Rs.) Sales 57,75,96,195 Excess Received 2,06,281 Operating revenue 57,78,02,476 Expenses debited to profit and loss account 53,87,95,639 Less: Interest 1,60,46,942 Operating Expenses 52,27,48,697 Operating Profit 5,50,53,779 2.1 The above financials were considered by the TPO for the purposes of transfer pricing analysis. The assessee adopted TNMM as most appropriate method. As per transfer pricing documentation the assessee did not consider any comparable company for transfer pricing study. However, vide submissions dated 21/9/2011, ten companies were chosen as final comparables and internati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olished diamonds. The RPTs constitute less than 25% of the revenues. RPTs - Rs.Nil. However, the manufacturing sales from jewellery constitutes less than 75% of the revenues (7O.44%). Thus the company is not considered as a comparable. 6. Neogem India Ltd The company is trading in studded jewellery and polished diamonds. As the company is functionally different, the same is not considered as a comparable. 7. S B & T Designs Ltd The company is into sale of gold, diamond & precious stone jewellery. The RPTs constitute more than 25% of the revenues. RPTs - Rs. 15.83 crore. As the company fails RPT filter, the same is not considered as a comparable. 8. S B & T International Ltd The company is into trading in gold, diamond & precious stone jewellery. The RPTs constitute more than 25% of the revenues. RPTs - Rs. 33.43 crore. As the company fails RPT filter, the same is not considered as a comparable. 9. Shantivijay Jewels Ltd The company is into sale of jewellery articles. Tue RPTs constitute less than 25% of the revenues. RPTs - Rs. 3.79 crore. As the company is functionally similar, the same is considered as a comparable. 10. Shreeji Jewellery Ltd The company is into sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of DHL Express (India) Ltd T/SACIT, where it was held that when direct comparables are available, there is no need to consider the segmental results. The taxpayer also stated that Capital Employed by the companies in the segments is not ascertainable. The TPO considered only Jewellery segment of the company with its turnover of Rs. 70.66 crores and segmental results contained in the audited financials of the company are considered. Thus, it cannot be said that the jewellery segment is operating at higher scale as the segment turnover of the company is comparable to the turnover of the taxpayer at Rs. 58 crores. Thus, the Jewellery segment is comparable to the taxpayer's SEEPZ undertaking, as the company's Jewellery segment is into manufacture and sale of diamond studded gold jewellery. Further, capital employed for each segment is available in the audited financials of the company and the same is considered by the TPO. As the segmental results are audited, the taxpayer or the TPO cannot question the reliability of such information available in the audited financials. As transfer pricing is an exercise dependent on facts and circumstances of a particular case, the decision of H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I of the assessee as under: Average Capital Employment: Particulars/ Amount in Rs. Share Capital (A) Reserves and Surplus (B) Debt (C) Investments (D) Capital Employed (E)= A+B+C-D As on 01-04-2007 10000000 262997872 320252684 29335500 563915056 As on 31-03-2008 98300000 291562004 346046737 29335500 706573241 AVERAGE CAPITAL EMPLOYED 635244149 Computation of PLI: Particulars Amount in Rs. Operating Revenues 57,78,02,476 Operating Cost 52,27,48,697 Operating Profit 5,50,53,779 Average Capital Employed 63,52,44,149 RoCE 8.67% 2.6 In the similar manner PLI and arithmetic margin of seven comparables chosen by TPO was computed at 15.79% as per following table. Sl. No. Company Average Capital Employed Operating Revenue (Rs. In Lacs) Operating Profit (Rs. In Lacs) RoCE 1. Goldiam Jewellery Ltd. 2139.89 5507.68 678.12 31.69% 2. Shreeji Jewellary Ltd. 5378.52 5906.72 208.56 3.88% 3. Shantivijay Jewels Ltd. 3224.94 6034.30 214.81 6.66% 4. Asian Star Co. Ltd (Seg.) 5569.74 7065.92 1340.52 24.07% 5. Diagold Designs Ltd. 4303.72 7359.34 350.36 8.14% 6. Fine Jewellery (India) Ltd. 7309.82 7860.12 489.93 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AE it is 193 days. Ld. CIT(A) also rejected the contention of the assessee that adjustment should be deleted on the ground that TPO did not bring any material to show application of CUP method. Ld. CIT(A) also rejected the contention of the assessee that as per business practice no interest was being charged by the assessee on delayed payments from its customers. He also rejected the claim of the assessee regarding set off of credit balance payable by the assessee to its AE. All these findings recorded in para 4.4 of Ld. CIT(A)'s order and in this manner Ld. CIT(A) has upheld the TP adjustment. 4. Though in the grounds of appeal the assessee has contested the TP adjustment on various grounds, however, to cut short the matter it was submitted by Ld. AR that RoCE method applied by the TPO is not appropriate method to compute PLI. He submitted that in the case of Gold Star Jewellery Design Pvt. Ltd. vs. ITO, 144 ITD 99, this issue has been examined and it was held that in a case where 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 correctne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the correct base under the TNMM. The TPO worked out the average capital employed at Rs. 67.66 crore and by considering the amount of operating profit at Rs. 3.58 crore and total turnover of Rs. 80.54 crore determined RoCE at 5.29%. Here it is relevant to mention that the sales to the AE in the present case total Rs. 11.42 crore as against the total sales at Rs. 80.54 crore. There are no segmental accounts. In other words, there is a common pool of capital employed which is used both for the AE and non- AE transactions. It is obvious that the period of realization in respect of exports and domestic sales is always different. 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 before us, then how the assessee's RoCE can be precisely worked out, is anybody's guess. The position would have been different and the applicability of the RoCE practical, if the assessee had been engaged in transactions exclusively with its AE or some sort of demarcation in the use of capital employed and profitability for transactions with AEs and non-AEs had been there with or without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of TPO order Diagold Designs Ltd. 7359.34 7008.98 350.36 5.00% Page 10 of TPO order Fine Jewellery (India) Ltd. 7860.12 7370.19 489.93 6.65% Page 10 of TPO order Su-Raj Diamond Industries Ltd (Seg.) 12230.00 11785.00 445.00 3.78% Page 10 of TPO order AM of Comparable 8.60% PLI of Appellant 5778.02 5227.48 550.53 10.53% Page 2 of TPO order 4.2 Without prejudice to the above arguments it was submitted that the RoCE of the assessee company has wrongly been computed by the TPO at 8.67% as the same should be computed at 9.32% and the mistake committed by TPO in computing PLI of ROCE was pointed out as under: 2.1 Calculation of ROCE of the Appellant company: * Calculation by TPO has some mistakes-refer page 9 of the TPO order. The numbers presented in the table are correct and match with the financials. * However, in calculating the capital employed for FY 07-08, the TPO has made calculation mistake, the correct capital employed should be Rs. 61,81,03,241/- (Rs. 61.81 Crs as against 70.65 Crs) * The average capital employed for 2 years thus comes to 59,10,09,148 instead of 63,52,44,149. * CIT(A) has properly calculated avera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Paper Book. Hence, this status ensured this company to get benefit of uninterrupted supply of quality diamonds at competitive prices. 4.4 It was further submitted that M/s. Su-Raj Diamond Industries Ltd. also cannot be taken as comparable for the following reasons: " b. Suraj Diamonds Industries: Plain v/s studded jewellery: - Appellant is mainly into manufacturing of studded jewellery whereas Suraj Diamond Industry mainly into manufacturing of 'plain gold jewellery' -Refer note no.19(b) of Notes to Account to the Financials. In case of Suraj Diamonds, the % of studded jewellery constitutes only 8.51% of total sales and % of plain gold jewellery constitutes 42.79% of total sales. Relying on case law of Goldstar Jewellery Design (P) Ltd. [(2013) 144 ITD 99, Mumbai]. Para 6.1 on Page 7. Retail business segment - relying on case law of Goldstar Jewellery Design (P) Ltd. [(2013) 144 ITD 99, Mumbai]. Para 6.2 at Page 7. Has significant amount of 'labour or job work charges: (Refer page 132 of Paper Book). The labour charges are Rs. 4.08 Crs as against 'Salary cost' of Rs. 1.38 Crs. This implies it is mainly into outsourcing / job work basis and thus would have lower investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13.52% Appellant's ROCE 5910.09 550.53 9.32% Working of +/- 5% is given in below table: (INR in Lacs) Particulars Reference Transaction with AE Sales A 4787.31 Average Capital Employed B 4896.73 Correct ROCE of Appellant C 9.32% RoCE of remaining 6 Comparable companies D 13.52% Differences in RoCE E=(D-C) 4.20% Adjustments of Sales F= (E*B) 205.90 Arm's Length Sales G=(A+F) 4993.21 Range of ALP with +/- 5% + 5% -5% 5036.97 4537.65 4.7 So far as it relates to second issue regarding adjustment made on account of non-payment of interest by the AEs it was submitted by Ld.AR that assessee has never charged interest to its AE debtors and it is evident from the copies of ledger accounts of the AEs and in this regard he referred to pages 31,33 to 41, 44 to 53 of the paper book. He submitted that assessee also did not charge interest from its non-AE debtors and this fact is evident from the ledger accounts of non- AEs, copies of which are submitted at pages 149 to 185 of the paper book. It was submitted that there were similar delays in the cases of non-AEs also. It was submitted that AE creditors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the order passed by TPO and Ld. CIT(A). He submitted that TP adjustment has rightly been made and the same has rightly been sustained by Ld. CIT(A). 6. We have heard both the parties and their contentions have carefully been considered. As per decision of Co-ordinate Bench in the case of Gold Star Jewellery Design Pvt. Ltd. vs. ITO (supra), the issue decided was that whether RoCE is correct PLI under the facts and circumstances of the case. In the said case the assessee was engaged in the business of manufacturing of diamond studded gold jewellery. It purchased diamond studded jewellery from its AE amounting to Rs. 5,75,64,505/- and sales were made of diamond studded jewellery to AE at Rs. 11,42,16,876/-. The assessee bench marked its international transactions on TNMM by applying PLI of OP/TC. The TPO did not accept assessee's adoption of OP/TC as correct PLI. According to TPO the correct PLI of RoCE should have been applied. Accordingly, TPO applied RoCE and addition was made. Before Tribunal it was submitted that in the earlier year the assessee applied PLI of OP/TC which was accepted by TPO and copy of assessment order was placed on record. Reference was made to three order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per page-2 of the TPO's order on the basis of OP/TC will be 10.63% and as the PLI of the assessee is higher than the arithmetical margin of the comparables no TP adjustment can be made in respect of international transactions on account of application of TNMM. It may be mentioned here that table regarding such computation has already been reproduced in the above part of this order in para- 4.1. The figures mentioned in the table, on the basis of which PLI has been computed, are resembling with the figures given in the order of the TPO at pages 10 & 2 of the order of TPO and this fact has also been mentioned in the table. 6.2 It may also be mentioned here that in subsequent two assessment years, it is the case of the assessee that OP/TC has been accepted by the TPO and to support such contention TPO's order for A.Y 2009-10 and 2010-11 are enclosed in the paper book. This contention of the assessee has not been controverted. Therefore, in view of principle of consistency also different method cannot be adopted for the year under consideration to compare PLI particularly in absence of distinguishable facts and circumstances existing for justification of the same. 6.3 As we have a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t can be made as assessee is not avoiding any tax by intentionally not charging any interest from the AEs. This position of Tribunal has been confirmed by Hon'ble Bombay High Court in the case of CIT vs. Indo American Jewellery Ltd. (2014) 44 Taxman.com 310 (Bom) (copy placed on record), wherein their Lordships were addressed to answer the following question. "B. Whether on the facts in the circumstances of the case and in law, ITAT was justified in deleting the addition of Rs. 87,66,641/- being interest receivable on outstanding amount due to the Assessee Company from the Associated Enterprises?" Their Lordships have answered the said question as under: "5. On appeal filed by the Revenue, the ITAT upheld the order of CIT(A). While upholding the order of CIT(A) , the ITAT held that interest income is associated only with the lending or borrowing of money and not in case of sale. We express no opinion on the above reasoning of the ITAT and keep that reasoning open for debate in an appropriate case. However, in the facts of the present case, the specific finding of the ITAT is that there is complete uniformity in the act of the assessee in not charging interest from both the Assoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Appellant Company has granted average credit period of 173 days to its Non- AE customers, as worked out below: Particulars Dinurje Jewellery Private Limited Total Sales to Non- AE Customers Rs.14,43,19,764.00 Net Receivable from Non-AE Customers (A) Rs.6,84,5,508.40 Sales per day = Sales/365(B) 3,95,397 Credit-period allowed to Non- AE Customers (A/B) 173 days In comparison, the Appellant allowed credit-period of 193 days to its AE, as worked out below: Particulars Dinurje Jewellery Private Limited Sales to AE 47.87 crores Net Receivable from AE (A) 25.27 crores Sales per day = Sales/365 (B) 0.131 crores Credit-period allowed to AE (A/B) 193 days So, interest on overdue receivables might be charged for excess credit-period of 20 days (193-173) allowed by the Appellant to its AE. Rate of Interest The rate at which Interest might be chargedU on overdue receivables from the AE. As explained during the hearing on 02.08.2013, USD LIBOR Rate may be taken into account for charging Interest. During FY 2007-08, the average USD LIBOR Rate; for debts of 1 year maturity period, was 4.53% [See Annexure] The TPO has determined the credit rating of AE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year 2008-09 as per memorandum explaining the amendment. Ld. DR submitted that Ld. CIT(A) has committed an error in accepting the claim of the assessee in view of section 115JB(6) as according to Ld. DR since sub-section(6) of section 115JB is concurrently inserted on insertion of section 10AA, therefore, sub-section(6) of section 115JB is applicable only to section 10AA units and not to 10A units. Ld. DR also referred to para-44 of the Board Circular No.3/2008 to contend that explanation 1(f) and (ii) of section 115JB is applicable from assessment year 2008-09. 9. As against above arguments of Ld. DR it is the case of Ld. AR that this issue is directly covered in favour of the assessee by the decision of Mumbai Tribunal in the case of Genesys International Corpn. Ltd. vs. ACIT 55 SOT 10(Mum). It was submitted that the said case is also in respect of assessment year 2008-09 and 2009-10. He submitted that similar arguments were raised by the Revenue in that case as have been raised in the present case by Ld. DR and after considering all these arguments it was held by the Tribunal that the unit in SEZ will be covered by sub-section (6) of section 115JB of the Act irrespective of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g areas: " Free Trade Zone (FTZ) * Electronic Hardware Technology Park (EHTP) * Software Technology Par (STP) * Export Oriented Units (EOU5) By Special Economic Zone Act, 2005 w.e.f 10.2.2006, a new section 1OAA has been inserted which provide exemption to the units located in SEZ. Section 2 of SEZ Act, defines SEZ as under: (za)Special Economic Zone - means each Special Economic Zone notified under the proviso to sub-section (4) of section 3 and sub-section(1) of section 4(including Free Trade and Warehousing Zone) and includes an existing Special Economic Zone' 21. It is evident from above that an existing SEZ unit will also be governed by Special Economic Zones Act, 2005. Therefore, we are of the considered view that the benefits which are to be provided to the newly established unit in SEZ as per section 1OAA of the Act will also be available to the existing units in SEZ. Moreover, section 4(1) of SEZ Act provides that an existing SEZ unit shall be deemed to have been notified and established in accordance with provisions of SEZ Act and the provisions of Special Economic Zones Act shall apply to such existing SEZ units. It is also observed that by the SEZ Act, sub-sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year 2008-09. Hence, Ground No.4 of appeal taken by the assessee for assessment year 2008-09 is allowed." Ld. A.R submitted that following the said decision Ld. CIT(A) has given relief to the assessee and his order should be upheld. 10. We have carefully considered the rival submissions in the light of material placed before us. Ld. CIT(A) has granted relief to the assessee on the basis of aforementioned decision of Tribunal in the case of Genesys International Corpn. Ltd. vs. ACIT (supra). The relevant observations of the Tribunal from the said decision have already been reproduced. No contrary decision has been cited by the Revenue. Therefore, respectfully following the the decision in the case of Genesys International Corpn.(supra) we decline to interfere in the relief granted by Ld. CIT(A) and ground No.1 to 4 of the Revenue are dismissed. 11. Apropos Ground No.5 of Departmental appeal; during the course of assessment proceedings it was noticed by the AO that the assessee had claimed an amount of Rs. 17.30 lacs under the head assortment charges as against Rs. 3,25,000/- claimed in the immediate preceding year. The assessee was required to explain the same. From the detai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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