S.B. & T INTERNATIONAL LTD,MUMBAI vs. DCIT CIR 11(2)(1), MUMBAI

In total, the assessee has raised five grounds of appeal. Grounds no.1 and 2, being general in nature, do not require specific adjudication.

Brief facts are, the assessee, an Indian company, is engaged in the business of procurement of raw materials like diamond, gold, colour stone, silver and platinum from local market and after processing them, exports gold studded jewellery to its AEs as well as others. Besides the above, the assessee also trades in cut and polished diamond procured mainly from indigenous source. As stated by the Assessing Officer, trading in diamond accounts for more than 87% of the total turnover of the company for the year under consideration. During the transfer pricing proceedings, the Transfer Pricing Officer noticed that the assessee has benchmarked the international transaction relating to export of cut and polished diamond to the AEs by adopting Cost Plus Method (CPM) as the most appropriate method.

The learned Authorised Representative submitted, the assessee has also entered into similar transaction with non–AEs/unrelated parties. Therefore, such transactions with non–AEs/unrelated parties should be applied as internal TNMM for benchmarking the transaction. He submitted, while deciding identical issue in assessee’s own case for the assessment year 2011–12, the Tribunal has accepted internal TNMM as the most appropriate method to benchmark the export of cut and polished diamond to the AEs.

The learned Departmental Representative relying upon the observations of the Transfer Pricing Officer and learned DRP submitted, since the assessee did not object to either applicability of external TNMM as the most appropriate method as well as the set of comparables selected by the Transfer Pricing Officer, the Transfer Pricing Officer had no other option but to determine the arm's length price by applying external TNMM as well as the comparables selected by him. He submitted, neither before learned DRP nor before the Tribunal, the assessee has furnished any relevant information/data to justify applicability of internal TNMM.

We have considered rival submissions and perused the material on record. The dispute before us is with regard to the adjustment made towards arm's length price of the export of cut and polished diamond to the AEs amounting to ` 66,35,648. It is noticed, though, in Para–7 of the order passed under section 92CA(3) of the Act, the Transfer Pricing Officer has specifically mentioned that as per audit report in Form no.3CEB, the assessee has benchmarked this particular transaction applying CPM, however, in subsequent paragraphs he has observed that the assessee has neither made any transfer pricing study report nor benchmarked the transaction on the plea that the transaction amount is below ` 1 crore. Further, the Transfer Pricing Officer has alleged that when called upon to offer his explanation/submissions with regard to the applicability of external TNMM as well as the comparables selected for that purpose, the assessee did not object to it and in this context, the Transfer Pricing Officer has referred to the order sheet entry dated 8th October 2015. Even, learned DRP while dealing with the objections on this particular issue has observed that apart from referring to rule 10B(1)(c) and submitting that unaudited segmental account can be relied upon for comparing profitability of controlled transaction with uncontrolled transaction, the assessee has not advanced any specific argument against applicability of external TNMM as well as the comparables

In ground no.4, the assessee has challenged the disallowance of ` 79,50,776, made under section 14A r/w rule 8D.

Brief facts are, during the assessment proceedings, the Assessing Officer noticed that as on 31st March 2012, the assessee’s investment in exempt income yielding asset stood at ` 25,73,35,000. Noticing the above, he called upon the assessee to explain why expenditure attributable to investment made in exempt income yielding asset should not be disallowed under section 14A r/w rule 8D. In response, it was submitted by the assessee that since it did not receive any exempt income during the year under consideration, no disallowance under section 14A of the Act can be made. However, rejecting the explanation of the assessee, the Assessing Officer proceeded to compute the disallowance under section 14A of the Act by applying the method prescribed in rule 8D, which worked out to ` 79,50,776. The disallowance made by the Assessing Officer was upheld by learned DRP.

The learned Authorised Representative submitted, since the assessee had not earned any exempt income during the year, the provisions of section 14A r/w rule 8D would not be applicable. In support of such contention, he relied upon the following decisions:–

The learned Departmental Representative relied upon the observations of the Assessing Officer and the DRP.

We have considered rival submissions and perused the material on record. From the stage of assessment proceedings itself, the assessee had objected to applicability of section 14A of the Act on the plea that it had not earned any exempt income during the year under consideration. The aforesaid contention of the assessee has remained uncontroverted. No material has been brought on record by the Revenue to suggest that the assessee had earned any exempt income during the year under consideration. Now, it is fairly well settled that if any particular assessment year no exempt income has been earned, no disallowance under section 14A of the Act can be made. Even, the Hon'ble Jurisdictional High Court in case of Ballarpur Industries Ltd. (supra) has expressed the aforesaid view. That being the case, the disallowance made under section 14A of the Act cannot be sustained. Accordingly, the Assessing Officer is directed to delete the disallowance of ` 79,50,776. This ground is allowed.