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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 ..... ons of sale of diamond with the associated enterprise and also deletion of transfer pricing adjustment of Rs. 4,65,23,007 on account of notional interest to be charged on delayed payment on sales/invoices which are receivables from the associated enterprise. Since common issue of transfer pricing adjustment is involved in both the appeals, therefore, they are being disposed of by this consolidated order for the sake of convenience. 2. The facts in 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 metho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejected by the Transfer Pricing Officer on the ground that, when these parties are entering into international transaction, the prices are negotiated, keeping in view the price prevailing in the uncontrolled scenario and the assessee who is 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... '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 Rs. 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 Rs. 1,26,34,59,644 Rate of interest 16 per cent Interest (1,26,34,59,644 x 16)/(365 x 100) = Rs. 4,65,23,007 In view of the above, an adjustment of Rs. 4,65,23,007 is made on account of delayed realisation from associated enterprises." 2.4. Thus, the total adjustment of Rs. 6,44,75,012 in the arm's length price was made by the Transfer Pricing Officer. 3. Before the Commissioner of Income-tax (Appeals), on the first issue, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellate 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 Rs. 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, 2010 had categorically stated that prices charged by the assessee for the sale of diamonds were exorbitant and since the said non-associated enterprise could not pass on such high prices to its customers, therefore, it had returned the said diamonds to the assessee's associated enterprise. This additional evidence was also forwarded to the Transfer Pricing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. Further what are those judicial pronouncements which have held about the uniqueness of the diamond in the Indian context has not been submitted by the appellant. It is further mentioned here that it is the facts of the case and not disputed by the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 adjustments accordingly. In this respect, as submitted by the appellant and also confirmed by the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discount adjustment. Further, the appellant has not brought 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 Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rature on shapes and sizes of the diamonds 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactional net margin method is to 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 Rs. 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. Sim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se as well as to the third party. Thus he applied internal comparable uncontrolled price and has made the adjustment of Rs. 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... generally not a very 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer Pricing Officer, as the price difference was less than 5 per cent. and it was only with regard to three transactions, which have been given at serial Nos. 2, 4 and 8, the Transfer Pricing Officer has drawn the adverse inference on the basis of major difference in prices charged by the assessee. From the above details, it appears that under a particular description, invoices raised to associated enterprise and non-associated enterprise were similar. Exact difference in invoices have not been brought forth before us. Thus in the case of the assessee, there was availability of the internal comparable uncontrolled price, wherein on similar nature of transaction and similar description of product as given in the invoices, the assessee has been charging prices from the associated enterprise as well as from the third party. Even though there may be some differences of size, carat, weight and other aspects, however the same has not been clearly demarcated or demonstrated by the assessee either before the Transfer Pricing Officer or before the Commissioner of Income-tax (Appeals). In such a situation the presumption can be drawn, that even with the third party customers, similar nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incorporated and dealt with by the Commissioner of Income-tax (Appeals) also as discussed herein the foregoing paragraphs, from the above letter and relevant finding of the Commissioner of Income-tax (Appeals), it is quite conclusive that, the said party has not purchased the diamonds sent on these two invoices and ultimately, it has been sold to associated enterprise only. Thus, such a transaction cannot be considered for benchmarking and determining the arm's length price. Once the particular transaction, which is the subject matter of comparison for transfer pricing adjustment, has not even undertaken or has been cancelled, then such a transaction has to be excluded for the purpose of benchmarking the transfer price. The detail reasoning and the conclusion given by the Commissioner of Income-tax (Appeals) as have been reproduced by us the foregoing paras, with regard to the non inclusion of such a transaction and also the consequent deletion of adjustment of Rs. 1,28,19,493 on account of such transaction is both factually and legally correct and has rightly been deleted by the Commissioner of Income-tax (Appeals). We do not find any reason to deviate from such a finding of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions, the contractual terms of the parties, the geographical market conditions in which the transaction takes place, the time and period of the transaction and various other risk factors like bad debt risk, foreign currency risk, etc. All these factors have to be taken into account for determination of the price in a given transaction. In this particular transaction, the assessee has sold a total quantity of 2773.20 to its associated enterprise with an average rate of 328.89 dollars, whereas to the third party, the assessee has merely sold quantity of 8.50 carats with the rate of 370 dollars. Thus there is a huge difference in volume of sale and it is quite a normal phenomena that if the purchases and sales are made in huge quantity then there is always a chance of negotiation of preferable price by the purchaser and there is difference in the price as compared to the one where very small quantity of sale or purchase takes place. Such difference of volume, definitely has a bearing on the negotiation of the prices and, therefore, adjustment on this factor has to be made. This itself is a material difference. We, also agree with the contention of the assessee that marketing expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome-tax (Appeals), the assessee's main submission was that this credit period for the sales made to associated enterprise and non-associated enterprise cannot be looked into isolation as it is not a separate transaction but part of the same transaction itself. There had been several instances when the unrelated parties also had made payments beyond the credit period granted and in such cases also the assessee had not charged any interest on such delayed payment. In fact in the diamond industry, payment beyond the credit period is usual business practice and none of the entities charge any interest on such delayed payments. In support of this, a certificate/letter from Gem and Jewellery Export Promotion Council was filed before the Commissioner of Income- tax (Appeals). Besides this various judicial precedents were also cited which has been dealt by the Commissioner of Income-tax (Appeals) in pages 13 to 15 of the appellate order. The learned Commissioner of Income-tax (Appeals) duly appreciated the assessee's contention and also relying upon the various decisions of the Income-tax Appellate Tribunal, has deleted the said addition. 11. Before us, learned counsel reiterate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olled transaction then the same cannot be taken as a benchmark for the controlled transaction. Moreover, we agree with the contention of learned counsel that in the case of associated enterprise the volume of sale is very huge as compared to volume of sale in the case of third party and such delay in realisation of payment should not be adversely viewed on the basis of average working of days. The average days of delay in payment as worked out by the Transfer Pricing Officer is also inappropriate as number of sale transactions with associated enterprise is far more than the non-associated enterprise and will result in improper working of average days. On these facts of the case, we do not find any reason for making any kind of upward adjustment on account of differences in period for realisation of payments in respect of sales made to associated enterprise as well as non-associated enterprises. Such a notional interest cannot be charged for the purpose of making adjustment in the arm's length price. Thus the order of the Commissioner of Income-tax (Appeals) deleting the adjustment of Rs, 4,65,23,007 on this score is upheld and the ground raised by the Department stands dismisse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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