D.C.I.T.16(3), MUMBAI V. LIVING STONES, MUMBAI

ITA 7460/MUM/2011

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 71589 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 11 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-10-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: K
• Next Hearing Date: 29-08-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 04-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: VIJAY MEHTA JKTLP DH LS
• Keywords: Business income; Transfer pricing; International transaction; Additional evidence; Reasonable cause; Notional interest
• Section: 92C; 143(3); 10B

Judgement Text

M/S LIVINGSTONES - 1 - VK;DJ VIHYH; VF/KDJ.K DS U;K;IHB EQACBZ ESAA IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUM BAI JH IH ,E TXRKI YS[KK LNL; ,OA JH VFER 'KQDYK] U;KF;D LNL; DS L E{K JH IH ,E TXRKI YS[KK LNL; ,OA JH VFER 'KQDYK] U;KF;D LNL; DS L E{K JH IH ,E TXRKI YS[KK LNL; ,OA JH VFER 'KQDYK] U;KF;D LNL; DS L E{K JH IH ,E TXRKI YS[KK LNL; ,OA JH VFER 'KQDYK] U;KF;D LNL; DS L E{K BEFORE SHRI P.M. JAGTAP ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA JUDICIAL MEMBER VK;DJ VIHY LA[;K /ITA NO. 7303/MUM/2011 FU/KKZJ.K O'KZ @ ASSESSMENT YEAR: - 2007-08 M/S LIVINGSTONES 201, DHARAM PALACE BUILDING, N.S. PATKAR MARG, GAMDEVI, MUMBAI -400 007. CUKE@ VS. DEPUTY COMMISSIONER OF INCOME TAX, 16(3), MUMBAI MATRU MANDIR, 02 ND FLOOR, GRANT ROAD, MUMBAI 400 007. PAN:- AAAFL0356L VIHYKFKHZ @ APPELLANT IZR;FKHZ @ RESPONDENT VK;DJ VIHY LA[;K /ITA NO. 7460/MUM/2011 FU/KKZJ.K O'KZ @ ASSESSMENT YEAR: - 2007-08 DCIT 16(3) ACIT-16 (3), MATRU MANDIR, 2 ND FLOOR, R. NO. 206, TARDEO ROAD, MUMBAI 400 007. CUKE@ VS. M/S LIVINGSTONES 201, DHARAM PALACE BUILDING, N.S. PATKAR MARG, GAMDEVI, MUMBAI -400 007. PAN:- AAAFL0356L VIHYKFKHZ @ APPELLANT IZR;FKHZ @ RESPONDENT FU/KKZFJRH DH VKSJ LS @ ASSESSEE BY SHRI VIJAY MEHTA JKTLP DH VKSJ LS @ REVENUE BY SHRI AJEET KUMAR JAIN VKNS'K@ VKNS'K@ VKNS'K@ VKNS'K@ ORDER PER AMIT SHUKLA, JM THESE CROSS APPEALS ARE DIRECTED AGAINST THE IMPUGN ED ORDER DATED 25-8-2011 PASSED BY CIT(APPEALS)-50, MUMBAI, FOR TH E QUANTUM OF ASSESSMENT PASSED U/S 143(3) FOR THE ASSESSMENT YEA R 2007-08. THE LQUOKBZ DH RKJH[K @ DATE OF HEARING 29-08-2013 ?KKS'K.KK DH RKJH[K @ DATE OF PRONOUNCEMENT 23-10-2013 M/S LIVINGSTONES - 2 - MAIN ISSUE INVOLVED IN THESE APPEALS ARE TRANSFER P RICING ADJUSTMENT ON ACCOUNT OF SALE TRANSACTIONS WITH AE. THE ASSESSEE HAS CHALLENGED THE ADDITION OF RS 51,32,512/- ON ACCOUNT OF TRANSFER P RICING ADJUSTMENT IN RESPECT OF SALE MADE TO THE AE BY APPLYING CUP METH OD INSTEAD OF TNMM, WHEREAS THE REVENUE HAS CHALLENGED THE SIMILAR DELE TION OF TRANSFER PRICING ADJUSTMENT OF RS. 1,28,19,493/- ON ACCOUNT OF TRANSACTIONS OF SALE OF DIAMOND WITH THE AE AND ALSO DELETION OF TP ADJU STMENT OF RS. 4,65,23,007/- ON ACCOUNT OF NOTIONAL INTEREST TO BE CHARGED ON DELAYED PAYMENT ON SALES/INVOICES WHICH ARE RECEIVABLES FRO M THE AE. SINCE COMMON ISSUE OF TRANSFER PRICING ADJUSTMENT IS INVO LVED IN BOTH THE APPEALS, THEREFORE, THEY ARE BEING DISPOSED OFF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2. THE FACTS IN BRIEF, ARE THAT THE ASSESSEE WHICH IS A PARTNERSHIP FIRM, IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF CUT AND POLISHED DIAMONDS AND SELLING THEM TO AE AS WELL AS TO THE THIRD PART IES. IN THE TRANSFER PRICING REPORT IN FORM 3CEB, THE ASSESSEE HAS DISCL OSED THE FOLLOWING INTERNATIONAL TRANSACTION WITH ITS ASSOCIATE ENTERP RISES (AES) :- SL NO. CLASS OF TRANSACTIONS IN F.Y 2006-07 AMOUNT IN RS. METHOD USED 1. PURCHASE OF ROUGH DIAMONDS 10,88,53,365/- TNMM 2. SALE OF CUT & POLISHED DIAMONDS 1,26,34,59,644/- TNMM FOR BENCH MARKING THE TRANSACTIONS WITH ITS AE, TH E ASSESSEE HAS ADOPTED TNMM AS MOST APPROPRIATE METHOD, WHEREIN TH E PLI MARGIN OF M/S LIVINGSTONES - 3 - THE COMPARABLES WERE 4.53%, WHEREAS THE ASSESSEES OPERATING MARGIN ON SALES WITH ITS AE WAS AT 8.22%. THUS IT WAS REPO RTED THAT ASSESSEES TRANSACTION WITH THE AE WERE AT ARMS LENGTH PRICE. 2.1 THE, TRANSFER PRICING OFFICER, (TPO) TO WHOM TH E MATTER WAS REFERRED BY THE ASSESSING OFFICER (AO) U/S 92CA(1), FOR EXAMINING THE ARMS LENGTH PRICE OF THE TRANSACTIONS WITH AES, RE QUIRED THE ASSESSEE TO FURNISH THE COPY INVOICES OF EXPORT MADE TO AE AS WELL AS TO NON AES. FROM THE EXAMINATION OF THESE DETAILS, THE TPO NOTE D THAT EACH INVOICES BEAR THE DESCRIPTION OF DIAMONDS EXPORTED AND ALSO GIVE THE DETAILS OF PIECES PER CARAT AND VARIETIES OF DIAMONDS, WHICH H AS BEEN EXPORTED TO AE AS WELL AS TO NON AE. THE LIST OF SUCH INVOICES HAS BEEN ILLUSTRATED AT PAGE 2 OF THE TPOS ORDER. FROM DETAILS OF SUCH TRA NSACTIONS, HE NOTICED THAT THERE ARE DIFFERENCES IN PRICES WHICH WERE CHA RGED FROM AE AND FROM THE THIRD PARTIES. ACCORDINGLY, HE DEDUCED THAT THE PRICES CHARGED FROM THE NON AE CAN BE USED AS COMPARABLE FOR BENCH MARK ING THE PRICE CHARGED BY THE ASSESSEE FROM ITS AES, BY APPLYING I NTERNAL CUP. ON THIS ASPECT, THE TPO REQUIRED THE ASSESSEE TO SHOW CAUSE , AS TO WHY THE DIFFERENCE IN THE RATES PAID TO THE AE IN COMPARISO N TO NON AE SHOULD NOT BE CONSIDERED AS ADDITIONAL PRICE TO BE CHARGED FRO M THE AE ON SALES MADE TO THEM AND UPWARD ADJUSTMENT BE MADE ON THE V ALUE OF SUCH INTERNATIONAL TRANSACTION. IN RESPONSE, THE ASSESSE E SUBMITTED THAT THERE ARE VARIOUS REASONS FOR NON COMPARABILITY OF AE AND NON-AE TRANSACTIONS SOLELY BASED ON INVOICES, BECAUSE THERE ARE:- (I). DIFFERENCES ON ACCOUNT OF PERIOD AND PRICE FLUCTUATION; (II) DIFFERENCES O N ACCOUNT OF VOLUME OF SALES; (III) DIFFERENCES ON ACCOUNT OF BAD DEBT RIS K; (IV) DIFFERENCES ON ACCOUNT OF MARKETING EXPENSES; AND (V) ADJUSTMENT O N ACCOUNT OF M/S LIVINGSTONES - 4 - GEOGRAPHICAL DIFFERENCES. SUCH A REASONING GIVEN BY THE ASSESSEE HAS BEEN REJECTED BY THE TPO ON THE GROUND THAT, WHEN T HESE PARTIES ARE ENTERING INTO INTERNATIONAL TRANSACTION, THE PRICES ARE NEGOTIATED, KEEPING IN VIEW THE PRICE PREVAILING IN THE UNCONTROLLED SC ENARIO AND THE ASSESSEE WHO IS SELLING THE SAME PRODUCT TO THE UNRELATED PA RTIES ON SAID RATE, THE SAME SHOULD BE BENCH MARKED FOR THE NEGOTIATION OF PRICE WITH THE RELATED PARTY ALSO. AFTER ANALYZING THE VARIOUS TRANSACTION S WITH THE AES AS WELL AS NON AES, HE NOTED THAT IN THE THREE CATEGORIES OF T RANSACTION OF SALE OF DIAMONDS, THERE WAS DIFFERENCE OF PRICES BY MORE TH AN 5% AS THE PRICES CHARGED FROM THE AES WERE LESS THAN THE PRICES CHAR GED FROM THE NON AES, ACCORDINGLY HE PROCEEDED TO MAKE ADJUSTMENT IN RESPECT OF THE SAID THREE CATEGORIES OF TRANSACTIONS. THE CALCULATION A ND THE ADDITION MADE BY THE TPO IN RESPECT OF THREE CATEGORIES OF THE DIAMO NDS WERE AS UNDER:- PRODUCTS QTY. IN CARATS DIFFERE NCE /CARATS (US DOLLAR) VALUE OF DIFFERENCES (US DOLLAR ) VALUE OF DIFFERENCE ( IN RS.) EXPORT TO THE AE 25 P/ CT D CUT WHITE VS1 3250.08 82.28 270667.65 1,21,85,458 25 P/ CT D CUT WHITE VVS1 2773.20 41.11 114005.15 51,32,512 6P/ CT D CUT WHITE VVS1 201.35 69.94 14083.40 6,34, 035 TOTAL 398756.2 1,79,52,005 2.2 ACCORDINGLY THE TPO MADE ADJUSTMENT OF RS. 1,7 9,52,005/- TO THE ARMS LENGTH PRICE OF THE EXPORTS OF DIAMONDS MADE TO THE AE. 2.3 FURTHER WHILE ANALYZING THE DETAILS OF REALIZAT ION PERIOD OF SALE PROCEEDS FROM AES AS WELL AS NON THE TPO, NOTICED THAT THE CREDIT PERIOD M/S LIVINGSTONES - 5 - GIVEN TO THE AE AND ALSO THE REALIZATION PERIOD AS COMPARED TO NON AES WERE MORE. FROM THE REPLY DATED 24.9.2010 FURNISHED BY THE ASSESSEE, HE NOTED THAT THE DETAILS OF AVERAGE REALIZATION PERIO D, WHICH SHOWED THAT AVERAGE PERIOD OF REALIZATION OF THE ASSESSEE FROM THE AES WERE 210 DAYS, WHEREAS THE AVERAGE REALIZATION PERIOD IN RESPECT O F EXPORT TO NON AES WERE 126 DAYS. THUS HE DEDUCED, THAT THERE IS A DEL AY OF 84 DAYS IN REALIZATION OF SALE PROCEEDS FROM THE AE AND, THER EFORE, REQUIRED THE ASSESSEE TO SHOW CAUSE AS TO WHY THE ADJUSTMENT ON ACCOUNT OF INTEREST ON SUCH LATE REALIZATION SHOULD NOT BE MADE. THE AS SESSEE IN RESPONSE SUBMITTED THAT, SINCE IT IS USING THE TNMM METHOD T O BENCH MARK ITS MARGIN, THE REALIZATION PERIOD HAS TO BE COMPARED W ITH THE COMPARABLE COMPANIES. FURTHER THERE IS A LESS RISK INVOLVED IN THE PAYMENT FROM AES AND, THEREFORE, THE BENEFIT OF EXTENDED CREDIT PERI OD IS QUITE JUSTIFIED. HOWEVER THE AO REJECTED THE ASSESSEES CONTENTION A ND WORKED OUT THE UPWARD ADJUSTMENT OF RS. 4,65,23,007/- AFTER OBSERV ING AND HOLDING AS UNDER:- THE SUBMISSION OF THE ASSESSEE HAS BEEN DULY CONS IDERED. IT IS CLEAR THAT THE ASSESSEE IS GIVING BENEFIT TO ITS AE BY AL LOWING MORE DAYS OF INTEREST FREE CREDIT VIS--VIS THE NON AES. THUS, A ND ADJUSTMENT IS WARRANTED ON ACCOUT OF DELAYED AVERAGE REALIZATION PERIOD. FOLLOWING THE CUP METHOD, BECAUSE NO PERSON IN UNCONTROLLED TRANS ACTIONS WILL PERMIT USE OF MONEY WITHOUT INTERESTS, SO AS TO CONSIDER T HE TRANSACTION TO BE AT ARMS LENGTH. THE ASSESSEE WAS ALSO ASKED TO FURNIS H THE AVERAGE BORROWING COST OF ITS FUND. THE ASSESSEE VIDE ITS S UBMISSION DATED 11.10.2010 SUBMITTED THE DETAILS OF THE VARIOUS LOA NS AVAILED BY IT FROM DIFFERENT BANKS. IT IS OBSERVED THAT THE MAXIMUM IN TEREST PAID BY THE M/S LIVINGSTONES - 6 - ASSESSEE IS 15.25%. IF WE MAKE AN ADJUSTMENT ON ACC OUNT OF INVOLVEMENT OF PERSONAL SECURITY, LOSS OF BUSINESS OPPORTUNITY OTHER COST RISK ETC, THE RATE SHOULD NOT BE LESS THAN 16%. AN ADJUSTMENT OF RS. 4,65,23,007/- IS TO BE MADE ON ACCOUNT OF DELAYED CREDIT REALIZATION PERIOD FROM THE AE. THE WORKING OF THE SAME IS GIVEN AS UNDER:- DELAY IN DAYS 84 TOTAL VALUE OF REALIZATION FROM THE AE RS. 1,26,3 4,59,644/- RATE OF INTEREST 16% INTEREST 1,26,34,59,644 X 84 X 16 = RS. 4,65,23,007/- 365X100 IN VIEW OF THE ABOVE, AN ADJUSTMENT OF RS. 4,65,23, 007/- IS MADE ON ACCOUNT OF DELAYED REALIZATION FROM AES. 2.4 THUS, THE TOTAL ADJUSTMENT OF RS. 6,44,75,012/- IN THE ALP WAS MADE BY THE TPO. 3. BEFORE THE CIT(A), ON THE FIRST ISSUE, THE ASSES SEE SUBMITTED THAT THE COMPARABLE UNCONTROLLED PRICE METHOD (CUP) CANN OT BE ADOPTED AS MOST APPROPRIATE METHOD, BECAUSE THE PRICES OF TWO DIAMONDS CANNOT BE SAME OR CAN BE COMPARED MERELY ON THE BASIS THAT T HE DIAMONDS HAVE SAME DESCRIPTION ON INVOICES, AS THERE ARE SEVERAL FACTORS WHICH HAS TO BE TAKEN INTO CONSIDERATION ON WHICH DIAMONDS ARE PRIC ED LIKE QUALITY OF DIAMONDS, SIZE PER CARAT, TYPE OF SHAPE, TYPE OF CO LOUR AND FLORESCENCE, PURITY AND VARIOUS GRADES OF DIAMONDS. ALL THESE FA CTORS NEEDS TO BE DIFFERENTIATED AND THEY HAVE AFFECT THE PRICING OF THE DIAMONDS, AND THESE DIFFERENCES ARE NOT POSSIBLE TO MENTION IN TH E INVOICES. IN SUPPORT M/S LIVINGSTONES - 7 - OF THIS CONTENTION, THE ASSESSEE SUBMITTED RAPPORT REPORT, AND CERTIFICATE FROM INTERNATIONAL GEMOLOGICAL INSTITUTE, TO POINT OUT VARIOUS SUB CLASSIFICATIONS WITHIN EACH CATEGORY OF DIAMOND AND THE IMPACT ON PRICING OF THE DIAMONDS. THE ASSESSEE HAS ALSO HIGHLIGHTED THE VARIOUS INSTANCES, WHEREIN IT HAD SOLD THE SAME CATEGORY OF DIAMOND TO THE SAME CUSTOMER IN SAME INVOICES BUT AT MUCH DIFFERENT RATES. THIS GOES TO SHOW THAT, EVEN THOUGH THE DIAMONDS WHICH ARE FALLING IN THE SAME C ATEGORY, BUT DUE TO VARIOUS DISTINCT DIFFERENCES IN THE SUB CLASSIFICAT ION, THE PRICING GETS AFFECTED AND, THEREFORE, THERE ARE DIFFERENCES IN P RICING ALSO. FURTHER, IT WAS ALSO SUBMITTED THAT ITS OPERATING MARGIN WAS 8. 22% ON SALES WHICH IS QUITE COMPARABLE AND COMMENSURATE WITH THE MARGINS OF COMPARABLE COMPANIES WHICH HAD AVERAGE OPERATING MARGIN OF 4.5 3% OF SALES, DESPITE THE FACT THAT THE ASSESSEE HAS MAJOR SALE T RANSACTIONS WITH THE AES WHICH WERE AT 66.20%. WITHOUT PREJUDICE, IT WAS ALSO SUBMITTED THAT THERE ARE VARIOUS DIFFERENCES LIKE VOLUME DIFFERENC E, CREDIT RISK, MARKETING EXPENSES ETC. WHICH SHOULD HAVE BEEN TAKEN INTO ACC OUNT FOR DETERMINING THE PRICES WITH THE AE, BECAUSE VOLUME OF SALE TO T HE AES WERE HUGE AS COMPARED TO NON AES. FURTHER, IN CASE OF SALE TO AE S, THE ASSESSEE DOES NOT HAVE TO INCUR VARIOUS COSTS OF MARKETING EXPENS ES AND THE RISK FACTOR IS ALSO LESS WHILE MAKING SALES TO THE AES. THESE D IFFERENCES HAS TO BE TAKEN INTO ACCOUNT WHILE BENCH MARKING THE PRICES W ITH THE AES AS WELL AS WITH NON AES. 3.1 DURING THE COURSE OF APPELLATE PROCEEDINGS, THE ASSESSEE ALSO FILED ADDITIONAL EVIDENCE WITH REGARD TO PARTICULAR TRANS ACTIONS IN THE CASE OF SIMONA NV (THIRD PARTY), WHICH HAS BEEN BENCH MARKE D BY THE TPO AND HAD MADE THE ADJUSTMENT IN RESPECT OF TWO CATEGORIE S OF TRANSACTIONS, M/S LIVINGSTONES - 8 - THIS HAS RESULTED INTO ADJUSTMENT OF RS. 1,28,19,49 3/-. FROM THE SAID ADDITIONAL EVIDENCE WHICH WAS IN THE FORM OF LETTER FROM THE SAID PARTY THE ASSESSEE HAD CONTENDED THAT THE SAID NON AE HAD NOT PURCHASED THE DIAMONDS, BUT HAD FORWARDED THE SAID CONSIGNMENT OF DIAMONDS TO THE AE OF THE ASSESSEE, ON THE GROUND THAT THE PRICE C HARGED BY THE ASSESSEE WAS TOO HIGH AND, THEREFORE, THE SAID PRICE CANNOT BE USED FOR BENCH MARKING THE PRICE CHARGED WITH THE AE. SIMONA NV, V IDE LETTER DATED 14.10.2010 HAD CATEGORICALLY STATED THAT PRICES CHA RGED BY THE ASSESSEE FOR THE SALE OF DIAMONDS WERE EXORBITANT AND SINCE THE SAID NON AE COULD NOT PASS ON SUCH HIGH PRICES TO ITS CUSTOMERS, THE REFORE, IT HAD RETURNED THE SAID DIAMONDS TO THE ASSESSEES AE. THIS ADDITI ONAL EVIDENCE WAS ALSO FORWARDED TO THE TPO TO SUBMIT HIS REMAND REPORT. T HE TPO, IN RESPONSE HAS OBJECTED TO THE ADMISSION OF SUCH ADDITIONAL EV IDENCE ON THE GROUND THAT SUFFICIENT OPPORTUNITY WAS GIVEN TO THE ASSESS EE WHICH IS EVIDENT FROM THE VARIOUS DAYS OF HEARING GIVEN TO THE ASSES SEE AND, THEREFORE, THERE WAS NO REASONABLE CAUSE FOR NON SUBMITTING T HIS LETTER BEFORE THE TPO. HOWEVER, THE TPO ON PERUSAL OF THE CONFIRMATI ON LETTER AND INVOICES, OBSERVED THAT THIS TRANSACTION WAS CIRCU LAR IN NATURE AS THE SALE HAS BEEN DIVERTED TO ASSESSEES AE. THE LEARNED CIT (A) ACCEPTED THE SAID ADDITIONAL EVIDENCE ON THE GROUND THAT, THE SAID LE TTER WAS DATED 14.10.2010, WHEREAS THE PROCEEDINGS BEFORE THE TPO HAD ENDED BY THAT TIME AS THE ORDER OF TPO WAS PASSED ON 18.10.2010. AFTER DETAIL REASONING THE LD CIT(A) HAS ADMITTED THIS ADDITIONA L EVIDENCE, BECAUSE IT GOES TO THE VERY ROOT OF THE TRANSFER PRICING ADJUS TMENT. THE ADMISSION OF THIS ADDITIONAL EVIDENCE HAS ALSO NOT BEEN CHALLENG ED BY THE DEPARTMENT IN ITS APPEAL. M/S LIVINGSTONES - 9 - 3.2 THUS AFTER ADMITTING THIS ADDITIONAL EVIDENCE A ND CONSIDERING THE ENTIRE MATERIAL ON RECORD, THIS ISSUE OF TRANSFER P RICING ADJUSTMENT OF RS. 1,79,52,005/- ON THE EXPORT OF DIAMONDS MADE TO THE AES, THE LEARNED CIT(A) PARTLY REJECTED THE ASSESSEES CONTENTION AF TER GIVING VERY DETAIL REASONING, WHICH IS REPRODUCED HEREIN BELOW FOR THE SAKE OF READY REFERENCE WHICH ARE APPEARING FROM PAGES 8 TO 10 OF THE APPELLATE ORDER:- 1. IN RESPECT OF THE APPLICABILITY OF THE CUP, I C ONCUR WITH THE FINDINGS OF TPO IN HIS ORDER, WHEN TWO PARTIES ARE ENTERING INTO ANY TRANSACTION; THE PRICES ARE NEGOTIATED KEEPING IN VIEW THE PRICES PR EVAILING IN AN UNCONTROLLED SCENARIO. SO FAR AS THE APPELLANT IS CONCERNED, IT HAD ALREADY BEEN SELLING THE PRODUCTS TO THE UNRELATED PARTIES AT CERTAIN RATES. THEREFORE, THOSE PRICES WILL BE A BENCHMARK FOR NEGOTIATION WITH A RELAY TOO. IN ITS SUBMISSION THE APPELLANT HAS NOT BEEN ABLE TO DEMONSTRATE THAT THE FACTORS OF DIFFERENCES WHICH IT HAS MENTIONED, HAVE ANYWAYS AFFECTED THE T RANSFER PRICES OF THE PRODUCTS. ACCORDINGLY EVEN IF SUCH DIFFERENCES EXIS TED, THE SAME AT BEST COULD BE TREATED AS MERE DIFFERENCES AND NOT THE MATE RIAL DIFFERENCES, WHICH WOULD AFFECT THE PRICE OF THE PRODUCT IN THE OPEN M ARKET, AS HAS BEEN ENVISAGED IN THE RULE IOB(1)(A)(II) OF THE I. T. RU LES, 1962. IN VIEW OF THESE FACTS AND CIRCUMSTANCES, THE OBJECTIONS RAISED BY T HE APPELLANT IN THIS REGARD ARE REJECTED. 2. THE APPELLANT HAS FURTHER MENTIONED THAT DIAMON D INDUSTRY IS VERY PRICE SENSITIVE AND THAT THERE ARE VARIOUS JUDICIAL PRECEDENTS IN THE INDIAN CONTEXT, WHERE IN, IT HAS BEEN HELD THAT EACH DIAMO ND IS UNIQUE, AND HENCE, THE PRICES OF DIFFERENT DIAMOND CANNOT BE COMPARED. IN THIS REGARD IT IS STATED THAT THE APPELLANT HAS NOT DEMONSTRATED WITH ANY FACTS OR FIGURES, HOW SUCH A MENTION IS RELEVANT TO THE APPELLANTS CASE. FURTHER WHAT ARE THOSE JUDICIAL PRONOUNCEMENTS WHICH HAVE HELD ABOUT THE U NIQUENESS OF THE DIAMOND IN THE INDIAN CONTEXT HAS NOT BEEN SUBMITTE D BY THE APPELLANT. IT IS FURTHER MENTIONED HERE THAT IT IS THE FACTS OF THE CASE AND NOT DISPUTED BY THE M/S LIVINGSTONES - 10 - APPELLANT THAT WHAT HAS BEEN COMPARED BY THE TPO IS THE PRICE OF THE DIAMONDS WHICH WERE SAME AS PER THE DESCRIPTION MEN TIONED IN THE INVOICES RAISED BY THE APPELLANT. 3. IT HAS BEEN SUBMITTED THAT OPERATING MARGINS EA RNED BY THE OVERSEAS AES WERE IN FACT LOWER THAN THE OPERATING MARGIN EARNED BY THE APPELLANT. IN THIS REGARD IT IS STATED THAT OPERATI NG MARGINS OF THE OVERSEAS AE DO NOT CONCLUSIVELY SUPPORT THE ARMS LENGTH NAT URE OF INTERNATIONAL TRANSACTION. THE OPERATING MARGIN OF THE AE COULD B E LOWER, IN THE YEAR UNDER CONSIDERATION, ON ACCOUNT OF VARIETY OF REASO NS AND NOT FOR THE REASON OF THE APPELLANTS INTERNATIONAL TRANSACTION BEING AT ARMS LENGTH. 4. THE APPELLANT HAS MADE SUBMISSION AND ALSO FILE D ADDITIONAL EVIDENCES DURING THE COURSE OF THE INSTANT PROCEEDI NGS. IT HAS ALSO SUBMITTED THAT THE TPO HAS NOT GRANTED ENOUGH OPPORTUNITY AND TIME TO PROVE THAT THE COMPARABLE PRICES USED BY THE TPO IN RESPECT OF WHI CH THE ADJUSTMENTS HAVE BEEN MADE ARE IN FACT NOT COMPARABLE TRANSACTIONS A T ALL. IN THIS REGARD IT IS STATED THAT THE APPELLANT WAS GIVEN SUFFICIENT OPPO RTUNITY BY THE TPO. THE PROCEEDINGS BEFORE THE TPO WERE INITIATED ON 18.3.2 010 AND THE ORDER U/S 92CA(3) WAS PASSED ON 18. 10.2010. DURING THE COURS E OF THE PROCEEDINGS THE AUTHORIZED REPRESENTATIVE ATTENDED BEFORE THE T PO AT LEAST FOR 8 TIMES ON VARIOUS DATES. ACCORDINGLY IT CANNOT BE ARRIVED, AT THAT THE APPELLANT WAS NOT GIVEN SUFFICIENT OPPORTUNITY TO MAKE ITS SUBMISSION S OR IT WAS NOT GIVEN SUFFICIENT OR REASONABLE OPPORTUNITY BY THE TPO. HO WEVER IT MAY BE MENTIONED HERE THAT THE ADDITIONAL EVIDENCE WHICH T HE APPELLANT FILED AND SEES TO BE CONSIDERED IN THE INSTANT PROCEEDINGS, I S A LETTER DATED 14.10.2010 OF M/S SIMONA NV. KEEPING IN VIEW THAT LAST SUBMISS ION WAS FILED BY THE APPELLANT ON 13.10.2010 AND THE ORDER U/S 92CA (3) WAS PASSED ON THE 18.10.2010, IT CAN REASONABLY BE CONCLUDED THAT AT THE TIME WHEN THE APPELLANT FILED ITS LAST SUBMISSION, IT DID NOT HAV E THE LETTER DATED 14.10.2010 OF M/S SIMONA NV. ACCORDINGLY THE APPELLANT COULD N OT HAVE SUBMITTED THE SAME BEFORE THE TPO. IN VIEW OF THESE SET OF FACTS THE ADDITIONAL EVIDENCE SO M/S LIVINGSTONES - 11 - SUBMITTED BY THE APPELLANT ARE ADMITTED FOR CONSIDE RATION AND DECISION OF THE ISSUE ON HAND. 5. ON PERUSAL OF THE VARIOUS SUBMISSIONS OF THE AP PELLANT, THE REMAND REPORT OF THE TPO WHERE IN IT HAS BEEN MENTIONED TH AT FROM THE RECORDS, IT IS SEEN THAT THE TFO HAD CONSIDERED TRANSACTION WIT H M/S SIMONA N V. FOR BENCH MARKING AND DETERMINING THE ARM S LENGTH P RICE. AND THAT ON PERUSAL OF THE PHOTOCOPIES OF CONFIRMATION LETTER A ND BILLS SUBMITTED BY THE ASSESSEE, IT IS SEEN THAT THE SAID TRANSACTIONS UND ER REFERENCE WERE OF CIRCULAR NATURE IT IS SEEN THAT IN RESPECT OF SAID TWO CATEGORIES OF DIAMONDS, TPO HAD USED SALES MADE TO SIMONA N.V. VIDE INVOICE NO. 187 DATED MARCH 13, 2007 AND VIDE INVOICE NO. 215 DATED MARCH 31, 2 007 AS COMPARABLE UNCONTROLLED TRANSACTION AND MADE ADJUSTMENTS ACCOR DINGLY. IN THIS RESPECT, AS SUBMITTED BY APPELLANT AND ALSO CONFIRMED BY TPO VIDE HIS REMAND REPORT DATED JULY 20, 2011, THE SAID SALES TO NON AE (SIMO NA N.V.) WERE EVENTUALLY SOLD TO AE, SINCE ) THE NON AE FOUND THE PRICES TO BE VERY HIGH. ACCORDINGLY, THE SAID TRANSACTION CANNOT BE REGARDED AS COMPARAB LE UNCONTROLLED TRANSACTIONS; ACCORDINGLY CONSEQUENT BENCHMARKING A ND HENCE THE ADJUSTMENT DONE BY TP() WOULD NOT BE VALID. IN VIEW OF THESE SET OF FACTS THE CONSEQUENT ADJUSTMENT MADE AMOUNTING TO RS. 1,28,19 ,493/- IN RESPECT OF THESE TWO CATEGORIES OF DIAMONDS IS DIRECTED TO BE DELETED. 6. FURTHER, IN RESPECT OF THE REMAINING ONE CATEG ORY OF DIAMOND (I.E. 25 P/CT D CUT WHITE S13 APPEARING AT SR. 2 IN THE TPOS ORDER WHERE ADJUSTMENT IS RS. 51,32,512) THE APPELLANT HAD DURI NG THE RELEVANT YEAR SOLD THE SAID CATEGORY OF DIAMOND TO ONLY ONE NON AE (I .E. POLYPEARL LIVINGSTONES CO. LTD.). 7. THE APPELLANT FURTHER CONTENDED THAT THERE IS HU GE DIFFERENCE IN THE VOLUMES OF QUANTITY SOLD BY IT TO ITS AES AND NON A ES. IT WAS SUBMITTED THAT THE QUANTITY OF SAID CATEGORY OF DIAMONDS SOLD TO P OLYPEARLS LIVINGSTONES IS ONLY 0.3% OF THE QUANTITY OF THE SAID CATEGORY OF D IAMONDS SOLD TO AES. FURTHER, IT WAS ALSO SUBMITTED THAT THE TOTAL SALES MADE TO THE SAID NON AES DURING THE RELEVANT YEAR WAS ONLY RS. 0.70 CRORES A S AGAINST THE SALES OF RS. M/S LIVINGSTONES - 12 - 126.34 CRORES MADE TO AL FURTHER, THERE ARE ALSO VA RIOUS OTHER DIFFERENCES SUCH AS DIFFERENCE IN CREDIT RISK, MARKETING EXPENS ES ETC. THE APPELLANT ALSO STATED THAT AN APPROPRIATE ADJUSTMENT WOULD HAVE TO BE MADE TO THE PRICES CHARGED TO NON AES TO MAKE THEM COMPARABLE TO THE P RICES CHARGED O AES. THE APPELLANT ALSO SUBMITTED THE CALCULATION OF THE SAID ADJUSTMENT AND CONTENDED THAT THE PRICES CHARGED TO AES WERE AT AR MS LENGTH. 8. I HAVE GONE THROUGH THE ARGUMENTS AND I DONT A GREE WITH TIE APPELLANTS CONTENTION. THE APPELLANT HAS NOT SUBMI TTED ANY BASIS OF CALCULATION OF THE SAID DISCOUNT ADJUSTMENT. FURTHE R, THE APPELLANT HAS NOT BROUGHT ANYTHING ON RECORD TO SUGGEST THAT THE AES WERE ELIGIBLE FOR DISCOUNT BASED ON THE QUANTITY SOLD. IN ITS SUBMISSION THE A PPELLANT HAS NOT BEEN ABLE TO DEMONSTRATE THAT THE FACTORS OF DIFFERENCES WHIC H IT HAS MENTIONED, HAVE ANYWAYS AFFECTED THE TRANSFER PRICES OF THE PRODUCT S. ACCORDINGLY EVEN IF SUCH DIFFERENCE EXISTED, THE SAME AT BEST COULD BE TREAT ED AS MERE DIFFERENCES AND NOT THE MATERIAL DIFFERENCES, WHICH WOULD AFF ECT THE PRICE OF THE PRODUCT IN THE OPEN MARKET AS HAS BEEN ENVISAGED IN THE RUL E IOB(L)(A)(II) OF THE I. T. RULES, 1962. IN VIEW OF THESE FACTS AND CIRCUMST ANCES, THE OBJECTIONS RAISED BY THE APPELLANT ARE REJECTED. ACCORDINGLY, THE APPELLANTS ARGUMENTS ARE REJECTED AND THE ADDITIONS MADE BY THE TPO IN R ESPECT OF THE ABOVE CATEGORY OF DIAMOND AMOUNTING TO RS. 51,32,512/- IS CONFIRMED. 3.3 IN SUM AND SUBSTANCE, THE CIT(A) HAS UPHELD THE APPLICABILITY OF CUP METHOD ON THE GROUND THAT THE ASSESSEE HAS BEEN SELLING THE SAME PRODUCTS TO THE AE AND ALSO TO UN RELATED PARTIES A ND THE PRICES CHARGED FROM THEM CAN BE BENCH MARKED FOR DETERMINING THE A RMS LENGTH PRICE. SECONDLY, HE HAS ACCEPTED THE ADDITIONAL EVIDENCE I N THE FORM OF LETTER DATED 14.10.2010 OF M/S SIMONA NV AFTER GIVING THE DETAIL REASONING AND BASED ON SUCH LETTER, HE CAME TO THE CONLUSION THAT NO ADJUSTMENT ON ACCOUNT OF SUCH TRANSACTION CAN BE MADE, AS THE SAL E ITSELF WAS NOT UNDERTAKEN AND HENCE CANNOT BE CONSIDERED FOR COMPA RABLE UNCONTROLLED M/S LIVINGSTONES - 13 - TRANSACTION AND, THEREFORE, ADJUSTMENT ON SUCH A TR ANSACTION IS NOT VALID. ACCORDINGLY SUM OF RS. 1,28,19,493/- BASED ON SUCH TRANSACTION WAS DELETED. LASTLY, ON THE BALANCE TRANSACTION, WHEREI N, THE ADJUSTMENT OF RS. 51,32,512/ WAS MADE BY TPO HAS BEEN CONFIRMED B Y HIM. AGAINST THIS, THE ASSESSEE AS WELL AS THE DEPARTMENT HAD CO ME IN APPEAL BEFORE US. 4. THE LEARNED COUNSEL, SHRI VIJAY MEHTA ON BEHALF OF THE ASSESSEE SUBMITTED BEFORE US THAT FIRST OF ALL, NO VALID REA SON HAD BEEN GIVEN BY THE TPO OR CIT(A) FOR REJECTING THE ASSESSEES SELECTIO N OF TNMM, AS THE MOST APPROPRIATE METHOD FOR BENCH MARKING THE TRANSACTIO NS. THE TRANSFER PRICING STUDY REPORT GIVES DETAIL REASONING AS TO WHY CUP METHOD CANNOT BE ADOPTED IN ASSESSEES NATURE OF TRANSACTION AND WHY TNMM IS THE ONLY APPROPRIATE METHOD WHICH CAN BE APPLIED. HE POINTED OUT THAT THE TRANSACTIONS BASED ON INVOICES WHICH HAS BEEN INCOR PORATED BY THE TPO AT PAGE 2 OF THE TPOS ORDER COULD NOT LEAD TO ANY INF ERENCE THAT CUP IS THE ONLY APPROPRIATE METHOD FOR BENCH MARKING THE PRICE WHICH HAS BEEN CHARGED BY THE AE. ON THE PROPOSITION THAT CUP MET HOD CANNOT BE APPLIED IN SUCH CASES, HE SUBMITTED THAT, IN THE DI AMOND INDUSTRY NO TWO DIAMOND CAN HAVE THE SAME RATE. EVEN THE SAME DESCR IPTION OF DIAMOND HAVE RATE VARIATIONS BECAUSE OF THE SHAPE, WEIGHT, CLARITY, COLOUR FLORESCENCE, POLISH ETC. SUCH A HUGE DISSIMILARITY IN THE PRODUCTS ITSELF CANNOT LEAD TO APPLICATION OF CUP METHOD, WHICH REQ UIRES VERY HIGH DEGREE OF PRODUCT SIMILARITY. HE DREW OUR ATTENTION TO RAPPORT REPORT AND CERTIFICATE OF INTERNATIONAL GEMOLOGICAL INSTITUTE, ALONGWITH THE LITERATURE ON SHAPES AND SIZES OF THE DIAMONDS IN SUPPORT THE CONTENTION THAT, THERE IS A HUGE DIFFERENCE IN THE GRADING AND PRICI NG OF THE DIAMONDS. M/S LIVINGSTONES - 14 - EVEN IN THE TP STUDY REPORT THIS ISSUE HAS BEEN HIG HLIGHTED IN DETAIL AND OUR SPECIFIC ATTENTION WAS DRAWN TO PAGE 129 OF THE PAPER BOOK AND ALSO ON PAGES 39 AND 40 OF THE PAPER BOOK. EVEN FROM THE PERUSAL OF THE INVOICES, HE SUBMITTED THAT, IT CAN BE SEEN THAT TP O HAS NOT TAKEN PIECE WISE OR CARAT WISE DESCRIPTION BUT HAS GONE BY THE PRICING BY THE CATEGORY OF DIAMOND WHICH WAS SOLD TO THE AE AS WEL L AS TO UN RELATED PARTIES. WITHIN THE SAME CATEGORY, THERE IS A HUGE VARIATION OF QUALITY AND PRICES OF THE DIAMOND WHICH HAS NOT BEEN TAKEN INTO CONSIDERATION EITHER BY THE TPO OR BY CIT(A). HE ALSO SUBMITTED THAT IN THE EARLIER YEARS, THE TNMM HAS BEEN HELD TO BE THE MOST APPROPRIATE METHO D BY THE TPO HIMSELF IN THE ASSESSMENT YEAR 2005-06 AND 2006-07. THE COPIES OF THE TPOS ORDER FOR THESE YEARS WERE ALSO SUBMITTED BEF ORE US. THUS IN THIS YEAR, THE METHODOLOGY CANNOT BE CHANGED WITHOUT ANY MATERIAL DIFFERENCE IN THIS YEAR. IN THE EARLIER YEARS ALSO THE SAME CO MPARABLES CHOSEN BY THE ASSESSEE HAVE BEEN ACCEPTED BY THE TPO ALONG WITH M ARGIN OF SUCH COMPARABLES. IN THIS YEAR ALSO, THE UPDATED MARGIN OF THESE COMPARABLES HAS BEEN BENCH MARKED WITH THAT OF THE ASSESSEES M ARGIN WHICH IN THIS YEAR IS FAR BETTER. THEREFORE, NOT ONLY THE TNMM ME THOD SHOULD BE ACCEPTED AS MOST APPROPRIATE METHOD IN THE CASE OF THE ASSESSEE BUT ALSO THE SAME COMPARABLES. 5. PER CONTRA, LD CIT(DR), SHRI AJIT JAIN, SUBMITTE D THAT, FROM THE VERY PERUSAL OF THE TRANSACTION AS HIGHLIGHTED BY THE TP O AT PAGE 2 OF HIS ORDER, IT CAN BE SEEN THAT THERE IS A CLEAR CUT DES CRIPTION OF PIECE PER CARAT, THE KIND OF CUT AND THE DESCRIPTION OF THE C LARITY OF THE DIAMONDS. UNDER SUCH DESCRIPTION, THE ASSESSEE HAS NOT ONLY S OLD THE DIAMONDS TO THE AE BUT ALSO TO THE THIRD PARTY CUSTOMERS AND, T HEREFORE, IN SUCH A M/S LIVINGSTONES - 15 - SITUATION THE NEGOTIATED PRICE WITH THE AE AS WELL AS WITH THE UN RELATED PARTIES HAS TO BE COMPARED AND BENCH MARKED. THIS I S WHAT TPO HAS DONE AFTER APPLYING THE CUP METHOD. IN THIS CASE, T HERE WAS AN INTERNAL CUP, THEREFORE, THERE WAS NO NEED TO RESORT TO TNMM . ONCE THE DIRECT METHOD OF BENCH MARKING THE TRANSACTION IN THE FORM OF CUP WAS AVAILABLE, THEN TNMM SHOULD NOT BE RESORTED TO. HE FURTHER SUBMITTED THAT, EVEN IN THE MARKET, DIAMOND IS SOLD IN A LOT WHICH ARE SEGREGATED ON THE BASIS OF SHAPE, CARAT SIZE, AND COLOUR ETC. IN A GIVEN LOT, THE DIAMONDS ARE SOLD WITH ALMOST SIMILAR KIND OF SHAPE, SIZE, C LARITY AND CARAT. THE MINOR DIFFERENCE WILL NOT MAKE ANY MATERIAL CHANGE, SO AS TO HOLD THAT CUP IS NOT APPLICABLE IN THE DIAMOND INDUSTRY. THE TPO, HAS ONLY COMPARED SIMILAR KIND OF LOT SOLD TO AE AS WELL AS NON AE AND, THEREFORE, THERE IS NO SUBSTANCE IN THE ARGUMENTS RAISED BY TH E LD. COUNSEL. ACCORDINGLY, THE FINDING OF CIT(A) TO THIS EXTENT I S PERFECTLY JUSTIFIED. WITHOUT PREJUDICE, HE SUBMITTED THAT IF TNMM IS TO BE APPLIED THEN, EXAMINATION OF COMPARABLES HAS TO BE DONE BECAUSE N EITHER THE TPO NOR THE CIT (A) HAS CARRIED OUT ANY COMPARABILITY ANALY SIS. SOME OF THE COMPARABLES AS HIGHLIGHTED BY THE ASSESSEE ARE ALSO INTO JEWELLERY BUSINESS, WHEREAS THE ASSESSEE IS PURELY ENGAGED IN THE BUSINESS OF SELLING OF CUT AND POLISHED DIAMONDS. IN ANY CASE, IF TNMM HAS TO BE ACCEPTED THEN THE MATTER IS REQUIRED TO BE SENT BAC K TO THE TPO FOR FRESH CONSIDERATION. 5.1 AS REGARDS DELETION/ADJUSTMENT OF RS. 1,28,19,4 93/- ON ACCOUNT OF TRANSACTION WITH M/S SIMONA NV, LEARNED CIT (DR) ST RONGLY RELIED UPON THE FINDINGS GIVEN BY THE TPO IN THE REMAND REPORT, WHICH HAS BEEN DEALT AT PAGE 7 OF THE APPELLATE ORDER AND FURTHER SUBMIT TED THAT THE M/S LIVINGSTONES - 16 - TRANSACTION WITH THE SAID PARTY HAS TO BE SEEN FOR THE PURPOSE OF COMPARING THE PRICES ONLY AND WHETHER SUCH TRANSACT ION HAS ACTUALLY MATERIALIZED OR NOT, WILL NOT MAKE ANY DIFFERENCE. 6. IN REJOINDER, THE LEARNED COUNSEL SUBMITTED THAT SO FAR AS TRANSACTIONS WITH M/S SIMONA NV IS CONCERNED, THERE IS A CLEAR CUT MATERIAL ON RECORD THAT THE SAID TRANSACTION DID NO T TAKE PLACE AS THE SALE WHICH WAS MADE TO THE SAID PARTY HAS BEEN RETURNED BACK AND DIVERTED TO THE AE OF THE ASSESSEE. THUS SUCH A TRANSACTION CAN NOT BE REGARDED AS COMPARABLE UNCONTROLLED TRANSACTION FOR THE PURPOSE OF BENCH MARKING THE PRICE. MOREOVER, OUT OF ELEVEN TRANSACTIONS THE TPO HIMSELF HAS ACCEPTED EIGHT OF THE TRANSACTIONS. THUS SUCH A TR ANSACTION WHICH HAS NOT RESULTED INTO SALE, THE SAME HAS RIGHTLY BEEN E XCLUDED BY CIT(A). HE THUS STRONGLY RELIED UPON THE FINDINGS OF CIT(A) ON THIS SCORE. 7. WE HAVE GIVEN OUR CAREFUL CONSIDERATION TO THE E NTIRE GAMUT OF ARGUMENTS PUT FORTH BY THE LEARNED COUNSEL AS WELL AS BY THE LEARNED DR, THE RELEVANT FINDING BY THE CIT(A) AND BY THE TPO A ND ALSO THE MATERIAL REFERRED TO, BEFORE US. THE ASSESSEE IS MAINLY ENGA GED IN THE MANUFACTURING AND SELLING OF CUT AND POLISHED DIAMO NDS AND FOR THIS PURPOSE IT HAS PURCHASED ROUGH DIAMONDS FROM AE AND HAD ALSO SOLD CUT AND POLISHED DIAMONDS TO ITS AE. THE TRANSACTION WI TH THE AE CONSTITUTES MORE THAN 66% OF THE ENTIRE SALE. THE OPERATING MAR GIN AS SHOWN BY THE ASSESSEE ON ITS SALES WAS AT 8.22%. FOR BENCH MARKI NG THE ARMS LENGTH PRICE OF ITS INTERNATIONAL TRANSACTION WITH ITS AE, THE ASSESSEE HAS ADOPTED TNMM AS THE MOST APPROPRIATE METHOD, AFTER ANALYZIN G VARIOUS OTHER METHODS AND ALSO AS TO WHY OTHER METHODS CANNOT BE APPLIED IN THE CASE M/S LIVINGSTONES - 17 - OF THE ASSESSEE.FOR COMPARABILITY ANALYSIS UNDER TN MM METHOD, IT HAS FINALLY SELECTED SEVEN COMPARABLES WHOSE AVERAGE P ROFIT MARGIN WERE 4.53%. HENCE, IT WAS STATED THAT ITS PRICE MARGIN O N THE SALE TRANSACTIONS WITH THE AE WERE AT ARMS LENGTH. THE TPO AFTER CAL LING FOR THE INVOICES OF EXPORT SALES TO AE AS WELL AS NON AE, NOTICED THAT THERE WERE ELEVEN SUCH TRANSACTIONS DURING THE YEAR AND OUT OF ELEVEN TRAN SACTION, IN THREE TRANSACTIONS THERE WERE PRICE DIFFERENCE OF MORE TH AN 5% BETWEEN THE SALE MADE TO AE AS WELL AS TO THE THIRD PARTY. THUS HE APPLIED INTERNAL CUP AND HAS MADE THE ADJUSTMENT OF RS, 1,79,52,005/ - IN THE MANNERS ALREADY DISCUSSED ABOVE. THE FIRST AND FOREMOST ISS UE BEFORE US IS, WHETHER ON FACTS AND CIRCUMSTANCES OF THE CASE, CUP SHOULD BE REGARDED AS THE MOST APPROPRIATE METHOD FOR BENCH MARKING TH E PRICE CHARGED BY THE ASSESSEE WITH ITS AE OR THE TNMM SHOULD BE THE MOST APPROPRIATE METHOD. 7.1 THE APPLICATION OF ARMS LENGTH PRICE IS BASED ON COMPARISON OF THE CONDITIONS IN CONTROLLED TRANSACTION WITH THE CONDI TIONS IN TRANSACTION BETWEEN INDEPENDENT ENTERPRISE I.E. UNCONTROLLED TR ANSACTION, SO AS TO DETERMINE THE MARKET PRICE OR THE MARGIN ON WHICH T HE TWO RELATED PARTIES ARE CARRYING ON THEIR TRANSACTION. THE DETE RMINATION OF ARMS LENGTH PRICE HAS TO BE DONE AS PER THE METHODOLOGY PRESCRIBED U/S 92C READ WITH RULE 10B. ALL THESE METHODS ARE EITHER BA SED ON PRICE OR ON PROFIT WHICH DETERMINE THE TRANSFER PRICE BY EXAMIN ING COMPARABLE MATCHING TRANSACTION, COMPARABLE ADJUSTABLE TRANSAC TION AND COMPARABLE PROFIT TRANSACTION. THE RULE 10B(1)(A) PROVIDES THA T COMPARABLE UNCONTROLLED PRICE METHOD I.E. CUP, IS COMPARISON O F THE PRICES OF THE PROPERTY OR SERVICES TRANSFERRED IN A CONTROL TRANS ACTION TO THE PRICE M/S LIVINGSTONES - 18 - CHARGED IN THE PROPERTY OR SERVICES TRANSFERRED IN A COMPARABLE UNCONTROLLED TRANSACTION. THE MAIN CRITERIA IS THAT , THE MARKET PRICE SHOULD BE COMPARABLE TO THE SAME OR SIMILAR NATURE OF GOO DS WHICH HAS BEEN CHARGED UNDER SIMILAR CONDITIONS. THUS, NOT ONLY TH ERE SHOULD BE HUGE SIMILARITY IN THE PRODUCTS BUT ALSO IN THE BUSINESS FUNCTIONS. LOOKING TO ITS SENSITIVITY ON THE PROPERTIES OF THE PRODUCT AND AC COMPANYING CIRCUMSTANCES AND CONDITIONS, THE APPLICATION OF CU P METHOD BECOMES VERY DIFFICULT. EVEN A MINOR CHANGES IN THE PROPERT IES OF THE PRODUCTS, RENDERS THE APPLICABILITY OF CUP METHOD INAPPLICABL E. THE PRODUCT COMPARABILITY IS AN ABSOLUTE KEY IN CUP, BECAUSE PH YSICAL FEATURES SUCH AS SIZE, WEIGHT, APPEARANCE, VOLUME AND RELIABILITY OF THE PRODUCT ETC, HAS TO BE EXAMINED. IF SIMILARITY OF PRODUCT AND CONDITION S IN COMPARABLE CONTROLLED TRANSACTIONS AND UNCONTROLLED TRANSACTIO NS ARE THE SAME, THEN THE CUP METHOD CAN BE APPLIED WITH CERTAIN ADJUSTME NTS. THERE CAN BE AN INTERNAL CUP, WHEN ONE OF THE GROUP ENTITIES ENT ERS INTO A COMPARABLE TRANSACTION WITH AN UNRELATED PARTY WHERE THE GOODS OR SERVICES UNDER CONSIDERATION ARE SAME OR SIMILAR. THERE CAN BE EXT ERNAL CUP ALSO, IF A TRANSACTION BETWEEN TWO INDEPENDENT ENTERPRISES INV OLVES GOODS OR SERVICES UNDER COMPARABLE CONDITIONS. AS POINTED OU T BY THE LD. COUNSEL, IN DIAMOND INDUSTRY/BUSINESS WITHIN THE SAME PRODUC T OF DIAMOND, THERE IS A HUGE DISSIMILARITY AND VARIATION OF FEATURES W HICH LEADS TO DIFFERENCE IN THE PRICES. THE PRICING OF THE DIAMONDS DEPENDS UPON VARIOUS PARAMETERS/FACTORS LIKE SIZE OF THE DIAMOND , CARAT WEIGHT, VARIOUS TYPES OF SHAPE, COLOUR FLORESCENCE, CLARITY GRADE, POLISH ING, HEIGHT AND DEPTH ANGLE, GIRDLE THICKNESS ETC., WHICH LEADS TO DIFFER ENTIAL PRICING OF THE DIAMONDS. IN SUCH A CONDITION IT BECOMES VERY DIFFI CULT TO APPLY CUP METHOD IN BENCH MARKING THE PRICING OF THE DIAMOND. ON THIS PROPOSITION M/S LIVINGSTONES - 19 - WE FULLY AGREE WITH THE CONTENTION OF THE LD. COUNS EL THAT CUP METHOD IS GENERALLY NOT A VERY SUITABLE METHOD FOR BENCH MARK ING THE PRICING OF THE DIAMONDS AND PRICE PAID IN COMPARABLE UNCONTROLLED PURCHASE OR SALES. IT IS NOT A VERY EASY PROPOSITION TO HOLD THAT CUP WO ULD BE AN APPROPRIATE METHOD FOR BENCHMARKING THE PRICES IN THE TRANSACTI ON OF THE DIAMONDS, OWNING TO VARIOUS DIFFERENCES BETWEEN THE PRODUCTS ITSELF AS HIGHLIGHTED ABOVE. 7.2 HOWEVER ON THE FACTS OF THE PRESENT CASE, IF W E ANALYZE THE INVOICES BASED TRANSACTIONS, WHICH HAS BEEN DONE BY THE TPO FOR ANALYZING THE COMPARABLE PRICES WHICH HAS BEEN CHAR GED BY THE ASSESSEE FROM ITS AE AND WITH THE 3 RD PARTIES, IT IS SEEN THAT THE TPO HAS FIRST OF ALL , GIVEN THE DESCRIPTION OF THE DIAMONDS IN THE INVOIC ES WHICH GIVES THE DETAILS OF PIECE PER CARAT, TYPE OF CUT AND THE CLA RITY OF THE DIAMOND. UNDER THIS DESCRIPTION, INVOICES HAS BEEN RAISED NO T ONLY TO THE AE BUT ALSO TO THE THIRD PARTY CUSTOMERS. IF ON THE SIMILA R NATURE OF TRANSACTION AND DESCRIPTION OF GOODS THE PRICES HAVE BEEN NEGOT IATED BY TWO PARTIES, ONE IN CONTROLLED SITUATION AND ANOTHER IN UNCONTRO LLED TRANSACTION, THEN SUCH A PRICING CAN BE EXAMINED FOR THE PURPOSE OF B ENCH MARKING THE PRICE WHICH HAD BEEN CHARGED BY THE ASSESSEE UNLESS IT IS SHOWN THAT WITHIN SUCH INVOICES THERE WERE DIFFERENT KIND OF D IAMONDS UNDER SALE TRANSACTION. THOUGH WE HAVE ALREADY HELD THAT IN TH E SALE OF DIAMONDS, IT IS VERY DIFFICULT TO BENCH MARK THE PRICE BY APPLYI NG THE CUP METHOD, HOWEVER ON THE PECULIAR FACTS OF THE PRESENT CASE, IT IS SEEN THAT IN THE NATURE OF SALE TRANSACTION UNDERTAKEN BY THE ASSESS EE AND PRICE WHICH HAS BEEN CHARGED FROM THE AE APPEARS TO BE ON SIMIL AR DESCRIPTION OF DIAMONDS WHICH HAS BEEN SOLD TO THE THIRD PARTY ALS O. THE NATURE AND M/S LIVINGSTONES - 20 - VARIOUS TYPES OF DIFFERENCES OF THE DIAMONDS SOLD I N EACH INVOICE TO AE VIS-A-VIS THE NON AE HAS NOT BEEN PROPERLY EXPLAINED. THUS F ROM THE DETAILS AND DESCRIPTION OF SALES MADE TO AE AS WELL TO NON AE, IT APPEARS TO BE OF SIMILAR NATURE. FOR THE SAKE OF READY REFE RENCE THE DETAILS OF SUCH TRANSACTION AS INCORPORATED BY THE TPO AT PAGE 2 IS REPRODUCED HERE UNDER:- SL. NO. DESCRIPTION DETAILS IN RESPECT OF THE SALES MADE TO THE AE DETAILS IN RESPECT OF THE SALES MADE TO THE THIRD PARTY CUSTOMERS ADJUSTMENT AMOUNT TOTAL QUANTITY AVERAG E RATE $ TOTAL QUANTITY $ AVERAGE RATE $ DIFF IN RATES $ DIFF IN AMOUNT $ 1 25P/CT D CUT WHITE PQ 11361.35 321.06 12.16 330.00 8.94 12176.50 2* 25P/ CT D CUT WHTIE VS1 3250.08 419.90 550.57 503.18 82.28 270667.6 5 3 100P/CT D CUT WHITE S13 21.12 315.00 68.76 321.17 6.17 130.26 4* 25P/CT D CUT WHITE VS1 2773.20 328.89 8.50 370.00 41.11 114005.1 5 5 100 P/CT D CUT WHITE SI1 599.92 360.53 63.84 370.01 9.47 5683.98 6 100 P CT D CUT WHITE VVS1 144.49 481.71 16.04 485.00 3.29 475.70 7 10 P /CT D CUT WHITE VVS 2 485.47 648.66 70.32 673.73 25.07 12169.22 8* 6P/ CT D CUT WHITE VVS1 201.35 847.02 2.37 916.96 69.94 14083.40 9 6P/CT D CUT WHITE VVS2 100.89 793.15 14.38 823.79 30.64 3091.22 10 6P/CT D CUT WHITE VS2 42.84 635.00 43.43 662.17 27.17 1164.17 11 10P/ CT D CUT WHITE VVS1 431.09 715.57 9.89 720.70 5.13 2213.19 * SUBJECT MATTER OF TRANSFER PRICING ADJUSTMENT. M/S LIVINGSTONES - 21 - 7.3 OUT OF ALL THESE TRANSACTION, NINE TRANSACTION HAVE BEEN ACCEPTED BY THE TPO, AS THE PRICE DIFFERENCE WAS LESS THAN 5% A ND IT WAS ONLY WITH REGARD TO THREE TRANSACTIONS, WHICH HAVE BEEN GIVE N AT SERIAL NOS. 2, 4 AND 8, THE TPO HAS DRAWN THE ADVERSE INFERENCE ON T HE BASIS OF MAJOR DIFFERENCE IN PRICES CHARGED BY THE ASSESSEE. FROM THE ABOVE DETAILS, IT APPEARS THAT UNDER A PARTICULAR DESCRIPTION, INVOIC ES RAISED TO AE AND NON AE WERE SIMILAR. EXACT DIFFERENCE IN INVOICES HAVE NOT BEEN BROUGHT FORTH BEFORE US. THUS IN THE CASE OF THE ASSESSEE, THERE WAS AVAILABILITY OF INTERNAL CUP, WHEREIN ON SIMILAR NATURE OF TRANSACT ION AND SIMILAR DESCRIPTION OF PRODUCT AS GIVEN IN THE INVOICES, TH E ASSESSEE HAS BEEN CHARGING THE PRICES FROM THE AE AS WELL AS FROM THE THIRD PARTY. EVEN THOUGH THERE MAY BE SOME DIFFERENCES OF SIZE, CARAT , WEIGHT AND OTHER ASPECTS, HOWEVER THE SAME HAS NOT BEEN CLEARLY DEMA RCATED OR DEMONSTRATED BY THE ASSESSEE EITHER BEFORE THE TPO OR BEFORE THE CIT(A). IN SUCH A SITUATION THE PRESUMPTION CAN BE DRAWN, THAT EVEN WITH THE THIRD PARTY CUSTOMERS, SIMILAR NATURE OF PRODUCTS H AVE BEEN SOLD ON NEGOTIATION AND, THEREFORE, THE PRICES OF THE TWO T RANSACTIONS CAN BE COMPARED. IN A WAY, WE UPHOLD THE CONTENTION OF THE LD. CIT(A) THAT THERE WAS INTERNAL CUP AVAILABLE IN THE CASE OF THE ASSESSEE FOR DETERMINING THE TRANSFER PRICE. ONCE A DIRECT METHO D OF INTERNAL CUP IS AVAILABLE THEN THERE IS NO NEED TO RESORT TO TNMM M ETHOD. 7.4 NOW COMING TO THE DELETION OF ADDITION OF RS. 1 ,28,19,493/- BY THE CIT(A), WHICH IS SUBJECT MATTER OF GROUND NO. 1,2, & 3 IN DEPARTMENTS APPEAL. OUT OF THE THREE TRANSACTIONS, WHICH HAS BE EN ADVERSELY VIEWED BY THE TPO, TWO TRANSACTIONS PERTAINED TO SALE MADE BY THE ASSESSEE TO ONE M/S SIMONA NV. NOW IT HAS BEEN BROUGHT ON THE R ECORD BEFORE THE M/S LIVINGSTONES - 22 - CIT(A), WHICH HAS ALSO BEEN A SUBJECT MATTER OF RE MAND BEFORE THE TPO THAT THE SAID TRANSACTIONS HAVE BEEN CANCELLED, AS THE SAID PARTY HAS RETURNED BACK/DIVERTED THE DIAMONDS SOLD TO THEM TO THE ASSESSEES AE. THIS IS EVIDENT FROM THE LETTER DATED 14.10.2010, W RITTEN BY SIMONA NV, THE CONTENTS OF WHICH IS REPRODUCED HEREUNDER:- FURTHER TO OUR TELEPHONE CONVERSATION AND TO YOUR REQUEST, I AM CONFIRMING THE FOLLOWING TRANSACTIONS: WE HAVE RECEIVED THESE 2 SHIPMENTS FROM YOU: 1) INVOICE NO. 187/2006-2007 DATED 13 MARCH 2007 (1,027,02 CARATS FOR US$ 454,121.45) 2) INVOICE NO. 215/2006-2007 DATED 31 MARCH 2007 ( 709.00 CARATS FOR US$349,990.50) ALTHOUGH THE QUALITY AND THE MAKE WERE GOOD, WE HAV E NOTICED THAT THE PRICE, YOU CHARGED FOR THE GOODS WAS EXORBITANT, IT WOULD HAVE BEEN IMPOSSIBLE FOR US TO PASS ON THIS INCREASE TO OUR CUSTOMERS. THEREFORE AFTER HAVING DISCUSSED THE MATTER WITH YO U, OVER THE PHONE, WE HAVE RETURNED BOTH THE SHIPMENTS TO DIAMSTONES BVBA ADDI NG 1% TO YOUR INVOICE AMOUNT ON ACCOUNT OF OCCURRED EXPENSES. GOODS WERE INVOICED AS FOLLOWS: 1) INVOICE NO. 07/101 DATED 16 MARCH 2007 (1027.0 2 CARATS FOR US$ 458,660.00) 2) INVOICE NO. 07/103 DATED 13 APRIL 2007 ( 709. 00 CARATS FOR US$ 353,490.41). THE SAID LETTER HAS BEEN SUBJECT TO REMAND BEFORE T HE TPO, WHO HAS GIVEN HIS REMARK, WHICH HAS BEEN INCORPORATED AND D EALT BY THE CIT(A) ALSO AS DISCUSSED HEREIN THE FOREGOING PARAGRAPHS, FROM THE ABOVE LETTER AND RELEVANT FINDING OF HE CIT(A), IT IS QUITE CONC LUSIVE THAT, THE SAID PARTY HAS NOT PURCHASED THE DIAMONDS SENT ON THESE TWO INVOICES AND ULTIMATELY, IT HAS BEEN SOLD TO AE ONLY. THUS, SUCH A TRANSACTION CANNOT BE CONSIDERED FOR BENCH MARKING AND DETERMINING THE ARMS LENGTH PRICE. M/S LIVINGSTONES - 23 - ONCE THE PARTICULAR TRANSACTION, WHICH IS THE SUBJE CT MATTER OF COMPARISON FOR TRANSFER PRICING ADJUSTMENT, HAS NOT EVEN UNDER TAKEN OR HAS BEEN CANCELLED, THEN SUCH A TRANSACTION HAS TO BE EXCLUD ED FOR THE PURPOSE OF BENCH MARKING THE TRANSFER PRICE. THE DETAIL REASON ING AND THE CONCLUSION GIVEN BY THE CIT(A) AS HAVE BEEN REPRODUCED BY US T HE FOREGOING PARAS, WITH REGARD TO THE NON INCLUSION OF SUCH A TRANSACT ION AND ALSO THE CONSEQUENT DELETION OF ADJUSTMENT OF RS. 1,28,19,49 3/- ON ACCOUNT OF SUCH TRANSACTION IS BOTH FACTUALLY AND LEGALLY CORR ECT AND HAS RIGHTLY BEEN DELETED BY THE CIT(A). WE DO NOT FIND ANY REASON TO DEVIATE FROM SUCH A FINDING OF FACT AND ACCORDINGLY WE UPHOLD THIS FIND ING. THUS THE GROUNDS TAKEN BY THE DEPARTMENT ON THIS SCORE IS DISMISSED. 8. NOW COMING TO THE ADJUSTMENT OF RS. 51,32,512/-O N WHICH ASSESSEE IS IN APPEAL, WHICH IS ON ACCOUNT OF TRANSACTIONS W ITH ONE OF THE THIRD PARTY GIVEN AT SERIAL NO.4 OF THE TABLE, ASSESSEES CASE BEFORE THE TPO AS WELL AS BEFORE THE CIT(A) WAS THAT, THE ASSESSEES SALES WITH ITS AE AGGREGATED TO RS. 126.43 CRORES, WHEREAS IN CASE O F THE NON AE IT WAS ONLY 70 LAKHS, THUS THERE WAS A HUGE DIFFERENCE OF VOLUME WHICH SHOULD BE TAKEN INTO CONSIDERATION WHILE EXAMINING THE PRI CE DIFFERENCES AND ACCORDINGLY THE ADJUSTMENT SHOULD BE MADE. BESIDES THIS, IT WAS ALSO SUBMITTED THAT PRICE DIFFERENCES IN DIAMOND BUSINES S ARE ALSO ON ACCOUNT OF PRICE FLUCTUATION AND DIFFERENTIAL TIME PERIOD. FURTHER, IN CASE OF THIRD PARTY THERE IS ALWAYS A RISK OF BAD DEBT WHICH IS N OT THERE IN THE CASE OF THE AE AND ALSO THE MARKETING EXPENSES IN THE CASE OF THE AE IS LESS. IF THESE DIFFERENCES ARE TAKEN INTO CONSIDERATION AND ACCORDINGLY ADJUSTMENT IS MADE, THEN THERE IS NO REQUIREMENT FOR MAKING AN Y UPWARD ADJUSTMENT OF THE ARMS LENGTH PRICE. THE LD CIT(A) HAS REJEC TED THIS CONTENTION, M/S LIVINGSTONES - 24 - MAINLY ON THE GROUND THAT THE ASSESSEE COULD NOT BR OUGHT ANYTHING ON THE RECORD THAT AES WERE ELIGIBLE FOR DISCOUNT, BASED O N QUANTITY SOLD AND THESE DIFFERENCES ARE NOT MATERIAL DIFFERENCE. WE A RE OF THE OPINION THAT SUCH A REASONING GIVEN BY THE LD. CIT(A) CANNOT BE UPHELD, BECAUSE THESE FACTORS DO HAVE AFFECT IN THE NEGOTIATION OF PRICE. THE DIFFERENCE ON ACCOUNT OF FACTORS AFFECTING THE PRICES HAVE TO BE GIVEN ADJUSTMENT WITH THE COMPARABLES. SINCE, IN A CUP METHOD A VERY HIGH DEGREE OF COMPARISON OF BUSINESS CONDITIONS, PRODUCTS AND OTH ER PHYSICAL ATTRIBUTES OF THE PRODUCTS AND SERVICES ARE TO BE EXAMINED, TH EREFORE, MORE OFTEN IT BECOMES VERY DIFFICULT TO HAVE SUCH COMPARABLE TRAN SACTIONS. THE RULE 10B. PROVIDES THAT IN SUCH A SITUATION, ADJUSTMENT ON ACCOUNT OF DIFFERENCES CAN BE MADE IF IT MATERIALLY AFFECTS TH E PRICE IN THE OPEN MARKET. THE NEGOTIATION OF A PRICE DEPENDS UPON VAR IOUS FACTORS LIKE VOLUME OF SALES/TRANSACTION, CONTRACTUAL TERMS OF T HE PARTIES, GEOGRAPHICAL MARKET CONDITIONS IN WHICH TRANSACTION TAKES PLACE, TIME AND PERIOD OF TRANSACTION AND VARIOUS OTHER RISK FACTORS LIKE BAD DEBT RISK, FOREIGN CURRENCY RISK ETC. ALL THESE FACTORS HAVE TO BE TAK EN INTO ACCOUNT FOR THE DETERMINATION OF A PRICE IN A GIVEN TRANSACTION. IN THIS PARTICULAR TRANSACTION, THE ASSESSEE HAS SOLD THE TOTAL QUANTI TY OF 2773.20 TO ITS AE WITH AN AVERAGE RATE OF 328.89 DOLLARS, WHEREAS TO THE THIRD PARTY, THE ASSESSEE HAS MERELY SOLD QUANTITY OF 8.50 WITH THE RATE OF 370 DOLLARS. THUS THERE IS A HUGE DIFFERENCE IN VOLUME OF SALE A ND IT IS QUITE A NORMAL PHENOMENA THAT IF THE PURCHASES AND SALES ARE MADE IN HUGE QUANTITY THEN THERE IS ALWAYS A CHANCE OF NEGOTIATION OF PRE FERABLE PRICE BY THE PURCHASER AND THERE IS DIFFERENCE IN THE PRICE AS COMPARED TO THE ONE WHERE VERY SMALL QUANTITY OF SALE OR PURCHASE TAKE S PLACE. SUCH DIFFERENCE OF VOLUME, DEFINITELY HAS A BEARING ON T HE NEGOTIATION OF THE M/S LIVINGSTONES - 25 - PRICES AND, THEREFORE, ADJUSTMENT ON THIS FACTOR HA S TO BE MADE. THIS ITSELF IS A MATERIAL DIFFERENCE. WE, ALSO AGREE WIT H THE CONTENTION OF THE ASSESSEE THAT MARKETING EXPENSES IN THE CASE OF THE AE ARE COMPARATIVELY LESS AS THERE IS QUITE PROBABILITY OF TRANSACTION B EING FINALIZED. THERE IS ALSO AN ELEMENT OF BAD DEBT RISK INVOLVED IN THE CA SE OF THIRD PARTY WHICH IS MUCH LESS PROBABLE IN THE CASE OF THE RELATED PA RTY. IF ALL THESE DIFFERENCES, WHICH IN OUR OPINION ARE QUITE MATERI AL DIFFERENCES ARE TAKEN INTO ACCOUNT AND ADJUSTMENT IS MADE THEN DIFFERENCE OF RATE, WHICH HERE IN THIS CASE IS APPROXIMATELY 11%, CAN BE MADE. TH US, LOOKING TO THESE FACTORS OF MATERIAL DIFFERENCE INCLUDING HUGE DIFFE RENCE IN VOLUME, ADJUSTMENT OF DIFFERENTIAL RATE OF 41.11 IN TERMS O F DOLLAR IN THE TRANSACTION OF SALE PRICE BETWEEN AE AND THIRD PART Y CAN BE MADE UNDER THE CUP, WHICH IS ALSO PERMISSIBLE UNDER RULE 10B ACCORDINGLY, WE HOLD THAT SUCH A PRICE DIFFERENCE IN THE AFORESAID TRAN SACTION HAS TO BE IGNORED AND ADJUSTMENT HAS TO BE MADE FOR COMPARING THE NEG OTIATED PRICE CHARGED FROM THE AE AS WELL AS FROM THE THIRD PARTY AND IF SUCH AN ADJUSTMENT IS CARRIED OUT THEN THERE IS NO REQUIREM ENT FOR MAKING ANY KIND OF UPWARD ADJUSTMENT IN THIS CASE. THEREFORE, THE DECISION OF CIT(A) IN CONFIRMING THE ADJUSTMENT OF RS. 51,32,512/- TO THE ARMS LENGTH PRICE IS REVERSED AND THE SAID ADDITION IS DELETED.. ACC ORDINGLY, THE GROUND RAISED BY THE ASSESSEE IS TREATED AS ALLOWED, WHERE AS GROUND NO. 1,2 AND 3 AS RAISED BY THE REVENUE STANDS DISMISSED. 9. THE OTHER ISSUE INVOLVED IN THE DEPARTMENTAL APP EAL IS WITH REGARD TO THE TRANSFER PRICING ADJUSTMENT OF RS. 4,65,23,0 07/- ON ACCOUNT OF NOTIONAL INTEREST ON DELAYED COLLECTION OF PAYMENT ON SALE INVOICES FROM AES IN COMPARISON TO NON AES. THE TPO HAS MADE THIS ADJUSTMENT ONLY ON M/S LIVINGSTONES - 26 - THE GROUND OF AVERAGE DAYS OF REALIZATION IN RESPEC T OF SALES TO AE WHICH WAS 210 DAYS, WHEREAS IN RESPECT OF NON AES THE AVE RAGE DAYS OF REALIZATION WAS 126 DAYS. ACCORDINGLY, HE CONCLUDED THAT THERE WAS AN AVERAGE DELAY OF 84 DAYS IN REALIZATION OF MONEY FR OM AES AS COMPARED TO NON AES IN RESPECT OF SALE MADE TO THEM. HE THUS AP PLIED THE RATE OF 16% IN RESPECT OF EXCESS CREDIT PERIOD AVAILABLE TO THE AE. 10. BEFORE THE CIT(A), THE ASSESSEES MAIN SUBMISSI ON WAS THAT THIS CREDIT PERIOD FOR THE SALES MADE TO AE AND NON AE C ANNOT BE LOOKED INTO ISOLATION AS IT IS NOT A SEPARATE TRANSACTION BUT P ART OF THE SAME TRANSACTION ITSELF. THERE HAD BEEN SEVERAL INSTANCE S WHEN THE UNRELATED PARTIES ALSO HAD MADE PAYMENTS BEYOND THE CREDIT PE RIOD GRANTED AND IN SUCH CASES ALSO THE ASSESSEE HAD NOT CHARGED ANY IN TEREST ON SUCH DELAYED PAYMENT. IN FACT IN THE DIAMOND INDUSTRY, P AYMENT BEYOND THE CREDIT PERIOD IS USUAL BUSINESS PRACTICE AND NONE O F THE ENTITIES CHARGE ANY INTEREST ON SUCH DELAYED PAYMENTS. IN SUPPORT O F THIS, A CERTIFICATE/LETTER FROM GEM AND JEWELLERY EXPORT PR OMOTION COUNCIL WAS FILED BEFORE THE CIT(A). BESIDES THIS VARIOUS JUDIC IAL PRECEDENTS WERE ALSO CITED WHICH HAS BEEN DEALT BY THE CIT(A) IN PAGES 1 3 TO 15 OF THE APPELLATE ORDER. THE LEARNED CIT(A) DULY APPRECIAT ED THE ASSESSEES CONTENTION AND ALSO RELYING UPON THE VARIOUS DECISI ONS OF INCOME-TAX APPELLATE TRIBUNAL, HAS DELETED THE SAID ADDITION. 11. BEFORE US, THE LEARNED COUNSEL, REITERATED THE SUBMISSIONS MADE BEFORE LOWER AUTHORITIES AND ALSO RELIED UPON THE D ECISIONS OF COORDINATE BENCH OF TRIBUNAL IN THE CASE OF LINTAS INDIA PVT. LTD VS. ACIT REPORTED IN (2013) 152 TTJ (MUMBAI) AND THE DECISION OF DCIT VS . INDO AMERICAN M/S LIVINGSTONES - 27 - JEWELLERY LTD REPORTED IN (2012) 50 SOT 528, WHEREI N SIMILAR CHARGING O NOTIONAL INTEREST ON DELAYED REALIZATION OF PAYMENT FROM AE HAVE BEEN DELETED. IT WAS ALSO POINTED OUT BY HIM THAT LATER DECISION HAS ALSO BEEN AFFIRMED BY THE JURISDICTIONAL HIGH COURT VIDE JUDG MENT DATED 8 TH JANUARY 2013 IN INCOME TAX APPEAL NO. 1053 OF 2012. THE LEA RNED COUNSEL, BEFORE US, ALSO POINTED OUT THAT IN SOME OF THE SAL E INSTANCES WITH THIRD PARTY, THE CREDIT PERIOD HAS GONE UPTO MORE THAN 40 0 DAYS AND THERE ARE VARIOUS INSTANCES WHERE THE CREDIT PERIOD HAS ALSO GONE UPTO MORE THAN 200 DAYS. THE AVERAGE CREDIT PERIOD CANNOT BE WORKE D OUT IN SUCH A CASE FOR THE REASON THAT VOLUME OF SALES WITH THE AE IS VERY LARGE AS COMPARED TO VOLUME OF SALES UNDERTAKEN BY THE THIRD PARTY. H E ALSO DREW OUR ATTENTION TO AVERAGE PERIOD OF ADDITIONAL DAYS TAKE N BY THE AE FOR MAKING THE PAYMENT AND ALSO BY THE THIRD PARTY WHICH HAS B EEN PLACED IN THE PAPER BOOK FROM PAGES 176 TO 179. THE LEARNED DR ON THE OTHER HAND STRONGLY SUPPORTED THE FINDINGS OF CIT(A). 12. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS AND ALSO PERUSED THE RELEVANT FINDING OF THE TPO AS WELL AS THE CIT( A) AND ALSO THE MATERIAL ON RECORD. IT IS AN UNDISPUTED FACT THAT THE ASSESS EE HAS NOT CHARGED ANY INTEREST FROM THE THIRD PARTY IN RESPECT OF DELAYED PAYMENTS EVEN WHEN THE TIME PERIOD OF REALIZATION HAS EXCEEDED MORE TH AN 300 TO 400 DAYS. FROM THE PERUSAL OF THE DETAILS AS SUBMITTED BY THE LEARNED COUNSEL IN THE PAPERBOOK, IT IS SEEN THAT THERE ARE MANY INSTANCES IN WHICH MORE THAN 200 DAYS HAVE BEEN EXCEEDED IN REALIZATION OF PAYME NTS IN CASE OF THIRD PARTIES. ONCE ON SUCH DELAYED PAYMENTS WITH THIRD P ARTY NO INTEREST HAS BEEN CHARGED, THEN TO WORK OUT THE NOTIONAL INTERES T IN CASE OF DELAYED PAYMENT BY THE AE IS ALSO NOT CALLED FOR. THE COMPA RISON IN SUCH A CASE M/S LIVINGSTONES - 28 - HAS TO BE MADE WITH CONTROLLED AND UNCONTROLLED TRA NSACTIONS AND ONCE THERE IS NO SUCH FACTOR PRESENT IN THE UNCONTROLLED TRANSACTION THEN THE SAME CANNOT BE TAKEN AS A BENCH MARK FOR THE CONTRO LLED TRANSACTION. MOREOVER, WE AGREE WITH THE CONTENTION OF LEARNED C OUNSEL THAT IN THE CASE OF AE THE VOLUME OF SALE IS VERY HUGE AS COMPA RED TO VOLUME OF SALE IN CASE OF THIRD PARTY AND SUCH DELAY IN REALIZATIO N OF PAYMENT SHOULD NOT BE ADVERSELY VIEWED ON THE BASIS OF AVERAGE WORKING OF DAYS. THE AVERAGE DAYS OF DELAY IN PAYMENT AS WORKED OUT BY T HE TPO IS ALSO INAPPROPRIATE AS NUMBER OF SALE TRANSACTIONS WITH A E IS FAR MORE THAN THE NON AE AND WILL RESULT IN IMPROPER WORKING OF AVERA GE DAYS. ON THESE FACTS OF THE CASE, WE DO NOT FIND ANY REASON FOR MA KING ANY KIND OF UPWARD ADJUSTMENT ON ACCOUNT OF DIFFERENCES IN PERI OD FOR REALIZATION OF PAYMENTS IN RESPECT OF SALES MADE TO AE AS WELL AS NON AES. SUCH A NOTIONAL INTEREST CANNOT BE CHARGED FOR THE PURPOSE OF MAKING ADJUSTMENT IN ARMS LENGTH PRICE. THUS THE ORDER OF CIT(A) DEL ETING THE ADJUSTMENT OF RS, 4,65,23,007/- ON THIS SCORE IS UPHELD AND THE G ROUND RAISED BY THE DEPARTMENT STANDS DISMISSED. 12. IN THE RESULT APPEAL FILED BY THE ASSESSEE IS A LLOWED, WHEREAS THE APPEAL FILED BY THE DEPARTMENT IS DISMISSED. ORDER PRONOUNCED ON 23RD DAY OF OCTOBER 2013. SD/- SD/- (P.M. JAGTAP) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER SKS SR. P.S, MUMBAI DATED 23 .10.2013 M/S LIVINGSTONES - 29 - COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, K BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI