TaxTMI 
TaxTMI 
2013 (11) TMI 1620
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....lates to the addition of Rs. 6,48,72,712/- 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 tran....
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....wellery.Ps constitute more than 25% of the revenued RPTs Rs. 149.95crore. 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 ....
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....ital intensive. The levelof sundry debtors and inventories are very high in this industry. Further, the value addition as well as wmployee cost as a percentage of sales is less, indicating that the value additions as well as contribution of human capital less when compared to the value of goods purchased or sold. In these circumstances the appropriate 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 d....
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....nd seek your comments and provide you an opportunity to explain/state your postion. Further, your having granted excessing credit period to your AE can be understood by the debtors turnover ratio in the case of AE vis-à-vis: AE (Rs. In crores) Non AE(Rs. In crores) Total as per balance sheet Sundry debtors 32.26 61.40 93.66 Sales 60.02 199.66 259.65 (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 3^rdparties. 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 R....
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....e assessee. In addition to the rejection of some of the comparables that the assessee selected, the TPO has on its own added a few more comparables. No basis has been provided to us for making the said addition. In the final list of comparables taken by the TPO, 2 outliers have been included. Asian Star having a R0CE of 24.63% and Suraj Diamond Industries Limited having a RoCE of 0.88%. Outliers have to be excluded 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 occur....
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....patible to the assessee's profile and business functions. The assessee's specific reference to the rejection of Karp Impex Ltd. as a comparable is misplaced. The company is functionally not similar. This company is mainly into trading in polished diamonds whereas the assessee is engaged in the business of cutting rough diamonds, subjecting it to manufacturing process and then exporting the cut and polished diamonds. The assessee's business 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 again....
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....efore an opportunity may be given to the A.O./TPO to verify the same. 12. We have considered the rival submissions and also perused the relevant material available on record. It is observed that ROCE is taken by the TPO as price level indicator and since the average ROCE of the comparables selected by him was found to be 8.93% as against 6.92% that of the assessee, the difference of 2.01% was applied by him to the capital employed for the 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% ....
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.... New company included by the TPO 5 Suraj Diamonds & Jewellery ltd. 3.48 New company included by the TPO 6 Suraj Diamond Industries Ltd. 4.08 Selected as a comparable company by the assessee. Arithmetic mean 7.60 As against the average OP/TC of the comparables selected by the TPO, the OP/TC of the assessee for the year under consideration is 6.82%as shown in the following working furnished by the assessee:- Particulars Amount (INR) Income Sales 2,596,478,466 Other income 27,480 Total Income ,2,596,505,946 Expenditure Cost of goods sold 2,164,488,618 Administrative & other expenses (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 diamon....
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....unal in support of its two alternative stands requires verification and the A.O/TPO may therefore be given an opportunity to verify the said working. We find merit in this contention of the ld. D.R. Accordingly, the matter is restored to the file of the A.O./TPO with a direction to verify the working furnished by the assessee in support of its case that the ALP as worked out by any of the two methods being within the safe harbor limit of 5% that the price charged by the assessee, no TP adjustment is required to be made in respect of the transactions of the assessee company with its AEs of import and export of cut and polished diamonds. On verification, if it is found that the difference is less than 5% as claimed by the assessee, the A.O. shall not make any TP adjustment in respect of transactions of the assessee with its AEs of export of cut and polished diamonds. Ground No. 1, 2, 4 & 5 of the assessee's appeal for A.Y. 2008-09 are accordingly 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 inter....
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....eived before 315t March or outstanding as on 3lst March. * Notwithstanding the above, if an addition is to be made for delayed realisation, the rate of 12% being the yield on bonds of 1 to 2 years cannot be used as a CUP. The assessee was not given the working of 12% and asked to show cause why this rate should not be used. Therefore, the assessee has no opportunity to determine the adequacy of this method for CUP." 20. After taking into consideration the above objection raised by the assessee, the DRP directed the A.O. to decide this issue as per the following directions given in para 3. 3.1 of his order:- "3.3.1 The adjustment on account of excess credit period of 85 days to AE has also been examined by us. The assessee has stated that the terms of credit are equivalent of 180 days to both the AE and non-AE. In this respect we find that if this is borne out by facts, there is no case for the adjustment as the transaction between AE and non-AE will 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 vie....
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....ortunity may be given to the assessee for this purpose. Since the ld. D.R. has not raised any objection in this regard, we set aside this issue to the file of the A.O. for deciding the same afresh after giving an opportunity to the assessee to establish its claim on further evidence that the credit period offered by it to AEs as well as non-AEs was at par. Ground No. 3 of assessee's appeal is accordingly treated as allowed for statistical purpose. 23. In ground No. 6, a limited issue raised by the assessee is that its profitability for the purpose of transfer pricing should be computed after considering the effect of various allowances/disallowance as made to its total income. 24. As agreed by the ld. representatives of both the sides, this issue is consequential in nature and accordingly the A.O. is directed to give consequential relief to the assessee on this issue. 25. The issue raised in ground No. 7 relates to the disallowance made u/s 40A(2)(b) of the 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 Aakas....
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....heap and lower quality goods were given to it. However, the assessee could not substantiate the same by documentary evidence. Moreover, there is substantial difference in the rates charged by AD compared to this party and the payments to AD are 2.72 times of the rates charged by this party. This in view of the fact that Shri Jyibiai K. Desai is a regular party who has worked for the assessee for the whole year and it is the only un-related party working for the assessee." On the basis of above findings/observations, the A.O. came to the conclusion that the assessee company and its related concern M/s Aakash Diamonds were not acting as independent parties and the transactions between them were not at arm's length. According to him, the reasonable average labour rate for polish work done by Aadash Diamonds for the assessee was Rs. 450/- per carat and accordingly the excess labour charges allegedly paid by the assessee to Aakash Diamonds was worked by him at Rs. 7,00,92,107/-. Accordingly, 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 Aa....
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....nd examine the comparable rates from the third parties at Deesa and then benchmark the average job work rate for the financial year in question and compute the job work charges." The order for A.Y. 2005-06 has been subsequently followed by the Tribunal in A.Y. 2007-08 to restore the similar issue to the file of the A.O. for deciding the same afresh as per the same directions as given in A.Y. 2005-06 vide an order dated 21-02-2013 passed in ITA No. 7052/Mum/2011. As the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to that of A.Y. 2005-06, we respectfully follow the order of the Tribunal for A.Y. 2005-06 and restore this matter to the file of the A.O. for deciding the same afresh as per the same direction as given in A.Y. 2005-06. Ground No. 7 of assessee's appeal for A.Y. 2008-09 is accordingly treated as allowed for statistical purpose. 28. The issue raised in ground No. 8 relates to the disallowance made on account of assessee'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 pla....
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.... the case of Gem India Manufacturing Co. (supra) relied upon by the A.O., the issue before the Hon'ble Supreme Court was whether the cutting and polishing of diamonds would amount to manufacturing or production of goods and the same was decided by the Hon'ble Supreme Court against the assessee holding that cutting and polishing of diamonds does not amount to manufacturing or production of goods. The Hon'ble Apex Court decision in the case of Gem India Manufacturing Co. (supra) thus is directly applicable in the present case involving a similar issue and respectfully following the same, we uphold the impugned order of the A.O. disallowing the assessee's claim for additional depreciation u/s 32(1)(iia) of the Act. Ground No. 8 of assessee's appeal is accordingly dismissed. 31. The issue raised in ground No. 9 relates to the addition made to the total income of the assessee on account of difference in value of closing stock as shown by the assessee in the stock statement submitted to the bank and as shown 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....
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....olve a common issue relating to the disallowance made by the A.O. and confirmed by the ld. CIT(A) u/s 40A(2)(b) of the Act in respect of labour charges paid to Aakash Diamonds. 36. As the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to A.Y. 2005-06 & 2008-09, we respectfully follow the said orders of the Tribunal for A.Y. 2005-06 & 2008-09 and restore this matter to the file of the A.O. for deciding the same afresh as per the same direction as given in A.Y. 2005-06 & 2008-09. Ground No. 1 to 5 of assessee's appeal for A.Y. 2006-07 is accordingly allowed for statistical purpose. 37. The next issue involved in ground No. 6 relates to the disallowance of 60% made by the A.O. out of residential telephone expenses which has been sustained by the ld. CIT(A) to the extent of 30%. 38. During the course of assessment proceedings, it was noticed by the A.O. that out of the total telephone expenses of Rs. 7,82,759/- claimed by the assessee, a sum of Rs. 4,38,668/- was in respect of residential telephone expenses of its partners. In this regard, the explanation offered by the assessee before the A.O. was that it is deali....