TaxTMI 
TaxTMI 
2014 (11) TMI 904
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.... that the assessee made Purchases of diamond studded jewellery from its Associated Enterprises (AEs) amounting to Rs. 5,75,64,505 and sales were made of diamond studded jewellery to AEs at Rs. 11,42,16,876. Apart from that, the assessee also paid commission of Rs. 46,63,835 to its AEs. The assessee benchmarked its international transaction on Transactional Net Margin Method (TNMM). It applied Profit Level Indicator (PLI) of OP / TC. The assessee chose nine comparable cases with the average of OP / TC at 4.43% and OP / Sales at 4.12%. The assessee's margin of OP / Sales at 4.45% and OP / TC at 4.65% was claimed at ALP. The TPO rejected some of comparables chosen by the assessee because of significant related party transactions and also due to consideration of earlier year's data in computing the PLI of such comparable cases. The TPO set out certain filters in his order and on that basis chose certain fresh cases as comparable. Out of assessee's nine comparable cases, the TPO retained only four and added eight new cases at his own to make the list of comparables at twelve. The TPO also did not accept the assessee's adoption of OP / TC or OP/Sales as correct PLI. In his opinion the co....
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....rage capital employed. The assessee is in appeal against the order passed by the A.O. making the transfer pricing adjustment of Rs. 4.12 crore. 4. We have heard the rival submissions and perused the relevant material on record. First objection taken by the learned AR before us relates to inclusion of three cases in the final list of comparables, being, Goldiam Jewellery Limited, Su Raj Diamonds Industries Limited and Forever Precious Jewellery & Diamonds Limited. The upholding of inclusion of other cases by the DRP out of those chosen by the TPO and exclusion of other cases by the TPO out of the comparable cases chosen by the assessee is not in dispute. Thus the area of controversy qua the comparable cases is restricted to examining the comparability or otherwise of the above referred three cases. 5.1. The first case is that of Goldiam Jewellery Limited. The learned AR contended that the TPO adopted filter of 25% Related Party Transactions (RPTs). Referring to the details of RPTs in the case of Goldiam Jewellery Limited, it was claimed that the percentage of RPTs to the Total revenue in that case was at 35.10% and hence this case was liable to be excluded. In working out the ....
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....purpose which are of the revenue character having a direct bearing on the profitability. Such related party transactions which are profit neutral shall stand excluded for this purpose. To put it simply, when we determine the RPTs as a percentage of total revenue what is intended to be included in the related party transactions is the transactions which find their place either in the Manufacturing, Trading or the Profit and loss account, all of which are of the revenue nature. The transactions of capital nature finding their place in the Balance Sheet shall be expelled from the purview of the `Related party transactions' for this purpose. In that view of the matter, the transaction of accepting or advancing loan per se has no effect on the profitability. If however there is some interest expenditure or interest income from such loan advanced or accepted which finds place in the Profit and loss account that would definitely constitute related party transaction in such computation because of its revenue nature. As such, it is vivid that the figure of loan taken by the comparable case from its related party cannot find place in total related party transactions for the purposes of compu....
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....facturing jewellery but also those of plain gold jewellery. The learned AR stated that the assessee was engaged only in the business of studded manufacturing jewellery and not plain gold jewellery. The percentage of total sales of studded manufacturing jewellery in the case of Su- Raj Diamond Industries Limited worked out at 8.5% only as against the percentage of plain gold jewellery at 42.79%. In the backdrop of these facts, it was urged that this case be ignored. In the opposition, the ld. DR supported the impugned order in including this case in the list of comparables. 6.2. Having heard both the sides on the point we are unable to rank the case of Su-Raj Diamond Industries Limited as comparable to the assessee because it is operating in the retail segment, whereas the assessee is operating in wholesale business of diamond studded jewellery. There can be no comparison of the volume and profit rate in respect of whole sellers and retailers. On this score alone, we are of the considered opinion that the case of Su-Raj Diamond Industries Limited is liable to be excluded from the final list of comparables. We order accordingly. 7. The third case is that of Forever Precious Jew....
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....d by the TPO. Albeit he placed on record a copy of the order passed by the TPO for assessment year 2007-2008, however, it could not be precisely pointed out as to what was the PLI in such earlier year. The learned AR invited our attention towards three orders passed by the Mumbai Benches of the Tribunal, being Addl.CIT v. Tej Diam [(2010) 37 SOT 341 (Mum.)], ACIT v. Super Diamonds [(2012) 26 Taxmann.com 101 (Mum.)] and Tara Jewels Export (P.) Ltd. v. ACIT [(2013) 31 taxmann.com 383 (Mumbai-Trib.)] in which Operating margin to Sales or OP/TC has been accepted as PLI in the case of jewellery industry. It was, therefore, prayed that there was no logic in rejecting the assessee's PLI which was consistently followed in preference to RoCE. In the opposition the learned Departmental Representative pressed for the applicability of RoCE as PLI. On a specific query, he could not point out any order of the tribunal in the context of jewellery industry in which RoCE has been approved as correct PLI. It was, however, maintained that the transfer pricing provisions are going through its initial phase and there is consistent updation of law on day to day basis. Simply because PLI of RoCE was not ....
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.... 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 is always different. When there is no identifiable capital employed and separate amount of profit in respect of transactions with the AEs in the situation like the one which is prevailing before us, then how the assessee's RoCE can be precisely worked out, is anybody's guess. The position would have been different and the applicability of the RoCE practical, if the assessee had been engaged in transactions exclusively with its AE or some sort of demarcation in the use of capital employed and profitability for transactions with AEs and non-AEs had been there with or without s....