DINURJE JEWELLERY P. LTD, MUMBAI V. ITO 5(1)(3), MUMBAI

ITA 5875/MUM/2013

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 8020 (ITAT-MUMBAI)
• Duration Of Justice: 10 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-08-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Next Hearing Date: 24-07-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 03-10-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B P K
• Keywords: Business income; Transfer pricing; International transaction; Rule of consistency; Fair market value; Notional interest
• Section: 10AA; 115JB; 10B

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES K MUMBAI . . , / BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER AND . , SHRI D.KARUNAKARA RAO, ACCOUNTANT MEMBER . / ITA NO.5875/MUM/2013 / ASSESSMENT YEAR 2008-09 DINURJE JEWELLERY PVT. LTD. GE-8041/42, 8 TH FLOOR, GTOWER, BHARAT DIAMOND BROSE, G-BLOCK, BKC, BANDRA (E), MUMBAI 400 051 / VS. INCOME TAX OFFICER-5(1)(3), ROOM NO.525, 5 TH FLOOR, AAYKAR BHAVAN, MK ROAD, MUMBAI 400020 ! ./ '# ./ PAN/GIR NO. : AACCD3988P ( !$ / APPELLANT ) .. ( %&!$ / RESPONDENT ) . / ITA NO.6221/MUM/2013 / ASSESSMENT YEAR 2008-09 DY.COMMISSIONER OF INCOME-TAX 5(1), ROOM NO.568, 5 TH FLOOR, AAYKAR BHAVAN, MK ROAD, MUMBAI 400020 / VS. DINURJE JEWELLERY PVT. LTD. GE-8041/42, 8 TH FLOOR, GTOWER, BHARAT DIAMOND BROSE, G-BLOCK, BKC, BANDRA (E), MUMBAI 400 051 ! ./ '# ./ PAN/GIR NO. : AACCD3988P ( !$ / APPELLANT ) .. ( %&!$ / RESPONDENT ) ASSESSEE BY: SHRI. JITENDRA JAIN REVENUE BY : SHRI B.P.K.PANDA ( ) / DATE OF HEARING : 31/07/2014 *+ ( ) / DATE OF PRONOUNCEMENT : 08/08/2014 , / O R D E R . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 2 PER I.P.BANSAL, J.M: THESE ARE CROSS APPEALS AND THEY ARE DIRECTED AGAI NST ORDER OF LD. CIT(A)- 15 MUMBAI DATED 7/8/2013 FOR ASSESSMENT YEAR 2008-0 9. GROUNDS OF APPEAL IN BOTH THE APPEALS READ AS UNDER: GROUNDS OF ASSESSEES APPEAL IN ITA NO.5875/MUM/201 3: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A) HAS ERRED IN LAW AND IN FACTS IN CONFIRMING THE ADDITION OF RS. 4,52 ,51,272/- MADE BY THE ASSESSING OFFICER (AO) / TRANSFER PRICING OFFICER (TPO) TOWAR DS ADJUSTMENT ON ACCOUNT OF ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTION IN JEWELLERY MANUFACTURING DIVISION OF THE ASSESSEE COMPANY. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A) HAS ERRED IN LAW AND IN FACTS IN REJECTING THE ASSESSEES CONTENTION S TO EXCLUDE THREE COMPANIES VIZ. ASIAN STAR CO. LTD., SU-RAJ DIAMOND INDUSTRIES LTD. AND GOLDIAM JEWELLERY LIMITED FROM THE COMPARABLE FOR DETERMINATION OF MEAN PLI O F THE COMPARABLE ENTITIES. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A) HAS ERRED IN LAW AND IN FACTS IN CONFIRMING THE ACTION OF THE AO/TPO IN TAKING ROCE AS THE APPROPRIATE PLI INSTEAD OF TNMM CONSIDERED BY THE ASSESSEE AS APPROPRIATE PLI IN THIS CASE. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A) HAS ERRED IN LAW AND IN FACTS IN REJECTING THE ASSESSEES CONTENTION THAT THE TPO HAD WRONGLY MADE ADDITION OF TP ADJUSTMENT RELATABLE TO ENTIRE SALES INSTEAD OF LIMITING IT TO AN AMOUNT CORRESPONDING TO THE INTERNATIONAL TRANSACTION ONLY . 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A) HAS ERRED IN LAW AND IN FACTS IN CONFIRMING ADDITION OF RS. 7,02,95, 833/- MADE BY AO/TPO TOWARDS ADJUSTMENT ON ACCOUNT OF ALP OF INTEREST ON DEBTS R ECEIVABLE FROM ASSOCIATED ENTERPRISES (AES). 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A) HAS ERRED IN LAW AND IN FACTS IN NOT ADMITTING THE ADDITIONAL EVIDEN CE FILED BY THE ASSESSEE UNDER RULE 46A OF THE INCOME TAX RULES ON THE ISSUE OF IN TEREST ON RECOVERABLE DEBTS FROM AES. GROUNDS OF REVENUES APPEAL IN ITA NO.6221/MUM/2013 : 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN UPHOLDING THE ASSESSEES CLAIM THAT PR OFIT U/S. 10A IS NOT LIABLE TO BE INCLUDED IN BOOK PROFIT COMPUTED U/S.115JB OF THE A CT AND IGNORING THE AMENDMENT BY FINANCE ACT, 2007 W.E.F. 01.04.2008 WHEREBY THE WORDS 10A AND 10B HAVE BEEN OMITTED FROM EXPLANATION 1(F) AND 9II) OF SECTION 1 15JB OF THE ACT, THEREBY BRINGING THE PROFIT/LOSS OF 10A AND 10B UNITS WITHIN THE PUR VIEW OF MAT.? . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 3 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN HOLDING THAT INSPITE OF OMISSIO N OF WORDS 10A AND 10B IN EXPLANATION 1(F) AND (II) OF SECTION 115JB BY FINAN CE ACT, 2007 W.E.F. 01.04.2008, ASSESSEE WILL NOT BE LIABLE FOR TAX U/S. 115JB OF T HE ACT AS ITS UNIT IS IN THE SPECIAL ECONOMIC ZONE AND HENCE COVERED WITHIN THE EXEMPTIO N PROVIDED IN CLAUSE (6) OF SECTION 115JB OF THE ACT? 3. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) HAS ERRED IN HOLDING THAT THE ASSESSEES 10A PROFIT IS NOT LIABLE FOR TAX U/S.115JB OF THE ACT, IN VIEW OF CLAUSE (6) THEREOF WITHOUT APPR ECIATING THAT CLAUSE (6) HAS BEEN INSERTED BY SPECIAL ECONOMIC ZONES ACT 2005 W.E.F. 10.02.2006 CONCURRENTLY WITH THE INSERTION OF SECTION 10AA, ALSO BY THE SPECIAL ECONOMIC ZONES ACT, 2005 W.E.F. 10.2.2006. HENCE CLAUSE (6) OF SEC.115JB IS APPLIC ABLE ONLY TO 10AA UNITS AND NOT TO 10A UNITS, AS DUE TO AMENDMENT TO CLAUSES (F) A ND (II) OF EXPLANATION OF 1 OF SECTION 115JB BY THE FINANCE ACT, 2007, PROFIT / LO SS OF 10A AND 10B UNITS HAVE BEEN EXPRESSLY BROUGHT WITHIN PURVIEW OF MAT EFFECT IVE FROM A.Y.2008-09? 4 WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) HAS ERRED IN NOT CONSIDERING THE CLARIFICATION GIVEN IN PARA 44 OF THE BOARDS CIRCULAR 3/2008 REGARDING AMENDMENT IN SEC. 115JB BY THE FIN ANCE ACT, 2007 WHICH IS APPLICABLE TO THE ASSESSEES CASE IN ASSESSMENT YEA R UNDER CONSIDERATION.? 5. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN ALLOWING ASSORTMENT CHARGES TO THE EXT ENT OF 50% OF THE AMOUNT PAID TO ITS SISTER CONCERN COVERED UNDER SECTION 40A(2)(B) OF THE I.T. ACT, 1961 AND WAS WITHOUT HAVING NECESSARY SUPPORTING EVIENCE.? 2. THE ASSESSEE COMPANY IS ENGAGED IN THE MANUFACTU RE AND TRADING IN CUT AND POLISHED DIAMONDS LOCATED IN SEEPZ AS A UNIT NO TIFIED AS SEZ. IT ENTERED INTO FOLLOWING INTERNATIONAL TRANSACTION WITH ITS AES. SL.NO. PARTICULARS AMOUNT (RS.) 1. PURCHASE OF RAW MATERIALS (DIAMONDS, GOLD AND FINDINGS) 39,54,43,185 2. SALE OF DIAMONDS STUDDED JEWELLERY 47,87,31, 461 THE ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSAC TIONS WITH ITS AES ONLY WITH ITS SEEPZ UNDERTAKING IN MUMBAI. THE FINAL RESULT FOR FINANCIAL YEAR 2007-08, IN RESPECT OF JEWELLERY MANUFACTURING DIVISION AND SEE PZ UNDERTAKING AT MUMBAI ARE AS FOLLOWS: . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 4 PARTICULARS AMOUNT (RS.) SALES 57,75,96,195 EXCESS RECEIVED 2,06,281 OPERATING REVENUE 57,78,02,476 EXPENSES DEBITED TO PROFIT AND LOSS ACCOUNT 53,87,95,639 LESS: INTEREST 1,60,46,942 OPERATING EXPENSES 52,27,48,697 OPERATING PROFIT 5,50,53,779 2.1 THE ABOVE FINANCIALS WERE CONSIDERED BY THE TPO FOR THE PURPOSES OF TRANSFER PRICING ANALYSIS. THE ASSESSEE ADOPTED TN MM AS MOST APPROPRIATE METHOD. AS PER TRANSFER PRICING DOCUMENTATION THE ASSESSEE DID NOT CONSIDER ANY COMPARABLE COMPANY FOR TRANSFER PRICING STUDY. HOWEVER, VIDE SUBMISSIONS DATED 21/9/2011, TEN COMPANIES WERE CHOSEN AS FIN AL COMPARABLES AND INTERNATIONAL TRANSACTION WAS ANALYZED BY APPLYING TNMM AND BY ADOPTING OPERATING PROFIT TO OPERATING COST(OP/OC) AS APPROP RIATE PROFIT LEVEL INDICATOR (PLI). THE PLI TO COMPARABLE WERE COMPUTED ON THE BASIS OF MARGIN TAKEN FROM DATA FOR FINANCIAL YEAR 2007-08. THE PROFIT MARGIN OF THE ASSESSEE WAS COMPUTED AT 13.45% WHICH WAS HIGHER THAN THE ARITHMETIC MARG IN OF 7.75% ON COST OF THE COMPARABLES. THUS, IT WAS CLAIMED THAT THE TRANSAC TIONS OF THE ASSESSEE WITH ITS AE ARE AT ARMS LENGTH. 2.2 IT MAY BE MENTIONED HERE THAT TPO REJECTED FI VE COMPARABLE OUT OF TEN COMPARABLES ADOPTED BY THE ASSESSEE AND ADDED TWO COMPARABLES TO THE LIST OF THE ASSESSEE BY MAKING THE NUMBER OF COMPARABLE AT SEVEN. THE DETAILS OF THE COMPARABLES SELECTED BY THE ASSESSEE AND THE REASON S GIVEN BY T.P.O FOR ACCEPTANCE OR REJECTION OF THE COMPARABLE ARE AS UN DER: . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 5 SL.NO. NAME OF THE COMPANY REMARKS OF THE TPO 1 DIAGOLD DESIGNS LTD THE COMPANY MANUFACTURES AND EXPORTS DIAMOND AND CO LOR STONE STUDDED GOLD & SILVER JEWELLERY FROM INDIA. T HE RPTS CONSTITUTE LESS THAN 25% OF THE REVENUES. RPTS - RS . 0.56 CRORE. AS THE COMPANY IS FUNCTIONALLY SIMILAR, THE SAME IS CONSIDERED AS A COMPARABLE. 2 FINE JEWELLERY (INDIA) LTD. THE COMPANY IS INTO SALE OF JEWELLERY AND DIAMONDS. THE COMPANY IS PREDOMINANTLY IN SALE OF DIAMOND STUDDED GOLD JEWELLERY. THE RPTS CONSTITUTE LESS THAN 25% OF THE REVENUES. RPTS - RS. 0.84 CRORE. AS THE COMPANY IS FUNCTIONALLY SIMILAR, THE SAME IS CONSIDERED AS A COMPARABLE. 3 GOLDIAM INTERNATIONAL LTD. THE COMPANY IS MAINLY INTO MANUFACTURE AND SALE OF JEWELLERY. THE RPTS CONSTITUTE LESS THAN 25% OF THE REVENUES. RPTS - RS.14.14 CRORE. BUT, THE COMPANYS REVENUES DECLINED DRASTICALLY RESULTING IN UNDERUTI LISATION OF ASSETS AND HUMAN RESOURCES, FOR WHICH ACCURATE ADJUSTMENTS CANNOT BE MADE. FURTHER, THE COMPANY AL SO HAS INCOME FROM INVESTMENT ACTIVITIES. SEGMENTAL RESULT S ARE NOT AVAILABLE. THUS THE COMPANY IS NOT CONSIDERED AS A COMPARABLE. 4 GOLDIAM JEWELLERY LTD. THE COMPANY IS A SUBSIDIARY OF GOLDIAM INTERNATIONA L LTD. THE COMPANY IS MAINLY INTO SALE OF JEWELLERY. THE R PTS CONSTITUTE LESS THAN 25% OF THE REVENUES. RPTS - RS .6.03 CRORE. AS THE COMPANY IS FUNCTIONALLY SIMILAR, THE SAME IS CONSIDERED AS A COMPARABLE. 5 GOLKUNDA DIAMONDS & JEWELLERY LTD THE COMPANY IS MAINLY INTO MANUFACTURING AND SALE O F STUDDED GOLD JEWELLERY AND ALSO TRADING IN CUT & PO LISHED DIAMONDS. THE RPTS CONSTITUTE LESS THAN 25% OF THE REVENUES. RPTS - RS.NIL. HOWEVER, THE MANUFACTURING SALES FROM JEWELLERY CONSTITUTES LESS THAN 75% OF THE REV ENUES (7O.44%). THUS THE COMPANY IS NOT CONSIDERED AS A COMPARABLE. 6 NEOGEM INDIA LTD THE COMPANY IS TRADING IN STUDDED JEWELLERY AND POL ISHED DIAMONDS. AS THE COMPANY IS FUNCTIONALLY DIFFERENT, THE SAME IS NOT CONSIDERED AS A COMPARABLE. 7 S B & T DESIGNS LTD THE COMPANY IS INTO SALE OF GOLD, DIAMOND & PRECIOU S STONE JEWELLERY. THE RPTS CONSTITUTE MORE THAN 25% OF THE REVENUES. RPTS - RS.15.83 CRORE. AS THE COMPANY FAI LS RPT FILTER, THE SAME IS NOT CONSIDERED AS A COMPARABLE. 8 S B & T INTERNATIONAL LTD THE COMPANY IS INTO TRADING IN GOLD, DIAMOND & PREC IOUS STONE JEWELLERY. THE RPTS CONSTITUTE MORE THAN 25% OF THE . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 6 REVENUES. RPTS - RS.33.43 CRORE. AS THE COMPANY FA ILS RPT FILTER, THE SAME IS NOT CONSIDERED AS A COMPARABLE. 9 SHANTIVIJAY JEWELS LTD THE COMPANY IS INTO SALE OF JEWELLERY ARTICLES. TUE RPTS CONSTITUTE LESS THAN 25% OF THE REVENUES. RPTS - RS . 3.79 CRORE. AS THE COMPANY IS FUNCTIONALLY SIMILAR, THE SAME IS CONSIDERED AS A COMPARABLE. 10 SHREEJI JEWELLERY LTD THE COMPANY IS INTO SALE OF GOLD JEWELLERY STUDDED WITH DIAMONDS. THE RPTS CONSTITUTE LESS THAN 25% OF THE REVENUES. RPTS - RS.0.27 CRORE. AS THE COMPANY IS FUNCTIONALLY SIMILAR, THE SAME IS CONSIDERED AS A C OMPARABLE THE DETAILS OF TWO COMPARABLES ADDED BY T.P.O IS AS UNDER: SL. NO NAME OF COMPANY REMARKS OF THE TPO 1 ASIAN STAR CO. LTD THE COMPANY HAS DIAMOND SEGMEN T AS WELL AS JEWELLERY SEGMENT. THE RPTS CONSTITUTE LESS THAN 25 % OF THE REVENUES. RPTS - 13.94 CRORES. THE JEWELLERY SEGMENT IS INTO MANUFACTURE OF GOLD, PLATINUM,DIAMO ND STUDDED JEWELLERY. THIS SEGMENT IS CONSIDERED AS A COMPARABLE. 2 SU-RAJ DIAMOND INDUSTRIES LTD THE COMPANY HAS PROCESSED DIAMOND AND GOLD JEWELLERY SEGMENTS. THE RPTS CONSTITUTE LESS THAN 2 5% OF THE REVENUES. RPTS - RS. 7.80 CRORE. THE GOLD JEWELLERY SEGMENT IS FUNCTIONALLY SIMILAR AND THE S AME IS CONSIDERED AS A COMPARABLE. 2.3 FINALLY THE TPO ADOPTED LIST OF SEVEN COMPARABL ES AND ARITHMETIC MARGIN OF SEVEN COMPARABLES WAS COMPUTED AT 25.56% AS PER FOL LOWING TABLE. SI NO. COMPANY AVERAGE CAPITAL EMPLOYED OPERATING REVENUE (RS. IN LACS) OPERATING PROFIT (RS. IN LACS) ROCE 1 GOLDIAM JEWELLERY LTD. 2139.89 5507.68 678.12 31.69% 2 SHREEJI JEWELLARY LTD. 5378.52 5906.72 208.56 3.88% 3 SHANTIVIJAY JEWELS LTD. 3224.94 6034.30 223.03 6.92% 4 ASIAN STAR CO. LTD (SEG.) 2113.37 7065.92 1340.52 63.43% . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 7 5 DIAGOLD DESIGNS LTD. 4303.72 7359.34 347.72 8.08% 6 FINE JEWELLERY (INDIA) LTD. 7355.67 7860.12 870.23 11.83% 7 SU-RAJ DIAMOND INDUSTRIES LTD (SEG.) 838.00 12230.00 445.00 53.10% ARITHMETICAL MEAN 25.56% 2.4 THE ASSESSEE OBJECTED TO THE INCLUSION OF ASIA N STAR COMPANY LTD. AND SU- RAJ DIAMONDS ON THE GROUND THAT THEY CANNOT BE TAKE N AS COMPARABLES. THE SUBMISSION OF THE ASSESSEE BEFORE TPO WITH REGARD T O THESE TWO COMPARABLES AND REJECTION THEREOF BY THE TPO IS AS UNDER: 1. ASIAN STAR COMPANY. 6.5.1 ASIAN STAR CO. LTD (SEG.) THE TAPAYER ARGUED THAT THIS COMPANY IS OPERATING A T MUCH HIGHER SCALE THAN THE TAXPAYER COMPANY. IT FURTHER ARGUED THAT THE TURNOV ER OF THE COMPANY DURING THE YEAR IS AT RS.1495.96 CRORES, OUT OF WHICH INDUSTRI AL SALES ARE AT RS. 1486.17 CRORES. THE COMPANY IS MAINLY ENGAGED IN DIAMOND SEGMENT. J EWELLERY SEGMENT CONSTITUTES ONLY 5.22% OF TOTAL TURNOVER FOR THE FY 2007- 08. T HE TAXPAYER RELIED ON THE DECISION OF ITAT, MUMBAI IN THE CASE OF DHL EXPRESS (INDIA) LTD T/SACIT, WHERE IT WAS HELD THAT WHEN DIRECT COMPARABLES ARE AVAILABLE, THERE I S NO NEED TO CONSIDER THE SEGMENTAL RESULTS. THE TAXPAYER ALSO STATED THAT CA PITAL EMPLOYED BY THE COMPANIES IN THE SEGMENTS IS NOT ASCERTAINABLE. THE TPO CONSIDERED ONLY JEWELLERY SEGMENT OF THE CO MPANY WITH ITS TURNOVER OF RS. 70.66 CRORES AND SEGMENTAL RESULTS CONTAINED IN THE AUDITED FINANCIALS OF THE COMPANY ARE CONSIDERED. THUS, IT CANNOT BE SAID THA T THE JEWELLERY SEGMENT IS OPERATING AT HIGHER SCALE AS THE SEGMENT TURNOVER O F THE COMPANY IS COMPARABLE TO THE TURNOVER OF THE TAXPAYER AT RS.58 CRORES. THUS, THE JEWELLERY SEGMENT IS COMPARABLE TO THE TAXPAYERS SEEPZ UNDERTAKING, AS THE COMPANYS JEWELLERY SEGMENT IS INTO MANUFACTURE AND SALE OF DIAMOND STU DDED GOLD JEWELLERY. FURTHER, CAPITAL EMPLOYED FOR EACH SEGMENT IS AVAILABLE IN T HE AUDITED FINANCIALS OF THE COMPANY AND THE SAME IS CONSIDERED BY THE TPO. AS T HE SEGMENTAL RESULTS ARE AUDITED, THE TAXPAYER OR THE TPO CANNOT QUESTION TH E RELIABILITY OF SUCH INFORMATION AVAILABLE IN THE AUDITED FINANCIALS. AS TRANSFER PRICING IS AN EXERCISE DEPENDENT ON FAC TS AND CIRCUMSTANCES OF A PARTICULAR CASE, THE DECISION OF HONBLE ITAT, MUMB AI IN THE CASE OF DHL EXPRESS (INDIA) LTD. FURTHER, THE ISSUE OF CONSIDERING SEGM ENTAL RESULTS HAS NOT YET REACHED A LEGAL FINALITY. THUS, THE COMPANYS JEWELLERY SEGMENT IS CONSIDERED AS A COMPARABLE AS IT IS FUNCTIONALLY SIMILAR TO THE TAXPAYER. 6.5.2 SU-RAJ DIAMOND INDUSTRIES LTD (SEG.) . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 8 THE TAXPAYER ARGUED THAT THIS COMPANY IS OPERATING AT MUCH HIGHER SCALE THAN THE TAXPAYER COMPANY. IT FURTHER ARGUED THAT THE TURNOV ER OF THE COMPANY DURING THE YEAR IS AT RS. 252.25 CRORES, OUT OF WHICH INDUSTRI AL SALES ARE AT RS. 247.20 CRORES. JEWELLERY SEGMENT CONSTITUTES ONLY 50.32% OF TOTAL TURNOVER FOR THE FY 2007-08. THE TAXPAYER RELIED ON THE DECISION OF ITAT, MUMBAI IN THE CASE OF DHL EXPRESS (INDIA) LTD VS ACIT, WHERE IT WAS HELD THAT WHEN DIRECT COM PARABLES ARE AVAILABLE, THERE IS NO NEED TO CONSIDER THE SEGMENTAL RESULTS. THE TAXP AYER ALSO STATED THAT CAPITAL EMPLOYED BY THE COMPANIES IN THE SEGMENTS IS NOT AS CERTAINABLE. THE TPO CONSIDERED ONLY JEWELLERY SEGMENT OF THE CO MPANY WITH ITS TURNOVER OF RS. 122.30 CRORES AND SEGMENTAL RESULTS CONTAINED IN TH E AUDITED FINANCIALS OF THE COMPANY ARE CONSIDERED. THUS, IT CANNOT BE SAID THAT THE JEWELLERY SEGMENT IS OPERATING AT HIGHER SCALE AS THE SEGMENT TURNOVER OF THE COMPANY IS COMPARABLE T O THE TURNOVER OF THE TAXPAYER AT RS. 58 CRORES. THUS, THE JEWELLERY SEGMENT IS CO MPARABLE TO THE TAXPAYERS SEEPZ UNDERTAKING, AS THE COMPANYS JEWELLERY SEGME NT IS INTO MANUFACTURE AND SALE OF DIAMOND STUDDED GOLD JEWELLERY. FURTHER, CA PITAL EMPLOYED FOR EACH SEGMENT IS AVAILABLE IN THE AUDITED FINANCIALS OF THE COMPA NY AND THE SAME IS CONSIDERED BY THE TPO. AS THE SEGMENTAL RESULTS ARE AUDITED, THE TAXPAYER OR THE TPO CANNOT QUESTION THE RELIABILITY OF SUCH INFORMATION AVAILA BLE IN THE AUDITED FINANCIALS. AS TRANSFER PRICING IS AN EXERCISE DEPENDENT ON FAC TS AND CIRCUMSTANCES OF A PARTICULAR CASE, THE DECISION OF HONBLE ITAT, MUMB AI IN THE CASE OF DHL EXPRESS (INDIA) LTD. FURTHER, THE ISSUE OF CONSIDERING SEGM ENTAL RESULTS HAS NOT YET REACHED A LEGAL FINALITY. THUS, THE COMPANYS JEWELLERY SEGMENT IS CONSIDERED AS A COMPARABLE AS IT IS FUNCTIONALLY SIMILAR TO THE TAXPAYER. 2.5 THE TPO ALSO OBJECTED TO THE ANALYSIS OF THE AS SESSEE REGARDING OP/OC AND HAS COME TO A CONCLUSION THAT MOST APPROPRIATE METH OD FOR COMPUTING PLI WILL BE RETURN ON CAPITAL EMPLOYMENT (ROCE). ADOPTING ROCE LD. TPO COMPUTED THE PLI OF THE ASSESSEE AS UNDER: AVERAGE CAPITAL EMPLOYMENT: PARTICULARS/ AMOUNT IN RS. SHARE CAPITAL (A) RESERVES AND SURPLUS (B) DEBT (C) INVESTMENTS (D) CAPITAL EMPLOYED (E)= A+B+C-D AS ON 01- 04-2007 10000000 262997872 320252684 29335500 563915056 AS ON 31- 03-2008 98300000 291562004 346046737 29335500 706573241 AVERAGE CAPITAL EMPLOYED 635244149 . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 9 COMPUTATION OF PLI: PARTICULARS AMOUNT IN RS. OPERATING REVENUES 57,78,02,476 OPERATING COST 52,27,48,697 OPERATING PROFIT 5,50,53,779 AVERAGE CAPITAL EMPLOYED 63,52,44,149 ROCE 8.67% 2.6 IN THE SIMILAR MANNER PLI AND ARITHMETIC MAR GIN OF SEVEN COMPARABLES CHOSEN BY TPO WAS COMPUTED AT 15.79% AS PER FOLLOWI NG TABLE. SI NO. COMPANY AVERAGE CAPITAL EMPLOYED OPERATING REVENUE (RS. IN LACS) OPERATING PROFIT (RS. IN LACS) ROCE 1 GOLDIAM JEWELLERY LTD. 2139.89 5507.68 678.12 31.69% 2 SHREEJI JEWELLARY LTD. 5378.52 5906.72 208.56 3.88% 3 SHANTIVIJAY JEWELS LTD. 3224.94 6034.30 214.81 6.66% 4 ASIAN STAR CO. LTD (SEG.) 5569.74 7065.92 1340.52 24.07% 5 DIAGOLD DESIGNS LTD. 4303.72 7359.34 350.36 8.14% 6 FINE JEWELLERY (INDIA) LTD. 7309.82 7860.12 489.93 6.70% 7 SU-RAJ DIAMOND INDUSTRIES LTD (SEG.) 1513.5 12230.00 445.00 29.40% ARITHMETICAL MEAN 15.79% 2.7 ON THE BASIS OF ABOVE FIGURES TPO WORKED OUT TP ADJUSTMENT OF RS.4,52,51,272/- AS UNDER: . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 10 ARMS LENGTH MEAN PLI OR ROCE 15.79% AVERAGE CAPITAL EMPLOYED BY THE TAXPAYER RS.63,52,44,149/-* ARMS LENGTH MEAN PLI 15.79% OF THE AVERAGE CAPITAL EMPLOYED ARMS LENGTH OPERATING PROFITS RS.10,03,05,051/- OPERATING PROFITS SHOWN BY THE TAXPAYER RS.5,50,53,779/- SHORTFALL BEING ADJUSTMENT U/S 92CA RS.4,52,51,272/ - 2.8 THE TPO FURTHER FOUND THAT ASSESSEE DID NOT CHA RGE INTEREST FROM ITS AE ON OUTSTANDING AMOUNT. IT WAS THE CONTENTION OF THE A SSESSEE THAT IT DOES NOT CHARGE INTEREST FROM ITS CUSTOMERS ON OUTSTANDIN G BALANCES AND IN THE SIMILAR MANNER INTEREST WAS NOT CHARGED FROM THE AES. HOW EVER, TPO HAS COME TO THE CONCLUSION THAT SUCH INTEREST WAS CHARGEABLE AND HE DETERMINED INTEREST RATE OF 14.18% PER ANNUM AND SINCE NO INTEREST WAS CHARGED ADDITION OF RS.7,02,95,833/- WAS COMPUTED TO BRING THE TRANSACT ION AT ARMS LENGTH AS PER FOLLOWING TABLE. OPENING AE DEBTOR BALANCE AS ON 01.04.2007 RS. 46,50,36,038/- CLOSING AE DEBTOR BALANCE AS ON 31-03-2008 RS. 52,64,42,564/- AVERAGE OUTSTANDING BALANCE WITH THE AE, DINURJE CORP., USA RS. 49,57,39,301/- ARMSS LENGTH INTEREST RATE 14.18 % ARMS LENGTH INTEREST @ 14.18% P.A. ON THE AVERAGE OUTSTANDING BALANCE AS COMPUTED ABOVE. RS. 7,02,95,833/- 2.9 SINCE ADDITION ON ACCOUNT OF INTEREST WAS MORE THAN THE ADDITION COMPUTED BY ADOPTING PLI ON THE BASIS OF ROCE, THE TPO MADE ONLY ONE ADDITION OF RS.7,82,95,833/- WHICH WAS HIGHER THAN THE EARLIER ADDITION. . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 11 3. THE AFOREMENTIONED TREATMENT GIVEN BY THE TPO WA S CHALLENGED IN AN APPEAL FILED BEFORE LD. CIT(A). THE ASSESSEE OBJEC TED TO THE INCLUSION OF THREE COMPARABLES BY THE TPO I.E. REGARDING ASIAN STAR CO MPANY LTD., SU-RAJ DIAMONDS AND GOLDIAM JEWELLERY LTD. IT WAS ALSO SUBMITTED THAT ROCE IS NOT APPROPRIATE PLI AS THE SAME IS APPLICABLE ONLY ON T HE MANUFACTURING UNIT. ALL THESE CONTENTIONS OF THE ASSESSEE WERE REJECTED BY LD. CIT(A). LD. CIT(A) ALSO REJECTED THE CLAIM OF THE ASSESSEE THAT NO ADJUSTME NT WAS REQUIRED TO BE MADE ON ACCOUNT OF INTEREST. HOWEVER, LD. CIT(A) HAS NOTED IN PARA 4.4 THAT FROM THE DETAILS FURNISHED BY THE ASSESSEE CREDIT PERIOD A LLOWED BY THE ASSESSEE TO ITS NON-AES IS 173 DAYS WHILE TO AE IT IS 193 DAYS. LD . CIT(A) ALSO REJECTED THE CONTENTION OF THE ASSESSEE THAT ADJUSTMENT SHOULD B E DELETED ON THE GROUND THAT TPO DID NOT BRING ANY MATERIAL TO SHOW APPLICATION OF CUP METHOD. LD. CIT(A) ALSO REJECTED THE CONTENTION OF THE ASSESSEE THAT A S PER BUSINESS PRACTICE NO INTEREST WAS BEING CHARGED BY THE ASSESSEE ON DELA YED PAYMENTS FROM ITS CUSTOMERS. HE ALSO REJECTED THE CLAIM OF THE ASSES SEE REGARDING SET OFF OF CREDIT BALANCE PAYABLE BY THE ASSESSEE TO ITS AE. ALL THE SE FINDINGS RECORDED IN PARA 4.4 OF LD. CIT(A)S ORDER AND IN THIS MANNER LD. CIT(A) HAS UPHELD THE TP ADJUSTMENT. 4. THOUGH IN THE GROUNDS OF APPEAL THE ASSESSEE HAS CONTESTED THE TP ADJUSTMENT ON VARIOUS GROUNDS, HOWEVER, TO CUT SHO RT THE MATTER IT WAS SUBMITTED BY LD. AR THAT ROCE METHOD APPLIED BY THE TPO IS NOT APPROPRIATE METHOD TO COMPUTE PLI. HE SUBMITTED THAT IN THE CASE OF GOLD STAR JEWELLERY DESIGN PVT. LTD. VS. ITO, 144 ITD 99, THIS ISSUE HA S BEEN EXAMINED AND IT WAS HELD THAT IN A CASE WHERE COMPUTATION OF SEPARATE C APITAL EMPLOYED OR PROFITABILITY IN RESPECT OF TRANSACTIONS WITH AES IS NOT PRACTICAL DUE TO COMMONALITY OF BOTH THE SETS OF TRANSACTIONS WITH THE AES AND NON-AES, THE CORRECTNESS OF APPLICABILITY OF ROCE AS PLI UNDER T HE TNMM CANNOT BE COUNTENANCED. OUR ATTENTION WAS DRAWN TO THE FOLLO WING OBSERVATIONS OF THE TRIBUNAL. . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 12 9.2 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE RELEVANT MATERIAL ON RECORD. THE PERTINENT QUESTION WHICH HAS BEEN POSTE D FOR CONSIDERATION BEFORE US THROUGH THIS GROUND IS AS TO WHETHER THE ROCE IS A CORRECT PLI IN THE PRESENT FACTS AND CIRCUMSTANCES. 9.3 SECTION 92C(1) PROVIDES THAT THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE SPECI FIED METHODS, BEING THE MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASSOCIATED PERSONS OR FUNCT IONS PERFORMED BY SUCH PERSONS OR SUCH OTHER RELEVANT FACTORS AS THE BOARD MAY PRESCR IBE. SUCH METHODS, INTER ALIA, INCLUDE 'TRANSACTIONAL NET MARGIN METHOD', WHICH HA S BEEN APPLIED BY THE ASSESSEE IN THE PRESENT CASE, AND THE SAME IS NOT DISPUTED. THE MECHANISM FOR DETERMINATION OF THE ALP UNDER THIS METHOD HAS BEEN ENSHRINED IN RULE 10B(1)(E). SUB-CLAUSE (I) OF THE CLAUSE (E) PROVIDES THAT THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSO CIATED ENTERPRISE SHALL BE COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFF ECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE. SIMILAR BASE IS THEN EMPLOYED FOR DETERMINING THE AVERAGE R ATE OF OPERATING PROFIT IN RESPECT OF COMPARABLE CASES FOR THE PURPOSES OF DETERMINING THE ALP OF INTERNATIONAL TRANSACTIONS. A BARE READING OF THIS PROVISION INDI CATES THAT THE OPERATING PROFIT CAN BE COMPUTED WITH ANY OF THE BASES, VIZ., COSTS INCU RRED OR SALES EFFECTED OR ASSETS EMPLOYED OR ANY OTHER RELEVANT BASE. WHICH IS THE C ORRECT BASE DEPENDS UPON THE FACTS AND CIRCUMSTANCES OF EACH CASE. IN PRINCIPLE, THERE CAN BE NO INHIBITION ON THE TPO TO COMPUTE PROFIT MARGIN BY A PARTICULAR BASE, IF THE FACTS AND CIRCUMSTANCES OF THE CASE WARRANT ADOPTION OF A DIFFERENT BASE FROM THAT ADOPTED BY THE ASSESSEE. AS ASSETS OR CAPITAL EMPLOYED IS ONE OF THE RECOGNIZED BASES, WE SEE NO REASON TO RESTRICT THE ADOPTION OF BASE ONLY TO TOTAL COST OR SALES. IN FACT, THE CHOICE OF THE CORRECT BASE DEPENDS ON VARIOUS FACTORS INCLUDING I TS WORKABILITY IN THE FACTS OF THE CASE. LET US SEE AS TO WHETHER THE TPO WAS CORRECT IN ADOPTING ROCE AS THE CORRECT BASE UNDER THE TNMM. THE TPO WORKED OUT THE AVERAGE CAPITAL EMPLOYED AT RS. 67.66 CRORE AND BY CONSIDERING THE AMOUNT OF OPERAT ING PROFIT AT RS. 3.58 CRORE AND TOTAL TURNOVER OF RS. 80.54 CRORE DETERMINED ROCE A T 5.29%. HERE IT IS RELEVANT TO MENTION THAT THE SALES TO THE AE IN THE PRESENT CAS E TOTAL RS. 11.42 CRORE AS AGAINST THE TOTAL SALES AT RS. 80.54 CRORE. THERE ARE NO SE GMENTAL ACCOUNTS. IN OTHER WORDS, THERE IS A COMMON POOL OF CAPITAL EMPLOYED WHICH IS USED BOTH FOR THE AE AND NON- AE TRANSACTIONS. IT IS OBVIOUS THAT THE PERIOD OF R EALIZATION IN RESPECT OF EXPORTS AND DOMESTIC SALES IS ALWAYS DIFFERENT. WHEN THERE IS N O IDENTIFIABLE CAPITAL EMPLOYED AND SEPARATE AMOUNT OF PROFIT IN RESPECT OF TRANSAC TIONS WITH THE AES IN THE SITUATION LIKE THE ONE WHICH IS PREVAILING BEFORE US, THEN HO W THE ASSESSEE'S ROCE CAN BE PRECISELY WORKED OUT, IS ANYBODY'S GUESS. THE POSIT ION WOULD HAVE BEEN DIFFERENT AND THE APPLICABILITY OF THE ROCE PRACTICAL, IF THE ASSESSEE HAD BEEN ENGAGED IN TRANSACTIONS EXCLUSIVELY WITH ITS AE OR SOME SORT O F DEMARCATION IN THE USE OF CAPITAL EMPLOYED AND PROFITABILITY FOR TRANSACTIONS WITH AE S AND NON-AES HAD BEEN THERE WITH OR WITHOUT SEGMENTAL ACCOUNTS. IN THAT CASE, T HERE COULD HAVE BEEN NO PROBLEM IN USING ROCE AS PLI UNDER THE TNMM. AS THE FACTS O F THE PRESENT CASE AMPLY DEMONSTRATE THAT COMPUTATION OF SEPARATE CAPITAL EM PLOYED OR PROFITABILITY IN RESPECT OF TRANSACTIONS WITH AES IS NOT PRACTICAL DUE TO CO MMONALITY OF BOTH THE SETS OF . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 13 TRANSACTIONS WITH THE AES AND NON-AES, IN OUR CONSI DERED OPINION, THE CORRECTNESS OF THE APPLICABILITY OF ROCE AS PLI UNDER THE TNMM CAN NOT BE COUNTENANCED. 9.4 IT IS FURTHER IMPORTANT TO NOTE THAT THE MUMBA I BENCHES OF THE TRIBUNAL IN THE AFOREQUOTED THREE ORDERS HAVE CONSIDERED EITHER OPE RATING MARGIN TO SALES OR OPERATING PROFIT TO TOTAL COST AS THE PLI IN THE CO NTEXT OF JEWELLERY/DIAMOND INDUSTRY, ALTHOUGH IN NONE OF THESE CASES THERE WAS ANY CONTROVERSY AS TO THE APPLICATION OF ROCE V. OP/TC OR OP/SALES. THE LEARN ED DEPARTMENTAL REPRESENTATIVE COULD NOT POINT OUT EVEN A SINGLE OR DER IN WHICH ROCE HAS BEEN HELD TO BE CORRECT PLI UNDER THE TNMM. IN VIEW OF THE DI SCUSSION IN PARA 9.3 OF THIS ORDER AND RESPECTFULLY FOLLOWING THE PRINCIPLE OF CONSIST ENCY PERMEATING FROM THE ABOVE REFEREED THREE ORDERS, WE ARE OF THE CONSIDERED OPI NION THAT THE ADOPTION OF ROCE BY THE AUTHORITIES BELOW CANNOT BE APPROVED. WE, THERE FORE, SET ASIDE THE IMPUGNED ORDER ON THIS ISSUE AND DIRECT THAT THE PLI OF OP/T C OR OP/SALES SHOULD BE APPLIED IN THE FACTS OF THE PRESENT CASE (EMPHASIS OURS) 4,1 IT WAS FURTHER SUBMITTED THAT TPO HIMSELF IN SU BSEQUENT ASSESSMENT YEARS HAS ACCEPTED OP/OC AS APPROPRIATE METHOD TO COMPUTE PLI. IN THIS REGARD LD. AR REFERRED TO TRANSFER PRICING ORDER FOR ASSESSMEN T 2009-10, COPY OF WHICH IS PLACED AT PAGE 1 TO 14 OF THE PAPER BOOK. COPY OF TRANSFER PRICING ORDER FOR A.Y 2010-11 IS PLACED AT PAGES 15 TO 24 OF THE PAPER BO OK. IT WAS SUBMITTED THAT IF OP/OC IS TAKEN AS APPROPRIATE PLI THEN NO ADDITION CAN BE MADE ON ACCOUNT OF ALP AS THE PLI OF THE ASSESSEE WILL BE 10.53% AS AG AINST ARITHMETIC MARGIN OF COMPARABLES AT 8.60%. REFERENCE WAS MADE TO THE FO LLOWING TABLE. (INR IN LAC) NAME OF COMPANY REVENUE COSTS PROFIT PLI PAGE REFERENCE GOLDIAM JEWELLERY LTD. 5507.68 4829.56 678.12 14.04% PAGE 10 OF TPO ORDER SHREEJI JEWELLERY LTD. 5906.72 5698.16 208.56 3.66% PAGE 10 OF TPO ORDER SHANTIVIJAY JEWELS LTD. 6034.30 5819.49 214.81 3.69% PAGE 10 OF TPO ORDER ASIAN STAR CO. LTD (SEG.) 7065.92 5725.40 1340.52 23.41% PAGE 10 OF TPO ORDER DIAGOLD DESIGNS LTD. 7359.34 7008.98 350.36 5.00% PAGE 10 OF TPO ORDER FINE JEWELLERY (INDIA) LTD. 7860.12 7370.19 489.93 6.65% PAGE 10 OF TPO ORDER . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 14 SU-RAJ DIAMOND INDUSTRIES LTD (SEG.) 12230.00 11785.00 445.00 3.78% PAGE 10 OF TPO ORDER AM OF COMPARABLE 8.60% PLI OF APPELLANT 5778.02 5227.48 550.53 10.53% PAGE 2 OF TPO ORDER 4.2 WITHOUT PREJUDICE TO THE ABOVE ARGUMENTS IT WAS SUBMITTED THAT THE ROCE OF THE ASSESSEE COMPANY HAS WRONGLY BEEN COMPUTED B Y THE TPO AT 8.67% AS THE SAME SHOULD BE COMPUTED AT 9.32% AND THE MISTAKE CO MMITTED BY TPO IN COMPUTING PLI OF ROCE WAS POINTED OUT AS UNDER: 2.1 CALCULATION OF ROCE OF THE APPELLANT COMPANY: CALCULATION BY TPO HAS SOME MISTAKES-REFER PAGE 9 OF THE TPO ORDER. THE NUMBERS PRESENTED IN THE TABLE ARE CORRECT AND MATC H WITH THE FINANCIALS. HOWEVER, IN CALCULATING THE CAPITAL EMPLOYED FOR F Y 07-08, THE TPO HAS MADE CALCULATION MISTAKE, THE CORRECT CAPITAL EMPLOYED S HOULD BE RS. 61,81,03,241/- (RS. 61.81 CRS AS AGAINST 70.65 CRS) THE AVERAGE CAPITAL EMPLOYED FOR 2 YEARS THUS COME S TO 59,10,09,148 INSTEAD OF 63,52,44,149. CIT(A) HAS PROPERLY CALCULATED AVERAGE CAPITAL EMP LOYED AT PAGE 27 OF HIS ORDER. REVISED ROCE AS PER THE CORRECT WORKING IS AS FOLL OWS: PARTICULARS AMOUNT AND RATIO REFERENCE OPERATING PROFIT 55,053,780 AS PER PAGE 2 OF TPO ORDER AVERAGE CAPITAL EMPLOYED 591,009,149 AS ABOVE ROCE% 9.32% 4.3 IT WAS SUBMITTED THAT ASIAN STAR COMPANY LTD. C ANNOT BE TAKEN AS COMPARABLE FOR THE FOLLOWING REASONS. COMMENTS ON COMPARABLE COMPANIES ADDED BY THE TPO: A. ASIAN STAR COMPANY LTD.: HAS SIGNIFICANT AMOUNT OF PROCESSING EXPENSES OF RS.63.73 CRS AS COMPARED TO WAGES OF RS.1.14 CRS AND SALARY COST OF RS.9.04 CR5 (REFER SCHEDULE . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 15 K ON MANUFACTURING & OTHER EXPENSES AT PAGE 52 OF A NNUAL REPORT). THIS IMPLIES IT IS MAINLY INTO OUTSOURCING /JOB WORK BASIS AND THUS WOULD HAVE LOWER INVESTMENT IN PLANT AND MACHINERY AND HENCE HIGHER ROCE. (THIS IS NOT PART OF PAPER BOOK, 4 CERTIFIED TRUE COPY OF THIS PAGE KEPT). VERY HIGH TURNOVER AS PER P&L, THE TOTAL TURNOVER REPORTED FOR FY 0 7-08 WAS RS.1,305 CRS. THE TURNOVER IN THE JEWELLERY SEGMENT WAS RS.70.66 CRS. SINCE THIS COMPANY IS VERY LARGE, ITS JEWELLERY SEGMENT GOT TH E ADVANTAGE OF INTEGRATION / SYNERGIES WITH DIAMOND SEGMENT. PREDOMINANTLY ENGAGED IN MANUFACTURING OF DIAMONDS THE RATIO OF SALES OF JEWELLERY SEGMENT ONLY CONSTITUTES TO 5.41% OF T OTAL SALES OF THE COMPANY. HIGH RPT AS PER THE SEGMENTAL INFORMATION GIVEN IN PAGE 57 & 59 OF THE ANNUAL REPORT (REFER PAGE 116 & 117 OF PAPER BOOK), THERE WAS TRANSFER OF RS.30.29 CRS FROM DIAMOND SEGMENT TO JEWELLERY SEGMENT CONST ITUTING 42.86% OF TOTAL TURNOVER OF JEWELLERY SEGMENT. THIS VIOLATES THE RELATED PAR TY FILTER / CRITERIA OF 25% OF SALES (JEWELLERY SEGMENT IS RELEVANT SINCE FOR PLI SEGMEN TAL INFORMATION IS CONSIDERED). HAD THE JEWELLERY SEGMENT BEEN A SEPARATE COMPANY, THIS WOULD HAVE ACCOUNTED FOR SEPARATE TRANSACTIONS AND WOULD HAVE FAILED THE RPT FILTER. FURTHER, THIS SHOWS THAT BOTH JEWELLERY AND DIAMOND SEGMENTS ARE INTEGRATED AND ENJOYS SYNERGIES AND HENCE CANNOT BE RELIED IN ISOLATION. TPO HAS USED SEGMENTAL INFORMATION FOR CALCULATING PLI (ROCE). WHERE SEGMENTAL INFORMATION IS USED, IT IS DIFFICULT TO U SE ROCE AS PLI AS IT IS NOT PRACTICAL TO DETERMINE THE SEGMENTAL CAPITAL EMPLOYED. RELIAN CE IS PLACED ON GOLDSTAR JEWELLERY DESIGN (P) LTD. [(2013) 144 ITD 99, MUMBA I]. PORN 9.3 AT PAGE 9. LISTED COMPANY AND A SIGHT HOLDER OF DTC REFER PAGE 115 OF PAPER BOOK. HENCE, THIS STATUS ENSURED THIS COMPANY TO GET BENE FIT OF UNINTERRUPTED SUPPLY OF QUALITY DIAMONDS AT COMPETITIVE PRICES. 4.4 IT WAS FURTHER SUBMITTED THAT M/S. SU-RAJ DIAM OND INDUSTRIES LTD. ALSO CANNOT BE TAKEN AS COMPARABLE FOR THE FOLLOWING REA SONS: B. SURAJ DIAMONDS INDUSTRIES: PLAIN V/S STUDDED JEWELLERY: - APPELLANT IS MAINLY INTO MANUFACTURING OF STUDDED JEWELLERY WHEREAS SURAJ DIAMOND INDUSTRY MAINLY INTO MANUFACTURING OF PLAI N GOLD JEWELLERY -REFER NOTE NO.19(B) OF NOTES TO ACCOUNT TO THE FINANCIALS. IN CASE OF SURAJ DIAMONDS, THE % OF STUDDED JEWELLERY CONSTITUTES ONLY 8.51% OF TOTAL S ALES AND % OF PLAIN GOLD JEWELLERY CONSTITUTES 42.79% OF TOTAL SALES. RELYING ON CASE LAW OF GOLDSTAR JEWELLERY DESIGN (P) LTD. [(2013) 144 ITD 99, MUMBAI]. PARA 6.1 ON P AGE 7. RETAIL BUSINESS SEGMENT RELYING ON CASE LAW OF GOLDSTAR JEWELLERY DESIGN (P) LTD. [(2013) 144 ITD 99, MUMBAI]. PARA 6.2 AT PAGE 7. . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 16 HAS SIGNIFICANT AMOUNT OF LABOUR OR JOB WORK CHARG ES : (REFER PAGE 132 OF PAPER BOOK). THE LABOUR CHARGES ARE RS.4.08 CRS AS AGAINST SALARY COST OF RS.1.38 CRS. THIS IMPLIES IT IS MAINLY INTO OUTSOURCING / J OB WORK BASIS AND THUS WOULD HAVE LOWER INVESTMENT IN PLANT AND MACHINERY AND HENCE H IGHER ROCE. TPO HAS USED SEGMENTAL INFORMATION FOR PLI PURPOSE. WHERE SEGMENTAL INFORMATION IS USED, IT IS DIFFICULT TO USE ROCE AS PLI AS IT IS NOT PRACTICAL TO DETERMINE THE SEGMENTAL CAPITAL EMPLOYED. RELIANCE IS PLACED ON GOLDSTAR JEWELLERY DESIGN (P) LTD. [(2013) 144 ITD 99, MUMBAL]. PARA 9.3 AT PAGE 9. 4.5 IT WAS SUBMITTED IF THE AFOREMENTIONED TWO COMP ARABLES ARE REMOVED THEN THERE WILL BE NO TP ADJUSTMENT AS PER FOLLOWING CA LCULATIONS. 23. AFTER REMOVING THESE 2 COMPANIES, THE AVERAGE R OCE OF REMAINING 5 COMPANIES IS UNDER: (INR IN LACS) NAME OF COMPANY AVG. CAPITAL EMPLOYED OP. PROFIT ROCE PAGE REFERENCE GOLDIAM JEWELLERY LTD. 2139.89 678.12 31.69% PAGE 1 0 OF TPO ORDER SHREEJI JEWELLARY LTD. 5378.52 208.56 3.88% ----DO ---- SHANTIVIJAY JEWELS LTD. 3224.94 214.81 6.66% ----DO ---- DIAGOLD DESIGNS LTD. 4303.72 350.36 8.14% ----DO--- - FINE JEWELLERY (INDIA) LTD. 7309.82 489.93 6.70% ----DO---- ARITHMETIC MEAN 11.41% APPELLANTS ROCE 5910.09 550.53 9.32% WORKING OF +/- 5% (INR IN LACS) PARTICULARS REFERENCE TRANSACTION WITH AE SALES (ONLY AE) A 4787.31 AVERAGE CAPITAL EMPLOYED B 4896.73 CORRECT ROCE OF APPELLANT C 9.32% ROCE OF REMAINING 5 COMPARABLE COMPANIES D 11.41% DIFFERENCES IN ROCE E=(D-C) 2.10% ADJUSTMENTS OF SALES F= (E*B) 102.77 ARMS LENGTH SALES G=(A+F) 4890.08 RANGE OF ALP WITH +/- 5% + 5% -5% 5031.81 4542.81 . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 17 4.6 IN THE ALTERNATIVE IT WAS SUBMITTED THAT EVEN I F M/S. SU-RAJ DIAMOND INDUSTRIES LTD. ALONE IS REMOVED FROM THE LIST OF C OMPARABLES THEN ALSO NO ADDITION CAN BE MADE AS TP ADJUSTMENT AS PER FOLLOW ING CALCULATIONS. EVEN IF 1 COMPANY IS REMOVED, VIZ SU-RAJ DIAMONDS INDUSTRIES, THE AVERAGE ROCE OF REMAINING 6 COMPANIES WORKS OUT TO 13.52% A ND FALLS WITHIN +/- 5% RANGE. (IN R IN LACS) NAME OF COMPANY AVG. CAPITAL EMPLOYED OP. PROFIT ROCE PAGE REFERENCE GOLDIAM JEWELLERY LTD. 2139.89 678.12 31.69% PAGE 10 OF TPO ORDER SHREEJI JEWELLERY LTD. 5378.52 208.56 3.88% ----DO---- SHANTIVIJAY JEWELS LTD. 3224.94 214.81 6.66% ----DO---- DIAGOLD DESIGNS LTD. 4303.72 350.36 8.14% ----DO---- FINE JEWELLERY (INDIA) LTD. 7309.82 489.93 6.70% ----DO---- ASIAN STAR CO. LTD.(SEG) 5569.74 1340.52 24.07% ----DO--- ARITHMETIC MEAN 13.52% APPELLANTS ROCE 5910.09 550.53 9.32% WORKING OF +/- 5% IS GIVEN IN BELOW TABLE: (INR IN LACS) PARTICULARS REFERENCE TRANSACTION WITH AE SALES A 4787.31 AVERAGE CAPITAL EMPLOYED B 4896.73 CORRECT ROCE OF APPELLANT C 9.32% ROCE OF REMAINING 6 COMPARABLE COMPANIES D 13.52% DIFFERENCES IN ROCE E=(D-C) 4.20% ADJUSTMENTS OF SALES F= (E*B) 205.90 ARMS LENGTH SALES G=(A+F) 4993.21 RANGE OF ALP WITH +/- 5% + 5% -5% 5036.97 4537.65 4.7 SO FAR AS IT RELATES TO SECOND ISSUE REGARDING ADJUSTMENT MADE ON ACCOUNT OF NON-PAYMENT OF INTEREST BY THE AES IT WAS SUBMIT TED BY LD.AR THAT ASSESSEE HAS NEVER CHARGED INTEREST TO ITS AE DEBTORS AND IT IS EVIDENT FROM THE COPIES OF LEDGER ACCOUNTS OF THE AES AND IN THIS REGARD HE RE FERRED TO PAGES 31,33 TO 41, 44 TO 53 OF THE PAPER BOOK. HE SUBMITTED THAT ASSESSE E ALSO DID NOT CHARGE INTEREST . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 18 FROM ITS NON-AE DEBTORS AND THIS FACT IS EVIDENT FR OM THE LEDGER ACCOUNTS OF NON- AES, COPIES OF WHICH ARE SUBMITTED AT PAGES 149 TO 185 OF THE PAPER BOOK. IT WAS SUBMITTED THAT THERE WERE SIMILAR DELAYS IN THE CAS ES OF NON-AES ALSO. IT WAS SUBMITTED THAT AE CREDITORS HAVE ALSO NOT CHARGED A NY INTEREST FROM THE ASSESSEE AS IT IS EVIDENT FROM THE COPIES OF LEDGER ACCOUNT OF AE CREDITORS WHICH ARE SUBMITTED ON PAGES 32,42 TO 43, 54 TO 55 OF THE PAP ER BOOK. IT WAS SUBMITTED THAT IN FACT ASSESSEE DURING THE YEAR DID NOT PA Y ANYTHING TO ITS AES FOR THE PURCHASES MADE DURING THE YEAR. IT WAS SUBMITTED T HAT ACCORDING TO FOLLOWING DECISIONS ADJUSTMENT CANNOT BE MADE IN SUCH A CASE. 3.2 RELIANCE ON THE JUDICIAL PRECEDENCE: INDO AMERICAN JEWELLERY LTD. [(2014) 44 TAXMAN.COM 310, BOMBAY HIGH COURT] INDO AMERICAN JEWELLERY LTD. [(2012) 50 SOT 528, M UMBAI TRI.] LIVINGSTONES. ITA NO.5884/MUM/2012 AND 5930/MUM/20 12 (AY 08-09). NIMBUS COMMUNICATIONS LTD. [(2013) 145 ITD 582, MU MBAI TRI.] 4.8 IN THE ALTERNATIVE IT WAS SUBMITTED THAT ADJUST MENT ON ACCOUNT OF DELAYED RECEIPT OF PAYMENTS, IF ANY IS TO BE MADE THEN T HE SAME SHALL BE RESTRICTED TO DIFFERENCE BETWEEN NUMBER OF DAYS OF DELAY IN TH E CASE OF AES AND NON-AES. REFERENCE IN THIS REGARD WAS MADE TO THE ORDER OF LD. CIT(A), WHEREIN AT PAGE 56 SUCH DIFFERENCE HAS BEEN POINTED OUT AND IT HAS BEE N MENTIONED THAT AVERAGE DELAY IN THE CASE OF AES IS OF 193 DAYS AND IN THE CASE OF NON-AES IT IS 173 DAYS. THUS, IT WAS SUBMITTED THAT INTEREST, IF ANY, SHOUL D BE CHARGED FOR 20 DAYS AS THE INTERNAL COMPARABLE INSTANCE IS AVAILABLE. IN THE ALTERNATIVE IT WAS SUBMITTED THAT THE TPO HAS WRONGLY APPLIED RATE OF 14.18% PER ANNUM AS INTEREST IS REQUIRED TO BE CALCULATED ON THE BASIS OF LIBOR AS PER FOLLOWING DECISIONS: 3.5 WITHOUT PREJUDICE TO ABOVE, INTEREST SHALL B E CALCULATED BASED ON LIBOR: TECH MAHINDRA LTD-[(2011) 12 TAXMANN.COM 132, MUMB AI TRI.] COTTON NATURALS (I) PVT. LTD. [2013) 32 TAXMANN. COM 219, DELHI TRI.]-PARA 14 VVF LTD- (2012) 31 CCH 474, MUMBAI TRI. (2010-TII- 04-ITAT-MUM-TP) TATA AUTOCOMP SYSTEMS LTD. [(ITA NO.7354/MUM/11(A Y 2007-08)] EURIBOR SIVA INDUSTRIES AND HOLDINGS LTD.- [(2011 59 DTR 1 82, CHENNAI TRI.] . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 19 4.9 IT WAS SUBMITTED THAT IF LIBOR IS APPLIED THE CALCULATION OF DISALLOWANCE WILL BE ONLY A SUM OF RS.6,26,250/- AS PER FOLLO WING CALCULATION. NET RECEIVABLES FROM AE= RS.25.27 CRS (REFER PAGE 55 OF CIT(A) ORDER) LIBOR RATE = 4.53% (REFER PAGE 56 OF CIT(A) ORDER) INTEREST SHALL BE RS.6,27,250 (25.27* 4.53% * 20/36 5 ) 4.10 THUS, IT WAS SUBMITTED BY LD. AR THAT APPROPRI ATE RELIEF MAY BE GRANTED TO THE ASSESSEE. 5. ON THE OTHER HAND, LD. DR RELIED UPON THE ORDER PASSED BY TPO AND LD. CIT(A). HE SUBMITTED THAT TP ADJUSTMENT HAS RIGHTL Y BEEN MADE AND THE SAME HAS RIGHTLY BEEN SUSTAINED BY LD. CIT(A). 6. WE HAVE HEARD BOTH THE PARTIES AND THEIR CONTENT IONS HAVE CAREFULLY BEEN CONSIDERED. AS PER DECISION OF CO-ORDINATE BENCH I N THE CASE OF GOLD STAR JEWELLERY DESIGN PVT. LTD. VS. ITO (SUPRA), THE ISS UE DECIDED WAS THAT WHETHER ROCE IS CORRECT PLI UNDER THE FACTS AND CIRCUMSTANC ES OF THE CASE. IN THE SAID CASE THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MA NUFACTURING OF DIAMOND STUDDED GOLD JEWELLERY. IT PURCHASED DIAMOND STUDD ED JEWELLERY FROM ITS AE AMOUNTING TO RS.5,75,64,505/- AND SALES WERE MADE O F DIAMOND STUDDED JEWELLERY TO AE AT RS.11,42,16,876/-. THE ASSESSEE BENCH MARKED ITS INTERNATIONAL TRANSACTIONS ON TNMM BY APPLYING PLI OF OP/TC. THE TPO DID NOT ACCEPT ASSESSEES ADOPTION OF OP/TC AS CORRECT PLI. ACCORDING TO TPO THE CORRECT PLI OF ROCE SHOULD HAVE BEEN APPLIED. ACC ORDINGLY, TPO APPLIED ROCE AND ADDITION WAS MADE. BEFORE TRIBUNAL IT WAS SU BMITTED THAT IN THE EARLIER YEAR THE ASSESSEE APPLIED PLI OF OP/TC WHICH WAS AC CEPTED BY TPO AND COPY OF ASSESSMENT ORDER WAS PLACED ON RECORD. REFERENCE W AS MADE TO THREE ORDERS PASSED BY ITAT IN THE CASES OF ADDL. CIT VS. TEJ D IAM, 37 SOT 341; ACIT VS. SUPER DIAMONDS, 53 SOT 243 AND TARA JEWEL EXPORTS P VT. LTD. VS. ACIT, 31 TAXMAN.COM 383, IN WHICH OPERATING MARGIN TO SALES OR OP/TC WERE ACCEPTED AS PLI IN THE CASE OF JEWELLERY INDUSTRIES. IT WAS PL EADED THAT THERE WAS NO LOGIC IN . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 20 REJECTING THE ASSESSEES PLI WHICH WAS CONSISTENTLY FOLLOWED IN PREFERENCE TO ROCE. ON THESE FACTS THE TRIBUNAL HAS HELD THAT DUE TO COMMONALITY OF BOTH THE SETS OF TRANSACTIONS OF THE AES AND NON-AES, IT WA S NOT PRACTICAL TO COMPUTE SEPARATE CAPITAL EMPLOYED OR PROFITABILITY IN RESP ECT OF TRANSACTION WITH THE AES. THE CORRECTNESS OF APPLICABILITY OF ROCE AS PLI UND ER THE TNMM CANNOT BE COUNTENANCED (RELEVANT OBSERVATIONS OF TRIBUNAL H AVE ALREADY BEEN REPRODUCED IN ABOVE PART OF THIS ORDER IN PARA-4). IN THE PRE SENT CASE LD. CIT(A) HAS REJECTED SUCH CONTENTION OF THE ASSESSEE ON THE GROUND THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING. RELEVANT OBSERVATIONS O F LD. CIT(A) ARE AS UNDER: IV. APPELLANT ARGUED THAT ROCE IS NOT THE APPROPR IATE PLI SINCE SAME APPLIES TO APPLIES TO MANUFACTURING UNITS. HOWEVER, SINCE APPE LLANT IS DOING MANUFACTURING ALSO THE ARGUMENT IS MISPLACED. FURTHER WHILE MAKI NG COMPARISON OF FIXED ASSETS TO EMPLOYEE COST, APPELLANT HAS SELECTIVELY TAKEN ONLY 4 COMPANIES HENCE SAME DOES NOT PROVIDE CLEAR PICTURE AND CONSEQUENTLY NOT RELI ABLE. APPELLANT ARGUED THAT WORKING CAPITAL IN JEWELLERY BUSINESS IS SEASONAL H ENCE CANT BE TAKEN AS PLI. THIS, HOWEVER IS NOT CORRECT SINCE NO BUSINESS CAN FUNCTI ON WITHOUT CAPITAL AND THAT TOO A BUSINESS LIKE DIAMOND WHOSE MAIN BASIS IS CAPITAL EMPLOYED BEING A CAPITAL INTENSIVE INDUSTRY. FURTHER, PROFITABILITY IS ALWA YS LINKED TO CAPITAL BEING MOST SIGNIFICANT FACTOR IN THIS INDUSTRY. 6.1 IN THE PRESENT CASE ALSO THERE IS COMMONALITY OF THE TRANSACTION WITH AE AND NON-AES AND DUE TO SUCH COMMONALITY IT IS NO T PRACTICAL TO COMPUTE SEPARATE CAPITAL EMPLOYED OR PROFITABILITY IN RESPE CT OF TRANSACTIONS WITH AES. IN ABSENCE THEREOF, WE ARE OF THE OPINION THAT THIS ISSUE IS COVERED BY THE AFOREMENTIONED DECISION OF TRIBUNAL IN THE CASE OF GOLD STAR JEWELLERY DESIGNS PVT. LTD. VS. ITO(SUPRA). IF SUCH IS THE POSITION THEN AS PER COMPUTATION MADE BY THE ASSESSEE WHICH IS BASED ON THE FIGURES GIVEN I N TPOS ORDER AT PAGE-5, THE ARITHMETICAL MARGIN OF COMPARABLE WILL BE 8.60% AND ASSESSEES MARGIN AS PER PAGE-2 OF THE TPOS ORDER ON THE BASIS OF OP/TC WIL L BE 10.63% AND AS THE PLI OF THE ASSESSEE IS HIGHER THAN THE ARITHMETICAL MARGI N OF THE COMPARABLES NO TP ADJUSTMENT CAN BE MADE IN RESPECT OF INTERNATIONAL TRANSACTIONS ON ACCOUNT OF APPLICATION OF TNMM. IT MAY BE MENTIONED HERE THAT TABLE REGARDING SUCH COMPUTATION HAS ALREADY BEEN REPRODUCED IN THE ABOV E PART OF THIS ORDER IN PARA- 4.1. THE FIGURES MENTIONED IN THE TABLE, ON THE BA SIS OF WHICH PLI HAS BEEN . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 21 COMPUTED, ARE RESEMBLING WITH THE FIGURES GIVEN IN THE ORDER OF THE TPO AT PAGES 10 & 2 OF THE ORDER OF TPO AND THIS FACT H AS ALSO BEEN MENTIONED IN THE TABLE. 6.2 IT MAY ALSO BE MENTIONED HERE THAT IN SUBSEQUEN T TWO ASSESSMENT YEARS, IT IS THE CASE OF THE ASSESSEE THAT OP/TC HAS BEEN ACC EPTED BY THE TPO AND TO SUPPORT SUCH CONTENTION TPOS ORDER FOR A.Y 2009-1 0 AND 2010-11 ARE ENCLOSED IN THE PAPER BOOK. THIS CONTENTION OF THE ASSESSEE HAS NOT BEEN CONTROVERTED. THEREFORE, IN VIEW OF PRINCIPLE OF CONSISTENCY AL SO DIFFERENT METHOD CANNOT BE ADOPTED FOR THE YEAR UNDER CONSIDERATION TO COMPAR E PLI PARTICULARLY IN ABSENCE OF DISTINGUISHABLE FACTS AND CIRCUMSTANCES EXIST ING FOR JUSTIFICATION OF THE SAME. 6.3 AS WE HAVE APPROVED THE CALCULATION OF PLI ON THE BASIS OF OP/OC AND BY ADOPTING THAT METHOD THE TRANSACTION OF THE ASSESSE E IS FOUND TO BE AT ARMS LENGTH, THEREFORE, WE DO NOT CONSIDER IT NECESSARY TO GO INTO OTHER ALTERNATIVE ARGUMENTS TAKEN BY LD. AR ON THE BASIS OF WHICH ALS O IT IS HIS CONTENTION THAT TP ADJUSTMENT IS NOT JUSTIFIED AS THOSE ARGUMENT S HAVE BECOME ACADEMIC. 7. NOW COMING TO THE TP ADJUSTMENT MADE ON ACCOUNT OF NON-CHARGING OF INTEREST BY THE ASSESSEE FROM ITS AE. IN THIS REGAR D, IT HAS BEEN THE CONTENTION OF THE ASSESSEE THAT IT DID NOT CHARGE INTEREST IN RES PECT OF AMOUNTS OUTSTANDING OUT OF SALES EITHER FROM ITS AES OR FROM NON- AE DEBTORS. SUCH CONTENTION OF THE ASSESSEE IS SUPPORTED BY THE COPY OF LEDGER A CCOUNTS SUBMITTED BY THE ASSESSEE IN RESPECT OF AES AND NON-AE TRANSACTIONS. NO MATERIAL HAS BEEN BROUGHT ON RECORD TO SUGGEST THAT SUCH CONTENTION O F THE ASSESSEE IS EITHER INCORRECT OR IS NOT SUPPORTED BY THE EVIDENCE PLACE D ON RECORD. FACTUAL ASPECT OF THE MATTER IS ALSO NOT UNDER DISPUTE THAT AVERAGE D ELAY IN RECEIVING THE PAYMENT BY THE ASSESSEE IN THE CASE OF AE TRANSACTION IS 19 3 DAYS AND IN THE CASE OF NON- AES, IT IS 173 DAYS AND ACCORDING TO THE FINDING R ECORDED BY LD. CIT(A) IN PARA . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 22 4.4 THIS FACT HAS BEEN MENTIONED. LD. CIT(A) DID NOT CONTROVERT THIS FACT, HOWEVER, HE HAS REJECTED THE CONTENTION OF THE ASS ESSEE ON THE GROUND THAT DIFFERENCE IN THE PERIOD ITSELF PROVES THAT ASSESS EE IS NOT ADOPTING UNIFORM APPROACH. THIS FINDING OF LD. CIT(A) IS RECORDED IN PARA 4.4.VI. SUCH OBSERVATION OF LD.CIT(A) IS INCORRECT AS THE APPROA CH OF THE ASSESSEE IN NON- CHARGING THE INTEREST FROM ITS AE AND NON-AES IS U NIFORM EXCEPT THERE BEING SOME MORE DELAY IN RECEIVING THE PAYMENT FROM AE. THE UNIFORM APPROACH IS DEPICTED IN THE FACT THAT EITHER THE ASSESSEE IS CHARGING INTEREST FROM AE AND NON-AE AND NOT CHARGING ANY INTEREST FROM THEM. T HE APPROACH OF THE ASSESSEE IN THE PRESENT CASE IS UNIFORM SO AS IT RELATES TO NON-CHARGING OF INTEREST FROM AES AS WELL AS NON-AES. IF IT IS SO THEN THE CASE OF THE ASSESSEE TO THE EXTENT OF EQUAL DELAY IN REALIZATION IS COV ERED BY THE DECISION OF MUMBAI ITAT IN THE CASE OF DCIT VS. INDO AMERICAN JEWELLER Y LTD.(SUPRA), WHEREIN IT HAS BEEN HELD THAT THERE BEING COMPLETE UNIFORMITY IN THE ACT OF ASSESSEE IN NOT CHARGING INTEREST FROM BOTH THE AE AND NON-AE DEBT ORS FOR ALMOST EQUAL DELAY IN REALIZATION, NO SUCH ADJUSTMENT CAN BE MADE AS ASSE SSEE IS NOT AVOIDING ANY TAX BY INTENTIONALLY NOT CHARGING ANY INTEREST FROM THE AES. THIS POSITION OF TRIBUNAL HAS BEEN CONFIRMED BY HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. INDO AMERICAN JEWELLERY LTD. (2014) 44 TAXMAN.COM 3 10 (BOM) (COPY PLACED ON RECORD), WHEREIN THEIR LORDSHIPS WERE ADDRESSED TO ANSWER THE FOLLOWING QUESTION. B. WHETHER ON THE FACTS IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, ITAT WAS JUSTIFIED IN DELETING THE ADDITION OF RS.87,66,641/ - BEING INTEREST RECEIVABLE ON OUTSTANDING AMOUNT DUE TO THE ASSESSEE COMPANY FRO M THE ASSOCIATED ENTERPRISES? THEIR LORDSHIPS HAVE ANSWERED THE SAID QUESTION AS UNDER: 5. ON APPEAL FILED BY THE REVENUE, THE ITAT UPHEL D THE ORDER OF CIT(A). WHILE UPHOLDING THE ORDER OF CIT(A) , THE ITAT HELD THAT INTEREST INCOME IS ASSOCIATED ONLY WITH THE LENDING OR BORROWING OF MONEY AND NOT IN CASE OF SALE. WE EXPRESS NO OPINION ON THE ABOVE REASONING OF THE ITAT AND KEE P THAT REASONING OPEN FOR DEBATE IN AN APPROPRIATE CASE. HOWEVER, IN THE FACTS OF T HE PRESENT CASE, THE SPECIFIC FINDING OF THE ITAT IS THAT THERE IS COMPLETE UNIFO RMITY IN THE ACT OF THE ASSESSEE IN NOT CHARGING INTEREST FROM BOTH THE ASSOCIATED ENTE RPRISES AND NON ASSOCIATED ENTERPRISES DEBTORS AND THE DELAY IN REALIZATION OF THE EXPORT PROCEEDS IN BOTH THE CASES IS SAME. IN THESE CIRCUMSTANCES THE DECISION OF THE ITAT IN DELETING THE . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 23 NOTIONAL INTEREST ON OUTSTANDING AMOUNT OF EXPORT P ROCEEDS REALIZED BELATEDLY CANNOT BE FAULTED. ( EMPHASIS OURS ) 7.1 IT CAN BE SEEN FROM THE ABOVE OBSERVATIONS OF THEIR LORDSHIPS THAT IT HAS BEEN HELD THAT IF THERE IS A COMPLETE UNIFORMITY I N THE ACT OF THE ASSESSEE IN NOT CHARGING INTEREST FROM BOTH THE AE AND NON-AES DE BTORS AND THE DELAY IN REALIZATION OF THE EXPORT PROCEEDS IN BOTH THE CAS ES IS SAME THEN THE TRIBUNAL WAS RIGHT IN DELETING THE NOTIONAL INTEREST ON OUT STANDING AMOUNT OF EXPORT PROCEEDS WHICH WERE REALIZED BELATEDLY. THEREFORE , IN OUR OPINION ACCORDING TO AFOREMENTIONED POSITION OF LAW UPHELD BY HONBLE BO MBAY HIGH COURT, NO NOTIONAL INTEREST CAN BE ADDED TO DETERMINE THE ALP TO THE EXTENT OF DELAY OF 173 DAYS FROM AE TRANSACTION AS TO THAT EXTENT, IN ANY CASE, (EVEN ACCORDING TO CUP METHOD), NO ADJUSTMENT CAN BE MADE. 7.2 NOW THE QUESTION REMAINS THAT WHAT WOULD BE TH E INTEREST RATE APPLICABLE FOR REMAINING 20 DAYS. THE TPO HAS APPLIED RATE OF 14.18% ON THE BASIS OF YIELD FROM BBB GRADE CREDIT BOND (INVESTMENT GRADE BOND) WHICH WAS 14.18% FOR 1 TO 2 YEARS PERIOD FOR THE FINANCIAL YEAR 2007-08. AS AGAINST IT IS THE CASE OF ASSESSEE THAT INTEREST RATE SHOULD BE CALCULATED ON THE BASIS OF LIBOR AND SUCH CONTENTION OF THE ASSESSEE IS BASED ON THE DECISION S RELIED UPON BY LD. AR MENTIONED IN 4.8 OF THIS ORDER. 7.3 THE ASSESSEE HAS ALSO SUBMITTED THESE CALCULATI ON WHICH IS EVEN RECORDED BY LD. CIT(A) AT PAGE 55 TO 57 OF ORDER OF LD. CIT( A). THE SAME READ AS UNDER: A. AMOUNT ON WHICH INTEREST MIGHT BE CHARGED THE APPELLANT EXPORTED JEWELLERY TO DINURJE CORP. U SA (AE). THE APPELLANT ALSO PURCHASED POLISHED DIAMONDS FROM THE AE. NET AMOUNT OF RS. 25.27 CRORES WAS RECEIVABLE FROM THE AE AGAINST SUCH EXPORTS AS ON 3 1.03.2008, AS SHOWN BELOW: . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 24 RECEIVABLE FOR EXPORT (SALES) FROM SEEPZ UNIT: 52.6 4 CRORES . RECEIVABLE FOR EXPORT (SALES) FROM MUMBAI UNIT: 5.5 3 CRORES PAYABLE FOR IMPORT (PURCHASES) BY SEEPZ UNIT: - 8.4 5 CRORES PAYABLE FOR IMPORT (PURCHASES) BY SURAT UNIT: - 24. 45 CRORES SO; INTEREST MIGHT BE CHARGED ON NET AMOUNT RECEIVA BLE FROM THE AE I.E. RS.25.27 CRORES PERIOD FOR WHICH INTEREST MIGHT BE CHARGED - BASED ON INTERNAL COMPARABLES THE APPELLANT COMPANY HAS GRANTED AVERAGE CREDIT PE RIOD OF 173 DAYS TO ITS NON- AE CUSTOMERS, AS WORKED OUT BELOW: PARTICULARS DINURJE JEWELLERY PRIVATE LIMITED TOTAL SALES TO NON- AE CUSTOMERS RS.14,43,19,764.00 NET RECEIVABLE FROM NON- AE CUSTOMERS (A) SALES PER DAY = SALES/365(B) RS.6,84,5,508.40 3,95,397 CREDIT-PERIOD ALLOWED TO NON- AE CUSTOMERS (A/B) 173 DAYS IN COMPARISON, THE APPELLANT ALLOWED CREDIT-PERIOD OF 193 DAYS TO ITS AE, AS WORKED OUT BELOW: PARTICULARS DINURJE JEWELLERY PRIVATE LIMITED SALES TO AE 47.87 CRORES NET RECEIVABLE FROM AE (A) 25.27 CRORES SALES PER DAY = SALES/365 (B) 0.131 CRORES CREDIT-PERIOD ALLOWED TO AE (A/B) 193 DAYS SO, INTEREST ON OVERDUE RECEIVABLES MIGHT BE CHARGE D FOR EXCESS CREDIT-PERIOD OF 20 DAYS (193-173) ALLOWED BY THE APPELLANT TO ITS A E. RATE OF INTEREST THE RATE AT WHICH INTEREST MIGHT BE CHARGED ON OVE RDUE RECEIVABLES FROM THE AE. AS EXPLAINED DURING THE HEARING ON 02.08.2013, USD LIB OR RATE MAY BE TAKEN INTO . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 25 ACCOUNT FOR CHARGING INTEREST. DURING FY 2007-08, T HE AVERAGE USD LIBOR RATE; FOR DEBTS OF 1 YEAR MATURITY PERIOD, WAS 4.53% [SEE ANN EXURE] THE TPO HAS DETERMINED THE CREDIT RATING OF AE (DIN URJE CORP. USA) AT BBB. THE LLBOR RATE IS FOR LENDING AT MINIMUM RISK. AS SOME RISK WOULD BE INVOLVED IN LENDING TO A BBB RATED BORROWER, THE LENDER WOULD CHARGE INTEREST AT A RATE LITTLE HIGHER THAN THE LIBOR RATE . IN CASE OF AURIONPRO SOLUTIONS LTD. V ADDL. CIT (IT AT MUMBAI-I.TA. NO. 7872/MUM/2011, DATED 12.04.2013), IT HAS BEEN HELD THAT ARMS LENGTH INTEREST ON LOANS AND ADVANCES GIVEN TO AE CAN BE DETERMINED BY CONSIDERING THE LIBOR PLUS %. IN THAT CASE THE AE OF THE ASSESSEE WAS RATED AT A LEVEL BELOW BBB. ACCORDINGLY, IN THE CASE OF THE APPELLANT- WHOSE AE IS RATED AT BBB-INTEREST MAT BE CHARGED AT LLIBOR PLUS 2% I.E. AT 6.53% (4.53 + 2). THE SAME MAY BE ROUNDED OFF TO 7%. BASED ON THAT, THE INTEREST ON RECEIVABLE FROM AE C AN BE COMPUTED AS UNDER: 25.27 CRORES(NET RECEIVABLE) X 7% X 20 DAYS/365 =.0 .097 CRORES OR 9.70 LAKHS 7.4 THE ABOVE CALCULATIONS OF THE ASSESSEE HAVE NOT BEEN DISPUTED BY THE REVENUE AT ANY STAGE OF THE PROCEEDINGS. THEREFORE , WE ARE OF THE OPINION THAT ADDITION, IF ANY, CAN BE MADE ONLY TO THE EXTENT O F RS.9.70 LACS AS CALCULATED ABOVE AND THIS AMOUNT WILL ALSO FALL WITHIN THE +/- 5% RANGE, THEREFORE, NO ADDITION CAN BE MADE AS TRANSFER PRICING ADJUSTMENT EVEN ON ACCOUNT OF NON- CHARGING OF INTEREST FOR BELATED PAYMENT RECEIVED F ROM AES. 7.5 IN VIEW OF ABOVE DISCUSSION WE HOLD THAT NO AD DITION ON ACCOUNT OF TP ADJUSTMENT IN THE PRESENT CASE IS CALLED FOR AND THE ADDITION CONFIRMED BY LD. CIT(A) IS DELETED AND THE APPEAL FILED BY THE ASSE SSEE IS ALLOWED. 8. NOW COMING TO THE DEPARTMENTAL APPEAL, THE GRIEV ANCE OF THE REVENUE AS EXPRESSED IN GROUND NO.1 TO 4 IS THAT LD. CIT(A) HA S ERRED IN ACCEPTING THE ASSESSEES CLAIM THAT PROFIT UNDER SECTION 10A OF T HE INCOME TAX ACT,1961 (THE ACT) IS NOT LIABLE TO BE INCLUDED IN THE BOOK PROFI T COMPUTED UNDER SECTION 115JB OF THE ACT. THE MAIN ARGUMENTS HAVE BEEN REFERRED INTO THE GROUNDS OF APPEAL ON THE BASIS OF WHICH LD. DR HAS ARGUED THIS ISSUE . IT WAS THE CONTENTION OF LD. DR THAT WHILE HOLDING SO LD. CIT(A) HAS IGNORED THE AMENDMENT BROUGHT INTO THE . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 26 STATUTE W.E.F. 1/4/2008, WHEREBY WORDS 10A AND 10 B WERE OMITTED FROM EXPLANATION-1(F) & (II) OF SECTION 115JB OF THE ACT . ACCORDING TO LD. DR, IN VIEW OF THE SAID AMENDMENT, THE PROFIT/LOSS OF 10A & 10B UN ITS HAVE COME WITHIN THE PURVIEW OF MAT. IT IS ALSO THE CONTENTION OF LD. D R THAT THIS AMENDMENT IS APPLICABLE TO ASSESSMENT YEAR 2008-09 AS PER MEMORA NDUM EXPLAINING THE AMENDMENT. LD. DR SUBMITTED THAT LD. CIT(A) HAS COMMITTED AN ERROR IN ACCEPTING THE CLAIM OF THE ASSESSEE IN VIEW OF SEC TION 115JB(6) AS ACCORDING TO LD. DR SINCE SUB-SECTION(6) OF SECTION 115JB IS CON CURRENTLY INSERTED ON INSERTION OF SECTION 10AA, THEREFORE, SUB-SECTION(6) OF SECTI ON 115JB IS APPLICABLE ONLY TO SECTION 10AA UNITS AND NOT TO 10A UNITS. LD. DR AL SO REFERRED TO PARA-44 OF THE BOARD CIRCULAR NO.3/2008 TO CONTEND THAT EXPLANATIO N 1(F) AND (II) OF SECTION 115JB IS APPLICABLE FROM ASSESSMENT YEAR 2008-09. 9. AS AGAINST ABOVE ARGUMENTS OF LD. DR IT IS THE C ASE OF LD. AR THAT THIS ISSUE IS DIRECTLY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF MUMBAI TRIBUNAL IN THE CASE OF GENESYS INTERNATIONAL CORPN . LTD. VS. ACIT 55 SOT 10(MUM). IT WAS SUBMITTED THAT THE SAID CASE IS AL SO IN RESPECT OF ASSESSMENT YEAR 2008-09 AND 2009-10. HE SUBMITTED THAT SIMILA R ARGUMENTS WERE RAISED BY THE REVENUE IN THAT CASE AS HAVE BEEN RAISED IN T HE PRESENT CASE BY LD. DR AND AFTER CONSIDERING ALL THESE ARGUMENTS IT WAS HELD B Y THE TRIBUNAL THAT THE UNIT IN SEZ WILL BE COVERED BY SUB-SECTION (6) OF SECTION 1 15JB OF THE ACT IRRESPECTIVE OF THE FACT THAT THOSE UNITS WERE CLAIMING DEDUCTION U NDER SECTION 10A OF THE ACT. HE IN THIS REGARD INVITED OUR ATTENTION TO PARA-14 OF THE SAID DECISION TO SUBMIT THAT THE VERY BASIS OF REJECTION OF THE CLAIM OF TH E ASSESSEE BY THE AO IS THE SAME WHICH HAVE BEEN ARGUED BY LD. DR. THE SAID PARA -1 4 READ AS UNDER: 14. AO DID NOT ACCEPT SAID CONTENTION OF THE ASSES SEE AND STATED THAT AS PER PROVISIONS OF SECTION 115JB OF THE ACT, BOOK PROFIT IS TO BE COMPUTED AFTER MAKING SPECIFIED ADJUSTMENTS TO THE NET PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT. IN THE FINANCE ACT, 2007, THE SCOPE OF MINIMUM ALTERNATE T AX (MAT) WAS WIDENED BY INCLUDING THE INCOME EXEMPT U/S.1OA/1OB OF THE INCO ME TAX ACT IN THE BOOK PROFIT. AO AFTER CONSIDERING EXPLANATORY NOTES I.E. CIRCULA R NO.3/2008 DATED 12.3.2008 . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 27 HELD THAT MAT PROVISIONS ARE APPLICABLE TO A COMPAN Y ON THE INCOME WHICH IS FROM ANY BUSINESS OR SERVICES DERIVED FROM UNIT OR SPECI AL ECONOMIC ZONE. HE FURTHER STATED THAT SECTION 115JB(6) WAS INSERTED BY SPECIA L ECONOMIC ZONES ACT, 2005, WHEN SECTION 1OAA WAS ALSO INSERTED BY THE SAME ACT . SECTION 1OAA PROVIDES A DEDUCTION OF SUCH PROFITS AND GAIN DERIVED BY AN AS SESSEE BEING ENTREPRENEUR REFERRED TO IN CLAUSE (F) OF SECTION 2 OF SPECIAL E CONOMIC ZONE ACT, 2005 FROM ITS UNIT. AO STATED THAT BY INSERTING SUB- SECTION(6) IN SECT ION 115JB, THE LEGISLATURE HAS PROVIDED AN EXEMPTION UNDER MAT ALSO TO SUCH UNITS. THEREFORE, SECTION 115JB(6) IS APPLICABLE TO AN ASSESSEE CLAIMING DEDUCTION UNDER SECTION 1OAA OF THE ACT AND NOT AN ASSESSEE CLAIMING DEDUCTION UNDER 1OA OF THE ACT . AO STATED THAT ASSESSEE HAS CLAIMED DEDUCTION OF 1OA OF THE ACT UNDER NORMAL PR OVISIONS OF THE ACT. THEREFORE, FOR COMPUTING BOOK PROFIT U/S.115JB OF THE ACT, INC OME RELATES TO SEC. 1OA UNIT IS TO BE INCLUDED IN THE BOOK PROFIT. BEING AGGRIEVED, AS SESSEE FILED APPEAL BEFORE LD CIT(A). LD. AR SUBMITTED THAT THESE ARGUMENTS HAVE BEEN CON SIDERED BY THE TRIBUNAL IN PARA 20 TO 22 OF THE ORDER WHICH READ AS UNDER: 20. WE HAVE CONSIDERED SUBMISSIONS OF LD. REPRESEN TATIVES OF PARTIES AND ORDERS OF AUTHORITIES BELOW. WE HAVE ALSO CAREFULLY CONSIDERE D THE RELEVANT PROVISIONS OF THE ACT. THERE IS NO DISPUTE TO THE FACT THAT ASSESSEE S UNIT IN MUMBAI IS LOCATED IN SEZ. SECTION 1OA PROVIDES DEDUCTION OF PROFITS DERIVED B Y THE UNDERTAKING IN RESPECT OF UNITS WHICH ARE LOCATED NOT ONLY IN SEZ BUT ALSO IN THE FOLLOWING AREAS: FREE TRADE ZONE (FTZ) ELECTRONIC HARDWARE TECHNOLOGY PARK (EHTP) SOFTWARE TECHNOLOGY PAR (STP) EXPORT ORIENTED UNITS (EOU5) BY SPECIAL ECONOMIC ZONE ACT, 2005 W.E.F 10.2.2006, A NEW SECTION 1OAA HAS BEEN INSERTED WHICH PROVIDE EXEMPTION TO THE UNITS LOCAT ED IN SEZ. SECTION 2 OF SEZ ACT, DEFINES SEZ AS UNDER: (ZA)SPECIAL ECONOMIC ZONE MEANS EACH SPECIAL ECON OMIC ZONE NOTIFIED UNDER THE PROVISO TO SUB-SECTION (4) OF SECTION 3 AND SUB-SEC TION(1) OF SECTION 4(INCLUDING FREE TRADE AND WAREHOUSING ZONE) AND INCLUDES AN EXISTIN G SPECIAL ECONOMIC ZONE 21. IT IS EVIDENT FROM ABOVE THAT AN EXISTING SEZ U NIT WILL ALSO BE GOVERNED BY SPECIAL ECONOMIC ZONES ACT, 2005. THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT THE BENEFITS WHICH ARE TO BE PROVIDED TO THE NEWLY ESTA BLISHED UNIT IN SEZ AS PER SECTION 1OAA OF THE ACT WILL ALSO BE AVAILABLE TO THE EXIST ING UNITS IN SEZ. MOREOVER, SECTION 4(1) OF SEZ ACT PROVIDES THAT AN EXISTING SEZ UNIT SHALL BE DEEMED TO HAVE BEEN NOTIFIED AND ESTABLISHED IN ACCORDANCE WITH PROVISI ONS OF SEZ ACT AND THE PROVISIONS OF SPECIAL ECONOMIC ZONES ACT SHALL APPLY TO SUCH E XISTING SEZ UNITS. IT IS ALSO OBSERVED THAT BY THE SEZ ACT, SUB-SECTION (6) TO SE CTION 115JB WAS ALSO INSERTED PROVIDING THAT PROVISIONS OF SECTION 115JB SHALL NO T APPLY TO THE INCOME ACCRUED OR ARISEN ON OR AFTER 1.4.2005 FROM ANY BUSINESS CARRI ED ON, OR SERVICES RENDERED, BY . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 28 AN ENTREPRENEUR OR A DEVELOPER, IN A UNIT OR SPECIA L ECONOMIC ZONE, AS THE CASE MAY BE. HENCE, INCOME OF UNITS LOCATED SEZ WILL NOT BE INCLUDED WHILE COMPUTING BOOK PROFIT FOR THE PURPOSE OF MAT AS PER SECTION 115JB( 6) OF THE ACT. IN VIEW OF ABOVE, WE ARE OF THE CONSIDERED VIEW THAT THERE IS MERIT IN T HE CONTENTION OF LD A.R. THAT IRRESPECTIVE OF THE FACT THAT AMENDMENT HAS BEEN MA DE IN CLAUSE (F) OF EXPLANATION (1) TO SECTION 115JB(2) OF THE ACT TO APPLY THE PRO VISIONS OF MAT IN RESPECT OF UNITS WHICH ARE ENTITLED TO DEDUCTION U/S.1OA OR 1OB BUT THE UNITS WHICH ARE IN SEZ WILL CONTINUE TO GET BENEFITS FROM THE APPLICABILITY OF PROVISIONS OF MAT IN VIEW OF SUBSECTION(6) OF THE ACT. THE CONTENTION OF LD D.R. THAT ASSESSEE WILL NOT BE ENTITLED TO GET THE BENEFIT U/S.1153B(6) OF THE ACT AS ASSES SEE HAS CLAIMED DEDUCTION U/S.1OA OF THE ACT IS TO BE REJECTED FOR THE REASON THAT SECTION 115JB (6) DOES NOT REFER SECTION 1OA OR SECTION 1OAA BUT IT ONLY REFER THAT PROVISIONS OF SECTION 115JB WILL NOT APPLY TO THE INCOME ACCRUED OR ARISEN ON O R AFTER 1.4.2005 FROM ANY BUSINESS CARRIED ON IN AN UNIT LOCATED IN SEZ. HENC E, WE ARE OF THE CONSIDERED VIEW THAT THE UNIT IN SEZ WILL BE COVERED BY SUB-SECTION (6) TO SECTION 115JB OF THE ACT IRRESPECTIVE OF THE FACT THAT THOSE UNITS WERE CLAI MING DEDUCTION U/S.1OA OF THE ACT. WE ALSO OBSERVE THAT BENEFIT GIVEN TO SEZ UNIT FROM THE APPLICABILITY OF PROVISIONS OF SECTION 115JB HAS BEEN WITHDRAWN BY THE FINANCE ACT , 2011 BY INSERTING A PROVISO TO SECTION 115JB(6) OF THE ACT, WHICH READS AS UNDE R: SECTION 15JB(6) PROVIDED THAT THE PROVISIONS OF THIS SUB-SECTION SH ALL CEASE TO HAVE EFFECT IN RESPECT OF AN PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR COMMENCING ON OR AFTER THE 1ST DAY OF APRIL, 2012. .. 22. HENCE, WE HOLD THAT AUTHORITIES BELOW WERE NOT JUSTIFIED TO INCLUDE THE BOOK PROFIT IN RESPECT OF SEZ UNIT AT MUMBAI OF THE ASSE SSEE WHILE COMPUTING BOOK PROFIT U/S.115JB OF THE ACT FOR ASSESSMENT YEAR 2008-09. T HEREFORE, WE REVERSE THE ORDERS OF AUTHORITIES BELOW BY HOLDING THAT INCOME RELATIN G TO SEZ UNIT AT MUMBAI IS TO BE EXCLUDED WHILE COMPUTING BOOK PROFIT U/S.115JB OF T HE ACT FOR ASSESSMENT YEAR 2008-09. HENCE, GROUND NO.4 OF APPEAL TAKEN BY THE ASSESSEE FOR ASSESSMENT YEAR 2008-09 IS ALLOWED. LD. A.R SUBMITTED THAT FOLLOWING THE SAID DECISION LD. CIT(A) HAS GIVEN RELIEF TO THE ASSESSEE AND HIS ORDER SHOULD BE UPHELD. 10. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISS IONS IN THE LIGHT OF MATERIAL PLACED BEFORE US. LD. CIT(A) HAS GRANTED RELIEF TO THE ASSESSEE ON THE BASIS OF AFOREMENTIONED DECISION OF TRIBUNAL IN THE CASE OF GENESYS INTERNATIONAL CORPN. LTD. VS. ACIT (SUPRA). THE RELEVANT OBSERVATIONS OF THE TRIBUNAL FROM THE SAID DECISION HAVE ALREADY BEEN REPRODUCED. NO CONTRARY DECISION HAS BEEN CITED BY THE REVENUE. THEREFORE, RESPECTFULLY FOLLOWING THE THE DECISIO N IN THE CASE OF GENESYS . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 29 INTERNATIONAL CORPN.(SUPRA) WE DECLINE TO INTERFERE IN THE RELIEF GRANTED BY LD. CIT(A) AND GROUND NO.1 TO 4 OF THE REVENUE ARE DISM ISSED. 11. APROPOS GROUND NO.5 OF DEPARTMENTAL APPEAL; DUR ING THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS NOTICED BY THE AO TH AT THE ASSESSEE HAD CLAIMED AN AMOUNT OF RS. 17.30 LACS UNDER THE HEAD ASSORTME NT CHARGES AS AGAINST RS.3,25,000/- CLAIMED IN THE IMMEDIATE PRECEDING Y EAR. THE ASSESSEE WAS REQUIRED TO EXPLAIN THE SAME. FROM THE DETAILS FUR NISHED IT WAS NOTICED BY THE A.O THAT ASSORTMENT CHARGES OF RS.8,12,000/- AND RS.3,13,000/- WERE PAID TO M/S. DINU PLANTATION AND M/S. SUDHIR DIAMONDS PVT. LTD. RESPECTIVELY. FROM THE RETURN FILED BY THOSE PARTIES IT WAS NOTICED THAT T HEY DID NOT CARRY OUT ANY BUSINESS ACTIVITY. ACCORDING TO AO THEY DID NOT HA VE EXPERIENCE AND EXPERTISE IN THE WORK OF ASSORTMENT OF DIAMONDS. AS THESE PAYME NTS WERE MADE TO THE PERSONS SPECIFIED IN SECTION 40A(2)(B,) THE AO DIS ALLOWED THE AMOUNT. 11.1 BEFORE LD. CIT(A) IT WAS ARGUED THAT AO HAS C OMMITTED AN ERROR IN DISALLOWING THE ENTIRE PAYMENT WITHOUT BRINGING ANY MATERIAL TO SHO W THAT THESE PAYMENTS MADE TO SPECIFIED PERSONS WERE EXCESSIVE AS PROVIDED UNDER SECTION 40A(20(B) OF THE ACT AND IT WAS PLEADED THAT THE SAME IS TO BE ALLOWED ON REAS ONABLE BASIS. ACCEPTING THE REQUEST OF THE ASSESSEE LD. CIT(A) HAS RESTRICTED THE DISAL LOWANCE TO 50%. IT MAY BE MENTIONED HERE THAT IT WAS THE CONTENTION OF THE ASSESSEE BE FORE LD. CIT(A) THAT DURING THE COURSE OF HEARING BEFORE A.O THE ASSESSEE HAD SUBMITTED R EASONS FOR INCURRING HIGHER EXPENDITURE ON ASSORTMENT CHARGES AND COPIES OF SO ME INVOICES WERE ALSO PRODUCED BEFORE HIM TO PROVE THAT SMALL QUANTITY OF DIAMOND S IN LARGE NUMBERS WERE SOLD BY THE ASSESSEE DURING THE YEAR AND THUS IT WAS CLAIMED TH AT THE CLAIM OF THE ASSESSEE HAS WRONGLY BEEN REJECTED BY AO WITHOUT BRINGING ANY MA TERIAL ON RECORD. 12. WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE AN D THEIR CONTENTIONS HAVE CAREFULLY BEEN CONSIDERED. AFTER CAREFUL CONSIDERA TION, WE DECLINE TO INTERFERE IN THE ORDER PASSED BY LD. CIT(A)AS THE AO ALSO IN HI S ORDER DID NOT MENTION THE EXACT CIRCUMSTANCES UNDER WHICH HE APPLIED SECTIO N 40A(2)(B) AS REQUIREMENT OF . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 30 THE SAID SECTION IS THAT A.O HAS TO FORM AN OPINION THAT IMPUGNED EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MA DE OR THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEF IT DERIVED BY OR ACCRUED TO HIM THERE FROM SO MUCH OF THE EXPENDITURE AS IS SO CON SIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION. IT HAS BEEN FOUND BY LD. CIT(A) THAT BEFORE AO CERTAIN DETAILS WERE S UBMITTED AND IT WAS SHOWN THAT DURING THE YEAR UNDER CONSIDERATION QUANTUM OF SMA LL DIAMONDS WERE IN LARGE NUMBERS. IN VIEW OF NON-SPECIFIC FINDINGS RECORDED BY AO IN THIS RESPECT, WE DECLINE TO INTERFERE IN THE RELIEF GRANTED BY LD. C IT(A) AS HE HAS GRANTED RELIEF ONLY TO THE EXTENT OF 50% AND ASSESSEE DID NOT FILE ANY APPEAL AGAINST THE SUSTAINED DISALLOWANCE. ACCORDINGLY, THIS GROUND OF THE REVE NUE IS DISMISSED. 13. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS ALLOWED AND APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 08/08/2014 , ( *+ - ./ 08 /08/2014 + ( 0 1 SD/- SD/ - ( . / D.KARUNAKARA RAO ) ( . . / I.P. BANSAL ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI; . DATED 08 /08/2014 . / ITA NO.5875&6221/MUM/2013 / ASSESSMENT YEAR 2008-09 31 , , , , ( (( ( %)2 %)2 %)2 %)2 32 ) 32 ) 32 ) 32 ) / COPY OF THE ORDER FORWARDED TO : 1. !$ / THE APPELLANT 2. %&!$ / THE RESPONDENT. 3. 4 ( ) / THE CIT(A)- 4. 4 / CIT 5. 250 %) , , / DR, ITAT, MUMBAI 6. 0 6 / GUARD FILE. , , , , / BY ORDER, &2) %) //TRUE COPY// 7 77 7 / 8 8 8 8 ' ' ' ' (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI . . ./ VM , SR. PS