HARSHID EXPORTS,MUMBAI V. CIRCLE 23(1), MUMBAI ASSESSING OFFICER, MUMBAI

ITTPA 6290/MUM/2024

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The case involves Harshid Exports, a partnership firm engaged in the business of importing rough diamonds and reselling them, which was assessed by the Deputy Commissioner of Income Tax under the Income Tax Act, 1961. The primary legal contention revolved around the appropriate method for transfer pricing assessment of international transactions. The assessee argued for the application of the Resale Price Method (RPM), while the TPO initially applied the Transactional Net Margin Method (TNMM). The Tribunal found that the issue required further examination and additional evidence provided by the assessee was not adequately considered by the lower authorities.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 789915 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 25 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 24-11-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Assessment Year: misc
• Appeal Filed On: 30-11-2024
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PRAVIN SALUNKHE
• Assessee Lawyers: SANJIV M. SHAH
• Keywords: Set aside; Additional evidence; Transfer pricing; International transaction; Rule of consistency; Principle of natural justice
• Section: 143(3); 142(1); 234B; 92D

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “H” BENCH, MUMBAI BEFORE SHRI SANDEEP SINGH KARHAIL, JUDICIAL MEMBER SHRI GIRISH AGRAWAL, ACCOUNTANT MEMBER IT(TP)A No.6290/MUM/2024 (Assessment Year 2021-22) Harshid Exports DC-2090, Bandra Kurla Road, Bharat Diamond Bourse, Bandra Kurla Complex, BKC, Mumbai - 400051 PAN: AADFH1829H ............... Appellant v/s Deputy Commissioner of Income Tax, – Circle-23(1), Mumbai Mumbai - 400012 ……………… Respondent Assessee by : Shri Sanjiv M. Shah Revenue by : Shri Pravin Salunkhe, Sr.DR Date of Hearing – 28/8/2025 Date of Order - 24/11/2025 O R D E R PER SANDEEP SINGH KARHAIL, J.M. The assessee has filed the present appeal against the impugned final assessment order dated 07/10/2024, passed under section 143(3) read with section 144C(3) read with section 144B of the Income Tax Act, 1961 (“the Act”) pursuant to the directions issued by the learned Dispute Resolution Panel-1, Mumbai-3, [“learned DRP”] under section 144C(5) of the Act, for the assessment year 2021-22. Printed from counselvise.com IT(TP)A No..6290/Mum/2024 (A.Y. 2021-22) 2 2. During the hearing, the learned Authorised Representative (“learned AR”) filed the concise grounds of appeal and wishes to press the same. In the absence of any objection from the other side, we proceed to decide the present appeal on the basis of the said concise grounds, which are reproduced as follows: – “1. Learned Dispute Resolution Panel-1, Mumbai [DRP] erred in passing under Section 144C of the Income Tax Act, 1961 [Act) vide order dated 24.09.24 (impugned order) in violation of principles of natural justice. 2. The Assessment Unit, Income Tax Department erred in proposing based Transfer Pricing Officer's [TPO] order dated 29.10.23 and DRP erred in confirming transfer pricing adjustment Rs.2,30,95,945/- under Section 92CA(3). 3. The Assessment Unit, Income Tax Department erred in proposing Transfer Pricing Officer's (TPO] order dated 29.10.23 and DRP erred in confirming that in computing Profit Level Indicator [PLI] comprising operating profit (OP)/operating revenue (OR) under Rule 10B(1)(e) of Income Tax Rules, 1962 [Rules] concerning Transaction Net Margin Method [TNMM], partners' remuneration Rs.2,03,61,209/- ought to be considered as cost incurred/operating expense and consequently, must be deducted while working out operating profit. 4. The Assessment Unit, Income Tax Department erred based on Transfer pricing order dated 29.10.23 and DRP as consequence of rejection of objection no 2 erred in not making adjustments in comparables deployed by TPO to take into account the differences between the international transaction of Appellant-Applicant and foregoing comparables affecting the amount of PLI enunciated above under TNMM. 5. DRP and TPO erred in dismissing additional ground of objections pertaining to application of Resale Price method [RPM] instead of TNMM to Appellant- Applicant's pure trading activity of importing rough diamonds and reselling them in local markets of India without any value addition. 6. DRP further erred in this connection in holding that RPM is not the most appropriate method pertaining to the trading of rough diamonds as claimed by Appellant-Applicant. 7. The Assessment Unit, Income Tax Department erred in levying interest under sections 234A, 234B and 234C.” 3. At the outset, the learned AR placed his arguments on the concise grounds no. 5 and 6, which pertain to benchmarking the international Printed from counselvise.com IT(TP)A No..6290/Mum/2024 (A.Y. 2021-22) 3 transaction of trading of imported rough diamonds and reselling them in the local market by adopting the Resale Price Method (“RPM”) as the most appropriate method. 4. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is engaged in the business of importing rough diamonds from its foreign associated enterprises in Belgium and Dubai, and after doing the job work on the diamonds, the same were resold in the local and overseas markets. For the year under consideration, the assessee filed its return of income on 28/01/2022, declaring a total income of INR 1,34,02,770. The return filed by the assessee was selected for scrutiny, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the year under consideration, the assessee entered into the following international transactions with its associated enterprises: – Nature of Transactions Amount as per Form 3CEB Method adopted for Benchmarking Import purchases form Diambel Belgium AE 35,00,02,500 TNMM Import purchases from DMCC Dubai AE 50,77,36,510 TNMM Total International transactions as per 3CEB 85,77,39,010 5. The assessee benchmarked the international transactions with the associated enterprises using the Transactional Net Margin Method (“TNMM”) as the most appropriate method, and since the ratio of operating profit to operating revenue in case of the assessee was higher than that of uncontrolled Printed from counselvise.com IT(TP)A No..6290/Mum/2024 (A.Y. 2021-22) 4 parties, the cost of purchase from the associated enterprises was considered to be at arm’s length price by the assessee in its transfer pricing study report. 6. Pursuant to the reference by the Assessing Officer (“AO”) under section 92CA(1) of the Act, the Transfer Pricing Officer (“TPO”) issued a show cause notice directing the assessee to recompute its margin by taking into account all the operating expenses. Further, the TPO also raised objections regarding the companies considered as comparable by the assessee, as some of these companies were trading in jewellery, ornaments and gold, which was not in line with the business activity of the assessee, comprising the purchase of rough diamonds and the selling of polished diamonds. In response, the assessee submitted the revised computation of its margin, taking into consideration other operating expenses, which were not taken into account earlier while calculating the profit margin. However, from the revised computation, it was observed that the assessee has not included partners' remuneration for the purpose of operating cost. It was further observed that the revised list of comparable, as submitted by the assessee, still includes entities dealing with gems and jewellery and not only in rough diamonds and polished diamonds like the assessee. Accordingly, after considering the submissions of the assessee, the TPO, vide order dated 29/10/2023 passed under section 92CA(3) of the Act, computed the operating profit margin of the assessee after including the partners’ remuneration in the scope of operating expenses. Further, by considering the revised set of comparables, the TPO held that the assessee’s margin does not fall within the 35th percentile margin and 65th percentile margin range of the comparable companies. Accordingly, Printed from counselvise.com IT(TP)A No..6290/Mum/2024 (A.Y. 2021-22) 5 the TPO computed the transfer pricing adjustment of INR 2,30,95,945 in respect of the international transactions undertaken by the assessee. In conformity, the AO passed the draft assessment order dated 26/12/2023 under section 144C(1) of the Act, proposing to assess the total income of the assessee at INR 3,64,98,315. 7. In the proceedings before the learned DRP , the assessee, inter alia, raised additional grounds of objections that the international transaction of import of rough diamonds and reselling them ought to have been benchmarked by adopting the RPM, as it was a pure trading activity without any value addition. The assessee also filed an application seeking admission of additional evidence before the learned DRP. The learned DRP forwarded this additional evidence to the TPO for a remand report. 8. The TPO, vide letter dated 12/09/2024, furnished its remand report in response to the additional evidence filed by the assessee. In its report, the TPO accepted that RPM is applicable in a resale situation, where the property or services purchased from the associated enterprise are sold to an unrelated enterprise. Referring to the facts of the instant case, the TPO submitted that the rough diamonds purchased by the assessee vary in quality and size, and therefore, each piece of rough diamond would command a different sale price on the basis of its purchase price. It was further submitted that two diamonds of the same size may vary in quality and, therefore, would command different purchase and sale prices. The TPO submitted that in RPM, the size and quality of the commodities are usually uniform, and consequently, it is possible to calculate the arm’s length price by adopting RPM. Thus, it was submitted that Printed from counselvise.com IT(TP)A No..6290/Mum/2024 (A.Y. 2021-22) 6 in the case of diamonds, the calculation of arm’s length price in the case of adoption of RPM as the most appropriate method would require calculation of arm’s length price of each of the pieces of diamond, since each diamond would vary from the other piece of diamond, qualitatively and quantitatively. Accordingly, the TPO submitted that the benchmarking of the transaction at the entity level in such a case cannot be made and benchmarking by taking into account the cost of an entire block of rough diamonds purchased and resold is not possible, since each piece of diamond would have its separate purchase value and sale value. The TPO further submitted that the assessee has not furnished any data or details in respect of the purchase and sale of each piece of rough diamond that was resold without any value addition. Hence, the TPO refused to accept the plea of the assessee for benchmarking the international transaction of trading of rough diamonds by adopting RPM as the most appropriate method. 9. In its response to the remand report furnished by the TPO, the assessee, inter alia, submitted that the chart exhibiting invoice-wise details of imported purchases of rough diamonds from the associated enterprises and subsequent sale of the same to local buyers form part of the additional evidence paper book. By referring to the annexure to the tax audit report, the assessee submitted that it displays a cumulative summary of quantitative details of rough diamonds. Accordingly, the assessee submitted that these details are sufficient to compute RPM in conformity with Rule 10B(1)(b) of the Income Tax Rules, 1962. The assessee further submitted that it was incumbent upon the TPO to requisition relevant information and data from the assessee, which, Printed from counselvise.com IT(TP)A No..6290/Mum/2024 (A.Y. 2021-22) 7 in his opinion, was vital to compute the margin by adopting RPM as the most appropriate method. However, the TPO failed to do so. 10. The learned DRP, after considering the submissions of both sides on the additional objection raised by the assessee, held that RPM requires pure resale/trading, while the assessee has identified itself as a manufacturer in its Form 3CEB Audit Report. Further, by referring to the profit and loss account of the assessee, the learned DRP held that the same also paints a similar picture regarding engagement in manufacturing to a large extent. Further, the learned DRP held that the Schedule to the profit and loss account mentions “Sale of Rough Diamonds” and not “Resale”, which is a different activity. Accordingly, the learned DRP rejected the claim of the assessee and held that segmental benchmarking for the RPM segment, as submitted by the assessee, is completely erroneous. Further, the learned DRP held that the assessee is a manufacturing concern and not a reseller. The relevant findings of the learned DRP , as regards the additional objection raised by the assessee, are as follows:– “Findings of the Panel: The Panel is not convinced by that claim regarding Rough “RESALE” and RPM segmental value due to: (i) The Audit Report uses the term \"Rough diamond consumed\" of Rs. 88,76,70,756/-. \"Consumption\" is a term related to manufacturing of diamonds, and not resale. (ii) The Audit Report of the Applicant categorises the applicant as \"Manufacturing entity\". This further adds to the fact that the Rough have been processed and then sold. (iii) Where there has been \"RESALE\", the Ld. Auditor has used the term unambiguously \"RESOLD\", like in the case of \"POLISHED DIAMONDS RESOLD\". No such term has been used in case of Rough Diamonds. Printed from counselvise.com IT(TP)A No..6290/Mum/2024 (A.Y. 2021-22) 8 (iv) The Transfer Pricing Study Report of the applicant has historically used TNMM as the Most Appropriate Method for the manufacturing entity. (v) The applicant has claimed \"Processing Charges\" of Rs. 9,35,35,063/- and \"Other Expenses\" of Rs. 3,22,33,750/-. The above charges are representative of a Manufacturing entity. (vi) It shows that the Roughs have also been processed to certain extent, as a part and parcel of a manufacturing process. Even pre-polishing stages of sorting, sawing, cleaving, planning, bruting, cutting, blocking etc. are manufacturing processes of the \"Rough Diamond\". If the applicant's claim that only Polished Diamonds have been manufactured is accepted, then the polished diamond volume is Rs. 361208930 (480674689 - 119465759). The processing and other expenditures of Rs. 12,57,68,813/- would go to constitute 34.81% of just processing charges, which is not plausible. Hence, Panel finds that the Rough Diamonds have also been processed and manufactured, and not merely RESOLD. (vii) Panel notes that the Applicant has not produced the Qualitywise registers and the Rough - Polish, input-output details to segregate the claimed Resale Segment from the Manufacturing Segment. Hence, the Panel is not inclined to agree with the subsequent segmentation. The Ld. AR has vehemently argued that the applicant is primarily a Trading/Resale. Hence, in view of the above, the segmental turnover of the applicant adopted in the second round after resiling from TNMM as Most Appropriate Method do not appear to be very reliable. The above observations buttressed with the fact that the applicant itself had adopted TNMM as historical Most Appropriate Method makes the Panel sway in favour of the Transfer Pricing Officer and the Remand Report. In addition to the above, the Panel notes that: (i) The segmentation is not supported with proper working of margins of the comparables. (ii) The Comparables lack segmental (RPM vs. TNMM) reporting and figures. Hence, it is not possible to compute the margins on basis of limited no. of comparables. (iii) It is not known whether the comparables are into \"Rough Diamond\" resale or \"Polished Diamond\" resale. Such a distinction affects the comparability. (iv) The cost allocation amongst the segmentals have been not duly explained before the Transfer Pricing Officer. (v) The original Transfer Pricing Study Report has categorically rejected RPM and adopted TNMM: Printed from counselvise.com IT(TP)A No..6290/Mum/2024 (A.Y. 2021-22) 9 (vi) RPM has been rejected due to the fact that: Margins earned by a reseller to the Gross Profit Margins earned by uncontrolled resellers. Resale price method is generally used in the case of resellers, Company being a manufacturing concern and having regard to the nature of transactions, RPM cannot be applied for the international transactions. - the applicant is a manufacturing concern, and not a reseller. This is a statement of fact by the Auditor. It cannot be altered subsequently on the basis of unreliable data and information. (vii) The TPSR meticulously detailed the Most Appropriate Method selection process, emphasizing a rigorous examination and search, including queries in relevant databases. The sudden change in the Most Appropriate Method goes against principle of consistency of use of the method over AYs. (viii) The Ld. TPO has not examined the RPM comparables and many of those comparables appear to be lacking in segments. Those comparables were picked by the Ld. TPO for application of TNMM and not RPM. Hence, the margins have not been examined. (ix) Additionally, the DRP emphasizes the legal obligation of the Applicant assessee to maintain and provide relevant documents as mandated by Section 92D of the Income Tax Act for transparent representation before the Transfer Pricing Officer is not fulfilled if the Most Appropriate Method is changed after about 11 months of completion Transfer Pricing proceedings. (x) The Panel has denied the applicability of RPM on basis of peculiar facts in the Transfer Pricing Study Report and Audit Report. Therefore, the reliance of the Ld. AR on decisions of Hon'ble ITAT regarding applicability of RPM to diamond trading business is not germane. Panel thus distinguishes the decisions of the Hon'ble Income Tax Appellate Tribunal with utmost respect. In view of the above discussion, the Additional objection of the applicant fails. The Panel returns a finding that the RPM (Resale Price Method) is not the Most Printed from counselvise.com IT(TP)A No..6290/Mum/2024 (A.Y. 2021-22) 10 Appropriate Method pertaining to the segment, and that the segmentals are unreliable and not supported with the facts emerging from the Audit Report.” 11. Accordingly, the AO passed the impugned final assessment order assessing the total income of the assessee at INR 3,64,98,715. Being aggrieved, the assessee is in appeal before us. 12. We have considered the submissions of both sides and perused the material available on record. In the present case, the assessee is a partnership firm engaged in the business of rough and polished diamonds. As per the assessee, rough diamonds are imported exclusively from its associated enterprises, namely, DiamDel NV, Antwerp, Belgium and Diambel ME DMCC, Dubai. Further, it is the plea of the assessee that no purchase of rough diamonds was made either from the local market or imports from other parties. As per the assessee, the rough diamonds are either resold in local markets or further processed on a job work basis and sold as polished diamonds in local markets or exported. Thus, the business segment of the assessee can be summarised as follows: - (a) importing of rough diamonds from associated enterprises and reselling to third parties without any value addition; (b) importing of rough diamonds and applying them for manufacturing cut, polished and finished diamonds by subjecting them to various processes, inter-alia, by outsourcing job work and selling them as new products to third parties; and (c) trading in cut, polished and finished diamonds by purchasing them from third parties (non-associated enterprises) and reselling them to unrelated customers. Printed from counselvise.com IT(TP)A No..6290/Mum/2024 (A.Y. 2021-22) 11 13. It is evident from the record that the assessee, in its transfer pricing study report, benchmarked the international transactions with its associated enterprises by adopting TNMM as the most appropriate method. However, in the proceedings before the learned DRP, the assessee raised additional grounds that the international transaction of trading of imported rough diamonds and reselling them in the local market should be benchmarked, adopting RPM as the most appropriate method. In this regard, the assessee also filed additional evidence before the learned DRP . However, as noted in the foregoing paragraphs, the learned DRP rejected the additional objections filed by the assessee. 14. During the hearing, the learned AR, inter-alia, submitted that insofar as the international transaction of import of rough diamonds from associated enterprises and reselling them to the third parties on “as is, where is and what basis” without any value addition of further processing or physical alteration whatsoever, the only appropriate method, as per the Indian Transfer Pricing Regulations, is RPM. The learned AR submitted that the assessee committed an error in preparing its transfer pricing study report for the year under consideration, and that the said transaction was benchmarked using TNMM as the most appropriate method. The learned AR by referring to the TPO’s order for the immediately succeeding assessment year, i.e. assessment year 2022- 23, submitted that in respect of the similar international transaction of import of rough diamonds from associated enterprises and reselling them to the third parties, the assessee vide show cause notice was suggested to conduct fresh benchmarking and determine the arm’s length price by adopting RPM as the Printed from counselvise.com IT(TP)A No..6290/Mum/2024 (A.Y. 2021-22) 12 most appropriate method. Thus, after considering the submissions of the assessee, the similar international transaction for the assessment year 2022- 23 was ultimately benchmarked by adopting RPM as the most appropriate method by the TPO. Accordingly, the learned AR submitted that since in the year under consideration the assessee had entered into similar international transaction, the said transaction needs to be benchmarked only by adopting RPM as the most appropriate method, and even if the assessee benchmarked the transaction by adopting TNMM, as the most appropriate method, the TPO should have benchmarked the transaction by adopting RPM as it is a pure trading activity without any value addition by the assessee. 15. As noted in the foregoing paragraphs, the learned DRP placed extensive reliance on the nomenclature of the entries in the books of accounts of the assessee to arrive at the conclusion that the assessee is a manufacturing concern and not a reseller. At this stage, at the outset, it is relevant to note the well-settled proposition that the entries in the books of account are not conclusive to determine the nature of income. Therefore, we do not find any merit in such reliance placed by the learned DRP . On the other hand, to substantiate its claim that the rough diamonds imported from associated enterprises were resold to third parties without any value addition, and that there is complete reconciliation of segment-by-stock details, the assessee has filed additional evidence before us. Further, during the hearing, the learned AR, referring to the paper book at pages 208, 209 and 246, submitted that the stock of rough diamonds traded by the assessee is entirely in line with its books of account. Reiterating its submissions made before the learned DRP , it Printed from counselvise.com IT(TP)A No..6290/Mum/2024 (A.Y. 2021-22) 13 was also submitted that if the TPO, during the remand proceedings, wanted any further details which, in his opinion, were vital to compute resale price, then it was incumbent upon him to requisition those details; however, no notice in this regard was issued by the TPO. 16. In the present case, it is evident from the record that there is no dispute regarding the fact that RPM is the most appropriate method in a reseller transaction, where the property purchased from the associated enterprise is sold to an unrelated enterprise without any value addition. However, as the lower authorities were not satisfied with the segmental details furnished by the assessee regarding the international transaction involving the import of rough diamonds from associated enterprises and their resale to third parties, the assessee's plea was rejected. Before us, the assessee has filed additional evidence to buttress its submission that proper segmental details of this transaction are available, and the same can only be benchmarked by adopting RPM as the most appropriate method. Since these details were not examined by any of the lower authorities, we deem it appropriate to restore this issue to the file of the AO/TPO for fresh consideration after examination of the additional evidence filed by the assessee in support of its claim. We order accordingly. Since the findings on this issue shall have a bearing on the arm’s length price determination of the international transactions entered into by the assessee, the impugned transfer pricing adjustment as made by the TPO in the present case is set aside. Needless to mention, no order shall be passed without affording reasonable and adequate opportunity of hearing to the Printed from counselvise.com IT(TP)A No..6290/Mum/2024 (A.Y. 2021-22) 14 assessee. Accordingly, the concise grounds of appeal no. 5 and 6 raised by the assessee are allowed for statistical purposes. 17. As the matter is being restored to the file of the AO/TPO on the aforesaid issue, the other grievances raised by the assessee in the present appeal do not call for adjudication at this stage. Accordingly, the other grounds raised by the assessee are allowed for statistical purposes. 18. In the result, the appeal by the assessee is allowed for statistical purposes. Order pronounced in the open Court on 24/11/2025 Sd/- GIRISH AGRAWAL ACCOUNTANT MEMBER Sd/- SANDEEP SINGH KARHAIL JUDICIAL MEMBER MUMBAI, DATED: 24/11/2025 Prabhat Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); (4) The DR, ITAT, Mumbai; and (5) Guard file. By Order Assistant Registrar ITAT, Mumbai. Printed from counselvise.com "