AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2013 (11) TMI 1620
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....made by way of transfer pricing adjustment in respect of export sales made by the assessee to its Associated Enterprise (AE). 4. The assessee in the present case is a partnership firm which filed its return of income for the year under consideration on 29-9-2008 declaring total income of Rs. 8,22,90,939/-. It is engaged in the business of cutting rough diamonds, subjecting the same to manufacturing process and then exporting the cut and polished diamonds. The manufacturing process for cutting and polishing diamonds stated to involve very specialized skill which is carried out by expert karigars - some of whom are independent subcontractors and some of whom are employed by the assessee. This process results in various categories of polished diamonds having different sizes and quality. During the year under consideration, the assessee had made export of cut and polished diamonds to its AEs namely Prism Diamonds, USA and Bhansali & Co., Hongkong amounting to Rs. 7,10,78,575/- and Rs. 52,92,74,437/- respectively. These international transactions of the assessee company were referred by the A.O. to the TPO along with other international transactions for the determination of the Arm's L....
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....9.95crore. As the company fails RTP filter the same is not functionally similar, the same is not considered as a comparable. 3 SB&T International Ltd The company is inot trading in gold, diamond &precious stone jewellery. The RTPs constitute more than 25% of the revenues. RPTs-Rs 33.43 crore As the company fails RPT filter, the same isnot considered as a comparable 4. Suashish Diamonds Ltd The company is not sale of jewellery and diamonds.The RPTs constitute more than 25% of the revenues. RPTs - Rs. 498.94 crore. As the company fails RPT filter, the same is not considered as a comparable. 5. Sunraj Diamond Exports Ltd The company is into trading in cut and polished diamonds. The RTPs constitute less than 25% of the revenues.RTPs-Rs Nil. As the company is not functionally similar, the same is not considered as a comparable. 6 Zodiac-JRD-MKJ Ltd. The company is mainly into trading in cut and polished diamonds. The RTPs constitute less than 25% of the Revenues. RPTs -Rs. Nil. As the company is not functionally similar, the same is not considered as a comparable. 5. After adding one new comparable to the remaining five comparables selected by the assessee, the average RO....
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....base for compiting the PLI would be capital emploted rather than cost or sales. Further as stated by the taxpayer, there are many variations in the quantity of diamonds and stones. Thus assest base asset based PLI is more appropriate as it is less prone to the differences in functions as well as differences in products. Thus in the facts and circumstances of the case, return on capital employed is considered as the most appropriate profit level indicator . ROCE = operating pofit/ Average capital Employed Capital Employed= Fixed Assets + current Assets or share capital +Reserves and surplus +Debt- Investment Average capital Employed = Average of CE as on 1/4/2007 and 31/3/2008 C Assessee's plea that depreciation, bamk charges and bad debts be considered as non-operational expenses. In any normal business depreciation and bad debts are normal operating expenses. Bank chargesare not to be confused with bank interest. Bank charges are normal business expenses unlike bank interest. D The assessee has objected to entities having high ROCEW as M/s. Asian Star Co- 24.63% and Suraj Diamonds Industires Ltd at 0,88% The fact that the comparables set includes entities with low Roce, to h....
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....59.65 (Debtors/sales )*365 days 197 days 112 days Prima facie you have given excess credit to your AE, by 85 days (197 less 112 days), for which interest ought to have been chargeable. To this extent you have not reported this international transaction being arms length price of interest chargeable from AEs on account of excess period of interest chargeable from AEs on account of excess period granted to them vis-à-vis 3rdparties. 7. Accordingly, after rejecting the objections of the assessee, the TPO proceeded to determine the ALP of the international transactions of the assessee with its AEs of export of cut and polished diamonds. In this regard, he observed that the return on capital employed of the assessee was at 6.92% being Rs. 16.57 crores on Rs. 239.47 crores which was less than the average ROCE of the comparables finally selected by him at 8.93%. Accordingly, the TP adjustment of Rs. 4.81 crores was proposed by him being 2.01% of Rs. 239.47 crores. 8. The TP adjustment proposed by the TPO on account of international transactions of export of cut and polished diamonds to its AEs was objected by the assessee before the DRP by raising the followin....
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....as per the judgement referred to above. Export invoices show that credit period given to AE and non-AE is 180 days. This submission has not been taken on record by the TPO. As the credit period given in both cases is the same, the same is at ALP and there should be no interest charge in respect of the delayed receivables. As regards the outstanding debtors, the total outstanding debtors as on 31st March, 2008 from the AE were Rs. 32.26 crores. In respect of the outstanding debtors from the AE, the assessee confirms that all sales in respect of which the debtors are outstanding have occurred on or after October the details of which have already been furnished to the Assessing Officer. The use of the debtors/turnover ratio is not relevant as sales have occurred at different times during the year to the AE and non-AE. The terms of credit are equivalent of 180 days to both the AE and non-AE. Therefore, if an export has been made on l October by the assessee firm, any realization received by 3l March of the following year is deemed to have been received within time. As stated above, in the instant case, the outstanding debtors for the AE are for sales made on or after l October and t....
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....siness is thus highly specialised. Since the TPO has used RoCE as the P11, there could be no question of applying the arm's length R0CE to the sales made to the AEs, and he has correctly applied the same to the capital employed in the assessee's case to determine the adjustment. The adjustment is thus in order." 10. The ld. counsel for the assessee raised mainly two contentions in support of the assessee's case on this issue. He submitted that even going by the return on capital employed taken by the TPO as price level indicator, if the adjustment is limited to international transactions of the assessee with its AEs, the ALP of the transactions of the assessee of export of cut and polished diamonds with its AEs would come to Rs. 61.15 crores as against Rs. 60.04 crores charged by the assessee and the difference being within the range of 5%, no TP adjustment is required to be made in respect of the said transaction. In this regard, he invited our attention to the working furnished at page 6 of his paper book and submitted that if the difference in ROCE of 2.01% (8.93% as per TPO's comparables and 6.92% that of the assessee) is applied to the average capital employed by the assessee....
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....he entire business of the assessee to make TP adjustment of Rs. 4.81 crores. As rightly contended by the ld. counsel for the assessee, the said difference of 2.01% is required to be applied only to the capital employed by the assessee for the purpose of its transactions of export of cut and polished diamonds with its AEs. The ld. counsel for the assessee has furnished the following working in this regard:- Particulars Transactions with AEs Transactions with Non-AEs Total Sales A 60.04 199.61 259.65 Average Capital Employed B 55.37 184.10 239.47 ROCE as per Assessee's Comparables C 6.92% 6.92% 6.92% ROCE as per TPO's Comparables D 8.93% 8.93% 8.93% Difference in ROCE E=D-C 2.01% 2.01% 2.01% Adjustment to Export sales F=E*B 1.11 3.70 4.81 Arm's length Sales G=A+F 61.15 203.31 264.46 Range of Arms Length Price considering 5% Variation from ALP &n....
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....includes Bank charges and basd debts) 79,526,805 Increase/(decrease) in stock 176,757,200 Depriciation 10,002,802 Total Expenditure 2,430,775,425 Net operating Profit 165,730,521 OP/TC (%) 6.28 15. The OP/TC of the assessee thus is lower by 0.78% (7.60% (-) 6.82%) and if the adjustment to that extent is made to the transactions of the assessee company with its AEs on account of cut and polished diamonds amounting to Rs. 60.04 crores, the ALP of the said transactions would come to Rs. 60.48 crores as against Rs. 60.04 crores charged by the assessee as shown in the following working furnished by the assessee:- Particulars Transactions with AEs Transactions with Non-AEs Total Sales A 60.04 199.61 259.65 Total cost B 56.21 186.61 243.07 Total Profit C 3.83 12.75 16.58 OP/TC of Assessee D 6.82% 6.82% 6.82% OP/TC as per TPO's comparables E 7.60% 7.60% 7.60% Difference in OP/TC F=E-D 0.78% &n....
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....gly treated as allowed as indicated above. 18. The issue raised in ground No. 3 of assessee's appeal for A.Y. 2008-09 relates to the addition made by the Assessing Officer/TPO by way of transfer pricing adjustment on account of notional interest on outstanding AE debtors. 19. As noted by the TPO, the assessee had granted excess credit period to its AEs by 85 days vis-à-vis credit granted to third parties. As the assessee could not bring any evidence on record to support and substantiate its claim that the third parties were also being granted same credit period of 180 days as granted to the AEs, the TPO held that the assessee ought to have charged interest on the excess credit period granted by it to the AEs. On the basis of the information obtained by him from M/s Crisil regarding the average yield on the short/long term instruments, he adopted arm's length rate of such interest at 12% by following CUP method. This interest rate of 12% was applied by him to the excess credit of 85 days allowed by the assessee to its AEs on total sales of Rs. 60.02 crores to work out the interest that ought to have been charged by the assessee to its AEs at Rs. 1,67,72,712/- and accordingl....
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....l be at par so far as the credit period is concerned. There is no specific finding in the TPO's order that the non-AEs paid back earlier than 180 days. The TPO has only given an inferential observation that this is not so. In view of the assessee's submission before us we find that this verification needs to be revisited. AC is therefore directed to verify this and delete the adjustment f the assessee's contention is found correct. Otherwise, in absence of equivalent benefit to non-AE, the adjustment made by the TPO will be in order. In this situation, it is obvious, the assessee has given a benefit to its AE for which a compensation will be inevitable: In that event, the basis of interest charged by the TPO is also found to be in order." 21. As per the directions of the DRP, the A.O. examined this issue and found that although the credit period in the case of AEs and non-AEs was the same of 180 days as mentioned in the relevant copies of invoices placed by the assessee on record, there was a specific finding given by the TPO that the assessee has granted excess credit period to its AEs by 85 days vis-à-vis credit granted to third parties. According to the A.O., the assesse....
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....Act to the total income of the assessee on account of labour charges paid to M/s Aakash Diamonds. 26. During the year under consideration, the assessee had paid total labour charges of Rs. 14,83,30,322/- to M/s Aakash Diamonds, the related concern covered u/s 40A(2)(b) of the Act. The assessee was called upon by the A.O. to justify the reasonableness of these payments and after considering the explanation offered by the assessee in this regard as well as the material placed on record in support, the A.O. recorded his findings/observations on this issue as under:- "(i) The assessee is paying average per Carat Rate of Rs. 831 per Carat for Surat unit while for the Deesa unit; the average rate of Rs. 870.31 is paid. No justification for this substantial difference is given. (ii) The assessee has increased the rates of Surat unit by only Rs. 25 over the year but for Deesa unit, rate was increased by Rs. 75. No justification for this substantial variation is given. (iii) The assessee has not given any detail in the bills in respect of quality of diamond processed by these parties. (iv) Even in the Jangads issued to AD, no details in respect of quality are mentioned. (v) In t....
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....ngly, the disallowance u/s 40A(2)(b) of the Act was proposed by the A.O. to that extent. On objection raised by the assessee, the DRP held that the reasonable labour rate for the polish work done by Aakash Diamonds for the assessee was Rs. 808.33 per carat as paid in the earlier years. Accordingly, the disallowance was finally made by the A.O. at Rs. 77,91,886/-. 27. We have heard the arguments of both the sides and also perused the relevant material available on record. It is observed that a similar issue was involved in assessee's own case for A.Y. 2005-06 and the same was set aside by the Tribunal to the file of the A.O. for deciding the same afresh for the following reasons given in para 11,12 & 13 of its order dated 19th December, 2012 passed in ITA No. 2282/Mum/2010:- "11. We have heard the arguments in detail and we find that Mr. Mahesh Bhasali, partner of the assessee firm is also a partner in 75% ratio in Aakash, hence, the assessee and the vendor, i.e. Aakash are associates and provisions of section 40A(2)(b) are attracted. On the issue of justification of addition made by the AO and sustained by the CIT(A), we find from the impugned order that the assessee had, in fact....
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....e's claim for additional depreciation on plant and machinery. 29. In its return of income, the assessee had claimed additional depreciation @ 20% u/s 32(1)(iia) of the Act on the new plant and machinery acquired and installed during the year under consideration. As per section 32(1)(iia) of the Act, additional depreciation was allowable to an assessee who is engaged in the business of manufacture or production of any article or thing. In this regard, the A.O. relied on the decision of Hon'ble Supreme Court in the case of CIT vs. Gem India Manufacturing Co. (2001 249 ITR 307 (SC) wherein it was held that cutting and polishing of diamonds does not amount to manufacturing or production of goods and disallowed the claim of the assessee for additional depreciation in plant and machinery u/s 32(1)(iia) of the Act. 30. We have heard the arguments of both the sides and also perused the relevant material available on record. The ld. counsel for the assessee in support of the assessee case on this issue has relied on the decision of the Tribunal in the case of Sheetal Diamonds Limited vs. ITO (ITA No. 6687 to 6689/Mum/2003 dated 23rd March, 2011 where it was held that the profits derived b....
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....own by the assessee in the books of account. 32. During the course of assessment proceedings, it was noticed by the A.O. that although the quantity of stock of diamonds as shown in the stock statement submitted to the bank as o n 31-3-2008 was same as shown in its books of account, the valuation as shown in the bank statement was higher at Rs. 139.46 crores as against 138.80 crores shown by the assessee in the books of account. Since the difference could not be explained by the assessee to the satisfaction of the A.O. and the assessee also could not give any basis of valuation of stock as shown either in the bank statement or in the books of accounts, the A.O. added the difference of Rs. 66 lacs in the valuation of closing stock to the total income of the assessee. 33. We have heard the arguments of both the sides and also perused the relevant material on record. Although the ld. counsel for the assessee has tried to justify the valuation of closing stock as taken by the assessee in the balance sheet, he has not been able to give any basis of the said valuation taken by the assessee. It is noted that the quantity of rough diamonds and polished diamonds shown in both the statement....