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TMI Blog2014 (9) TMI 1221X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act amounting to Rs. 2,04,37,007/- by erroneously rejecting the submission of the Appellant and on erroneous reading of the said section." 2. The assessee is an individual inter-alia carrying on business of diamond merchant under proprietary concern namely M/s. Dipti Diamonds. The assessee during the financial year under consideration has entered into following international transactions with its Associated Enterprises (AEs). 2.1 The PLI was taken as under: 2.2 The profit margin of the assessee was taken at 0.47% on cost. Six companies were considered as comparables whose Arithmetic Mean Margin was shown at 0.05% on cost and thus it was claimed that assessee's transaction with its AE were at Arms Length. In the order framed by Ld. TPO under section 92C(3) dated 28/10/2011 eight comparables were adopted. In the present appeal assessee does not dispute either inclusion or exclusion of any of the comparables adopted by TPO. Ld. TPO has adopted the mean margin of the comparables at 3.81% as per following table: 2.3 An addition of Rs. 1,68,78,811/- was computed by Ld. TPO as per following table: 2.4 It may also be mentioned here that TPO had adopted two methods for comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparable companies. The choice of a PLI depends on a number of factors, including the comparative analysis of the functions and risks/nature of activities of the tested party vis-a-vis the comparable companies, the availability, accuracy and reliability of the financial data of the tested party as well as for the comparable companies, and the extent to which the PLI is likely to produce an appropriate measure of an arm's length result. .......................................................................................... iii. vi In the facts of the case the appellant is mainly engaged in trading in cut and polished diamonds and also to some extent manufacturing of diamonds. Though the issue of applicability of RoCE as PLI has been discussed in the order of the TPO, but finally the adjustment which has been made by the TPO is by considering the operating profit over operating cost as the correct PLI. As such in the facts of the case, the discussion in respect of appropriate PLI becomes only academic in nature. Under such facts and circumstances, the OP/TC as contended by the appellant and as also accepted by the TPO is considered to be the correct PLI in this case. (emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 92C(2) of the Act would apply to the case and there would be no adjustment on account of ALP. b) OP/TC as PLI (On International Transaction of Rs. 9.59 crores) The ALP of "International Transaction" of Rs. 9.59 crores with mean operating profit of 3.81% has been computed at Rs. 9.90 crores, which is within +5% range of the "International Transaction" computed at Rs. 10.07 crores. Hence, the Second proviso to Section 92C(2) of the Act would apply to the case and there would be no adjustment on account of ALP. c) RoCE as PLI (On total sales of Rs. 50.84 crores) The ALP of sales with mean PLI of 6.17% is computed at Rs. 51.66 crores, which is within +5% range of total sales computed at Rs. 53.38 crores. Hence, the Second proviso to Section 92C(2) of the Act would apply to the case and there would be no adjustment on account of ALP. d) RoCE as PLI (on international transaction of Rs. 9.59 crores) The ALP of the "International Transaction" with mean PLI of 6.17% is computed at Rs. 9.74 crores, which is within +5% range of the "International Transaction" computed at Rs. 10.07 crores. Hence, the Second proviso to Section 92C(2) of the Act would apply to the case and there would b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said proviso and the price at which such transaction has actually been undertaken exceeds five per cent of the arithmetical mean, then, the assessee shall not be entitled to exercise the option as referred to in the said proviso." iv. iv. Accordingly the benefit of the second proviso to section 92C(2) is not available to the appellant." 3.4 The assessee is aggrieved with the aforementioned decision of Ld. CIT(A) and grievance has been expressed in Ground No. 1 of the concise grounds filed before us. 4. After narrating the facts it was submitted by Ld. AR that Ld. TPO while determining the ALP had initially adopted two methods to compute PLI i.e. OP/TC and RoCE. However, the TPO adopted OP/TC as PLI to compute the profit margin of the assessee. Ld. CIT(A) has also adopted OP/TC as method for computing PLI and discarded the RoCE method by saying that it is academic. It was submitted by Ld. AR that Department did not express any grievance regarding adoption of OP/TC method, therefore, he would advance his arguments on the basis of PLI computing on the basis of OP/TC method and if during the course of hearing Department raise any objection or support the adoption of RoCE method the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fall within the safe harbour of +/-5%. 5. On the other hand, Ld. DR relying upon the order passed by Ld. CIT(A), the relevant portion of which has been reproduced in para 3.3 of this order, submitted that Ld. CIT(A) has rightly upheld the addition and his order in this regard should be confirmed. 6. We have carefully considered the rival submissions in the light of material placed before us. So far as it relates to computation of ALP on the basis of RoCE method, though the TPO had also determined ALP on the basis of RoCE but ultimately he applied OP/TC method. Ld. CIT(A) has also given his verdict on the basis of method of OP/TC. No arguments was raised by Ld. DR in support of that method. Therefore, we proceed on the basis that OP/TC is correct method to evaluate the international transaction for determining the ALP. The table regarding computation of ALP by the TPO has already been reproduced in para 2.3. It can be seen from the said table that a sum of Rs. 1,92,79,181/- computed as operating profit by taking mean margin of the comparables at 3.81% on the figure of Rs. 50,60,15,254/-, which represent operating expenses. Thus, the operating profit has been taken on the operating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion only and not with transactions which have no international cross border element at all. Therefore, the basis of making the adjustment on the enterprise level by taking Rs. 68.76 crores as the base is not correct. 6.3 In the case of IL Jin Electronics (I) (P.) Ltd. Vs. ACIT (supra) it was held that AO was incorrect in calculating operating profit on the entire sales of the assessee particularly in view of the admitted position that only 45.51% of the raw material was acquired by the assessee from its AE for the purpose of manufacturing items. On the submissions of the assessee it was found that operating profit, if applied to 45.51% of the turnover it would come to Rs. 24,35,175/- booked by the assessee and the difference thereof addition could be made and it was directed by the Tribunal that adjustment should be made only to the extent of difference in arm's length operating profit with adjusted profit with reference to 45.51% of the turnover and not to the total turnover of the assessee. 6.4 In view of the aforementioned decisions of the Tribunal it is clear that principle of proportionality is well accepted principle and transfer pricing adjustment, if any, is required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether an adjustment can be made to the entire purchases, both domestic and international transactions. He filed the calculation sheet to demonstrate that even if the margin of 11.87% as determined by the AO is applied to international transactions, then also no adjustment is called for u/s. 92C. He relied on the decision of the Mumbai Bench of the Tribunal in the case of Tej Diam (supra) and submitted that the Bench has held that the adjustments can be made only to international transactions and not to domestic transactions. Similarly he relied on the decision of I-Bench of the Tribunal in the case of DCIT vs. Starline (supra). He also relied on the decision of the Delhi Bench of the Tribunal in ITA No. 438/Del/2008 in the case of IL Jin Electronics (I) (P) Ltd. vs. ACIT, order dated 6th Nov., 2009 and pointed out that the Bench has clearly held that applying the operating profit on total sales is not justified and at best it can be applied to the proportionate sales made out of raw material imported from the associated concern. On a query from the Bench, he submitted that the issue whether operating margins at enterprise level can be taken as the margins earned on a transaction or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tarline (supra) wherein the Tribunal held as follows: "TNMM requires comparison of net profit margins realized by an enterprise from an international transaction or an aggregate of international transactions and not comparison of operating margins of enterprises." 16. The Mumbai L-Bench of the Tribunal, on similar issue, in the case of DCIT vs. M/s. Ankit Diamonds in ITA No. 6437/Mum/2005, order dated 26th Nov., 2010, has set aside the issue to the file of the AO for fresh adjudication in accordance with law. Respectfully following the same, we set aside the issue to the file of the AO for fresh adjudication in accordance with law. The assessee is directed to file fresh transfer pricing study in accordance with law." 6.5 From the above observations it can be seen that the said order of the Tribunal cannot be taken as an authority in which it can be said that either Tribunal did not accept the decisions relied upon by Ld. AR of the assessee or a different proposition has been laid down as has been canvassed by the Ld. AR of the assessee. Therefore, the decisions relied upon by Ld. AR would be applicable to the facts of the present case. Thus, table No. 2 reproduced in para 3.2 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,21,37,007/- was an aggregate of all the three items including second item which was taken by the AO at a sum of Rs. 1,29,99,655/-. The AO has also accepted this figure in order passed u/s. 154 of the Act. So the correct position after rectification would be the following table: 7.2 In the concise ground also the assessee has stated a sum of Rs. 2,04,37,007/-. 7.3 It has already been mentioned that assessee is an individual. It maintain two books of account, one in the individual name and other in the name of proprietary concern M/s. Dipti Diamonds. The assessee is maintaining two accounts in her ledger, one in the personal books and other in the books of M/s. Dipti Diamonds and in the name of M/s. Dinurje Jewellery Pvt. Ltd. (Seepz) (in short Dinurje). Copy of both these accounts are filed at pages 241 to 243 of the paper book which is in the personal books of the assessee and a sum of Rs. 12,99,655/- is shown as credit balance as on 29/3/2008. In the other account, copy of which is placed at pages 243 of the paper book which is in the name of M/s. Dipti Diamonds a sum of Rs. 43.00 lacs has been shown as credit as on 4/7/2007. According to Department both these entries represent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e books of Dipti Diamonds and in the books of Dina Sudhir Shah separately. It was contended that Dina Sudhir Shah as individual and Dina Sudhir Shah as proprietor of M/s. Dipti Diamonds should be considered as one and same instead of two separate entities and the two accounts should be combined/consolidated to find out any credit or debit balance outstanding in the name of any other party in the books of Dina Sudhir Shah. Therefore, it was submitted that the AO has erred in considering the account of Dinurje Jewellery Pvt. Ltd. (Seepz) in the books of Dipti Diamonds and the account of Dinurje Jewellery Pvt. Ltd. (Seepz) in the books of Dina Sudhir Shah separately. v. The AO has also erred in considering the account of Dinurje Jewellery Pvt. Ltd. (Seepz) and Dinurje Jewellery Pvt. Ltd. (Mumbai) as two separate accounts. These two are only different units of Dinurje Jewellery Pvt. Ltd. Therefore, any credit or debit balance of Dinurje Jewellery Pvt. Ltd. in any third party's account should be considered by combining/consolidating the account of Dinurje Jewellery Pvt. Ltd. (Seepz) and Dinurje Jewellery Pvt. Ltd. (Mumbai). vi. It was submitted that if the accounts of Dinurje Je ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . even though the assessee had a substantial interest in both these companies. Therefore, the addition of Rs. 1,48,37,352/- needed to be deleted." (emphasis ours) 8.1 Ld. AR submitted that Ld. CIT(A) has committed an error in not allowing relief to the assessee and the reason for rejection of the contention of the assessee is that transactions in the nature of trading in the regular course of business cannot be clubbed with the transactions of loans and advances. It was submitted by Ld. AR that it will be incorrect to say that the assessee has obtained any loan from the company in which she was having substantial interest as the assessee was having her credit balance in the said company. Therefore, Ld. AR pleaded that appropriate relief should be allowed to the assessee. 9. On the other hand, relying upon the assessment order and the observations of Ld. CIT(A) Ld. DR pleaded that no benefit should be granted to the assessee in the light of assessee's transaction with Dinurje which are in the nature of trade. 10. It may be mentioned here that during the course of hearing on 10/09/2014, since the account of the assessee in the books of Dinurje was not available in the paper b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is a substantial share holder of both these concerns having around 70% share of both the concerns. Applying section 2(22)(e) of the Act this addition has been made in the hands of the assessee. The scheme of section 2(22)(e) has been explained by Hon'ble Delhi High Court in the case of CIT vs. Ankitech Pvt. Ltd. 340 ITR 14. The observations of their Lordships are as under: "In so far as the provisions of section 2(22)(e) are concerned, we have already extracted this provision and taken note of the conditions/requisites which are to be established for making the provision applicable. In CIT v. C.P. Sarathy Mudaliar [1972] 83 ITR 170 (SC), the Supreme Court had traced out the assessee of this provision in the following manner: "Any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan. First limb (a) to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l interest, is based on the presumption that the loans or advances would ultimately be made available to the shareholders of the company giving the loan or advance." 12.1 According to aforementioned decision the case of assessee will fall in second limb of section 2(22)(e) which describe that the loan or advance will be treated as deemed dividend in a case where shareholder is a member or partner and is having substantial interest. According to the facts of the case there is no dispute regarding the fact that the assessee is having substantial interest in both the concerns and there is also no dispute to the extent that a sum of Rs. 1,48,37,352/- has been given as loan or advance by Dinurje to Ace Divine. There is no material on record to say that the said amount of Rs. 1,48,37,352/- relates to trade transactions made in the regular course of business as the trade transactions between these two concerns are recorded in separate ledger accounts, copies of which are placed at pages 248 & 249 of the paper book. Under these facts it has to be seen that whether Ld. CIT(A) was right in upholding the addition to the extent of Rs. 1,48,37,352/-. According to the second limb of section 2(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amounts advanced are for business transactions between the parties, such payment would not fall within the deeming dividend under section 2(22)(e) of the Act. In so far as reliance upon Circular No. 495, dated September 22, 1987, issued by the Central Board of Direct Taxes is concerned, we are inclined to agree with the observations of the Mumbai Bench decision in Bhaumik Colour (P) Ltd. [2009] 313 ITR (AT) 146 (Mumbai) [SB] that such observations are not binding on the courts. Once it is found that such loan or advance cannot be treated as deemed dividend at the hands of such a concern which is not a shareholder, and that, according to us, is the correct legal position, such a circular would be of no avail. No doubt, the legal fiction/deemed provision created by the Legislature has to be taken to "logical conclusion" as held in Andaleeb Sehgal [2010] 173 DLT 296 (Delhi) [FB]. The Revenue wants the deeming provision to be extended which is illogical and the attempt is to create a real legal fiction, which is not created by the Legislature. We say at the cost of repetition that the definition of shareholder is not enlarged by any fiction. Before we part with, some comment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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