TaxTMI 
TaxTMI 
2011 (9) TMI 562
X X X X Extracts X X X X
X X X X Extracts X X X X
....count of adjustments made to the Arms Length Price of Rs. 4,25,00,000/- u/s.92CA(3) in respect of international transactions entered into with Associate Enterprise without appreciating the facts of the case." 3. Facts of the case, in brief, are that a reference u/s. 92CA(1) in the case of the assessee was made by the AO to the TPO. The TPO noted that the assessee imports rough diamonds on free of cost basis from a group company and the cost of import is borne by the Supplier. The processing charges are fixed based on nature and quality of diamond processed and has no bearing on the cost of diamond. The assessee has charged for the processing at USD 10,20,35 AND USD 100 rates. After processing as per the design and specification, it exports the diamond back to the same group Company. Therefore, basically it is a job work for the assessee on captive industry basis. The assessee submitted that rate of processing charge is same as in the earlier year. The TPO noted that the assessee has not shown that this rate for processing is the prevailing market rate. No other basis for fixing this market rate was given. The bifurcation submitted by the assessee is as under:- Rate (USD) N....
X X X X Extracts X X X X
X X X X Extracts X X X X
....out making any change in the Processing Charges, HIPL has earned profit of Rs. 25.21 lacs after charging depreciation of Rs. 82.61 lacs in the subsequent year. 3.2 However, the TPO was not convinced with the reasons cited by the assessee. From analysis of the Profit & Loss account of the assessee, he noted that the rates for processing the diamonds as received from the A.E. have remained same in this year. On the other hand, the charges incurred by the assessee for processing the diamonds have increased substantially. According to him the assessee basically works as a captive unit depending solely on the work assigned by the A.E. Under this scenario there is no reason for incurring loss as such. The rates charged by the assessee should have been increased at least in the same proportion as the increase in rates paid by the assessee. However, this has not been done. According to the TPO the personnel cost (part of processing charges) paid by the assessee has increased from 3.98 crore in the preceeding year to 4.55 crore in this year. But processing income has decreased from 10.35 crore in the preceeding year to 7.58 crore in this year. Further, there is a sharp increase in the pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assessee's transactions were at Arms Length for Assessment Year 2003-04. In the subsequent years, it was emphasized that the basis for fixing Processing Charges has not changed and the assessee have been consistently following the same basis. 5.2 In Assessment Year 2004-05, the assessee entered into similar transactions with related companies and the matter was again referred to the TPO for verification. In addition to the working filed for the earlier year, the assessee also filed a detailed working on the cost of processing one piece of diamond, the capacity utilisation etc. 5.3 It was submitted that a perusal of the workings clearly brings out certain relevant facts which are as under :- (i) One category of diamonds for which the assessee charges US $ 35 per piece, accounts for 84.15% of the total revenues. (ii) The assessee earns a mark up of 52.4% on sales and 110.09% on cost for this category of diamond. (iii) After making adjustments for unutilized capacity, the assessee earned an overall net profit of 26.94%. The assessee submitted that this net profit is much higher than the average net profit of around 5% of the other 10 companies found t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....depreciation of Rs. 40.76 lacs during the year in appeal. 6.1 It was submitted that the assessee during the course of assessment proceedings filed workings similar to earlier year. The workings brought out the above facts as also the fact that due to shortage of quality stone, the assessee have worked at 40.08% much lower than 53.46% during the earlier year. The assessee earned a mark-up of 40.94% on sales and 69.32% on cost on USD 35 category. After making adjustments for unutilized capacity, the assessee earned an overall net profit of 37.50%. The assessee submitted that this net profit is much higher than the average net profit of around 5% of the other 10 companies found to be comparable during the previous year. In addition to this, the assessee also provided a separate working showing that total cartage processed during the year (22914.86 carats) and submitted that the assessee has charged average processing charges of Rs. 33.09.70 per carat which is much higher than the normally accepted norm of Rs. 500/- per carat charged by other comparable companies in the local market. The TPO-I(IV) has chosen to disregard all the submissions made by the assesses and has chosen to fix....
X X X X Extracts X X X X
X X X X Extracts X X X X
....count of shortage of business cannot be justified. 6.4 Attention was also drawn to the TPO's statement that "The rates charged by the assessee should have been increased, at least in the same proportion as the increase in rates paid by the assessee". The working provided by the assessee shows that the labour cost per piece of processing has increased to Rs. 329/- per piece as against Rs. 326/- in the earlier year, an increase of 0.92%. Going by the statement made by the TPO the maximum adjustment to revenues should have been only to the extent of 0.92%. 6.5 Finally and most importantly it was submitted that while making a substantial adjustment to the assessee's arms length price (ALP) on the basis of labour cost to revenue ratio of the previous year, the TPO failed to provide an independent comparable, where revenues increase based on such ratios. It was accordingly submitted that the adjustment of Rs. 4.25 crores, made by the TPO are purely adhoc, without any justification against settled principles of law and liable to be set aside in full. 7. Based on the arguments advanced by the assessee, the Ld. CIT(A) deleted the T.P. adjustment of 4.25 crores by holding as under :....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n account of investment in plant and machinery. These facts was neither rebutted or accepted by the TPO. It is an establishment fact that higher deprecation on new assets can distort profits especially if there is an excess unused capacity (Schefenacker Mother Son Delhi in ITAT) as has been observed this year in this case. Infact, its net profit after adjustment for unutilised capacity comes to 37.50% which is higher than earlier years figure on the same criteria at 26.94%. As stated earlier there was no adjustments in the earlier year in this case. Despite these factors, it has earned a mark up of 40.94% on sales of 69.32% on the cost on USD 35 category which account for the bulk of its revenue. In fact its main driver of revenue was USD 35 per piece diamonds which had accounted for 84.5% in the last year but it fell to 59.08% during the year whereas the lower quality category of USD 20 went up and accounted for revenue of 34.4% during the year in appeal as against 61% last year. This changed composition of turnover had a major role in depressing the profit. The appellant after making adjustment for unutilized capacity earned an overall profit of 37.50% and thus net profit w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nnot be the basis for assuming that the processing income also should go up. Therefore, ad hoc adjustment on this ground, in our opinion, is arbitrary. We also find force in the submission of the Ld. Counsel for the assessee that the fall in revenue is due to unutilised capacity, increase in depreciation and increase in overall expenses. The Ld. DR could not controvert the detailed findings given by the Ld. CIT(A). In this view of the matter, and in view of the detailed order passed by the Ld. CIT(A), we find no infirmity in the same. Accordingly, the same is upheld. The ground by the Revenue is accordingly dismissed. ITA No. : 8187/Mum/2010 Assessment Year : 2006-07 10. Facts of the case, in brief, are that a reference was made to the TPO to ascertain the ALP of its international transactions with AE's since, the transactions with AE's had exceeded Rs. 15 crores. From the various details furnished before the TPO summarised the international transactions of the assessee which are as under : Sr.No. Nature of Transaction Amount 1 Purchase of diamond industrial powder 3,05,739 2 Processing charges for cutting & polished diamonds 7,89,50,462 3 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng income has gone up from 39.16% to 55.14%. 12.1 Secondly, the assessee has claimed that it is undertaking specialized cutting and polishing operation involving specialized machines and technology. Keeping in view the same, the rate charged by the assessee cannot be compared with the prevailing market price for cutting which is pre-dominantly carried out in traditional manners with common prevalent designs. 12.2 Finally, the assessee is a captive unit of the AE. It is the AE which has undertaken a massive expansion on the capacities and insisted on the assessee to install sophisticated machines for carrying out its works. In such a scenario from a transfer pricing prospective the AE should have compensated the assessee at an arm's length price. 12.3 The TPO further noted that during the Assessment Year 2004-05, the assessee had carried out a detailed transfer pricing analysis giving the comparable rates of third party processors. During the current year no such exercise has been carried out by the assessee nor has it been able to justify the lower margins earned by it. The fact that the assessee has not increased its processing rates margins during the past three years in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....addition of Rs. 3,25,92,361/-, the assessee is in appeal before us with the following grounds : "1. The learned AO/TPO/Dispute Resolution Panel (DRP-I) grossly erred in making adjustments to the Arm's Length Price charged by the appellants for international transactions, totally amounting to Rs. 3,25,92,361/- 1.1 The learned AO/TPO/DRP-I erred in completely ignoring the fact that on reference made to the Transfer Pricing Officer, during the previous year 2003-04 i.e. Assessment Year 2004-05, the price charged by the appellants had been accepted to be the Arm's Length Price. The appellants submit that there is no change in the price charged by the appellants during the year under appeal and the same ought to have been accepted to be the 'Arm's Length Price'. 1.2 The learned AO/TPO/DRP-I, completely disregarded the fact that, adjustments made on similar facts for the assessment for AY 2005-06 have been set aside in appeal by the learned CIT(A). 1.3 The learned AO/TPO/DRP-I grossly erred in making the adjustment to the appellants sales figure, in proportion to the wages paid by the appellants. The appellants respectfully submit that wages paid are of no relevance and canno....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssociated companies, he submitted that the assessee company has not been established with the intention of catering to the needs of the group companies only. The assessee has been trying to obtain business from independent customers but has not been able to accept proposals due to low prices being offered by the independent customers. Referring to pg. no. 55 of the paper book, he drew the attention of the bench to the letter addressed to the TPO on 20th October, 2009 where it was clearly mentioned that HIPL has received rough diamonds from 'Associated Enterprises' on 'Loan Basis' for Processing. He submitted that the property belongs to others. If any thing goes wrong while doing the processing, the assessee will loose only the processing charges. The assessee is not the owner of the diamonds at any point of time. Referring to pg. no. 33 of the paper book, the Ld. Counsel for the assessee drew the attention of the bench to the analysis of Processing Charges for the Assessment Year 2006-07. Referring to pg. no. 34 of the paper book, he drew the attention of the bench to the Computation of Gross Profit - For USD 35 and the percentage of net profit on sales shown at 44.42%. Referring ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ermining the ALP. 16.1 Referring to the decision of the Tribunal in the case of Dy. CIT v. Starlite [2010] 40 SOT 421 (Mum.), he submitted that the TNMM does not permit the assessee or the AO to compare enterprise level profits and make adjustments. Referring to the said decision, he submitted that complete reading of the relevant provisions of the Act as well as the Rules shows that it is mandatory for the assessee to follow one of the prescribed methods and demonstrate that the international transaction entered into by it with AE is at ALP. By simply saying that none of the method can be applied and citing excuses for the same does not absolve the assessee of its statutory duty in determining the ALP as per the law. He accordingly, submitted that the TPO was justified in making the adjustments. 17. The Ld. Counsel for the assessee in his rejoinder submitted that both the decisions cited by the Ld. DR are not applicable to the facts of the present case. The assessee in the instant case has discharged the burden cast on it by explaining the most appropriate method based on the nature of the transaction and justify the same by producing the relevant material and documents. It ....