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TMI Blog2014 (11) TMI 904X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 diamon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case are that the assessee is engaged in the business of manufacturing of diamond studded gold jewellery. It filed return declaring total income of ₹ 2,12,490. Due to certain international transactions entered into by the assessee, the Assessing Officer (AO), in terms of section 92CA(1), made reference to the Transfer Pricing Officer (TPO) for determining Arm s Length Price (ALP) in respect of such international transactions. The TPO observed that the assessee made Purchases of diamond studded jewellery from its Associated Enterprises (AEs) amounting to ₹ 5,75,64,505 and sales were made of diamond studded jewellery to AEs at ₹ 11,42,16,876. Apart from that, the assessee also paid commission of ₹ 46,63,835 to its AEs. The assessee benchmarked its international transaction on Transactional Net Margin Method (TNMM). It applied Profit Level Indicator (PLI) of OP / TC. The assessee chose nine comparable cases with the average of OP / TC at 4.43% and OP / Sales at 4.12%. The assessee s margin of OP / Sales at 4.45% and OP / TC at 4.65% was claimed at ALP. The TPO rejected some of comparables chosen by the assessee because of significant related party transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Fin Platinum India Limited 5.03% 4. Golden Jewellery Limited 31.69% 5. Shreeji Jewellery Limited 3.88% 6. Shantivijay Jewels Limited 6.66% 7. Diagold Design Limited 8.14% 8. Fine Jewellery (India) Limited 6.70% 9. Suraj Diamonds Industries Limited 29.40% 10 Foreever Precious Jewellery Diamonds Ltd. 14.32% Arithmetical Mean 11.39 3. By considering the assessee s rate of RoCE at 5.29%, the A.O. made transfer pricing adjustment to the tune of ₹ 4,12,75,990 by applying shortfall of 6.10% (11.39% - 5.29%) on the average capital employed. The assessee is in appeal against the order passed by the A.O. making the transfer pricing adjustment of ₹ 4.12 crore. 4. We have heard the rival submissions and perused the rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions at arm s length with a suitable base and the question is of determining the comparability of a case, the term `related party transactions cannot be considered in its generic sense. It will encompass only such transactions between the related profits which directly affect the overall profitability in one way or the other. It is more so because the percentage of related party transactions is computed vis- -vis total sales. The components of both the variables of this ratio, being the RPTs and total revenue must be of the same genus, though there may be difference in species. When on one hand, we are taking the figure of total sales, which is of the revenue nature, then the related party transactions should also be of the revenue and not of the capital nature. The items of total revenue (total sales), sale of goods and purchase of goods to or from related parties are of the revenue nature. In other words, only such related party transactions can be considered for this purpose which are of the revenue character having a direct bearing on the profitability. Such related party transactions which are profit neutral shall stand excluded for this purpose. To put it simply, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind that there is no actual payment of interest on the loan taken. As such, no hypothetical interest can be included in the RPTs. Further, 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. As there is no dispute on the otherwise comparability of this case, we uphold the impugned order insofar as the inclusion of this case in the final list of comparables is concerned. 6.1. The second case whose inclusion has been disputed is Su- Raj Diamond Industries Limited. The learned AR submitted that Su- Raj Diamond Industries Limited cannot be considered as comparable as it is operating in retail segment whereas the assessee is operating in wholesale business of diamond studded jewellery. Apart from that, it was also put forth that in computing the figures of this case, the TPO not only considered the amounts of studded manufacturing jewellery but also those of plain gold jewellery. The learned AR stated that the assessee was engaged only in the business of studded manufacturing jewellery and not plain gold jewellery. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l employed in respect of diamond jewellery of this case are not available, this case cannot be considered as comparable. We, therefore, order for the expunging of this case. 8. To sum up, our decision on the inclusion or exclusion of the three cases agitated before us is that whereas the case of Goldium Jewellery Limited shall continue to be included in the final list of comparables, the cases of Forever Precious Jewellery Diamonds Limited and Su-Raj Diamonds Industries Limited would be excluded. In view of the change in the list of comparable cases, we set aside the impugned order and restore the matter to the file of the AO/TPO to determine the ALP of the international transactions of the assessee afresh in the light of our above directions. 9.1. Now we espouse the next issue agitated by the assessee in the present appeal, which is against the change of PLI from OP / TC or OP / Sales to RoCE. The learned AR contended that in the earlier year the assessee applied PLI of OP / TC which was accepted by the TPO. Albeit he placed on record a copy of the order passed by the TPO for assessment year 2007-2008, however, it could not be precisely pointed out as to what was the PLI i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 bases, viz., costs incurred or sales effected or assets employed or any other relevant base. Which is the correct base depends upon the facts and circumstances of each case. In principle, there can be no inhibition on the TPO to compute profit margin by a particular base, if the facts and circumstances of the case warrant adoption of a different base from that adopted by the assessee. As assets or capital employed is one of the recognized bases, we see no reason to restrict the adoption of base only to total cost or sales. In fact, the choice of the correct base depends on various factors including its workability in the facts of the case. Let us see as to whether the TPO was correct in adopting RoCE as the correct base under the TNMM. The TPO worked out the average capital employed at ₹ 67.66 crore and by considering the amount of operating profit at ₹ 3.58 cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts of the present case. 10. The last objection taken by the learned AR is that the authorities below have carried out the transfer pricing adjustment in respect of total transactions instead of restricting it to international transactions. It is simple and plain that transfer pricing adjustment has to be confined only to the international transactions as is evident from the language of sub-section (1) of section 92 which 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 to mean a transaction between two or more associated enterprises, either or both of whom are non-residents . Section 92A defines associated enterprise in relation to another enterprise by certain yardsticks. A conjoint reading of these provisions makes it amply clear 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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