Income Tax Appellate Tribunal - Mumbai
Firestone International P. Ltd, Mumbai vs Assessee on 6 November, 2012
ITA No.4520 of 2011 & CO No.47 of 2012 Firestone International Pvt Ltd Mumbai
IN THE INCOME TAX APPELLATE TRIBUNAL
"K" Bench, Mumbai
Before Shri B. Ramakotaiah, Accountant Member
and Shri Amit Shukla, Judicial Member and
ITA No. 4520/Mum/2011
(Assessment year: 2006-07 )
DCIT, Central Circle 39, Room Vs. Firestone International (P)
No.32 (1) Ground Floor, Ltd, 110 Prasad Chambers,
Aayakar Bhavan, MK Road, 11th Floor, Opera House,
Mumbai 400020 Mumbai 400004
PAN: AAACF 7931 L
(Appellant) (Respondent)
C.O No.47/Mum/2012
(Arising out of ITA No.4520/Mum/2011)
Firestone International (P) Ltd, Vs. DCIT, Central Circle 39,
110 Prasad Chambers, 11th Room No.32 (1) Ground
Floor, Opera House, Floor, Aayakar Bhavan, MK
Mumbai 400004 Road, Mumbai 400020
PAN: AAACF 7931 L
(Cross Objector) (Respondent)
Department by: Shri Ajeet Kumar Jain, CIT and
Shri Dinesh Kumar, DR
Assessee by: Shri Vijay Mehta &
Shri Sunil Hirawat
Date of Hearing: 06/11/2012
Date of Pronouncement: 09/11/2012
ORDER
Per Bench:
These are cross appeals by Revenue and Assessee against the orders of the CIT (A)-15 Mumbai, dated 21.3.2011.
2. Assessee is in the business of diamond export and also engaged in Jeweler manufacturing. Apart from allocation of expenditure between diamond export business and jewellery manufacturing business the unit of which was eligible for deduction under section 10B, AO also made an addition of `.1,20,84,042/-on Page 1 of 14 ITA No.4520 of 2011 & CO No.47 of 2012 Firestone International Pvt Ltd Mumbai the basis of the report of TPO towards International Transactions with AE by determining the arms length price. The learned CIT (A) restricted the adjustment to the transactions with AE thereby confirming only an amount of `.8,39,245/- as against `.1,20,84,882/- added by AO. The CIT (A) also reallocated some expenditure. Accordingly, the grounds are raised by Assessee and Revenue in these appeals. For the sake of record, the grounds are extracted as under:
ITA No.4520/Mum/2011:"1. Whether on the facts and in the circumstances of the case and in law, the learned CIT (A) erred in reducing the adjustment made to the income of assessee from `.1,20,84,042/- to `.8,39,245/- on account of transaction carried out with associate concerns under section 92CA(3) of the IT Act".
2. Whether on the facts and in the circumstances of the case and in law, the learned CIT (A) is justified in holding that adjustment to the returned income under section 92CA(3) can be made only on sales made to associate enterprises without appreciating the fact that on TNMM analysis the adjustment is required to be made on total transactions entered as the analysis is on entity level".
3. Whether on the facts and in the circumstances of the case and in law, the learned CIT (A) erred in deleting allocation of travelling expenses, donation and part of miscellaneous expenses to jewellery unit without explaining the fact as to why the same are allocable to diamond unit only"
C.No.47/Mum/20121. On facts and in law, the learned CIT (A) erred in confirming the addition of `.8,39,245/- under section 92CA(3) of the I.T. Act. Under the facts and circumstances of the matter, he ought to have deleted the said addition of `.8,39,245/-.
2. On facts and in law, the learned CIT (A) erred in not directing AO not to allocate the communication expenses, conveyance & vehicle expenses, miscellaneous expenses, audit fees etc., in the ratio of 95:05 between Diamond Unit and Jewellery Unit respectively. Under the Page 2 of 14 ITA No.4520 of 2011 & CO No.47 of 2012 Firestone International Pvt Ltd Mumbai facts and circumstances of the matter, he ought not to held so.
3. On facts and in law, the learned CIT (A) ought to have deleted the disallowance of `.7,73,425/- made by AO under section 14A of the Income Tax Act".
3. We have heard the learned CIT (DR) and the learned Counsel in detail and considered their submissions. The appeals are decided as under:
Transfer Pricing Issue:
4. Ground Nos. 1 & 2 in Revenue appeal and Ground No.1 in Cross Objection are with reference to the Transfer Pricing Adjustment made in the order. Assessee has foreign transactions with its Associated Enterprises (AE) in the jewellery and diamond business and accordingly the matter was referred to the Transfer Pricing Officer (TPO) for analyzing the foreign transactions at arms length price. TPO examined the issue and vide his order dated 22.10.2009 has proposed adjustment of `.1,20,84,042/-. The order of AO does not speak about the adjustment so made and in fact refers only to the show cause notice issued to AO after receipt of the order of TPO without specifying any addition so to be made on the basis of the TPO order. Be that as it may, in the computation of income AO made addition of `.1,20,84,042/-. The TPO order was placed on record.
5. The revised international transaction of assessee are as under:
S.No Nature of Transaction Amount
1 Import of polished diamond- bond 70,60,082
2 Import of polished diamond 1,45,46,358
manufacturing
3 Export of polished diamond 4,51,20,741
manufacturing
4 Export of polished diamond-bond 6,48,59,891
5 Import of jewellery 3,49,76,753
6 Export of diamond studded jewellery 10,40,49,417
Total 27,06,13,242
Page 3 of 14
ITA No.4520 of 2011 & CO No.47 of 2012 Firestone International Pvt Ltd Mumbai The TPO after examination of the details accepted some transactions as at arms length price. So far as import and export of studded jewellery in the jewellery division and import and export of polished diamond- bond are concerned, as there are separate lot- wise records these were accepted. However, with reference to import and export of polished diamond he has rejected assessee's comparables and after fresh analysis and giving opportunity to assessee and taking his objections into consideration, determined the arms length price as under:-
"9. Determination of Arm's Length Price.
ACTUAL BENCH MARKED ON ADJUSTMENT
COST
Sales 607,846,238 619,930,280
Non-AE 562,725.497 562,725,497
AE 45,120,741 57,204,783 12,084,042
Variation 21.12
(%)
Cost 590,972,622 590,972,622
OP Profit 16,873,616 28,957,658
OP/OC 2.86 4.9
The arms length price of `.5.72 crores varies from the transaction price of `.4.51 crores by 21.12% i.e. more than 5%. This will result in an adjustment of `.1,20,84,042/- as shown above"
6. Before the CIT (A) assessee contended and placed many arguments which the CIT (A) has not accepted. However, the one argument which was accepted by the CIT (A) was that the addition cannot be made on the entire turnover of assessee when the same was only to be considered on the transactions with AE. Following the decision of the ITAT Delhi Bench in EL Jin and Abhisek Industries, it was held that such addition should be restricted to transactions with AE only. Therefore, the CIT(A) has recasted the adjustment so made in arriving at an adjustment of 1.86% on sales Page 4 of 14 ITA No.4520 of 2011 & CO No.47 of 2012 Firestone International Pvt Ltd Mumbai to AE on `.4,51,20,741/- i.e. at `.8,39,245/-. Therefore, the same was confirmed whereas the balance amount was deleted.
7. The Revenue in Ground Nos. 1 & 2 is mainly contesting the relief given by the CIT (A), on the reason that under the TNMM analysis, adjustment is required to be made on total transactions entered as the analysis is on entity level. At the outset it is fairly admitted that this issue was already crystallized in favour of assessee by the following decisions:
a) DCIT v. Starlite (40 SOT 421 (Mum)
b) DCIT vs. Ankit Diamonds (43 SOT 523 (Mum)
c) Addl. CIT vs. Tej Dam (37 SOT 341 (Mum)
d) M/s Genisys Integrating Systems (India) Pvt. Ltd (ITA No.1231/Bang/2010)
e) ACIT vs. Wockhardt Ltd (6 Taxman.com 78 ITAT (Mum)
f) Abhishek Auto Industries Ltd (2010 TII-54-ITAT (Del)
g) DCIT vs. Startex Networks (India) Pvt. Ltd (2010 - TII-13 ITAT (Del).
Respectfully following, we hold that the CIT (A) order is in tune with the provisions of the Act as interpreted by the above orders of the ITAT. Since the arms length price has to be determined only with reference to the international transactions, whatever be the method followed or adopted for arriving at the ALP, the ALP can only be considered on the value of international transactions alone and not on the entire turnover of assessee. If this sort of adjustment is permitted this will result in increasing the profit of assessee on the entire non-AE sales also, which is not according to the provisions of Transfer Pricing mandated by the Act for the impugned assessment year. Therefore, the Revenue grounds on this are rejected.
8. The cross objection by assessee on the same issue is with reference to the confirmation of an amount of `.8,39,245/- by the CIT (A) without applying the safe harbor provisions of +/- 5%. Assessee raised the objection before the TPO as well as before the Page 5 of 14 ITA No.4520 of 2011 & CO No.47 of 2012 Firestone International Pvt Ltd Mumbai CIT (A), but these are not accepted by them. The learned DR also gave his working of +/- working of safe harbor provisions as under:
Total AE Non AE
Transaction Transaction
Sales of assessee 607846238 A 45120741 562725497
Since non AE
transactions are at
arm's length hence
apply the arm's
length margin i.e.
4.90% to arrive at the
cost
Cost 590972622 B 54532682 536439940
Apply the arm's C 2672101
length margin on the
cost used to earn the
AE sales
Arm's Length price of D=B+C 57204783
sales made to the
AEs
Difference of Arm's E=D-A 12084042
length price and the
price at which the
international
transaction has
taken place
95% of arms length 54344544
price
9. The learned AR objected to the above working stating that in this working the cost of non AE transactions are reduced so as to increase the cost of AE transactions which cannot be permitted as assessee is maintaining its cost working as per the profits earned by assessee. However, if the working of the CIT (DR) is to be accepted, then it is a sort of readjusting the addition under domestic sales also which cannot be permitted. It was further contention that the CIT (DR) cannot improve the order of the TPO wherein the operating cost was determined which cannot be varied. He submitted the working of safe harbor provisions as under:
Page 6 of 14ITA No.4520 of 2011 & CO No.47 of 2012 Firestone International Pvt Ltd Mumbai Working showing difference in price (OP/Sales) ( in Rupees) Sales to Associated Enterprises 4,51,20,741 Operating margin percentage as per P/L a/c 2.78% Operating margin (4,51,20,741 * 2.78%) 12,54,357 Operating margin determined by TPO 4.84% Operating margin as per TPO (4,51,20,741 * 4.84%) 21,83,844 Difference in operating margin (21,83,844- 9,29,487 12,54,357) Price as per TPO (4,51,20,741+9,29,487) 4,60,50,228 Difference in price (4,60,50,228-4,51,20,741) 9,29,487 Percentage difference (9,29,487*100/4,51,20,741) 2.06% Working showing difference in price (OP/TC) (in Rupees) Total cost 59,09,72,622 Operating margin as a percentage of total cost 2.86% Operating margin (59,09,72,622*2.86%) 1,69,01,817 Operating margin determined by TPO 4.90% Operating margin as per TPO(59,09,72,622*4.90%) 2,89,57,658 Difference in operating margin (2,89,57,658- 1,20,55,841 1,69,01,817) Price as per TPO(59,09,72,622+2,89,57,658) 61,99,30,280 Difference in price (61,99,30,280-60,78,74,439) 1,20,55,841 Percentage difference 2.04% (1,20,55,841*100/59,09,72,622)
10. The learned Counsel submitted that considering the amounts either way, whatever is the working, the percentage difference is only around 2%. Therefore, it is within the +/- 5% safe harbor range as per the provisions of the Act.
Page 7 of 14ITA No.4520 of 2011 & CO No.47 of 2012 Firestone International Pvt Ltd Mumbai
11. We have considered the issue. As seen from the order of the CIT (A) he has arrived at the difference in ALP at 1.86% and on the AE transactions he confirmed only an amount of `.8,39,245/-. This amount is certainly within the +/-5% range as provided under section 92CA(4) of the Income Tax Act. Not only that as submitted by the learned Counsel, the difference in price (operating profits/ sales) the A L P as per the TPO comes to `.4,60,50,228/-. 105% of ALP (+5% range) on this is at `.4,83,52,739/-. 95% of the ALP determined (-5% range) is at `.4,37,47,717/-. Therefore, the sales to AE at `.4,51,20,741/- is within the safe harbor range. The difference in price (operating profits/ Total costs) ie.the second table, the A L P as per the TPO comes to `.61,9930,280/-. The operating cost considered by TPO in TP report was Rs. 59,09,72,622. 105% of this (+5% range) is at `. 65,09,26,794/-. 95% of this (-5% range) is at `.58,89,33,766/-. Therefore, the operating cost at Rs. 59,09,72,622 is within the safe harbor range. Therefore, there is no need to make any addition under the provisions of the Transfer Pricing. In view of the above assessee's ground no. 1 is allowed and the addition sustained at `.8,39,245/- is also directed to be deleted.
Allocation of Expenses:
12. Assessee is running two units i.e. diamond polishing and manufacturing of jewellery. The unit manufacturing jewellery is eligible for deduction under section 10B. AO has listed out the total expenses and allocation to different units by assessee as under:
Particulars Total Expense Expenses
allocated to allocated
diamond to jewellery
unit unit
Travelling expenses 2,34,19,542 1,83,94,685 50,14,858
Communication expenses 46,55,399 45,97,656 57,743
Conveyance and Vehicle 34,27,161 33,95,054 32,106
expenses
Donation 20,52,300 20,52,300 -
Page 8 of 14
ITA No.4520 of 2011 & CO No.47 of 2012 Firestone International Pvt Ltd Mumbai Miscellaneous expenses 1,00,59,268 96,47,042 4,12,225 Audit fees 2,53,125 2,53,125 -
Total 4,36,66,795 3,83,39,862 55,26,932 AO did not accept assessee's contention that actual expenditure was allocated. He went on to allocate the expenditure in the ratio of 76:24 which is ratio of sales in respect of the diamond unit and jewellery unit. Even though he has mentioned that the aforesaid expenses are re-allocated as follows, the order does not contain any table indicating allocation of expenditure. However, the total disallowance was determined at `.50,01,097/-. In fact this is not a disallowance out of the returned income but allocation of expenditure from diamond unit to jewellery unit and AO should have reworked out the profits of different units while computing the Total Income which he has not done. The CIT (A) after considering the relevant submissions of assessee confirmed the issue partly by stating as under:
"2.4 I have perused the assessment order and the written submissions. The appellant has two units - (a) Diamond Unit. (b) .Jewellery Unit. The Jewellery unit is entitled to deduction u/s 1OB. The appellant has drawn two separate P&L accounts for these units and allocated expenditure and audited accordingly. The AO is of the view that expenses have not been allocated proportionately so as to ensure higher deduction under section 10B in Jewellery Unit. In order to rectify the above situation, it has allocated the expenditure in the ratio of sales. Since the sales of diamond unit constituted 76%, hence expenses to that extent was allocated to jewellery unit which claims exemption under section 10B.
2.5 The appellant has made detailed submission including the fact that separate books of account have been maintained for both the units and audited accordingly. While the fact of maintaining separate books of accounts for both the units is not disputed by the AO but the manner of allocation of expenses remains at the discretion of the appellant itself as all the transactions are controlled by it. There is no independent, corroborative evidence to justify the allocation of expenses. Moreover the nature of expenses Page 9 of 14 ITA No.4520 of 2011 & CO No.47 of 2012 Firestone International Pvt Ltd Mumbai are also fungible and not amenable to allocation to either of the units in a clear cut manner. That is lo say that they remain in the subjective domain of the taxpayers. This subjectively assumes greater importance in the light of the fact that one of the units enjoys exemption under section 10B. Thus the issue of allocation of each of the expenses has to be examined in above context. 2.6 Travelling expenses out of the total expenditure incurred at Rs.2.34 crores around Rs.50,14,858/- has been allocated to jewellery unit which appears to be reasonable and so it is fe1t that there is no scope for any reallocation or the 76:24 formula based on sales ratio. 2.7. As regards communication, out of total expenditure of `.46,55,399/- the appellant has allocated only `.57,743/- on the jewellery unit. This is abnormally low and obviously does not reflect the actual ground realities. The appellant has taken a plea regarding Mr. Mihir Bhansali expenditure being borne by another related firm. The same is not accepted as it was not raised before AO nor backed by requisite evidences at the assessment level or at appellate level. As such it remains an assertion only. In such circumstances it will be fair to reject the appellant's entry into books and adopt a formulary approach based on sales. The reallocation done by AO of this expenses is therefore held to be in order. The same plea has been taken for conveyance and vehicle expenses. Here also out of total expenditure of `.34,27,161/- the appellant has allocated only `.32,106/- to the jewellery unit, which is abnormally low. As such the action of AO in carrying out pro-rata allocation on these items of expenditure also is held to be in order.
2.8 As regards donation, the same has already been disallowed by the appellants in its computation and so the reallocation of the same to the jewellery unit is leading to the double disallowance to the extent of `.4,92,552/-. As such the same is deleted.
2.9 Coming to the miscellaneous expenses of `.1 crores approx, it is observed that the appellant has allocated only 4 lakhs to the jewellery unit. The same is also abnormally low and cannot be said to be reflecting the true and fair picture. The appellant claim's that miscellaneous expenses includes commission, assortment charges of `.17.5 lakhs which is clearly allocable to the diamond unit and so there is no scope for reallocation. There is force in the argument of the appellant as assortment charges are specific to diamond business unit and so it will not be fair to treat them as common or fungible. As such `.17.5 lakhs will Page 10 of 14 ITA No.4520 of 2011 & CO No.47 of 2012 Firestone International Pvt Ltd Mumbai have to be excluded for reallocation. As regards office expenses etc., the contention of the appellant that diamond unit occupies more space and has more staff is accepted but AO has already given 76% weightage to this aspect, hence in way this argument has been taken care of. As such, the action of AO in reallocating it is in order. To sum up, after excluding `.17.5 lakhs related to assortment charges, the balance is liable to be apportioned on 76:24 basis.
With regard to the audit fees of `.2.53 lakhs, the appellant has not allocated a single paisa to the jewellery unit though it claims both the unit are audited separately. This betrays a contradiction in its stand and also strengthens the case of AO that allocation to both the units is not scientific and objective calling for reallocation. The action of AO in applying the ratio as above on audit fees is held to be correct.
Taking into account the reasons as aforesaid, this ground is partly allowed".
13. Both the Revenue and assessee have raised the respective grounds on the issue. The learned DR however, mainly explained that in the absence of any proper allocation of expenditure, the ratio of sales in different units is the main basis for allocation of expenditure and particularly referred to the travelling expenses which were not according to the ratio. The learned Counsel however, submitted that assessee has maintained separate books of account and expenditure was allocated on actual basis. Therefore, there is no need for allocating on the ratio of sales as was done by AO. In the items confirmed by the CIT (A), it was his submission that the expenditure allocated to a particular unit was on the basis of actual expenditure in the unit and therefore, there is no need for allocation of expenditure on a different ratio.
14. We have considered the rival submissions and examined the allocation of expenditure. As far as travelling expenditure is considered the CIT (A) affirmed the allocation of expenditure on actual basis with which we also agree. Therefore, Revenue ground on this issue cannot be accepted. With reference to the communication expenditure the expenses allocated to the diamond Page 11 of 14 ITA No.4520 of 2011 & CO No.47 of 2012 Firestone International Pvt Ltd Mumbai unit is almost in its entirety with a meager expenditure for jewellery unit which earned profit at 18.25% as against 2.66% in the diamond unit. As rightly pointed out by the CIT (A) since no evidence was furnished for the argument that most of the expenditure pertains to Mr. Mihir Bhansali was booked in another related firm, the contention of assessee cannot be accepted. No evidence was also placed before us. Since this issue was decided on factual basis, in the absence of justification of expenditure allocated disproportionately, there is no other option than to allocate on pro- rata basis. Therefore, the order of the CIT (A) is confirmed and assessee's contention on this is rejected.
15. With reference to the miscellaneous expenses, we confirm the order of the CIT (A) as he has considered the issue on factual basis and also on the reason that the allocation to jewellery unit is very meager and there could be booking of expenditure in the unit not eligible for deduction. For these reasons, we upheld the order of the CIT (A) and reject assessee's contentions. With reference to the donations the CIT (A) examined this issue gave relief as it may result in double disallowance. Nothing was brought on record to counter the findings of the CIT (A), therefore, Revenue ground on this issue is rejected.
16. With reference to the audit fees, as rightly pointed out by the CIT (A), assessee has not allocated a single paisa to the jewellery unit, though it claimed both the units are audited separately. The CIT(A) upheld the allocation of audit fees to the jewellery unit as well, as was done by the AO in the same ratio of sales. For these reasons, we uphold the order of the CIT (A) on the above issues and reject the grounds raised by the Revenue as well as assessee.
Disallowance u/s 14A.
17. Assessee has raised issue of disallowance under section 14A as Ground No.3 in cross objection. Since this issue was not agitated Page 12 of 14 ITA No.4520 of 2011 & CO No.47 of 2012 Firestone International Pvt Ltd Mumbai before the CIT(A) and the disallowance made by AO was not contested, the ground cannot be accepted as main ground in cross objection. In view of this, assessee prayed for admission of additional ground on the issue and filed a request accordingly. After considering the plea, this ground is admitted as additional ground.
18. During the year assessee has received interest on RBI Relief Bonds to an extent of `.31,87,500/- and AO invoking the Rule 8D worked out worked out the disallowance at `.7,73,425/-. Since this issue was not agitated before the CIT (A), we are of the opinion that AO is required to rework out the disallowances after examining the reasonableness of the expenditure. Basically on RBI bonds, there cannot be any expenditure except to examine whether the funds are own funds or borrowed funds and any interest expenditure was incurred. This aspect was never examined. It was also assessee's contention that 0.5% of the disallowance was worked on the total investment of `.15.46 crores which itself was carried over from March 31, 2005 out of which `.10.57 crores was invested in a subsidiary company, the income of which is not exempt as it is a US based company. On investment in joint venture company, there was no change in facts from earlier year. Therefore, if at all any disallowances is to be worked out on a reasonable basis as per the principles established by the Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT (323 ITR 81) (Bom), it has to be on the amount of `.3.75 crores invested in RBI relief bonds. During the course of the argument, the learned Counsel placed an order of the Coordinate Bench in the case of Pawan Kumar Parmeshwarlal vs. ACIT in ITA No.530/Mum/2009, dated 11th January, 2011 for the proposition that no disallowance under section 14A is required. However, the facts of that case was that assessee was an individual and there was no disallowance of the business expenditure while determining the income from business. The investment made by assessee in personal capacity in the RBI Page 13 of 14 ITA No.4520 of 2011 & CO No.47 of 2012 Firestone International Pvt Ltd Mumbai bonds and PPF were considered for disallowance. Therefore, considering the factual position therein, the disallowance under section 14A was held to be not warranted. However, in this case assessee is not an individual and the funds are invested as part of company business either as investment or for business purposes. Whether they are made with own funds or with borrowed funds and whether there is any expenditure incurred or not was not examined by AO and disallowed amount u/s 14A, invoking Rule 8D. As Rule 8D is not applicable for the impugned assessment year, the matter is restored to the file of AO for examination of the issue afresh and determining the reasonable amount as per the principles laid down by the Hon'ble High court or Hon'ble Supreme Court if any, after giving due opportunity to assessee. Additional ground is restored to the file of AO.
19. In the result, Revenue appeal is dismissed and assessee's C.O is partly allowed for statistical purposes.
Order pronounced in the open court on 9th November, 2012.
Sd/- Sd/-
(Amit Shukla) (B. Ramakotaiah)
Judicial Member Accountant Member
Mumbai, dated 9th November, 2012.
Vnodan/sps
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
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