Transfer pricing for diamond-studded jewellery wholesaler: interest-free related-party loans ignored in RPT filter; retail comparable, RoCE PLI rejected.

Loans from a related party, where no interest is actually paid or received, do not constitute related party transactions for applying the RPT filter because such financing does not directly impact operating profitability; consequently, no hypothetical interest could be added and the concerned company qualified within the 25% RPT threshold and was included as a comparable. A company operating in retail was held functionally incomparable to an assessee engaged in wholesale diamond-studded jewellery business and was excluded. Another company was excluded because segmental operating profit and capital employed for the relevant jewellery segment were unascertainable and sales figures were inconsistent. RoCE was rejected as the PLI under TNMM due to impracticability of reliably identifying AE-specific capital employed/profitability, and the matter was remitted with directions to confine any TP adjustment only to AE international transactions.

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Issues Involved:
1. Inclusion of specific comparable cases in the final list.
2. Change of Profit Level Indicator (PLI) from Operating Profit to Total Cost (OP/TC) or Operating Profit to Sales (OP/Sales) to Return on Capital Employed (RoCE).
3. Extent of transfer pricing adjustment, whether it should be restricted to international transactions only.

Issue-wise Detailed Analysis:

1. Inclusion of Specific Comparable Cases:
The first issue pertains to the inclusion of three specific cases in the final list of comparables: Goldiam Jewellery Limited, Su-Raj Diamond Industries Limited, and Forever Precious Jewellery & Diamonds Limited.

Goldiam Jewellery Limited:
The assessee argued that Goldiam Jewellery Limited should be excluded because its Related Party Transactions (RPTs) constituted 35.10% of total revenue, exceeding the 25% filter set by the TPO. The TPO, however, excluded the loan transactions from the RPTs, reducing the percentage to within the acceptable limit. The Tribunal upheld this exclusion, stating that only revenue nature transactions should be considered for RPTs, and loan transactions, being capital in nature, should not be included.

Su-Raj Diamond Industries Limited:
The assessee contended that Su-Raj Diamond Industries Limited should not be considered comparable because it operated in the retail segment, whereas the assessee operated in wholesale. Additionally, the TPO included figures from both studded and plain gold jewellery, while the assessee dealt only in studded jewellery. The Tribunal agreed, excluding Su-Raj Diamond Industries Limited due to its retail operations and the inclusion of non-comparable product segments.

Forever Precious Jewellery & Diamonds Limited:
The assessee argued that the figures used by the TPO for Forever Precious Jewellery & Diamonds Limited were inconsistent, and segmental data for diamond jewellery were not available. The Tribunal found that the lack of segmental data and the involvement in multiple product segments made this case non-comparable, leading to its exclusion.

2. Change of Profit Level Indicator (PLI):
The second issue involved the change of PLI from OP/TC or OP/Sales to RoCE by the TPO. The assessee argued that the PLI of OP/TC was accepted in earlier years and cited several Tribunal decisions where OP/TC or OP/Sales was used in the jewellery industry.

The Tribunal noted that while RoCE is a recognized PLI under Rule 10B(1)(e), its application in this case was impractical due to the common pool of capital employed for both AE and non-AE transactions. The Tribunal emphasized the lack of segmental accounts and the difficulty in precisely calculating RoCE for AE transactions. Consequently, the Tribunal directed that the PLI of OP/TC or OP/Sales should be applied.

3. Extent of Transfer Pricing Adjustment:
The last issue was whether the transfer pricing adjustment should be restricted to international transactions only. The Tribunal clarified that transfer pricing adjustments must be confined to international transactions as per Section 92C(1) and Section 92B of the Income-tax Act. The Tribunal directed the authorities to restrict the TP adjustment to transactions with AEs in the fresh proceedings.

Conclusion:
The Tribunal's judgment addressed the inclusion of comparable cases, the appropriateness of the PLI, and the scope of transfer pricing adjustments. Goldiam Jewellery Limited was retained as a comparable, while Su-Raj Diamond Industries Limited and Forever Precious Jewellery & Diamonds Limited were excluded. The Tribunal rejected the use of RoCE as PLI, directing the use of OP/TC or OP/Sales. Finally, the Tribunal mandated that transfer pricing adjustments be limited to international transactions. The appeal was allowed for statistical purposes, with directions for fresh determination of ALP by the AO/TPO.

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