TMI Blog2011 (9) TMI 296X X X X Extracts X X X X X X X X Extracts X X X X ..... with the law, by way of a speaking order and after giving a reasonable opportunity of hearing to the assessee. - 5098 (MUM.) OF 2010 - - - Dated:- 7-9-2011 - PRAMOD KUMAR, R.S. PADVEKAR, JJ. ORDER Pramod Kumar, Accountant Member. ‑ By way of this appeal, the Assessing Officer has challenged correctness of CIT(A)'s order, dated 29-3-2010, in the matter of assessment under section 143(3) of the Income-tax Act, 1961 for the assessment year 2004-05, mainly on the following ground : On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the addition of Rs. 8,27,30,858 made by the Assessing Officer under section 92CA(3) by way of applying TNMM method with regard to the transactions with Associated Enterprises, without appreciating facts and circumstances of the case. 2. The assessee before us is engaged in the business of manufacturer and exporter of studded diamond and gold jewellery. During the relevant previous year, the assessee exported goods worth Rs. 29,92,83,448 to its associated enterprises abroad, out of a total turnover of Rs. 107,57,89,057. As its transactions with AEs were in excess of Rs. 5 crores, the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e again, the assessee did not give any details about comparable prices or evidenced the export price being the same as comparable uncontrolled price. No documentation whatsoever was produced to justify ascertainment of price as per comparable uncontrolled price. It was in this backdrop that the TPO rejected assessee's claim for the ascertainment of arm's length price by CPM so far as exports are concerned and ascertainment of arm's length price by CUP so far as imports and exports of diamonds are concerned. The TPO required the assessee to show cause as to why, given the above position, the arm's length price of international transactions by the assessee not be adopted on the basis of transaction net margin method (TNMM), and confronted the assessee with comparable figures of profit level indicator as operational profit /total cost in eighteen cases which averaged to 7.25%. As the assessee once again reiterated his arguments, without meeting the points raised by the TPO, the stand of the assessee was rejected. Accordingly, TPO proceeded to make an adjustment of Rs. 8,27,30,858 in the arm's length price of assessee's international transactions, and the sales to AEs was taken as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant. 2. The AO ought to have accepted the CUP Method to determine the arm's length price with the Associated Enterprises for the purchase and sale of diamonds used in the jewellery manufactured and exported by the appellant as the cup method is the most appropriate method in the circumstances of the appellant's case and it is based on cogent evidence. 3. On the facts and in the circumstances of the case and in law, the AO erred in rejecting the cost plus method to determine the arm's length price with the Associated Enterprises for the jewellery manufactured and exported by the appellant. 4. The AO ought to have determined the arm's length price by applying the cost plus method as the same is the most appropriate method in the circumstances of the appellant's case and it is based on cogent evidence. 5. The AO erred in applying the Transactional Net Margin Method to determine the arm's length price with the Associated Enterprises in respect of both purchase and sale of diamonds as well as sale of jewellery though the nature of the two transactions are entirely different. 6. The AO failed to appreciate that the Transactional Net Margin Method is not the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the orders, product mix etc can differ substantially more so when it concerns diamond industry. 2.8 Taking into account the above facts, I am of the opinion that the cost plus method adopted by the appellant company using internal comparables is correct as the appellant company is maintaining total cost details of the AEs and non AEs. As per details submitted by the AR of the appellant company, the assessee company has earned average gross margin on its AE transactions, whereas the assessee company has earned average gross margin of 14.80% on its non AE transactions. As the average margin earned from AE transactions is more than average margin earned from non AE transactions, no (ALP) adjustment is required to be made. Ground Nos. 1 to 9 are allowed. 5. The Assessing Officer is aggrieved of the relief so granted by the learned CIT(A), and is in appeal before us. 6. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 7. A plain look at the sequence of events shows that the first appellate authority completely missed the vital fundamental fact that TNMM was resorted to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort of determination of ALP of diamond imports and diamond exports, it is only elementary that in a situation where international transactions with AEs have three significant areas of impact on the overall profitability (i.e. sales of finished goods to AEs, sales of raw materials to AEs and purchase of raw materials of AEs), and when ALP cannot be reasonably determined by CUP or any other direct method (i.e. cost plus method and resale price method) in respect of even one of these areas, the application of TNMM or other indirect method (i.e. profit split method) is inevitable and it cannot be rejected. Once it is clear that there is no documentation available for determination of ALP, under CUP or any other direct method, of diamond imports and diamond exports, and even if we assume that the sales is at an ALP, it is inevitable that TNMM has to be applied anyway, unless, of course, profit split method is found to be appropriate. On a conceptual note, when arm's length prices of the transactions with AEs cannot be reasonably ascertained, the profit earned by the assessee entering into these transactions is to be estimated, and that is precisely what TNMM does. When TNMM is applied i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , though it "may have some persuasive efficacy". What is more important, however, is the fact that a five member bench of this Tribunal, in the case of Aztech Software technology Services Ltd. v ACIT (107 ITD SB 141), has held that it is not necessary to demonstrate tax avoidance motives before transfer pricing provisions can be enforced. The views so expressed by the larger bench bind us, and, respectfully following the same, we reject the technical objection raised by the learned counsel. 8. We now come to the question whether cost plus method, as claimed by the assessee and as applied by the assessee on the facts of this case, is sustainable in law. Let us begin by taking a look at the relevant statutory provision under Rule 10 B which provides as follows: (c) cost plus method, by which, (i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined; (ii) the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ongruities. For example, if our average mark up to unrelated enterprises is 20%, and we charge a mark-up of 2% in one transaction with AE and 38% in another transaction with the AE, both these transactions, by applying the mark up on global basis, will meet the test of ALP whereas in the first case, the mark up charged is certainly not a mark-up resulting in an ALP. In this particular case, for example, the normal mark up in transactions with has been computed at 16.31%, and the average of mark up on sales to AEs having been taken at 17.08%, entire sales to AEs has been taken at ALP, but, the mark up in the many cases is clearly less than benchmark. To give one example, at page 221 of the paper-book, margin of 14.15% (4 invoices), 13.95%, 13.81%, 14% (4 invoices), 14.14% (2 invoices), and 14.16% is given by assessee's own computation, and, on the same page, on one invoice, the assessee has shown a margin as high as 27%. The cost plus method, therefore, has not been correctly applied. In any case, one of the most important input, i.e. diamond, has been imported at a price for which no ALP documentation is available and the price of imports have been taken into account in computation ..... X X X X Extracts X X X X X X X X Extracts X X X X
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