TMI Blog2010 (4) TMI 704X X X X Extracts X X X X X X X X Extracts X X X X ..... - assessee has placed certain monies with the Bank as FD and these deposits were kept as margin money for availing facilities from the bank - The Jurisdictional High Court in the case of Indo Swiss Jewels Ltd. & Another, 284 ITR 389 (Bom) – It was held that such interest income, is to be assessed only as income from business – Decided in the favour of the assessee Regarding exclusion of 90% of such income from profits of business while computing relief u/s. 8OHHC - The Hon'ble Bombay High court in the case of CIT-III Vs. Asian Star Co. Ltd (2010 -TMI - 77709 - BOMBAY HIGH COURT),held that only 90% gross interest is to be eliminated - In the result, both these appeals are allowed for statistical purposes - ITA No. 925 and 2279/(Mum.) of 2006 - - - Dated:- 20-4-2010 - ORDER PER J. SUDHAKAR REDDY, AM :- These are cross' appeals directed against the order of learned CIT(A)-XVII, Mumbai dated 23.1.2006 for A.Y. 2002-03. 2. Facts in brief : The assessee is a partnership firm and in the business of import, manufacture and export of diamonds and Jewellery. During the year, the assessee has shown export sale of polished diamonds and claimed deduction u/s. 80HHC. The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, then the assessee may justify the ALP, determining the same under the transactional net margin Method. Further as the assessee had contended that the import of rough diamonds was examined by the customs authorities. It was requested to provide details of any valuation report or other order passed by the customs authorities in particular in respect of its transactions during the relevant previous year." 4. Thereafter, the TPO found that the assessee had compared, his profit margin at the entity level, with another comparable company i.e. M/s. Suraj Diamonds and justified its international transactions with its associated enterprise, as having been done at ALP. TPO thereafter collected information, data etc. from, among other firms, engaged in the activities of cutting and polishing diamonds and also of exporting the same. After taking larger sample of comparables, TPO, made certain adjustments, by observing that operational profit to sales ratio, averages to 9.57%, when all the comparables are taking into account and whereas operational profit of cost ratio, averages to 11.28%, on these very comparables. The assessee was given an opportunity. The submissions of the assessee and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Diamonds are engaged in related party transactions. Hence, these two entities cannot be considered as comparables as they are not uncontrolled transactions. 6) Some minor mistakes in the calculation of profit margins were found and the same have been corrected. The operating profit is calculated by considering the net profit before interest and sale tax. To the said profits, all non operating expenses are added and non operating incomes are excluded there from. The cost base considered is all costs excluding non operating costs. The revenue based considered is all revenue excluding non operating income such as interest, dividend etc.. As already stated the assessee was given full opportunity to examine all the balance sheets and take a copy-thereof. 5. Thereafter, the TPO made an adjustment of Rs. 1.69 crores on purchase or alternatively an adjustment of Rs. 2.16 crores on sales. The Assessing Officer after giving an opportunity to the assessee, adopted report of TPO and made an addition of rupees 1.69 crores. 6. On appeal by the assessee, First Appellate Authority considered the objections of the assessee and by not disturbing the methodology adopted by the TPO, came t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said method was not an appropriate method. b) In using comparables for the TNMM that were not strictly comparable to the business income the appellant. In particular, in not including the results of Akshay Diamonds and Blue Star Industries merely on the grounds they had related parties. c) In suggesting that the Comparable Uncontrolled Price (CUP) method was the most appropriate method for arriving at ALP and sending show cause notice to appellant of her proposal to use CUP as the most appropriate method but in not ultimately using the same when the appellant had shown how the transactions with the AE were at ALP using the CUP method as suggested by the Assessing Officer. 2) In holding that the interest income of Rs. 5,23,230/- was income from other sources' instead of business income', notwithstanding the nature of the deposits. Without prejudice in not allowing interest expenses as a deduction u/s. 57(iii) if interest income was chargeable as income from other sources, 10, We have heard Mr. Apurva Shah, learned counsel for the assessee and Mr. Aarsi Prasad, learned DR. On careful consideration of the facts and circumstances of the case, perusal of the papers on record an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly (e) comparable uncontrolled price method; (f) resale price method; (g) cost plus method; (h) profit split method; {e) transactional net margin method; (/) such other method as may be prescribed 22 by the Board. Rule 10B reads as follows : Determination of arm's length price under section 92C,10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely 11. Plain reading of the above provisions in the Act as well as in the Rules, show that it is mandatory for the assessee, to follow one of the prescribed method and demonstrate that the international transactions, entered into by it, with an associated enterprise, are at Arms Length Price. By simply saying that none of the methods can be applied and citing excuses for the same, in our considered opinion does not absolve the assessee of its statutory duty in determining ALP as per the law. In a number of cases, where different assesses, are having similar lines of business, transfer pricing report has been filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (Hi); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction. A plain reading of the above shows that TNMM requires comparison of net profit margins realised by an enterprise from an international transaction or an aggregate of international transactions and not comparisons of operating margins of enterprises. For arriving at this conclusion, we drew strength from the decision of Mumbai 'L' Bench of the Tribunal in the case of UCB India P. Ltd. vs. ACIT 121 ITD 131 (Mum.) where it is held that section 92C read with Rule 10B(l)(e) deals with Transactions Net Margin Method (TNMM) and it refers t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase, we find that the assessee has placed certain monies with the Bank as FD and these deposits were kept as margin money for availing facilities from the bank. Under such circumstances, The Jurisdictional High Court in the case of Indo Swiss Jewels Ltd. Another, 284 ITR 389 (Bom) and in the case of Lok Holdings, 308 ITR 356 (Bom) have held that under such circumastances.such interest income, is to be assessed only as income from business. Thus, this ground of the assessee succeeds. 15. Coming to exclusion of 90% of such income from profits of business while computing relief u/s. SOHHC.The Hon'ble Bombay High court in ITA No. 200 of 2009 in the case of CIT-III Vs. Asian Star Co. Ltd, order dated lS-^* March 2010, held that only 90% gross interest is to be eliminated. The decision of Special Bench of the Tribunal in the case of Lai Sons, 89 ITD 25 (SB) has been overruled. In view of the above binding decision, we reject this contention of netting made by the assessee. In the result, Ground No. 1 of the assessee's appeal is allowed for statistical purposes and Ground No. 2 is allowed in part. Coming to Ground No. 2 of the revenue's appeal, both the parties submitted that this ..... X X X X Extracts X X X X X X X X Extracts X X X X
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