TaxTMI 
TaxTMI 
2010 (4) TMI 704
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to the same entitles and others. During the previous year, the total turnover of the assessee company is Rs. 41.42 crores giving a net profit of Rs. 0.87 crores. The assessee has been availing exemption under the provisions of section 80HHC of the Income Tax Act in respect of the exports made by it. The assessee has been carrying on this business for more than 14 years. 4)One of the main partners of the assessee firm having 40% shares in the profits has a brother located at Belgium. The brother has the management and control over a firm in Belgium called Sunshine Gems. Hence, the assessee and the firm in Belgium are associated enterprises of one another in terms of section 92CA(2)(j) of the Income Tax Act. 3. The assessee contended before the TPO that, for the purpose of benchmarking the assesse's international transactions, none of the methods prescribed under the income tax act are applicable in its case. In the transfer pricing study report, the assessee for the reasons given therein i.e, impossibility of adopting one of the prescribed methods as the most appropriate methord, has not determined any ALP for its various international transactions. TPO at paragraph 9 responded a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hey are primarily engaged in job work. 3) The assessee has further considered the case of Dharamanandan Diamonds and contended that they are not comparable to the assessee in view of the fact that the quality of diamonds polished by them are of much superior level as compared to the assessee. Further, the assessee contends that they use a laser machine for the purpose of cutting and polishing whereas the assessee does not have such machines. In view of the same, the assessee contends that this company should not be considered as a comparable. 4) The assessee contends that if these two entities are removed from the list of comparables its operating profit margin would be comparable, to the operating profit margin. 15. The various contentions of the assessee are considered as follows :- 1) The assessee's contention regarding M/s. Hope India Polishing Works is accepted and the same is not included in the list of comparable cases. 2) The various objections raised by the assessee in connection with the Dhamanandan Diamonds are not acceptable. Under the transactional net margin method the only requirement is of functional comparability. The ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the T.P. Rules and Regulations. In view of his above findings, he deleted the addition of Rs. 1,69,91,181/-. 7. There was one more issue with regard to computation of relief u/s. 80HHC. Learned CIT(A), on the issue of treatment of exchange difference of earlier years, followed his Predecessor's order and granted relief. On the issue of head of income, under which, interest income is taxable, learned CIT(A) dismissed the claim of the assessee that the same is business income, Aggrieved, both the assessee and the revenue are in appeal. 8. The Revenue has filed its appeal on the following two effective grounds :- 1) That learned CIT(A) has erred in law and on facts in directing the Assessing Officer to delete the addition of Rs. 1,69,91,181/- being adjustment to the value of international transactions with associated enterprise which was made u/s. 92CA(3) as per order of the Addl.CIT TP-III dated 15.3.2005. 2) That the learned CIT(A) has erred in law and on facts in directing the Assessing Officer to consider foreign exchange rate difference gain of Rs. 24,17,607/-, pertaining to the exports of earlier years as part of export turnover for the purpose of deduction ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re in fact with associated enterprises as denned in section 92A of the Act. The assessee had voluntarily filed Transfer Pricing Repot in Form No. 3CEB for transactions with the A.E. Thus, this issue is not before us and we cannot comment on the same. There is no dispute raised by the assessee in this regard. Coming to the issue of determination of ALP, we agree with the findings of TPO at paragraph No. 9 of her order, which is already extracted in para 3 of this order. It is mandatory under special provision stipulated in Chapter-X of the Income Tax Act, 1961, to compute the ALP in one of the methods specified under Statute. Section 92(1) reads as follows :- Meaning of international transaction. 92B. (1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutua....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion of income ALP by TPO,as well as by the assessee, we find that TPO has adopted enterprises level operating margins, as TNMM for the purpose of comparison. In our considered opinion, Transactions Net Margin Method (TNMM) does not permit the assessee or the Assessing Officer, to compare enterprise level profits and make adjustments under Chapter-X. This Bench of the Tribunal in ITA No. 5034/Mum/07 dated 15.2.2010, *L' Bench in the case of Addl. CIT Vs. M/s. Tej Diam at paragraph 6 onwards held as follows :- "6. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and a perusal of the papers on record and the orders of the authorities below, we hold as follows. 7. The following definitions are extracted for ready reference : Section 92F(ii) arm's length price: arm's length price" means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions." (v) - transaction. "transaction includes an arrangement, understanding or action in concert,- (A) whether or not such arrangement, understanding or action is formal or in writing; or (B) w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....emplated in the Act, we have no other alternative but to set aside her order. In any event, as the assessee has also not fulfilled its statutory obligations contemplated in Chapter-X of the Act, we deem it appropriate, under the facts and circumstances of the case, to set aside the matter, to the file of the Assessing Officer for fresh adjudication. As both the assessee as well as the Assessing Officer have not followed the law, in the interest of justice, we deem it appropriate to permit the assessee to furnish a fresh transfer pricing study report, in support of its contention, that the transactions with associated enterprises were in fact at arms length. We make it clear that the assessee would be entitled to furnish fresh information and documentation, or chose a fresh method as prescribed, as the most appropriate method, in support of its case. The Assessing Officer as well as the TPO shall examine the report as contemplated under Section 92E de novo, after giving appropriate opportunity to the assessee. We also agree with the arguments of learned counsel for the assessee that adjustments, if any, arising due to computation of ALP should be restricted only to the international....