Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI G.S.PANNU & SHRI AMARJIT SINGH
ORDER PER G.S.PANNU,A.M:
The captioned appeal by the Revenue and Cross-objection by the assessee arise from an assessment order passed by the Assessing Officer under section. 143(3) r.w.s. 144(1) the Income Tax Act, 1961 (in short ‘the Act’), which has been passed as per the directions of the Dispute Resolution Panel- 1,(DRP) dated 01/11/2013 pertaining to assessment year 2002-03.
In the appeal of the Revenue, the following Grounds of appeal have been raised:-
“1.Whether on the facts and circumstances of the case and in law, the Hon'ble DRP-I, Mumbai has erred in ignoring the turnover as valid criteria in choosing the comparables? 2. Whether on the facts and circumstances of the case and in law, the Hon'ble DRP failed to appreciate that it is a settled fact that S/s 92C & Rule 108(2) of Income Tax Act and Rules has clearly laid down the principle that the turnover filter is an important criteria in choosing the comparables because significant differences in size of the companies would impact comparability even there is no functional difference in their activities.
3. Whether on the facts and circumstances of the case the Hon. ORP failed to appreciate that the said stance is also upheld in various cases by the courts such as Sony India 114 ITO 448 (Del)(2008)? 4. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”
In the cross objection, the assessee has raised the following Grounds of appeal:-
1. The learned Assessing Officer has erred in raising the ground related to turnover filter in respect of the comparable Anshumi Commercials Ltd. as the same was rejected as "not found functionally comparable", whereas the following entities in Diamond Business were selected based on "criteria of functional similarity" inspite of C.O No.171/Mum/2014 (Assessment Year 2002-03) they having huge difference in turnover when compared to turnover of the appellant at Rs. 32.32 crores. Comparable Total Turnover Turnover in (Rs. In Crores) Diamond (Rs. In Crores) Sunraj Diamond Exports 1.58 1.05 Asian Star Company Limited 756.40 756.40 Suashish Diamonds Ltd. 493.77 478.55 2. The learned Assessing Officer and the learned members of Hon’ble DRP have erred in considering the following entities as comparable:-
Name Nature of Total Turnover Turnover in Business turnover in Diamond Jewellery business Business Goldiam Intimate Diamond 100.89 93.43 7.46 Ltd. &Jewllery SB&Tribunal Jewellery 109.45 1009.45 Nil International Ltd.
3. The learned Transfer Pricing Officer has erred in not giving standard deduction of + (-) 5% u/s. 92C(2)
4. The learned Assessing Officer has erred in not reducing Exchange Difference of Rs. 11,79,872 from Total Income of the current year for computing taxable income of the current year inspite of specific direction of Hon'ble DRP in this respect.”
The substantive grievance of the Revenue is on account of the direction of the DRP that the transfer pricing adjustment of Rs.1,27,21,348/- determined by the Transfer Pricing Officer on account of international transactions entered into by the assessee with its associated enterprises on account of import and export of diamonds is not merited.
In order to appreciate the controversy, the following background is relevant. The assessee before us is a partnership firm which is engaged in the C.O No.171/Mum/2014 (Assessment Year 2002-03)
business of cutting and polishing of diamonds. In this case, initially, the assessment was completed under section 143(3) of the Act and the income assessed at Rs.1,77,34,100/-, which has since been set-aside by the Tribunal vide its order in and the matter was restored back to the file of Assessing Officer for deciding afresh. In the remanded proceedings, the Assessing Officer referred the matter of determination of arm's length price of the international transactions of import and export of diamonds entered by the assessee with its associated enterprises under section 92CA(1) of the Act to the Transfer Pricing Officer. The Transfer Pricing Officer has examined the international transactions of import and export of diamonds with the associated enterprises and benchmarked the same by selecting the TNM method as the most appropriate method. The Transfer Pricing Officer selected 15 concerns, which were comparable to the assessee and determined their mean profit margin at 11.02% and since assessee’s margin was 6.82%, he determined an adjustment ofRs.1,27,21,348/- which according to him was required to be made in order to compute the arm's length price of the international transactions in an order passed under section 92CA(3) of the Act dated 16/01/2013. As a consequence of the order of the Transfer Pricing Officer, the Assessing Officer, passed a draft assessment order dated 08/03/2013, against which assessee raised objections before the DRP. The DRP has passed an order dated 01/11/2013 giving certain directions to the Assessing Officer in order to finalize the assessment . One of the directions given the DRP was to the effect that M/s. Anshuni Commercials Ltd.,which was not included in the final set of comparables by the Transfer Pricing Officer, be included as a comparable. Following the said direction, the Transfer Pricing Officer recomputed the arms length price of the international
C.O No.171/Mum/2014 (Assessment Year 2002-03) transactions and found that the arithmetic mean of the expanded set of comparables (by including M/s. Anshuni Commercials Ltd) came to 10.41%, against which assessee’s margin was 6.82%. Since the assessee’s margin was within +/- 5% range, the Transfer Pricing Officer held that no further adjustment was required to be made to the stated value of the international transactions entered by the assessee with its associated enterprises.
Before us, the grievance of the Revenue is primarily against the direction of the DRP to include M/s. Anshuni Commercials Ltd in the final set of comparables. At the time of hearing , Ld. Departmental Representative pointed out that the Transfer Pricing Officer had excluded the said concern on the ground that it was not functionally comparable. Against this, the DRP has directed for its inclusion by making the following discussion in the order:-
“9.Anshuni Commercials Ltd is seen to be in the business of export of rough diamonds and cut and polished diamonds. However, total sales are only 79.8 lakhs whereas the sale of the assessee is 33.32 crores. However, difference in turnover cannot be 'regarded as valid criteria to exclude a comparable. Otherwise, it is functionally comparable. The TPO has therefore wrongly mentioned that it is not functionally comparable without assigning any specific reason. Therefore, TPO is directed to use this company as comparable for benchmarking.” 6.1 Adverting to the Grounds of appeal, the Ld. CIT-DR pointed out that the DRP has erred in holding that the difference in turnover cannot be regarded as a valid criteria to exclude a concern from the list comparables.
On the other hand, the Ld. Representative for the assessee has primarily defended the direction of the DRP by asserting that M/s.Anshuni Commercials Ltd. has been rightly directed to be included in the final set of comparables.
C.O No.171/Mum/2014 (Assessment Year 2002-03)
We have carefully considered the rival submissions. At the outset, in our considered opinion, the contention of the Revenue seeking to reverse the finding of the DRP to include M/s. Anshuni Commercials Ltd. from the final set of comparable is misconceived. In this context, it is notable from the relevant discussion by the DRP that the said concern has been directed to be included on the ground that it is functionally comparable with the assessee. In fact, the Transfer Pricing Officer had excluded it from the final set of comparables on the ground that the said concern was ‘not found functionally comparable’. Thus, the objection of the Transfer Pricing Officer with regard to the functional comparability has not been accepted by the DRP, who in turn has held it be functionally comparable. The said aspect of the controversy is not manifested in the Grounds of appeal raised by the Revenue, which only encompass a plea that the DRP erred in deciding that the turnover was not a valid criteria in selection of the comparables. Therefore, on this point itself, the present appeal of the Revenue is unsustainable.
8.1 Be that as it may, we may also now take up for consideration the plea of the Revenue as manifested in the Grounds of appeal raised before us . Going back to the discussion of the DRP in para-9, which is reproduced above, it can be seen that apart from establishing functional comparability with the assessee, the DRP found that the total sales of M/s.Anshuni Commercials Ltd. was only Rs.79.80 lacs, whereas that of the assessee was Rs.33.32 crores. The DRP noted that such difference in turnover is not a valid criteria to exclude a concern from the list of comparable so long as it is otherwise functionally comparable. The Revenue seeks to assail the premise of the DRP that difference in turnover cannot be regarded as a valid criteria in order to include
C.O No.171/Mum/2014 (Assessment Year 2002-03) or exclude a concern from the final set of comparables. In other words, as per the Revenue, turnover is a deciding factor in considering whether a concern is comparable or not.
8.2 Quite clearly, economically, the relevant characteristics of a concern in any uncontrolled transaction between independent enterprises must be sufficiently comparable with the tested transactions if the two are to be placed in similar situation. The Hon'ble Bombay High Court in the case of CIT v. M/s. Pentair Water India Pvt. Ltd. in Tax Appeal No.18 of 2015 dated 16th September, 2015 has observed that turnover is a relevant factor to consider the comparability. Notably, the Hon'ble Bombay High Court was dealing with the stand of the Revenue that the Tribunal had erred in holding that the size and turnover of concerns are deciding factors in treating a concern as comparable or not. So however, the stand of the Revenue before us is opposite to what was being canvassed before the Hon'ble Bombay High Court in the case of M/s. Pentair Water India Pvt. Ltd(supra), wherein the Hon'ble High Court observed that the turnover was indeed a relevant criteria. Be that as it may, in so far as the present case is concerned, even if we were to uphold the stand of the Revenue that turnover is a deciding factor in considering comparability of concern following the judgment of the Hon'ble Bombay High Court in the case of M/s.Pentair Water India Pvt. Ltd.(supra) yet, in our considered opinion, it would make no difference to the ultimate decision of the DRP to include M/s.Anshuni Commercials Ltd. in the final set of comparables, as our following discussion would show. Firstly, DRP has included it on account of functional similarities with the assessee, an aspect which is not challenged by the Revenue in its appeal. Secondly and more
C.O No.171/Mum/2014 (Assessment Year 2002-03) importantly, in our view, the ratio of the judgment of the Hon’’ble Delhi High Court in the case of CIT vs. Nortel Networks India A. Pvt. Ltd. in ITA 115/2015 dated 24/02/2015 is very apt and fully governs the controversy before us. In the case of Nortel Networks India A. Pvt. Ltd.(supra), the Transfer Pricing Officer had excluded M/s.Capital Trust Ltd. from the list of comparables on account of its low turnover. The DRP also concurred with the Transfer Pricing Officer noting that because of the small turnover, the said concern could not be taken as comparable. The Tribunal noted that no turnover filter was applied by either of the parties and, therefore, M/s. Capital Trust Ltd. was wrongly excluded, on the basis of difference in turnover, especially after it was found that the activities of M/s. Capital Trust Ltd. were comparable with those of the assessee. The aforesaid decision of the Tribunal was sought to be contested by the Revenue before the High Court on the ground that the reason for exclusion of M/s. Capital Trust Ltd. was sound and reasonable and that the Tribunal erred in over- emphasizing the size of turnover in relation to said concern. The Hon'ble High Court disagreed with the Revenue and noted the conclusion of the Tribunal that turnover filter was not applied by either of the parties at any stage. As per the Hon'ble High Court, the issue as to whether the turnover filter is an appropriate one and applicable in a case cannot be answered in the abstract and is entirely fact-dependent. The Hon'ble High Court further noted that the record of the case before it indicated that the Transfer Pricing Officer chose to apply the turnover filter in an inconsistent manner so as to exclude only the concern M/s. Capital Trust Ltd., which was impermissible. Pertinently, the Hon'ble High Court noted that turnover filter was not a test even in respect of the surviving comparables. In our considered opinion, the aforesaid parity of reasoning laid down by the C.O No.171/Mum/2014 (Assessment Year 2002-03)
Hon'ble High Court in the case of M/s. Nortel Networks India A. Pvt. Ltd.(supra)is squarely attracted in the present case. In the present case too, the turnover filter has not been applied by any of the parties at any stage. In fact, at the time of hearing, it was specifically put-across to the Ld. Departmental Representative. The Ld. Representative for the assessee, on the other hand, pointed out that in the list of 14 concerns selected by the Transfer Pricing Officer as comparables, there are concerns viz. M/s. Sunraj Diamonds Exports, M/s. Asian Star Company Ltd., and M/s. Suashish Diamond Ltd., which were included on the ground of functional comparability inspite of the fact that there was huge differences in turnover in comparison to the turnover of assessee’s tested segment. Therefore, in our considered opinion, the Revenue is misplaced in seeking to raise the aforesaid Grounds of appeal, when the record clearly show that the turnover filter is being selectively sought to be used by the Revenue to exclude M/s.Anshuni Commercials Ltd., whereas the surviving comparables have not been put to such a test by the Transfer Pricing Officer. Therefore, following the decision of the Hon'ble Delhi High Court in the case of M/s. Nortel Networks India A. Pvt. Ltd.(supra), the stand of the Revenue seeking exclusion of M/s. Anshuni Commercials Ltd. from the set of final comparables is quite untenable and is hereby rejected.
8.4 In the result, appeal of the Revenue is dismissed.
Now we may take up the Cross objection of the assessee. In so far as Grounds of appeal No.1 & 2 are concerned, the same are to the effect that the stated concerns be excluded from the final set of comparables on the basis of difference in turnover. The above Grounds spring-up in the context of the C.O No.171/Mum/2014 (Assessment Year 2002-03)
Ground raised by the Revenue in its cross-appeal. Having regard to the reasons for which the Grounds of appeal of the Revenue have been dismissed, the said Grounds raised by the assessee become academic, and, in any case, there is no addition surviving on account of determination of arm's length price in the instant case after the dismissal of the appeal of the Revenue. Therefore, the Grounds of appeal No.1 & 2 in the Cross-objection of the assessee are treated as infructuous and are accordingly dismissed.
10. The only other Ground in the Cross-objection of the assessee is to the effect that the Assessing Officer erred in not reducing the Exchange Difference of Rs.11,79,872/- from the total income of the current year for computing taxable income inspite of a specific direction by the DRP in this regard. We find that the relevant direction by the DRP is contained in para-21 of its order. On this aspect, it would suffice to direct the Assessing Officer to give effect to the directions of the DRP to exclude Exchange Difference of Rs.11,79,872/- from the total income of the current year in order to arrive at the taxable income. We hold so. Thus, on this aspect, assessee succeeds for statistical purposes.
Resultantly, whereas the appeal of the Revenue is dismissed, the Cross- objection of the assessee is partly allowed.
Order pronounced in the open court on 30/11/2016