2010 (4) TMI 686 - AT - Income Tax

Transaction Net Margin Method or cost plus method - The assessee has not taken the ground that cost plus method is the most appropriate method and the TPO has struck down this method as inappropriate - The decision of Mumbai L Bench of the Tribunal in the case of UCB India (P.) Ltd. v. ACIT where it is held that section 92C read with rule 10B(1)(e) deals with Transactions Net Margin Method (TNMM) and it refers to only net profit margin realised by an enterprise from an international transaction or a class of such transaction but not operational margins of enterprises as a whole. Held that no other alternative but to set aside the entire issues to the file of the Assessing Officer for fresh adjudication - In view of the peculiar circumstances of this case we permit the assessee to file yet another report contemplated under section 92E of the Act and also support its ALP under any other method by relying on fresh comparables and documents with these observations we set aside the matter to the file of the Assessing Officer for fresh adjudication de novo in accordance with law after giving the assessee adequate opportunity - The revenue is allowed for statistical purposes Business income or Income from other sources - Interest on FDRs - When the assessee has not brought out any evidence to demonstrate that the interest income in question is having a nexus with business transaction it cannot be assessed under the head Business income - Non-furnishing of required details entitled the Assessing Officer to draw adverse inference and tax interest income under the head Income from other sources The appeal of revenue is allowed Netting of interest - The issue of netting is covered against the assessee by the judgment of Hon ble Bombay High Court in the case of CIT v. Asian Star Co. Ltd.(2010 -TMI - 77709 - BOMBAY HIGH COURT)- The appeal of revenue is allowed. Relief u/s 80HHC - assessee shall not be entitled to reduction from the purchase cost of sales value of rough diamonds exported which are not scrap or sales returned. If they are sales returns as claimed by the assessee on account of rejection then the assessee would be entitled to reduction from purchase cost. This fact that rough diamonds were rejected and returned to the same party from whom they were purchased at the same cost has to be proved by the assessee for enabling it to get reduction from the purchase cost as only such return to the seller at the same cost can be called a sales return. - Rejection of certain rough diamonds purchased and re-exporting them at a profit margin does not in our humble opinion entitle the assessee to claim the same as scrap or purchases returned. - Appeal of the revenue allowed.

Summary

Issues Involved:
1. Transfer Pricing Adjustment under Section 92CA(3)
2. Classification of Interest Income
3. Netting of Interest
4. Exclusion of Export Receipts of Rough Rejection Diamonds from Total Turnover

Detailed Analysis:

1. Transfer Pricing Adjustment under Section 92CA(3)
The primary issue revolves around the determination of the Arm's Length Price (ALP) for international transactions. The assessee, engaged in the manufacturing and export of cut and polished diamonds, initially used the Cost Plus Method (CPM) for computing ALP. However, the Transfer Pricing Officer (TPO) rejected this method due to insufficient data and instead adopted the Transaction Net Margin Method (TNMM). The TPO's application of TNMM, which compared entity-level operational margins to sales, was found to be incorrect by the Tribunal. The Tribunal emphasized that TNMM requires comparison of net profit margins realized from specific international transactions, not overall enterprise-level profits. Consequently, the matter was remanded to the Assessing Officer for fresh adjudication, allowing the assessee to submit a new report under Section 92E and support its ALP with fresh comparables and documents.

2. Classification of Interest Income
The second issue pertains to whether the interest on Fixed Deposit Receipts (FDRs) should be classified as 'Business Income' or 'Income from Other Sources'. The Assessing Officer classified it as 'Income from Other Sources' due to the assessee's failure to provide evidence linking the interest income to business transactions. The Tribunal upheld this classification, stating that in the absence of required details, the Assessing Officer was justified in drawing an adverse inference.

3. Netting of Interest
This issue was rendered moot by the Tribunal's decision on the classification of interest income. The Tribunal noted that the netting of interest is covered against the assessee by the judgment of the Hon'ble Bombay High Court in the case of CIT v. Asian Star Co. Ltd., thereby rejecting this ground.

4. Exclusion of Export Receipts of Rough Rejection Diamonds from Total Turnover
The final issue concerns the exclusion of export receipts of rough rejection diamonds from the total turnover for computing deductions under Section 80HHC. The Tribunal found that the decision of the CIT(A) to exclude these receipts was incorrect. The Tribunal distinguished between negligible wastage (as in the case of Sheetal Mfg. Co.) and substantial exports of rough diamonds, which constituted 32.98% of the total turnover. The Tribunal held that such high percentages could not be considered 'scrap' or 'sales returns' and directed the Assessing Officer to verify whether the rough diamonds were returned to the same party at the same cost to qualify as sales returns. The matter was remanded for fresh adjudication, requiring the assessee to produce adequate evidence.

Conclusion:
The appeal by the revenue was allowed for statistical purposes, with directions for fresh adjudication on the issues of transfer pricing adjustment and the exclusion of export receipts of rough rejection diamonds. The Tribunal upheld the classification of interest income as 'Income from Other Sources' and rejected the ground related to the netting of interest.