AI Drafter 
TaxTMI 
TaxTMI 
2012 (11) TMI 1128
X X X X Extracts X X X X
X X X X Extracts X X X X
....84,882/- added by AO. The CIT (A) also reallocated some expenditure. Accordingly, the grounds are raised by Assessee and Revenue in these appeals. For the sake of record, the grounds are extracted as under: ITA No.4520/Mum/2011: "1. Whether on the facts and in the circumstances of the case and in law, the learned CIT (A) erred in reducing the adjustment made to the income of assessee from Rs. 1,20,84,042/- to Rs. 8,39,245/- on account of transaction carried out with associate concerns under section 92CA(3) of the IT Act". 2. Whether on the facts and in the circumstances of the case and in law, the learned CIT (A) is justified in holding that adjustment to the returned income under section 92CA(3) can be made only on sales made to associate enterprises without appreciating the fact that on TNMM analysis the adjustment is required to be made on total transactions entered as the analysis is on entity level". 3. Whether on the facts and in the circumstances of the case and in law, the learned CIT (A) erred in deleting allocation of travelling expenses, donation and part of miscellaneous expenses to jewellery unit without explaining the fact as to why the same are allocable ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... So far as import and export of studded jewellery in the jewellery division and import and export of polished diamond- bond are concerned, as there are separate lotwise records these were accepted. However, with reference to import and export of polished diamond he has rejected assessee's comparables and after fresh analysis and giving opportunity to assessee and taking his objections into consideration, determined the arms length price as under:- "9. Determination of Arm's Length Price. ACTUAL BENCH MARKED ON COST ADJUSTMENT Sales 607,846,238 619,930,280 Non-AE 562,725.497 562,725,497 AE 45,120,741 57,204,783 12,084,042 Variation (%) 21.12 Cost 590,972,622 590,972,622 OP Profit 16,873,616 28,957,658 OP/OC 2.86 4.9 The arms length price of Rs. 5.72 crores varies from the transaction price of Rs. 4.51 crores by 21.12% i.e. more than 5%. This will result in an adjustment of Rs. 1,20,84,042/-....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rovisions of +/- 5%. Assessee raised the objection before the TPO as well as before the CIT (A), but these are not accepted by them. The learned DR also gave his working of +/- working of safe harbor provisions as under: Total AE Transaction Non AE Transaction Sales of assessee 607846238 A 45120741 562725497 Since non AE transactions are at arm's length hence apply the arm's length margin i.e. 4.90% to arrive at the cost Cost 590972622 B 54532682 536439940 Apply the arm's length margin on the cost used to earn the AE sales C 2672101 Arm's Length price of sales made to the AEs D=B+C 57204783 Difference of Arm's length price and the price at which the international transaction has taken place E=D-A 12084042 95% of arms length price 54344544 9. The learned AR objected to the above working stating that in this working the cost of non AE transactions are reduced so as to increase the cost of AE transactions which cannot be permitted as assessee is maintaining ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Rs. 4,37,47,717/-. Therefore, the sales to AE at Rs. 4,51,20,741/- is within the safe harbor range. The difference in price (operating profits/ Total costs) ie.the second table, the A L P as per the TPO comes to Rs. 61,9930,280/-. The operating cost considered by TPO in TP report was Rs. 59,09,72,622. 105% of this (+5% range) is at Rs. 65,09,26,794/-. 95% of this (-5% range) is at Rs. 58,89,33,766/-. Therefore, the operating cost at Rs. 59,09,72,622 is within the safe harbor range. Therefore, there is no need to make any addition under the provisions of the Transfer Pricing. In view of the above assessee's ground no. 1 is allowed and the addition sustained at Rs. 8,39,245/- is also directed to be deleted. Allocation of Expenses: 12. Assessee is running two units i.e. diamond polishing and manufacturing of jewellery. The unit manufacturing jewellery is eligible for deduction under section 10B. AO has listed out the total expenses and allocation to different units by assessee as under: Particulars Total Expense allocated to diamond unit Expenses allocated to jewellery unit Travelling expenses 2,34,19,542 1,83,94,685 50,14,858 Communication expe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....llocation to either of the units in a clear cut manner. That is lo say that they remain in the subjective domain of the taxpayers. This subjectively assumes greater importance in the light of the fact that one of the units enjoys exemption under section 10B. Thus the issue of allocation of each of the expenses has to be examined in above context. 2.6 Travelling expenses out of the total expenditure incurred at Rs. 2.34 crores around Rs. 50,14,858/- has been allocated to jewellery unit which appears to be reasonable and so it is fe1t that there is no scope for any reallocation or the 76:24 formula based on sales ratio. 2.7. As regards communication, out of total expenditure of Rs. 46,55,399/- the appellant has allocated only Rs. 57,743/- on the jewellery unit. This is abnormally low and obviously does not reflect the actual ground realities. The appellant has taken a plea regarding Mr. Mihir Bhansali expenditure being borne by another related firm. The same is not accepted as it was not raised before AO nor backed by requisite evidences at the assessment level or at appellate level. As such it remains an assertion only. In such circumstances it will be fair to reject the ap....
X X X X Extracts X X X X
X X X X Extracts X X X X
....assessee have raised the respective grounds on the issue. The learned DR however, mainly explained that in the absence of any proper allocation of expenditure, the ratio of sales in different units is the main basis for allocation of expenditure and particularly referred to the travelling expenses which were not according to the ratio. The learned Counsel however, submitted that assessee has maintained separate books of account and expenditure was allocated on actual basis. Therefore, there is no need for allocating on the ratio of sales as was done by AO. In the items confirmed by the CIT (A), it was his submission that the expenditure allocated to a particular unit was on the basis of actual expenditure in the unit and therefore, there is no need for allocation of expenditure on a different ratio. 14. We have considered the rival submissions and examined the allocation of expenditure. As far as travelling expenditure is considered the CIT (A) affirmed the allocation of expenditure on actual basis with which we also agree. Therefore, Revenue ground on this issue cannot be accepted. With reference to the communication expenditure the expenses allocated to the diamond unit is alm....
X X X X Extracts X X X X
X X X X Extracts X X X X
....out worked out the disallowance at Rs. 7,73,425/-. Since this issue was not agitated before the CIT (A), we are of the opinion that AO is required to rework out the disallowances after examining the reasonableness of the expenditure. Basically on RBI bonds, there cannot be any expenditure except to examine whether the funds are own funds or borrowed funds and any interest expenditure was incurred. This aspect was never examined. It was also assessee's contention that 0.5% of the disallowance was worked on the total investment of Rs. 15.46 crores which itself was carried over from March 31, 2005 out of which Rs. 10.57 crores was invested in a subsidiary company, the income of which is not exempt as it is a US based company. On investment in joint venture company, there was no change in facts from earlier year. Therefore, if at all any disallowances is to be worked out on a reasonable basis as per the principles established by the Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT (323 ITR 81) (Bom), it has to be on the amount of Rs. 3.75 crores invested in RBI relief bonds. During the course of the argument, the learned Counsel placed an order of the Coordinat....