AI Insights
The case involves P.N. Gadgil Jewellers Private Limited appealing against the final assessment order passed by the Assistant Commissioner of Income Tax, which included significant transfer pricing adjustments. The primary issues revolved around the selection of comparables for benchmarking international and specified domestic transactions, particularly concerning the sale and purchase of goods and remuneration to directors. The Tribunal examined the appropriateness of using Titan Company Ltd. and Tribhovandas Bhimji Zaveri Limited as comparables and the treatment of certain expenses in the calculation of ALP. The Tribunal's decision was influenced by precedents and the specific functional and financial characteristics of the companies involved.
Appeal Details
Counselvise Citation
[2023] 140 COUNSELVISE.COM (IT) 133031 (ITAT-PUNE)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
1 year(s) 11 month(s) 26 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
19-02-2023
Appeal Filed By
Assessee
Order Result
PartlyAllowed
Bench Allotted
C
Next Hearing Date
22-01-2023
Assessment Year
2016-2017
Appeal Filed On
24-02-2021
Judgement Text
आयकर अपीलीय अधिकरण “सी” न्यायपीठ पुणे में । IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER आयकर अपील सं. / ITA No.49/PUN/2021 धििाारण वर्ा / Assessment Year : 2016-17 P.N. Gadgil Jewellers Private Limited, PNG House, 694, Narayan Peth, Laxmi Road, Pune – 411030 PAN : AAHCP4162E ......अपीलार्थी / Appellant बिाम / V/s. The Assistant Commissioner of Income Tax, Central Circle – 1(3), Pune ......प्रत्यर्थी / Respondent Assessee by : S/Shri M.P. Lohia & Rajendra Agiwal Revenue by : Shri Shishir Shrivastava सुिवाई की तारीख / Date of Hearing : 23-01-2023 घोर्णा की तारीख / Date of Pronouncement : 20-02-2023 आदेश / ORDER PER S.S. VISWANETHRA RAVI, JM : This appeal by the assessee against the final assessment order dated 28-12-2020 passed by the ACIT, Central Circle-1(3), Pune (the AO) u/s. 143(3) r.w.s. 144C(13) of the Act for assessment year 2016-17. 2. Ground Nos. 1, 2.1 and 2.3 are general in nature, hence, require no adjudication. 2 ITA No.49/PUN/2021, A.Y. 2016-17 3. The ld. AR submits that the assessee is not interested to prosecute ground Nos. 2.2, 2.6, 3.4 and 5. Hence, the same are dismissed as not pressed. 4. Brief facts of the case are that the assessee is a private limited company engaged in the business of Gems and Jewellery. The assessee conducts its business under the name and style as “P.N. Gadgil Jewellers Private Limited”. The assessee company purchases gold and silver bullion diamonds, precious and semi-precious stones from market and handover the same to various job workers making ornaments. The assessee also engaged in sale of gold and silver bullions and loose diamonds, precious and semi-precious stones. The assessee filed its return of income declaring a total income of Rs.10,20,89,450/- and under scrutiny after following statutory notices u/s. 143(2) and 142(1) of the Act determined total income of the assessee at Rs.21,05,60,210/- inter alia making transfer pricing adjustment on corporate guarantee, arm’s length price of international transactions and specified domestic transactions to an extent of Rs.11,00,57,203/-. 5. During the year under consideration, the assessee entered into the international transactions and specified domestic transactions with its AEs which is evident from para 4 of the TPO’s order, amongst which the only dispute is with regard to sale of goods, purchase of gold, diamonds and ornaments and remuneration to directors in this appeal. The assessee benchmarked the purchase and sale of transactions with its AEs using CUP method, but however, for having proper documentation with regard to the said method, the TPO rejected the same and applied TNMM as the most appropriate method as it was adopted in A.Ys. 2013-14 and 2014-15 as it was brought to our notice there was no objection by the assessee for 3 ITA No.49/PUN/2021, A.Y. 2016-17 application of TNMM. Considering the same method, the AO computed PLI by taking the assessee as tested party determined margin at 1.82% which is evident from the chart at page 4 of the TPO’s order. Further, we note by adopting filters as taken in A.Y. 2015-16 for selection of comparables, the TPO accepted Titan Company Ltd. and rejected the Tribhovandas Bhimji Zaveri Limited being out of 10% to 60% inventory filter as comparable which is evident from page 17 of the TPO’s order. Since, the assessee’s margin is lower than the margin of comparables, the TPO asked the assessee to explain why the adjustment should not be done by applying PLI of comparable which is evident from TPO’s comments at page 15 of the TPO’s order, by taking margin amongst percentile, the TPO arrived at PLI of comparables at 3.01% and proposed transfer pricing adjustment as against 1.82% of assessee. The DRP directed TPO to verify the incorrect computation operating profits margins of comparables be that of operating margin of assessee. Following the said direction the TPO given relief by reducing the transfer pricing adjustment from Rs.1,12,30,56/- to Rs.96,26,642/-. Against which the assessee is before us for exclusion of Titan Company Ltd. by way of ground No. 2.4 and for inclusion of Tribhovandas Bhimji Zaveri Limited by way of ground No. 2.5. 6. Ground No. 2.4 raised by the assessee is with regard to exclusion of Titan Company Ltd. 7. The ld. AR submits that the Titan Company Ltd. engaged in wide range of products that the watch, jewellery, eyewear and others and drew our attention to pages 373 and 451 of the Paper Book-I. He argued that the assessee is engaged in the business of gems and jewellery. Further, the Titan Engineering and Automation Limited was incorporated on 24-03- 2015 to acquire the Precision Engineering through a court approved 4 ITA No.49/PUN/2021, A.Y. 2016-17 scheme of arrangement and drew our attention to page 366 of the Paper Book-I. He argued that the said incorporation is an extra ordinary event and cannot be comparable with the assessee company. Further, referring to high brand value of Titan Company Ltd. he submits that the Tata brand is an associated with the Titan Company Ltd. and its brand value of Tata increased to 14.2 bullion USD. The ld. AR drew our attention to the decision of Hon’ble High Court of Delhi in the case of Avaya India (P.) Ltd. reported in 416 ITR 638 (Delhi) which was affirmed by the Hon’ble Supreme Court in SLP No. 15267 of 2020 vide order dated 18-12-2020 and drew our attention to page 595 of the Paper Book-II. At the outset, he argued the functions of Titan Company Ltd. are entirely different as that of assessee company as the Titan Company Ltd. is engaged in manufacturing and sale of various products apart from jewellery. 8. The ld. DR submits that the assessee was established in 1832 and has brand value than the Titan Company Ltd. He drew our attention to page 109 of the paper book and argued that the tangible assets in the form of goodwill shows the brand value of the assessee. 9. We note that the notes on financial statement of the assessee at page 6 of the Paper Book-I, shows that the assessee is engaged in retail sales of all types of gems, diamonds, semi-precious stones, precious stones and other types of jewellery of gold, silver and other precious stones, whereas, the Titan Company Ltd. is engaged in various manufacturing activities apart from gelwellery which is evident from Annual Report for F.Y. 2015-16 at page 376 of the paper book. On an examination of the same the Titan Company Ltd. is engaged in eyewear, watches and accessories apart from jewellery. Page 3 of the paper book which is profit and loss account of the assessee for the year under consideration the net revenue operations at 5 ITA No.49/PUN/2021, A.Y. 2016-17 Rs.21,62,45,65,606/-, the other income which consists of interest received, profit on foreign exchange difference and share of profit in partnership firm and other receipts, the details of which are at page 26 of the paper book. The financials of Titan Company Ltd. is at page 399 of the paper book, where the total net sales are of Rs.1,126,453/- lakhs amongst which the jewellery net sales are Rs.870,798/- lakhs. The said segment wise performance of the Titan Company Ltd. clearly shows that the jewellery division is the major activity in the Titan Company Ltd. compared to other segments like watches, eyewear etc. We note that the Titan Company Ltd. was incorporated in the year 1984, whereas the assessee’s existence shows 1832 which is evident from small compilation paper book. 10. Coming to the brand value of Tata group of which Titan Company Ltd. belongs, we find 2018 report of brand finance showing Tata brand value rising 9% from last year to US$14.2 billion which is at pages 965 to 968 of the paper book. On perusal of the said report of brand finance which reads as the Tata brand continues to be India’s most valuable brand according to the annual assessment by brand finance which is the world’s leading brand valuation and strategy consultancy. Further, the brand value for 2017 was at $13.1 billion which has surged to $14.2 billion in 2018. We note that the said brand value strength is understood and evaluated through a balanced scorecard of factors such as marketing investment, stakeholder equity and business performance. It is also mentioned that there are 30 companies under the Tata group. The ld. AR vehemently argued that the assessee cannot be compared with a Tata group company, i.e. Titan Company Ltd. as comparable taking into account the brand value of Tata group. The Hon’ble High Court of Delhi in the case of Avaya India (P.) Ltd. (supra) at page 595 of the paper book, which, held the companies having high brand value and operated on a 6 ITA No.49/PUN/2021, A.Y. 2016-17 huge economic upscale were to be excluded as comparables. The ld. DR did not dispute that the SLP against the said decision of Hon’ble High Court of Delhi was dismissed by the Hon’ble Supreme Court. Therefore, we hold that the Titan Company Ltd. is functionally different from the assessee’s functions and being a high brand value of Tata group, is not comparable. Therefore, we direct the AO/TPO/DRP to exclude the Titan Company Ltd. from the final set of comparables. Thus, ground No. 2.4 raised by the assessee is allowed. 11. Ground No. 2.5 raised by the assessee is with regard to inclusion of Tribhovandas Bhimji Zaveri Limited. 12. We note that the assessee contended before the TPO that the Tribhovandas Bhimji Zaveri Limited is functionally comparable as it is also engaged in the business of manufacturing, sale and trading of gold and diamond jewellery. In support of that the assessee placed reliance in support of its contention that the Tribhovandas Bhimji Zaveri Limited is functionally comparable to the functions of assessee on annual report for F.Y. 2015-16 (A.Y. 2016-17) which is evident from page 14 of the TPO’s order. Before the DRP, it was contended that the application of inventory to operating revenue is not appropriate as that of number of showroom across the country does not have any effect on the inventory to operating revenue ratio of the company. The DRP by following order for A.Y. 2015-16 in assessee’s own case having holding no change in the facts of the case, application of filter of ratio of inventory to operating revenue between 10% to 60% is held to be correct. Further, it also held that the view of TPO is correct that the business model does affect the ratio of inventory to operating revenue. Further, we note that the DRP observed that the filter chosen by the TPO is reasonable can only be compared with business 7 ITA No.49/PUN/2021, A.Y. 2016-17 having similar model vide pra 6.2 of the DRP’s order. Before us, the ld. AR drew our attention to page 817 of the paper book and submits that the inventory was increased due to opening of one new showroom during the year in the case of Tribhovandas Bhimji Zaveri Limited. Admittedly, the said Tribhovandas Bhimji Zaveri Limited was accepted as comparable in A.Y. 2015-16 as inventory to turnover ratio was below 60% and in the present year under consideration, the said inventory turnover ratio is beyond 60% i.e. 68.04%. We note that the details of inventory of said Tribhovandas Bhimji Zaveri Limited is placed at pages 896 and 897 of the paper book which clearly shows the value of inventory for the year under consideration is 1,12,564.02 lakhs as on 31-03-2016 and turnover is at page 897 of the paper book which shows 1,65,431.05 lakhs which is admittedly beyond 68% of the turnover. The contention of TPO/DRP is that the same filter applied in A.Y. 2015-16 which was below 60% of inventory to turnover over ratio admittedly the said Tribhovandas Bhimji Zaveri Limited was accepted as comparable. In the year under consideration except stating that the inventory increased due to opening of new showroom, there is no other reason why filter 10 to 60% should not be applied, before all the authorities including this Tribunal. Therefore, we reject the arguments of ld. AR that the TPO/DRP arbitrarily applied the filter 10-60%. Thus, we uphold the final assessment order passed by the AO/TPO/DRP in rejecting the Tribhovandas Bhimji Zaveri Limited as comparable. Thus, ground No. 2.5 raised by the assessee fails and it is dismissed. 13. Ground No. 2.7 raised by the assessee is with regard to considering finance cost, donation, loss on sale of asset and CSR expenditure as non- operating expenses. 8 ITA No.49/PUN/2021, A.Y. 2016-17 14. In this regard, the ld. AR drew our attention to the order of this Tribunal in the case of M/s. Extentia Information Technology Pvt. Ltd. in ITA No. 2331/PUN/2017 for A.Y. 2013-14 vide order dated 04-03-2020 at page 969 of the Paper Book-3 and argued that this Tribunal held that the expenses which were made out of operating expenses should be excluded while calculating the PLI of the assessee. We note that the assessee claimed the finance cost, donation, loss on sale of asset and CSR expenses as non-operating expenses which is evident from page 4 of the TPO’s order and details are at pages 3 and 29 of the Paper Book-I. Admittedly, the TPO considered the same in calculating the PLI as operating expenses for arriving at profit margin in the process determination of the ALP. Therefore, by following the order of this Tribunal in the case of M/s. Extentia Information Technology Pvt. Ltd. (supra), we direct the TPO/DRP to exclude the said expenses from operating expenses for the purpose of calculation of ALP. Thus, ground No. 2.7 raised by the assessee is allowed. 15. The issues in ground Nos. 3.1, 3.2 and 3.3 in ground No. 3 raised by the assessee challenging the transfer pricing adjustment on account of specified domestic transactions pertaining to payment of director remuneration. 16. The ld. AR submits that the issues raised in ground No. 3 are covered in faour of the assessee in assessee’s own case for A.Y. 2014-15 vide order dated 04-09-2019 in ITA No. 1891/PUN/2018. Following the same, the Tribunal in assessee’s own case in A.Y. 2015-16 held the benchmarking the specified domestic transactions of director remuneration is not sustainable and drew our attention to page 176 of the Paper Book-I. The ld. DR did not dispute the same and no contrary view brought on record. On perusal of the said order, the Tribunal decided the issue from 9 ITA No.49/PUN/2021, A.Y. 2016-17 paras 9 to 12 of the said order. We note that the Tribunal in A.Y. 2015-16 followed the order of this Tribunal in assessee’s own case for A.Y. 2014-15, wherein, the Tribunal held while accepting the TNMM as the most appropriate method at entity level involving aggregated approach isolation of specified domestic transactions of director remuneration for separate benchmarking is improper. The relevant portion at paras 9 to 12 of the said order is reproduced as under for ready reference : “9. Ground no.3 relates to the transfer pricing adjustment of Rs.4,73,65,411/- on account of Specified Domestic Transaction of Director’s Remuneration. On this issue, the case of the assessee is that the said adjustment determined by the TPO is excessive. Further, it is the case of the assessee that the Assessing Officer/TPO accepted the TNM Method as the most appropriate method at the entity level. While accepting the same at the entity level involving aggregated approach, an attempt of the TPO to isolate the specified domestic transactions of director’s remuneration for separate benchmarking is improper as the same is against the principle of subsuming. No particulars method is applied by the TPO/Assessing Officer for benchmarking the same and no sustainable comparables were chosen for benchmarking the said transactions. 10. Further, it is the case of the AR for the assessee before us that similar benchmarking exercise were undertaken with specified domestic transaction of director’s remuneration and the fate of the said adjustments decided in favour of the assessee by the Tribunal in assessee’s own case for the assessment year 2014-15 vide ITA No.1891/PUN/2018 order dated 04.09.2019. A copy of the same is placed at page 171 of the Paper Book – I. In this regard, ld. Counsel for the assessee brought our attention to the ground no.9 and read out the relevant paras relate to the granting of relief to the assessee considering the another order of the Tribunal in the case of Hindustan Unilever Limited vs. Addl.CIT in ITA No.7868/Mum/2010 for the assessment year 2006-07 dated 10.12.2012. 11. On hearing both the parties on this issue, we find, the Tribunal granted relief on similar transactions of specified domestic transactions of directors remuneration. For the sake of completeness, the ground no.9 as well as its related paras are extracted hereunder :- “Ground : 9. Inappropriately not aggregating the specified domestic transaction pertaining to payment of director's remuneration while applying TNMM. Erred on the facts and in circumstances of the case and in law by not aggregating the specified domestic transaction pertaining to payment of director's remuneration while applying TNMM. Related paras extracted showing the decision of the Tribunal in favour of the assessee: 10 ITA No.49/PUN/2021, A.Y. 2016-17 9. Coming to second issue vide ground of appeal No.9, the learned Authorized Representative for the assessee stated that once entity level results are taken up, then the margins are higher and the Directors remuneration would get subsumed in the same and no separate adjustment in this regard is to be made. For this, he placed reliance on the decision of Mumbai Bench of Tribunal in the case of Hindustan Unilever Limited Vs. Addl.CIT in ITA No.7868/Mum/2010, relating to assessment year 2006-07, order dated 10.12.2012. The learned Authorized Representative for the assessee pointed out that in case grounds of appeal No.7 and 9 are decided in favour of assessee, then the issue of proportionate adjustment raised vide ground of appeal No.8 would become academic. 10. The learned Departmental Representative for the Revenue on the other hand, strongly placed reliance on the orders of authorities below with special reference to the order of DRP. ........ 15. Now, coming to the linked issue of payment of Directors remuneration, in case entity level results are taken and where the margins were within arm's length price, then no separate adjustment merits to be made on account of Directors remuneration, as the said expenditure subsumed. In this regard, we find that Mumbai Bench of Tribunal in the case of Hindustan Unilever Limited Vs. Addl.CIT (supra) had deliberated on the issue and held that if benchmarking was being done at the entity level either for the AE transactions or for the entire transactions, then there was no requirement for further adjustment as all the adjustments made by Assessing Officer / TPO would get automatically subsumed including those adjustments also relating to royalty, etc. as done by the TPO. Applying the said principle, we hold that no separate adjustment is to be made on account of Directors remuneration in the hands of assessee. In view thereof, we allow grounds of appeal No.7 and 9 raised by assessee and ground of appeal No.8 becomes academic and the same is dismissed.” 12. From the above, it is evident that the benchmarking of the specified domestic transactions of director’s remuneration while accepting the aggregated results, is not sustainable. The decision of the Mumbai Bench of the Tribunal in the case of Hindustan Unilever Limited (supra) helps the assessee. Therefore, ground no.3 should be allowed in favour of the assessee as a covered case. Accordingly, we order. Thus, the ground no.3 is allowed.” 17. In the light of the above, the benchmarking of specified domestic transactions of director’s remuneration for separate benchmarking is not maintainable. Following the same, we hold the final assessment order is not justified. Thus, ground No. 3 consisting of issues in 3.1, 3.2 and 3.3 raised by the assessee are allowed. 11 ITA No.49/PUN/2021, A.Y. 2016-17 18. In view of our decision in ground No. 3, the ground Nos. 2.8 and 2.9 raised by the assessee becomes academic, requiring no adjudication. 19. In the result, the appeal of assessee is partly allowed. Order pronounced in the open court on 20 th February, 2023. Sd/- Sd/- (R.S. Syal) (S.S. Viswanethra Ravi) VICE PRESIDENT JUDICIAL MEMBER पुणे / Pune; ददिांक / Dated : 20 th February, 2023. रधव आदेश की प्रधतधलधप अग्रेधर्त / Copy of the Order forwarded to : 1. अपीलार्थी / The Appellant. 2. प्रत्यर्थी / The Respondent. 3. The CIT(DRP-3), Mumbai-2 4. The Pr. CIT concerned. 5. धवभागीय प्रधतधिधि, आयकर अपीलीय अधिकरण, “सी” बेंच, पुणे / DR, ITAT, “C” Bench, Pune. 6. गार्ा फ़ाइल / Guard File. //सत्याधपत प्रधत// True Copy// आदेशािुसार / BY ORDER, वररष्ठ धिजी सधचव / Sr. Private Secretary आयकर अपीलीय अधिकरण ,पुणे / ITAT, Pune
Other Referred Cases
Avaya India (P.) Ltd. vs. Addl.CIT, Hindustan Unilever Limited vs. Addl.CIT
Laws Referred To
Income Tax Act
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1:1 Consultation on Salary Structuring
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1:1 Consultation on Startup Compliance
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Research Collaboration Agreement
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