TaxTMI 
TaxTMI 
2014 (11) TMI 883
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....panies viz. Asian Star Co. Ltd., Su-Raj Diamond Industries Ltd. and Goldiam Jewellery Limited from the comparable for determination of mean PLI of the comparable entities. 3. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law and in facts in confirming the action of the AO/TPO in taking RoCE as the appropriate PLI instead of TNMM considered by the assessee as appropriate PLI in this case. 4. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law and in facts in rejecting the assessee's contention that the TPO had wrongly made addition of TP adjustment relatable to entire sales instead of limiting it to an amount corresponding to the international transaction only. 5. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law and in facts in confirming addition of Rs. 7,02,95,833/- made by AO/TPO towards adjustment on account of ALP of interest on debts receivable from Associated Enterprises (AEs). 6. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law and in facts in not admitting the additional evidence filed by the assessee under Rule 46A of the Income Ta....
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.... assessee company is engaged in the manufacture and trading in cut and polished diamonds located in SEEPZ as a unit notified as SEZ. It entered into following international transaction with its AEs. Sl.No. Particulars Amount (Rs.) 1. Purchase of raw materials (diamonds, gold and findings) 39,54,43,185 2. Sale of diamonds studded jewellery 47,87,31,461 The assessee has entered into international transactions with its AEs only with its SEEPZ undertaking in Mumbai. The final result for financial year 2007-08, in respect of jewellery manufacturing division and SEEPZ undertaking at Mumbai are as follows: Particulars Amount (Rs.) Sales 57,75,96,195 Excess Received 2,06,281 Operating revenue 57,78,02,476 Expenses debited to profit and loss account 53,87,95,639 Less: Interest 1,60,46,942 Operating Expenses 52,27,48,697 Operating Profit 5,50,53,779 2.1 The above financials were considered by the TPO for the purposes of transfer pricing analysis. The assessee adopted TNMM as most appropriate method. As per transfer pricing documentation the assessee did not consider any comparable company for....
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....as a comparable. 5. Golkunda Diamonds & Jewellery Ltd The company is mainly into manufacturing and sale of studded gold jewellery and also trading in cut & polished diamonds. The RPTs constitute less than 25% of the revenues. RPTs - Rs.Nil. However, the manufacturing sales from jewellery constitutes less than 75% of the revenues (7O.44%). Thus the company is not considered as a comparable. 6. Neogem India Ltd The company is trading in studded jewellery and polished diamonds. As the company is functionally different, the same is not considered as a comparable. 7. S B & T Designs Ltd The company is into sale of gold, diamond & precious stone jewellery. The RPTs constitute more than 25% of the revenues. RPTs - Rs. 15.83 crore. As the company fails RPT filter, the same is not considered as a comparable. 8. S B & T International Ltd The company is into trading in gold, diamond & precious stone jewellery. The RPTs constitute more than 25% of the revenues. RPTs - Rs. 33.43 crore. As the company fails RPT filter, the same is not considered as a comparable. 9. Shantivijay Jewels Ltd The company is into sale of jewellery articles. Tue RPTs constit....
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....r argued that the turnover of the company during the year is at Rs. 1495.96 crores, out of which industrial sales are at Rs. 1486.17 crores. The company is mainly engaged in diamond segment. Jewellery segment constitutes only 5.22% of total turnover for the FY 2007- 08. The taxpayer relied on the decision of ITAT, Mumbai in the case of DHL Express (India) Ltd T/SACIT, where it was held that when direct comparables are available, there is no need to consider the segmental results. The taxpayer also stated that Capital Employed by the companies in the segments is not ascertainable. The TPO considered only Jewellery segment of the company with its turnover of Rs. 70.66 crores and segmental results contained in the audited financials of the company are considered. Thus, it cannot be said that the jewellery segment is operating at higher scale as the segment turnover of the company is comparable to the turnover of the taxpayer at Rs. 58 crores. Thus, the Jewellery segment is comparable to the taxpayer's SEEPZ undertaking, as the company's Jewellery segment is into manufacture and sale of diamond studded gold jewellery. Further, capital employed for each segment is available in the au....
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.... Thus, the company's Jewellery segment is considered as a comparable as it is functionally similar to the taxpayer. 2.5 The TPO also objected to the analysis of the assessee regarding OP/OC and has come to a conclusion that most appropriate method for computing PLI will be Return on Capital Employment (RoCE). Adopting RoCE Ld. TPO computed the PLI of the assessee as under: Average Capital Employment: Particulars/ Amount in Rs. Share Capital (A) Reserves and Surplus (B) Debt (C) Investments (D) Capital Employed (E)= A+B+C-D As on 01-04-2007 10000000 262997872 320252684 29335500 563915056 As on 31-03-2008 98300000 291562004 346046737 29335500 706573241 AVERAGE CAPITAL EMPLOYED 635244149 Computation of PLI: Particulars Amount in Rs. Operating Revenues 57,78,02,476 Operating Cost 52,27,48,697 Operating Profit 5,50,53,779 Average Capital Employed 63,52,44,149 RoCE 8.67% 2.6 In the similar manner PLI and arithmetic margin of seven comparables chosen by TPO was computed at 15.79% as per following table. Sl. No. Company Average Capital Employed Operat....
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....sion of three comparables by the TPO i.e. regarding Asian Star Company Ltd., Su-Raj Diamonds and Goldiam Jewellery Ltd. It was also submitted that RoCE is not appropriate PLI as the same is applicable only on the manufacturing unit. All these contentions of the assessee were rejected by Ld. CIT(A). Ld. CIT(A) also rejected the claim of the assessee that no adjustment was required to be made on account of interest. However, Ld. CIT(A) has noted in para 4.4 that from the details furnished by the assessee credit period allowed by the assessee to its non-AEs is 173 days while to AE it is 193 days. Ld. CIT(A) also rejected the contention of the assessee that adjustment should be deleted on the ground that TPO did not bring any material to show application of CUP method. Ld. CIT(A) also rejected the contention of the assessee that as per business practice no interest was being charged by the assessee on delayed payments from its customers. He also rejected the claim of the assessee regarding set off of credit balance payable by the assessee to its AE. All these findings recorded in para 4.4 of Ld. CIT(A)'s order and in this manner Ld. CIT(A) has upheld the TP adjustment. 4. Though in ....
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....ds upon the facts and circumstances of each case. In principle, there can be no inhibition on the TPO to compute profit margin by a particular base, if the facts and circumstances of the case warrant adoption of a different base from that adopted by the assessee. As assets or capital employed is one of the recognized bases, we see no reason to restrict the adoption of base only to total cost or sales. In fact, the choice of the correct base depends on various factors including its workability in the facts of the case. Let us see as to whether the TPO was correct in adopting RoCE as the correct base under the TNMM. The TPO worked out the average capital employed at Rs. 67.66 crore and by considering the amount of operating profit at Rs. 3.58 crore and total turnover of Rs. 80.54 crore determined RoCE at 5.29%. Here it is relevant to mention that the sales to the AE in the present case total Rs. 11.42 crore as against the total sales at Rs. 80.54 crore. There are no segmental accounts. In other words, there is a common pool of capital employed which is used both for the AE and non- AE transactions. It is obvious that the period of realization in respect of exports and domestic sales ....
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.... as appropriate PLI then no addition can be made on account of ALP as the PLI of the assessee will be 10.53% as against arithmetic margin of comparables at 8.60%. Reference was made to the following table. (INR in Lac) Name of company Revenue Costs Profit PLI Page Reference Goldiam Jewellery Ltd. 5507.68 4829.56 678.12 14.04% Page 10 of TPO order Shreeji Jewellery Ltd. 5906.72 5698.16 208.56 3.66% Page 10 of TPO order Shantivijay Jewels Ltd. 6034.30 5819.49 214.81 3.69% Page 10 of TPO order Asian Star Co. Ltd (Seg.) 7065.92 5725.40 1340.52 23.41% Page 10 of TPO order Diagold Designs Ltd. 7359.34 7008.98 350.36 5.00% Page 10 of TPO order Fine Jewellery (India) Ltd. 7860.12 7370.19 489.93 6.65% Page 10 of TPO order Su-Raj Diamond Industries Ltd (Seg.) 12230.00 11785.00 445.00 3.78% Page 10 of TPO order AM of Comparable 8.60% PLI of Appellant 5778.02 5227.48 550.53 10.53% Page 2 of TPO order 4.2 Without prejudice to the above arguments it was submitted that the RoCE of the a....
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....er / criteria of 25% of sales (Jewellery segment is relevant since for PLI segmental information is considered). Had the jewellery segment been a separate company, this would have accounted for separate transactions and would have failed the RPT filter. Further, this shows that both jewellery and diamond segments are integrated and enjoys synergies and hence cannot be relied in isolation. * TPO has used segmental information for calculating PLI (ROCE). Where segmental information is used, it is difficult to use ROCE as PLI as it is not practical to determine the segmental Capital employed. Reliance is placed on Goldstar Jewellery Design (P) Ltd. [(2013) 144 ITD 99, Mumbai]. Porn 9.3 at Page 9. * Listed company and a sight holder of DTC - refer page 115 of Paper Book. Hence, this status ensured this company to get benefit of uninterrupted supply of quality diamonds at competitive prices. 4.4 It was further submitted that M/s. Su-Raj Diamond Industries Ltd. also cannot be taken as comparable for the following reasons: " b. Suraj Diamonds Industries: Plain v/s studded jewellery: - Appellant is mainly into manufacturing of studded jewellery whereas Suraj Diamond Indus....
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....% -5% 5031.81 4542.81 4.6 In the alternative it was submitted that even if M/s. Su-Raj Diamond Industries Ltd. alone is removed from the list of comparables then also no addition can be made as TP adjustment as per following calculations. Even if 1 company is removed, viz Su-Raj Diamonds Industries, the average ROCE of remaining 6 companies works out to 13.52% and falls within +/- 5% range. (INR in Lacs) Name of Company Avg. Capital Employed Op. Profit ROCE Page Reference Goldiam Jewellery Ltd. 2139.89 678.12 31.69% Page 10 of TPO order Shreeji Jewellery Ltd. 5378.52 208.56 3.88% ----do---- Shantivijay Jewels Ltd. 3224.94 214.81 6.66% ----do---- Diagold Designs Ltd. 4303.72 350.36 8.14% ----do---- Fine Jewellery (India) Ltd. 7309.82 489.93 6.70% ----do---- Asian Star Co. Ltd.(Seg) 5569.74 1340.52 24.07% ----do--- Arithmetic Mean 13.52% Appellant's ROCE 5910.09 550.53 9.32% Working of +/- 5% is given in below table: (INR in Lacs) Particulars Refer....
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....e internal comparable instance is available. In the alternative it was submitted that the TPO has wrongly applied rate of 14.18% per annum as interest is required to be calculated on the basis of LIBOR as per following decisions: "3.5 WITHOUT PREJUDICE TO ABOVE, INTEREST SHALL BE CALCULATED BASED ON LIBOR: Tech Mahindra Ltd-[(2011) 12 Taxmann.com 132, Mumbai Tri.] Cotton Naturals (I) Pvt. Ltd. - [2013) 32 Taxmann.com 219, Delhi Tri.]-Para 14 VVF Ltd- (2012) 31 CCH 474, Mumbai Tri. (2010-TII-04-ITAT-MUM-TP) Tata Autocomp Systems Ltd. -[(ITA No.7354/Mum/11(AY 2007-08)] EURIBOR Siva Industries and Holdings Ltd.- [(2011 59 DTR 182, Chennai Tri.]" 4.9 It was submitted that if LIBOR is applied the calculation of disallowance will be only a sum of Rs. 6,26,250/- as per following calculation. " Net receivables from AE= Rs. 25.27 Crs (refer page 55 of CIT(A) order) LIBOR rate = 4.53% (refer page 56 of CIT(A) order) Interest shall be Rs. 6,27,250 (25.27* 4.53% * 20/365)" 4.10 Thus, it was submitted by Ld. AR that appropriate relief may be granted to the assessee. 5. On the other hand, Ld. DR relied upon the order passed by TPO and Ld. CIT(A). He submitted ....
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....assets to employee cost, appellant has selectively taken only 4 companies hence same does not provide clear picture and consequently not reliable. Appellant argued that working capital in jewellery business is seasonal hence can't be taken as PLI. This, however is not correct since no business can function without capital and that too a business like diamond whose main basis is capital employed being a capital intensive industry. Further, profitability is always linked to capital being most significant factor in this industry." 6.1 In the present case also there is commonality of the transaction with AE and Non-AEs and due to such commonality it is not practical to compute separate capital employed or profitability in respect of transactions with AEs. In absence thereof, we are of the opinion that this issue is covered by the aforementioned decision of Tribunal in the case of Gold Star Jewellery Designs Pvt. Ltd. vs. ITO(supra). If such is the position then as per computation made by the assessee which is based on the figures given in TPOs order at page-5, the arithmetical margin of comparable will be 8.60% and assessee's margin as per page-2 of the TPO's order on the basis of O....
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....een mentioned. Ld. CIT(A) did not controvert this fact, however, he has rejected the contention of the assessee on the ground that difference in the period itself proves that assessee is not adopting uniform approach. This finding of Ld. CIT(A) is recorded in para 4.4.vi. Such observation of Ld.CIT(A) is incorrect as the approach of the assessee in noncharging the interest from its AE and non-AEs is uniform except there being some more delay in receiving the payment from AE. The uniform approach is depicted in the fact that either the assessee is charging interest from AE and non-AE and not charging any interest from them. The approach of the assessee in the present case is uniform so as it relates to non-charging of interest from AEs as well as non-AEs. If it is so then the case of the assessee to the extent of equal delay in realization is covered by the decision of Mumbai ITAT in the case of DCIT vs. Indo American Jewellery Ltd.(supra), wherein it has been held that there being complete uniformity in the act of assessee in not charging interest from both the AE and Non-AE debtors for almost equal delay in realization, no such adjustment can be made as assessee is not avoiding an....
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....d (investment grade bond) which was 14.18% for 1 to 2 years period for the financial year 2007-08. As against it is the case of assessee that interest rate should be calculated on the basis of LIBOR and such contention of the assessee is based on the decisions relied upon by Ld. AR mentioned in 4.8 of this order. 7.3 The assessee has also submitted these calculation which is even recorded by Ld. CIT(A) at page 55 to 57 of order of Ld. CIT(A). The same read as under: a. Amount on which Interest might be charged The Appellant exported jewellery to Dinurje Corp. USA (AE). The Appellant also purchased polished diamonds from the AE. Net amount of Rs. 25.27 crores was receivable from the AE against such exports as on 31.03.2008, as shown below: Receivable for export (sales) from SEEPZ Unit: 52.64 crores . Receivable for export (sales) from Mumbai Unit: 5.53 crores Payable for import (purchases) by SEEPZ Unit: - 8.45 crores Payable for import (purchases) by Surat Unit: - 24.45 crores So; interest might be charged on net amount receivable from the AE i.e. Rs. 25.27 crores Period for which Interest might be charged - based on Internal Comparables The Appellant ....
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....e, therefore, no addition can be made as transfer pricing adjustment even on account of noncharging of interest for belated payment received from AEs. 7.5 In view of above discussion we hold that no addition on account of TP adjustment in the present case is called for and the addition confirmed by Ld. CIT(A) is deleted and the appeal filed by the assessee is allowed. 8. Now coming to the Departmental appeal, the grievance of the Revenue as expressed in Ground No.1 to 4 is that Ld. CIT(A) has erred in accepting the assessee's claim that profit under section 10A of the Income Tax Act,1961 (the Act) is not liable to be included in the book profit computed under section 115JB of the Act. The main arguments have been referred into the grounds of appeal on the basis of which Ld. DR has argued this issue. It was the contention of Ld. DR that while holding so Ld. CIT(A) has ignored the amendment brought into the statute w.e.f. 1/4/2008, whereby words "10A and 10B" were omitted from explanation-1(f) & (ii) of section 115JB of the Act. According to Ld. DR, in view of the said amendment, the profit/loss of 10A & 10B units have come within the purview of MAT. It is also the contention o....
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....and gain derived by an assessee being entrepreneur referred to in clause (f) of Section 2 of Special Economic Zone Act, 2005 from its unit. AO stated that by inserting sub- section(6) in Section 115JB, the legislature has provided an exemption under MAT also to such units. Therefore, section 115JB(6) is applicable to an assessee claiming deduction under section 1OAA of the Act and not an assessee claiming deduction under 1OA of the Act. AO stated that assessee has claimed deduction of 1OA of the Act under normal provisions of the Act. Therefore, for computing book profit u/s.115JB of the Act, income relates to sec. 1OA unit is to be included in the book profit. Being aggrieved, assessee filed appeal before Ld CIT(A)." Ld. AR submitted that these arguments have been considered by the Tribunal in para 20 to 22 of the order which read as under: "20. We have considered submissions of ld. representatives of parties and orders of authorities below. We have also carefully considered the relevant provisions of the Act. There is no dispute to the fact that assessee's unit in Mumbai is located in SEZ. Section 1OA provides deduction of profits derived by the undertaking in respect of un....
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....er section 1OA or section 1OAA but it only refer that provisions of section 115JB will not apply to the income accrued or arisen on or after 1.4.2005 from any business carried on in an unit located in SEZ. Hence, we are of the considered view that the unit in SEZ will be covered by sub-section(6) to section 115JB of the Act irrespective of the fact that those units were claiming deduction u/s.1OA of the Act. We also observe that benefit given to SEZ unit from the applicability of provisions of section 115JB has been withdrawn by the Finance Act, 2011 by inserting a proviso to section 115JB(6) of the Act, which reads as under: Section 15JB(6)......... Provided that the provisions of this sub-section shall cease to have effect in respect of an previous year relevant to the assessment year commencing on or after the 1st day of April, 2012." .................... 22. Hence, we hold that authorities below were not justified to include the book profit in respect of SEZ unit at Mumbai of the assessee while computing book profit u/s.115JB of the Act for assessment year 2008-09. Therefore, we reverse the orders of authorities below by holding that income relating to SEZ unit at M....