Income Tax Appellate Tribunal - Mumbai
T Two International P. Ltd, Mumbai vs Department Of Income Tax on 11 March, 2008
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH "L1",MUMBAI
BEFORE SHRI T.R.SOOD (A.M) AND SMT. P.MADHAVI DEVI(J.M)
ITA NO.5644/MUM/2008(A.Y. 2004-05)
The ACIT, Range 8(3), M/s. T.Two International Pvt. Ltd.
Mumbai. Unit No.GJ-7,SDF VII,
Vs. SEEPZ, Andheri (East),
Mumbai 96
PAN: AABCT 1038K
(Appellant) (Respondent)
ITA NO.5645/MUM/2008(.Y.2004-05)
The ACIT, Range 8(3), M/s. Tara Jewels Exports P. Ltd.
Mumbai. G-44, Gems & Jewellery
Complex, SEEPZ,
Vs. Andheri (East)
Mumbai - 400 096.
(Appellant ) PAN:AABCT 1161H
(Respondent)
ITA NO.5646/MUM/2008(A.Y.2004-05)
The ACIT, Range 8(3), M/s. Tara Ultimo Pvt. Ltd.
Mumbai. Plot No.29(p)& 30(p)
Sub Plot A,SEEPZ,
Vs. Andheri (East),
Mumbai 96
(Appellant) PAN:AABCT 3846M
Revenue by : Shri N.K.Balodia
Respondent by : Shri. B.V. Jhaveri
ORDER
PER T.R.SOOD, A.M,
These appeals filed by the revenue are directed against separate orders passed by the ld. CIT(A) XXXII, Mumbai, of even dated 11/03/2008, in respect of three different assessees for the assessment year 2004-05.
2 ITA No.5644,5645&5646/M/208
2. At the outset both the parties agreed that identical issue is involved in all these appeals, only difference being amounts involved, therefore, only one appeal may be taken up to understand the facts and the conclusion reached may be applied to all the three appeals. With the consent of the parties we first take up ITA No.5644/Mum/2008. In this appeal the revenue has raised the following ground:
"On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Addition of Rs. 2,57,26,138/- made by the T.P.O to the value of international transaction undertaken by the assessee, without appreciating the facts of the case."
3. After hearing both the parties we find that the reference for computation of Arms Length Price in relation to international transaction which were listed in the detailed audit report was made by JCIT (OSD) Range 8(3) Mumbai to ACIT Transfer Pricing- III,Mumbai. A notice under section 92CA(2) along with a questionnaire was issued by Transfer Pricing Officer. It was found that assessee was located at SEEPZ, SEZ and, hence, enjoyed 100% tax holiday under section 10A of the Act. It was further found that assessee was engaged in the business of sale of finished jewellery to its Associate Enterprises and Non-Associate Enterprises. The assessee had considered the Cost Plus method as most appropriate method. As per the workings given by the assessee it was earning G.P margin of 16.95% in the transactions with unrelated parties as against 19.37% from the related parties. In view of this it was claimed that the transactions with related parties were made at Arms Length Price.
4. It was observed by TPO that as per data provided by the assessee GP/Sales had been used as the PLI. Since the assessee could not provide detailed calculation of the margin and, therefore, strict comparability was not possible. The TPO further observed that internal third party transaction is functionally different due to various terms and 3 ITA No.5644,5645&5646/M/208 conditions and risks being different to the related parties transactions. In view of this the cost plus method was rejected and consequently the Arm's Length Price as calculated by the assessee was also rejected. Accordingly a show cause notice was issued as to why Transactional Net Margin Method (TNMM) method should not be considered as most appropriate method using the following comparable companies:
Name of the Company OP/TC% C I Jewels Ltd. 1.44% Deep Diamond India Ltd. 7.14% Diastar Jewellery Ltd. 0.69% Fine Jewellery (India) Ltd. 10.92% Fine Platinum (India) Ltd. 16.34% Gitanjali Jewels Ltd. 5.88% Gold Star Jewellery Ltd. 4.19% Goldiam Internation Ltd. 10.86% International Gold co. Ltd. 1.71% Moon Diamonds Ltd. 2.21% Shantivijay Jewels Ltd. 4.62% Shreeji Jewellery Ltd. 12.81% Sovereign Diamonds Ltd. 1.39% Classic Diamonds (India) Ltd. 24.10% Gemplus Jewellery India Ltd. 2.73% Shrenju & Co. Ltd. 6.63% Su-Raj Diamonds & Jewellery Ltd. 6.14% Vaibhav Gems Ltd. 10.66% Average 7.25%
5. In response to the above notice assessee again provided the GP calculation and contended that cost plus method is the most appropriate method. It was also argued that the assessee was maintaining detailed cost data and the same was recorded on the ERP system and thus G.P margin provided by the assessee was accurate. The TPO examined the data and rejected the same because detailed calculations were not furnished. In this background the adjustment to be made in respect of Arm's Length Price in case of transaction with the Associated Enterprises and was worked out as under:
4 ITA No.5644,5645&5646/M/208
Particulars Assessee Arms Length Margin @
7.25%
Sales
Controlled 25,02,43,313
Uncontrolled 64,49,57,996 89,52,01,309 92,09,27,446
Purchase cost 81,32,15,805
Direct Cost 1,76,66,6605
Indirect Cost 2,77,71,200
Total Cost 85,86,73,610 85,96,73,610
Net Profit 3,65,27,699 6,22,53,836
"6. The arm's length sales as per the above calculation is determined as Rs. 27,59,69,451/- (92,01,27,446 - 64,49,57,996) and the -5% of the same is determined at Rs. 26,21,70,978/-. As against this the assessee's arms length price is Rs.25,02,43,313/-.
7. the assessee's transaction value is below the arms length price an adjustment of Rs. 2,57,26,138/- (Rs.27,59,69,451 - Rs. 25,02,43,313) is being made to all the transactions undertaken by the assessee."
6. In response to the above order assessee accepted the application of TNMM method, however, assessee made an application for rectification under section 154of the Act. In that application it was mainly stated that adjustment has been made on total sales inclusive of controlled sales. It was pointed out that as per the provisions of the Act the adjustment could be made only in respect of controlled sales. Accordingly the assessee suggested the calculation which is as under:-
Particulars AE Non-AE Total Sales 250,243,313 433,598,227 683,841,540 Ratio of sales 36.59% 63.41% 100% Total cost 239,031,865 414,239,152 653,271,017 Operating profit(PBIT) 11,211,448 19,359,075 30,570,523 OP/TC 4.69% Est.Profit if OP/TC is 17,329,810 7.25% TP adj. as per the 61,18,362 assessee
7. This application was rejected by making reference to the original order and observing that TPO has correctly followed the procedure for making the said adjustment.
5 ITA No.5644,5645&5646/M/208
8. Thereafter an appeal was filed against the rejection of application under section
154. Before ld. CIT(A) it was mainly contended that TPO has applied 7.25% margin on total cost of Rs. 85,86,73,610/- and arrived at Arm's Length Price at Rs. 92,09,27,446/-. This means 7.25% margin has been calculated on the total cost which is not permissible under the Act. It was further submitted that at best the adjustment could be made at Rs.61,18,362/- and the calculation for the same was again furnished. Alternatively it was argued that if break-up of cost between controlled sales and uncontrolled sales was not available with the TPO at the time of assessment and he wished to apply 7.25% margin on controlled sales and assuming the cost is equal to sale and the assessee has not made any profit even then the addition on account of transfer pricing could have been made at Rs.1,81,42,640/- and, therefore, in any case adjustment has been made excessively by Rs. 75,83,498/-. Again vide letter dated 10/3/2008 the assessee submitted that following correct method should have been adopted:
Particulars - Assessee Arms length Margin
@ 7.25% of
controlled
transactions.
Sales
Controlled 250,243,312
Uncontrolled 644,957,996 895,201,309 876,073,557
(75,86,73,610+7.25%-
23,99,99,274)
Purchase cost 813,215,805
Direct Cost 17,666,605
Indirect Cost 27,791,200
Total Cost 858,673,610
(Distributed in Sales
Ratio)
Controlled (29.50%) 239,999,274
Uncontrolled 618,674,336 858,673,610
(70.50%)
Net Profit 36,527,699 62,253,836
6 ITA No.5644,5645&5646/M/208
It can be observed from the statement that the arms length sales as per the above calculation is determined at Rs. 87,60,73,557/- which was arrived at by applying 7.25% margin on the controlled cost of Rs. 23,99,99,274/- and adding the balance uncontrolled cost. Thereafter from the total sales calculated at Rs. 87,60,73,557/- the uncontrolled sales (i.e. sales to non AE's) of Rs.64,49,57,996/- has been reduced thereby arriving at the arms length sale price of controlled transactions at Rs. 23,11,15,561/- (87,60,73,557/- - 64,49,57,996/-). As the assessee company's value of controlled sales is above the arm's length price calculated above no adjustments is necessary to the transactions undertaken by the assessee."
9. The ld. CIT(A) after considering the submissions observed that TPO has definitely made excessive adjustment because 7.25% profit was applied to the total cost in respect of related and unrelated parties. The ld. CIT(A) accepted the calculation given by the assessee and allowed the appeal and observed vide para 2.7 , 2.8 and 2.9 as under:-
"2.7 From the above chart and discussion it is seen that the T.P.O has applied 7.25% profit margin to total cost and then from the total sales so determined, the sales to third parties have been excluded to arrive at the arms length sales to AEs. However, as per section 92C(3), the A.O/T.P.O are supposed to determine the arms length price in relation to the international transactions (with the AEs) only and not with the third parties also. By applying the profit margin to total cost, the T.P.O., in effect has applied the provisions of transfer pricing to all the transactions including those with the third parties. However, the excess sale price so determined has been allocated only to the transactions with AEs. This methodology is not correct.
2.8 The T.P.O was first required to obtain figures of sales and costs in respect of appellant's international transactions with the AEs. Then as per TNMM, the arm's length profit margin of 7.25% should have been applied to such cost to determine arm's length value of sales and accordingly, the adjustment was required to be made. It is thus evident that there is a mistake which is apparent from the record. The T.P.O was, therefore, not justified in rejecting the rectification application of the appellant. The correct computation of arm's length price to be carried out is as under:-7 ITA No.5644,5645&5646/M/208
Particulars Amount
Export sales to AE 25,02,43,313
Direct and Indirect cost incurred (in 24,00,32,410
sales ratio)
Arms's Length Profit Margin 7.25%
Arms Length Value of Sales to AE 25,74,34,760
Adjustment 71,91,447
95% of Arm's Length Value of Sales to 24,45,63,022
AE
2.9 From the above it is seen that 95% of Arm's Length Value of sales to AE is less than the figure of actual sales shown in the books of account. Hence, in view of the proviso to section 92C(2), no adjustment is required to be made. The A.O is directed accordingly."
10. Before us ld. D.R referred to para 4 of the rectification order and pointed out that figures of sales given in the rectification application are totally different from the original figures. For example the total sales shown in rectification application is Rs.68,38,41,540/-, whereas originally sales have been recorded by the TPO at Rs. 89,52,01,309/-. He then referred to the original TPO's order and submitted that since assessee failed to give the separate figures for gross profit margin on the sales to related and unrelated parties and, therefore, TPO had correctly considered the TNMM as the correct method and, therefore, the same could not be reviewed in the garb of rectification application under section 154. He also referred to the appellate order and submitted that no basis has been given for distribution of purchase cost and direct cost by the assessee and, therefore, ld. CIT(A) should not have followed those figures.
11. On the other hand, ld. counsel for the assessee admitted that assessee had not challenged the original assessment order by way of appeal because the assessee had accepted the adoption of TNMM. The assessee had also admitted the 7.25% rate of margin. However, while disputing the cost etc. some minor differences have arisen and 8 ITA No.5644,5645&5646/M/208 they are because involvement of interest because only operating profits were calculated by the TPO. In this regard he referred to page 2 of the original order passed under section 92CA(3) and pointed out that at the heading of the chart the TPO has mentioned "OP/TC%". This clearly shows that TPO has only considered operating margin. He also reiterated the submissions made before lower authorities that adjustment has been made on the total sales which is not possible. He argued that, therefore, there was definitely an error in the order of TPO and same has been correctly held to be rectifiable by ld. CIT(A) and accordingly he strongly supported the order of the first appellate authority.
12. In the rejoinder ld. D.R invited our attention to Rule 10B of the Income-tax Rules, 1962, wherein procedure regarding determination of Arm's Length Price has been detailed. He particularly referred to sub-clause (e), which deals with Transactional Net Margin Method (TNMM) and all clauses make reference to the net profit. He argued that TNMM would always involve calculation of net profit and there was no scope for making any further adjustment.
13. We have considered the rival submissions carefully. We partially agree with the submissions of the ld. counsel for the assessee that original TPO's order is definitely erroneous because he has applied the net profit margin of 7.25% on the gross sales and followed a complicated procedure to arrive at the amount of adjustment. In simple terms if the sales to Associated Enterprises is taken at Rs. 25 crores and straight way 7.25% margin is applied then approximately total margin would be Rs. 1.81 crores, whereas adjustment has been made at Rs. 2,57,26,138/-. At the same time we are unable to agree with the order of ld. CIT(A) that no adjustment could have been made. Before us ld. counsel for the assessee admitted that assessee has no objection that if 9 ITA No.5644,5645&5646/M/208 TNMM was followed and even no objection was raised to the average profit rate of 7.25%. However, he argued that this rate should be taken as only operating profiting which is not correct because Transactional Net Margin Method in Rule 10B of Income- tax Rules refers to only net profit and, therefore, there is no scope for reducing interest or any other overheads. Here also TPO has at top of the chart where average rate was calculated at page 2 of his order refers to OP/TC%. Therefore, it is not clear whether this margin is net profit or not. Similarly how the cost etc. was distributed by ld. CIT(A) is not clear because detailed figures are not available. Therefore, in the interest of justice we set aside the order of ld. CIT(A) and remit the matter back to the file of AO with a direction to follow TNMM by working out the average net profit. Further, the adjustment should be worked out on a very simple basis by reducing the net profit declared by the assessee from the gross sales and then divide the same in the controlled and uncontrolled sale and apply the net profit rate. Needless to say that assessee should be given adequate opportunity of hearing.
14. In the result, all the appeals are allowed for statistical purposes.
Order pronounced on the 23rd day of Feb.2010.
Sd/- Sd/-
(P.MADHAVI DEVI) (T.R.SOOD)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, Dt. 23rd Feb.2010
10 ITA No.5644,5645&5646/M/208
Copy to: 1. The Appellant 2. The Respondent 3. The CIT(A)Concerned
4. The CIT,Concerned. 5. The D.R"L1 " Bench.
(True copy) By Order
Asst. Registrar, ITAT, Mumbai Benches
MUMBAI.
Vm.
11 ITA No.5644,5645&5646/M/208
Details Date Initials Designation
1 Draft dictated on Sr.PS/PS
2 Draft Placed before author Sr.PS/PS
3 Draft proposed & placed before JM/AM
the Second Member
4 Draft discussed/approved by JM/AM
Second Member
5. Approved Draft comes to the Sr.PS/PS
Sr.PS/PS
6. Kept for pronouncement on Sr.PS/PS
7. File sent to the Bench Clerk Sr.PS/PS
8 Date on which the file goes to
the Head clerk
9 Date of Dispatch of order
12 ITA No.5644,5645&5646/M/208