TaxTMI 
TaxTMI 
2011 (1) TMI 151
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....table. Accordingly from assessment year 2002-2003 onwards, the resale price method was adopted by the assessee for ascertaining arms length price. The Transfer Pricing Officer passed an order under section 92CA (3) on 22-12-2006 and held that the imports made from the assessee's Associated Enterprise amounting to Rs. 5.62 crores is not in accordance with the transfer pricing guidelines and held that arms length price adjustment of Rs. 96 lakhs is required to be made to the imports. He has held that arms length price of the imports from the AE should have been Rs. 4.66 crores as against Rs. 5.62 crores shown by the assessee. 3. The First Appellate Authority held that the resale price method adopted by the assessee, cannot be accepted for the reason that, comparables i.e., M/s. Flawless Diamonds as well as M/s. Professional Diamonds, cited by the assessee, are engaged in export of cut and polished diamonds and are not resellers of rough diamonds as claimed by the assessee. After rejecting the resale price method adopted by the assessee, the first appellate authority considered the arithmetical mean of the operating margins of three other comparables, along with the comparables cit....
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....omain and it is not in the business of trading in rough diamonds. (e) That the TNMM as prescribed in the Act and Rules has not been applied by the Transfer Pricing Officer and the CIT(A) was in error in approving the same. (f) The TNMM requires comparison of net margins of international transactions. (g) That the CIT(A) has grossly erred in making adjustments to the gross turnover by holding that, comparison should be at enterprise level. (h) That ALP can be determined only for the international transactions and adjustment can be determined only for international transactions. (i) That adjustment is wrongly made on gross purchases without reducing purchase returns. (j) He submitted that purchases minus purchase returns, should be considered as an international transaction and ALP determined for such a quantum or otherwise, it would give absurd results. 5. He relied on the following case laws : (i) Mumbai Tribunal Decision in the case of Addl.CIT v. Tej Dian (2010) 37 SOT 341. &....
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....entity level and cannot be segmented unless the margins of the external comparables are also segmented. Such segmented data was neither available in public domain at the relevant point of time, nor has the appellant provided the same for the comparables chosen by it. In view of the same the appellant's plea to calculate profit only on sales of the goods purchased from AEs is not accepted." (Emphasis own) 9. This finding in our considered opinion is totally erroneous. This Bench of the Tribunal in the case of DCIT v. M/s. Ankit Diamonds ITA.No. 6437/Mum/2005 'L' Bench Order dated 26th November, 2010 held as follows : "13. Chapter X. of the Income-tax Act, deals with the computation of income from international transaction, having regard to ALP. We extract some of the sections of the statute which we feel relevant to this case. Meaning of International Transaction. 92B.(1) For the purposes of this section and sections 92, 92C, 92D and 92E "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, ....
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....y the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market. (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the....
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.... to the International Transaction and (ii) The Assessing Officer shall compute the "Total Income" having regard to the ALP determined by TPO in relation to the International Transaction. There is no authority under the law bestowed on the TPO to determine the "Total Income" of the assessee. He is to determine only the ALP of the International Transaction". (Emphasis ours). 18. In our view, these submissions of the assessee are the correct legal position. The A.O. himself states that, he find some merit and force in the submission of the assessee, but in view of the directions of the T.P.O. and as the assessment is getting time barred, he made the addition in question. The submission of the assessee that, the T.P.O. is not authorised to determine the net operational profits at the enterprises level and thereby determine the total income of the assessee, but that he shall determine only, the ALP of the international transaction is correct." 11. Similar is the view of this Bench in the case of Addl. CIT, 16(3), Mumbai v. Tej Diam (2010) 37 SOT 341 (Mum.). Respectfully following the same, this finding of the first appellate authority at para 7.19 extracted above has to be necessa....
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....rchase and sale of rough diamonds, it would have to set aside of the issue to the file of the Assessing Officer for fresh adjudication, so as to enable both the assessee, as well as the Assessing Officer to undertake a fresh exercise, by finding out appropriate comparables, and adopting resale price method. Before doing so we observe as follows : 14. In the case on hand, the facts of the transactions in question are brought out in para 3.2 of the CIT(A) order. "The appellant is a branch office of Star Diamond Co. (Belgium) N. V. and is in the business of import of rough diamonds and selling in the local market. The assessee is engaged in the business of trading in rough diamonds. The assessee has purchased rough diamonds from its Associate Enterprise M/s. Star Diamond Enterprise NV worth Rs. 5.62 crores. During the year under consideration, the assessee has returned rough diamonds purchased from the same entity worth Rs. 4.68 crores since they were not suitable for sale. Accordingly, the net purchases are only worth Rs. 94 lacs. The assessee has used RPM as the most appropriate method." (Emphasis own) These facts are also recorded in para 3 of the Transfer Pricing Officer'....