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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI JASON P. BOAZ, AM & SHRI AMIT SHUKLA, JM
PER BENCH These are cross appeals, one by Assessee and the other by the Revenue, directed against the order of the CIT(A)-15, Mumbai dated 13.07.2012 for A.Y. 2008-09.
The facts of the case, briefly, are as under: - 2.1 The assessee, a company engaged in trading in diamonds, precious stones, semi-precious stones and jewellery, filed its return of income for A.Y. 2008-09 on 27.09.2008. The return was processed under section 143(1) of the Income Tax Act, 1961 (short ‘the Act’) and the case was subsequently taken up for scrutiny. The Assessing Officer (‘AO’) made a reference under section 92CA of the Act to the Transfer Pricing Officer (‘TPO’) for determination of the arms length price (‘ALP’) of the international transactions entered into by the assessee with its associated enterprises (‘AEs’) as reported in Form No. 3CEB. The TPO passed an order under section 92CA(3) of the Act dated 30.09.2011 wherein he has proposed an adjustment of `2,14,17,202/- towards the ALP of the assessee’s international transactions. Consequent thereto, the AO passed the draft order of assessment under section 143(3) r.w.s. 144C(1) of the Act dated 26.12.2011 determining the income of the assessee at `2,84,97,300/-. Since the assessee, vide letter dated 20.01.2012, submitted that it proposed to file an appeal against the order before the CIT(A), the AO then passed the final order of assessment under section 143(3) r.w.s. 143C(3) of the Act vide order dated 30.01.2012 wherein the income of the assessee was determined at `2,84,97,300/-, which included the T P adjustment of `2,14,17,202/-.
3 M/s. Maine Global Enterprises Pvt. Ltd. 2.2 Aggrieved by the order of assessment for A.Y. 2008-09, the assessee preferred an appeal before the CIT(A)-15, Mumbai. The learned CIT(A) disposed off the appeal vide order dated 13.07.2012 allowing assessee partial relief.
3. Aggrieved by the order of the CIT(A)-15, Mumbai for A.Y. 2008-09, both Assessee and the Revenue have preferred appeals raising the following grounds: - “1. Transfer Pricing adjustment 1.1 On the facts and circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) - 15 [hereinafter referred to as CIT(A)], has erred in upholding the action of the learned Assistant Commissioner of Income Tax, Circle 5(3) (hereinafter referred to as AO) or learned Additional Commissioner of Income Tax (Transfer Pricing-11(3)) (hereinafter referred to as TPO), of rejecting the comparable companies as selected by the appellant based on the detailed transfer pricing study carried on by it, without giving any cogent and detailed reasons for applying adhoc turnover filter. 1.2 Without prejudice to above, the appellant contends that the learned CIT(A) has erred in upholding the action of TPO/AO in including new comparable companies merely on the ground that the number of comparable companies remaining after rejecting appellant's comparables, is inadequate for the determination of the arm's length price of appellant's international transactions. 1.3 Without prejudice to above, the appellant contends that the learned CIT(A) has erred in upholding the fresh search adopted by the TPO/AO for selecting comparable companies based on ad-hoc, selective and arbitrary criteria without giving any reasonable and scientific justifications for the same. Further, the learned TPO/AO has also erred in not providing the detailed search process for arriving at the set of such comparable companies. 1.4 Without prejudice to above, the appellant contends that the learned CIT(A) has erred in not rejecting one comparable company (i.e., Indo Unique Trading Private
4 M/s. Maine Global Enterprises Pvt. Ltd. Limited) adopted by the AO/TPO even though the same ought to have been rejected based on facts of case and in law. 1.5 Without prejudice to above, on the facts and circumstances of the case and in law, the learned CIT(A) has erred in not allowing any adjustments in the operating margins to account for differences in the working capital between the Appellant company and comparable companies, ignoring the detailed submission made by the Appellant wherein, the need for making necessary adjustment for differences on factors affecting profitability has been clearly spelled out in the judicial precedents submitted by the Appellant. 1.6 Without prejudice to above, the appellant contends that the learned CIT(A) has erred in not considering the fact that the operating margins earned by overseas associated enterprise during the year under consideration were in fact lower than the operating margins earned by the appellant and hence, its transactions with the associated enterprise meets with the arm's length requirements. 1.7 Without prejudice to above, the appellant contends that the learned CIT(A) has erred in upholding the action of TPO in not considering the “base erosion" principle and the intention behind introducing the transfer pricing provisions, which is well enshrined in the CBDT circulars and Memorandum explaining the Finance Bill and the Finance Minister's speech. 1.8 Without prejudice to above, the appellant contends that the learned CIT(A) has erred in upholding AO/TPO's contention of not considering other business commercial factors such as lower export sales ratio, significant increase in turnover, verification done by customs authority, etc. while determining the arm's length prices for international transactions. 1.9 Without prejudice to above, the learned CIT(A) has erred in law, by not accepting that the transfer pricing adjustments, if any, should be restricted to the international transactions with the associated enterprise and hence, the profit level indicator should be applied only to such international transactions. The learned 5 M/s. Maine Global Enterprises Pvt. Ltd. CIT(A) has also erred in ignoring the judicial precedents submitted by the Appellant, which explicitly bring out that the transfer pricing adjustments should be made only to the value of international transactions with Associated Enterprises. 1.10 Without prejudice to above, the learned CIT(A) has erred in law, by not calculating the +15% working & not deleting the adjustments and instead in remanding the file back to the AO for calculating the same.
2. Penalty proceedings The learned CIT(A) has erred in law, by not adjudicating on the penalty proceedings under section 271(1)(c) initiated by the AO stating that the same is premature.”
“1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing that M/s. Emmar Diamonds Pvt. Ltd. and Shri Sai Jewels Pvt. Ltd. should be excluded from the set of comparables for the purpose of benchmarking of assessee’s international transactions on the ground that financials of these companies are not available in public domain without verifying the assessee’s claim and appreciating that the financials were available to the Transfer Pricing Officer from Prowess database from which the operating margins were computed by the Transfer Pricing Officer in his show cause letter dated 16.09.2011 addressed to the assessee? 2. The Appellant prays that the order of the Ld. CIT(A) be set aside and the order of the AO be restored.
The Appellant craves leave to amend or alter any ground or add any other grounds which may be necessary.” Assessee’s appeal in ITA No. 5969/Mum/2012
At the outset, the learned A.R. for the assessee submitted that in the assessee’s appeal he would only be pressing ground No. 1 (1.9) on the T P adjustment. In these circumstances the grounds raised
on the T P adjustment at S. Nos.
1. (1.1 to 1.8 and 1.10) and at S.No. 2 on penalty proceedings not being pressed or urged before
T P Adjustment - Ground No. 1.9 5.1 This was the sole ground urged by the learned A.R. for the assessee. In this ground it is contended that the learned CIT(A) erred in not restricting the T P adjustment to the ALP of international transactions entered into by the assessee with its AE’s, but in holding that the adjustment is required to be made on total transactions entered into at entity level. In this regard, the learned A.R. for the assessee contended that this issue that the T P adjustment is to be determined only in respect of the ALP of the international transactions entered into by the assessee with its AE’s, whatever be the method followed or adopted for arriving at the ALP and not at the entity level (viz. entire turnover) of the assessee, is covered by the decision of the Coordinate Bench of the Tribunal, inter alia, in the case of Firestone International (P) Ltd. in of 2011 dated 09.11.2012.
5.2 We have heard both the learned A.R. for the assessee and the learned D.R. for Revenue in the matter and perused and carefully considered the material on record, including the judicial pronouncement cited. We find that this issue has been considered by a Coordinate Bench of this Tribunal in the case of Firestone International (P) Ltd. in dated 09.11.2012 wherein at para 7 thereof it has been held that the T P adjustment towards ALP, if any, is required to be made only in respect of the international transactions entered into by the assessee with its AE’s and not at the entity level of the assessee. The operative portion of the order of the Coordinate Bench (supra) at para 7 thereof is extracted hereunder: -
7 M/s. Maine Global Enterprises Pvt. Ltd. “7. The Revenue in Ground Nos. 1 & 2 is mainly contesting the relief given by the CIT (A), on the reason that under the TNMM analysis, adjustment is required to be made on total transactions entered as the analysis is on entity level. At the outset it is fairly admitted that this issue was already crystallized in favour of assessee by the following decisions: a) DCIT v. Starlite (40 SOT 421 (Mum) b) DCIT vs. Ankit Diamonds (43 SOT 523 (Mum) c) Addl. CIT vs. Tej Dam (37 SOT 341 (Mum) d) M/s Genisys Integrating Systems (India) Pvt. Ltd (ITA No. 1231/Bang/2010) e) ACIT vs. Wockhardt Ltd (6 Taxman.com 78 ITAT (Mum) f) Abhishek Auto Industries Ltd (2010 TII-54-ITAT (Del) g) DCIT vs. Startex Networks (India) Pvt. Ltd (2010 — TII-13 ITAT (Del). Respectfully following, we hold that the CIT (A) order is in tune with the provisions of the Act as interpreted by the above orders of the ITAT. Since the arms length price has to be determined only with reference to the international transactions, whatever be the method followed or adopted for arriving at the ALP, the ALP can only be considered on the value of international transactions alone and not on the entire turnover of assessee. If this sort of adjustment is permitted this will result in increasing the profit of assessee on the entire non-AE sales also, which is not according to the provisions of Transfer Pricing mandated by the Act for the impugned assessment year. Therefore, the Revenue grounds on this are rejected.” 5.2.1 Following the decision of the Coordinate Bench in the case of Firestone International (P) Ltd. (supra) we direct the AO/TPO to restrict the T P adjustment, if any, computed while determining the ALP only to those international transactions entered into by the assessee with its AE’S. It is accordingly ordered. Consequently ground No. 1(1.9) of assessee’s appeal is allowed.
The learned A.R. for the assessee further submitted that if it is held by the Bench while adjudicating the ground No. 1.9 (supra) that the T P adjustment, if any, is required to be restricted only to those
8 M/s. Maine Global Enterprises Pvt. Ltd. international transactions entered into by the assessee with its AE’s, then the assessee would fall within the +/- 5% range and consequently no T P adjustment would be required to be made de Hors the decision in Revenue’s appeal; i.e. even if it were to be allowed. The assessee has submitted the working in this regard at page 70 of the assessee’s paper book, which is as under: -
WORKING OF +/- 5% as per section 92C AE Purchase A 169,934,716 12.86% Non AE cost B 1,151,473,035 87.14% Total Cost C=A+B 1,321,407,751 100.00% Add: Actual Operating profit D 22,630,313
Actual Sales E=C+D 1,344,038,064
Sales in relation to AE Cost F=E/C* 172,845,003 A [Total Sale/Total cost / AE cost]
Arm’s length operating profit G 3.71% margin % on sales (as determined by Your Honour) Arm’s length operating profit H=F*G 6,412,550 [Rs.]
Arm’s length value of AE I=F-H 166,432,453 purchase 105% thereof [proviso to Sec J=I*10 174,754,076 92C(2)] 5% Actual AE Purchase A 169,934,716 Since A, AE Purchase fits within the 5% range.
6.1 The AO/TPO is directed to examine the working of the assessee in support of its claim that its international transactions with the AE’s comes within the +/- 5% range as stipulated under section 92C of the Act.
Grounds at S. No. 2 & 3 are general in nature and therefore no adjudication is called for thereon.
Ground No. 1: Revenue contends that the learned CIT(A) erred in directing that the following comparables; (i) Emmar Diamonds Pvt. Ltd., and (ii) Shri Sai Jewels Pvt. Ltd. be excluded from the set of comparables to the assessee for benchmarking its international transactions on the ground that the financials of these companies are not available in the public domain without verifying the veracity of assessee’s claim. It was contended that the financials were available with the TPO from the Prowess data base and it was from this that the TPO computed the operating margins which were sent to the assessee in the show cause notice dated 16.09.2011. 9.1 We have heard both the learned D.R. for Revenue and the learned A.R. for the assessee and have perused and carefully considered the material on record. On a perusal of pages 25 to 27 of the impugned order of the learned CIT(A), where he has dealt with these two comparables i.e. Emmar Diamonds Pvt. Ltd. and Shri Sai Jewels Pvt. Ltd., we are inclined to concur with the averments of Revenue that the learned CIT(A) had directed the exclusion of these two comparable merely going by the submissions of the assessee. It is seen that the learned CIT(A) has excluded these two comparables without verifying the assessee’s claim vis-à-vis the TPO’s order; background correspondence in the TPO’s record; such as the show cause notice dated 16.09.2011, the material gathered by the TPO in respect of these two comparables from the search through Prowess/ Capitaline data base, etc. In these circumstances, we are of the view that the issue of the comparability of these aforesaid two companies 10 M/s. Maine Global Enterprises Pvt. Ltd. M/s. Emmar Diamonds Pvt. Ltd. and M/s. Shri Sai Jewels Pvt. Ltd. are to be re-examined in detail and therefore restore this matter to the file of the learned CIT(A) for de novo examination and adjudication thereon in the light of our observations above and after affording the assessee adequate opportunity of being heard and to file details/submissions in the matter, which shall be duly considered. It is accordingly ordered.
In the result, Revenue’s appeal for A.Y. 2008-09 is allowed for statistical purposes.
To sum up, Assessee’s appeal for A.Y. 2008-09 is partly allowed and Revenue’s cross appeal is allowed for statistical purposes. प�रणामतः िनधा�रती क� अपील आंिशक �वीकृत क� जाती है । राज�व क� अपील सां�यक�य उ�े�य के िलए �वीकृत क� जाती है । Order pronounced in the open court on 22nd December, 2015. आदेश क� घोषणा खुले �यायालय म� �दनांकः 22.12.2015 को क� गई । Sd/- Sd/- (AMIT SHUKLA) (JASON P. BOAZ) लेखा सद�य/JUDICIAL MEMBER �याियक सद�य/ACCOUNTANT MEMBER मुंबई Mumbai, �दनांक Dated 22nd December, 2015
आदेश क� �ितिलिप अ�ेिषत/Copy of the Order forwarded to :