The ACIT, Circle-4, Surat V. M/s. Sparkle Diam Pvt.Ltd., Surat

ITA 3971/AHD/2008

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 1057 (ITAT-AHMEDABAD)
• Duration Of Justice: 7 year(s) 7 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-07-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 19-07-2016
• Assessment Year: 2004-2005
• Appeal Filed On: 08-12-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ROOP CHAND
• Keywords: Depreciation; Transfer pricing; International transaction
• Section: 92C; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD I BENCH AHMEDABAD , BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER, AND SHRI N. K. BILLAIYA , ACCOUNTANT MEMBER. ITA. NO.3971/AHD/2008 (ASSESSMENT YEAR: 2004-05) A.C.I.T., CIRCLE-4, ROOM NO.223, AAYAKAR BHAVAN, MAJURA GATE, SURAT APPELLANT VS. M/S. SPARKLE DIAM PVT. LTD. T-90G, BELGIUM TOWER, OPP.- LINEAR BUS STAND, RING ROAD, SURAT RESPONDENT PAN: AAPCS4186D /BY APPELLANT : SHRI ROOP CHAND, ADDL. CIT /BY RESPONDENT : SHRI TUSHAR HEMANI, A.R. /DATE OF HEARING : 19.07.2016 /DATE OF PRONOUNCEMENT : 26.07.2016 ORDER PER SHAILENDRA KUMAR YADAV, J.M: THIS APPEAL HAS BEEN FILED BY REVENUE AGAINST THE O RDER OF COMMISSIONER OF INCOME TAX (APPEALS)-I, SURAT, D ATED 07.10.2008 FOR A.Y. 2004-05 ON FOLLOWING GROUND. ITA NO.3971/AHD/08 A.Y. 04-05 [ACIT VS. M/S. SPARKLE DIAM PVT. LTD.] PAGE 2 [1] ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD.CIT(A)-III, SURAT HAS ERRED IN DELET ING THE ADDITION OF RS.97,30,144/- MADE BY THE ASSESSIN G OFFICER ON ACCOUNT OF UPWARD ADJUSTMENT IN THE INTERNATIONAL TRANSACTION RELATED TO SALES. 2. ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND EXPORT OF DIAMOND STUDDED JEWELLE RY. DURING YEAR, ASSESSEE HAS ENTERED INTO TWO INTERNAT IONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES. AN AM OUNT OF RS.7,13,35,151/- WAS RECEIVED FROM K. GIRDHARLAL IN C. (KG USA) FOR EXPORT OF DIAMONDS STUDDED GOLD JEWELLERY. AN AMOUNT OF RS.63,120/- HAS BEEN PAID TO K. GIRDHARLA L (HONGKONG) LTD. (KG HK) FOR IMPORT OF MOUNTINGS. FO R BOTH THESE TRANSACTIONS, THE METHOD USED WAS TRANSACTION AL NET MARGIN METHOD (HEREINAFTER CALLED AS TNMM). ASSES SING OFFICER REFERRED THIS CASE TO THE ADDITIONAL CIT (T RANSFER PRICING)-III, MUMBAI TO COMPUTE THE CORRECT AND A T RUE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION MADE BY ASSESSEE. AS PER THE ORDER OF TPO AN UPWARD ADJUST MENT OF RS.97,30144/- WAS REQUIRED TO BE MADE TO THE TOTAL INCOME OF ASSESSEE. IN VIEW OF ORDER OF TPO, ASSESSING OFFIC ER ISSUED SHOW CAUSE NOTICE AS TO WHY UPWARD ADJUSTMENT OF RS.97,30,144/- BE NOT MADE. ACCORDING TO ASSESSING OFFICER, THE SUBMISSIONS OF ASSESSEE WERE CONSIDERED AND NOT FOUND TO BE SATISFACTORY, MADE ADDITION OF RS.97,30,144/-. 2.1 MATTER WAS CARRIED BEFORE THE FIRST APPELLATE A UTHORITY, WHEREIN VARIOUS CONTENTIONS MADE ON BEHALF OF ASSES SEE AND ITA NO.3971/AHD/08 A.Y. 04-05 [ACIT VS. M/S. SPARKLE DIAM PVT. LTD.] PAGE 3 HAVING CONSIDERED THE SAME, CIT(A) DELETED THE ADDI TION IN QUESTION. 2.2 SAME HAS BEEN OPPOSED BEFORE US ON BEHALF OF RE VENUE INTER ALIA SUBMITTING THAT CIT(A) ERRED IN DELETING THE ADDITION OF RS.97,30,144/- MADE BY ASSESSING OFFICER ON ACCO UNT OF UPWARD ADJUSTMENT IN THE INTERNATIONAL TRANSACTIONS RELATED TO SALES. ACCORDINGLY, LEARNED DEPARTMENTAL REPRES ENTATIVE REQUESTED TO SET ASIDE THE ORDER OF CIT(A) AND THAT OF ASSESSING OFFICER BE RESTORED. ON THE OTHER HAND, LD. AUTHORIZED REPRESENTATIVE SUPPORTED THE ORDER OF CI T(A). 2.3 AFTER GOING THROUGH RIVAL SUBMISSIONS AND MATER IAL ON RECORD, WE FIND THAT ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND EXPORT OF DIAMOND STU DDED JEWELLERY. THE ONLY REASON GIVEN FOR ADOPTING THE COST PLUS METHOD (CPM) AND FOR REJECTING THE TRANSACTION NET MARGIN METHOD (TNMM) OF ASSESSEE WAS THAT ASSESSEE HAS INC URRED LOSS DURING THE YEAR. THE TPO STATED THAT ASSESSEE HAS INCURRED LOSS DUE TO NON-RECOVERY OF FIXED ASSETS A ND THEREFORE, IT WOULD BE APPROPRIATE TO TAKE GROSS PR OFIT AS BENCH MARKING. THE TPO HAS NOT DISCUSSED IN HIS ORDER AS TO HOW HE HAS ARRIVED AT CPM AS THE MOST APPROPRIATE METHO D AND TNMM IS NOT THE MOST APPROPRIATE METHOD. AS PER TH E PROVISIONS OF SECTION 92C, ASSESSING OFFICER HAS TO FOLLOW THE FOLLOWING STEPS BEFORE MAKING ADJUSTMENTS TO THE IN COME SHOWN BY ASSESSEE IN RESPECT OF TRANSFER POLICY:- ITA NO.3971/AHD/08 A.Y. 04-05 [ACIT VS. M/S. SPARKLE DIAM PVT. LTD.] PAGE 4 (A) AS PER THE PROVISIONS OF SUB-SECTION (3) OF SE CTION 92C, IF THE A.O. IS OF THE OPINION THAT THE PRICE CHARGED OR PAID IS NOT IN ACCORDANCE WITH THE MOST APPROPRIATE METHOD MENTIONED IN SUB-SECTION (1) AND SUB-SECTION (2) OR IF HE IS OF THE OPINION THAT THE ASSESSEE HAS NOT MAINTAINED ANY INFORMATION AND DOCUMENT RELATING TO THE INTERNATIONAL TRANSACTION IN ACCORDANCE WITH SECTION 92D(1) OR RULES OR IF HE IS OF THE OPINION THAT INFORMATION DATA USED BY THE ASSESSEE IS NOT RELIABLE OR INCORRECT OR THE ASSESS EE HAS FAILED TO FURNISH VARIOUS DETAILS AND DOCUMENTS REQUIRED U/S.92D(3) THEN HE MAY PROCEED TO DETERMINE THE ARMS LENGTH PRICE. (B) HOWEVER, IF THE A.O. CONSIDERS IT NECESSARY OR EXPEDIENT SO TO DO, HE MAY, WITH THE PREVIOUS APPROVAL OF THE COMMISSIONER, REFER THE MATTER TO T HE TPO. (C) ON RECEIPT OF SUCH A REFERENCE, THE TPO HAS TO ISSUE A SHOW-CAUSE NOTICE AS PRESCRIBED UNDER SECTION 92CA(3) ASKING FOR VARIOUS DETAILS/DOCUMENTS. (D) THE TPO SHALL THEREAFTER DETERMINE THE ARMS LE NGTH PRICE IN ACCORDANCE WITH SECTION 92C(3) I.E. THE PROCEDURE MENTIONED IN PARA-(A) ABOVE. FOR THE PURPOSE OF COMPUTING THIS ARMS LENGTH PRICE, THE TP O HAS TO FOLLOW THE PROCEDURE AND METHOD MENTIONED IN SUB-SECTION (1) AND SUB-SECTION (2) OF SECTION 92C READ WITH RULE 10B & 10C. (E) RULE 10B PRESCRIBES VARIOUS METHODS AND GIVES VARIOUS CONDITIONS WHEREBY THE TPO/A.O. IS REQUIRED TO ADHERE TO FOR DETERMINING THE MOST APPROPRIATE METHOD. THIS RULE GIVES VARIOUS CONDITIONS A S PER WHICH EITHER CCPM OR RPM OR TNMM WOULD BE THE MOST APPROPRIATE METHOD. RULE 10C LAID DOWN VARIOUS FACTORS WHICH THE A.O. SHOULD TAKE INTO ACCOUNT FOR SELECTING THE MOST APPROPRIATE METHOD. ITA NO.3971/AHD/08 A.Y. 04-05 [ACIT VS. M/S. SPARKLE DIAM PVT. LTD.] PAGE 5 2.4 FROM THE ABOVE, WE FIND THAT NEITHER THE ASSESS ING OFFICER NOR THE TPO HAVE DISCUSSED AS TO WHY THE TN MM FOLLOWED BY ASSESSEE WAS WRONG AND WHY IT WAS NOT ACCEPTABLE. THE TPO HAS POINTED OUT NO DEFECT AT A LL IN THE METHOD FOLLOWED BY ASSESSEE EXCEPT SAYING ASSESSEE HAS INCURRED LOSS DUE TO NON-RECOVERY OF FIXED ASSETS A ND, THEREFORE, IT WOULD BE APPROPRIATE TO TAKE GROSS PR OFIT AS BENCH MARKING. EVEN IN REMAND REPORT, NEITHER THE ASSESS ING OFFICER NOR THE TPO WAS JUSTIFIED IN THEIR OBSERVAT IONS. IN FACT, THEY HAD NOT FOLLOWED THE PROCEDURES LAID DOWN IN S ECTION 92C OF THE ACT AND IN RULES 10B & 10C. THE TPO HAS NOT MADE ANY ATTEMPT IN SHOWING WHY THE RESULTS OF DEEP DIAM OND INDIA LTD., MOON DIAMONDS LTD., SHANTI VIJAY JEWELS LTD. AND SOVEREIGN DIAMONDS LTD. ARE COMPARABLE FOR CALCULAT ING THE GROSS PROFIT MARGIN. 2.5 ASSESSEE HAS POINTED OUT THAT DURING THE YEAR A SSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND EXPORT O F PLAIN AND STUDDED JEWELLERY IN THE FORM OF BANGLES, RINGS , EAR RINGS, BRACELETS, PENDANTS, NECKLACES ETC. THE JEWELLERY I S MANUFACTURED OF GOLD, SEMI PRECIOUS AND PRECIOUS GE MS AND DIAMONDS. THE STUDDED GOLD JEWELLERY IS SOLD BOTH I N THE LOCAL AND OVERSEAS MARKET. DURING THE YEAR, ASSESSEE MADE SALES OF RS.8.53 CRORES OUT OF WHICH EXPORT TO ASSOCIATED EN TERPRISE IS OF RS.7.13 CRORES AND PURCHASES WERE OF RS.63,121/- ONLY. ACCORDING TO ASSESSING OFFICER, ASSESSEE'S GROSS PR OFIT MARGIN ON COST WAS 7.4%. ASSESSEE STATED THAT IN COMPARISO N TO THIS ITA NO.3971/AHD/08 A.Y. 04-05 [ACIT VS. M/S. SPARKLE DIAM PVT. LTD.] PAGE 6 THE DIRECTORS' REPORT OF DEEP DIAMOND INDIA LTD, FO R A.Y, 2003-04 REVEALS THAT THE BUSINESS OF DEEP DIAMOND I NDIA LTD. COMPRISED ONLY OF DOMESTIC OPERATION WHEREAS ASSESS EE COMPANY HAS 87% OF THE TURNOVER AS EXPORT SALES. FU RTHER, THE TURNOVER OF DEEP DIAMOND INDIA LTD. WAS ONLY RS .3.79 CRORES WHEREAS ASSESSEES TURNOVER IS RS.8.53 CRORE S. 2.6 REGARDING MOON DIAMOND LTD., THE STAND OF ASSES SEE HAS BEEN THAT IT IS ALSO NOT COMPARABLE BECAUSE AS PER THE NOTES ON ACCOUNT OF THE ANNUAL ACCOUNTS FOR F.Y. 2003-04 MOON DIAMONDS LTD. HAS SUBSTANTIAL RELATED PARTY TRANSAC TIONS IN THE NATURE OF PURCHASE OF MATERIALS/FINISHED GOODS AND SALE OF MATERIALS/FINISHED GOODS WITH ITS HOLDING COMPANIES M/S. SHRENUJ & CO. LTD. AND M/S. ADITI DIAMIMPEX TRADING &. MANUFACTURING CO. LTD. WHEREAS ASSESSEE MADE PURCHA SES FROM ITS RELATED COMPANY OF ONLY RS.63,121/- AND HE NCE THESE CASES ARE NOT COMPARABLE. 2.7 WITH REGARD TO SHANTIVIJAY JEWELS LTD, THE STAND OF ASSESSEE HAS BEEN THAT THIS CASE IS ALSO NOT COMPAR ABLE BECAUSE THIS COMPANY WAS IN EXISTENCE FOR THE LAST 31 YEARS AND IT WAS WELL ESTABLISHED IN THE MARKET WHEREAS A SSESSEE HAS STARTED FULL FLEDGED OPERATION IN THE CURRENT Y EAR ONLY THAT TOO FROM JANUARY 2004 I.E. ONLY FOR THREE MONTHS AS THIS IS THE FIRST YEAR OF ASSESSEE COMPANY. SHANTIVIJAY JEWELS LTD. IN LOCATED IN SEEPZ WHEREAS THE ASSESSEE COMPANY WAS N OT LOCATED IN SEEPZ AND HENCE THE BENEFITS AVAILED BY SHANTIVIJAY JEWELS LTD. WERE NOT AVAILABLE TO ASSES SEE COMPARE ITA NO.3971/AHD/08 A.Y. 04-05 [ACIT VS. M/S. SPARKLE DIAM PVT. LTD.] PAGE 7 LIKE DUTY FREE IMPORTS OF PLANT AND MACHINERY, SPAR ES AND CONSUMABLES. SHANTIVIJAY JEWELS LTD. HAS ALSO FACIL ITIES LIKE TAX HOLIDAY U/S.IO10A AS WELL AS OTHER BENEFITS LIK E SALES-TAX AND SERVICE-TAX EXEMPTION WHICH ARE NOT AVAILABLE T O THE APPELLANT COMPANY. SHANTIVIJAY'S FIXED COST LIKE EN ERGY COST, WAGES & SALARY AND DEPRECIATION HAVE REMAINED SAME WHEREAS SALES HAVE INCREASED SIGNIFICANTLY WHEREAS ASSESSEE COMPANY HAS A NEW SECTOR. 2.8 WITH REGARD TO SOVEREIGN DIAMOND, STAND OF ASSE SSEE HAS BEEN THAT THIS COMPANY WAS EXISTED LAST 30 YE ARS, WHEREAS ASSESSEE COMPANY HAS STARTED OPERATION IN THE CURRE NT YEAR ONLY I.E. FROM JANUARY 2004 I.E. ONLY FOR THREE MON THS. DURING F.Y, 2003-O4 SOVEREIGN DIAMONDS LTD. RAW MATERIAL PURCHASES HAVE COME DOWN BY 22.3%. FURTHER, FROM TH E FACT THAT THE CONSUMPTION OF RAW MATERIALS AS PERCENTAGE OF SALES HAS BEEN SHOWING CONSISTENTLY DECLINED AND HAS VARI ED DRASTICALLY FROM 92.6% (2002), 65.11% (2003), 57.59 % (2004) AND EVEN SUBSEQUENTLY 38.73% IN 2005 WHICH SHOWS TH AT POSSIBLY THE COMPANY WAS GOING INTO JOB WORK INCOME WHERE THE CUSTOMERS HAVE SUPPLIED THE RAW MATERIALS LIKE DIAMONDS PARTLY. IN SUCH A CASE MATERIALS WERE PARTLY SUPPLI ED BY THE CLIENTS AND, THEREFORE, THE CASE IS NOT COMPARABLE. 2.9 FURTHER, ASSESSEE STATED THAT FROM THE CHART PR EPARED BY TPO REPRODUCED ON PAGE-4 OF THE ASSESSMENT ORDER, I T WAS OBSERVED THAT ALTHOUGH THE GROSS PROFIT MARGIN ON C OST IS 7.40% IN RESPECT OF ASSESSEE BUT THE CASES ADOPTED BY THE ITA NO.3971/AHD/08 A.Y. 04-05 [ACIT VS. M/S. SPARKLE DIAM PVT. LTD.] PAGE 8 TPO HAS SUCH VARIED GROSS PROFIT MARGIN ON COST AS 14.5% IN RESPECT OF DEEP DIAMONDS LTD., 7.38% IN RESPECL: OF MOON DIAMONDS LTD., 14.53% IN RESPECT OF SHANTIVIJAY JEW ELS LTD. AND ABSOLUTELY HIGH BEING 53.98% IN RESPECT OF SOVE REIGN DIAMONDS LTD. THE STAND OF ASSESSEE HAS BEEN THAT T PO HAS NOT EXPLAINED AS TO WHY THE CASES HAVING SUCH HUGE VARIATION HAVE BEEN ADOPTED. 2.10 WITH REGARD TO MOON DIAMONDS LTD., THE STAND O F ASSESSEE HAS BEEN THAT 7.38% GROSS PROFIT MARGIN ON COST IS INCLUDED IN THE TABLE THEN WHY THE ASSESSEE'S 7.4% GROSS PROFIT MARGIN ON COST WAS NOT FOUND ACCEPTABLE. 2.11 IN VIEW OF ABOVE, WE FIND THAT THE ASSESSING O FFICER /TPO HAS NOT GIVEN ANY JUSTIFICATION FOR ADOPTING THE CP M AND FOR CHOOSING THE FOUR CASES MENTIONED ABOVE AND FOR REJ ECTING ASSESSEE,S CALCULATIONS. EVEN IN REMAND REPORT, ASS ESSING OFFICER /TPO HAS NOT GIVEN COMMENTS IN RESPECT OF E ACH AND EVERY GROUND AND SUBMISSION OF ASSESSEE EVEN THOUGH THE TPO HAS SENT THE REPORT AFTER LONG TIME. ALL THESE THINGS SHOW THAT THE TPO/ASSESSING OFFICER DOES NOT HAVE ANY JU STIFICATION OR VALID REASON FOR THEIR UPWARD ADJUSTMENT. IF TH E ORDER OF THE ASSESSING OFFICER /TPO DOES NOT SIGNIFIES THAT AS TO WHY ASSESSEES CALCULATIONS WERE WRONG AND WHY TNMM ADO PTED BY ASSESSEE HAS TO BE REJECTED AND WHY THE CPM WAS CORRECT AS ADOPTED BY THE ASSESSING OFFICER /TPO. THESE C ASES DO NOT APPEAR TO BE COMPARABLE FOR THE REASON DISCUSSE D ABOVE. IN VIEW OF ABOVE, CIT(A) WAS JUSTIFIED IN DELETING THE ADDITION ITA NO.3971/AHD/08 A.Y. 04-05 [ACIT VS. M/S. SPARKLE DIAM PVT. LTD.] PAGE 9 MADE BY TPO/ASSESSING OFFICER. THIS REASONED FACTU AL FINDING OF CIT(A) NEEDS NO INTERFERENCE FROM OUR SIDE. WE UPHOLD THE SAME. 3. AS A RESULT, APPEAL FILED BY REVENUE IS DISMISSE D. PRONOUNCED IN THE OPEN COURT ON THIS THE 26 TH DAY OF JULY, 2016. SD/- SD/- (N. K. BILLAIYA) (SHAILENDRA KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBE R AHMEDABAD: DATED 26/07/2016 TRUE COPY S.K.SINHA / COPY OF ORDER FORWARDED TO:- / REVENUE 2 / ASSESSEE $ %&%'( ) / CONCERNED CIT 4 )- / CIT (A) ,-./00'(1 '( 123& / DR, ITAT, AHMEDABAD 4/5678 / GUARD FILE. BY ORDER / 1 / 2% '( 123&