THE ACIT 16(3), MUMBAI V. M/S. TEJ DIAM, MUMBAI

ITA 5034/MUM/2007

• Counselvise Citation: [2007] 113 COUNSELVISE.COM (IT) 9464 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-02-2007
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: L
• Next Hearing Date: 26-11-2009
• Assessment Year: 2004-2005
• Appeal Filed On: 19-07-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction
• Section: 92C; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L, MUMBAI. BEFORE SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER A ND SHRI R.S. PADVEKAR, JUDICIAL MEMBER. I.T.A. NO. 50 34/MUM/2007 ASSESSMENT YEAR : 2004-05. ADDL. COMMISSIONER OF M/S TEJ DIAM, INCOME TAX-16(3), VS. 1101, PRASAD CHAMBERS, MUMBAI. OPERA HOUSE, MUMBAI 400 004. PAN AAAFT2830P APPELLANT RESPONDENT APPELLAN T BY : SHRI AARSI PRASAD. RESPONDENT BY : SHRI VIJAY MEH TA. O R D E R PER J. SUDHAKAR REDDY, A.M. THIS IS AN APPEAL FILED BY THE ASSESSEE DIRECTED AGAINST THE ORDER OF THE CIT(APPEALS)-XVII, MUMBAI DATED 16-04- 2007 FOR THE ASSESSMENT YEAR 2004-05. 2. FACTS IN BRIEF : THE ASSESSEE IS A PARTNERSHIP FIRM AND IS IN THE BUSINESS OF IMPORT AND EXPORT OF DIAMONDS. DURING THE YEAR UNDE R CONSIDERATION THE ASSESSEE HAS ENTERED INTO AN INTERNATIONAL TRANSACT ION WITH M/S HARIZON DIAMOND B.V. BELGIUM WHICH IS OWNED AND CONTROLLED BY M/S JITENDRA SHAH WHO IS THE BROTHER OF THE PARTNER MR. VINIT SH AH, OF THE FIRM. THE ASSESSEE FILED A AUDITED REPORT IN FORM NO. 3CEB. I T ADOPTED THE CUP METHOD FOR COMPUTING THE ARMS LENGTH PRICE OF THE I NTERNATIONAL 2 TRANSACTION. THE TPO ON THE GROUND THAT, THE ASSESS EE HAS NOT GIVEN ANY COMPARABLES, HAD REJECTED THE METHOD FOLLOWED BY TH E ASSESSEE AND HE USED THE TRANSACTION NET MARGIN METHOD (TNMM). IN THE TPOS ORDER U/S 92A(3) DATED 22-12-2006, AN ADJUSTMENT OF RS.44 LAKHS HAS BEEN SUGGESTED WHILE ADOPTING THE TRANSACTION NET MARGIN METHOD. THE AO CONSIDERED OPERATING MARGINS TO SALE OF VARIOUS EN TERPRISES AND ARRIVED AT A CONCLUSION THAT AN ADJUSTMENT WAS CALLED FOR UNDE R THE TRANSFER PRICING REGULATIONS. THE AO SIMPLY ADOPTED THE REPORT OF TH E TPO. ON APPEAL, THE FIRST APPELLATE AUTHORITY HELD THAT IF NON OPE RATIONAL PROFITS ARE EXCLUDED, THE PRICE VARIATION WOULD BE LESS THAN 5% AND IN VIEW OF THE BOARDS CIRCULAR, NO ADJUSTMENT IS CALLED FOR. HE D ELETED THE ADDITION. AGGRIEVED, THE REVENUE IS IN APPEAL ON THE FOLLOWIN G GROUND : THAT THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FA CTS IN DELETING THE ADDITION OF RS.44,00,000/- MADE ON ACCOUNT OF T RANSFER PRICING ADJUSTMENT U/S 92CA(3) OF THE I.T. ACT, 1961 AS WOR KED OUT BY THE TRANSFER PRICING OFFICE. 3. MR. AARSI PRASAD, THE LEARNED, DR, SUBMITTED TH AT THE REJECTION OF CUP METHOD BY THE TPO IS NOT UNDER CHA LLENGE. ON THE CONTRARY, HE POINTED OUT THAT THE ASSESSEE HAD ACCE PTED THAT ON THE FACTS OF THE CASE, THE ASSESSEE HAD COMMITTED AN ERROR IN AD OPTING CUP METHOD. NOW COMING TO THE TNM METHOD, THE LEARNED DR SUBMIT TED THAT THE CIT(APPEALS) HAS COMMITTED ERROR IN ELIMINATING THE HIGHEST COMPARABLES AND NOT ELIMINATING THE LOWEST COMPARABLES. ON A QU ERY FROM THE BENCH AS TO WHETHER THE AO IS AUTHORISED TO ADOPT GROSS M ARGINS OF ONE ENTERPRISES UNDER TNM METHOD, THE LEARNED DR SUBMIT TED THAT THE TRANSACTION DETAILS WERE NOT AVAILABLE AND UNDER TH OSE CIRCUMSTANCES ENTERPRISES LEVEL OPERATING PROFITS CAN BE ADOPTED. 3 4. THE LEARNED COUNSEL FOR THE ASSESSEE, SHRI VIJA Y MEHTA, ON THE OTHER HAND, SUBMITTED THAT EVEN IN THE METHOD A DOPTED BY THE AO, THE ERRORS HAVE CREPT IN AS NON OPERATIONAL PROFITS HAV E NOT BEEN EXCLUDED WHILE COMPUTING THE PERCENTAGE OF OPERATING PROFITS . HE SUBMITS THAT IF THE NON OPERATIONAL PROFITS ARE EXCLUDED, THEN THE VARIATION IS BELOW 5% AND IN VIEW OF THE CBDT CIRCULAR, THE CIT(APPEALS) WAS RIGHT IN HOLDING THAT NO ADJUSTMENT IS CALLED FOR. 5. COMING TO THE ISSUE WHETHER TNM METHOD ALLOWS T HE AO TO TAKE THE PROFITS AT ENTERPRISES LEVEL, HE SUBMITTED THAT THE METHODOLOGY IS AGAINST THE PROVISIONS OF THE ACT. 6. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDERA TION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND A PERUSAL O F THE PAPERS ON RECORD AND THE ORDERS OF THE AUTHORITIES BELOW, WE HOLD AS FOLLOWS. 7. THE FOLLOWING DEFINITIONS ARE EXTRACTED FOR REA DY REFERENCE : SECTION 92F(II) ARMS LENGTH PRICE: ARMS LENGTH PRICE MEANS A PRICE WHICH IS APPLIE D OR PROPOSED TO BE APPLIED IN A TRANSACTION BETWEEN PERSONS OTHER T HAN ASSOCIATED ENTERPRISES, IN UNCONTROLLED CONDITIONS. (V) - TRANSACTION. TRANSACTION INCLUDES AN ARRANGEMENT, UNDERSTANDING OR ACTION IN CONCERT,- (A) WHETHER OR NOT SUCH ARRANGEMENT, UNDERSTANDING OR A CTION IS FORMAL OR IN WRITING; OR (B) WHETHER OR NOT SUCH ARRANGEMENT, UNDERSTANDING OR A CTION IS INTENDED TO BE ENFORCEABLE BY LEGAL PROCEEDING. 4 RULE 10B SUB CLAUSE (E) TRANSACTION AT MARGIN MET HOD: ( E ) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, ( I ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSO CIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRE D OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY TH E ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT B ASE; ( II ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COM PUTED HAVING REGARD TO THE SAME BASE; ( III ) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE ( II ) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERN ATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSAC TIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACT IONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MA RGIN IN THE OPEN MARKET; ( IV ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE AND REFERRED TO IN SUB-CLAUSE ( I ) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE ( III ); ( V ) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TA KEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELAT ION TO THE INTERNATIONAL TRANSACTION. 8. A PLAIN READING OF THE ABOVE SHOWS THAT TNMM RE QUIRES COMPARISON OF NET PROFIT MARGINS REALISED BY AN ENT ERPRISE FROM AN INTERNATIONAL TRANSACTION OR AN AGGREGATE OF INTERN ATIONAL TRANSACTIONS AND NOT COMPARISONS OF OPERATING MARGINS OF ENTERPRISES . FOR ARRIVING AT THIS CONCLUSION, WE DREW STRENGTH FROM THE DECISION OF M UMBAI L BENCH OF THE TRIBUNAL IN THE CASE OF UCB INDIA P. LTD. VS. A CIT 121 ITD 131 (MUM.) WHERE IT IS HELD THAT SECTION 92C READ WITH RULE 10B(1)(E) DEALS WITH TRANSACTIONS NET MARGIN METHOD (TNMM) AND IT REFERS TO ONLY NET PROFIT MARGIN REALISED BY AN ENTERPRISE FROM AN INT ERNATIONAL TRANSACTION 5 OR A CLASS OF SUCH TRANSACTION, BUT NOT OPERATIONAL MARGINS OF ENTERPRISES AS A WHOLE. 9. RESPECTFULLY FOLLOWING THE SAME, WE HOLD THAT T HE TPO AS WELL AS THE AO HAVE COMMITTED AN ERROR BY WRONGLY A PPLYING TRANSACTION NET MARGIN METHOD. THUS WE UPHOLD THE ORDER OF THE CIT(APPEALS), THOUGH FOR DIFFERENT REASONS. 10. IN THE RESULT, THE APPEAL OF THE REVENUE IS DI SMISSED. ORDER PRONOUNCED ON THIS 15 TH DAY OF FEBRUARY, 2010. SD/- SD/- (R.S. PADVEKAR) (J. SUDHAKAR REDDY) JUDICIAL MEMBER. ACCOUNTANT MEMBER. MUMBAI, DATED : 15 TH JANUARY, 2010. WAKODE COPY FORWARDED TO : 1. APPELLANT. 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, L-BENCH (TRUE COPY) BY ORDER ASSTT.REGISTRAR, ITAT, MUMBAI BENCHES