TMI Blog2013 (11) TMI 520X X X X Extracts X X X X X X X X Extracts X X X X ..... t available on record and further the said company is having a SEZ unit; therefore, in the facts and circumstances, these aspects are required a proper verification and examination. As regards the exceptional result, this issue is now settled by various decisions of this Tribunal that the factors for determining inclusion or exclusion of any case in the list of comparables are specifically provided under Rule 10B(2). Therefore, unless and until there are specific reasons and factors as provide under the Rule 10B, an entity cannot be excluded or eliminated from the list of comparables solely on the basis of high profit making or loss making entity because no such factor finds place either in Rule 10B(2) or 10B (3) of IT Rules. Exclusion of foreign exchange gain - Foreign currency exposure - Export and import of diamonds with AEs - Forward contracts - Held that:- It is clear that in case of hedging of foreign currency exposure on the underlining trade receivable or payable the profit of loss will be treated in the same way in determining the net profit - In view of the facts that the assessee has entered into forward contracts for the purpose of hedging of foreign currency expo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.7.2012 passed u/s 144C(5) of the I T Act for the AY 2008-09. 2. The assessee has raised the following effective grounds in this appeal: "1. Transfer Pricing Adjustment: Rs. 10,81,72,606/- On facts and in the circumstances of the case and in law, the learned Transfer pricing Officer ('ld. TPO') and the ld. AO under the directions issued by the Hon'ble DRP, erred in computing the arm's length price of international transaction and confirming the adjustment of Rs. 10,81,72,606/- to the Appellant's total income based on the provisions of Chapter X of the Act. 2. Adjustment should be restricted to the extent of international transactions with AE. On the facts and in the circumstances of the case and in law, the Id. TPO erred in and the Hon'ble DRP further erred in considering the entire turnover of the company while calculating adjustment. 3. Violation of provisions of Rule 10B(2) and 10B(3) and arbitrary rejection of comparables selected by the appellant and considered Goenka Diamonds Jewels Ld as a comparable to the appellant. On the facts and in the circumstances of the case and in law, the Id. TPO erred in and the Hon'ble DRP further erred in upholdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sons or conditions mentioned in clause (a) to (d) therein are not satisfied by the Appellant for determining the arm's length price. 10. Initiation of Penalty Proceedings On the facts and in circumstances of the case and in law, the Id. AO erred in initiating penalty proceedings under section 271(1)(c) of the Act as there has been no wilful concealment or has furnished inaccurate particulars during the course of assessment proceedings. Accordingly, penalty proceedings ought not to be initiated against the Appellant. Accordingly, we request your Honour to kindly direct the Id. AO to drop the penalty proceedings. 11. Incorrect Levy of interest under section 234B, 234C and 220(2) of the Act Without prejudice to the above or any other grounds, if the transfer pricing adjustment is sustained then the Id. AO has erred in levying interest under Section 234B and 234C of the Act to the extent the addition is made based on the updated financial data for the comparable companies." The other grounds raised by the assessee are argumentative in nature. 3 The assessee is a partnership firm and engaged in the business of manufacturing and import and export of cut and polish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dept. 2 Goenka Diamonds Jewels Ltd (SEg) 163.20 150.42 12.78 8.50 Dept 3 Mohid Diamonds P Ltd 215.08 202.08 13.00 6.43 Assessee 4 Su-Raj Diamonds Jewellery Ltgd (Seg) 759.26 737.51 21.75 2.95 Arithmetic Mean 315.57 302.49 12.99 5.40 Assessee 207.98 209.56 3.63 1.73 3.5 The TPO worked out the arithmetical means of 4 comparables at 5.40% as against the assessee's operating profit to sales of 1.73%. The TPO further proposed to exclude the foreign exchange gain of Rs. 5.20 crores to which the assessee objected vide letters dated 19.10.2011, 21.10.2011 and 24.10.2011. 3.6 The TPO held that the assessee has entered into forward contracts on a regular basis, which constitutes treasury operations and therefore, the same cannot be treated as part of their main business of manufacturing of diamonds. Accordingly, the foreign exchange gain of Rs. 5.20 crores was treated by the TPO as not forming part of the main business activities and hence, excluded f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the annual account whereas the said company is earning it major revenue from the trading activities. The assessee raised the objections against this company before the DRP; but the DRP while passing the directions has not considered the objections raised by the assessee. He has referred the page 4 of the DRP directions and submitted that the company has substantial income from trading activity. Further, the company has acquired 95% holding in a Russian company to procure a better quality of semi finished cut and polished diamonds at reasonable and attractive rates. It is a SEZ unit and getting various benefits like customs, octroi duty, concessional municipal/property taxes, cheaper finance at lower rates of interest, rebate of duty on electricity charges, easy availability of labour, lower sales promotion expenses etc., Thus, this company cannot be compared with non-SEZ entity like assessee. In support of his contention, he has relied upon the order of this Tribunal in case of Dy. CIT v. Indo American Jewellery Ltd. [2010] 41 SOT 1 (Mum.). 6.2 The ld Sr counsel has further contended that the said company carried out abnormal diamond trading activity during the FY 2007-08 as can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . v. Asstt. DIT in ITA No. 8997/Mum/2010. 6.6 Even otherwise exceptional results, as contended by the ld Sr counsel for the assessee are based on presumption whether these are in the segment of rough diamonds as it is not borne out from the accounts. 7. We have considered the rival submissions as well as the relevant material on record. The first objection of the assessee is against GDJL is that the said company has not reported the segmental financial and therefore, when more than 80% of the revenue of the said company is from the trading activity, the same cannot be compared with the assessee, who is in the business of manufacturing of diamonds. Undisputedly, the data available on record do not give segmental results of DGJL. The TPO has considered the segmental data and source of which is stated to be capitaline. Since the bifurcation of revenue and expenses are not based as per the accounts reported by the company; therefore, the authenticity of such bifurcated data is not free from doubt. Further, there is no dispute that the DGJL has a SEZ unit which is having benefit of concessional levy, duty taxes etc. Though, it is not clear from the records whether the diamond unit o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they suffer losses. 3.66 A similar investigation should be undertaken for potential comparables returning abnormally large profits relative to other potential comparables. Thus, it is clear that even the loss making or high profit making comparables that satisfy comparability analysis should not be rejected on the sale basis that they suffers loss or earned high profit. 7.3 We further note that even the assessee's own gross profit has increased from 2.4 crores in the preceding year to 4.4 crores which shows about 100% increase in the gross profit. 7.4 As regards the objection regarding acquisition of the Russian entity, we note from the record that the said entity was acquired on 10.3.2008; therefore, for the year under consideration, there cannot be any influence on the results of the comparable GDJL due to such acquisition at the fag end of the FY. 8. Ground no.4 is regarding exclusion of foreign exchange gain. 8.1 The assessee considered Rs. 5,20,70,149 as operating income on account of foreign exchange gain arising on forward contracts. The assessee contended that the exchange gain arising on cancellation of forward contracts are to be considered as part of ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ewal of forward exchange contract is recognized as income or as expenses. 9.1 The ld DR on the other hand has submitted that as per OECD guidelines on the Transfer Pricing, the foreign exchange gain or loss should be excluded or included depends on whether or not the tested party is responsible for the same. He has referred paras 2.82 of the OECD guidelines and submitted that when, as per the contract between and assessee and the AE, the AE has assumed the risk of foreign exchange fluctuation; then exchange gain cannot be included in the profit of the assessee for the purpose of determination of net margin. The ld DR has referred the TP study at page 10 of the paper book and submitted that risk of foreign exchange fluctuation upto 3% in USD is to be earned by the AE. Therefore, the same cannot be included to the profit of the assessee for the purpose of computation of operating profit of the assessee. 10. We have considered the rival submissions as well as the relevant material on record. The assessee has entered into forward contracts for the purpose of hedging of foreign currency exposure on export and import of diamonds with AEs. Therefore, the hedging of foreign currency ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontrary to the fact on record because vide letter dated 16.9.2011, the assessee recalculated the working capital adjustment with regard to the comparable companies. Therefore, after excluding the comparable company namely DGDJ, if any adjustment is made then the working capital adjustment has to be considered. Accordingly, this issue is set aside to the record of the TPO/Assessing Officer for considering the revised computation of working capital adjustment as produced by the assessee before the DRP. 13. Ground no.6 is regarding exclusion of fire damages. 13.1 The assessee stated before the TPO that on account of fire took place on 6.9.2006, the stock of ₹ 1,04,61,120 was lost. This amount has been written off in the books of account on 6.12.2007 and against it, an amount of Rs. 30,49,009/- has been received as claim from the Insurance company during the FY 2008-09. Accordingly, the assessee submitted that he stock of Rs. 1,04,61,120/- should be excluded as exceptional item of loss. However, the claim of the assessee was not accepted by the TPO on the ground that fire took place on 6.9.2006 which pertains to Financial Year 2006-07 and not FY 2007-08 which is under conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee what is the actual claim and grievance of the assessee. Accordingly, we set aside this issue to the record of the Assessing Officer/TPO to decide the same afresh after recording all the relevant facts. 16. Ground no.2 is regarding TP adjustments only in respect of transactions between the assessee and the AEs. 17. We have heard the ld Sr counsel for the assessee as well as the ld DR and considered the relevant material on record. There is no dispute on the point that the transfer pricing adjustment is required to be made only in respect of the transactions between the assessee and the AE and not in respect of the total transaction of the assessee including the transactions with non AEs. 17.1 Similar view has been taken by the coordinate Bench of this Tribunal in the case of Petro Araldite (P.) Ltd v. DCIT in ITA BNo.6271/Mum/2012 vide order dated 18.1.2013 as relied upon by the ld Sr counsel for the assessee in para 20 as under: "20. After considering the rival submissions and perusing relevant material on record it is seen that Chapter-X of the Act contains special provisions relating avoidance of tax. Section 92, which is the substantive section of Chapter, pro ..... 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