THE GLOBAL JEWELLERY PVT. LTD, MUMBAI V. M/S. ITO 8(1)(4), MUMBAI

CO 132/MUM/2008

• Counselvise Citation: [2012] 122 COUNSELVISE.COM (IT) 8031 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 2 month(s) 10 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 07-11-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: K
• Next Hearing Date: 15-10-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 27-08-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: AJEET KUMAR JAIN
• Keywords: Business income; Transfer pricing; International transaction
• Section: 92C; 143(3); 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K, BENC H MUMBAI BEFORE SHRI B.RAMAKOTAIAH, AM & SHRI AMIT SHUKLA, J M ITA NO.2804/MUM/2008 (ASSESSMENT YEAR :2004-2005) ITO 8(1)(4), MUMBAI VS. M/S GLOBAL JEWELLERY PVT. LTD., G-49, GEM & JEWELLERY COMPLEX(I), NEAR MMTC LTD., SEEPZ, ANDHERI(E), MUM-96 PAN NO. : AABCG 5222 E ( APPELLANT ) .. ( RESPONDENT ) AND C.O. NO.132/MUM/2008 (ASSESSMENT YEAR :2004-2005) M/S GLOBAL JEWELLERY PVT. LTD., G-49, GEM & JEWELLERY COMPLEX(I), NEAR MMTC LTD., SEEPZ, ANDHERI(E), MUM-96 VS. ITO 8(1)(4), MUMBAI PAN NO. : AABCG 5222 E ( CROSS - OBJECTOR ) .. ( RESPONDENT ) REVENUE BY : MR. AJEET KUMAR JAIN ASSESSEE BY : MR. VIJAY MEHTA / DATE OF HEARING : 15 TH OCT., 2012 / DATE OF PRONOUNCEMENT : 7 TH NOV.,2012 / O R D E R PER BENCH : THE REVENUE HAS PREFERRED THIS APPEAL, AGAINST ORDE R DATED 18-2- 2007, PASSED BY CIT(A)-XIX, MUMBAI FOR THE QUANTUM OF ASSESSMENT PASSED UNDER SECTION 143(3) OF THE ACT, FOR THE ASS ESSMENT YEAR 2004- 05, WHEREAS THE ASSESSEE HAS ALSO FILED CROSS OBJEC TION SUPPORTING THE SAID ORDER. ITA NO2804/08 & C.O.NO.132/2008 2 2. WE FIRST TAKE UP APPEAL ITA NO.2804/08 FILED BY THE REVENUE FOR THE ASSESSMENT YEAR 2004-05. IN THIS APPEAL, THE RE VENUE HAS TAKEN THE FOLLOWING GROUND :- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE CIT(A) ERRED IN DELETING THE TPOS ADJUSTM ENT OF RS.1,41,69,161/- MADE U/S.92CA(3) IN RESPECT OF ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS ENTE RED INTO BY THE ASSESSEE WITHOUT APPRECIATING THE FACTS OF THE CASE. THUS, THE ONLY ISSUE INVOLVED IS OF TRANSFER PRICIN G ADJUSTMENT OF RS.1,41,69,161/- MADE UNDER SECTION 92CA(3) IN RESP ECT OF ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTION S OF THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES (AES). 3 . THE FACTS IN BRIEF ARE THAT THE ASSESSEE, AN INDI AN COMPANY, IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF DIAMOND AND GOLD STUDDED JEWELLERY AND EXPORTING THE SAME TO THE FOR EIGN COUNTRIES. IT IS 100% EXPORT ORIENTED UNIT LOCATED IN SEEPZ. THE ASS ESSEE HAD INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATE ENTER PRISES NAMELY SHAH DIAMOND INC. SINCE THE ASSESSEE HAD INTERNATIONAL T RANSACTIONS, THE ASSESSING OFFICER MADE A REFERENCE UNDER SECTION 92 CA(1) TO THE TRANSFER PRICING OFFICER. BEFORE THE TPO, A COPY OF THE REPORT IN FORM NO.ECEB, WHICH WAS FILED ALONG WITH THE RETURN OF I NCOME WAS FORWARDED. THE ASSESSEES TOTAL TURN OVER FROM ITS BUSINESS WAS AT RS.55,65,67,744/-, AS AGAINST THIS, SALES TO THE AS SOCIATED ENTERPRISES ITA NO2804/08 & C.O.NO.132/2008 3 WAS AT RS.28,21,88,519/-. THE ASSESSEES OPERATIVE MARGIN WAS AT 3.41%. THE TPO SELECTED SIX COMPARABLES FOR BENCH-M ARKING ITS ARMS LENGTH PRICE FOR INTERNATIONAL TRANSACTIONS AND AFT ER CONSIDERING THE ASSESSEES OBJECTION FOR THE COMPANY HAVING HIGH TU RN OVER, FINALLY, FOUR COMPANIES WERE SELECTED AND ARITHMETIC MEAN OF THE OPERATING PROFIT MARGIN WAS DETERMINED AT 5.74%, AS AGAINST 3 .41% SHOWN BY THE ASSESSEE. THE TPO AFTER APPLYING THE SAID PROFIT MA RGIN OF 5.74% ON THE ENTIRE SALES, MADE AN ADJUSTMENT OF RS.1,41,69, 191/- TO DETERMINE THE ARMS LENGTH PRICE. SUBSEQUENTLY, VIDE ORDER DAT ED 20-2-2007, IN RESPONSE TO PETITION FOR RECTIFICATION UNDER SECTIO N 154, THE ADJUSTMENT WAS REDUCED TO RS.1,29,55,813/- AS THE TPO HAD ERRO NEOUSLY TAKEN THE NET PROFIT BEFORE TAX FOR COMPUTATION OF ARMS L ENGTH PRICE INSTEAD OF OPERATING PROFIT. 4 . THE LEARNED CIT(A) DELETED THE SAID ENTIRE ADJUST MENT MADE IN THE ARMS LENGTH PRICE ON THE GROUND THAT THE TPO HA S NOT FOLLOWED THE PROPER METHODOLOGY FOR REJECTING THE CLAIM OF THE A SSESSEE AS WELL AS NOT CARRIED OUT PROPER STUDY ON THE BASIS OF WHICH ADJUSTMENT WAS CALLED FOR. FOR COMING TO THIS CONCLUSION, HE HAS D ISCUSSED THE ISSUE AT LENGTH AFTER CONSIDERING THE ASSESSEES CONTENTION. 5 . AT THE OUTSET, LEARNED COUNSEL FOR THE ASSESSEE S UBMITTED THAT, WITHOUT PREJUDICE TO THE REASONS GIVEN BY THE CIT(A ) FOR DELETING THE ALP ADJUSTMENT, THE ASSESSEES CASE IS COVERED BY T HE 2 ND PROVISO TO SECTION 92C AS EVEN AFTER ADJUSTMENT MADE BY THE TP O, THE ARMS ITA NO2804/08 & C.O.NO.132/2008 4 LENGTH PRICE FALLS WITHIN +/- RANGE OF 5%. HE FURTH ER SUBMITTED THAT THE TPO HAS WRONGLY APPLIED THE MARGIN OF 5.74% ON THE ENTIRE SALES INSTEAD OF SALES MADE TO ASSOCIATE ENTERPRISES. HE SUBMITTED THAT ON THIS PRELIMINARY GROUND ALONE NO ADJUSTMENT IN ARMS LENGTH PRICE IS CALLED FOR. 6. ON THE OTHER HAND, LEARNED CITDR STRONGLY RELYING UPON THE TPOS ORDER, CONTENDED THAT THE CALCULATION MADE BY THE TPO IN THE REVISED ORDER IS WHOLLY JUSTIFIED. ON MERITS ALSO B OTH THE PARTIES HAVE MADE THEREIN DETAIL SUBMISSIONS. 7. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS , PERUSED THE ORDERS PASSED BY THE AUTHORITIES BELOW AND, PRIMA FACIE , WE FIND THAT THE ARITHMETIC MEAN DETERMINED BY THE TPO AFTER CON SIDERING THE PROFIT MARGIN OF THE COMPARABLES COMES AT 5.74% WHICH FALL S WITHIN +/- RANGE OF 5% WHEREAS, THE ASSESSEES OPERATING PROFIT MARG IN IS AT 3.41%. THE DIFFERENCE OF RS. 1,29,55,813/- AS WORKED OUT BY TH E TPO IN HIS REVISED ORDER, EVEN IF IT IS APPLIED ON THE ENTIRE TURN OVE R, THEN ALSO ITS PERCENTAGE COMES TO 2.33% ONLY. LEARNED COUNSEL HAS GIVEN THE FOLLOWING WORKING TO SHOW THE DIFFERENCE IN PRICE O N OPERATING PROFIT /SALES IN THE FOLLOWING MANNER :- RS. SALES TO ASSOCIATED ENTERPRISES 28,21,88,519 OPERATING MARGIN PERCENTAGE AS PER P/L ACCOUNT 3.41 % OPERATING MARGIN (28,21,88,519 @ 3.41%) 96,22,628 OPERATING MARGIN DETERMINED BY TPO 5.74% ITA NO2804/08 & C.O.NO.132/2008 5 OPERATING MARGIN AS PER TPO (28,21,88,519 @ 5.74% ) 1,61,97,620 DIFFERENCE IN OPERATING MARGIN (1,61,97,620-96,22,6 28) 65,74,992 PRICE AS PER TPO (28,21,88,519 + 6 5,74,992) 28,87,63,511 DIFFERENCE IN PRICE (28,87,63,511-28,2 1,88,519) 65,74,992 PERCENTAGE DIFFERENCE (65,74,992X100/28,21,88,519 ) 2.32% FROM THE ABOVE, IT IS CLEAR THAT THE DIFFERENCE IN PRICE COMES TO RS. 65,74,992 ON TOTAL SALES MADE TO THE ASSOCIATED ENT ERPRISES AND THE PERCENTAGE OF WHICH COMES TO 2.32%. THUS, THIS FALL WITHIN +/- 5% RANGE THE TPO HAS WORKED THE DIFFERENCE OF RS.1,29, 55,813/- ON TOTAL SALES OF RS.55,65,67,744/-, WHICH IS NOT A CORRECT APPROACH AS THE SAME SHOULD HAVE BEEN CONFINED TO THE INTERNATIONAL TRANSACTIONS I.E. SALES MADE TO THE ASSOCIATED ENTERPRISES AND NOT TO TOTAL SALES. EVEN OTHERWISE ALSO, ADMITTEDLY, THE DIFFERENCE IN THE P ROFIT MARGIN SHOWN BY THE ASSESSEE AND THE ARITHMETIC MEAN DETERMINED BY THE TPO IS NOT EXCEEDING 5% AND IN VIEW OF SECOND PROVISO TO SECTION 92C(2), NO ADJUSTMENT IS CALLED FOR. ACCORDINGLY, ADJUSTMENT M ADE IN ALP IS DELETED. ON THIS PRELIMINARY GROUND ALONE, THE GROU ND RAISED BY THE DEPARTMENT IN ITS APPEAL STANDS REJECTED. HENCE, WE DO NOT FIND ANY NECESSITY TO FURTHER DISCUSS THE ISSUES ON MERITS A S HAS BEEN DISCUSSED BY THE LEARNED CIT(A). ACCORDINGLY, THE APPEAL FILED BY THE DEPARTMENT STANDS DISMISSED. 8. THE ASSESSEE HAS FILED CROSS OBJECTION I.E. C.O.NO.132/2008 , RAISING THE FOLLOWING GROUNDS:- ITA NO2804/08 & C.O.NO.132/2008 6 1. ON THE FACT AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LD. IT(A) HAS RIGHTLY DELETED THE ADDITION OF THE TPOS ADJUSTMENTS OF RS.1,41,69,161/- MADE IN RESPE CT OF ARMS LENGTH PRICES OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE. 2. ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE ORDER OF THE LD. AO IS NOT ENTITLED TO BE RESTORED. 9. THESE GROUNDS ARE IN SUPPORT OF THE ORDER OF THE C IT(A). SINCE, WE HAVE ALREADY DECIDED THE SAME ISSUE WHILE CONSID ERING THE APPEAL FILED BY THE REVENUE, WHEREBY THE REVENUE APPEAL HA S BEEN DISMISSED ON PRELIMINARY GROUND, THEREFORE, THE CROSS OBJECTI ON FILED BY THE ASSESSEE HAS BECOME INFRUCTUOUS. THUS, THE CROSS OB JECTION FILED BY THE ASSESSEE IS TREATED AS DISMISSED FOR STATISTICA L PURPOSES AS HAVING BEEN RENDERED INFRUCTUOUS. 10. IN THE RESULT, APPEAL FILED BY THE REVENUE IS D ISMISSED AND THE CROSS OBJECTION FILED BY THE ASSESSEE IS ALSO D ISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 7 TH DAY OF NOV.,2012. SD/- SD/- (B.RAMAKOTAIAH) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI ; DATED : 7 TH NOV./ 2012. .. /PKM , . / PS COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A)-X, MUMBAI. ITA NO2804/08 & C.O.NO.132/2008 7 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY// BY ORDER, ( DY./ASSTT. REGISTRAR) ITAT, MUMBAI