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TMI Blog2014 (11) TMI 883X X X X Extracts X X X X X X X X Extracts X X X X ..... r the year under consideration to compare PLI particularly in absence of distinguishable facts and circumstances existing for justification of the same - the calculation of PLI on the basis of OP/OC and by adopting that method the transaction of the assessee is found to be at arms length is approved – Decided in favour of assessee. Transfer pricing adjustment – Non-charging of interest from AE – Held that:- The observation of CIT(A) is incorrect as the approach of the assessee in non-charging the interest from its AE and non-AEs is uniform except there being some more delay in receiving the payment from AE - The uniform approach is depicted in the fact that either the assessee is charging interest from AE and non-AE and not charging any interest from them - The approach of the assessee is uniform so as it relates to non-charging of interest from AEs as well as non-AEs – relying upon DCIT vs. Indo American Jewellery Ltd. [2012 (2) TMI 366 - ITAT MUMBAI] wherein it has been held that there being complete uniformity in the act of assessee in not charging interest from both the AE and Non-AE debtors for almost equal delay in realization, no such adjustment can be made as assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accrued to him there from so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction - before AO certain details were submitted and it was shown that during the year under consideration quantum of small diamonds were in large numbers - CIT(A) rightly granted relief only to the extent of 50% - Decided against revenue. - ITA No.5875/MUM/2013, ITA No.6221/MUM/2013 - - - Dated:- 8-8-2014 - SHRI I.P. BANSAL AND SHRI D.KARUNAKARA RAO, JJ. For The Assessee : Shri. Jitendra Jain For The Revenue : Shri B.P.K.Panda ORDER PER I.P.BANSAL, J.M: These are cross appeals and they are directed against order of Ld. CIT(A)- 15 Mumbai dated 7/8/2013 for assessment year 2008-09. Grounds of appeal in both the appeals read as under: Grounds of Assessee s appeal in ITA No.5875/Mum/2013: 1. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law and in facts in confirm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1(f) and (ii) of Section 115JB by Finance Act, 2007 w.e.f. 01.04.2008, assessee will not be liable for tax u/s. 115JB of the Act as its unit is in the Special Economic Zone and hence covered within the exemption provided in clause (6) of section 115JB of the Act? 3. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in holding that the assessee s 10A profit is not liable for tax u/s.115JB of the Act, in view of clause (6) thereof without appreciating that clause (6) has been inserted by Special Economic Zones Act 2005 w.e.f. 10.02.2006 concurrently with the insertion of Section 10AA, also by the Special Economic Zones Act, 2005 w.e.f. 10.2.2006. Hence clause (6) of sec.115JB is applicable only to 10AA units and not to 10A units, as due to amendment to clauses (f) and (ii) of Explanation of 1 of section 115JB by the Finance Act, 2007, profit / loss of 10A and 10B units have been expressly brought within purview of MAT effective from A.Y.2008-09? 4 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not considering the clarification given in para 44 of the Board s circular 3/2008 regarding amendment i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2007-08. The profit margin of the assessee was computed at 13.45% which was higher than the arithmetic margin of 7.75% on cost of the comparables. Thus, it was claimed that the transactions of the assessee with its AE are at arms length. 2.2 It may be mentioned here that TPO rejected five comparable out of ten comparables adopted by the assessee and added two comparables to the list of the assessee by making the number of comparable at seven. The details of the comparables selected by the assessee and the reasons given by T.P.O for acceptance or rejection of the comparable are as under: Sl.No. Name of the Company Remarks of the TPO 1. Diagold Designs Ltd The company manufactures and exports diamond and color stone studded gold silver jewellery from India. The RPTs constitute less than 25% of the revenues. RPTs - ₹ 0.56 crore. As the company is functionally similar, the same is considered as a comparable. 2. Fine Jewellery (India) Ltd. The company is into sale of jewellery and diamonds. The company is predominantly in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ewels Ltd The company is into sale of jewellery articles. Tue RPTs constitute less than 25% of the revenues. RPTs - ₹ 3.79 crore. As the company is functionally similar, the same is considered as a comparable. 10. Shreeji Jewellery Ltd The company is into sale of gold jewellery studded with diamonds. The RPTs constitute less than 25% of the revenues. RPTs - ₹ 0.27 crore. As the company is functionally similar, the same is considered as a comparable The details of two comparables added by T.P.O is as under: Sl. No Name of Company Remarks of the TPO 1. Asian Star Co. Ltd The company has diamond segment as well as jewellery segment. The RPTs constitute less than 25% of the revenues. RPTs - 13.94 Crores. The jewellery segment is into manufacture of gold, platinum,diamond studded jewellery. This segment is considered as a comparable. 2. Su-Raj Diamond Industries Ltd The company has processed diamond and gold jewellery segments. The R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly 5.22% of total turnover for the FY 2007- 08. The taxpayer relied on the decision of ITAT, Mumbai in the case 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 ₹ 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 ₹ 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 fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has come to a conclusion that most appropriate method for computing PLI will be Return on Capital Employment (RoCE). Adopting RoCE Ld. TPO computed the PLI 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest from its customers on outstanding balances and in the similar manner interest was not charged from the AEs. However, TPO has come to the conclusion that such interest was chargeable and he determined interest rate of 14.18% per annum and since no interest was charged addition of ₹ 7,02,95,833/- was computed to bring the transaction at arms length as per following table. Opening AE debtor balance as on 01.04.2007 ₹ 46,50,36,038/- Closing AE debtor balance as on 31-03-2008 ₹ 52,64,42,564/- Average outstanding balance with the AE, Dinurje Corp., USA ₹ 49,57,39,301/- Arms's Length Interest Rate 14.18% Arm's Length Interest @ 14.18% p.a. on the average outstanding balance as computed above. ₹ 7,02,95,833/- 2.9 Since addition on account of interest was more than the addition computed by adopting PLI on the basis of RoCE, the TPO made only one addition of ₹ 7,82,95,833/- which was higher than the earlier addition. 3. The aforement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national transaction shall be determined by any of the specified methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe. Such methods, inter alia, include 'Transactional net margin method', which has been applied by the assessee in the present case, and the same is not disputed. The mechanism for determination of the ALP under this method has been enshrined in Rule 10B(1)(e). Sub-clause (i) of the clause (e) provides that the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise shall be computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base. Similar base is then employed for determining the average rate of operating profit in respect of comparable cases for the purposes of determining the ALP of international transactions. A bare reading of this provision indicates that the operating profit can be computed with any of the base ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 It is further important to note that the Mumbai Benches of the tribunal in the aforequoted three orders have considered either Operating margin to Sales or Operating profit to Total cost as the PLI in the context of jewellery/diamond industry, although in none of these cases there was any controversy as to the application of RoCE v. OP/TC or OP/Sales. The learned Departmental Representative could not point out even a single order in which RoCE has been held to be correct PLI under the TNMM. In view of the discussion in para 9.3 of this order and respectfully following the principle of consistency permeating from the above refereed three orders, we are of the considered opinion that the adoption of RoCE by the authorities below cannot be approved. We, therefore, set aside the impugned order on this issue and direct that the PLI of OP/TC or OP/Sales should be applied in the facts of the present case (emphasis ours) 4,1 It was further submitted that TPO himself in subsequent assessment years has accepted OP/OC as appropriate method to compute PLI. In this regard Ld. AR referred to transfer pricing order for assessment 2009-10, copy of which is placed at page 1 to 14 of the paper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me 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 ₹ 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 average capital employed at page 27 of his order. Revised ROCE as per the correct working is as follows: Particulars Amount and Ratio Reference Operating Profit 55,053,780 As per page 2 of TPO order Average Capital Employed 591,009,149 As above ROCE% 9.32% 4.3 It was submitted that Asian Star Company Ltd. cannot be taken as comparable for the following reasons. Comments on Comparable Companies added by the TPO: a. Asian Star Company Ltd.: Has significant amount of Processing Expenses of ₹ 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer 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 ₹ 4.08 Crs as against Salary cost of ₹ 1.38 Crs. This implies it is mainly into outsourcing / job work basis and thus would have lower investment in plant and machinery and hence higher ROCE. TPO has used segmental information for PLI purpose. Where segmental information is used, it is difficult to use ROCE as PLI as it is not practical to determine the segmental Capital employed. Reliance is placed on Goldstar Jewellery Design (P) Ltd. [(2013) 144 ITD 99, Mumbal]. Para 9.3 at Page 9. 4.5 It was submitted if the aforementioned two comparables are removed then there will be no TP adjustment as per follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amonds Industries, the average ROCE of remaining 6 companies works out to 13.52% and falls within +/- 5% range. (INR in Lacs) Name of Company Avg. Capital Employed Op. Profit ROCE Page Reference Goldiam Jewellery Ltd. 2139.89 678.12 31.69% Page 10 of TPO order Shreeji Jewellery Ltd. 5378.52 208.56 3.88% ----do---- Shantivijay Jewels Ltd. 3224.94 214.81 6.66% ----do---- Diagold Designs Ltd. 4303.72 350.36 8.14% ----do---- Fine Jewellery (India) Ltd. 7309.82 489.93 6.70% ----do---- Asian Star Co. Ltd.(Seg) 5569.74 1340.52 24.07% ----do--- Arithmetic Mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um/2012 and 5930/Mum/2012 (AY 08-09). Nimbus Communications Ltd. [(2013) 145 ITD 582, Mumbai Tri.] 4.8 In the alternative it was submitted that adjustment on account of delayed receipt of payments, if any is to be made then the same shall be restricted to difference between number of days of delay in the case of AEs and non-AEs. Reference in this regard was made to the order of Ld. CIT(A), wherein at page 56 such difference has been pointed out and it has been mentioned that average delay in the case of AEs is of 193 days and in the case of non-AEs it is 173 days. Thus, it was submitted that interest, if any, should be charged for 20 days as the internal comparable instance is available. In the alternative it was submitted that the TPO has wrongly applied rate of 14.18% per annum as interest is required to be calculated on the basis of LIBOR as per following decisions: 3.5 WITHOUT PREJUDICE TO ABOVE, INTEREST SHALL BE CALCULATED BASED ON LIBOR: Tech Mahindra Ltd-[(2011) 12 Taxmann.com 132, Mumbai Tri.] Cotton Naturals (I) Pvt. Ltd. [2013) 32 Taxmann.com 219, Delhi Tri.]-Para 14 VVF Ltd- (2012) 31 CCH 474, Mumbai Tri. (2010-TII-04-ITAT-MUM-TP) Tata Autocomp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofitability in respect of transaction with the AEs. The correctness of applicability of RoCE as PLI under the TNMM cannot be countenanced (relevant observations of Tribunal have already been reproduced in above part of this order in para-4). In the present case Ld. CIT(A) has rejected such contention of the assessee on the ground that assessee is engaged in the business of manufacturing. Relevant observations of Ld. CIT(A) are as under: IV. Appellant argued that ROCE is not the appropriate PLI since same applies to applies to manufacturing units. However, since appellant is doing manufacturing also the argument is misplaced. Further while making comparison of fixed assets to employee cost, appellant has selectively taken only 4 companies hence same does not provide clear picture and consequently not reliable. Appellant argued that working capital in jewellery business is seasonal hence can t be taken as PLI. This, however is not correct since no business can function without capital and that too a business like diamond whose main basis is capital employed being a capital intensive industry. Further, profitability is always linked to capital being most significant factor in thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in respect of amounts outstanding out of sales either from its AEs or from non-AE debtors. Such contention of the assessee is supported by the copy of ledger accounts submitted by the assessee in respect of AEs and non-AE transactions. No material has been brought on record to suggest that such contention of the assessee is either incorrect or is not supported by the evidence placed on record. Factual aspect of the matter is also not under dispute that average delay in receiving the payment by the assessee in the case of AE transaction is 193 days and in the case of non- AEs, it is 173 days and according to the finding recorded by Ld. CIT(A) in para 4.4 this fact has been mentioned. Ld. CIT(A) did not controvert this fact, however, he has rejected the contention of the assessee on the ground that difference in the period itself proves that assessee is not adopting uniform approach. This finding of Ld. CIT(A) is recorded in para 4.4.vi. Such observation of Ld.CIT(A) is incorrect as the approach of the assessee in noncharging the interest from its AE and non-AEs is uniform except there being some more delay in receiving the payment from AE. The uniform approach is depicted in the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... zation of the export proceeds in both the cases is same then the Tribunal was right in deleting the notional interest on outstanding amount of export proceeds which were realized belatedly. Therefore, in our opinion according to aforementioned position of law upheld by Hon ble Bombay High Court, no notional interest can be added to determine the ALP to the extent of delay of 173 days from AE transaction as to that extent, in any case, (even according to CUP method), no adjustment can be made. 7.2 Now the question remains that what would be the interest rate applicable for remaining 20 days. The TPO has applied rate of 14.18% on the basis of yield from BBB Grade Credit Bond (investment grade bond) which was 14.18% for 1 to 2 years period for the financial year 2007-08. As against it is the case of assessee that interest rate should be calculated on the basis of LIBOR and such contention of the assessee is based on the decisions relied upon by Ld. AR mentioned in 4.8 of this order. 7.3 The assessee has also submitted these calculation which is even recorded by Ld. CIT(A) at page 55 to 57 of order of Ld. CIT(A). The same read as under: a. Amount on which Interest might be cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrower, the Lender would charge interest at a rate little higher than the LIBOR rate . In case of Aurionpro Solutions Ltd. v Addl. CIT (ITAT Mumbai-I.TA. No. 7872/Mum/2011, Dated 12.04.2013), it has been held that Arm s length interest on loans and advances given to AE can be determined by considering the LIBOR plus %. In that case the AE of the Assessee was rated at a level below BBB . Accordingly, in the case of the Appellant- whose AE is rated at BBB -interest mat be charged at LLIBOR plus 2% i.e. at 6.53% (4.53 + 2). The same may be rounded off to 7%. Based on that, the Interest on Receivable from AE can be computed as under: 25.27 Crores(Net Receivable) x 7% x 20 days/365 =.0.097 Crores or 9.70 Lakhs 7.4 The above calculations of the assessee have not been disputed by the Revenue at any stage of the proceedings. Therefore, we are of the opinion that addition, if any, can be made only to the extent of ₹ 9.70 lacs as calculated above and this amount will also fall within the +/-5% range, therefore, no addition can be made as transfer pricing adjustment even on account of noncharging of interest for belated payment received from AEs. 7.5 In view of abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to para-14 of the said decision to submit that the very basis of rejection of the claim of the assessee by the AO is the same which have been argued by Ld. DR. The said para -14 read as under: 14. AO did not accept said contention of the assessee and stated that as per provisions of section 115JB of the Act, book profit is to be computed after making specified adjustments to the net profit as shown in the profit and loss account. In the Finance Act, 2007, the scope of Minimum Alternate Tax (MAT) was widened by including the income exempt u/s.1OA/1OB of the Income tax Act in the book profit. AO after considering explanatory notes i.e. Circular No.3/2008 dated 12.3.2008 held that MAT provisions are applicable to a company on the income which is from any business or services derived from unit or Special Economic Zone. He further stated that section 115JB(6) was inserted by Special Economic Zones Act, 2005, when section 1OAA was also inserted by the same Act. Section 1OAA provides a deduction of such profits and gain derived by an assessee being entrepreneur referred to in clause (f) of Section 2 of Special Economic Zone Act, 2005 from its unit. AO stated that by inserting sub- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly to the income accrued or arisen on or after 1.4.2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic Zone, as the case may be. Hence, income of units located SEZ will not be included while computing book profit for the purpose of MAT as per section 115JB(6) of the Act. In view of above, we are of the considered view that there is merit in the contention of ld A.R. that irrespective of the fact that amendment has been made in clause (f) of Explanation (1) to section 115JB(2) of the Act to apply the provisions of MAT in respect of units which are entitled to deduction u/s.1OA or 1OB but the units which are in SEZ will continue to get benefits from the applicability of provisions of MAT in view of subsection(6) of the Act. The contention of ld D.R. that assessee will not be entitled to get the benefit u/s.1153B(6) of the Act as assessee has claimed deduction u/s.1OA of the Act is to be rejected for the reason that section 115JB (6) does not refer section 1OA or section 1OAA but it only refer that provisions of section 115JB will not apply to the income accrued or arisen on or after 1.4.2005 from any business carri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 3,13,000/- were paid to M/s. Dinu Plantation and M/s. Sudhir Diamonds Pvt. Ltd. respectively. From the return filed by those parties it was noticed that they did not carry out any business activity. According to AO they did not have experience and expertise in the work of assortment of diamonds. As these payments were made to the persons specified in section 40A(2)(b,) the AO disallowed the amount. 11.1 Before Ld. CIT(A) it was argued that AO has committed an error in disallowing the entire payment without bringing any material to show that these payments made to specified persons were excessive as provided under section 40A(20(b) of the Act and it was pleaded that the same is to be allowed on reasonable basis. Accepting the request of the assessee Ld. CIT(A) has restricted the disallowance to 50%. It may be mentioned here that it was the contention of the assessee before Ld. CIT(A) that during the course of hearing before A.O the assessee had submitted reasons for incurring higher expenditure on assortment charges and copies of some invoices were also produced before him to prove that small quantity of diamonds in large numbers were sold by the assessee during the year and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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