2010 (8) TMI 749 - AT - Income Tax

Condonation petition - HELD THAT - There is a delay of 489 days in filing of the CO by the assessee. After considering the reasons given in the condonation petition the affidavit and in the view of the principles laid down in the case N. Balkrishnan V.M. Krishnamurthy 1998 (9) TMI 602 - SUPREME COURT Vasu Co. v. State of Kerala 2001 (6) TMI 796 - KERALA HIGH COURT the delay in filing of the CO is condoned as the assessee is not otherwise gaining more as he can also take shelter of Rule 27. Adjustment (international transaction) in the ALP - comparable cases - Assessee has purchased goods from and sold to its AEs and has adopted the Cost Plus Method. Referring to provisions of section 92C(2) he submitted that there is no scope for the CIT(A) to adopt weighted average method since the Act provides only simple arithmetic mean. HELD THAT - we find the AO made the addition on the basis of the order of the TPO who had selected four parties as comparable cases for the T.P. study. We find out of the four companies namely Moon Diamonds (India) Ltd. Deep Diamonds (India) Ltd. Shantivijay Jewels Ltd. and Sovereign Diamonds Ltd. the CIT(A) considered the first three parties as comparables and he accepted the contention of the assessee that Sovereign Diamonds Ltd. cannot be compared because it is engaged in the business of diamonds and the results shown by it i.e. G.P. of 53.81 per cent on cost is beyond the norms and standards of the industry. In our opinion Sovereign Diamonds Ltd. showing a gross profit margin of 53.81 per cent cannot be considered as a comparable which shows abnormal profit which is beyond the norms and standards of the industry. Similarly in view of the wide variations in various parameters of the comparables weighted average in our opinion should be adopted as against simple arithmetic average adopted by the AO. We therefore do not find any infirmity in the order of the CIT(A) to this extent and the grounds raised by the revenue have to be dismissed. Applicability of the Board circular - CIT(A) while deciding the issue has not considered the CBDT circular according to which no adjustment to the ALP can be made where the difference in the margin is within 1 5 per cent of the price determined by the AO. HELD THAT - It is the settled proposition of law that the Board s circulars are binding on the Department. We find although the CIT(A) has discussed the issue he however has not given any specific finding whether the assessee s case is covered by the Board s circular. It is the submission of the learned DR that since this issue was not before the AO and the assessee has raised the issue before the CIT(A) for the first time who has not given any decision on this issue therefore the matter may be restored to the CIT(A) for adjudication on this issue. However considering the totality of the facts of the case we are of the considered opinion that this issue i.e. applicability of the Board circular No. 12/2001 to the facts of the case of the assessee should be restored to the file of the AO since it requires certain calculations and verifications. We therefore restore the matter to the file of the AO for fresh adjudication of the issue. The grounds raised by the revenue on this issue are dismissed and the CO filed by the assessee is allowed for statistical purposes.

Issues Involved:
1. Adjustment of Arm's Length Price (ALP) in international transactions.
2. Eligibility for deduction under section 10A on enhanced profit/income.
3. Comparability of external and internal data for determining ALP.
4. Application of weighted average method versus simple arithmetic mean.
5. Exclusion of certain comparables due to abnormal profits.
6. Adherence to CBDT circular No. 12/2001 regarding ALP adjustments.
7. Delay in filing Cross Objection (CO) by the assessee and its condonation.

Detailed Analysis:

1. Adjustment of Arm's Length Price (ALP) in international transactions:
The Assessing Officer (AO) made an adjustment of Rs. 2,02,37,536 to the ALP of the assessee's international transactions. The Transfer Pricing Officer (TPO) had selected four comparables, but the CIT(A) reduced the adjustment to Rs. 17,96,663.46. The CIT(A) held that the TPO was justified in computing the ALP but erred in taking the simple average of gross profit margins. Instead, the CIT(A) adopted the weighted average method, excluding Sovereign Diamonds Ltd. due to its unrealistic gross profit margin of 53.81%.

2. Eligibility for deduction under section 10A on enhanced profit/income:
The AO held that the assessee was not eligible for deduction under section 10A on the enhanced profit/income as per the proviso to section 92C(4) of the Income-tax Act, 1961. This issue was not specifically addressed in the final judgment.

3. Comparability of external and internal data for determining ALP:
The assessee contended that internal comparables should be preferred over external comparables, citing OECD guidelines. The TPO, however, relied on external comparables. The CIT(A) accepted the assessee's contention in part, excluding Sovereign Diamonds Ltd. but retaining the other three comparables.

4. Application of weighted average method versus simple arithmetic mean:
The CIT(A) held that the weighted average method should be used for a more accurate comparison, as it accounts for variations in figures among comparables. This approach was upheld by the tribunal, which found no infirmity in the CIT(A)'s findings.

5. Exclusion of certain comparables due to abnormal profits:
The CIT(A) excluded Sovereign Diamonds Ltd. from the comparables due to its abnormal gross profit margin, which was considered unrealistic and beyond industry norms. This exclusion was upheld by the tribunal.

6. Adherence to CBDT circular No. 12/2001 regarding ALP adjustments:
The assessee argued that no adjustment should be made to the ALP if the difference is within +/-5% of the price determined by the AO, as per CBDT circular No. 12/2001. The CIT(A) discussed the circular but did not give a specific finding. The tribunal restored this issue to the AO for fresh adjudication, emphasizing the need for calculations and verifications in light of the circular.

7. Delay in filing Cross Objection (CO) by the assessee and its condonation:
The assessee filed the CO with a delay of 489 days, citing changes in management and subsequent advice from consultants. The tribunal condoned the delay, considering the reasons provided and relevant judicial precedents.

Conclusion:
The tribunal dismissed the revenue's appeal and allowed the assessee's CO for statistical purposes. The matter regarding the applicability of the CBDT circular was remanded to the AO for fresh adjudication. The tribunal upheld the CIT(A)'s decision to use the weighted average method and exclude Sovereign Diamonds Ltd. from the comparables.

← Previous Next →