TMI Blog2010 (5) TMI 530X X X X Extracts X X X X X X X X Extracts X X X X ..... in the business of manufacturing and export of plain and studded jewellery of gold, platinum, silver and other precious/semi precious diamonds, synthetic stones in the form of rings, pendants, ear rings, bracelets, etc. The company s products are exported mainly to US and UK. 3. During the year the assessee has entered into international transaction with the following AEs: a) Suashish Diamonds, Hong Kong Ltd. b) Suashish Star Inc. (SSI) c) Ishish Jewellery LLC d) Star Diamond Group Inc., USA ( STAR ) On being questioned by the TPO, the assessee justified the transactions under the overall TNM Method. It was submitted that the assessee s operating profit margin is 3.56% on sales and 3.70% on cost while that of comparables used by it is 3.27% on sales and 3.83% on cost. On the basis of details provided by the assessee it was submitted that the assessee earns a net margin of 5.38% on sale to the AEs and net margin of 1.77% on sale to non-AEs. Accordingly it was submitted that the same is to be at arms length. 4. The TPO perused the split financials provided by the assessee and rejected the same on the ground that the allocation keys used by the assessee for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal transactions. The Assessing Officer thus made an addition of Rs.3,39,63,606 on account of disallowance of arms length u/s. 92C(4) of the Act. 6. Before CIT(A) it was submitted that using financial data of the entities from the new set of comparables derived by TPO s office tantamount to rejecting the set of comparables provided by the assessee in its TP Study is unjust and goes against the principles of natural justice. It was submitted that the assessee has followed the basis as prescribed in the law and under the OECD principles in respect of its search for comparables to justify the ALP. The assessee has selected itself as tested party and its result has been benchmarked with the result of the comparable companies. The provisions of Rule 10B(2) of the Income-tax Rules, 1962 (the Rules) and provisions of section 92CA(3) r.w.s. 92C(3)(c) were brought to the notice of the CIT(A) and it was submitted that the assessee company has duly complied with the above provisions. It was submitted that as per the OECD transfer pricing guidelines if the tax payer presents a reasonable argument and evidence to suggest that its transfer pricing was the ALP, the burden of proof may legall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pricing is not an exact science and some degree of estimation is inbuilt with the whole process. He observed that the initial onus to establish that the international transaction is within the ALP lies with the assessee and the assessee has discharged its burden of proof by filing the detailed transfer study. The TPO should make a proper study and nalysis on the basis of the data available as well as the proper method to be followed. He referred to the CBDT instruction and the provisions of section 92C(3) and 92CA(3). He observed that in the instant case the TPO has not considered the various factors which require the adjustments in the industry margin calculated on the basis of the comparables of the assessee and it is not clear as to why the TPO did not reject the transfer pricing study submitted by the assessee and still went ahead making the transfer pricing adjustments in a summary manner. He also questioned the selection of various companies as comparables. Considering the operating profit/sales of the assessee at 3.56% which was higher than the industry margin he observed that the transactions between the assessee and its AEs were at arms length. Since the assessee in the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e order of the Assessing Officer. 10. The learned counsel for the assessee, on the other hand, while supporting the order of the CIT(A) submitted that the assessee has shown operating profit margin of 3.56% on sales and 3.70% on cost while that of comparable used by the assessee is 3.27% on sales and 3.83% on cost. He submitted that net margin of 5.38% on sale to AEs and net margin of 1.77% to non AEs as disclosed by the assessee is justified who abides by the OECD Transfer Pricing Guidelines and which has used TNM method. He submitted that the Assessing Officer failed to appreciate that internal comparables are more reliable as compared to external comparables. Referring to the fresh benchmarking, he submitted that the transactions entered into by the assessee with its AEs are at arms length. He submitted that the comparables chosen by the TPO cannot be applied to the assessee s case as most of them are either located in Seepz or had their jewellery manufacturing in Seepz since out of 18 comparable companies 13 are located in Seepz. He submitted that the Seepz units get a number of benefits which were pointed out before the CIT(A) and which are enumerated in the order of the CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the ALP should not be disturbed unless the pricing is not based on the prescribed methods. Since the assessee has shown operating profit on sales at 3.5% which is higher than the industry margin at 3.27%, therefore, the transaction between the assessee and its AEs were at arms length. He accordingly supported the order of the CIT(A) and submitted that the grounds raised by the Revenue should be dismissed. 11. We have considered the rival submissions made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. There is no dispute to the fact that the assessee during the relevant assessment year has entered into international transactions with four AEs, the details of which are already given at para 3 of this order. We find the assessee in the instant case has adopted TNM method. We find the split financials provided by the assessee were rejected by the TPO on the ground that allocation of manufacture expenses like employees remuneration, rent, etc., the allocation key used is sales whereas according to the TPO the ideal allocation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es are chosen and selected after doing a proper FAR study as well as adjustments are made to the extent possible it would be unfair to summarily reject the transfer pricing analysis made by the assessee. We find in the instant case the Assessing Officer/TPO has not made out a case to establish that the comparables used by the assessee deserve to be rejected. 12. We further find the learned counsel for the assessee on being asked by the Bench, filed additional details explaining the compliance to Rule 10B of the I.T. Rules, 1962. The learned counsel for the assessee explained in writing that the assessee company has complied with Rule 10B(2)(a), 10B(2)(b), 10B(2)(c) and 10B(2)(d) and the learned DR could not controvert the above submissions of the learned counsel for the assessee. We find the assessee s operating profit margin is 3.56% on sales and is 3.70% on cost whereas that of the comparables used by the assessee is at 3.27% of sales and at 3.82% on cost. Further from the details provided and as mentioned in TPO s order at para 7 we find it was submitted that the assessee earns a net margin of 5.38% on sales to Aes and net margin of 1.77% on sales to non-AEs which remains unco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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