TaxTMI 
TaxTMI 
2025 (8) TMI 1034
X X X X Extracts X X X X
X X X X Extracts X X X X
....ispose these two appeals by a common order. 2.1 In appeal no. 1144/JP/2024 the assessee has raised the following grounds: - 1 Under the facts and circumstances of the case and in law, the learned A.O. has erred by initiating proceedings and passing order u/s 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 being without jurisdiction and against the statutory provisions. Thus, the resultant order is against the law and deserves to be quashed. 2 Under the facts and circumstances of the case and in law, Ld.AO has erred in assessing the total income of the appellant at Rs. 325,44,82,409/- as against the returned income of Rs. 115,97,35,540/- in the assessment order passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961. 3 The Ld. TPO and Hon'ble DRP has erred on facts and in law in proposing an adjustment of amount of Rs. 136,31,75,249/- to the income of the appellant on account of alleged difference in Arm's Length Price (ALP) of the international transaction of sale and purchase made to/from Associated Enterprises (AEs) during the relevant previous year and adjustment of Rs. 96,03,898/- to the income of the appellant by treating....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rounds: 1. Under the facts and circumstances of the case and in law, the Ld. A.Ο. has erred by initiating proceedings and passing order u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 being without jurisdiction and against the statutory provisions. Thus, the resultant order is against the law and deserves to be quashed. 2. Under the facts and circumstances of the case and in law, the Ld.AO has erred in assessing the total income of the appellant at Rs. 325,44,82,409/- as against the returned income of Rs. 115,97,35,540/- in the assessment order passed under section143(3) r.w.s 144C(13) of the Income Tax Act, 1961. 3. The Ld. TPO and Hon'ble DRP has erred on facts and in law in proposing an adjustment of amount of Rs. 136,31,75,249/- to the income of the appellant on account of alleged difference in Arm's Length Price (ALP) of the international transaction of sale and purchase made to/from Associated Enterprises (AEs) during the relevant previous year and adjustment of Rs. 96,03,898/- to the income of the appellant by treating outstanding receivables as unsecured loans and charging notional interest thereon. Further, the Ld. AO has e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Under the facts and circumstances of the case and in law, the Ld. TPO, Ld. AO and the Hon'ble DRP erred in applying "Berrey Ratio" with operating profit / value added expenses (OP/VAB) as the PLI under the Transaction Net Margin Method (TNMM) based on the conjectures and surmises, without appreciating that the appellant is engaged in manufacturing activities and therefore, purchase and cost of production ought to be included in the cost base, thereby completely disregarding the facts of the case, the functional profile of the appellant, established legal principles and internationally accepted transfer pricing guidelines. In doing so, the ld. TPO, Ld. AO and the Hon'ble DRP also failed to appreciate that Berry ratio is applied only in specific circumstances i.e. low risk procurement and distributors. Additionally, the ld. AO has erred in applying 'Berry Ratio' even when in appellant's own case. Berry Ratio was rejected as PLI in the A. Y. 2016-17 and 2017-18 by the Hon'ble ITAT. 5. Under the facts and circumstances of the case and in law, the ld. TPO, Ld. AO and the Hon'ble DRP erred in violating the provisions of Rule 10B(2) of the Rules by rejecting functionally simi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Appellant 2. Without prejudice, the Ld. AO and the Ld. TPO erred in ignoring the fact that the gross as well as net margin earned by the Appellant from the primary international transaction of 'sale made to its AEs and related aggregated international transactions' during the year was much higher than the arim's length margin of comparable. In doing so, the ld. AO and Ld. TPO failed to appreciate that the impact of outstanding receivable is already subsumed in the higher margins earned by the Appellant. 3. Without prejudice, the Ld. AO and the Ld. TPO erred in adopting an ad-hoc period of 60 days to determine overdue receivables from the AEs for the purpose of treating such overdue receivables in nature of interest free unsecured loans. In doing so, the Ld. TPO/ AO grossly erred in ignoring that:- a) the Appellant has granted a credit period of up to 180 days to both AEs as well as non-AE third parties; b) the Appellant has not charged interest on delayed receivables from third parties as well; c) the Reserve Bank of India ('RBI') has itself acknowledged the hardships faced by the companies (operating in similar industries) an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e the Ld. AO has erred in invoking section 115QA of the Act and further erred by charging additional tax of distributed income in relation to buy back of shares of Rs. 71,99,99,211/- u/s. 115QA of the Act. 2. Under the facts and circumstances of the case the Ld. AO has erred by charging additional tax on whole amount of buy back rather than on distributed income as per section 115QA. V. Other Grounds 1. Under the facts and circumstances of the case and in law, the Ld.AO has erred in incorrectly computing book profits at INR 325,44,82,409/-after incorrectly adding the impugned TP adjustments and other disallowances required to be made only for purposes of computing income under normal provisions of the Act. As per settled legal principles and provisions of Section 115JB, only certain specified adjustments may be carried out for computing book profits, and hence the above action of Ld.AO is contrary to the provisions of the Act. 2. Under the facts and circumstances of the case and in law, the Ld.AO has erred in computing tax liability in a sense that income which is liable for tax at special rate of tax has been charged at normal rate of tax. Furth....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Value Added Expenses (OP/VAB) as the PLI under The Transactional Net Margin Method (TNMM') based on conjectures and surmises, without appreciating that the appellant is engaged in manufacturing activities and therefore, purchases and cost of production ought to be included in the cost base, thereby, completely disregarding 6 the facts of the case, the functional profile of the appellant, established legal principles and internationally accepted transfer pricing guidelines. In doing so, the Ld. TPO, Ld. AO and the Hon'ble DRP also failed to appreciate that Berry ratio is applied only in specific circumstances, i.e. low risk procurement and distributors. Additionally, the Ld. AO has erred in applying 'Berry Ratio' even when in appellant's own case, Berry Ratio was rejected as PLI in the A.Y. 2016-17 & 2017-18 by the Hon'ble ITAT. 7. Under the facts and in law, the Ld. TPO has erred in re-calculating the interest on outstanding receivables to Rs. 1,09,25,934/-, Further, the Ld. AO erred in confirming the same in the assessment order. The action of the Ld. TPO and Ld. AO is contrary to the facts and unjustified. 8. Under the facts and circumsta....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tional transaction of sale and purchase made to/from Associated Enterprises (AEs) during the relevant previous year. Further, the Ld. TPO and Hon'ble DRP and adjustment of Rs. 1,09,25,934/- to the income of the appellant by treating outstanding receivables as unsecured loans and charging notional interest thereon. Further, the Ld. AO has erred on facts and in law in adjusting the amount of Rs. 142,15,48,677/-(141,06,22,743 + 1,09,25,934/-) to the income of the appellant. II. Sale and Purchases made to/from Associated Enterprises (AEs): Adjustments of Rs. 141,06,22,743/-. 1. Under the facts and circumstances of the case and in law, the Ld. TPΟ, Ld. AO and the Hon'ble DRP erred in rejecting the economic analysis including the Most Appropriate Method and the filters applied by the appellant in the Transfer Pricing ("TP") documentation maintained under section 92D of the Act read with Rule 10D of the Income-Tax Rules, 1962 (the Rules) and subsequently applying new filters for the purpose of identification of companies comparable to the appellant In doing so, the Ld. TPO, Ld. AO and the Hon'ble DRP failed to discharge the statutory onus to establish....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e DRP erred in ignoring Net Operating Margin calculations carried out by the Appeallant considering Net Operating Margin (Operating Profit/ Operating Cost' or 'NCP) as the PLI and instead applied Berry Ratio. 6. Under the facts and in law, without prejudice to the above grounds, the Ld. AO, Ld. TPO and Hon'ble DRP erred in incorrectly computing OP/VAE of the Appellant while applying berry ratio and disregarding the Appellant's submission for considering the correct computation of OP/VAE. III. Addition on account of Notional Interest on outstanding receivables: Adjustment of Rs. 1,09,25,934/-. 1. Under the facts and in law, the Ld. TPO has erred in re-calculating the interest on outstanding receivables to 1,09,25,934/-. Further, the Ld. AO erred in confirming the same in the assessment order. The action of the Ld. TPO and Ld. AO is contrary to the facts and unjustified. 2. Under the facts and in law, the Ld. AO, the Ld. TPO and the Hon'ble DRP erred in making an addition of INR 1,09,25,934/- to the income of the Appellant by considering the receivables outstanding beyond stipulated time of the Appellant as an internati....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rice to 'LIBOR' for notional interest on loans provided to AEs: a) It is further submitted that in Appellant's own case for AY 2013-14, Hon'ble Income Tax Appellate Tribunal (ITAT) vide order dated 24 April 2018, followed the High Court order in the VGL's case for AY 2009-10 and AY 2010-11 wherein judgement of Delhi High Court in case of Cotton Naturals (1) P. Ltd. (276 CTR 445 [2015]) was relied upon and thereby, restricted the arm's length rate to LIBOR for the notional interest on loans granted to AEs. Accordingly, any mark-up on LIBOR rate is not warranted in the instant case. b) Furthermore, the Ld. AO and the Ld. AO had not followed the judgement of the Hon'ble ITAT, Jaipur, in the case of the appellant, for the A.Y. 2017-18. IV. Addition on account of unexplained Expenses of Rs. 6,40,927: 1. Under the facts and circumstances of the case the Ld. AO has erred in making addition of Rs. 3,97,000/- u/s 69C of the Act treating 'Dumb Document', as unaccounted expenses, without any corroborative material. The said addition is against the facts of the case. Hence, deserves to be deleted. 2. Under the fac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Income Tax (Central), Jaipur. The draft order of TPO was received by the ld. AO on 30.07.2023. The ld. AO passed the draft order on 26.09.2023. Subsequently the assessee filed the objections before the Dispute Resolution Panel (DRP) and in turn DRP passed direction on 30.06.2024. 3.1 As is evident from the record that M/s Vaibhav Global Limited (VGL) was incorporated in 1989 and is the parent entity of the Vaibhav Group with its registered and corporate offices situated in Jaipur. The company is engaged in the business of manufacturing and exports of colored gems stones and studded jewellery with its manufacturing units located at Jaipur and Mumbai. It processes stones, diamonds and other raw materials into rings, bracelets, pendants, etc. and exports to its associated enterprises located in USA Hong Kong. Thailand UK, Japan and Indonesia. 3.2 The ld. AO has tabulated the International and specified domestic transactions that have been entered into by the assessee. The TP report has described the functions of the assessee. The same were analyzed by the ld. AO. After considering the comparable and filters applied which are found appropriate and inappropriate considering the pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....une of Rs. 71,99,99,211/-. Ld. AO noted that as there has been an amendment vide Finance Act, 2019 section 115QA has been enacted and the assessee was required to pay the tax on distributed income to the tune of Rs. 71,99,99,211/-. Therefore, the assessee was found in violation of section 115QA of Income Tax Act, 1961 and thereby a show cause notice was issued to the assessee on 15.09.2023 to show cause as to why the abovementioned transactions should not be added to his total income. The assessee submitted its explanation on the issue that the company VGL's case falls under proviso to section 115QA because substantial activities were already completed before 5.7.2019. Assessee has requested for a positive and liberal perspective. Ld. AO noted that the reply of the assessee considered but considering the plain reading of the section 115QA, it can be seen that earlier, the amount distributed as buy- back of shares was chargeable to capital gains in the hands of the shareholders and not charged to the company which used to result into income tax payable at lower rates. This was used by the companies as a tool to avoid taxation and to distribute surplus income amongst sharehold....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of manufacturing and export of colored gems stone and studded Jewellery. 2. It has filed its return of income, declaring total income of Rs. 115,97,35,540/-, on 10.02.2021 which was selected for scrutiny and notices u/s 143(2) and 142(1) were issued. 3. During the course of assessment, a reference to the Transfer Pricing Officer u/s 92CA(1) of the Act was made on 06.10.2022 for determining the arms' length price of international transactions undertaken by the appellant during the year under consideration. 4. During the course of proceedings before Ld. TPO, transfer pricing documents, so maintained by the appellant, were submitted for perusal and consideration. 5. The appellant has been using the Cost-Plus Method ('CPM') and Gross Profit/Cost of Production ('GPM/COP') as the appropriate profit level indicator ('PLI') for benchmarking of its international transactions. 6. However, the Ld. TPO, without giving any cogent reason, rejected the PLI adopted by the appellant viz GPM/COP thereby rejecting CPM as the most appropriate method adopted by the appellant and arbitrarily proceeded to apply Berry ratio i.e. Operating profit/ Value Adding E....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er section143(3) r.w.s 144C(13) of the Income Tax Act, 1961. 3. The Ld. TPO and Hon'ble DRP has erred on facts and in law in proposing an adjustment of amount of Rs. 136,31,75,249/- to the income of the appellant on account of alleged difference in Arm's Length Price (ALP) of the international transaction of sale and purchase made to/from Associated Enterprises (AEs) during the relevant previous year and and adjustment of Rs. 96,03,898/- to the income of the appellant by treating outstanding receivables as unsecured loans and charging notional interest thereon. Further, the Ld. AO has erred on facts and in law in adjusting the amount of Rs. 137,27,79,147/-(136,31,75,249 + 96,03,898) to the income of the appellant. Submission: General in nature. Hence not pressed. II. Sale and Purchases made to/from Associated Enterprises (AEs): Adjustments of Rs. 136,31,75,249/-. 1. Under the facts and circumstances of the case and in law, the Ld. TPO, Ld. AO and the Hon'ble DRP erred in rejecting the economic analysis including the Most Appropriate Method and the filters applied by the appellant in the Transfer Pricing ("TP") documentation maintaine....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd in law, the Ld. TPO, Ld. AO and the Hon'ble DRP erred in violating the provisions of Rule 10B(2) of the Rules by rejecting functionally similar comparable Companies identified by the Appellant in its TP documentation and in arbitrarily identifying a new comparable company without conducting a methodical without considering the differences in the functions performed, assets employed, and risks assumed by such comparable company vis-a-vis the Appellant as required in accordance with Rules 10B and Rule 10C of the rules, thereby restoring to cherry-picking and unsubstantiated selection of the comparable. 6. Under facts and circumstances of the case and in law, without prejudice to the other grounds, even if TNMM is adopted as the Most Appropriate Method in the given case, Ld. TPO, Ld. AO and Hon'ble DRP erred in not considering Operating Profit/ Operating Cost (OP/OC) as the most appropriate PLI instead of berry ratio. 7. Under the facts and circumstances of the case and in law, without prejudice to the above grounds, of berry ratio. Ld. AO and The Hon'ble DRP erred in incorrectly computing OP/VAE of the Appellant and the alleged comparable companies select....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 32.73% 10. Jashan Jewels Pvt Ltd. 45.69% 11. Kalyan Jewellers India Pvt Ltd. 19.78% 12. Kanani Industries Ltd. 3.46% 13. Kays Jewels Pvt Ltd. 18.91% 14. KGK Creations (India) Pvt Ltd. 25.09% 15. Lalithaa Jewellery Mart Pvt Ltd 8.17% 16. Laxmi Diamond Pvt Ltd 14.84% 17. Mohammed Khan Jewellers Pvt Ltd. 17.90% 18. Moksh Ornaments Ltd. 4.16% 19. PC Jeweller Ltd. 12.39% 20. Rohit Jewellers Pvt Ltd. 6.44% 21. Shantivijay Jewels Ltd. 18.80% 22. Sovereign Diamonds Ltd. 25.74% 23. Swarnasarita Gems Ltd. 3.81% 24. Thangamayil Jewellery Ltd. 11.49% 25. Titan Company Ltd. 36.59% 26. Tribhovandas Bhimji Zaveri Ltd. 24.88% 27. Uday Jewellery Industries Ltd. 9.48% 28. Zel Jewellers Ltd. 23.20% 29. Zodiac-Jrd-Mkj Ltd. 7.45% 30. Tiara Jewels Pvt Ltd. 6.55% 31. Suashish Diamonds Ltd 67.83% Median 14.84% 5. At the outset, it is submitted that the issue under consideration is squarely covered by the decision of Hon'ble Bench, Jaipur in appellant's own case for assessment....
X X X X Extracts X X X X
X X X X Extracts X X X X
..../s Vaibhav Global Limited Vaibhav Global Ltd. ("VGL"), incorporated in 1989, is the parent entity of the Vaibhav Group with its registered and corporate offices situated in Jaipur. The company is engaged in the business of manufacturing and exports of colored gems stones and studded jewellery with its manufacturing units located at Jaipur and Mumbai. It processes stones, diamonds and other raw materials into rings, bracelets, pendants, etc. and exports to its associated enterprises located in U.S.A., Hong Kong, Thailand, UK, Japan and Indonesia". (iv) Para-26: In this para reference has been made to the findings of Ld. Lower authorities affirming the fact that assessee company is engaged in manufacturing. It is important to note that similar findings have been made for the assessment year under consideration wherein at Page-1 of final assessment order dated 30.07.2024 it has been clearly mentioned that "the assessee is a company involved in the business of manufacturing and exporting of colored gems stones and studded jewellery with precious and semi-precious stones". Similar finding has also been made by the DRP in point no. 3 at page 3 of its order dated 30.06.2024 which....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and selling to related parties, hence both cost and revenue sides are tainted. The DRP has also upheld, in point no. 3.4 at page 11 of its order, the reasoning so adopted by the TPO. The same identical findings were made by the Ld. AO and DRP in the A.Y. 2016-17 and 2017-18 also. b) To justify the validity of application of berry ratio, Ld. DRP has placed its reliance on the decision of Hon'ble Delhi High Court in the case of Sumitomo Corporation India P Ltd Vs CIT (2016) 71 taxmann.com 290 (Delhi HC). c) In this regard, reference in invited to para 33 and 34 of the order of the Hon'ble, ITAT wherein the Hon'ble ITAT explicitly stated that the judgement of Sumitomo (supra) does not support the case of the Revenue rather the appellant. Since, there being no change in facts and circumstances, the case of appellant is squarely covered by the decision arrived at by the Hon'ble Bench at Para-33 and 34. xi) Para 35: (a) As far as the contention of the Ld. TPO and DRP about purchase and sales being tainted, is concerned, the Ld. TPO has failed to appreciate that the appellant purchases raw material, such as Gems, colored stones etc. primarily from unrel....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Gross Margin 15.43% Without prejudice to anything stated in above para and without any admission, even otherwise also perusal of the comparable relied upon by the Ld. TPO shows that their median GPM comes to 9.99% which is lower than the GPM of 15.43% shown by the appellant, which makes it evident that transactions with the associated enterprises have been entered at arm's length price. xiii) Further, we are also submitting comparative analysis of the facts present in the A.Y.:2016-17 vis-a-vis facts present in the assessment year under consideration. a) Method adopted as PLI: Particular A.Y. 2016-17 A.Y. 2020-21 Method as per appellant GPM/COP (Page-21, Order) Para-19 of ITAT GPM/COP (Page-45, Point-2 of AO Order) Method as per Revenue OP/VAE (Page-21, Para-19 of ITAT Order) OP/VAE (page-45, Point-2 of AO Order) b) Nature of business of the appellant company: Particulars A.Y 2016-17 AY 2020-21 Nature/Profile Export Manufacturer (Para 27; Page-38 of ITAT Order) Export Manufacturer (Point I of AO) Profile of assessee company as per findings of lower authorities Manufacturer (Para 26; Page-37 o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rges 29,71,74,362 36,22,29,734.05 Stores and Consumables 5,64,85,051 4,71,13,477.01 Power and Fuel 3,57,87,155 4,36,33,845.24 Repairs and Maintenance - Plant and machinery 1,22,48,322 82,78,559.53 Other Manufacturing/direct Expenses 1,32,81,415 1,56,24,705.16 Total 41,49,76,305 47,68,80,320.99 Ratio of Sales to/Purchase from AEs Particulars A.Y 2016-17 A.Y 2020-21 Sales to AEs 88.34% 89.60% Sales to Non-AEs 11.66% 10.40% Purchase from AEs 21.09% 17.37% Purchase from Non- AEs 78.91% 82.63% Thus, there is no material change in ratio of sale to/purchase from AEs to take any divergent view. xv) Applicability of Berry Ratio: a) As submitted above, it is an admitted fact that the appellant is engaged in manufacturing activities. To support this further, reference is also invited to the set of filters found to be appropriate and inappropriate, keeping in mind the profile of the appellant, by the TPO, in his order dated 30.07.2023, wherein the Ld. TPO remarked: "Accept companies whose ratio of manufacturing to net sales is more than 75%. Buy ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... test for berry ratio to be applied in the instance case is failed. b) The applicability as stated in the order of DRP that berry ratio can be applied where only limited risk is involved. In this regard that Hon'ble ITAT, in para 27 of its order made specific observation that the appellant takes all types of risk such as inventory risk, credit & collection risk, product risk, manpower risk, market risk (to limited extent), technology risk, general business risk and foreign exchange risk. Therefore, the above submission is supported by the findings of the Hon'ble ITAT, at para 34 of order passed for A.Y. 2016-17. Thus, risk test for berry ratio to be applied in the instance case is failed. c) The above referred issued has also been dealt by Hon'ble ITAT, in para 27 of its order, while discussing the judgement of Hon'ble Delhi High Court(supra). c) Point No. 3.4.2 at page 11: Chapter 2 of the OECD Guidelines gives the example of intermediary activities where taxpayer purchases goods from an associated enterprise and on-sells those goods to other associated enterprises as an example where Berry Ratio may be applied. Appellant's Submission: ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee and the profits earned are directly linked with the operating expenditure incurred by the assessee. It has been held that where the assessee uses intangibles or has substantial fixed assets, the value of such intangibles or value addition by such assets would not be captured in the operating cost and thus, Berry ration would not be an appropriate PLI. It has been held that the fundamental premise which needs to be examined before applying Berry ratio is that the operating expenses should adequately represent all functions performed and risk undertaken and for this reason, Berry ratio is effectively applied only in case of stripped down distributors which have no financial exposure and risk in respect of goods so distributed by them. Therefore, we agree that the Berry ratio can be applied in certain circumstances but in the facts of the present case, where the assessee is admittedly and undisputedly, a manufacturer and exporter of coloured gemstones and studded fashion jewellery and not a distributor, one wonder how the value of goods so manufactured and exported have no role to play in the profits earned by the assessee. The assessee performs significant manufacturing functions ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... sells to its associated enterprises. As we noted above, the undisputed facts are that the assessee is a manufacturer and exporter and as part of its activities, it procures certain goods from its associated enterprises which constitute merely 21 .09 % of its total purchases besides purchases from other entities, process them in its manufacturing facilities and thereafter, export them to its associated enterprises. Therefore, it carries out significant manufacturing and processing operations and it is not a case of simpliciter purchase and sale activity which is being undertaken by the assessee. Only in a latter scenario, where it purchases from its associated enterprises and on-sells them to other associated enterprises, berry ratio can be held to be useful and appropriate PLI as stated in para 2 .102 of the OECD guidelines. Following the same, the Coordinate Bench in case of Mitsubishi Corporation ( supra) has also held that in case of a low risk high volume trading business involving back to back trading without any value addition to the goods traded, berry ratio could be appropriate PLI. However, in a situation in which there is further processing of the goods procured....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d no adjustment is warranted. 38. Therefore, in the entirety of facts and circumstances of the case and in light of aforesaid discussions and following the approach so suggested by OECD/UN transfer pricing guidelines and the decisions of the Hon' ble High Court and Coordinate Benches referred supra, the transfer pricing adjustment of Rs 29,25,17,385/- is hereby directed to be deleted. b) Issue is covered: In the assessment year: 2016-17, as observed by Hon'ble Bench, OP/COP shown by the appellant is higher than the average PLI of comparable. The similar facts are present in the current assessment year and accordingly the issue being covered in the favor of appellant, no adjustment is warranted. xvii) Not prejudicial to above and without any admission, it is important to note that in A.Y. 2016-17, 2017-18 and 2020-21, lower authorities have worked out berry ratio (OP/VAE) of 55.27%, 75.24% and of 136.78% respectively which itself shows abnormality and absurdity. Further, due to inconsistent application of filters to the comparable and due to violation of Hon'ble DRP directions, in general. In view of the above, since on identical facts th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to 180 days; d) not charging any interest on delayed receipts is a generally accepted practice for companies engaged in similar business segment as the Appellant. 4. Without prejudice to above objections, on facts and in law, the Ld. TPO/AO erred in arbitrarily & incorrectly imputing an interest of INR 96,03,898 based on 6 months LIBOR plus a mark-up of 400 basis points. In doing so, the Ld. TPO/AO have erred in:- a) Adopting an arbitrary & inappropriate mark up of 400 basis points over and above the 6 months LIBOR for calculating the rate of interest, b) not giving benefit of early realization from AEs for computing interest on overdue receivables. 5. Without prejudice to above objections, on facts and in law, the Ld. TPO and Ld. AO erred in arbitrarily applying a mark-up of 400 bps on USD LIBOR rate is not warranted specifically considering that in Appellant's own case for AY 2013-14, the Hon'ble Tribunal and High Court has restricted the arm's length price to 'LIBOR' for notional interest on loans provided to AEs. a) It is further submitted that in Appellant's own case for AY 2013-14, Hon'ble Income Tax Appellate Tribunal (IT....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... circumstances described in the following paragraphs 1.142-1.145 apply: 1.143 Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the arbitrary other tax administration does not share the same views as to how the transaction should be structured". 3. In this regard, we place our reliance on the following case laws: • CIT v. EKL Appliances Limited (2012) 345 ITR 241 (Delhi HC): "17. The significance of the aforesaid guidelines lies in the fact that they recognize that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction, should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. It is of further significance that the guidelines discourage restructuring of legitimate business transactions. The reason for characterization of such restructuring as an arbitrary exercise, as given in the guidelines, is that it has the potential to create double ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing Debit Balance is not a standalone international transaction but result of an international transaction: 1. At the outset, the appellant submits that the outstanding receivables are a result/consequence of appellant's international transactions with its overseas AEs and is not a separate international transaction per se as per provisions of section 92B of the Act and therefore the same does not warrant determination of any separate arm's length price under section 92C of the Income-tax Act, 1962. 2. It is submitted that in the absence of any specific provision in the Act which seeks to tax any 'hypothetical income', the appellant cannot be subject to tax in respect of hypothetical income, i.e., to say an income which ought to have been earned or that the appellant failed to earn. 3. It is further submitted that in the present case, since no income has been earned or can be said to have been earned by the appellant, in respect of interest chargeable from AEs, the question of applying the provisions of section 92 of the Act does not arise. 4. The appellant would like to highlight your kind attention on the definition of section 92(1) of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....action, it cannot be assumed that separate arm's length analysis of outstanding receivables is required since outstanding receivables emanate from the said international transaction itself. 10. We rely on the Guidance Note on Report u/s 92E issued by the Institute of Chartered Accountants of India (Revised 2022) Para 4.12 of the Guidance Note states as under: Para 4.14 of the Guidance Note states as under: "... Advance payments received or made and debts arising during the course of business shall need to be carefully considered and reported by the accountant however ensuring that there is no duplication or overlap with reporting of the principal transactions to which such advances or debts relate to ..." 11. Hence, it is evident from the above extract of the Guidance Note that once the 'principal transaction' has been covered, separate consideration of the consequential debtors is not required. 12. In support of the above contention, we rely on following Judicial Precedents: • Kusum Health Care Pvt. Ltd. in ITA 765/ 2016, wherein the Hon'ble Delhi High Court held that: "10. The Court is unable to agree with....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng assessment years, no adjustment on account of interest due on receivables from its AE can be made. " • We further place our reliance on the following case laws: - Gillette Diversified P Ltd in ITA No. 5736/5675/5677(Del) 2015 (Delhi Trib) - Target Sourcing Services India P Ltd (ITA No.4132/Del/2017) (Delhi Trib) - Lotus Labs Pvt Ltd in ITA No. 2295/Bang/2016 (Bangalore Trib.) - Dell International Services India P Ltd Vs JCIT in ITA(TP) No. 308/Bang/2015 (Bangalore Trib.) - Tally Solutions P Ltd Vs ACIT (2016) 73 taxmann.com 70 (Bangalore Trib.) - Goldstar Jewellery Ltd Vs JCIT (2015) 53 taxmann.com 353 (Mumbai Trib.) - Avnet India Pvt Ltd in IT(TP)A No.757/Bang/2011 (Bangalore Trib.) - DCIT Vs Indo American Jewellery Limited in ITA No.5872/Mum/2009 (Mumbai Trib.) - Bechtel India P Ltd Vs DCIT in ITA No. 1478/Del/2015 (Delhi Trib) C. Margins earned by the appellant are much higher than the ALP Computed: 1. In this regard, the appellant would like to submit that the outstanding receivables & payables are part and parcel of any business, as it arises as an outcome of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....examine the entity level margin of the taxpayer vis. a vis. comparable companies, the taxpayer has earned higher margin i.e. taxpayer earned 38.39% OP/OC margin vis a vis margin of comparable companies at 11.43%. In such circumstances, no separate adjustment on accent of interest can be made. Because the credit period extended to AE cannot be considered as a standalone transaction without considering the main transaction of the sale". This principle was earlier upheld in the case of "Kusum Healthcare Pvt Ltd. Vs ACIT, Range-5 ITA No. 6814/Del/2014 wherein it was held as under: "..17. From the above analysis, it is clear that Assessee had learned significantly higher margins than the comparable companies (which have been accepted by the TPO) which more than compensates for the credit period extended to the AEs. Thus, the approach by the assessee of aggregating the international transactions pertaining to sale of goods to AE and receivables arising from such transactions which is undoubtedly inextricable connected is in accordance with established TP principles as well as ratio Laid down by the Hon'ble jurisdictional High Court in the case of Sony Ericson Mobile....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o like appellant, the credit period is typically considered after factoring a variety of aspects such as relationship with the buyer, pricing, discounts, credit worthiness, number of years of relationship. Etc. and accordingly, it would not be feasible to consider a uniform credit period without taking into consideration the specific factors for the particular trade. 2. In the instant case, the appellant has granted a credit period of up to 180 days to both AEs as well as third parties. The appellant wishes to emphasize that granting a credit period of 180 days to third parties can itself be considered as an internal benchmark for the realization policy of the appellant and the same is in line with the RBI Guidelines (also discussed in the decisions of Hon'ble Tribunal discussed hereunder) 3. Appellant further wish to place reliance RBI Master Circular on Export of Goods and Services (FED Master Direction No. 16/2015-16). In the said direction, it is stated that proceeds from export of goods and services must be realized within a period of 9 months from the date of export. Relevant extract of the circular is given below: "A3. Realisation and Repatriation ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he hardship faced by the companies (operating in similar industry) in realizing the export remittances and has revised the foreign remittance guidelines to 180 days. F. No interest charged from Non-AEs as well: 1. Appellant wish to submit that it has allowed a credit period of 180 days in case of exports made to its AEs as well as to non-AEs i.e. third parties. The same is clearly evident from the invoices raised on AEs as well as non-AEs. Such Invoices raised on AEs as well as Non-AEs on sample basis were placed on record before the ld. TPO (PBP: 117 - 120). 2. In this regard, it is further submitted that it is the policy of appellant to not charge any interest from AEs as well as from the unrelated third parties on delayed receipts. It is imperative to note that no interest has been charged by appellant from third parties even in the cases where realization from third parties s exceeds beyond 180 days. The said practice is in line with the general industry standards of Gem & Jewellery industry. 3. Therefore, it is submitted that not charging interest from third parties could be regarded as CUP to determine that no interest was required to be ch....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al consideration for ensuring a long and healthy relationship. it is observed that only in the event of severance of relationship; parties do resort to charging of interest. "If the AEs are not recovering interests from third parties for late recoveries, then in the instant case it would be too much to expect the assessee to charge the interest from the AEs. There is no rationale to inflict upon the assessee, merely on presumption that he ought to have charged the interest from its AEs " • Evonik Degussa India P Ltd Vs ACIT in ITA No.7653/Mum/2011 (Mumbai Trib) • Lintas India P Ltd Vs ACIT in ITA No.2024/Mum/2007 (Mumbai Trib) • DCIT Mumbai Vs Tech Mahindra Limited in ITA No.1176/Mum/2010 (Mumbai Trib) • S Vinod kumar Diamonds P Ltd in ITA No.79/Mum/2015 (Mumbai Trib). G. Issue, under consideration, is covered by the Judgment of Hon'ble ITAT, Jaipur passed, for the A.Y. 2017-18, in appellant's own case: 1. Without prejudice to anything stated hereinbefore and without any admission, at the outset, the appellant humbly submits that the addition on same issue, with same reasons, was also made in A.Y. 2017-18, in the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ent made u/s 36(1)(va) of Rs. 19,68,509 without considering that the due date for depositing PF was a public holiday. Findings of the Ld. AO: Ld. assessing officer in the assessment order has relied on the judgment rendered by the Hon'ble Supreme Court in the case of CHECKMATE SERVICES P. LTD VS. COMMISSIONER OF INCOME TAX [2023] 290 Taxman 19 (SC)/[2022] 448 ITR 518 (SC): "One of the rules of interpretation of a tax statute is that if a deduction or exemption is available on compliance with certain conditions, the conditions are to be strictly complied with. This rule is in line with the general principle that taxing statutes are to be construed strictly, and that there is no room for equitable considerations. The deductions are to be granted only when the conditions which govern them are strictly complied with." Direction of Hon'ble DRP: If the due date is a public holiday, by application of General Clauses Act, the due date shifted to the subsequent day. The Ld. AO examine the issue and follow the direction. Submission: 1. The Hon'ble DRP directed the Ld. AO to examine that whether the due date is holiday or not and,....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....e. Sunday, however the said amount was deposited on next working day since it was a public holiday, therefore by virtue of Section 10 The General Clauses Act it shall be considered to be deposited within due date i.e. on 15.12.2019 and no disallowance can be made on the ground of its being deposited after the specified date since the due date in current case would be 16.12.2019 and not 15.12.2019. 6. Further, we would like to draw attention to judgement passed by Hon'ble Delhi High court after considering the judgement of Checkmate services P. Ltd vs. Commissioner of income tax (supra), which was passed in support of the contention of appellant and where the facts of case are similar to that of assessee's case, as under: • Pr. Commissioner of Income Tax-7 vs PEPSICO INDIA HOLDING PVT. LTD. (Delhi HC judgement) [ITA 12/2023]. The observations made by us therein, being opposite, are extracted hereafter: "11. Therefore, insofar as the first submission of Mr Chopra is concerned, which is founded on a Tribunal's view that disallowances could not be made under Section 143(1) of the Act while processing refund, we are of the opinion that this argument canno....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Sunday. Relevant extract is reproduced below: "11. Thus, in our opinion, considering the fact that the due date for depositing the contribution of ESIC & EPF falls on Sunday and gazette holiday, the said delay of one day deserves to be condoned as per Section 10 of General Clauses Act. Further it is also observed that the assessee has no intention not to deposit the contribution of ESI & EPF well within the time, depositing the contribution very next day of Holiday proves the bona-fide of the Assessee. Therefore, in our opinion, the authorities have committed error in disallowing the deposit made with one day delay where the due date under respective acts falls either on Sunday or on gazetted holiday. 12. In view of the above discussion, we allow Ground No. 3 of the assessee and delete the disallowance of delay deposit of one day on account of public holiday/Sunday on ESIC of Rs. 3,89,086/- and EPF of Rs. 15,47,915/-. Since the assessee has restricted Appeal to Ground No. 3 and the to the amount mentioned above, the Ground No. 1,2, 4 to 9 are dismissed as not pressed. • The Hon'ble ITAT, Delhi Bench 'F': New Delhi in the case of Radial International V....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... charged to tax and such company shall be liable to pay additional income-tax at the rate of twenty per cent on the distributed income:" (Emphasis Supplied) 2. 5th July, 2019: The Finance (No. 2) Bill, 2019 was introduced, on 05.07.2019, in the Lok Sabha whereby the phrase 'not being shares listed on a recognised stock exchange', as appearing the original section 115QA (supra), was proposed to be 'omitted' from the provisions of 115QA resulting bringing listed companies under section 115QA. The said amendment was proposed to be inserted w.r.e.f. 5th July, 2019. 3. 1st August, 2019: The Finance (No. 2) Bill, 2019 received the accent of the President on 1st August, 2019 and became Finance (No. 2) Act, 2019 bringing, into effect, the proposed amendment, in section 115QA, w.r.e.f. 05.07.2019 thereby including listed companies also in its scope. The amended section reads as under. "Tax on distributed income to shareholders. 115QA. (1) Notwithstanding anything contained in any other provision of this Act, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount of distributed i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....€¢ 22nd May, 2019: Notice of Board Meeting sent to directors and Stock Exchanges regarding Buy-back of shares (PBP: 122); • 30th May, 2019: Board Meeting held wherein Buy Back of Shares, terms and condition of Buy Back, Appointment of Merchant Banker and company's broker etc. was approved (PBP: 123 - 128); • 30th May, 2019: The outcome of Board Meeting was intimated to Stock Exchanges (PBP:129 - 131); • 30th May, 2019: Postal ballot was issued containing, inter alia, material information as contained in Schedule I of SEBI (Buy Back of Securities) Regulation, 2018 (PBP:132 - 139); • 30th May, 2019: Buy back of shared by the appellant was extensively covered in various social media platform and news channel (PBP: 140 - 142) • 31st May, 2019: Press release of Buy Back intimated to Stock Exchanges (PBP:143 - 145) • 7th August, 2019: Declaration of result of postal Ballot; • 8th August, 2019: Date of publication of public announcement as per SEBI (Buy Back of Securities) Regulation, 2018. Submission: I. Amendment in Section 115QA of the Act is not applicable on the appellant: ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at 'omission' of a provision is treated as 'amendment' 5. Hence, in view of the above judgements of the Hon'ble Apex Court, it would not be wrong to say, in the current case, that there is a 'repeal' of the repeal of the provision of the enactment by way of omission/ amendment. 6. With this background, attention is invited to clause (6) and clause (6A) of The General Clauses Act, 1897 which keep intact the rights accrued during operation of repealed/ omitted enactment. Specific attention is invited to sub-clause (c) Clause (6) which specifically state that repeal/ omission of enactment shall not affect, inter alia, the right accrued under any enactment so repealed. Hence, the right continued to subsist and are saved unless they are taken away expressly. Relevant clauses are re-produced for ready reference: "6. Effect of repeal.-Where this Act, or any 4 [Central Act] or Regulation made after the commencement of this Act, repeals any enactment hitherto made or hereafter to be made, then, unless a different intention appears, the repeal shall not- (a)... (c) affect any right, privilege, obligation or liability acquired, accrued or incurred ....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Attention is also invited to the 'Principle of Fairness' which states that the 'legislation introduced for the first time need not change the character of past transactions carried out upon the faith of the then existing law'. The said principle deserves its due recognition, in the current case. It is an admitted fact that tax was imposed on listed companies, for buy back of shares, first time after introduction of section 115QA in the statute on 01.06.2013. Further, appellant had also never been subject to such regulations in the past since it has bought back shares for the first time and complied with the then existing law. Therefore, in light of the 'Principle of Fairness' the appellant should not be subject to tax for the buy- back carried out, by it, before 5th July, 2019 as per the then prevailing law. II. Appellant cannot be subjected to tax even according to Proviso to Section 115QA of the Act being substantially complied: Without prejudice to anything stated above and without any admission, it is humbly submitted as under: 1. During the year under consideration, the appellant made buy-back of its equity shares and the component distributed, to the share....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 6. Without prejudice to anything stated in point no. 5 above, further, with regard to associating the relief with 'public announcement', it is to be noted that the intent of law was to provide relief to listed companies who are in transition phase i.e. process to buy back was initiated but not completed. This interpretation is also supported by the simple fact that the law maker could have linked the relief with the 'completion of the buy-back' which had made the proviso clearer rather the law makers chose 'public announcement' implying that the intent was to cover those cases where the information, with regard to buy back, was into the knowledge of the public prior to 5th July, 2019. 7. At this juncture, we would like to bring, into the kind attention of your honours, followings events happened or compliance made by the appellant, before 05.07.2019, with respect to buy back of shares: Sr. No. Date Event Details 1. 22nd May, 2019 Notice of Board Meeting sent to directors and Stock Exchanges regarding Buy-back of shares (PBP: 122) 2. 22nd May, 2019 Intimation to Stock Exchange regarding trading window closure period (PBP: 122) 3. 3....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... may be, shall make a public announcement in at least one English National Daily, one Hindi National Daily and one Regional language daily, at the place where the Registered office of the company is situated and the said public announcement shall contain all the material information as specified in Schedule II. Regulation, along with Schedule-II, is re-produced below for ready reference: "Disclosures, filing requirements and timelines for public announcement: 7. (i) The company which has been authorised by a special resolution or a resolution passed by the board of directors, as the case may be, shall make a public announcement within two working days from the date of declaration of results of the postal ballot for special resolution/board of directors resolution in at least one English National Daily, one Hindi National Daily and one Regional language daily, all with wide circulation at the place where the Registered Office of the company is situated and the said public announcement shall contain all the material information as specified in Schedule II." SCHEDULE - II [Regulation 7(i) and Regulation 22(ii)(b)] Disclosures in the Public Announcement for b....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the Board Meeting at which the buy- back was approved till the date of notice convening the general meeting; (c) the maximum and minimum price at which purchases and sales referred to in (b) above were made along with the relevant dates; Point No. 9 (PBP:135 - 136) viii) Intention of the promoters and persons in control of the company to tender shares or other specified securities for buy-back indicating the number of shares or other specified securities, details of acquisition with dates and price; Point No. 10 (PBP:136) ix) A confirmation that there are no defaults subsisting in repayment of deposits, redemption of debentures or preference shares or repayment of term loans to any financial institutions or banks; Point No. 11(vii) (PBP:136 - 137) x) A confirmation that the Board of Directors has made a full enquiry into the affairs and prospects of the company and that they have formed the opinion- a) that immediately following the date on which the General Meeting or the meeting of the Board of Directors is convened there will be no grounds on which the company could be found unable to pay its debts; b) as regards its prospec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....edure has always been viewed as the handmaid of justice and not meant to hamper the cause of justice or sanctify miscarriage of justice " 14. Doctrine of Substantial Compliance: At this stage, without any admission, the appellant wants to draw attention, of your honours, to the 'Doctrine of Substantial Compliances' which states that if mandatory conditions/ requirements are complied with, the enactment can be considered substantially complied with, even if there is non-compliance with procedural requirements. The substantial condition of the proviso, to section 115QA, was that the 'public announcement' should have been made before 5th July, 2019 and the mode of such public announcement i.e. the procedural requirement, was that public announcement should be made in accordance with SEBI (Buy-Back of Securities) Regulation, 2018. Hence, the 'essence' of proviso to section 115QA, was to inform the shareholders about the buy-back and material information related to it, which, in the instant case, was complied with by the appellant company way before 5th July, 2019 rather more than 90% of the requirement was complied with by the appellant (as elaborated in point no. 12 above). H....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ses where substantial compliance has been found, there has been actual compliance with the statute, albeit procedurally faulty. The doctrine of substantial compliance seeks to preserve the need to comply strictly with the conditions or requirements that are important to invoke a tax or duty exemption and forgive non- compliance for either unimportant and tangential requirements or requirements that are so confusingly or incorrectly written that an earnest effort at compliance should be accepted. (Emphasis Supplied) • The Hon'ble Gujarat High Court decision in the case of CIT Vs. Tarnetar Corporation (2012) 26 taxmann.com 180 held as under: "5. We have perused the detailed discussion of the CIT (Appeals) as well as the Tribunal on the issue. In particular, the Tribunal noted that the construction was completed in 2006. Application for BU permission to the Municipal authorities was filed on 15.2.2006 which was rejected on 1.7.06. Several residential units were occupied since the same was done without necessary permission. The assessee had also paid penalty and got such occupation regularized. Several tenements were sold long before the last date. 6 I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....shares was 'underway' prior to 5th July, 2019. d) Under the current case, the machinery provision, as submitted above, was to make the public announcement as per SEBI (Buy Back of Securities) Regulation, 2018 which provides how the public announcement is to be made. However, such machinery provision can never overshadow the intention of the law and has to be construed liberally. In this regard, observation of the Hon'ble Supreme Court in the case of CIT-III Vs. M/s Calcutta Knitwears [CA No. 3958 of 2014] is produced below for reference: "35. It is also trite that while interpreting a machinery provision, the courts would interpret a provision in such a way that it would give meaning to the charging provisions and that the machinery provisions are liberally construed by the courts..." e) On the other hand, if we go by the contention of the Ld. AO and make the machinery provision i.e. public announcement as per SEBI (Buy Back of Securities) Regulation, 2018 as the deciding factor, the object of the charging section would not be achieved. 16. Further, as far as allegation to evade tax is concerned, the appellant humbly submits that the transaction ....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... No. Particulars ABC Ltd XYZ Ltd 1 Capital & Reserve (Rs. in lacs) 20 20 2 Buy Back Value (Rs. in lacs) 2.002 2 3 Percentage of Buy back 10.01% 10% 4 Board Approval Date 29.06.2019 29.06.2019 5 Approval of Shareholder required Yes No 6 Date of Shareholder Approval 12.08.2019 NA 7 Public announcement 14.08.2019 01.07.2019 8 Applicability of buyback Tax Yes No 9 Tax amount @20% 0.4004 Nil c) In view of foregoing illustration, it is clear that proviso has not been inserted to give differential or unequal tax treatment but to carve out genuine cases where process, of buy back, as per SEBI Regulation, 2018 has started prior to 05.07.2019. d) Moreover, said treatment would infringe the 'Right to Equality' enshrined in Article 14 of the Constitution of India. The said Article is re-produced below for ready reference: "Right to Equality 14. Equality before law.-The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India." e) The above Article is relevant under Income ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f SEBI (Buy-Back of Securities) Regulation, 2018, the said company had time to make public announcement, within 2 days i.e. till 5th July, 2019. c) Hence it made the public announcement on 5th July, 2019. Now, as per the strict reading of the section, although such listed company has complied with all the regulatory requirement before 5th July, 2019 except public announcement, which was made on 5th July, 2019, it will come under the purview of Section 115QA and it had to pay 20% additional. d) On the other hand, if such company would have made the public announcement on 4th of July, 2019, no additional burden of tax would come onto it. e) Therefore, can such harsh interpretation be 'reasonable' considering the fact that the said company, who made public announcement on 5th July, 2019, had no idea of the proposed amendment and was following the compliance made by a specific Act: SEBI Act, 1992 read with SEBI (Buy-Back of Securities) Regulation, 2018. f) Further, going by such interpretation, would it be 'justified' to cover such companies, under the jurisdiction of section 115QA of the Act by making retrospective amendment w.e.f. 5th July, 2019, a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....company, which indicate complete non application of mind. d) Nevertheless, in order to determine correct amount of distributed income, reference is to be made to Rule 40BB of the Income Tax Rules which prescribes the manner of determining the 'amount received by the company in respect of issue of share'. Since the appellant had issued such shares by way of Initial Public Offer Subscription, hence sub-rule (2) of Rule 44BB would be relevant which is re-produced for your reference: "(2) Where the share has been issued by a company to any person by way of subscription, amount actually received by the company in respect of such share including any amount actually received by way of premium shall be the amount received by the company for issue of such share. e) In the instant case, the appellant has issued shares (8,65,675/- shares) at Rs. 30 and received Rs. 2,59,70,250/- which were subsequently bought back. The extracts of prospectus is reproduced below for reference: f) Accordingly, in terms of explanation read with above rule, such amount needs to be reduced from the addition, of Rs. 71,99,99,211, made by the Ld. AO in the assessment order. Hence,....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... As regards the issue of ESI/PF the last date being Holiday ld. DRP considered the submission of the assessee and directed the ld. AO to verify if the last day being Holiday then the same should be allowed. Ld. AR of the assessee in this regard filed the copy of the calendar stating that the last date being Sunday the direction of the DRP also support the contention of the assessee and thereby the addition is required to be deleted. As regards the issue of buy back ld. AR of the assessee submitted with the history of the section saying that earlier the provision was applicable to unlisted companies. On 5th July 2019 vide Finance (No.2) Bill, 2019 the phrase "not being shares listed on a recognized stock exchange" as appearing in the section was omitted. That bill which was proposed on 05.07.2019 become Act as the same was passed on got the approval of the Hon'ble President of India on 01.08.2019. Going further ld. AR of the assessee invited our attention to the statement of the Hon'ble Finance Minister in the press conference dated 20.09.2019 wherein it was clarified that " f. In order to provide relied to listed companies which have already made public announcement of buy back ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the contention that the two issue of TPO adjustment covered by the decision of the co-ordinate bench of ITAT, he stated that the addition were made to have the issue alive as the revenue has challenged the finding before the Hon'ble High Court. As regards the disallowance of PF amount the ld. DRP has already given direction and the same direction be given to the ld. AO. The amendment made vide Finance Bill from 05.07.2019 was already in public domain. As per the amended provision the assessee is suppose to pay tax and the law does not differential treatment to the assessee and the spirit of the provision of law to be read as it is enacted. As regards the requirement of the SEBI Act that cannot apply in the Income Tax Act. The decision of the board of director and that of the shareholders can be reversed till the same is not intimated to SEBI and therefore, the contention of the assessee is not tenable. 9. We have heard the rival contentions and perused the material placed on record. As is evident from the written submission filed by the ld. AR of the assessee that he has not pressed three sperate ground raised under the head General Grounds. Considering that prayer the sam....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....73% 10. Jashan Jewels Pvt Ltd. 45.69% 11. Kalyan Jewellers India Pvt Ltd. 19.78% 12. Kanani Industries Ltd. 3.46% 13. Kays Jewels Pvt Ltd. 18.91% 14. KGK Creations (India) Pvt Ltd. 25.09% 15. Lalithaa Jewellery Mart Pvt Ltd 8.17% 16. Laxmi Diamond Pvt Ltd 14.84% 17. Mohammed Khan Jewellers Pvt Ltd. 17.90% 18. Moksh Ornaments Ltd. 4.16% 19. PC Jeweller Ltd. 12.39% 20. Rohit Jewellers Pvt Ltd. 6.44% 21. Shantivijay Jewels Ltd. 18.80% 22. Sovereign Diamonds Ltd. 25.74% 23. Swarnasarita Gems Ltd. 3.81% 24. Thangamayil Jewellery Ltd. 11.49% 25. Titan Company Ltd. 36.59% 26. Tribhovandas Bhimji Zaveri Ltd. 24.88% 27. Uday Jewellery Industries Ltd. 9.48% 28. Zel Jewellers Ltd. 23.20% 29. Zodiac-Jrd-Mkj Ltd. 7.45% 30. Tiara Jewels Pvt Ltd. 6.55% 31. Suashish Diamonds Ltd 67.83% Median 14.84% 10.1 After considering the TP approach and documentation in this regard the bench also noted the following comparison of facts with this year with that of the earlier year so as to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pany: As per your TP submission, M/s Vaibhav Global Limited Vaibhav Global Ltd. ("VGL"), incorporated in 1989, is the parent entity of the Vaibhav Group with its registered and corporate offices situated in Jaipur. The company is engaged in the business of manufacturing and exports of colored gems stones and studded jewellery with its manufacturing units located at Jaipur and Mumbai. It processes stones, diamonds and other raw materials into rings, bracelets, pendants, etc. and exports to its associated enterprises located in U.S.A., Hong Kong, Thailand, UK, Japan and Indonesia". (xii) Para-26: In this para reference has been made to the findings of Ld. Lower authorities affirming the fact that assessee company is engaged in manufacturing. It is important to note that similar findings have been made for the assessment year under consideration wherein at Page-1 of final assessment order dated 30.07.2024 it has been clearly mentioned that "the assessee is a company involved in the business of manufacturing and exporting of colored gems stones and studded jewellery with precious and semi-precious stones". Similar finding has also been made by the DRP in point no. 3 a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....m 290 (Delhi HC). f) In this regard, reference in invited to para 33 and 34 of the order of the Hon'ble, ITAT wherein the Hon'ble ITAT explicitly stated that the judgement of Sumitomo (supra) does not support the case of the Revenue rather the appellant. Since, there being no change in facts and circumstances, the case of appellant is squarely covered by the decision arrived at by the Hon'ble Bench at Para-33 and 34. xviii) Para 35: d) As far as the contention of the Ld. TPO and DRP about purchase and sales being tainted, is concerned, the Ld. TPO has failed to appreciate that the appellant purchases raw material, such as Gems, colored stones etc. primarily from unrelated third parties. However, on certain occasions, on need basis, the also purchases, such materials from its AEs. During the year under consideration, purchases from AEs constitute merely 17.37% of its total purchases besides purchases from other entities. e) Further, it is to be noted that since the appellant is a manufacturer and exporter, it processes such raw material in its manufacturing facilities and thereafter, export them to its associated enterprises or unrelated third par....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... A.Y.:2016-17 vis-a-vis facts present in the assessment year under consideration. c) Method adopted as PLI: Particular A.Y. 2016-17 A.Y. 2020-21 Method as per appellant GPM/COP (Page-21, Para-19 of ITAT Order) GPM/COP (Page-45, Point-2 of AO Order) Method as per Revenue OP/VAE (Page-21, Para-19 of ITAT Order) OP/VAE (page-45, Point-2 of AO Order) d) Nature of business of the appellant company: Particulars A.Y 2016-17 AY 2020-21 Nature/Profile Export Manufacturer (Para 27; Page-38 of ITAT Order) Export Manufacturer (Point I of AO) Profile of assessee company as per findings of lower authorities Manufacturer (Para 26; Page-37 of ITAT Order) Manufacturer (Page 2, Point 3 of AO) xxi) The appellant possesses all the characteristics of a routine manufacturer performing all the entrepreneurial functions which is duly corroborated by its financial statements. In this regard, we are also producing extracts of Financial Statements depicting characteristics of a manufacturer: Fixed assets: S. No. Name of Assets Balance as on 31.03.2016 Balance as on 30.03.2020 A. Tang....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s to Non-AEs 11.66% 10.40% Purchase from AEs 21.09% 17.37% Purchase from Non- AEs 78.91% 82.63% Thus, there is no material change in ratio of sale to/purchase from AEs to take any divergent view. xxii) Applicability of Berry Ratio: i) As submitted above, it is an admitted fact that the appellant is engaged in manufacturing activities. To support this further, reference is also invited to the set of filters found to be appropriate and inappropriate, keeping in mind the profile of the appellant, by the TPO, in his order dated 30.07.2023, wherein the Ld. TPO remarked: "Accept companies whose ratio of manufacturing to net sales is more than 75%. Buy accepting the companies, that had the ratio of manufacturing to net sales of more than 75%, the Ld. TPO himself admitted that the appellant is engaged in 'manufacturing activities. Hence, since it is a settled position that 'Berry ratio' is not appropriate to apply on 'manufacturer' and the Ld. TPO himself categorized the appellant as 'manufacturer', applicability of berry ratio is unjustified. j) Further, reference is invited to the following observations made by the DRP in its or....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e risk. Therefore, the above submission is supported by the findings of the Hon'ble ITAT, at para 34 of order passed for A.Y. 2016-17. Thus, risk test for berry ratio to be applied in the instance case is failed. g) The above referred issued has also been dealt by Hon'ble ITAT, in para 27 of its order, while discussing the judgement of Hon'ble Delhi High Court(supra). k) Point No. 3.4.2 at page 11: Chapter 2 of the OECD Guidelines gives the example of intermediary activities where taxpayer purchases goods from an associated enterprise and on-sells those goods to other associated enterprises as an example where Berry Ratio may be applied. Appellant's Submission: b) As submitted above, the appellant is a manufacturer and not a intermediary. The appellant procures goods from its associated enterprises and other vendors, process them in its manufacturing activities and export them. The above submission is supported by the findings of the Hon'ble ITAT, at para 35 of order passed for A.Y. 2016-17. h) Point No. 3.4.4 at page 11: The DRP relied on the judgement of Sumitomo Corporation (supra). Appellant's Submission: b) The sai....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... adequately represent all functions performed and risk undertaken and for this reason, Berry ratio is effectively applied only in case of stripped down distributors which have no financial exposure and risk in respect of goods so distributed by them. Therefore, we agree that the Berry ratio can be applied in certain circumstances but in the facts of the present case, where the assessee is admittedly and undisputedly, a manufacturer and exporter of coloured gemstones and studded fashion jewellery and not a distributor, one wonder how the value of goods so manufactured and exported have no role to play in the profits earned by the assessee. The assessee performs significant manufacturing functions right from procurement of raw material in terms of rough diamonds and gemstones, product conceptualization and designing, processing of rough diamonds and gemstones at its Adarsh Nagar, Sitapura and SEZ Jaipur, SEEPZ Mumbai facilities thereby employing its assets both tangible and intangibles and infrastructure facility and requisite manpower, which are further used for manufacture of studded jewellery and subsequent marketing and sales to its associated enterprises and other independent en....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and it is not a case of simpliciter purchase and sale activity which is being undertaken by the assessee. Only in a latter scenario, where it purchases from its associated enterprises and on-sells them to other associated enterprises, berry ratio can be held to be useful and appropriate PLI as stated in para 2.102 of the OECD guidelines. Following the same, the Coordinate Bench in case of Mitsubishi Corporation (supra) has also held that in case of a low risk high volume trading business involving back to back trading without any value addition to the goods traded, berry ratio could be appropriate PLI. However, in a situation in which there is further processing of the goods procured before selling the same or in a situation which necessitates employment of assets in infrastructure for processing or maintenance of inventories, the use of berry ratio does not seem to be quite appropriate. We therefore find that in the facts of the present case, the approach adopted by the TPO is bereft of the factual position of the assessee in terms of functions performed, the assets employed and risk undertaken while carrying out its manufacturing and export activities and the approach so....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... OP/COP shown by the appellant is higher than the average PLI of comparable. The similar facts are present in the current assessment year and accordingly the issue being covered in the favor of appellant, no adjustment is warranted. xxiv) Not prejudicial to above and without any admission, it is important to note that in A.Y. 2016-17, 2017-18 and 2020-21, lower authorities have worked out berry ratio (OP/VAE) of 55.27%, 75.24% and of 136.78% respectively which itself shows abnormality and absurdity. Further, due to inconsistent application of filters to the comparable and due to violation of Hon'ble DRP directions, in general. 10.2 Before us ld. DR did not controvert this submission made by the ld. DR that the facts of this case with that of earlier year determined by the co- ordinate bench. On this issue we note from page no. 10 of the order of the DRP wherein DRP noted that "3.4.5 In the case at hand, since both sales and purchases are controlled transactions, no fault can be found with the action of the TPO in applying the berry ratio as the profit level indicator." Thus, we note that the adjustment was made by applying the berry ratio and while dealing with the appe....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... controlled transaction (e.g. consisting in the distribution of products), it is necessary that: • • The value of the functions performed in the controlled transaction (taking account of assets used and risks assumed) is proportional to the operating expenses, • The value of the functions performed in the controlled transaction (taking account of assets used and risks assumed) is not materially affected by the value of the products distributed, i.e. it is not proportional to sales, and • The taxpayer does not perform, in the controlled transactions, any other significant function (e.g. manufacturing function) that should be remunerated using another method or financial indicator. 2.108 A situation where Berry ratios can prove useful is for intermediary activities where a taxpayer purchases goods from an associated enterprise and on-sells them to other associated enterprises. In such cases, the resale price method may not be applicable given the absence of uncontrolled sales, and a cost plus method that would provide for a mark-up on the cost of goods sold might not be applicable either where the cost of goods sold consist....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hen fixed assets do not play a central role in generating operating profits. This is often the case for wholesale distributors and service providers. Operating margin has often been used when functions of the tested party are not close to those of the comparables, since differences in function have less effect on operating profit than on gross profit. B.3.3.7.5. The Berry Ratio represents a return on a company's value added functions on the assumption that these value added functions are captured in its operating expenses. It has been observed in practice that the Berry Ratio is used as a PLI for distributors and service providers. The Berry Ratio assumes that there is a relationship between the level of operating expenses and the level of gross profits earned by distributors and service providers in situations where their value-added functions can be considered to be reflected in the operating expenses. Consequently, it may be appropriate to use the Berry Ratio if the selling or marketing entity is a service provider entitled to a return on the costs of the provision of its services. However, some key limitations of the Berry Ratio are: • • T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Assessee had developed supply chain and human resources intangibles. In any event, there was no material to conclude that costs of such intangibles were not captured in the operating expenses. 47. In our prima facie view, the third reason stated by the TPO, that is, the rate of commission, paid to the Assessee is based on the value of the goods, would be a valid reason to reject the use of Berry ratio because Berry ratio can only be applied where the value of the goods are not directly linked to the quantum of profits and the profits are mainly dependent on expenses incurred. The fundamental premise being that the operating expenses adequately represent all functions performed and risks undertaken. For this reason Berry ratio is effectively applied only in cases of stripped down distribution; that is, distributors that have no financial exposure and risk in respect of the goods distributed by them." 23. Further, we refer to the Coordinate Delhi Benches decision in the case of Mitsubishi Corporation India Private Limited V s . DC IT (Supra) and the relevant discussion and findings are contained at paras 44 to 59 of its order which read as under: Berry rati....
X X X X Extracts X X X X
X X X X Extracts X X X X
....os. In order for a Berry ratio to be appropriate to test the remuneration of a controlled transaction (e.g. consisting in the distribution of products), it is necessary that: • • The value of the functions performed in the controlled transaction (taking account of assets used and risks assumed) is proportional to the operating expenses, • The value of the functions performed in the controlled transaction (taking account of assets used and risks assumed) is not materially affected by the value of the products distributed, i.e. it is not proportional to sales, and • The taxpayer does not perform, in the controlled transactions, any other significant function (e.g. manufacturing function) that should be remunerated using another method or financial indicator. 2.102 A situation where Berry ratios can prove useful is for intermediary activities where a taxpayer purchases goods from an associated enterprise and on-sells them to other associated enterprises. In such cases, the resale price method may not be applicable given the absence of uncontrolled sales, and a cost plus method that would provide for a mark-up on the cost of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....estimony. What came up for consideration in the said case was the "proper," arm's length compensation that a Swiss subsidiary of DuPont USA, engaged as a distributor of the DuPont-USA, should earn on the distribution services it performed in Switzerland on behalf of the AE. In his analysis, Charles Berry determined that the best method for determining an arm's length result was to compare the Swiss distributor's markup on operating expenses to the same markup earned by uncontrolled (i.e., third-party) distributors performing substantially similar functions. Berry's key insight in the case was that distributors should earn a return commensurate to the distribution services performed and that the value of the products being distributed, in other words, was irrelevant. The implicit emphasis was thus on the service element even in trading activity, and in the costs incurred on rendering this service rather than in the value of goods traded. That was a case in which the assessee was simply involved in distributorship function without much risks, though certainly much more risks than in a back to back trading, associated with inventories or with uncertainties of normal tr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pact of such risks is not reflected in operating expenses of the assessee. The berry ratio should, therefore, be equally useful in the present case as well. In the case of the traders like assessee, who neither assume any major inventory risk nor commit any significant assets for the same and particularly as there is no value addition or involvement of unique intangibles, the berry ratio should also be equally relevant as in the case of a limited risk distributor. 54. In the case of GAP International Sourcing India Pvt Ltd Vs ACIT [20 ITR (Trib) 779], a coordinate bench has upheld the use of this ratio. While taking note of the contentions of the assessee in this case, the coordinate bench has, inter alia, observed as follows: 6.4 Ld. counsel then referred to the well recognized Berry ratio in determination of ALP. Berry ratio also propounds that routine distributors should earn a return commensurate to the distribution services performed, measured as a percentage of the value-adding (operating) expenses incurred by them. The value of the products being distributed, in other words, is irrelevant. Distributors must achieve a particular gross profit in order to comp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s not assume any significant risks associated with the goods traded nor performs any functions on the same, and all the risks assumed by the assessee are adequately reflected by the operating costs, the berry ratio could be equally relevant. 56. What berry ratio thus seeks to examine is the relationship of the operating costs with the operating profits. It thus proceeds on the basis that there is a cause and effect relationship between operating costs and the operating profits. The factors, however, which can also have substantial impact on the operating profits, and thus dilute this direct relationship, could be factors like (a) in terms of functions - processing and value addition to the goods; (b) in terms of assets - fixed assets such as machinery, inventory, debtors and otherwise high assets, including intangible assets; and (c) in terms of risks - risk associated with holding inventories. In a diagram form, this relationship could be as follows: WHERE RELATIO SHIP IN OPERATING COSTS AND OPERATING PROFITS IS DIREC T AND UNDILUATED ; APPLICATION OF BERRY RATIO IS JUSTIFIED WHERE RELATIO SHIP IN OPERATING COSTS AND OPERATING PROFITS IS NOT D IRECT AND ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... functions performed, risks assumed and assets employed, higher the profits. A comparables, with economic justification for higher profits, cannot be rejected on the ground of being eligible for higher profits." 24. Similarly, Coordinate Ahmedabad Benches in the case of AC IT Vs. Bagadiya Brothers Private Limited (Supra) had an occasion to examine the applicability of the Berry ratio and the relevant findings are contained at para 6.5 to 6.9 of its order which read as under: "6.5 Adverting to assessee's adoption of TNMM method as most appropriate method for computation of ALP under TP regulation and adopting AE as a tested party, we find the TP working provided by the assessee to be correct. Similarly Berry Ratio cannot be applied to the assessee's case as it is applicable in specific circumstances of a pure distributor where no value added services are rendered. The observation of the TPO that AE had utilized the tangible and intangible assets of the parent company in earning such huge profit in the first year of its activity and cannot be treated as independent shipping service provider is only a presumption without any support. We are of the view that v....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y AE is 4.52% which is less when compared with 5.18% in case of other eleven comparable companies. This is within arm's length. Therefore, otherwise also no transfer pricing adjustment is called for by the safe harbor clause. 6.9 In view of the facts, circumstances, material available on record and after hearing the rival contentions we uphold the order of Id. CIT(A) on all counts which are upheld. Revenue grounds in this behalf are dismissed. 25. In the light of above OECD and UN guidelines and domestic jurisprudence, for the applicability of appropriate PLI or for that matter, Berry ratio in the instant case, what is therefore relevant to determine is the profile of the assessee company in terms of functions performed, assets employed and related risk undertaken by it. In this regard, we refer to the Transfer Pricing Report submitted by the assessee before the Transfer Pricing Officer wherein the profile of the assessee company has been described at para 4.1, which reads as under: " 4.1 Profile of VGL Vaibhav Global Ltd. ("VGL'') was incorporated in 1989 in Jaipur. VGL is engaged in the business of manufacturing and exports of color....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed to its associated enterprises and to a limited extent exported to third parties. 3. SEZ, Jaipur - SEZ unit started commercial production during the financial year 2015-16. The VGL has set up state of the art jewellery manufacturing unit at Sitapura SEZ and is involved in manufacturing of high end Jewellery. These are mainly exported to associated enterprises. 4. Seepz, Mumbai - In Seepz Unit, company is involved in manufacturing of high end Jewellery. These are either exported to associated enterprises as well as to non associated enterprises. 3. Bharat Diamond Bourse, BKC, Mumbai - It purchases diamond locally as well as imported from its associated enterprises. These are either exported or used for captive consumption for manufacturing of studded jewellery which is sold to unrelated party locally or internationally." 26. It is relevant to note that the TPO while issuing the show cause notice as well as while proposing the adjustment as well as the DRP has not disputed the fact rather there is an categorical affirmation that the assessee is engaged in the business of manufacture and export of colored stones and studded jewellery and has manuf....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ase Roughs, Color stones, Diamonds, Mountings/findings, etc., from the local market of their respective countries and send/export such goods/materials to VGL. For such facilitations/support work, the associated enterprises incur logistics and administration costs in this regard. We have been explained that these logistics and administration costs are recovered from VGL on actual basis. In substance, associated enterprises purchase these goods/materials from the local market and export it to VGL after adding logistics and administration costs incurred by them in this regard. We have been further given to understand that, no mark-up has been charged by such associated enterprises. The costs incurred have been charged back to / recovered from VGL on actual basis. Therefore, the price paid by VGL for such imports from its associated enterprises would be obviously lower than the price prevalent in the industry for similar purchases. Therefore, based on the facts and circumstances of the case, Cost Plus Method (CPM) appears to be the most appropriate method to benchmark VGL's import transactions." 30. Regarding export of gems stones and gems jewellery and adoption o....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Companies Act and follow accounting standards; no adjustment is warranted in respect of the accounting aspects. We, therefore, based on the above facts, have determined that CPM is the most appropriate method to evaluate the arm's-length nature of intercompany transactions based on Gross Profit markup as the profit level indicator." 31. The assessee thereafter considering Cost Plus Method and adopting the Gross Profit/cost of production as the PLI has worked out its Gross Profit Margin during the year under consideration as under: 32. The assessee thereafter carrying out the search procedure for independent comparable companies and selecting the comparables has determined yearly average gross margin of 8.95% of cost of production (GP/COP) and given its GP/COP of 15.62% has determined its sales transactions to its associated enterprises which constitute 88.34% of total sales at arm's length. The TPO however has not agreed with the PLI so adopted by the assessee company and has adopted OP/VAE as the appropriate PLI. 33. The reasoning adopted by the TPO is that as the assessee is purchasing from related parties and selling to related parties, b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....associated enterprises and other independent entities and providing after sales services. We find that it is the associated enterprises which performs the distributorship functions and sells the assessee's products through its retail stores and TV Channels and not the assessee. In the process, the assessee takes all types of risk such as inventory risk, credit & collection risk, product risk, manpower risk, market Risk (to a limited extent), technology risk, general business risk and foreign exchange risk. In terms of cost base for carrying out these functions and related risk, there are material costs, manufacturing expenses and employment/manpower costs which have been incurred by the assessee and therefore, for determining an appropriate return on such costs, these costs have to be necessarily considered and which has been rightly considered by the assessee as part of its "cost of production" and based thereon, has adopted operating profit/cost of production as an appropriate PLI. We failed to understand how the TPO has worked out the value added expenses and quantum thereof in the face of these undisputed facts and circumstances of the case ignoring the manufacturing functions ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....port activities and the approach so adopted is also not in consonance with the approach so suggested by OCED and UN, and the decisions of the Hon'ble Delhi High Court and the Coordinate Benches and therefore, the adoption of berry ratio as an appropriate PLI is not justified in the instant case. 10.3 As is evident from the records that in this case the Transfer Pricing Officer, Ld. AO and DRP rejected the economic analysis including the Most Appropriate Method and the filters applied by the appellant in the Transfer Pricing ("TP") documentation maintained under section 92D of the Act read with Rule 10D of the Income Tax Rules, 1962 (the Rules) and subsequently applying new filters for the purpose of identification of companies comparable to the appellant. While doing so we note that it has not been established that which conditions as Specified in clause (a) to (d) of Section 92C(3) of the Act have not been satisfied by the assessee. Leaving that contention of the assessee the bench noted that the Ld. TPO, Ld. AO and DRP rejected the CPM considered by the assessee as the Most Appropriate Method with GP /COP as the PLI, without giving any cogent reason. Without appreciating the f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rable and application of the PLI ( i.e. Gross Profit Margin / Cost of Production ) on this issue ld. AR of the assessee drawn our attention to the fact that where the PLI of GP/COP were applied on the comparable companies so selected by the TPO, the transaction of the assessee will meet the arm's length test requirement and ld. AR invited a reference to the submission of the assessee on this issue as contended before the lower authorities which reads as under : In the case in hand, following comparable companies were identified, by Ld. TPO, for benchmarking: S .No. Comparable Company Three Year Weighted Average GPM 1. Classic Ornaments Pvt. Ltd. 2.52% 2. Suvarna Shilpi Jewellers Pvt. Ltd. 3.04% 3. Master Chain Pvt. Ltd. 3.17% 4. Karp Impex Ltd. 8.84 5. Uday Jewellery Industries Ltd. 11.43% 6. Golkunda Diamonds & Jewellery Ltd. 13.68% 7. Inter Gold (India) Pvt. Ltd. 31.12% 8. Azure Jouel Pvt. Ltd. 49.12% Median 9.99% Assessee's Gross Margin 15.43% Without prejudice to anything stated in above para and without any admission, even otherwise also perusal of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Ld. TPO/ AO ignored the following facts : - a) the Appellant has granted a credit period of up to 180 days to both AEs as well as non-AE third parties; b) the Appellant has not charged interest on delayed receivables from third parties as well; c) the Reserve Bank of India ('RBI) has itself acknowledged the hardships faced by the companies (operating in similar industries) and has revised the foreign remittance guidelines related to credit period norm for jewellery exporters to 180 days; d) not charging any interest on delayed receipts is a generally accepted practice for companies engaged in similar business segment as the Appellant. The above issue has already been dealt with in the case of the assessee for A. Y. 2017-18 vide ITA no. 04/JP/2022 wherein the co-ordinate bench has held as under : 27. We have heard both the parties and perused the material available on record. The entire issue stem from action of TPO wherein vide Show Cause Notice dated 24.01.2021 the receivables which are outstanding beyond 60 days have been treated as unsecured loans advanced to AEs and accordingly interest has been imputed thereon. Further TPO has ad....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... DRP. On this issue ld. AR of the assessee vide continuation to the written submission has also filed placed on record the copy of the calendar stating that 15th December 2019 being Sunday and Holiday the payment was made on 16th December fully covered with the direction of the DRP. Ld. DR did not controvert this fact and therefore, considering that fact we see no reason to sustain the addition of Rs. 19,68,509/- and thereby the same is directed to be deleted. Based on this observation ground no. IV raised by the assessee is allowed. 13. Vide Ground no. V the assessee challenges action of the ld. AO invoking provision of section 115QA of the Act and thereby making the additional tax on the distributed income in relation to buy back of shares of Rs. 71,99,99,211/-. The assessee also contended that an exhaustive definition of distributed income is provided whereby the amount, which was received by the company, at the time of the issuance of shares, which was bought back by the company, must be reduced from the consideration paid by the company on buy back of such shares. Record reveals that Assessee - appellant M/s Vaibhav Global Limited has made 'Public Announcement" for buyb....
X X X X Extracts X X X X
X X X X Extracts X X X X
....propriate to deal with the provision of the Act pre amendment and post amendment. Section 115QA, as on 01.06.2013, "Tax on distributed income to shareholders. 115QA. (1) Notwithstanding anything contained in any other provision of this Act, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount of distributed income by the company on buy-back of shares (not being shares listed on a recognised stock exchange) from a shareholder shall be charged to tax and such company shall be liable to pay additional income-tax at the rate of twenty per cent on the distributed income:" Now examine the amended provision of law which reads as follows: "Tax on distributed income to shareholders. 115QA. (1) Notwithstanding anything contained in any other provision of this Act, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount of distributed income by the company on buy-back of shares from a shareholder shall be charged to tax and such company shall be liable to pay additional income-tax at the rat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fore 5th July 2019 tax on such buy back of shares shall not be charged. Before we go into the deep further in the matter it would be appropriate to deal with the exact provision brought in to the bill which reads as under : Notes on clause amended: Clause (34A) of the said section provides for exemption to any income arising to a shareholder on account of buy-back of shares not being listed on a recognised stock exchange by the company as referred to in section 115QA. It is proposed to amend the said clause so as to provide the said exemption also to the income arising to a shareholder on account of buy-back of shares listed on a recognised stock exchange by the company as referred to in section 115QA. This amendment will take effect from 5th July, 2019. Upon reading the above proposed amendment, notes on amended clause with that of the public announcement made by the Hon'ble Finance Minister in the public domain, the assessee reached to the destination and concluded the transaction which was made public. Accordingly reading that provision in that terms that what is available in public domain is the amendment made, notes on clause and guidelines ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o directors and Stock Exchanges regarding Buy-back of shares (PBP: 122); • 30th May, 2019: Board Meeting held wherein Buy Back of Shares, terms and condition of Buy Back, Appointment of Merchant Banker and company's broker etc. was approved (PBP: 123 - 128); • 30th May, 2019: The outcome of Board Meeting was intimated to Stock Exchanges (PBP:129 - 131); • 30th May, 2019: Postal ballot was issued containing, inter alia, material information as contained in Schedule I of SEBI (Buy Back of Securities) Regulation, 2018 (PBP:132 - 139); • 30th May, 2019: Buy back of shared by the appellant was extensively covered in various social media platform and news channel (PBP: 140 - 142) • 31st May, 2019: Press release of Buy Back intimated to Stock Exchanges (PBP:143 - 145) • 7th August 2019: Declaration of result of postal Ballot; • 8th August 2019: Date of publication of public announcement as per SEBI (Buy Back of Securities) Regulation, 2018. As is evident that till 08.08.2019 when the assessee completed the process that proviso which revenue relied was not available in public and assessee cannot b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....serve the need to comply strictly with regulatory requirements that are important, especially when a party seeks the benefits of an exemption clause that are important. Substantial compliance with an enactment is insisted, where mandatory and direct recruitment requirements are lumped together, for in such a case, if mandatory requirements are complied with, it will be proper to say that the enactment has been substantially complied with notwithstanding the non-compliance of directory requirements. In cases where substantial compliance has been found, there has been actual compliance with the statute, albeit procedurally faulty. The doctrine of substantial compliance seeks to preserve the need to comply strictly with the conditions or requirements that are important to invoke a tax or duty exemption and forgive non- compliance for either unimportant and tangential requirements or requirements that are so confusingly or incorrectly written that an earnest effort at compliance should be accepted. (Emphasis Supplied) This view is further supported by the decision of the Hon'ble Gujarat High Court decision in the case of CIT Vs. Tarnetar Corporation (2012) 26 taxmann.com 180 held....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed and proviso which was relied upon by the revenue was not made public and therefore, activities which were undertaken by the assessee based on the information available in public which till 08.08.2019 were followed and thereby cannot be considered or differentiated to tax the transaction which has retrospective effect. While reaching the conclusion we get support on the various judicial precedent cited in the written submission that the accrual of right on the repeal provision cannot be taken away. Even otherwise the assessee, before the change proposed i.e. on 05.07.2019 completed all the action which would be considered as the action of the assessee was in the public domain. Based on this observation sub ground no 1 of ground no. V raised by the assessee is allowed. Since we have directed to delete the main addition the contention of allowing the cost becomes educative in nature and does not require our finding. 14. So, far as ground no. VI under the head Other Grounds the bench noted that the assessee vide their written submission so filed and relied submitted that these grounds being general in nature. Hence not pressed and thereby the same are treated as dismissed as not ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ld. CIT(A) sustain the addition of Rs. 3,97,000/- u/s 69C of the Act treating 'Dumb Document', as unaccounted expenses, without any corroborative material, the assessee also contests the addition of Rs. 2,43,927/- u/s 69C of the Act which is made against the facts of the case. 20.1 The brief facts related to this addition is that a search/survey operations were conducted on, various premises of the appellant from 23.11.2021 to 27.11.2021. During that process, a rough diary (marked as Exhibit - 1 of Party: B-5) (PBP: 167), pertaining to an employee of the company, containing rough jottings were found and impounded. Ld. AO on perusal of this exhibit noted that the particulars written on that page were related to IT Cell of VGL. On a few pages, the expenses incurred upon the acquisition / procurement of equipment / items were written which reads as under: 20.2 During that proceeding a statement of Shri Ansuman Khandelwal, DGM ( Finance & Accounts ) was recorded and he was confronted about the content written vide question no. 37 of his statement. Vide that reply he denied to have any knowledge about the amounts mentioned / written on various pages of this exhibit. After ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f loose page/ dumb document: a) In this regard, the appellant wants to draw attention of your honours to the following whole page no. 3 of the Exhibit-1 of Party Number: B5 (PBP: 167) under consideration. b) Since it is an undisputed fact that the said diary is prepared by employee of the appellant. Hence, the employee is the author of the diary. Therefore, understanding the psyche of the author behind those jottings is crucial to understand their relevance and purpose. c) On careful analysis of such page, it can be observed that multiple jottings including marks, signs, random diagrams, arrows, circles, lines are appearing on the complete page. This pattern indicates that the author had a habit of jotting down marks, signs, arrows, circles, lines etc. while discussing anything which may be during discussion over phone or in person. d) In practical life it is common that certain discussions or thoughts are subsequently converted to transaction either as it is or with modification or in most of the case it could not be materialize. Therefore, jottings merely reflecting the discussion on a particular moment and not representing any transaction per ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ative evidence, could not be sustained." • Hon'ble Karnataka High Court in the case of DCIT/ CIT(A) Vs. Sunil Kumar Sharma [W.A. No. 830/2022] vide order 22.01.2024, rejected the appeal of the revenue by holding that loose sheets have no evidentiary value without corroborative evidence. Further, the Hon'ble Supreme Court has also dismissed SLP filed by the revenue against the said order. Relevant extracts of Hon'ble High Court order are reproduced below: "50. In the instant case, the first issue raised by the Revenue is as regards the addition of income made by the Assessing Officer based on loose sheets found in the house of a third party. However, we find that the Revenue has not established the said loose sheets to be considered as evidence in law by producing corroborative evidence supported by judgments and findings. Further, since the statement made by Shri K. Rajendran under Section 132 of the IT Act is later retracted by him by filing an affidavit, the statement given by him does not hold any evidentiary value. 51. The notice issued under Section 153C of the IT Act in respect of the Assessment year 2018-19 is not applicable, which is also supp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vidence to charge any person with liability. It is not enough merely to prove that the books have been regularly kept in the course of business and the entries therein are correct It is further incumbent upon the person relying upon those entries to prove that they were in accordance with facts; • The Hon'ble High Court of Madhya Pradesh in the case of PCIT-I Vs Shri Pukhraj Soni [ITA No. 53 of 2017] dated 06.02.2019. After taking into account the judgement(supra) of Hon'ble supreme court dismissed the department appeal where addition was made on the basis of loose papers Relevant extracts read as under: "The Apex Court has taken into account in similar circumstances the incriminating materials in form of random sheets, loose papers, computer prints, hard disk and pen drive etc. and has held that they are inadmissible in evidence, as they are in the form of loose papers. In the present case also entries found during search and seizure which are on loose papers are being made the basis to add income of this respondent. Resultantly, in light of the Supreme Court judgments, referred above, no case for interference is made out with the order pass....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ds that such loose sheets deserves to be treated as a dumb documents only since not revealing full details about the dates containing lack of further particulars and therefore, ought not to be made basis of an addition. Similar other judicial precedents ACIT Vs. Layer Exports P.Ltd., (2017) [184 TTJ 469] (Mumbai) & ITO Vs. Kranti Impex Pvt. Ltd., ITA No.1229/Mum/2013, dt.28-02- 2018 (dealing with a seized document seized not either bearing the taxpayer's name or signature). Shri Neeraj Goyal Vs. ACIT, ITA No.5951/Del/2017, dt.21-03-2018, (Del) (2012) 23 taxmann.com 269] Nagarjuna Construction Co. Ltd., Vs. DCIT, CIT Vs. S.M.Agarwal, [293 ITR 43], CIT Vs. Shri Girish Chaudhary (2008) 296 ITR 619 (Del) also echo the very principle. We accordingly hold that the impugned addition of on-money payment made in both these assessees' hands on the basis of a mere dumb document and not corroborated by any other evidence is not sustainable. We thus direct to delete the impugned identical addition forming subject matter of adjudication in both these cases". 3. No addition can be made without corroborative evidence: a) Without prejudice to anything stated hereinbefore and witho....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ry Estates (P) Ltd (2013)(356 ITR 159)(Delhi), the Hon'ble Delhi High Court has laid down following principles for making additions towards unaccounted sale receipts:- "The power of the assessing officer to raise valid queries on the basis of the facts or unusual features noticed by him must be conceded. The features noticed by him in the assessees' business certainly constitute a starting point of inquiry. They are, however, not to be taken as evidence or material showing any suppression or understatement of the sale price. If on further probe, the assessing officer was able to unearth any evidence or material on the basis of which actual suppression of the sale price could be found, then the additions made on that basis would be valid. Even if the evidence does not show the precise amount of suppressed sale price, but shows clearly and categorically that there was understatement of sale consideration, that would be sufficient to empower the assessing officer to reject the account books as being incorrect and incomplete. He may thereafter make an estimate of the profits of the business to the best of his judgment, on the basis of the evidence unearthed by him revealin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is no date of receipt or payment mentioned against any figure, the content of the paper was incorrect as the total sales consideration did not match to the sales consideration as per the agreement. Further, the sales consideration as per the loose paper did not even match to the handwritten jottings which raise serious doubts on its validity and accuracy. 14. Thus, the above said loose paper was not speaking document and it is a dumb document which can be used as a basis for making the addition u/s 69 of the Act in the absence of any substantive enquiry to validate the content of the paper with any supportive and corroborative material and evidence. The evidentiary value of loose paper which is unsigned, undated and unverified has been held to be highly questionable and has not been accepted by the Hon'ble Supreme Court and various High Courts in following judgments". 1. Without prejudice to anything stated hereinbefore and without any admission, the appellant wants to reiterate its submission made before the Ld. AO that although the jotting of 3,97,000/- does not carry any description of transaction, however, we tried to explain, to the best of our knowledge, tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at page were related to IT Cell of VGL. On a few pages, the expenses incurred upon the acquisition / procurement of equipment / items were written. To counter that paper a specific question no. 37 was asked to Shri Ansuman Khandelwal, DGM ( Finance & Accounts ) while recording the statement. Vide that reply he denied to have any knowledge about the amounts mentioned / written on various pages of this exhibit. After that proceeding the assessee submitted that the pages of these exhibits are daily task, routine work, IT related task, network ip, quotations of vendors, noting of discussion and issues of team including the personal notting were written. These noting remained unexplained and therefore, the ld. AO after going through that page noted that when the question related to this page was asked, assessee vide reply dated 14.9.2023 stated that this amount is rough jottings. The assessee submitted that ultimately vendor was ready to deliver the services / goods for an amount of Rs. 2,97,000/- and ultimately the same was billed for an amount of Rs. 2,70,928/ [APB-168]. Ld. AO since not satisfied with the reply issued a show cause notice to the assessee. In that submission the submit....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of our view from the decision of our Jurisdictional High Court in the case of CIT Vs. Kailash Chand Sharma [146 Taxman 376 (Raj) ] wherein the our High Court observed as under : 15. Having perused the three loose papers, it appears to us that the finding recorded by the Tribunal about the non-appearance of Chandra Kanta Pandit in the case of assessee is a finding based on appreciation of evidence which does not stand vitiated by perversity nor it can be said to be partly relevant or partly irrelevant consideration or not founded on the material on record. 16. Undoubtedly, non-appearance of Smt. Chandra Kanta Pandit may be one of the factors which has also relevance and can be taken into consideration but it is not possible to hold as a matter of law that every material on record must be discarded merely because of non-appearance of Smt. Chandra Kanta Pandit before the Assessing Officer and it would render all other materials unreliable and incredible and not relevant and on that basis, finding cannot be reached. In fact, in the letter submitted by the assessee, which has been quoted by the Assessing Officer in his order, gives a complete and comprehensive picture....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ned in Annexure A/6 Pages 66, 67 and 69. The Assessing Officer, after accepting the request of the assessee, has issued summons under section 131 to Smt. Chandra Kanta Pandit and Shri Gopal Sharma. However, Smt. Chandra Kanta Pandit has sought adjournments and could not attend office on account of her illness but Shri Gopal Sharma has confirmed the contents of the transactions that the same are with regard to the sale transactions of agricultural lands, which belonged to Smt. Chandra Kanta Pandit and also that he is the author of this document. Under such circumstances, and the facts available, the Assessing Officer still did not pursue the matter with the lady for dislodging the claim of the appellant. The Assessing Officer has failed to discharge his onus. Accordingly, we hold that the transactions mentioned in the seized annexure A-6, pages 66, 67 and 69 do not belong to the appellant and hence the addition made by the Assessing Officer at Rs. 42,27,900 is directed to be deleted." 17. In the totality of the facts and circumstances of the case, the Tribunal accepted the submissions made by the assessee that the transaction does not belong to the assessee. It cannot be sa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....10% 0 D.Navinchandra 30.87% 4 Jashan Jewels Pvt. Ltd. 34.57% Azure Jouel Pvt. Ltd. 47.49% Average 20,28% 35th Percentile 10.2696 Median 12.909% 65th Percentile 30.87% Document 3 Print XClose Press Information Bureau Government of India Ministry of Finance 20 SEP 2019 11:59AM by PIB Delhi Corporate tax rates slashed to 22% for domestic companies and 15% for new domestic manufacturing companies and other fiscal reliefs The Government has brought in the Taxation Laws (Amendment) Ordinance 2019 to make certain amendments in the Income-tax Act 1961 and the Finance (No. 2) Act 2019. This was announced by the Union Minister for Finance & Corporate Affairs Smt Nirmala Sitaraman during the Press Conference in Goa today. The Finance Minister elaborated further , the salient features of these amendments , which are as under :- f. In order to provide relief to listed companies which have already made a public announcement of buy-back before 5th July 2019, it is provided that tax on buy-back of shares in case of such companies shall not be charged. Document 4 PROSPECTUS VAIBHAV GEMS LIMITED Regd. Of : K-6-8, Fateh Iba, Adanh Nagar Road, Jal....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... appeal is pending with Income Tax Appetite Tribunal agalet an order posted by Income Tax Officer regarding an amamoment for the year 1993-94 ratinga demand of T'as. 3.80 Lida. Management Perception: The Company Document 5 Particulars Year ended 31st March, 2016 Sales (A) 360,60 Less: Direct and Indirect costs of production a. Material Costs (Refer schedule 21,22 &% 23 to the P&L A/c) 234.59 b. Manufacturing Expenses (Refer schedule 26 to P&L A/c) 41.50 c. Employment Cost (Refer schedule 24 to P&L A/c) 35.78 Cost of Production (B) = (a + b + c) 311.87 Gross Profit (C) = (A) - (B) 48.73 % of Gross Profit to Cost of Production = (C) / (B) 15.62% % of Gross Profit to Total Sales = (C)/ (A) 13.51% Document 6 No. Name of comparable companies selected by TPO Weighted Average PLI GP/COP 1 A.B.Jewels Put.Ltd. 3.86% 2 Karp Impex Ltd. 9.39% 3 Shantivijay Jewels Ltd. 10.26% 4 Golkunda Diamonds & Jewellery Ltd. 10.70% 5 Asian Star Jewels 15.10% 6 D.Navinchandra 30.87% 7 Jashan Jewels Put. Ltd. 34.57% 8 Azure Jouel Put. Ltd. 47.49% Average 20.28% 35th Percentile 10.26% Median 12.90% 65th Percentile 30.87% Document 7 ....