Income Tax Appellate Tribunal - Mumbai
Goldstar Jewellery Design P.Ltd, ... vs Assessee on 23 April, 2013
धकरण, मंुबई यायपीठ 'के', मंुबई ।
आयकर अपील य अ धकरण, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES "K", MUMBAI सव ी आर.एस. याल, लेखा सद य एवं वजय पाल राव, या यक सद य, के सम ।
Before Shri R.S.Syal, AM and Shri Vijay Pal Rao, JM ITA No.7317/Mum/2012 : Asst.Year 2008-2009 M/s.Goldstar Jewellery Design Pvt.Ltd. The Income Tax Officer Unit No.38 & 39, SDF-II, SEEPZ बनाम/ Ward 8(1)(4) Andheri (East), Mumbai - 400 096. Mumbai.
PAN : AACCG1410B. Vs.
(अपीलाथ /Appellant) ( यथ /Respondent)
अपीलाथ क ओर से /Appellant by : Shri M.Subramaniyam यथ क ओर से /Respondent by : Shri Ajeet Kumar Jain सनवाई ु क तार ख / घोषणा क तार ख / Date of Hearing : 17.04.2013 Date of Pronouncement : 23.04.2013 आदे श / O R D E R Per R.S.Syal ( AM) :
This appeal by the assessee is directed against the order dated 28.09.2012 passed by the Assessing Officer u/s 143(3) read with section 144C(13) of the Income-tax Act, 1961 (hereinafter called the Act) in relation to the assessment year 2008-2009.
2. Briefly stated the facts of the case are that the assessee is engaged in the business of manufacturing of diamond studded gold jewellery. It filed return declaring total income of `2,12,490. Due to certain international transactions entered into by the assessee, the Assessing Officer (AO), in terms of section 92CA(1), made reference to the Transfer Pricing Officer (TPO) for determining Arm's Length Price (ALP) in respect of such international transactions. The TPO observed that the assessee made Purchases of 2 ITA No.7317/Mum/2012. M/s.Goldstar Jewellery Design Private Limited.
diamond studded jewellery from its Associated Enterprises (AEs) amounting to `5,75,64,505 and sales were made of diamond studded jewellery to AEs at `11,42,16,876. Apart from that, the assessee also paid commission of `46,63,835 to its AEs. The assessee benchmarked its international transaction on Transactional Net Margin Method (TNMM). It applied Profit Level Indicator (PLI) of OP / TC. The assessee chose nine comparable cases with the average of OP / TC at 4.43% and OP / Sales at 4.12%. The assessee's margin of OP / Sales at 4.45% and OP / TC at 4.65% was claimed at ALP. The TPO rejected some of comparables chosen by the assessee because of significant related party transactions and also due to consideration of earlier year's data in computing the PLI of such comparable cases. The TPO set out certain filters in his order and on that basis chose certain fresh cases as comparable. Out of assessee's nine comparable cases, the TPO retained only four and added eight new cases at his own to make the list of comparables at twelve. The TPO also did not accept the assessee's adoption of OP / TC or OP/Sales as correct PLI. In his opinion the correct PLI of Return on Capital Employed (RoCE) should have been employed. He worked out the average Capital Employed by the assessee by taking average of Opening and Closing of Capital plus Reserves plus Debts minus Investments or in other words, Fixed assets plus Current assets. In this way, he determined the RoCE at 5.29% in the case of assessee and average of 18.26% in case of comparables so finalized. Shortfall in RoCE at 12.97% (18.26% - 5.29%) was applied to work out TP adjustment of `8,77,62,254. The assessee objected to such adjustment 3 ITA No.7317/Mum/2012. M/s.Goldstar Jewellery Design Private Limited.
before the Dispute Resolution Panel (DRP) pursuant to the draft order of the Assessing Officer u/s 143(3) read with section 144C(1). The assessee's objections were two-fold. First, about the inclusion of some fresh comparable cases and second, about the change in the PLI. The DRP concurred with the assessee's submissions and ordered to delete the case of Asian Star co. Ltd. and Renaissance Jewellery Ltd. out of the final list of comparables drawn by the TPO. The DRP did not find any weight in the assessee's argument for the exclusion of the case of Su-Raj Diamond Industries Limited because the TPO in that case had considered only the jewellery segment of the company. The assessee's second objection about the RoCE having been adopted as PLI was also rejected. The assessee's further contention that if RoCE was to be used, it should be applied only to the AE segment of the assessee, was also found to be wanting. While giving effect to the directions given by DRP, the AO vide his order u/s 143(3) read with section 144C(13), took ten comparable cases with RoCE as PLI as under:-
Sr. Name of the assessee ROCE
No.
1. Sovereign Diamonds Limited 3.94%
2. Shankar Jewells Limited 4.17%
3. Fin Platinum India Limited 5.03%
4. Golden Jewellery Limited 31.69%
5. Shreeji Jewellery Limited 3.88%
6. Shantivijay Jewels Limited 6.66%
7. Diagold Design Limited 8.14%
8. Fine Jewellery (India) Limited 6.70%
9. Suraj Diamonds Industries Limited 29.40%
10 Foreever Precious Jewellery & Diamonds Ltd. 14.32%
Arithmetical Mean 11.39
4 ITA No.7317/Mum/2012.
M/s.Goldstar Jewellery Design Private Limited.
3. By considering the assessee's rate of RoCE at 5.29%, the A.O. made transfer pricing adjustment to the tune of `4,12,75,990 by applying shortfall of 6.10% (11.39% - 5.29%) on the average capital employed. The assessee is in appeal against the order passed by the A.O. making the transfer pricing adjustment of `4.12 crore.
4. We have heard the rival submissions and perused the relevant material on record. First objection taken by the learned AR before us relates to inclusion of three cases in the final list of comparables, being, Goldiam Jewellery Limited, Su Raj Diamonds Industries Limited and Forever Precious Jewellery & Diamonds Limited. The upholding of inclusion of other cases by the DRP out of those chosen by the TPO and exclusion of other cases by the TPO out of the comparable cases chosen by the assessee is not in dispute. Thus the area of controversy qua the comparable cases is restricted to examining the comparability or otherwise of the above referred three cases.
5.1. The first case is that of Goldiam Jewellery Limited. The learned AR contended that the TPO adopted filter of 25% Related Party Transactions (RPTs). Referring to the details of RPTs in the case of Goldiam Jewellery Limited, it was claimed that the percentage of RPTs to the Total revenue in that case was at 35.10% and hence this case was liable to be excluded. In working out the said percentage of 35.10%, the ld. AR has grouped transactions of Sale of goods to GHL, Purchase of goods from GIL, GHL and GJL and also Loan taken from GIL for working out total RPTs of Goldiam 5 ITA No.7317/Mum/2012. M/s.Goldstar Jewellery Design Private Limited.
Jewellery Limited at `19.32 crore. The learned AR argued that since the percentage of RPTs to Total Revenue (Sales) of `55.06 crore was at 35.10%, the said party should have been excluded. Per contra, the learned Departmental Representative contended that the loan transaction should not be taken into consideration for working out the total RPTs. There is no dispute on the other aspects of comparability of this case with the assessee.
5.2. As such, we are called upon to decide as to whether the amount of loan taken can be construed as a related party transaction in determining the percentage of RPL to total sales. We find force in the contention of the learned Departmental Representative in this regard. In common parlance, the term `Related party transactions' refers to any transaction between related parties. These may include provision or receipt of goods or services; dealing in any tangible or intangible property ; or other financial transactions in the nature of capital contribution or borrowing or advancing loan, with or without interest. But in the context of Transactional Net Margin method, where the underlying object is to ascertain the profitability from international transactions at arm's length with a suitable base and the question is of determining the comparability of a case, the term `related party transactions' cannot be considered in its generic sense. It will encompass only such transactions between the related profits which directly affect the overall profitability in one way or the other. It is more so because the percentage of related party transactions is computed vis-à-vis total sales. The components of both the variables 6 ITA No.7317/Mum/2012. M/s.Goldstar Jewellery Design Private Limited.
of this ratio, being the RPTs and total revenue must be of the same genus, though there may be difference in species. When on one hand, we are taking the figure of total sales, which is of the revenue nature, then the related party transactions should also be of the revenue and not of the capital nature. The items of total revenue (total sales), sale of goods and purchase of goods to or from related parties are of the revenue nature. In other words, only such related party transactions can be considered for this purpose which are of the revenue character having a direct bearing on the profitability. Such related party transactions which are profit neutral shall stand excluded for this purpose. To put it simply, when we determine the RPTs as a percentage of total revenue what is intended to be included in the related party transactions is the transactions which find their place either in the Manufacturing, Trading or the Profit and loss account, all of which are of the revenue nature. The transactions of capital nature finding their place in the Balance Sheet shall be expelled from the purview of the `Related party transactions' for this purpose. In that view of the matter, the transaction of accepting or advancing loan per se has no effect on the profitability. If however there is some interest expenditure or interest income from such loan advanced or accepted which finds place in the Profit and loss account that would definitely constitute related party transaction in such computation because of its revenue nature. As such, it is vivid that the figure of loan taken by the comparable case from its related party cannot find place in total related party transactions for the purposes of computation of percentage of RPTs to the total revenue.
7 ITA No.7317/Mum/2012.M/s.Goldstar Jewellery Design Private Limited.
5.3. At this juncture, it would be relevant to mention that when this prima facie opinion was expressed by us in the Court, the learned AR came out with an alternative argument that the interest on such loan taken should be considered as a part of RPTs. When asked to point out the amount of actual interest paid on such loan, it was admitted that no such interest was actually paid. However it was emphasized that notional interest on such loan should be considered as part of RPTs. We are at loss to appreciate this contention for the manifest reason that the ambit of RPTs is confined to actual transactions and not any hypothetical transactions which may have resulted. The mere fact that no interest was, in fact, paid on this loan is sufficient enough for not inflating the amount of related party transactions with any hypothetical interest amount. We, therefore, hold that firstly, the loan taken cannot be considered as part of related party transactions and secondly, no hypothetical interest can be calculated for the purposes of inclusion in the total RPTs. If, however, in a case some amount of actual interest is paid or received on the loans accepted or given, that would form part and parcel of the RPTs for the purposes of computing the percentage of RPTs to the Total revenue.
5.4. Adverting to the facts of the instant case, we find that there is no actual payment of interest on the loan taken. As such, no hypothetical interest can be included in the RPTs. Further, if the amount of loan taken from GIL at `13.30 crore is reduced from total RPTs of Goldiam Jewellery Limited at `19.32 crore, the percentage 8 ITA No.7317/Mum/2012. M/s.Goldstar Jewellery Design Private Limited.
of RPTs to the total revenue would obviously fall within 25% filter. As there is no dispute on the otherwise comparability of this case, we uphold the impugned order insofar as the inclusion of this case in the final list of comparables is concerned.
6.1. The second case whose inclusion has been disputed is Su- Raj Diamond Industries Limited. The learned AR submitted that Su- Raj Diamond Industries Limited cannot be considered as comparable as it is operating in retail segment whereas the assessee is operating in wholesale business of diamond studded jewellery. Apart from that, it was also put forth that in computing the figures of this case, the TPO not only considered the amounts of studded manufacturing jewellery but also those of plain gold jewellery. The learned AR stated that the assessee was engaged only in the business of studded manufacturing jewellery and not plain gold jewellery. The percentage of total sales of studded manufacturing jewellery in the case of Su- Raj Diamond Industries Limited worked out at 8.5% only as against the percentage of plain gold jewellery at 42.79%. In the backdrop of these facts, it was urged that this case be ignored. In the opposition, the ld. DR supported the impugned order in including this case in the list of comparables.
6.2. Having heard both the sides on the point we are unable to rank the case of Su-Raj Diamond Industries Limited as comparable to the assessee because it is operating in the retail segment, whereas the assessee is operating in wholesale business of diamond studded jewellery. There can be no comparison of the volume and profit rate 9 ITA No.7317/Mum/2012. M/s.Goldstar Jewellery Design Private Limited.
in respect of whole sellers and retailers. On this score alone, we are of the considered opinion that the case of Su-Raj Diamond Industries Limited is liable to be excluded from the final list of comparables. We order accordingly.
7. The third case is that of Forever Precious Jewellery & Diamonds Limited. The learned AR contended that the Revenue has considered the operating revenue from manufacture of studded jewellery of this company at `41363 lakh. By inviting our attention towards Financial statement of this company it was stated that the total amount of sales as per the quantitative details forming part of Notes to account amounted to `28692.74 lakh, which did not match with the total sales as per Trading account at `41363 lakh. Further the sale of diamond jewellery was only at `3,532 lakh for which segmental operating profit and segmental capital details were not available. In view of this position, it was requested that this case may also be excluded. The learned Departmental Representative could not justify the figures adopted by the TPO. As the revenue has embarked upon PLI of RoCE and the details relating to segmental operating profit and segmental amount of capital employed of Forever Precious Jewellery & Diamonds Limited are not ascertainable, this case obviously needs to be removed from the list of comparables. Further this party, apart from dealing in diamond studded jewellery, is also dealing in other products such as silver jewellery etc. The figure of sales as per quantitative details also does not match with the total sales as per Trading account. Since the segmental operating profit and 10 ITA No.7317/Mum/2012. M/s.Goldstar Jewellery Design Private Limited.
segmental capital employed in respect of diamond jewellery of this case are not available, this case cannot be considered as comparable. We, therefore, order for the expunging of this case.
8. To sum up, our decision on the inclusion or exclusion of the three cases agitated before us is that whereas the case of Goldium Jewellery Limited shall continue to be included in the final list of comparables, the cases of Forever Precious Jewellery & Diamonds Limited and Su-Raj Diamonds Industries Limited would be excluded. In view of the change in the list of comparable cases, we set aside the impugned order and restore the matter to the file of the AO/TPO to determine the ALP of the international transactions of the assessee afresh in the light of our above directions.
9.1. Now we espouse the next issue agitated by the assessee in the present appeal, which is against the change of PLI from OP / TC or OP / Sales to RoCE. The learned AR contended that in the earlier year the assessee applied PLI of OP / TC which was accepted by the TPO. Albeit he placed on record a copy of the order passed by the TPO for assessment year 2007-2008, however, it could not be precisely pointed out as to what was the PLI in such earlier year. The learned AR invited our attention towards three orders passed by the Mumbai Benches of the Tribunal, being Addl.CIT v. Tej Diam [(2010) 37 SOT 341 (Mum.)], ACIT v. Super Diamonds [(2012) 26 Taxmann.com 101 (Mum.)] and Tara Jewels Export (P.) Ltd. v. ACIT [(2013) 31 taxmann.com 383 (Mumbai-Trib.)] in which Operating margin to Sales or OP/TC has been accepted as PLI in the case of 11 ITA No.7317/Mum/2012. M/s.Goldstar Jewellery Design Private Limited.
jewellery industry. It was, therefore, prayed that there was no logic in rejecting the assessee's PLI which was consistently followed in preference to RoCE. In the opposition the learned Departmental Representative pressed for the applicability of RoCE as PLI. On a specific query, he could not point out any order of the tribunal in the context of jewellery industry in which RoCE has been approved as correct PLI. It was, however, maintained that the transfer pricing provisions are going through its initial phase and there is consistent updation of law on day to day basis. Simply because PLI of RoCE was not applied in any case would not mean that it can never be applied. He accentuated on the point that the RoCE is one of the recognized PLIs as per rule 10B(1)(e).
9.2. We have heard the rival submissions and perused the relevant material on record. The pertinent question which has been posted 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 specified methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe. Such methods, inter alia, include `Transactional net margin method', which has been applied by the assessee in the present case, and the same is not disputed. The mechanism for determination of the ALP under this 12 ITA No.7317/Mum/2012. M/s.Goldstar Jewellery Design Private Limited.
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 associated enterprise shall be computed in relation to costs incurred or sales effected 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 rate of operating profit in respect of comparable cases for the purposes of determining the ALP of international transactions. A bare reading of this provision indicates that the operating profit can be computed with any of the bases, viz., costs incurred or sales effected or assets employed or any other relevant base. Which is the correct 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 its 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 `67.66 crore and by considering the amount of operating profit at `3.58 crore and total turnover of `80.54 crore determined RoCE at 5.29%. Here it is relevant to mention that the sales to the AE in the present case total ` 11.42 crore as against the total sales at ` 80.54 crore. There are no 13 ITA No.7317/Mum/2012. M/s.Goldstar Jewellery Design Private Limited.
segmental 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 realization in respect of exports and domestic sales is always different. When there is no identifiable capital employed and separate amount of profit in respect of transactions with the AEs in the situation like the one which is prevailing before us, then how the assessee's RoCE can be precisely worked out, is anybody's guess. The position 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 of demarcation in the use of capital employed and profitability for transactions with AEs and non-AEs had been there with or without segmental accounts. In that case, there could have been no problem in using RoCE as PLI under the TNMM. As the facts of the present case amply demonstrate that computation of separate capital 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, in our considered opinion, the correctness of the applicability of RoCE as PLI under the TNMM cannot be countenanced.
9.4. It is further important to note that the Mumbai Benches of the tribunal in the aforequoted three orders have considered either Operating margin to Sales or Operating profit to Total cost as the PLI in the context of jewellery / diamond industry, although in none of these cases there was any controversy as to the application of RoCE 14 ITA No.7317/Mum/2012. M/s.Goldstar Jewellery Design Private Limited.
vs. OP/TC or OP/Sales. The learned Departmental Representative could not point out even a single order in which RoCE has been held to be correct PLI under the TNMM. In view of the discussion in para 9.3 of this order and respectfully following the principle of consistency permeating from the above refereed three orders, we are of the considered opinion that the adoption of RoCE by the authorities below cannot be approved. We, therefore, set aside the impugned order on this issue and direct that the PLI of OP / TC or OP / Sales should be applied in the facts of the present case.
10. The last objection taken by the learned AR is that the authorities below have carried out the transfer pricing adjustment in respect of total transactions instead of restricting it to international transactions. It is simple and plain that transfer pricing adjustment has to be confined only to the international transactions as is evident from the language of sub-section (1) of section 92 which provides that "any income arising from an international transaction shall be computed having regard to the arm's length price". The term "international transaction" has been defined in section 92B to mean "a transaction between two or more associated enterprises, either or both of whom are non-residents". Section 92A defines associated enterprise in relation to another enterprise by certain yardsticks. A conjoint reading of these provisions makes it amply clear that it is only income arising from international transactions, being a transaction between associated enterprises, which is required to be computed having regard to arm's length price. In other words, transfer pricing 15 ITA No.7317/Mum/2012. M/s.Goldstar Jewellery Design Private Limited.
adjustment is warranted only qua the transactions with associated enterprises and not non-AEs. From the impugned order, it is patent that the transfer pricing adjustment has been made in relation to the total transactions of the assessee breaching the limit of transactions with the AEs. This is impermissible under law. As the matter of computation of ALP in the present case has been restored to the file of AO / TPO for a fresh decision in terms of our directions contained in earlier parts of this order, we direct the authorities to restrict the TP adjustment in the fresh proceedings only to the transactions with the AEs.
11. In the result, the appeal is allowed for statistical purposes. Order pronounced on this 23rd day of April, 2013.
आदे श क घोषणा दनांकः को क गई ।
Sd/- Sd/-
(Vijay Pal Rao) (R.S.Syal)
या यक सद य / JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER
मंुबई Mumbai; दनांक Dated : 23rd April, 2013.
Devdas*
आदे श क त ल प अ े षत/Copy
षत of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. आयकर आयु (अपील) / The CIT, Mumbai.
4. आयकर आयु / DRP-I, Mumbai
5. वभागीय त न ध, आयकर अपील य अ धकरण, मंुबई / DR, ITAT, Mumbai
6. गाड फाईल / Guard file.
ु / BY ORDER,
आदे शानसार
स या पत त //True Copy//
उप/सहायक पंजीकार (Dy./Asstt.
उप/ Registrar)
आयकर अपील य अ धकरण,
धकरण, मंुबई / ITAT, Mumbai