Income Tax Appellate Tribunal - Ahmedabad
Sparkle Diam Pvt.Ltd.,, Surat vs Department Of Income Tax on 26 July, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD "I" BENCH AHMEDABAD
आयकर अपील य अ
धकरण, अहमदाबाद यायपीठ 'आइ'
BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL
MEMBER,
AND SHRI N. K. BILLAIYA, ACCOUNTANT MEMBER.
ITA. No.3971/Ahd/2008
(Assessment Year: 2004-05)
A.C.I.T., Circle-4,
Room No.223, Aayakar
Bhavan, Majura Gate, Surat Appellant
Vs.
M/s. Sparkle Diam Pvt. Ltd.
T-90G, Belgium Tower, Opp.-
Linear Bus Stand, Ring Road, Surat Respondent
PAN: AAPCS4186D
अपीलाथ क
ओर से /By Appellant :Shri Roop Chand, Addl.
CIT
यथ क
ओर से/By Respondent : Shri Tushar Hemani,
A.R.
सन
ु वाई क
तार ख/Date of Hearing : 19.07.2016
घोषणा क
तार ख/Date of
Pronouncement : 26.07.2016
ORDER
PER SHAILENDRA KUMAR YADAV, J.M:
This appeal has been filed by Revenue against the order of Commissioner of Income Tax (Appeals)-I, Surat, dated 07.10.2008 for A.Y. 2004-05 on following ground.
ITA No.3971/Ahd/08 A.Y. 04-05[ACIT vs. M/s. Sparkle Diam Pvt. Ltd.] Page 2 "[1] On the facts and in the circumstances of the case and in Law, the Ld.CIT(A)-III, Surat has erred in deleting the addition of Rs.97,30,144/- made by the Assessing Officer on account of upward adjustment in the international transaction related to sales."
2. Assessee company is engaged in the business of manufacturing and export of Diamond studded jewellery. During year, assessee has entered into two international transactions with its associated enterprises. An amount of Rs.7,13,35,151/- was received from K. Girdharlal Inc. (KG USA) for export of diamonds studded gold jewellery. An amount of Rs.63,120/- has been paid to K. Girdharlal (Hongkong) Ltd. (KG HK) for import of mountings. For both these transactions, the method used was Transactional Net Margin Method (hereinafter called as 'TNMM'). Assessing Officer referred this case to the Additional CIT (Transfer Pricing)-III, Mumbai to compute the correct and a true arms length price of the international transaction made by assessee. As per the order of TPO an upward adjustment of Rs.97,30144/- was required to be made to the total income of assessee. In view of order of TPO, Assessing Officer issued show cause notice as to why upward adjustment of Rs.97,30,144/- be not made. According to Assessing Officer, the submissions of assessee were considered and not found to be satisfactory, made addition of Rs.97,30,144/-.
2.1 Matter was carried before the First Appellate Authority, wherein various contentions made on behalf of assessee and ITA No.3971/Ahd/08 A.Y. 04-05 [ACIT vs. M/s. Sparkle Diam Pvt. Ltd.] Page 3 having considered the same, CIT(A) deleted the addition in question.
2.2 Same has been opposed before us on behalf of Revenue inter alia submitting that CIT(A) erred in deleting the addition of Rs.97,30,144/- made by Assessing Officer on account of upward adjustment in the international transactions related to sales. Accordingly, learned Departmental Representative requested to set aside the order of CIT(A) and that of Assessing Officer be restored. On the other hand, ld. Authorized Representative supported the order of CIT(A).
2.3 After going through rival submissions and material on record, we find that Assessee company is engaged in the business of manufacturing and export of Diamond studded jewellery. The only reason given for adopting the cost plus method (CPM) and for rejecting the transaction net margin method (TNMM) of assessee was that assessee has incurred loss during the year. The TPO stated that assessee has incurred loss due to non-recovery of fixed assets and therefore, it would be appropriate to take gross profit as bench marking. The TPO has not discussed in his order as to how he has arrived at CPM as the most appropriate method and TNMM is not the most appropriate method. As per the provisions of Section 92C, Assessing Officer has to follow the following steps before making adjustments to the income shown by assessee in respect of transfer policy:-
ITA No.3971/Ahd/08 A.Y. 04-05[ACIT vs. M/s. Sparkle Diam Pvt. Ltd.] Page 4 "(a) As per the provisions of sub-section (3) of Section 92C, if the A.O. is of the opinion that the price charged or paid is not in accordance with the most appropriate method mentioned in sub-section (1) and sub-section (2) or if he is of the opinion that the assessee has not maintained any information and document relating to the international transaction in accordance with Section 92D(1) or Rules or if he is of the opinion that information data used by the assessee is not reliable or incorrect or the assessee has failed to furnish various details and documents required u/s.92D(3) then he may proceed to determine the arms length price.
(b) However, if the A.O. considers it necessary or expedient so to do, he may, with the previous approval of the Commissioner, refer the matter to the TPO.
(c) On receipt of such a reference, the TPO has to issue a show-cause notice as prescribed under Section 92CA(3) asking for various details/documents.
(d) The TPO shall thereafter determine the arms length price in accordance with Section 92C(3) i.e. the procedure mentioned in para-(a) above. For the purpose of computing this arms length price, the TPO has to follow the procedure and method mentioned in sub-section (1) and sub-section (2) of Section 92C read with Rule 10B & 10C.
(e) Rule 10B prescribes various methods and gives various conditions whereby the TPO/A.O. is required to adhere to for determining the most appropriate method. This rule gives various conditions as per which either CCPM or RPM or TNMM would be the most appropriate method. Rule 10C laid down various factors which the A.O. should take into account for selecting the most appropriate method."ITA No.3971/Ahd/08 A.Y. 04-05
[ACIT vs. M/s. Sparkle Diam Pvt. Ltd.] Page 5 2.4 From the above, we find that neither the Assessing Officer nor the TPO have discussed as to why the TNMM followed by assessee was wrong and why it was not acceptable. The TPO has pointed out no defect at all in the method followed by assessee except saying assessee has incurred loss due to non-recovery of fixed assets and, therefore, it would be appropriate to take gross profit as bench marking. Even in remand report, neither the Assessing Officer nor the TPO was justified in their observations. In fact, they had not followed the procedures laid down in Section 92C of the Act and in Rules 10B & 10C. The TPO has not made any attempt in showing why the results of Deep Diamond India Ltd., Moon Diamonds Ltd., Shanti Vijay Jewels Ltd. and Sovereign Diamonds Ltd. are comparable for calculating the gross profit margin.
2.5 Assessee has pointed out that during the year assessee is engaged in the business of manufacture and export of plain and studded jewellery in the form of bangles, rings, ear rings, bracelets, pendants, necklaces etc. The jewellery is manufactured of gold, semi precious and precious gems and diamonds. The studded gold jewellery is sold both in the local and overseas market. During the year, assessee made sales of Rs.8.53 crores out of which export to associated enterprise is of Rs.7.13 crores and purchases were of Rs.63,121/- only. According to Assessing Officer, assessee's gross profit margin on cost was 7.4%. Assessee stated that in comparison to this ITA No.3971/Ahd/08 A.Y. 04-05 [ACIT vs. M/s. Sparkle Diam Pvt. Ltd.] Page 6 the Directors' report of Deep Diamond India Ltd, for A.Y, 2003-04 reveals that the business of Deep Diamond India Ltd. comprised only of domestic operation whereas assessee company has 87% of the turnover as export sales. Further, the turnover of Deep Diamond India Ltd. was only Rs.3.79 crores whereas assessee's turnover is Rs.8.53 crores.
2.6 Regarding Moon Diamond Ltd., the stand of assessee has been that it is also not comparable because as per the notes on account of the annual accounts for F.Y. 2003-04 Moon Diamonds Ltd. has substantial related party transactions in the nature of purchase of materials/finished goods and sale of materials/finished goods with its holding companies M/s. Shrenuj & Co. Ltd. and M/s. Aditi Diamimpex Trading &. Manufacturing Co. Ltd. whereas assessee made purchases from its related company of only Rs.63,121/- and hence these cases are not comparable.
2.7 With regard to Shantivijay Jewels Ltd, the stand of assessee has been that this case is also not comparable because this company was in existence for the last 31 years and it was well established in the market whereas assessee has started full fledged operation in the current year only that too from January 2004 i.e. only for three months as this is the first year of assessee company. Shantivijay Jewels Ltd. in located in SEEPZ whereas the assessee company was not located in SEEPZ and hence the benefits availed by Shantivijay Jewels Ltd. were not available to assessee compare ITA No.3971/Ahd/08 A.Y. 04-05 [ACIT vs. M/s. Sparkle Diam Pvt. Ltd.] Page 7 like duty free imports of plant and machinery, spares and consumables. Shantivijay Jewels Ltd. has also facilities like tax holiday u/s.IO10A as well as other benefits like Sales-tax and Service-tax exemption which are not available to the appellant company. Shantivijay's fixed cost like energy cost, wages & salary and depreciation have remained same whereas sales have increased significantly whereas assessee company has a new sector.
2.8 With regard to Sovereign Diamond, stand of assessee has been that this company was existed last 30 years, whereas assessee company has started operation in the current year only i.e. from January 2004 i.e. only for three months. During F.Y, 2003-O4 Sovereign Diamonds Ltd. raw material purchases have come down by 22.3%. Further, from the fact that the consumption of raw materials as percentage of sales has been showing consistently declined and has varied drastically from 92.6% (2002), 65.11% (2003), 57.59% (2004) and even subsequently 38.73% in 2005 which shows that possibly the company was going into job work income where the customers have supplied the raw materials like diamonds partly. In such a case materials were partly supplied by the clients and, therefore, the case is not comparable.
2.9 Further, assessee stated that from the chart prepared by TPO reproduced on page-4 of the assessment order, it was observed that although the gross profit margin on cost is 7.40% in respect of assessee but the cases adopted by the ITA No.3971/Ahd/08 A.Y. 04-05 [ACIT vs. M/s. Sparkle Diam Pvt. Ltd.] Page 8 TPO has such varied gross profit margin on cost as 14.5% in respect of Deep Diamonds Ltd., 7.38% in respecl: of Moon Diamonds Ltd., 14.53% in respect of Shantivijay Jewels Ltd. and absolutely high being 53.98% in respect of Sovereign Diamonds Ltd. The stand of assessee has been that TPO has not explained as to why the cases having such huge variation have been adopted.
2.10 With regard to Moon Diamonds Ltd., the stand of assessee has been that 7.38% gross profit margin on cost is included in the table then why the assessee's 7.4% gross profit margin on cost was not found acceptable.
2.11 In view of above, we find that the Assessing Officer /TPO has not given any justification for adopting the CPM and for choosing the four cases mentioned above and for rejecting assessee,s calculations. Even in remand report, Assessing Officer /TPO has not given comments in respect of each and every ground and submission of assessee even though the TPO has sent the report after long time. All these things show that the TPO/Assessing Officer does not have any justification or valid reason for their upward adjustment. If the order of the Assessing Officer /TPO does not signifies that as to why assessee's calculations were wrong and why TNMM adopted by assessee has to be rejected and why the CPM was correct as adopted by the Assessing Officer /TPO. These cases do not appear to be comparable for the reason discussed above. In view of above, CIT(A) was justified in deleting the addition ITA No.3971/Ahd/08 A.Y. 04-05 [ACIT vs. M/s. Sparkle Diam Pvt. Ltd.] Page 9 made by TPO/Assessing Officer. This reasoned factual finding of CIT(A) needs no interference from our side. We uphold the same.
3. As a result, appeal filed by Revenue is dismissed.
Pronounced in the open Court on this the 26th day of July, 2016.
Sd/- Sd/-
(N. K. BILLAIYA) (SHAILENDRA KUMAR YADAV)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Ahmedabad: Dated 26/07/2016
True Copy
S.K.SINHA
आदे श क त ल प अ े षत / Copy of Order Forwarded to:-
1. राज व / Revenue
2. आ वेदक / Assessee
3. संबं'धत आ यकर आ यु)त / Concerned CIT
4. आ यकर आ यु)त- अपील / CIT (A)
5. -वभागीय 0त0न'ध, आ यकर अपील य अ'धकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाड6 फाइल / Guard file.
By order/आ दे श से, उप/सहायक पंजीकार आ यकर अपील य अ'धकरण, अहमदाबाद ।