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TMI Blog2015 (3) TMI 1025X X X X Extracts X X X X X X X X Extracts X X X X ..... tuation the presumption can be drawn, that even with the third party customers, similar nature of products have been sold on negotiation and, therefore, the prices of the two transactions can be compared. In a way, we uphold the contention of the learned Commissioner of Income-tax (Appeals) that there was internal comparable uncontrolled price available in the case of the assessee for determining the transfer price. Once a direct method of internal comparable uncontrolled price is available then there is no need to resort to transactional net margin method.- Decided against revenue. Transfer pricing adjustment on account of transactions of sale of diamond with the associated enterprise - CIT(A) deleted the addition - Held that:- Out of the three transactions, which has been adversely viewed by the Transfer Pricing Officer, two transactions pertained to sale made by the assessee to one M/s. Simona NV. Now it has been brought on the record before the Commissioner of Income-tax (Appeals), which has also been a subject matter of remand before the Transfer Pricing Officer that the said transactions have been cancelled, as the said party has returned back/diverted the diamonds sold t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese differences, which in our opinion are quite "material differences" are taken into account and adjustment is made then difference of rate, which here in this case is approximately 11 per cent., can be made. Thus, looking to these factors of material difference including huge difference in volume, adjustment of a differential rate of 41.11 in terms of dollars in the transaction of sale price between associated enterprise and third party can be made under the comparable uncontrolled price, which is also permissible under rule 10B. Accordingly, we hold that such a price difference in the aforesaid transaction has to be ignored and adjustment has to be made for comparing the negotiated price charged from the associated enterprise as well as from the third party and if such an adjustment is carried out then there is no requirement for making any kind of upward adjustment in this case. Therefore, the decision of the Commissioner of Income-tax (Appeals) in confirming the adjustment of ₹ 51,32,512 to the arm's length price is reversed and the said addition is deleted. - Decided in favour of assessee. Transfer pricing adjustment on account of notional interest on delayed collec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n brief, are that the assessee which is a partnership firm, is engaged in the business of manufacture of cut and polished diamonds and selling them to associated enterprise as well as to the third parties. In the transfer pricing report in Form 3CEB, the assessee has disclosed the following international transaction with its associate enterprises (AEs) : Sl. No. Class of transactions in the financial year 2006-07 Amount Method used 1. Purchase of rough diamonds 10,88,53,365 Transactional net margin method 2. Sale of cut and polished diamonds 1,26,34,59,644 Transactional net margin method For benchmarking the transactions with its associated enterprise, the assessee has adopted the transactional net margin method as the most appropriate method, wherein the profit level indicator margin of the comparables were 4.53 per cent., whereas the assessee's operating margin on sales with its associated enterprise was at 8.22 per cent. Thus it was reported t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... selling the same product to the unrelated parties on said rate, the same should be benchmarked for the negotiation of price with the related party also. After analysing the various transactions with the associated enterprises as well as non-associated enterprises, he noted that in the three categories of transaction of sale of diamonds, there was difference in price of more than 5 per cent. as the prices charged from the associated enterprises were less than the prices charged from the non-associated enterprises, accordingly he proceeded to make adjustment in respect of the said three categories of transactions. The calculation and the addition made by the Transfer Pricing Officer in respect of three categories of the diamonds were as under : Products Qty. in carats Difference/-carats (US dollar) Value of differences (US dollar) Value of difference (in Rs.) Export to the associated enterprise 25 P/CT D CUT white VS1 3250.08 82.28 270667. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trolled price Method, because no person in uncontrolled transactions will permit use of money without interests, so as to consider the trans action to be at arm's length. The assessee was also asked to furnish the average borrowing cost of its fund. The assessee vide its submis sion dated October 11, 2010 submitted the details of the various loans availed by it from different banks. It is observed that the maximum interest paid by the assessee is 15.25 per cent. If we make an adjust ment on account of involvement of personal security, loss of business opportunity other cost risk, etc., the rate should not be less than 16 per cent. An adjustment of ₹ 4,65,23,007 is to be made on account of delayed credit realisation period from the associated enterprise. The working of he same is given as under : Delay in days 84 Total value of realisation from the associated enterprise ₹ 1,26,34,59,644 Rate of interest 16 per cent Interest (1,26,34,59,644 x 16)/(365 x 100) = ₹ 4,65,23,007 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssociated enterprises, the assessee does not have to incur various costs of marketing expenses and the risk factor is also less while making sales to the associated enterprises. These differences has to be taken into account while benchmarking the prices with the associated enterprises as well as with non-associated enterprises. 3.1. During the course of appellate proceedings, the assessee also filed additional evidence with regard to particular transactions in the case of Simona NV (third party), which has been benchmarked by the Transfer Pricing Officer and had made the adjustment in respect of two categories of transactions, this has resulted into adjustment of ₹ 1,28,19,493. From the said additional evidence which was in the form of letter from the said party the assessee had contended that the said non-associated enterprise had not purchased the diamonds, but had forwarded the said consignment of diamonds to the associated enterprise of the assessee, on the ground that the price charged by the assessee was too high and, therefore, the said price cannot be used for benchmarking the price charged with the associated enterprise. Simona NV, vide letter dated October 14, 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it had already been selling the products to the unrelated parties at certain rates. Therefore, those prices will be a benchmark for negotiation with a relay too. In its submission the appellant has not been able to demonstrate that the factors of differences which it has mentioned, have any ways affected the transfer prices of the products. Accordingly even if such differences existed, the same at best could be treated as 'mere differences' and not the 'material differences', which would affect the price of the product in the open market, as has been envis aged in rule 10B(1)(a)(ii) of the Income-tax Rules, 1962. In view of these facts and circumstances, the objections raised by the appellant in this regard are rejected. 2. The appellant has further mentioned that diamond industry is very price sensitive and that there are various judicial precedents in the Indian context, wherein, it has been held that each diamond is unique, and hence, the prices of different diamond cannot be compared. In this regard it is stated that the appellant has not demonstrated with any facts or figures, how such a mention is relevant to the appellant's case. Furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n reasonably be concluded that at the time when the appellant filed its last submission, it did not have the letter dated October 14, 2010 of M/s. Simona NV. Accordingly the appellant could not have submitted the same before the Transfer Pricing Officer. In view of these set of facts the additional evidence so submitted by the appel lant are admitted for consideration and decision of the issue on hand. 5. On perusal of the various submissions of the appellant, the remand report of the Transfer Pricing Officer wherein it has been mentioned that 'From the records, it is seen that the Transfer Pricing Officer had considered transaction with M/s. Simona N V. for bench marking and determining the arm's length price' and that On perusal of the photocopies of confirmation letter and bills submitted by the assessee, it is seen that the said transactions under reference were of circular nature it is seen that in respect of the said two categories of diamonds, Transfer Pricing Officer had used sales made to Simona N. V. vide invoice No. 187 dated March 13, 2007 and vide invoice No. 215 dated March 31, 2007 as comparable uncontrolled transaction and made adjustm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ought anything on record to suggest that the associated enter prises were eligible for discount based on the quantity sold. In its submission the appellant has not been able to demonstrate that the factors of dffferences which it has mentioned, have anyways affected the transfer prices of the products. Accordingly even if such difference existed, the same at best could be treated as 'mere differences' and not the 'material differences', which would affect the price of the product in the open market as has been envisaged in rule 10B(1)(a)(ii) of the Income-tax Rules, 1962. In view of these facts and circum stances, the objections raised by the appellant are rejected. Accordingly, the appellant's arguments are rejected and the additions made by the Transfer Pricing Officer in respect of the above category of diamonds amounting to ₹ 51,32,512 is confirmed. 3.3. In sum and substance, the Commissioner of Income-tax (Appeals) has upheld the applicability of comparable uncontrolled price method on the ground that the assessee has been selling the same products to the associated enterprise and also to unrelated parties and the prices charged from them can be b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds in support the contention that, there is a huge difference in the grading and pricing of the diamonds. Even in the transfer pricing study report this issue has been highlighted in detail and our specific attention was drawn to page 129 of the paper book and also on pages 39 and 40 of the paper book. Even from the perusal of the invoices, he submitted that, it can be seen that Transfer Pricing Officer has not taken piece wise or carat wise description but has gone by the pricing by the category of diamond which was sold to the associated enterprise as well as to unrelated parties. Within the same category, there is a huge variation of quality and prices of the diamond which has not been taken into consideration either by the Transfer Pricing Officer or by the Commissioner of Income-tax (Appeals). He also submitted that in the earlier years, the transactional net margin method has been held to be the most appropriate method by the Transfer Pricing Officer himself in the assessment years 2005-06 and 2006-07. The copies of the Transfer Pricing Officer's order for these years were also submitted before us. Thus in this year, the methodology cannot be changed without any material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be applied then, examination of comparables has to be done because neither the Transfer Pricing Officer nor the Commissioner of Income-tax (Appeals) has carried out any comparability analysis. Some of the comparables as highlighted by the assessee are also into jewellery business, whereas the assessee is purely engaged in the business of selling of cut and polished diamonds. In any case, if transactional net margin method has to be accepted then the matter is required to be sent back to the Transfer Pricing Officer for fresh consideration. 5.1. As regards deletion/adjustment of ₹ 1,28,19,493 on account of transaction with M/s. Simona NV, learned Commissioner of Income-tax (Departmental representative) strongly relied upon the findings given by the Transfer Pricing Officer in the remand report, which has been dealt at page 7 of the appellate order and further submitted that the transaction with the said party has to be seen for the purpose of comparing the prices only and whether such transaction has actually materialised or not, will not make any difference. 6. In rejoinder, learned counsel submitted that so far as transactions with M/s. Simona NV is concerned, there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... party. Thus he applied internal comparable uncontrolled price and has made the adjustment of ₹ 1,79,52,005 in the manners already discussed above. The first and foremost issue before us is, whether on facts and circumstances of the case, comparable uncontrolled price should be regarded as the most appropriate method for benchmarking the price charged by the assessee with its associated enterprise or the transactional net margin method should be the most appropriate method. 7.1. The application of the arm's length price is based on comparison of the conditions in controlled transaction with the conditions in transaction between independent enterprise, i.e., uncontrolled transaction, so as to determine the market price or the margin on which the two related parties are carrying on their transaction. The determination of the arm's length price has to be done as per the methodology prescribed under section 92C read with rule 10B. All these methods are either based on price or on profit which determine the transfer price by examining comparable matching transaction, comparable adjustable transaction and comparable profit transaction. Rule 10B(1)(a) provides that the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suitable method for benchmarking the pricing of the diamonds and price paid in comparable uncontrolled purchase or sales. It is not a very easy proposition to hold that comparable uncontrolled price would be an appropriate method for benchmarking the prices in the transaction of the diamonds, owing to various differences between the products itself as highlighted above. 7.2. However on the facts of the present case, if we analyse the invoices based transactions, which has been done by the Transfer Pricing Officer for analysing the comparable prices which has been charged by the assessee from its associated enterprise and with the 3rd parties, it is seen that the Transfer Pricing Officer has first of all, given the description of the diamonds in the invoices which gives the details of piece per carat, type of cut and the clarity of the diamond. Under this description, invoices has been raised not only to the associated enterprise but also to the third party customers. If on the similar nature of transaction and description of goods the prices have been negotiated by two parties, one in controlled situation and another in uncontrolled transaction, then such a pricing can be exami ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 100 P/CT D CUT White SI 1599.92 360.53 63.84 370.01 9.47 5683.98 6 100 P CT D CUT White VVS1 144.49 481.71 16.04 485.00 3.29 475.70 7 10 P/CT D CUT White VVS2 485.47 648.66 70.32 673.73 25.07 12169.22 8* 6P/ CT D CUT White VVS1 201.35 847.02 2.37 916.96 69.94 14083.40 9 6P/CT D CUT White VVS2 100.89 793.15 14.38 823.79 30.64 3091.22 10 6P/CT D CUT White VS2 42.84 635.00 43.43 662.17 27.17 1164.17 11 10P/CT D CUT White VVS1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -tax (Appeals), which has also been a subject matter of remand before the Transfer Pricing Officer that the said transactions have been cancelled, as the said party has returned back/diverted the diamonds sold to them to the assessee's associated enterprise. This is evident from the letter dated October 14, 2010, written by Simona NV, the contents of which is reproduced hereunder : Further to our telephone conversation and to your request, I am confirming the following transactions : We have received these 2 shipments from you : (1) Invoice No. 187/2006-07 dated March 13, 2007 (102702 carats for US$ 454,121.45) (2) Invoice No. 215/2006-07 dated March 31, 2007 (709.00 carats for US$ 349,990.50) Although the quality and the make were good, we have noticed that the price, you charged for the goods was exorbitant, it would have been impossible for us to pass on this increase to our customers. Therefore after having discussed the matter with you, over the phone, we have returned both the shipments to Diamstones BVBA adding 1 per cent. to your invoice amount on account of occurred expenses. Goods were invoiced as follows : (1) Invoice No. 07/101 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther, in case of third party there is always a risk of bad debt which is not there in the case of the associated enterprise and also the marketing expenses in the case of the associated enterprise is less. If these differences are taken into consideration and accordingly adjustment is made, then there is no requirement for making any upward adjustment of the arm's length price. The learned Commissioner of Income-tax (Appeals) has rejected this contention, mainly on the ground that the assessee could not brought anything on the record that associated enterprises were eligible for discount, based on quantity sold and these differences are not material difference. We are of the opinion that such a reasoning given by the learned Commissioner of Income-tax (Appeals) cannot be upheld, because these factors do have affect in the negotiation of price. The difference on account of factors affecting the prices have to be given adjustment with the comparables. Since, in a comparable uncontrolled price method a very high degree of comparison of business conditions, products and other physical attributes of the products and services are to be examined, therefore, more often it becomes very ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and adjustment has to be made for comparing the negotiated price charged from the associated enterprise as well as from the third party and if such an adjustment is carried out then there is no requirement for making any kind of upward adjustment in this case. Therefore, the decision of the Commissioner of Income-tax (Appeals) in confirming the adjustment of ₹ 51,32,512 to the arm's length price is reversed and the said addition is deleted. Accordingly, the ground raised by the assessee is treated as allowed, whereas ground Nos. 1, 2 and 3 as raised by the Revenue stands dismissed. 9. The other issue involved in the Departmental appeal is with regard to the transfer pricing adjustment of ₹ 4,65,23,007 on account of notional interest on delayed collection of payment on sale invoices from associated enterprises in comparison to non-associated enterprises. The Transfer Pricing Officer has made this adjustment only on the ground of average days of realisation in respect of sales to associated enterprise which was 210 days, whereas in respect of non-associated enterprises the average days of realisation was 126 days. Accordingly, he concluded that there was an avera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e worked out in such a case for the reason that volume of sales with the associated enterprise is very large as compared to volume of sales undertaken by the third party. He also drew our attention to average period of additional days taken by the associated enterprise for making the payment and also by the third party which has been placed in the paper book from pages 176 to 179. The learned Departmental representative on the other hand strongly supported the findings of the Commissioner of Income-tax (Appeals). 12. We have carefully considered the rival submissions and also perused the relevant finding of the Transfer Pricing Officer as well as the Commissioner of Income-tax (Appeals) and also the material on record. It is an undisputed fact that the assessee has not charged any interest from the third party in respect of delayed payments even when the time period of realisation has exceeded more than 300 to 400 days. From the perusal of the details as submitted by learned counsel in the paperbook, it is seen that there are many instances in which more than 200 days have been exceeded in realisation of payments in case of third parties. Once on such delayed payments with third ..... X X X X Extracts X X X X X X X X Extracts X X X X
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