D.A. JHAVERI, MUMBAI V. ACIT 16(3), MUMBAI

CO 120/MUM/2010

• Counselvise Citation: [2012] 122 COUNSELVISE.COM (IT) 7499 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 30 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 20-06-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: L
• Next Hearing Date: 15-05-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 21-05-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Business income; Transfer pricing; Rectification of order; International transaction

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH: MUMBAI BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA NO.5161/MUM/2007 (ASSESSMENT YEAR: 2004-05) ASSTT. COMMISSIONER OF INCOME-TAX -16(3), MATRU MANDIR, 2ND FLOOR, R. NO.206, TARDEO ROAD, MUMBAI -400 007 ..... APPELLANT VS M/S. D.A. JHAVERI, FLAT NO.7, JAIN TOWER, 9TH FLOOR, MATHEW ROAD, OPERA HOUSE, MUMBAI -400 004 .... RESPONDENT C.O. NO.120/MUM/2010 ARISING OUT OF ITA NO.5161/MUM/2007, A.Y. 2004-05 M/S. D.A. JHAVERI, FLAT NO.7, JAIN TOWER, 9TH FLOOR, MATHEW ROAD, OPERA HOUSE, MUMBAI -400 004 ..... CROSS OBJECTOR VS ASSTT. COMMISSIONER OF INCOME-TAX -16(3), MATRU MANDIR, 2ND FLOOR, R. NO.206, TARDEO ROAD, MUMBAI -400 007 .... RESPONDENT PAN : AAAFD 0295 J APPELLANT BY: SHRI AJEET K. JAIN RESPONDENT-CROSS OBJECTOR BY: SHRI ASHOK J. PATIL DATE OF HEARING: 15.05.2012 DATE OF PRONOUNCEMENT: 20.06.2012 O R D E R PER P.M. JAGTAP, AM: THIS APPEAL IS PREFERRED BY THE REVENUE AGAINST THE ORDER OF THE LD. CIT (A)-17, MUMBAI DATED 01.05.2007 AND THE SAM E IS BEING ITA 5161/M/2007 C.O. 120/M/2010 M/S. D.A. JHAVERI 2 DISPOSED OFF ALONG WITH THE CROSS OBJECTION FILED B Y THE ASSESSEE BEING C.O. 120/M/2010. 2. IN GROUND NO.1 OF ITS APPEAL, THE REVENUE HAS CH ALLENGED THE ACTION OF THE LD. CIT (A) IN DIRECTING THE A.O. TO TREAT THE INTEREST INCOME OF ` 1,38,689/- AS BUSINESS INCOME INSTEAD OF INCOME FROM OTHER SOURCES. 3. AS STATED BY THE A.O. IN THE ASSESSMENT ORDER PA SSED U/S.143(3), THE ASSESSEE HAD RECEIVED INTEREST OF ` 1,38,689/- ON THE INCOME-TAX REFUND DURING THE YEAR UNDER CONSIDERATION AND THE SAME WAS TAKEN AS BUSINESS INCOME FOR THE PURPOSE OF COMPUTING DEDUCT ION U/S.80HHC. THE A.O. TREATED THE SAID INTEREST INCOME AS INCOME FROM OTHER SOURCES AND COMPUTED THE DEDUCTION U/S.80HHC ACCORDINGLY. ON APPEAL, THE LD. CIT (A) ACCEPTED THE TREATMENT GIVEN BY THE ASS ESSEE TO THE INTEREST INCOME AS BUSINESS INCOME OBSERVING THAT THE SAME W AS RECEIVED BY THE ASSESSEE ON BANK DEPOSITS. 4. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES ON THIS ISSUE AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBS ERVED THAT THERE IS A CONTRADICTION IN THE FINDINGS RECORDED BY THE A.O. AND THE LD. CIT (A) WHILE DECIDING THIS ISSUE INASMUCH AS IN THE ASSESS MENT ORDER, THE INTEREST WAS STATED TO BE RECEIVED BY THE ASSESSEE ON THE INCOME-TAX REFUND WHEREAS THE LD. CIT (A) IN HIS IMPUGNED ORDE R HAS TAKEN THE SAME AS INTEREST RECEIVED BY THE ASSESSEE ON THE BA NK DEPOSITS. SINCE NONE OF THE SIDES HAS BEEN ABLE TO THROW ANY LIGHT ON THIS ASPECT, WE SET ASIDE THE IMPUGNED ORDER OF THE LD. CIT (A) ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE OF THE A.O. WITH A DIRECTION TO DECIDE THE SAME AFRESH AFTER ASCERTAINING THE EXACT NATURE OF INTEREST INC OME RECEIVED BY THE ASSESSEE. GROUND NO.1 OF REVENUES APPEAL IS ACCOR DINGLY TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ITA 5161/M/2007 C.O. 120/M/2010 M/S. D.A. JHAVERI 3 5. IN GROUND NO.2, THE REVENUE HAS CHALLENGED THE A CTION OF LD. CIT (A) IN DELETING THE ADDITION OF ` 6.61 CRORES MADE BY THE A.O. BY WAY OF TRANSFER PRICING ADJUSTMENTS AS WORKED OUT BY THE T PO. 6. THE ASSESSEE IN THE PRESENT CASE IS A PARTNERSHI P FIRM WHICH IS ENGAGED IN THE BUSINESS OF MANUFACTURING AS WELL AS IMPORT AND EXPORT OF DIAMONDS. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION WAS FILED BY IT ON 30.10.2004 DECLARI NG TOTAL INCOME OF ` 3,00,60,180/-. AS PER THE AUDIT REPORT FILED ALONG WITH THE SAID RETURN, THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE A SSESSEE WITH ITS ASSOCIATED ENTERPRISES EXCEEDED ` 5 CRORES FOR THE YEAR UNDER CONSIDERATION. THE MATTER, THEREFORE, WAS REFERRED BY THE A.O. TO THE TRANSFER PRICING OFFICER (TPO) U/S.92CA(1) OF THE A CT FOR DETERMINATION OF THE ARMS LENGTH PRICE (ALP). THE ASSESSEE FIRM HAD PURCHASED ROUGH DIAMONDS WORTH ` 96,33,26,254/- WITH A MARK-UP OF ONLY 0.75% TO THE ASSOCIATED ENTERPRISE (AE) AND KEEPING IN VI EW THIS LOW MARK-UP TO THE AE ON ROUGH DIAMONDS SOLD TO THE ASSESSEE, T HE RELEVANT TRANSACTIONS WERE ACCEPTED BY THE TPO AS ARMS LENG TH. AS REGARDS THE TRANSACTIONS WITH PES INVOLVING SALE OF CUT AND POL ISHED DIAMONDS WORTH ` 25,86,92,850/- AND SALE OF ROUGH DIAMONDS WORTH ` 9,08,435/-, THE ASSESSEE HAD ADOPTED TNMM METHOD FOR COMPARATIV E ANALYSIS. THE TOTAL TURNOVER OF THE ASSESSEE WAS ` 120 CRORES OF WHICH EXPORT TURNOVER WAS ` 104 CRORES AND THE PBT TO NET SALES WAS 3.35%. TH E TPO FOUND ON THE BASIS OF ANALYSIS OF 33 COMPARABLES THAT THE AVERAGE OP / COST MARGIN WAS 6.84%. VARIOUS OBJECTIONS RAISED BY THE ASSESSEE IN THE COMPARATIVE STUDY MADE ON THE BASIS OF 33 COMPARA BLES CASES WERE NOT FOUND SUSTAINABLE BY THE TOP AND OVERRULING THE SAME, HE WORKED OUT THE SALES OF THE ASSESSEE AT ALP AT ` 127,28,25,114/- AFTER APPLYING OP / COST MARGIN OF 6.84% TO THE OPERATING COST OF THE ASSESSEE OF ` 119,13,37,621/-. SINCE THE SALES WERE SHOWN BY THE ASSESSEE AT ` 120,66,72,775/- HE WORKED OUT THE TRANSFER PRICING ADJUSTMENTS AT ` 6,61,52,339/- AS PER HIS ORDER PASSED U/S.92CA(3). BASED ON THE SAID ORDER PASSED BY THE TPO, ADDITION OF ` 6,61,52,339/- WAS MADE BY THE A.O. TO THE TOTAL INCOME OF THE ASSESSEE ON ACCOUNT OF TRANSFER PRICING ITA 5161/M/2007 C.O. 120/M/2010 M/S. D.A. JHAVERI 4 ADJUSTMENT IN THE ASSESSMENT COMPLETED U/S.143(3) V IDE ORDER DATED 28.12.2006. 7. THE ADDITION MADE BY THE A.O. BY WAY OF TP ADJUS TMENT WAS CHALLENGED BY THE ASSESSEE IN AN APPEAL FILED BEFOR E THE LD. CIT (A) AND VARIOUS SUBMISSIONS WERE MADE ON BEHALF OF THE ASSE SSEE BEFORE HIM IN SUPPORT OF ITS CASE THAT THE ADDITION MADE BY THE A .O. BY WAY OF TP ADJUSTMENTS BASED ON THE REPORT OF TPO WAS NOT SUST AINABLE. ONE OF THE SUBMISSIONS MADE ON BEHALF OF ASSESSEE, BESIDES POINTING OUT SOME ARITHMETICAL MISTAKES COMMITTED BY THE TPO IN HIS W ORKING, WAS THAT OUT OF 33 COMPARABLE CASES TAKEN BY THE TPO, AT LEA ST 3 CASES HAD ABNORMALLY HIGH OPERATING MARGINS AND THE SAME THER EFORE SHOULD HAVE BEEN EXCLUDED WHILE COMPUTING AVERAGE OP / COST RAT IO TO BE APPLIED TO DETERMINE THE ALP. THE OPERATING PROFIT TO COST RA TIO SHOWN IN THE SAID THREE CASES WAS 29.44%, 11.53% AND 10.05% AS AGAINS T A SIMILAR RATIO IN THE RANGE OF 5 TO 6% SHOWN IN THE REMAINING 30 C ASES. THE LD. CIT (A) FOUND MERIT IN THIS SUBMISSION OF THE ASSESSEE. HE ALSO FOUND THAT IN THE CASE OF VISHINDAS HOLARAM, WHOSE OP / COST M ARGIN WAS 29.44%, THEY WERE DTC SITE HOLDERS HAVING ASSURED SUPPLIES OF ROUGH DIAMONDS. HE ALSO FOUND THAT IN THE CASE OF VENUS JEWELS, WHO SE OP / COST MARGIN WAS 11.53%, THEY WERE SOLITAIRE DIAMONDS SPECIALIST S AND WERE SUPPLYING FANCY SPECIAL DIAMONDS. SIMILARLY, RAM KRISHNA EXPORTS, WHOSE OPERATING OP / COST MARGIN WAS 10.05%, WAS FO UND TO BE DEALING IN POINTERS (LARGE STONES) AND FULL CUTS WHICH AGAI N WERE FANCY ITEMS HAVING HIGHER REALIZATION VALUE. THE LD. CIT (A), THEREFORE, ACCEPTED THE STAND OF THE ASSESSEE THAT THESE THREE PARTIES HAVI NG ABNORMALLY HIGH OPERATING MARGINS SHOULD BE EXCLUDED FROM THE COMPA RABLES AND ACCORDINGLY AFTER EXCLUDING THE SAME, THE AVERAGE O P / COST MARGINS WAS WORKED OUT BY THE LD. CIT (A) 5.871%. THE LD. CIT (A) ALSO FOUND MERIT IN THE STAND OF THE ASSESSEE THAT THE SAID AV ERAGE OP / COST MARGIN SHOULD BE APPLIED ONLY TO THE RELEVANT TRANS ACTIONS OF EXPORT BY THE ASSESSEE FIRM TO ITS AES AND NOT TO THE TOTAL E XPORT SALES MADE BY THE ASSESSEE AS WAS DONE BY THE TPO. ACCORDINGLY, APPLYING THE AVERAGE OP COST MARGIN OF 5.871% TO THE OPERATING C OST OF SALES TO AES ITA 5161/M/2007 C.O. 120/M/2010 M/S. D.A. JHAVERI 5 OF ` 25.54 CRORES, THE ALP OF EXPORT SALES MADE BY THE ASSESSEE FIRM TO ITS ASSOCIATED ENTERPRISES (AES) WAS WORKED OUT BY THE LD. CIT (A) AT ` 27.04 CRORES. SINCE THE DIFFERENCE BETWEEN THE ALP SO WORKED OUT AND THE SALES PRICE SHOWN BY THE ASSESSEE AT ` 27.87 CRORES WAS LESS THAN THE SAFE HARBOR LIMIT OF 5%, THE LD. CIT (A) HELD T HAT NO ADDITION ON ACCOUNT OF TP ADJUSTMENT WAS REQUIRED TO BE MADE IN THE CASE OF THE ASSESSEE. ACCORDINGLY, THE ADDITION MADE BY THE A. O. ON ACCOUNT OF TP ADJUSTMENT BASED ON TPOS ORDER WAS DELETED BY THE LD. CIT (A). 8. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES ON THIS ISSUE AND ALSO PERUSED RELEVANT MATERIAL ON RECORD. AS SUBMI TTED BY THE LD. COUNSEL FOR THE ASSESSEE, THE EXCHANGE DIFFERENCE O F ` 81,64,577/- WAS WRONGLY INCLUDED BY THE TPO IN THE OPERATING COST O F ASSESSEES SALES FOR THE YEAR UNDER CONSIDERATION. THE ASSESSEE, THEREF ORE, MOVED AN APPLICATION U/S.154 SEEKING RECTIFICATION OF THE SA ID MISTAKE AND THE TPO VIDE AN ORDER DATED 28.03.2007 PASSED U/S.154, ACCEPTED THAT THE EXCHANGE DIFFERENCE LOSS WAS REQUIRED TO BE ACCOUNT ED FOR UNDER THE HEAD NON-OPERATING EXPENSES AND TP ADJUSTMENT TO THAT EXTENT WAS REQUIRED TO BE REDUCED. AS A RESULT OF THE SAID RE CTIFICATION ORDER PASSED BY THE TPO, THE OPERATING COST OF SALES OF THE ASSE SSEE WOULD BE REDUCED TO ` 118,31,73,044/- AND AS SHOWN IN THE WORKING PREPAR ED BY THE LD. COUNSEL FOR THE ASSESSEE, THE ALP OF SALES OF THE A SSESSEE APPLYING EVEN THE OP / COST MARGIN AS WORKED OUT BY THE TPO AT 6. 84% WOULD COME TO ` 126,41,02,080/- AS AGAINST SALES PRICE OF ` 120,66,72,775/-. THE DIFFERENCE IN THESE TWO FIGURES WOULD BE 5,74,29,305/- AND THE SAME BEING LESS THAN THE SAFE HARBOR LIMIT OF 5%, NO TRA NSFER PRICING ADJUSTMENT WOULD BE REQUIRED TO BE MADE TO THE EXPO RT SALES OF CUT AND POLISHED DIAMONDS AS WELL AS ROUGH DIAMONDS MADE BY THE ASSESSEE FIRM TO ITS ASSOCIATED CONCERNS AS SUBMITTED BY THE LD. COUNSEL FOR THE ASSESSEE. EVEN THE LD. D.R. HAS NOT BEEN ABLE TO R AISE ANY CONTENTION TO POINT OUT ANY MISTAKE OR ANY INFIRMITY IN THE WO RKING PREPARED AND FURNISHED BY THE ASSESSEE TO SHOW THAT EVEN AS PER THE RECTIFICATION ORDER PASSED BY THE TPO, THE ADDITION MADE BY WAY O F TP ADJUSTMENT IN THE CASE OF THE ASSESSEE IS NOT SUSTAINABLE. ITA 5161/M/2007 C.O. 120/M/2010 M/S. D.A. JHAVERI 6 9. IT IS ALSO OBSERVED THAT OUT OF THE 33 COMPARABL ES TAKEN BY THE TPO, OP TO COST RATIO SHOWN IN 30 CASES WAS IN THE RANGE OF 3 TO 8% AND ONLY IN THREE CASES, THE SAME WAS ABNORMALLY HIGH A T 29.44%, 10.05% AND 11.53%. AS FOUND BY THE LD. CIT (A), M/S. VISH INDAS HOLARAM WHOSE OP TO COST RATIO WAS 29.44%, WAS DTC SITE HOL DERS, HAVING ASSURED SUPPLIES OF ROUGH DIAMONDS. IN THE REMAINI NG TWO CASES VIZ. M/S. VENUS JEWELS SHOWING OP TO COST AT 11.53% AND RAMKRISHNA EXPORTS SHOWING OPERATING OP / COST AT 10.05%, THE PRODUCTS DEALT WITH WERE FANCY SPECIAL DIAMONDS HAVING BIGGER SIZE, W HICH CERTAINLY HAD HIGHER REALIZABLE VALUE THAN THE PRODUCTS DEALT WIT H BY THE ASSESSEE. THE SAID THREE CASES THUS WERE NOT EXACTLY COMPARAB LE WITH THE CASE OF THE ASSESSEE AND THE LD. CIT (A), IN OUR OPINION, W AS FULLY JUSTIFIED IN EXCLUDING THE SAME FOR THE PURPOSE OF COMPARATIVE S TUDY AND DELETING THE ADDITION MADE BY THE A.O. ON ACCOUNT OF TP ADJU STMENT AFTER HAVING FOUND THAT THE DIFFERENCE BETWEEN THE ALP WORKED OU T BY EXCLUDING THE SAID THREE CASES FROM COMPARABLES AND THE SALES PRI CE CHARGED BY THE ASSESSEE TO ITS AE WAS WITHIN THE SAFE HARBOR LIMIT OF 5%. WE, THEREFORE, FIND NO INFIRMITY IN THE IMPUGNED ORDER OF THE LD. CIT (A) DELETING THE ADDITION MADE BY THE A.O. ON ACCOUNT OF TP ADJUSTME NT AND UPHOLDING THE SAME, WE DISMISS GROUND NO.2 OF THE REVENUES A PPEAL. 10. ALTHOUGH THE ASSESSEE IN ITS CROSS OBJECTION HA S RAISED VARIOUS ISSUES RELATING TO TRANSFER PRICING ADJUSTMENTS MAD E BY THE A.O. ON THE BASIS OF TPOS ORDER, THE LD. COUNSEL FOR THE ASSES SEE HAS NOT PRESSED THE SAME AT THE TIME OF HEARING BEFORE US. THE CRO SS OBJECTION OF THE ASSESSEE IS ACCORDINGLY DISMISSED AS NOT PRESSED. 11. IN THE RESULT, THE APPEAL OF THE REVENUE IS TRE ATED AS PARTLY ALLOWED AND THE CROSS OBJECTION OF THE ASSESSEE IS DISMISSED. ITA 5161/M/2007 C.O. 120/M/2010 M/S. D.A. JHAVERI 7 ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 2 0TH JUNE 2012. SD/- ( AMIT SHUKLA ) JUDICIAL MEMBER SD/- ( P.M. JAGTAP ) ACCOUNTANT MEMBER MUMBAI, DATE: 20TH JUNE 2012 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A) 33, MUMBAI. 4) THE CIT / DIT INTERNATIONAL TAXATION __ CONCERNED M UMBAI. 5) THE D.R. L BENCH, MUMBAI. BY ORDER / / TRUE COPY / / ASSTT. REGISTRAR I.T.A.T., MUMBAI *CHAVAN