TMI Blog2013 (11) TMI 1620X X X X Extracts X X X X X X X X Extracts X X X X ..... as worked out by any of the two methods being within the safe harbor limit of 5% that the price charged by the assessee, no TP adjustment is required to be made in respect of the transactions of the assessee company with its AEs of import and export of cut and polished diamonds. On verification, if it is found that the difference is less than 5% as claimed by the assessee, the A.O. shall not make any TP adjustment in respect of transactions of the assessee with its AEs of export of cut and polished diamonds. Ground No. 1, 2, 4 & 5 of the assessee’s appeal for A.Y. 2008-09 are accordingly treated as allowed as indicated above. Addition made by the Assessing Officer/TPO by way of transfer pricing adjustment on account of notional interest on outstanding AE debtors - Held that:- The assessee in this regard has submitted that the relevant copies of invoices were filed by the assessee before the A.O. showing that the credit period allowed was 180 days to both the AEs and non-AEs. He has submitted that the A.O., however, brushed aside the same on the basis of finding given by the TPO that the assessee has granted excess credit period to its AEs by 85 days vis-a-vis credit granted to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment given to the bank than the one shown by the assessee in its books of accounts. In our opinion, the burden in this regard is on the assessee to prove which of these two values is correct by providing the relevant details regarding the basis adopted for the said valuation. Since this has not been done by the assessee, we are of the view that this issue needs to be set aside to the A.O. to give one more opportunity to the assessee to explain the basis of valuation. Accordingly, this issue is set aside to the file of A.O. with a direction to the assessee to furnish the relevant details in order to explain the basis of valuation of the closing stock adopted by it. The A.O. shall verify the details furnished by the assessee in this regard and decide the issue accordingly. Disallowance of 60% of residential telephone expenses - CIT(A) restricted the said disallowance to 30% - Held that:- No record was maintained by the assessee to show that the expenses incurred on residential telephones of the partners were wholly and exclusively for the purpose of its business. As rightly held by the A.O., personal use of residential telephones by the partners in the absence of such record could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e had made export of cut and polished diamonds to its AEs namely Prism Diamonds, USA and Bhansali Co., Hongkong amounting to ₹ 7,10,78,575/- and ₹ 52,92,74,437/- respectively. These international transactions of the assessee company were referred by the A.O. to the TPO along with other international transactions for the determination of the Arm s Length Price (ALP). In the transfer pricing study report, the assessee had used profit split method as the primary method of benchmarking supported by TNMM. It had selected 11 comparables and since the average (arithmetic mean) OP/OC of the said comparables at 6.64% was less than OP/OC of the assessee at 7%, it was claimed that the international transactions of the assessee with AEs were at arm s length. It was also reported that the average OP/TC of the said eleven comparables at 6.18% was less than OP/TC of the assessee company at 6.54%. In so far as the profit split method adopted by the assessee, the TPO was of the view that the case of the assessee was not that of unique transaction. He also noted that the relative contributions made by each of the AEs to the earning of combined net profit had not been evaluated on the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot considered as a comparable. 5. Sunraj Diamond Exports Ltd The company is into trading in cut and polished diamonds. The RTPs constitute less than 25% of the revenues.RTPs-Rs Nil. As the company is not functionally similar, the same is not considered as a comparable. 6 Zodiac-JRD-MKJ Ltd. The company is mainly into trading in cut and polished diamonds. The RTPs constitute less than 25% of the Revenues. RPTs Rs. Nil. As the company is not functionally similar, the same is not considered as a comparable. 5. After adding one new comparable to the remaining five comparables selected by the assessee, the average ROCE of these final six comparables was worked out by the TPO at 8.93% as under:- Seg AIRTHMETICAL MEAN FINAL COMPARABLES PROCESSING SALE OF DIAMONDS 8.93% S. NO Company As on 31-03-2008 As on 01-04-2007 Average capital Operating revenues Operating profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28108.01 26382.51 27245.26 124684.99 6711.00 24.63% AIRTHMETICAL MEAN 8.93% 6. The assessee raised various objections to the comparability analysis made by the TPO taking ROCE as PLI which were not found suitable by the TPO on the following grounds:- Sr. No Assessee s objections Rebuttal A B To the sudden change of PLI from OP/TC and OP/Sales to ROCE. Unsuitability of ROCE as a PLI for assessee s industry. C. Assessee s plea that depreciation bank charges and bad debts be considered as non-operational expenses. The taxpayer considered operating profit to total cost as the appropriate profit level indicator, however it has been seen that this industry is highly working capital intensive. The levelof sundry debtors and inventories are very high in this industry. Further, the value addition as well as wmployee cost as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of excess credit period givrn to the AEs as detailed in the letter dated 20.10.2011 is as follows:- In your letter dated 14-10-2011 you had submitted that total outstanding debtors on 31.03.2008 were ₹ 93.66 crores, out of which debtors relating to AE were ₹ 4.50 crores only. I find that your submission is incorrect and misleading. A perusal of sundry debtors show tha your AE M/s Bhansali co., HK were outstanding to the tune of ₹ 27.76 crores as on 31.03.2008, particularly whrn the sales made to this entity was ₹ 52.91 crores. Your non AE sles were ₹ 199.66 crores (total sales ₹ 259.65 crores, AE sales ₹ 60.02 crores) However, non AE outstanding debtors from out of ₹ 199.66 crores are ₹ 61.40 crores (Rs.93.66 crores being total sundry debtors less ₹ 32.26 crores being AE debtors). This shows that your non AE debtors have actually availed of lesser credit period than your AEs. Please provide evidence relating to stipulated credit period to AEs as well as non AEs. In an arms lengths situation, comparabitlity can be established whe the AEs as well as non AEs are being granted equivalent credit period. Therefore, I wish to m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the AE and not on the entire business of the assessee. The assessee has used the PLI as OP/TC over the past `several years in determining the ALP. The assessments for earlier years were also assessed by the TPO and this method was deemed appropriate. In the instant assessment year, the TPO has rejected OP/TC and used PLI as RoCE. For the reasons stated in the order. In the Gems and Jewellery industry, there are distortions in R0CE due to ageing of assets. These distortions cannot be identified and eliminated in schedule VI of the Balance Sheet. Further there are distortions due to location of units which cannot be identified and eliminated in a Schedule VI prepared Balance Sheet. Further unproductive assets cannot be so identified. Therefore, ROCE as a concept is not suitable to Jewellery Manufacturing and Sales units. Therefore, the choice of PLI is incorrect for the industry in which the assessee operates. From the list of 11 comparables selected by the assessee, Karp Impex Ltd. has been incorrectly excluded. As per the financials of Karp Impex Ltd - Notes to Accounts - clearly state the Company operates in one segment i.e. manufacturing and selling a single product i. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a CUP. The assessee was not given the working of 12% and asked to show cause why this rate should not be used. Therefore, the assessee has no opportunity to determine the adequacy of this method for CUP. 9. The DRP did not find the above objections raised by the assessee to be sustainable and overruling the same, the TP adjustment of ₹ 4.81 crores was held to be proper by DRP for the following reasons given in para 3.3 of its impugned order:- We have considered the TPO s order and the assessee s submissions. Considering the TP rules, the trends in the assessee s line of business, the FAR analysis and other facts brought on record by the TPO, we agree with the methodology. The profit split method used by the assessee has been rightly substituted by the TPO. There are no unique transactions in the assessee s case and the respective contributions by the AEs to the group s net profit have not been determined on a scientific FAR analysis. The results are also not benchmarked with data from third parties. In these circumstances, the TPO has rightly held that TNMM is the most appropriate method. The TPO has given detailed reasons for adopting the RoCE as the most appropriat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s than 5%, no adjustment would be required to be made as per the proviso to section 92-C of the Act. He further submitted that the OP/TC is actually more appropriate price level indicator in the facts of the assessee s case and the same has been accepted by the Assessing Officer/TPO in assessee s own case for the earlier years. He submitted that if the said PLI is used by adopting the consistent approach, the arithmetic mean of OP/TC of the comparables selected by the TPO would come to 7.60% as against 6.82% that of the assessee. He invited our attention to the working furnished in this regard at page 7 8 of the paper book and submitted that if the difference of 0.78% is adjusted, the ALP of the relevant international transactions made by the assessee with its AEs would come to ₹ 60.48 crores as against ₹ 60.04 crores and this difference being less than 5%, no adjustment would be required on account of transfer pricing as per the proviso to section 92-C of the Act. In support of this contention, the ld. counsel for the assessee relied on the decision of co-ordinate Bench of this Tribunal in the case of M/s Ratilal Becharlal Sons vs. JCIT rendered vide its order date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Difference in ROCE E=D-C 2.01% 2.01% 2.01% Adjustment to Export sales F=E*B 1.11 3.70 4.81 Arm s length Sales G=A+F 61.15 203.31 264.46 Range of Arms Length Price considering 5% Variation from ALP +5% 64.21 277.69 -5% 58.10 251.24 13. A perusal of the above working shows that if the difference of 2.01% in ROCE is applied to the average capital employed at ₹ 55.37 crores for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is 6.82%as shown in the following working furnished by the assessee:- Particulars Amount (INR) Income Sales 2,596,478,466 Other income 27,480 Total Income ,2,596,505,946 Expenditure Cost of goods sold 2,164,488,618 Administrative other expenses (includes Bank charges and basd debts) 79,526,805 Increase/(decrease) in stock 176,757,200 Depriciation 10,002,802 Total Expenditure 2,430,775,425 Net operating Profit 165,730,521 OP/TC (%) 6.28 15. The OP/TC of the assessee thus is lower by 0.78% (7.60% (-) 6.82%) and if the adjustme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 63.50 -5% 57.45 16. As the ALP of the relevant transactions of the assessee company with its AEs as worked out above at ₹ 60.48 crores is within the range of safe harbor limit of 5% as stipulated in proviso to section 92-C of the Act, no TP adjustment is required to be made to the transactions of the assessee company with its AEs of export of cut and polished diamonds as rightly contended by the ld. counsel for the assessee. 17. At the time of hearing before us, the ld. D.R. has not raised any material contention to dispute the propositions put forth by the ld. counsel for the assessee duly supported by the working furnished by him showing that the ALP of the international transactions of the assessee company with its AEs of export of cut and polished diamonds would be within the range of safe harbor limit of 5% as stipulated in the proviso to section 92-C of the Act going by any of the two methods adopted for the purpose of comparability analysis. He, however, has contended that this working furn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... show that credit period given to AE and non-AE is 180 days. This submission has not been taken on record by the TPO. As the credit period given in both cases is the same, the same is at ALP and there should be no interest charge in respect of the delayed receivables. As regards the outstanding debtors, the total outstanding debtors as on 31st March, 2008 from the AE were ₹ 32.26 crores. In respect of the outstanding debtors from the AE, the assessee confirms that all sales in respect of which the debtors are outstanding have occurred on or after October the details of which have already been furnished to the Assessing Officer. The use of the debtors/turnover ratio is not relevant as sales have occurred at different times during the year to the AE and non-AE. The terms of credit are equivalent of 180 days to both the AE and non-AE. Therefore, if an export has been made on l October by the assessee firm, any realization received by 3l March of the following year is deemed to have been received within time. As stated above, in the instant case, the outstanding debtors for the AE are for sales made on or after l October and therefore, are at arm s length with the credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the excess credit period allowed. 22. We have heard the arguments of both the sides and also perused the relevant material available on record. It is observed that the specific direction was given by the DRP to the A.O. after considering the objection raised by the assessee to verify that the credit period granted to AEs and non-AEs was at par. The A.O. was also directed by the DRP that if the claim of the assessee was found to be correct, no adjustment would be required to be made on this issue. The ld. counsel for the assessee in this regard has submitted that the relevant copies of invoices were filed by the assessee before the A.O. showing that the credit period allowed was 180 days to both the AEs and non-AEs. He has submitted that the A.O., however, brushed aside the same on the basis of finding given by the TPO that the assessee has granted excess credit period to its AEs by 85 days vis-a-vis credit granted to third parties and made the addition on this issue without giving the assessee an opportunity to establish its claim on further evidence that the credit period allowed to both AEs and non-AEs was at par. He has submitted that the assessee is in a position to establi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng year, the labour payments for the AD, Surat have increased from ₹ 810 per Carat for the month of April 2006 to ₹ 910 per Carat for the month of March 2007. The assessee has paid AD, Surat at the rate of ₹ 910 per Carat for the period of January to March 2007. However, from the month of April 2007 to December 2007, the rates charged were ₹ 825 per Carat which have increased to Ps. 850 per Carat from January, 2008 to March 2008. There is no justification available the assessee for decrease or increase of rates. (vii) The assessee has got polishing work of 2586 Carats done from Shri Revabhai K. Desai, one un-related party, who has processed the rough diamonds at the average rate of ₹ 313.63 per Carat. It is seen that this party is also working for the assessee for the whole year and as in the case of AD, in case of this party also the party is raising monthly bills only. However, the labour rates of this party are varying over the year between about ₹ 275 per Carat to Ps. 487 per Carat and the average rate of ₹ 313.63 per Carat was charged. The assessee could not give any justification for this substantial difference between the rate cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 377; 5,64,000 as admitted by the assessee or ₹ 43,97,629/- as computed by the AO. Since the assessee has accepted to some addition, in the submissions made before the CIT(A), we cannot now, accept that there cannot be any addition. This observation gathers strength from the order of the CIT(A), wherein he observes, they have given no analysis of labour, wages, etc. paid and cost of cutting and polishing of diamonds. . . 12. In our opinion, neither the assessee has provided any comparable rates to the revenue authorities nor the revenue authorities have made any attempt either by asking the assessee to provide for the comparable nor they suo moto collected any data from the market. What the revenue authorities have done is that they have relied on the internal comparable only to arrive at a figure of estimated charges per carat. In fact, the AO should have collected independent data or have asked the assessee to provide comparable periodic rates prevailing in the market at Deesa to set the bench mark. This exercise has not been done by the AO or by the CIT(A), which according to us, the revenue authorities should have done to arrive at some definite estimate. 13. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diamonds is eligible for deduction u/s 80IA of the Act. A perusal of the order of the Tribunal, however, shows that although a reference in the said order was made by the Tribunal to the decision of Hon ble Supreme Court in the case of Gem India Manufacturing Co. (supra), the tribunal finally relied on the decision of Hon ble Bombay High Court in the case of CIT vs. London Star Diamond Co. (India) Ltd. 213 ITR 517 (Bom) and that of Hon ble Supreme Court in the case of ITO vs. Arihant Tiles Marbles Pvt. Ltd., 320 ITR 79. It is, however, observed that in the case of London Star Diamond Co. (India) Ltd. (supra), it was held by the Hon ble Bombay High Court that the activity of cutting and polishing of diamond would definitely constitute processing and relying on the same, it was held by the Tribunal in the case of Sheetal Diamonds Ltd. that the assessee was entitled to deduction u/s 80IA of the Act as the processing or production of articles is also eligible for deduction u/s 80IA of the Act. In the case of Arihant Tiles Marbles Pvt. Ltd. (supra), the issue before the Hon ble Supreme Court was whether cutting and polishing of marble slabs into marble tiles would amount to manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the said quantity which is higher in the case of statement given to the bank than the one shown by the assessee in its books of accounts. In our opinion, the burden in this regard is on the assessee to prove which of these two values is correct by providing the relevant details regarding the basis adopted for the said valuation. Since this has not been done by the assessee, we are of the view that this issue needs to be set aside to the A.O. to give one more opportunity to the assessee to explain the basis of valuation. Accordingly, this issue is set aside to the file of A.O. with a direction to the assessee to furnish the relevant details in order to explain the basis of valuation of the closing stock adopted by it. The A.O. shall verify the details furnished by the assessee in this regard and decide the issue accordingly. Ground No. 9 of assessee s appeal is accordingly treated as allowed for statistical purpose. 34. The issue raised in ground No. 10 relating to the disallowance of assessee s claim for deduction u/s 80G of the Act is not pressed by the ld. counsel for the assessee at the time of hearing before us. The same is accordingly dismissed as not pressed. 35 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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