TaxTMI 
TaxTMI 
2016 (7) TMI 1488
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....s most appropriate method(MAM)for determining the Arm's Length Price(ALP)of the transactions, that it had selected three comparables. So, he made a reference to the Transfer Pricing Officer(TPO)to determine the Arm's length Price(ALP)of such transactions. After receiving the order of the TPO the AO issued a draft order to the assessee who opted not to challenge it before the DRP. The AO completed the assessment u/s.143(3) r.w.s. 144C(3)&(4) of the Act on 27.02.2012 determining the income of the assessee at Rs. NIL, after considering the brought forward losses of earlier years. 3. First ground of appeal is about TP adjustment of Rs. 3.59 Crores. During the TP proceedings the TPO observed that the assessee had only one AE. i.e. M/s. Fantasy Diamond Corporation, USA, that it was primarily engaged in purchase and Sale/ distribution of jewellery products in USA to the major USA wholesalers, that the total turnover of the assessee for the FY. 2007-08 was Rs. 16.31 Crores, that Operating Profit was Rs.(-) 0.46 Crores, that PIL (OP/Sales)for the year was 2.83% and OP/TC was (-)2.75%. After analysing the available material, the TPO observed that all the transactions were of the same segm....
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....Rs. 62 Crores in the next assessment year after stabilisation of processes and marketing on the same assets and expenses base, that the increase in expenses was mainly because of increase in direct expenses due to increase in volumes, that the assessee was working on almost the same asset base in both the years, that with almost the same base it had achieved fourfold increase in sales and tenfold increase in gross profit which had increased from Rs. 49.52 Crores to Rs. 510.29 Crores, that the profit on materials consumed was 9.80% and 10.70% for the AY.2008-09 and AY.2009 -10 respectively, that the difference in GP at the rate of 3.04% and 8.21% for the year under appeal and the AY. 2009- 10 could be explained as manufacturing expense for the year under appeal, that it had incurred loss during the year because of expenses incurred by it which were to commensurate with the sale of almost Rs. 60 Crores but could achieve the sales of Rs. 16 Crores only, that the basic intention underlying the TP provisions was to prevent shifting out profits by manipulating prices charged or paid in international transactions and evading the country's tax base, that it was a manufacturer of diamond st....
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....t there was no force in the argument of the assessee that the sales in each month picked up in the subsequent year. 4.2 The FAA further held that the TPO had determined ALP of the ITs of the assessee as per the provisions of section 92C(1) and 92C(2) of the Act that as per the TP Regulations of India there was no encumbrance either on the TPO or the AO to prove that there was any manipulations of the prices which had led to shifting of the profits outside India, that the TP Regulations had been brought into the statutes to prevent the erosion of the tax base of the country, it was not the case of the assessee that it had not under taken any IT.s which would fall within the meaning of section 92 of the Act or that the TP regulations of India were not applicable, that the assessee itself had undertaken benchmarking process and had arrived at the conclusion that its IT.s were at arm's length, that the subsequent year's data could not be considered for benchmarking the transactions as provided in Rule 10B(4) of IT Rules, that dividend distribution tax u/s.115-O was applicable to such profits, that in a case where a subsidiary had accumulated higher profit corresponding divid....
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....res, that it had argued before the FAA that benefit of underutilisation of capacity should be allowed before making any adjustment. 5.1 It is a fact that the TPO had compared results of selected 12 comparables without bringing them on same platform, that he ignored the fact that the assessee was a new unit, that effective sales happened only in 3 months of the calendar year 2008, i.e. September,October and November of the year under. In our opinion, for making TP adjustments, as per the provisions of section 92 of the Act, comparison has to be made between the two equals. An assessee who starts business in a particular year cannot be compared with the assessees who are doing business for many a years. Even if comparison of such an assessee has to be made , then it has to be seen that both are at same level. No assessee can achieve full capacity of production for an AY., if it starts business in the later part of that year. In the case under appeal major sales are not throughout the whole year,whereas the expenses incurred by it are same or almost the same as compared to the expenses of the next year. It is a fact that the assessee had achieved sales of Rs. 62 crores in next AY. ....
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....he depreciation certain fixed operating costs, like Factory Rent,Testing Research & Development Cost etc.would have to be incurred irrespective of the level of production. Respectfully following the cases relied upon by the AR(para 4.3 of our order),we hold that appropriate adjustment has to be allowed while computing the net margins in the case of tested party also to facilitate comparability analysis. Therefore, in our opinion, in the interest of justice, matter should be restored back to the file of the AO/TPO for fresh adjudication who would consider the capacityunderutilisation factor along with the other factors for determining TP adjustments. Besides, two of the comparables objected by the assessee needs to be reconsidered to find as to whether they are fair comparables. Proverbial apple has to be compared with an apple. The TPO/AO would decide the issue after affording a reasonable opportunity of hearing to the assessee. 5.3. With regard to matter of Haworth (India) P. Ltd. (supra), relied upon by the DR we would find that the assessee had computed its margin after claiming adjustment for capacity utilisation, that it had adopted the TNM method for the purpose of computi....
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....hat on a inquiry by him it submitted that quantitative details provided in the Audit Report u/s 44AB was incorrect, that the explanation was unbelievable, fabricated and was an after-thought. Accordingly, the AO took the value of closing stock of gold of 4572 grams at Rs. 55,45,836/- applying the market rate of Rs. 1,213 per gram. As a result an addition of Rs. 31,09,895/-was made being difference between value of closing stock shown by the assessee and value of closing stock computed as above. 6.2. During the appellate proceedings, before the FAA, the assessee submitted that the AO had made the addition without considering the details submitted by it and he did not make any attempt to analyze the same, that the reliance of the AO on the decision of the Hon'ble Supreme Court in the case of British Paints India Ltd. (188 ITR 44) was out of context, that from the statements submitted to the AO, vide letter dated 19.12.2011, the assessee had already added the overhead charges in valuing the closing stock of Finished Goods and Work-in-progress. 6.3 After considering the submissions of the assessee, the FAA held that closing stock of gold of 4572 grams which was valued at Rs. ....