TaxTMI 
TaxTMI 
2013 (11) TMI 520
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....t. 2. Adjustment should be restricted to the extent of international transactions with AE. On the facts and in the circumstances of the case and in law, the Id. TPO erred in and the Hon'ble DRP further erred in considering the entire turnover of the company while calculating adjustment. 3. Violation of provisions of Rule 10B(2) and 10B(3) and arbitrary rejection of comparables selected by the appellant and considered Goenka Diamonds & Jewels Ld as a comparable to the appellant. On the facts and in the circumstances of the case and in law, the Id. TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Id. TPO in adding new comparable company i.e., Goenka Diamonds & Jewels Ltd which differ in functions undertaken, assets employed and risk assumed as compared to Appellant. On the facts in circumstances of the case and in law, the Id. TPO as well as the Hon'ble DRP erred in not appreciating that the above action is contrary to the provisions of Rule IOB(2) &(3) of the Rules. 4. Exclusion of foreign exchange gain on cancellation of forward contracts from the c....
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.... has furnished inaccurate particulars during the course of assessment proceedings. Accordingly, penalty proceedings ought not to be initiated against the Appellant. Accordingly, we request your Honour to kindly direct the Id. AO to drop the penalty proceedings. 11. Incorrect Levy of interest under section 234B, 234C and 220(2) of the Act Without prejudice to the above or any other grounds, if the transfer pricing adjustment is sustained then the Id. AO has erred in levying interest under Section 234B and 234C of the Act to the extent the addition is made based on the updated financial data for the comparable companies." The other grounds raised by the assessee are argumentative in nature. 3 The assessee is a partnership firm and engaged in the business of manufacturing and import and export of cut and polished diamonds and precious stones. The assessee has two Associates Enterprises (AE) namely M/s Doshi Impex Ltd, Hongkong and M/s Doshi Diamonds, Hongkong. The AEs are engaged in trading of diamonds. During the year under consideration, the assessee had international transactions with the AEs, the details of which are given in para 6 of the T....
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....r proposed to exclude the foreign exchange gain of Rs. 5.20 crores to which the assessee objected vide letters dated 19.10.2011, 21.10.2011 and 24.10.2011. 3.6 The TPO held that the assessee has entered into forward contracts on a regular basis, which constitutes treasury operations and therefore, the same cannot be treated as part of their main business of manufacturing of diamonds. Accordingly, the foreign exchange gain of Rs. 5.20 crores was treated by the TPO as not forming part of the main business activities and hence, excluded from the operating profit earned from the export and import of diamonds for the purpose of determining the ALP. Apart from this, the TPO also did not exclude the loss due to fire. The assessee claimed working capital adjustments, credit risk adjustment and manufacturing cost adjustment which were also denied by the TPO. After excluding the foreign exchange gain, the assessee's operating profit comes to loss; therefore, the TPO worked out the assessee's operating profit to total cost at - 0.75% and operating profit/sales at - 0.76%. Since the arithmetical means of the operating profits/total cost of the 4 comparables was determined at 4.77%, therefor....
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....ssional municipal/property taxes, cheaper finance at lower rates of interest, rebate of duty on electricity charges, easy availability of labour, lower sales promotion expenses etc., Thus, this company cannot be compared with non-SEZ entity like assessee. In support of his contention, he has relied upon the order of this Tribunal in case of Dy. CIT v. Indo American Jewellery Ltd. [2010] 41 SOT 1 (Mum.). 6.2 The ld Sr counsel has further contended that the said company carried out abnormal diamond trading activity during the FY 2007-08 as can be verified from the disclosure in notes to accounts. The ld Sr counsel has further contented that though the TPO has purported to have taken the segmental data relating to rough diamonds and polished diamonds; however, he has artificially bifurcated the revenue and expenses which is not supported by the accounts of the said company. He has further contended that the TPO has allocated some un-allocable expenses but no basis of the same has been given as it shows from the table at page 293 of the paper book. The ld Sr counsel has contended that there is a discrepancy in the figures/data worked out by the TPO for working out the segmental oper....
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....g of diamonds. Undisputedly, the data available on record do not give segmental results of DGJL. The TPO has considered the segmental data and source of which is stated to be capitaline. Since the bifurcation of revenue and expenses are not based as per the accounts reported by the company; therefore, the authenticity of such bifurcated data is not free from doubt. Further, there is no dispute that the DGJL has a SEZ unit which is having benefit of concessional levy, duty taxes etc. Though, it is not clear from the records whether the diamond unit or Gold jewellery unit or both are SEZ unit; however, these are crucial and import aspect for considering the company as comparable. The TPO as well as DRP have not addressed this specific objection raised by the assessee. When substantial revenue of the said company is from trading activity and segmental results are not available on record and further the said company is having a SEZ unit; therefore, in the facts and circumstances, these aspects are required a proper verification and examination. Accordingly, we set aside this issue to the record of the Assessing Officer/TPO to verify these aspects as observed in this order and then deci....
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....garding acquisition of the Russian entity, we note from the record that the said entity was acquired on 10.3.2008; therefore, for the year under consideration, there cannot be any influence on the results of the comparable GDJL due to such acquisition at the fag end of the FY. 8. Ground no.4 is regarding exclusion of foreign exchange gain. 8.1 The assessee considered Rs. 5,20,70,149 as operating income on account of foreign exchange gain arising on forward contracts. The assessee contended that the exchange gain arising on cancellation of forward contracts are to be considered as part of operating profit since it is an integral part of the business of buying and selling of the diamonds and hence, is an operating income. The TPO did not accept the claim of the assessee for the reason that the exchange gain earned are against cancellation of forward contracts and the assessee has separately disclosed as profits and gains from foreign exchange fluctuations, which are not included in purchases and sales. Further, the TPO was of the view that this constitutes speculative and therefore, the same cannot be treated as part of the main business activity of manufacturing of diamonds of....
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....mination of net margin. The ld DR has referred the TP study at page 10 of the paper book and submitted that risk of foreign exchange fluctuation upto 3% in USD is to be earned by the AE. Therefore, the same cannot be included to the profit of the assessee for the purpose of computation of operating profit of the assessee. 10. We have considered the rival submissions as well as the relevant material on record. The assessee has entered into forward contracts for the purpose of hedging of foreign currency exposure on export and import of diamonds with AEs. Therefore, the hedging of foreign currency has nexus with the export and import activity of the assessee and the exposure of the assessee in relation to the export and import. The OECD guidelines in para 2.82 are as under; "2.82 Whether foreign exchange gains and losses should be included or excluded from the determination of the net profit indicator raises a number of difficult comparability issues. First, it needs to be considered whether the foreign exchange gains and losses are of a trading nature (e.g. exchange gain or loss on a trace receivable or payable) and whether or not the tested party is r....
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.... 13.1 The assessee stated before the TPO that on account of fire took place on 6.9.2006, the stock of Rs. 1,04,61,120 was lost. This amount has been written off in the books of account on 6.12.2007 and against it, an amount of Rs. 30,49,009/- has been received as claim from the Insurance company during the FY 2008-09. Accordingly, the assessee submitted that he stock of Rs. 1,04,61,120/- should be excluded as exceptional item of loss. However, the claim of the assessee was not accepted by the TPO on the ground that fire took place on 6.9.2006 which pertains to Financial Year 2006-07 and not FY 2007-08 which is under consideration and further the assessee is following accrual systems of account; therefore, loss of stock on account of fire pertains to FY 2006-07 should be taken into account that year itself. The TPO further observed that in the P&L account, nowhere it has been mentioned that this amount has been deducted as written of due to fire. 13.2 Before the DRP, the assessee contended that the survey report was received during the FY 2007-08 and therefore, the actual loss due to fire could be calculated only after receiving the survey report and accordingly, the same was de....