SITARA DIAMOND P.LTD, MUMBAI V. ITO WD 8(3)(2), MUMBAI

ITA 489/MUM/2014

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 3893 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 9 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-10-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Assessment Year: 2008-2009
• Appeal Filed On: 21-01-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V JENARDHANAN
• Assessee Lawyers: VIPUL MODY; NITESH JOSHI P BHANDARI
• Keywords: Transfer pricing; International transaction; Tax effect
• Section: 143(3)

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL J BENCH, MUMBAI BEFORE SHRI B.R. BASKARAN (AM) & SHRI RAMLAL NEGI (JM) I.T.A. NO. 489 /MUM/ 201 4 (ASSESSMENT YEAR 20 08 - 09 ) M/S. SITARA DIAMOND PVT. LTD. SDF - IV, UNIT NO. 108 SEEPZ, ANDHERI EAST MUMBAI - 400 096. V S . I TO WARD 8(3)(2) ROOM NO. 201 AAYAKAR BHAVAN M.K. ROAD MUMBAI - 400 020. ( APPELLANT ) ( RESPONDENT ) I.T.A. NO. 732/MUM/2014 (ASSESSMENT YEAR 2008 - 09) ITO WARD 8(3)(2) ROOM NO. 201 AAYAKAR BHAVAN M.K. ROAD MUMBAI - 400 020. V S . M/S. SITARA DIAMOND PVT. L TD. SDF - IV, UNIT NO. 108 SEEPZ, ANDHERI EAST MUMBAI - 400 096. ( APPELLANT ) ( RESPONDENT ) PAN : AACCR6206Q ASSESSEE BY S/ SHRI NITESH JOSHI, P . BHANDARI AND VIPUL MODY DEPARTMENT BY S/ SH R I V JENARDHANAN AND MANOJ KUMAR DATE OF HEARING 28.09 . 201 8 DATE OF PRONOUNCEMENT 28 . 10 . 201 8 O R D E R PER B.R. BASKARAN (AM) : THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER DATED 26.11.2013 PASSED BY THE LEARNED CIT(A) - 15, MUMBAI AND IT RELATES TO A.Y. 2008 - 09. 2. THE ASSESSEE IS A WHOLESALER D EALER OF GOLD AND DIAMOND JEWELLERY. THE ASSESSING OFFICER COMPLETED THE ASSESSMENT U/S 143(3) OF THE ACT AFTER OBTAINING REPORT FROM TRANSFER PRICING OFFICER. THE ISSUES CONTESTED BY THE ASSESSEE RELATE TO THE ADJUSTMENT MADE TO INTERNATIONAL TRANSACTIO NS ENTERED M/S. SITARA DIAMOND PVT. LTD. 2 BY THE ASSESSEE. DURING THE YEAR UNDER CONSIDERATION, T HE ASSESSEE HAS ENTERED INTO FOLLO WING INTERNATIONAL TRANSACTIONS : - SR.NO. NATURE OF INTERNATIONAL TRANSACTION VALUE IN ` METHOD A 5.1(I) REPAYMENT OF LOAN TAKEN EARLIER FROM AE - ROS Y BLUE JEWLLERY INC., USA INITIAL AMOUNT ` 1 CRORE - PAID DURING THE YEAR ` 27,72,650 5.1(II) INTEREST PAID ON THE ABOVE LOAN 4,64,048 CUP B 5.2 PURCHASE OF RAW MATERIAL FROM ROSY BLUE JEWLLERY INC. USA 101.33 CRORE CPM 5.3 SALE OF FINISHED GOODS TO ROSY BLUE JEWELLERY INC. USA 91.57 CRORES CUP THE TPO MADE ADJUSTMENT IN RESPECT OF INTEREST PAID ON LOAN AND ALSO ON TRANSACTION S RELATING TO PURCHASE OF RAW MATERIAL S AND SALE OF FINISHED GOODS. THE AO MADE THE ADDITIONS RELATING TO T.P ADJUSTMENTS MA DE BY THE TPO. 3. THE ASSESSEE HAD ALSO CLAIMED DEDUCTION U/S. 10A OF THE ACT AND THE ASSESSING OFFICER REJECTED THE SAME BY FOLLOWING HIS ORDER PASSED FOR A.Y. 2007 - 08. 4. THE LEARNED CIT(A) GRANTED RELIEF IN RESPECT OF DEDUCTION U/S. 10A OF THE ACT BUT CONFIRMED THE ADDITION RELATING TO TRANSFER PRICING ADJUSTMENT. AGGRIEVED BOTH THE PARTIES HAVE FILED THE APPEAL BEFORE US. 5. WE SHALL TAKE UP THE APPEAL FILED BY THE REVENUE. AT THE OUTSET, LEARNED AR SUBMITTED THAT THE QUANTUM IN DISPUTE IN RESPECT OF DEDUCTION ALLOWED U/S. 10A IS ONLY ` 26.63 LAKHS AND HENCE TAX EFFECT INVOLVED THEREIN IS LESS THAN ` 20 LAKHS. ACCORDINGLY, HE SUBMITTED THAT THE REVENUE IS PRECLUDED FROM PURSUING THIS APPEAL AS PER CBDT CIRCULAR NO.3/2018 DATED 11.07.2018. LEARNED AR F URTHER SUBMITTED THAT THE ASSESSING OFFICER HAD DISALLOWED DEDUCTION BY FOLLOWING HIS ORDER PASSED FOR A.Y. 2007 - 08. HOWEVER, THE M/S. SITARA DIAMOND PVT. LTD. 3 TRIBUNAL , VIDE ITS ORDER DATED 2.9.2015 PASSED IN ITA NO. 6727/MUM/2011 F O R A.Y. 2007 - 08 , HAS UPHELD THE ORDER PASSED BY THE L EARNED CIT(A) IN THAT YEAR IN ALLOWING DEDUCTION U/S. 10A OF THE ACT. ACCORDINGLY, LEARNED AR SUBMITTED THAT, ON MERITS ALSO, THE ORDER PASSED BY THE LEARNED CIT(A) DOES NOT CALL FOR ANY INTERFERENCE. 6. WE HAVE HEARD LEARNED DR AND PERUSED THE RECORD. H AVING REGARD TO THE FACT THAT THE TAX EFFECT INVOLVED IN THE APPEAL FILED BY THE REVENUE IS LESS THAN ` 20 LAKHS AND ALSO TAKING INTO CONSIDERATION THAT THE ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN FAVOUR OF THE ASSESSEE IN THE EARLIER YEARS , WE DO NOT FI ND ANY MERIT IN THE APPEAL FILED BY THE REVENUE. ACCORDINGLY, WE DISMISS THE APPEAL OF THE REVENUE. 7. WE SHALL TAKE UP THE APPEAL FILED BY THE ASSESSEE. FIRST ISSUE CONTESTED THEREIN RELATES TO TP ADJUSTMENT OF ` 1,61,595/ - MADE BY THE TPO W ITH REGARD TO INTEREST PAID BY THE ASSESSEE TO ITS AE M/S. ROSY BLUE JEWELLERY INC. FACT RELATING TO THE SAME ARE DISCUSSED IN BRIEF. 8. THE ASSESSEE HAD TAKEN LOAN IN US$ EQUIVALENT INR 1CRORE IN PRECEDING YEAR. AS PER THE AGREEMENT ENTERED W ITH ITS AE , THE INTERE ST IS PAYABLE AT THE LIB OR RATE AS ON 31 ST MARCH PLUS 200 BPS. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS REPAID PART OF LOAN AMOUNTING TO ` 27.72 LAKHS. THE TRANSFER PRICING OFFICER (TPO) NOTICED THAT THE ASSESSEE HAD PAID INTEREST OF ` 4,64,04 8/ - WHICH WAS CALCULATED AT THE RATE OF 6.94% FOR THE FIRST NINE MONTHS AND AT THE RATE OF 4.63% ON THE BALANCE OUTSTANDING AMOUNT. THE TPO NOTICED THAT LIBOR RATE AS ON 31 ST MARCH WAS 2.7%. ACCORDINGLY, THE TPO TOOK THE VIEW THAT THE ASSESSEE SHO ULD HAVE PAID INTEREST @ 4.7%. A CCORDINGLY, HE COMPUTED INTEREST @ 4.7% ON THE OUTSTANDING BALANCE LOAN AMOUNT OF ` 64.35 LAKHS , WHICH WORKED OUT TO ` 3,02,453/ - . ACCORDINGLY, HE TOOK THE VIEW THAT INTEREST HAS BEEN PAID IN EXCESS BY ` 1,61,595/ - . THE AO DISALLOW ED THE SAME AND T HE LEARNED CIT(A) ALSO CONFIRMED THE SAME. M/S. SITARA DIAMOND PVT. LTD. 4 9. WE HAVE HEARD THE PARTIES AND PERUSED THE RECORD. WE NOTICED THAT THE OPENING BALANCE AMOUNT WAS ` 1 CRORE AND THE ASSESSEE HAS REPAID THE AMOUNT TO THE EXTENT OF ` 27.72 LAKHS DURING THE YEAR UNDER CONSIDERATION. THE PLEA OF THE ASSESSEE BEFORE US WAS THAT INTEREST SHOULD HAVE BEEN CALCULATED ON TIME BASIS ON THE OUTSTANDING AMOUNT , I.E., ON ` 1 CRORE INTEREST SHOULD HAVE BEEN COMPUTED TILL DATE OF REPAYMENT OF ` 27.72 LAKHS AND THEREAFTER INT EREST SHOULD HAVE BEEN CALCULATED ON THE BALANCE AMOUNT OF ` 64.35 LAKHS FROM THAT DAY TO 31 ST MARCH . WE FIND MERIT IN THE SAID CONTENTION OF THE ASSESSEE. THE ASSESSING OFFICER SHOULD HAVE CALCULATED INTEREST ON OUTSTANDING AMOUNT OF LOAN FOR THE PERIOD F OR WHICH IT WAS OUTSTANDING. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY THE LEARNED CIT(A) ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTION TO COMPUTE INTEREST ON T IME BASIS O N AMOUNT OUTSTANDING. 10. NEXT ISSU E RELATES TO TRANSFER PRICING ADJUSTMENT MADE BY THE TPO ON PURCHASE OF RAW MATERIAL FROM ITS AE M/S. ROSY BLUE JEWELLERY INC. AND SALE OF FINISHED GOODS TO THE ABOVE SAID AE. THE ASSESSEE ADOPTED COST PLUS METHOD (CPM) METHOD FOR BENCHMARKING PURCHASE OF RAW MATERIAL AND CUP METHOD FOR BENCHMARKING FOR SALE OF FINISHED GOODS. THE TPO HOWEVER TOOK THE VIEW THAT BOTH THE TRANSACTIONS SHOULD BE AGGREGATED AND TNMM METHOD SHOULD BE ADOPTED FOR BENCHMARKING THE ABOVE SAID TRANSACTION. ACCORDINGLY, HE FOLLOWED T NMM METHOD BY AGGREGATING BOTH TRANSACTIONS AND RECOMMENDED TP ADJUSTMENT OF ` 990.71 LAKHS. THE LEARNED CIT(A) ALSO CONFIRMED THE SAME. 11. WE HAVE HEARD THE PARTIES AND PERUSED THE RECORD. IN RESPECT OF PURCHASE OF RAW MATERIAL , WE NOTICED THAT THE ASSE SSEE HA S STATED THAT ROUGH DIAMONDS WERE SUPPLIED BY ITS AE AT COST AND THE ASSESSEE WAS PROCESSING THE SAME ON JOB WORK BASIS WITH A MARKUP OF 5%. ACCORDINGLY, IT WAS SUBMITTED THAT THE ASSESSEE HAS FOLLOWED CPM METHOD FOR BENCHMARKING TRANSACTION. HOWEVE R , ON EXAMINATION OF THE WORKING GIVEN BY THE ASSESSEE, WE NOTICED THAT THE ASSESSEE HAS IN FACT FOLLOWED SEGMENTAL TNMM METHOD FOR BENCHMARKING PURCHASE OF RAW MATERIAL. WE NOTICED THAT THE ASSESSEE HAS PREPARED ITS M/S. SITARA DIAMOND PVT. LTD. 5 ACCOUNT ON CONSOLIDATED BASIS AND HEN CE NO SEGMENTAL RESULTS WERE AVAILABLE. ONLY FOR THE PURPOSE OF BENCHMARKING, THE ASSESSEE HAS PREPARED SEGMENTAL WORKINGS FOR PROCESSING ACTIVITIES ALONE , EVEN THOUGH IT IS TITLED AS MANUFACTURING. IN THE SAID WORKINGS, THE MANUFACTURING EXPENSES WERE NOT INCLUDED. HOWEVER, THE SALE VALUE HAS BEEN TAKEN AS THE SALE OF MANUFACTURED ARTICLES. HENCE, WE ARE OF THE VIEW THAT THE METHODOLOGY ADOPTED BY THE ASSESSEE CANNOT BE CONSIDERED AS CPM METHOD AS CLAIMED BY THE ASSESSEE. FURTHER, AS RIGHTLY POINTED OU T BY TPO, THE ASSESSEE HAS NOT EXPLAINED AS TO HOW DIRECT AND INDIRECT EXPENSES WERE SEGREGATED , I.E., THE ASSESSEE HAS NOT EXPLAINED AS TO HOW THE SEGMENTAL WORKING GIVEN BY IT WAS JUSTIFIED . HENCE THE APPROACH OF THE ASSESSEE, IN OUR VIEW, IS NOT CORREC T. 12. WE NOTICED EARLIER THAT THE TPO HAS AGGREGATED BOTH THE INTERNATIONAL TRANSACTIONS AND ADOPTED TNMM METHOD FOR BENCHMARKING THE TRANSACTIONS. IT IS THE CONTENTION OF THE ASSESSEE THAT THE ACTIVITY OF PURCHASE OF RAW MATERIAL A ND PROCESSING OF THE SAME IS AL TOGETHER DIFFERENT FROM THE ACTIVIT Y OF SALE OF MANUFACTURED JEWELLERY. ACCORDINGLY IT WAS CONTENDED THAT BOTH THE TRANSACTIONS SHOULD NOT HAVE BEEN CLUBBED TOGETHER. ACCORDINGLY, IT WAS CONTENDED THAT TPO WAS NOT JUSTIFIED IN AGGREGATING TWO U N COMPARABLE TRANSACTION S FOR THE PURPOSE OF DETERMINING ALP OF THE TRANSACTION. WE ALSO FIND MERIT IN THE CONTENTION S SO RAISED BY THE ASSESSEE. PURCHASE OF ROUGH DIAMONDS AND PROCESSING THEM INTO CUT AND POLISHED DIAMONDS IS DIFFERENT ACTIVITY AND THE SAM E CANNOT BE CLUBBED WITH SALE OF MANUFACTURED ORNAMENTS , WHICH IS A VALUE ADDED ITEM BY INCLUDING GOLD . ACCORDINGLY, WE ARE OF THE VIEW THAT THE APPROACH OF THE TPO IS ALSO NOT CORRECT. 13. IN VIEW OF THE ABOVE DISCUSSION S , WE ARE OF THE OPINION THAT THE ISSUES RELATING TO DETERMINATION OF ALP WITH REGARD TO PURCHASE AND PROCESSING OF RAW MATERIAL S AS WELL AS SALE OF MANUFACTURED JEWELLERY REQUIRE FRESH EXAMINATION AT THE AT END OF ASSESSING OFFICER/TPO. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY THE LE ARNED CIT(A) ON THESE TWO ISSUES AND RESTORE THEM TO THE FILE OF THE ASSESSING OFFICER/TPO FOR EXAMINATION THEM AFRESH. THE ASSESSEE IS FREE TO M/S. SITARA DIAMOND PVT. LTD. 6 ADVANCE ALL ARGUMENTS BEFORE THE TAX AUTHORITIES I.E. ALL THE ISSUES ARE KEPT UPON. 14. IN THE RESULT, APPEAL F ILED BY THE ASSESSEE IS TREATED AS ALLOWED AND APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER HAS BE EN PRONOUNCED IN THE COURT ON 28 . 10 . 201 8 . SD/ - SD/ - (RAMLAL NEGI) (B.R.BASKARAN) J U DICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED : 28 / 10 / 20 1 8 COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. BY ORDER, //TRUE COPY// ( SENIOR P RIVATE S E CRETARY ) PS ITAT, MUMBAI