TMI Blog2010 (8) TMI 749X X X X Extracts X X X X X X X X Extracts X X X X ..... is 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He observed from the order passed by the TPO under section 92CA(3) of the Act that the TPO has passed the order with an adjustment of Rs. 2,02,37,536. The Assessing Officer confronted the same to the assessee. Rejecting the various explanations given by the assessee, the Assessing Officer computed the total income of the assessee after making adjustment of Rs. 2,02,37,536 under section 92C(4) read with section 92CA(3) of the Act. While doing so, he further held that the assessee is not eligible for deduction under section 10A on enhanced profit/income as per the proviso to section 92C(4) of the Act. 3. Before CIT(A) it was submitted that the assessee has maintained proper records, it has selected most appropriate method i.e., Cost Plus Method, selection of profit level indicator i.e., gross profit mark up and has submitted and produced all necessary records and details as required by the TPO. It was submitted that the assessee has proved that the international transactions are at Arms Length. According to the assessee the margin of cost of AEs is 7.95 per cent as against 7.12 per cent with non-AEs. It was submitted that as per the provisions of section 92C(3) once the prim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess of the assessee. In case of Sovereign Diamonds Ltd., it is engaged in the business of diamonds but the result shown by it is beyond any norms and standards of the industry since the GP margin on cost has been declared at 53.81 per cent which is unusual, unique, unbelievable and to some extent an absurd result. However, the fourth company i.e., Moon Diamond India Ltd., can be considered as comparable whose gross profit margin on cost as worked out by the TPO is only 7.38 per cent as against 7.95 per cent declared by the assessee. 7. The assessee further relied on the provisions of section 10B(2) which lays down the criteria for comparability between international transactions and uncontrolled transactions. Without prejudice to the above, it was submitted that if the external comparables of the four companies as taken by the TPO are accepted as correct then also the TPO cannot make adjustment by applying the simple arithmetic mean of gross profit margin of the four companies and the TPO has to consider weighted average arithmetic mean which according to the assessee was 12.27 per cent, as per the chart produced before the CIT(A). Since the assessee has declared gross profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 900582 7900582 Stock adjustment -273648 -273648 -273648 152726522.86 152726522.86 152726522.86 Gross Profit 6599477.14 16876280.78 (1.05%* 152726522.86/100) 8396140.60 Gross Profit/Cost % 4.32% 11.05% 5.50% 10. He accordingly determined the adjustment in the international transactions of the assessee at Rs. 17,96,653.46 as against Rs. 2,02,37,536 determined by the Assessing Officer. 11. Aggrieved with such order of the CIT(A) the revenue is in appeal before us with the following grounds: ( i )On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing to reduce the adjustment in international transaction of the assessee company from Rs. 2,02,37,536 to Rs. 17,96,663.46 without appreciating the facts of the case. ( ii )The appellant prays that the order of the CIT(A) on the above grounds to be set aside and that of the ITO/AC/DCIT be restored. 12. The assessee has also filed the CO with the following grounds: 1.The Ld. CIT(A) erred in rejecting the assessee s contention that the provision of section 92C cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd provisions of section 254(1) are in favour of the assessee. 1. Assam Co. (India) Ltd. v. CIT [2002] 256 ITR 423 (Gau.). 2. CIT v. Gilbert Barker Manufacturing Co., USA [1978] 111 ITR 529 (Bom.). 3. CIT v. Smt. S. Vijayalaxmi [2000] 242 ITR 46 (Mad.). 15. The learned DR, on the other hand, had strongly opposed the condonation petition. As regards the contention of the assessee regarding Rule 27, he submitted that there is no specific ground decided against the assessee, therefore, Rule 27 is not applicable. Referring to the decision of the Hon ble Gauhati High Court reported in Assam Co. (India) Ltd. case ( supra ) he submitted that it does not give right to the respondent. 16. Arguing on merit, the learned DR submitted that the Assessee has purchased goods from and sold to its AEs and has adopted the Cost Plus Method. He submitted that the CIT(A) was not justified in adopting the weighted average method. He also should not have excluded Sovereign Diamond Ltd. from the comparables adopted by the TPO. He submitted that although the four comparable cases as selected by the TPO are having similar functions still the CIT(A) excluded Sovereign Diamond Ltd. f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted that since the CIT(A) has given the finding that there is no functional difference in the four comparables since they are in the same business, therefore, only some adjustment could have been done and one comparable case should not have been excluded. As regards the contention of the learned counsel for the assessee that transfer pricing is not applicable to the assessee, he submitted that applicability of transfer pricing method when the difference is within 5 per cent was not before the Assessing Officer but before the CIT(A) only. He, however, submitted that since the CIT(A) has not considered the issue of non applicability of ALP in case the difference in the margin of profit is within the 5 per cent of the comparables, therefore, the issue may go back to him for fresh adjudication. 19. 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. After considering the reasons given in the condonation petition, the affidavit and the various decisions relied on by the learned counsel for the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt less or up to 5 per cent more than the price determined by the Assessing Officer. In such cases the price declared by the taxpayer may be accepted. ( ii )The provisions of section 92 and 92A to 92F come into force with effect from 1st April, 2002 and are accordingly applicable to assessment year 2002-03 and subsequent years. The law required the associated enterprises to maintain such documents and information relating to international transactions as may be prescribed. However, the necessary rules could be framed by the Board only after the Finance Bill received the assent of the President and have just been notified. Therefore, where as assessee has failed to maintain the prescribed information or documents in respect of transactions entered into during the period 1-4-2002 to 31-8-2002 the provisions of section 92C(3) should not be invoked for such failure. Penalty proceedings under section 271AA or 271G should also not be initiated for such details. ( iii )It should be made clear to the concerned Assessing Officers that where an international transaction has been put to a scrutiny, the Assessing Officer can have recourse to subsection (3) of section 92C only under the cir ..... X X X X Extracts X X X X X X X X Extracts X X X X
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