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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI N.K. BILLAIYA
The aforesaid appeal of the assessee is directed against the order dated 17th September 2014, passed by the learned Commissioner (Appeals)–15, Mumbai, for the assessment year 2009–10.
The issue in dispute in the present appeal is confined to addition of an amount of ` 2,05,59,018, made by way of an adjustment to the arm's length price of the international transaction entered with the Associated Enterprise (A.E).
M/s. Signity India Pvt. Ltd. 2 3. Briefly the facts are, assessee an Indian company is engaged in the business of distribution of genuine and created synthetic gemstones purchased from its A.E. abroad. It may be stated that impugned assessment year is the first year of operation for the assessee. For the assessment year under dispute, the assessee filed its return of income on 30th September 2009, declaring loss of ` 1,21,18,789. The Assessing Officer noticing that the assessee has entered into international transaction with its A.Es made a reference to the Transfer Pricing Officer for determining the arm's length price. In the course of proceedings before him, the Transfer Pricing Officer on examining the transfer pricing study report as well as other information available on record found that the assessee during the relevant previous year, had purchased goods from A.Es for distribution / trading the details of which are as under:–
Swarovaki Purchase of Created & ` 14,36,27,936 RPM Aktiensellschaft Genuine Gemstones Liechtenstein Signity Thailand Purchase of Created & ` 2,74,162 RPM Ltd., Bangkok Genuine Gemstones
He further found that the assessee has determined the arm's length price of the goods purchased from its A.E. by adopting Resale Price Method (RPM) with gross profit to sales as PLI (Profit Level Indicator). The assessee has selected five companies as comparable with average arithmetic mean of 2.95%. Upon considering proceeding
M/s. Signity India Pvt. Ltd. 3 three years data. However, during transfer pricing proceedings, assessee furnished a working showing average arithmetic mean of the comparable companies except Shukra Bullions which did not had any transaction during the financial year 2008–09 @ 3.97% on the basis of contemporaneous data. Since the margin shown by the assessee was within the tolerance band of the average arithmetic mean of the comparable companies, the price paid towards purchases from A.E. was found to be within arm’s length. The Transfer Pricing Officer after verifying the details, though, accepted RPM as most appropriate method and also the profit margin of the comparables, however, he observed that assessee has made certain adjustments to its margin and profitability by reducing credit note obsolete stock, closing stock, from the purchase value of goods. Further, the assessee has claimed adjustment of 1% as a start–up entity and 2% towards payment of custom duty. The Transfer Pricing Officer did not agree with the adjustments made by the assessee. He observed, the transaction which is required to be bench marked is the entire purchases from the A.E. and not a net adjusted amount after reducing closing stock obsolete stock. Therefore, rejecting the arm's length price shown by the assessee, Transfer Pricing Officer proceeded to bench mark the arm's length price of the purchases independently. He observed as the transactions to be bench marked is the purchases the suitable PLI is operating profit to operating income. Since the operating profit /
M/s. Signity India Pvt. Ltd. 4 operating income of the assessee is a negative figure i.e., loss of 10.25%, the Transfer Pricing Officer proceeded to determining arm's length price of the transactions with A.E. as under:–
Sales value ` 14,44,82,232 Operating Cost including ` 15,93,05,305 2. purchase 3. Operating profit / (loss) ` 11,48,23,073 4. ALP margin 37% 5. ALP profit ` 57,35,945 6. ALP Operating cost (1–5) ` 13,87,46,287 Expenses other than AE ` 1,54,03,207 7. purchase (159305305– 143902098) 8. ALP purchases (6–7) ` 12,33,43,080 9. Transaction value minus ALP ` 2,05,59,018 purchase (14,39,02,098 – 12,33,43,080) ` 2,05,59,018 ALP adjustment 10. 95% of transaction value i.e., ` ` 13,67,06,993 14,39,02,098
As the arm's length price of the purchases determined by the Transfer Pricing Officer was less than 95% of the transaction value, he made transfer pricing adjustment of ` 2,05,59,018, towards the price paid. On the basis of adjustment made by the Transfer Pricing Officer to the arm's length price of international transaction, the Assessing Officer passed the assessment order making the addition as recommended by the Transfer Pricing Officer. Being aggrieved of the addition made on account of transfer pricing adjustment, assessee
M/s. Signity India Pvt. Ltd. 5 preferred appeal before the first appellate authority. However, the learned Commissioner (Appeals) also confirmed the addition made on account of transfer pricing adjustment.
The learned Counsel for the assessee referring to the computation of arm's length price made by the Transfer Pricing Officer submitted that there is no dispute either with regard to the sales value or the arm's length price margin of 3.97% and arm's length profit of ` 57,35,945, as computed by the Transfer Pricing Officer. He submitted, the fundamental error committed by the Transfer Pricing Officer is in respect of operating cost considered for the purpose of deriving operating profit. He submitted while considering the operating cost the Transfer Pricing Officer has not reduced the value of closing stock. He submitted, on unsold goods which remain as closing stock cannot be considered for determining arm's length price. In this context, he relied upon the decision of the Tribunal, Hyderabad Bench, in St. Jude Medical India Pvt. Ltd. v/s DCIT, ITA no.1626/Hyd./2010 dated 30th June 2011. The learned Counsel submitted, even in respect of expenditure also, the Transfer Pricing Officer has considered all expenses debited to the Profit & Loss account instead of considering the expenses which are directly related to purchase of goods. He, therefore, submitted, if adjustment on account of closing stock as well as expenses related directly to purchase of goods is allowed then the transaction value of the goods purchased from the A.Es would be M/s. Signity India Pvt. Ltd. 6 within + 5% and would require no further adjustment. He submitted in that event there is no need to deliberate upon the other adjustment claimed by the assessee on account of obsolete stock, start–up company, credit note, custom duty, etc. To support its contention, the learned Counsel also submitted a working of arm's length price after taking into account the closing stock and expenses directly related to purchase of goods. He submitted, while computing the margin of the comparable companies assessee has adopted the same method and the average arithmetic mean of 3.7% of the comparable companies was by taking the PLI as gross profit to sales, therefore, there is no reason to adopt a different method for computing assessee’s margin by considering operating profit / operating income as PLI and reducing the entire expenses debited to the Profit & Loss account. He submitted, assessee has adopted the same method even in the subsequent assessment years and the Transfer Pricing Officer in A.Y. 2011–12, has accepted the arm's length price shown by the assessee without making any further adjustment. In this context, he placed on record order dated 16th December 2014, passed under section 92CA(3), for the assessment year 2011–12.
The learned Departmental Representative, on the other hand, relying upon the order of the Transfer Pricing Officer and the learned Commissioner (Appeals), submitted before us, as per the guidance
M/s. Signity India Pvt. Ltd. 7 note of Institute of Chartered Accountant, closing stock cannot be reduced for determining the arm's length price.
We have considered the submissions of the parties, perused the orders of the Revenue authorities and material available on record. At the time of hearing before us, the learned Counsel for the assessee has submitted working of the arm's length price of the transaction with A.E. as under:–
PARTICULARS WORKING AS PER ICAI GUIDANCE NOTE Sales 14,44,82,232 Less: margin of the comparables @ 3.97% 57,35,945 Cost of goods sold 13,87,46,287 Add: Closing Stock 1,20,09,601 Less: Direct expenses – ALP (1,13,83,376) Actual transaction value 13,93,72,512 Difference 14,39,02,098 95% of actual transaction value (45,29,586) 105% of actual transaction value 13,67,06,993 Whether ALP is within the range Yes
On an comparative analysis of arm's length price as per the working furnished by the learned Counsel for the assessee and the computation of arm's length price by the Transfer Pricing Officer, it
M/s. Signity India Pvt. Ltd. 8 appears, the major dispute between the assessee and the Transfer Pricing Officer is on two issues viz. the operating cost considered by the Transfer Pricing Officer for determining the operating profit and expenses towards purchases made from A.E. On a perusal of the Profit & Loss account of the assessee as submitted in paper book, it is seen that the expenditure of ` 15,93,05,305 debited to Profit & Loss account includes the closing stock of ` 1,20,09,601. As per the decision of the Tribunal, Hyderabad Bench, in St. Jude Medical India Pvt. Ltd. (supra), unsold stock cannot be considered for determining arm's length price. We are also of the view whether the entire expenditure debited to the Profit & Loss account is directly related to purchases from A.E. requires consideration. Further, from the working of margin computation of four comparable companies furnished before us, it appears the assessee has followed the same method which was followed for computing its own margin. Therefore, when the Transfer Pricing Officer has no problem in accepting the computation of margin of the comparable companies, we fail to understand why he cannot accept assessee’s margin computed by adopting similar method. It is also noteworthy that the Transfer Pricing Officer in the assessment year 2011–12 has accepted the arm's length price computed by the assessee by adopting same method. If the assessee is following the same method consistently over the years and which is found acceptable by the Transfer Pricing Officer in assessment year i.e., A.Y. 2011–12, then
M/s. Signity India Pvt. Ltd. 9 there is no reason why it should not be accepted in the impugned assessment year if there are no noticeable difference in facts or the nature of transaction between the parties. On considering the aforesaid facts, we are of the view that the matter relating to determination of arm's length price is required to be examined afresh on the basis of working submitted by the assessee at the time of hearing before us. If the assessee has adopted the same approach of computing the margin as was followed in case of comparable companies and further if such method is accepted in a subsequent assessment year, then in our view, there should not be any difficulty in accepting the same. We, therefore, restore the matter back to the file of the Transfer Pricing Officer to decide afresh after due opportunity of being heard to the assessee. We must mention that the Transfer Pricing Officer should consider the submissions of the assessee in this regard and decide the issue in accordance with law.
In the result, appeal is allowed for statistical purposes. Order pronounced in the open Court on 20.11.2015