TaxTMI 
TaxTMI 
2015 (3) TMI 1025
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion of transfer pricing adjustment of Rs. 1,28,19,493 on account of transactions of sale of diamond with the associated enterprise and also deletion of transfer pricing adjustment of Rs. 4,65,23,007 on account of notional interest to be charged on delayed payment on sales/invoices which are receivables from the associated enterprise. Since common issue of transfer pricing adjustment is involved in both the appeals, therefore, they are being disposed of by this consolidated order for the sake of convenience. 2. The facts in brief, are that the assessee which is a partnership firm, is engaged in the business of manufacture of cut and polished diamonds and selling them to associated enterprise as well as to the third parties. In the transfer pricing report in Form 3CEB, the assessee has disclosed the following international transaction with its associate enterprises (AEs) : Sl. No. Class of transactions in the financial year 2006-07 Amount Method used 1. Purchase of rough diamonds 10,88,53,365 Transactional net margin method 2. Sale of cut and polished diamonds 1,26,34,59,644 Transactional net margin method For benchmarking....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s ; and (v) adjustment on account of geographical differences. Such a reasoning given by the assessee has been rejected by the Transfer Pricing Officer on the ground that, when these parties are entering into international transaction, the prices are negotiated, keeping in view the price prevailing in the uncontrolled scenario and the assessee who is selling the same product to the unrelated parties on said rate, the same should be benchmarked for the negotiation of price with the related party also. After analysing the various transactions with the associated enterprises as well as non-associated enterprises, he noted that in the three categories of transaction of sale of diamonds, there was difference in price of more than 5 per cent. as the prices charged from the associated enterprises were less than the prices charged from the non-associated enterprises, accordingly he proceeded to make adjustment in respect of the said three categories of transactions. The calculation and the addition made by the Transfer Pricing Officer in respect of three categories of the diamonds were as under : Products Qty. in carats Difference/-carats (US dollar) Value of differences (US do....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the comparable uncontrolled price Method, because no person in uncontrolled transactions will permit use of money without interests, so as to consider the trans action to be at arm's length. The assessee was also asked to furnish the average borrowing cost of its fund. The assessee vide its submis sion dated October 11, 2010 submitted the details of the various loans availed by it from different banks. It is observed that the maximum interest paid by the assessee is 15.25 per cent. If we make an adjust ment on account of involvement of personal security, loss of business opportunity other cost risk, etc., the rate should not be less than 16 per cent. An adjustment of Rs. 4,65,23,007 is to be made on account of delayed credit realisation period from the associated enterprise. The working of he same is given as under : Delay in days 84 Total value of realisation from the associated enterprise Rs. 1,26,34,59,644 Rate of interest 16 per cent Interest (1,26,34,59,644 x 16)/(365 x 100) = Rs. 4,65,23,007 In view of the above, an adjustment of Rs. 4,65,23,007 is made on account of delayed realisation from associated ent....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the associated enterprises. These differences has to be taken into account while benchmarking the prices with the associated enterprises as well as with non-associated enterprises. 3.1. During the course of appellate proceedings, the assessee also filed additional evidence with regard to particular transactions in the case of Simona NV (third party), which has been benchmarked by the Transfer Pricing Officer and had made the adjustment in respect of two categories of transactions, this has resulted into adjustment of Rs. 1,28,19,493. From the said additional evidence which was in the form of letter from the said party the assessee had contended that the said non-associated enterprise had not purchased the diamonds, but had forwarded the said consignment of diamonds to the associated enterprise of the assessee, on the ground that the price charged by the assessee was too high and, therefore, the said price cannot be used for benchmarking the price charged with the associated enterprise. Simona NV, vide letter dated October 14, 2010 had categorically stated that prices charged by the assessee for the sale of diamonds were exorbitant and since the said non-associated enterprise cou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re, those prices will be a benchmark for negotiation with a relay too. In its submission the appellant has not been able to demonstrate that the factors of differences which it has mentioned, have any ways affected the transfer prices of the products. Accordingly even if such differences existed, the same at best could be treated as 'mere differences' and not the 'material differences', which would affect the price of the product in the open market, as has been envis aged in rule 10B(1)(a)(ii) of the Income-tax Rules, 1962. In view of these facts and circumstances, the objections raised by the appellant in this regard are rejected. 2. The appellant has further mentioned that diamond industry is very price sensitive and that there are various judicial precedents in the Indian context, wherein, it has been held that each diamond is unique, and hence, the prices of different diamond cannot be compared. In this regard it is stated that the appellant has not demonstrated with any facts or figures, how such a mention is relevant to the appellant's case. Further what are those judicial pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e order under section 92CA(3) was passed on October 18, 2010, it can reasonably be concluded that at the time when the appellant filed its last submission, it did not have the letter dated October 14, 2010 of M/s. Simona NV. Accordingly the appellant could not have submitted the same before the Transfer Pricing Officer. In view of these set of facts the additional evidence so submitted by the appel lant are admitted for consideration and decision of the issue on hand. 5. On perusal of the various submissions of the appellant, the remand report of the Transfer Pricing Officer wherein it has been mentioned that 'From the records, it is seen that the Transfer Pricing Officer had considered transaction with M/s. Simona N V. for bench marking and determining the arm's length price' and that "On perusal of the photocopies of confirmation letter and bills submitted by the assessee, it is seen that the said transactions under reference were of circular nature" it is seen that in respect of the said two categories of diamonds, Transfer Pricing Officer had used sales made to Simona N. V. vide invoic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ngth. 8. I have gone through the arguments and I do not agree with the appellant's contention. The appellant has not submitted any basis of calculation of the said discount adjustment. Further, the appellant has not brought anything on record to suggest that the associated enter prises were eligible for discount based on the quantity sold. In its submission the appellant has not been able to demonstrate that the factors of dffferences which it has mentioned, have anyways affected the transfer prices of the products. Accordingly even if such difference existed, the same at best could be treated as 'mere differences' and not the 'material differences', which would affect the price of the product in the open market as has been envisaged in rule 10B(1)(a)(ii) of the Income-tax Rules, 1962. In view of these facts and circum stances, the objections raised by the appellant are rejected. Accordingly, the appellant's arguments are rejected and the additions made by the Transfer Pricing Officer in respect of the above category of diamonds amounting to Rs. 51,32,512 is confirmed." 3.3. In sum and substa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....not lead to application of comparable uncontrolled price method, which requires very high degree of product similarity. He drew our attention to Rapport report and certificate of International Gemological Institute, along with the literature on shapes and sizes of the diamonds in support the contention that, there is a huge difference in the grading and pricing of the diamonds. Even in the transfer pricing study report this issue has been highlighted in detail and our specific attention was drawn to page 129 of the paper book and also on pages 39 and 40 of the paper book. Even from the perusal of the invoices, he submitted that, it can be seen that Transfer Pricing Officer has not taken piece wise or carat wise description but has gone by the pricing by the category of diamond which was sold to the associated enterprise as well as to unrelated parties. Within the same category, there is a huge variation of quality and prices of the diamond which has not been taken into consideration either by the Transfer Pricing Officer or by the Commissioner of Income-tax (Appeals). He also submitted that in the earlier years, the transactional net margin method has been held to be the most appro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....prise and, therefore, there is no substance in the arguments raised by learned counsel. Accordingly, the finding of the Commissioner of Income-tax (Appeals) to this extent is perfectly justified. Without prejudice, he submitted that if transactional net margin method is to be applied then, examination of comparables has to be done because neither the Transfer Pricing Officer nor the Commissioner of Income-tax (Appeals) has carried out any comparability analysis. Some of the comparables as highlighted by the assessee are also into jewellery business, whereas the assessee is purely engaged in the business of selling of cut and polished diamonds. In any case, if transactional net margin method has to be accepted then the matter is required to be sent back to the Transfer Pricing Officer for fresh consideration. 5.1. As regards deletion/adjustment of Rs. 1,28,19,493 on account of transaction with M/s. Simona NV, learned Commissioner of Income-tax (Departmental representative) strongly relied upon the findings given by the Transfer Pricing Officer in the remand report, which has been dealt at page 7 of the appellate order and further submitted that the transaction with the said party....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... non-associated enterprise, noticed that there were eleven such transactions during the year and out of eleven transaction, in three transactions there were price difference of more than 5 per cent. between the sale made to associated enterprise as well as to the third party. Thus he applied internal comparable uncontrolled price and has made the adjustment of Rs. 1,79,52,005 in the manners already discussed above. The first and foremost issue before us is, whether on facts and circumstances of the case, comparable uncontrolled price should be regarded as the most appropriate method for benchmarking the price charged by the assessee with its associated enterprise or the transactional net margin method should be the most appropriate method. 7.1. The application of the arm's length price is based on comparison of the conditions in controlled transaction with the conditions in transaction between independent enterprise, i.e., uncontrolled transaction, so as to determine the market price or the margin on which the two related parties are carrying on their transaction. The determination of the arm's length price has to be done as per the methodology prescribed under section 9....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... condition it becomes very difficult to apply comparable uncontrolled price method in benchmarking the pricing of the diamond. On this proposition we fully agree with the contention of learned counsel that comparable uncontrolled price method is generally not a very suitable method for benchmarking the pricing of the diamonds and price paid in comparable uncontrolled purchase or sales. It is not a very easy proposition to hold that comparable uncontrolled price would be an appropriate method for benchmarking the prices in the transaction of the diamonds, owing to various differences between the products itself as highlighted above. 7.2. However on the facts of the present case, if we analyse the invoices based transactions, which has been done by the Transfer Pricing Officer for analysing the comparable prices which has been charged by the assessee from its associated enterprise and with the 3rd parties, it is seen that the Transfer Pricing Officer has first of all, given the description of the diamonds in the invoices which gives the details of piece per carat, type of cut and the clarity of the diamond. Under this description, invoices has been raised not only to the associate....
X X X X Extracts X X X X
X X X X Extracts X X X X
....6.96 69.94 14083.40 9 6P/CT D CUT White VVS2 100.89 793.15 14.38 823.79 30.64 3091.22 10 6P/CT D CUT White VS2 42.84 635.00 43.43 662.17 27.17 1164.17 11 10P/CT D CUT White VVS1 431.09 715.57 9.89 720.70 5.13 2213.19 * Subject matter of transfer pricing adjustment. 7.3. Out of all these transactions, nine transactions have been accepted by the Transfer Pricing Officer, as the price difference was less than 5 per cent. and it was only with regard to three transactions, which have been given at serial Nos. 2, 4 and 8, the Transfer Pricing Officer has drawn the adverse inference on the basis of major difference in prices charged by the assessee. From the above details, it appears that under a particular description, invoices raised to associated enterprise and non-associated enterprise were similar. Exact difference in invoices have not been brought forth before us. Thus in the case of the assessee, there was availability of the internal comparable uncontrolled price, wherein on similar nature of transaction and similar description of product as given in the invoices, the assessee has b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....you, over the phone, we have returned both the shipments to Diamstones BVBA adding 1 per cent. to your invoice amount on account of occurred expenses. Goods were invoiced as follows : (1) Invoice No. 07/101 dated March 16, 2007 (1027.02 carats for US$ 458,660.00) (2) Invoice No. 07/103 dated April 13, 2007 (709.00 carats for US$ 353,490.41)." The said letter has been subject to remand before the Transfer Pricing Officer, who has given his remark, which has been incorporated and dealt with by the Commissioner of Income-tax (Appeals) also as discussed herein the foregoing paragraphs, from the above letter and relevant finding of the Commissioner of Income-tax (Appeals), it is quite conclusive that, the said party has not purchased the diamonds sent on these two invoices and ultimately, it has been sold to associated enterprise only. Thus, such a transaction cannot be considered for benchmarking and determining the arm's length price. Once the particular transaction, which is the subject matter of comparison for transfer pricing adjustment, has not even undertaken or has been cancelled, then such a transaction has to be excluded for the purpose of benchmarking the tran....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ce method a very high degree of comparison of business conditions, products and other physical attributes of the products and services are to be examined, therefore, more often it becomes very difficult to have such comparable transactions. Rule 10B provides that in such a situation, adjustment on account of differences can be made if it materially affects the price in the open market. The negotiation of a price depends upon various factors like the volume of sales/ transactions, the contractual terms of the parties, the geographical market conditions in which the transaction takes place, the time and period of the transaction and various other risk factors like bad debt risk, foreign currency risk, etc. All these factors have to be taken into account for determination of the price in a given transaction. In this particular transaction, the assessee has sold a total quantity of 2773.20 to its associated enterprise with an average rate of 328.89 dollars, whereas to the third party, the assessee has merely sold quantity of 8.50 carats with the rate of 370 dollars. Thus there is a huge difference in volume of sale and it is quite a normal phenomena that if the purchases and sales are ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssociated enterprise which was 210 days, whereas in respect of non-associated enterprises the average days of realisation was 126 days. Accordingly, he concluded that there was an average delay of 84 days in realisation of money from associated enterprises as compared to non-associated enterprises in respect of sale made to them. He thus applied the rate of 16 per cent. in respect of excess credit period available to the associated enterprise. 10. Before the Commissioner of Income-tax (Appeals), the assessee's main submission was that this credit period for the sales made to associated enterprise and non-associated enterprise cannot be looked into isolation as it is not a separate transaction but part of the same transaction itself. There had been several instances when the unrelated parties also had made payments beyond the credit period granted and in such cases also the assessee had not charged any interest on such delayed payment. In fact in the diamond industry, payment beyond the credit period is usual business practice and none of the entities charge any interest on such delayed payments. In support of this, a certificate/letter from Gem and Jewellery Export Promotion....