Income Tax Appellate Tribunal - Mumbai
Twilight Jewellery P. Ltd, Mumbai vs Assessee
M/s Twilight Jewellery Pvt. Ltd
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IN THE INCOME TAX APPELLATE TRIBUNAL "K" BENCH, MUMBAI
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BEFORE SHRI P.M. JAGTAP ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA
JUDICIAL MEMBER
vk;dj vihy la[;k/ITA NO. 7281/Mum/2012
¼fu/kkZj.k o"kZ@Assessment year: - 2008-09
M/s Twilight Jewellery Pvt. Dy. Commissioner of Income Tax-
Ltd. Plot NO. M/3, 2nd Floor, cuke@ 9(3)
Cama Muni Ind. Estate, Vs.
Walbhat Road, Goregaon (E),
Mumbai - 400 063.
PAN:- AABCT9660R
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fu/kkZfjrh dh vksj ls@Assessee by Shri Vijay Mehta
jktLp dh vksj ls@Revenue by Shri Ajeet Kumar Jain
lquokbZ dh rkjh[k@Date of hearing 28-08-2013
?kks"k.kk dh rkjh[k@Date of 23-10-2013
pronouncement
vkns'k@ORDER
PER AMIT SHUKLA, JM
This appeal has been filed by the assessee against final assessment order dated 30.10.2012, passed in pursuance of direction u/s 144 C (5) given by the Dispute Resolution Panel, (herein after referred to as DRP) for the quantum of assessment passed u/s 143(3) r.w.s 144C(13) for the assessment year 2008-09. The only issue involved in this appeal is with regard to transfer pricing adjustment of Rs. 9,07,50,472/- on the transactions with Associated Enterprise (AE). In the original grounds of appeal, the assessee has raised several grounds -1- M/s Twilight Jewellery Pvt. Ltd with various sub grounds, however these ground have been concised now and only following grounds of appeal has been raised:-
1. The assessment order passed by the learned Assessing Officer u/s 143(3) r.w.s 144C(13) pursuant to the directions of learned DRP is bad in law.
2. The learned DRP erred on facts and in law in confirming the addition of Rs. 9,07,50,742/- on account of transfer pricing adjustment.
3. The appellant craves leave to add, alter or amend the grounds of appeal.
2. Besides aforesaid grounds the assessee has also raised two sets of 'additional grounds' one filed on 19-6-2013 and another set of additional ground filed on 28-8-2013. However at the time of hearing, the learned Counsel, Shri Vijay Mehta submitted that only the second set of additional grounds, which has been raised vide petition dated 27th August 2013 ( filed on 28th August 2013), should only be taken for consideration and the earlier set of additional grounds filed vide petition dated 19-6-2013 are being not pressed. The learned counsel has also filed a petition dated 28-8-2013 for admission of additional evidence, wherein the transfer pricing study report has been filed which has been stated that same could not be filed at the stage of TPO or before the DRP.
2.1 The facts of the case, in brief, are that the assessee company is engaged in the business of manufacturing of diamonds and precious stone studded jewellery from its manufacturing unit set up at SEEPZ, Mumbai and it is a -2- M/s Twilight Jewellery Pvt. Ltd 100% export orient unit. It has been submitted before the TPO as well as before the DRP that its main activity is export of jewellery, which is made as per designs given by its Associated Enterprises (AE) and is mainly sold back to AE. The principal raw material for manufacturing these jewelleries, like diamonds, colour stones, pearls and precious metals etc., are imported from AE only. The value of the exported products are then computed by adding mark up on the purchase cost of diamonds, colour stones, pearls and precious metals in the form of job work. Since the assessee had major international transaction with its AE, the matter was referred to the TPO in a reference made u/s 92CA (1) by the AO. During the relevant financial year, the operating income of the assessee was disclosed at Rs. 74.44 crores and operating profit was Rs. 0.5 crore ( i.e. Rs. 50,00,000/-).
2.2` The TPO noted that the assessee has purchased the cut and polished diamonds, colour stones, pearls etc from its AE for sums aggregating to Rs. 62.02 crores and sale of jewellery was made to the tune of Rs. 65.12 crores to its AE. As per the observation of the TPO the assessee has not submitted any TP study report during the course of the transfer pricing proceedings for bench marking the international transaction with the AE. This aspect was specifically brought to the notice of the assessee. However the assessee submitted vide letter dated 16.9.2011 that it had already submitted the transfer pricing study report, which fact has been found to wrong and has also been rebutted by the TPO, by categorically stating that no such report has been filed and only form 3CEB was filed. He has also observed that assessee has failed to submit the most appropriate method selected by it for bench marking the transaction of purchase and sale from AE and has also failed to justify how the mark up rates has been charged from the AE. The economic analysis and FAR test has not been under taken by the assessee and, therefore, it is very difficult to bench -3- M/s Twilight Jewellery Pvt. Ltd mark its transaction. Since no method has been selected by the assessee, the TPO suggested the TNMM (Transactional Net Margin Method) as a method of last resort and accordingly gave nine set of comparables to the assessee to submit its objections. The assessee's main contention before the TPO for rejection of some of the comparables was that the turnover of these companies were not comparable with that of the assessee and the business function was also different. The TPO rejected these objections, firstly, the turnover criteria for rejecting the comparables cannot be adopted as the assessee itself had not carried out any FAR analysis and secondly, other minor objections raised by the assessee have no basis. All this have been dealt by the TPO at page 3 of his order. The TPO also noted that the assessee's has contended that it is a manufacturer of jewellery in SEEPZ and SEZ for which it is entitled for deduction u/s 10B; because it is registered as a manufacturer of jewellery, however at the same time assessee has claimed its profitability merely as a job worker and is also claiming benefit u/s 10B. Thus the assessee is claiming to be manufacturer for the purpose of deduction u/s 10B but when for the purpose of determining the arm's length price, the assessee has objected the comparables on the ground that it is only a job worker and other comparables are jewellery manufacturer. Accordingly he rejected all the objections of the assessee. Ultimately the assessee's PBIT/Cost worked out at the rate of (-) 1.2477% and after applying average PLI margins of comparables at 10.95% the TPO computed the arm's length price in the following manner:-
In Rs.
Operating Cost A 743997977.00
Arm's Length Profit Margin on Cost B 0.1095
Arm's Length Profit C=A*B 81467778
Arm's Length Value Sales D=A+C 825465755
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M/s Twilight Jewellery Pvt. Ltd
Less Value of Non-AE sales E 83520357
Arm's length Value of sales F=D=E 741945398
(Adjusted) AE
Actual Value of AE sales H 651194656
105% of transaction value 683754389
95% of the transaction value 618634923
Adjustment I=F-H 90750742
and accordingly upward adjustment of Rs. 9,07,50,742/- was made in the arm's length price.
3. Before the DRP also assessee's objection to the adoption of TNMM method by the TPO and also the selection of nine comparables, has been rejected by the DRP, after detailed discussion, which has been dealt by the DRP from pages 1 to 15 of the DRPs Direction, which are not being discussed by us at present.
4. Before us, the learned counsel, Shri Vijay Mehta submitted that though the assessee has not filed any TP study report before TPO but in form 3CEB which was filed before him it has been clearly stated that most appropriate method for bench marking the transaction with its AE was Cost Plus Method (CPM). He, further submitted that looking to the overall functions performed and transactions undertaken by the assessee with its AE, neither the comparables chosen by the TPO can be adopted for bench marking the transaction, nor the TNMM method can be held to be the most appropriate method in the instant case. The reason being that the raw materials are mostly supplied by the foreign AE, which is as per the cost only and the assessee is manufacturing the jewellery as per the designs given by its AE only. What the -5- M/s Twilight Jewellery Pvt. Ltd assessee is receiving is only the job work charges and the margin of the job work charges received by the assessee is far better than those compared to other such comparables engaged in the similar kind of activities. As an example, he submitted that if the cut and polished diamonds of particular quantity are received by the AE at 100 Dollar then the same quantity is sent back on 100 Dollar only and to illustrate this contention that assessee's purchase of raw material is at cost and sold on same cost only, he referred to various invoices in the paper book. It is only for the purpose of custom law that the assessee had to pay the custom duty on such purchases as per the requirement of custom and excise law. However the purchase and sale is only notional and what the assessee has been remunerated; is only the labour charges along with the mark up. The TPO as well as the DRP has failed to understand the business module of the assessee and in such a situation not only the comparables but also the method applied by the TPO cannot be accepted.
Since the assessee is not engaged in the function of purchases, therefore, the comparison cannot be made with the companies who are doing purchases from the third parties. In support of his contention that purchases has been made from the AE on same quantity and value on which it has been sent back to the AE in the form of jewellery, he relied upon various documents placed in the paper book in the form of invoices. Thus the assessee has not made any profit on the purchase price.
4.1 He also submitted that in this case there were transactions with Non AE also and no profit has been charged on purchase and sale from non AEs as the assessee's margin is only on account of labour charges. Under these circumstances he submitted that even the Cost Plus Method as adopted by the assessee cannot be accepted and so also the TNMM. Most appropriate method in this case could be the CUP as there was an internal CUP with the non AEs -6- M/s Twilight Jewellery Pvt. Ltd and bench marking can be done with the internal comparable if that is carried out, then the assessee's margin would be at arm's length. He also submitted a chart showing the comparison between the price charged to AE and non AE if Cost Plus Method is applied and also the similar comparison if the CUP method is applied. However he submitted that the first chart giving the comparison by adopting Cost Plus Method would not be correct method, in the present case and only CUP method can be held to be applicable. He submitted that the details of internal comparability is clearly evident from the invoices which were there in the record. For the proposition that the assessee can contend before the Tribunal for applying the most appropriate method if it is demonstrated that such a method can lead to most appropriate determination of ALP, he relied upon the decision of co-ordinate bench of the Tribunal in the case of Mattle Toys India Pvt. Ltd., Vs. DCIT in ITA 2476 and 2801/Mum 2008 reported in (2013) 34 Taxmann. Com 203. Regarding internal comparability, he relied upon the third member's decision in the case of M/s Technimont ICB Pvt. Ltd. in ITA 4608/Mum/2010 and 5085/Mum/2010. He thus submitted that since all these aspects have not been examined properly by the TPO as well as the DRP, therefore, the matter can be set aside to the file of TPO for adopting the CUP as the most appropriate method, as all the relevant material for internal comparability is already available on record.
5. The learned CIT DR, Shri Ajit Jain, on the other hand submitted that first of all, the transfer pricing report which is the primary document to be submitted by the assessee before the TPO has not been filed and the same is being filed before the Tribunal as an additional evidence which could not be considered at this stage. In any case if the same is to be admitted then the matter should be sent back to the TPO for examining the same afresh. He also submitted that, TPO, only after giving various opportunities to the assessee has -7- M/s Twilight Jewellery Pvt. Ltd adopted the TNMM as most appropriate method and has also given the list of comparables to the assessee. After calling for assessee's objection and discussing them in detail, he has finally chosen the comparables and has bench marked the assessee's PLI with that of the comparables. Thus there is no ambiguity or irregularity in the order of TPO. He further submitted that the assessee has been changing its stand and there is no consistency in its approach, firstly, before the authorities below it has been contended that Cost Plus Method should be adopted, however no such bench marking or FAR analysis was given vis-à-vis any comparables. Now at this stage, the assessee has taken altogether new stand by submitting that CUP is the most appropriate method and there are internal comparables in the form of non AE. All these plea are completely new which is being taken before the Tribunal for the first time and, therefore, the same cannot be entertained. In any case without prejudice, if such a plea is being entertained now then the entire matter needs to be restored to the file of TPO to examine the contention of the assessee afresh and in accordance with the facts and materials placed on record and also in accordance with the law.
6. We have carefully considered the rival submissions and perused the relevant finding of the TPO as well as the direction given by the DRP and also the material referred to before us. It has been stated before us that the assessee is mainly engaged in the business of manufacturing of diamonds and precious stone studded jewellery from its manufacturing unit which has been registered as 100% EOU being the SEZ unit set up at SEEP Mumbai. The assessee has undertaken purchase of cut and polished diamonds, colour stones etc., from its AE at Rs. 62.02 crores and has also sold jewellery as per designs supplied by the AE's to the AE itself for a sums aggregating to Rs. 65.02 crores. The main contention of the assessee regarding his business module is -8- M/s Twilight Jewellery Pvt. Ltd that it is mainly engaged as contract manufacturer or job worker for its AE on whose behalf it has been manufacturing jewellery as per the designs and also the raw materials supplied by its AE. The purchases which has been made by the AE are on cost basis and there is no margin so far as the purchases are concerned. The only margin received by the assessee is on account of job work i.e. manufacturing the jewellery as per the designs and raw materials supplied by the AE. As per the observations of the TPO the assessee has failed to carry out any comparability analysis by following any of the prescribed method under the Act and, therefore, its international transactions with its AE has not been bench marked by the assessee. Thus, the TPO has resorted to apply TNMM as the most appropriate method and has also given set of nine comparables to the assessee. After calling for the objections by the assessee, he has finally determined the PLI margin of the comparables at 10.95% which was much higher than assessee's PLI which was at (-) 1.25% and thus made the total adjustment of Rs. 9,07,50,742/-.
7. First of all, in this case it is noticed that this appeal was heard earlier on 9.5.2013 which was later on released, vide order-sheet entry dated 23.5.2013 after observing as under:-
"After going through the record, it is seen that assessee has not selected any method for bench marking its ALP in relation to transactions with its AE and no TP study report was also furnished. Later on at the stage of TPO, one report n Form 3CEB was filed by adopting Cost Plus Method. However, in the said report no comparables were selected to evaluate the controlled and uncontrolled transaction, therefore, in such a situation CPM failed. The TPO has selected 9 comparables with average mean margin of 10.95% as against assessee's margin of (-)1.25%, by adopting TNMM as most appropriate -9- M/s Twilight Jewellery Pvt. Ltd method. The Ld. AR argued only to justify the net profit and margin earned by the assessee. He has not addressed us on the transfer pricing issue, as to how the ALP is justified after comparing, the controlled transaction with the related party with that of the uncontrolled transaction with the independent party. Under the transfer pricing mechanism ALP can be determined only by following any of the prescribed methods and by carrying out comparability analysis vis-à-vis comparables. Thus, we feel that this matter should be released and should be heard a fresh on the aforesaid aspect and also about the selection of comparables. Accordingly the case is released."
Sd/- Sd/-
(AMIT SHUKLA) (RAJEDNRA SINGH)
J.M. A.M.
8. Now at the second time of fresh hearing before us, an additional ground has been raised, wherein it has been contended that TNMM is not the appropriate method in this case and infact, CUP method should have been followed as most appropriate method for determining the ALP of the assessee's transaction with its AE. From the records it is seen the assessee has vehemently contended that, Cost Plus Method should be the MAM for bench marking the international transaction with the AE, however no such comparability analysis as FAR analysis with the comparables was done to arrive at arm's length price with its transaction with the AE. The comparability analysis has to be carried out for comparing the controlled transactions with an uncontrolled transactions after following the MAM prescribed under the Act. Thus, even though Cost Plus Method was stated to have been adopted, however no FAR analysis was carried out. In such a situation the TPO was fully justified in adopting the MAM on its own for bench marking the transactions. At this stage now the Ld counsel for the assessee has stated that
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M/s Twilight Jewellery Pvt. Ltd Cost Plus Method cannot be considered as MAM, because there is an internal CUP available for bench marking the transaction. Thus there is an inconsistency in the approach by the assessee, right from the stage of TPO to the stage of the Tribunal. Even the TP study report which is a primary document for analyzing and bench marking the international transaction and also the first onus of the assessee has not been filed before the TPO. In the paper-book filed earlier, the assessee has given a certificate that the TP study report was filed before the TPO/AO which has been found to be factually incorrect. This has now been rectified by the Ld. Counsel at the second time of hearing before us, by providing a correct certificate that TP study report is an additional evidence. In pursuance thereof, the petition for admission of additional evidence has also been filed, wherein the TP study report has been annexed. In the TP study report also, the assessee had stated that CPM is the MAM for determining the arm's length price of the assessee with its transaction with the AE and there is no whisper about applicability of internal CUP.
9. Under these circumstances it becomes very difficult to adjudicate as to, firstly, what is the stand of the assessee and secondly what could be the most appropriate method which has to be adopted for determining the ALP. Considering such a callous attitude of the assessee and also furnishing of false certificate in the paper book, which was there in the record when the case as heard finally and later on released on this ground only, we think, that some cost should be imposed upon the assessee to deter the assessee in future for resorting to such kind of making false representation before the court. Accordingly, we impose a cost of Rs. 10,000/- to the assessee which shall be deposited by way of challan before the AO.
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M/s Twilight Jewellery Pvt. Ltd
10. Now coming to the main issue in the present case as to what could be the MAM to determine the ALP for the transactions carried out with the AE. It has been stated that all the purchases have been made by the assessee from its AE at cost on the same value, which has been exported back to AE after manufacturing the jewellery as per designs. The assessee is only a job worker or a contract manufacturer who is entitled for making charges based on its cost incurred and not based on the value of material supplied by its AE. In such a situation, the comparables chosen by the TPO, who are full fledged independent manufacturers cannot be prima facie considered for the purpose of comparability analysis, as in all the cases of comparables there is a value addition and a mark up on cost at the time of sale. However the assessee has also not given any external comparables who are carrying out similar kind of job work for unrelated parties. Before us, the learned counsel Sri Vijay Mehta had submitted that there are internal CUP available with the similar transaction carried out by the third parties on similar negotiated price, which is evident from the invoices raised by them (which has also been placed in the paperbook before us) and once there is a direct method of CUP available, then there is no requirement of resorting to TNMM. Prima facie, we agree with the contention of learned counsel, that if any of the direct methods like CUP, RPM or CPM can be adopted for bench marking the transactions, then they should be given preference and once these traditional methods are rendered inapplicable then only the TNMM should be resorted to as a last measure. Since this argument of applicability of internal CUP has not been taken up either before the TPO or before the DRP, therefore, we set aside the order of the TPO/AO and the entire matter is remanded back to the file of the AO/TPO to examine whether the CUP can be considered as the most appropriate method or not. Even the Cost Plus Method can also be examined with some external comparabilities by carrying out FAR analysis, if CUP method fails in this case.
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M/s Twilight Jewellery Pvt. Ltd
11. Thus looking to the entire gamut of facts and circumstances of the case, we remand back the entire matter of transfer pricing adjustment to the file of TPO/AO to consider the assessee's plea for applicability of internal CUP and carry out comparability analysis afresh with the unrelated parties. If the CUP method fails, the Cost Plus Method could also be examined after calling for fresh comparables which are engaged in the similar line of business. The assessee will provide all the necessary information and material in support of its contention, firstly, as to what would be the most appropriate method and secondly, will also provide the internal or external comparables for bench marking its transaction with the AE. The TPO/AO will also provide due and effective opportunity to the assessee to explain its case with any such evidence or material as it may deem fit and TPO/AO shall examine the same afresh. Thus the entire assessment is set aside for fresh adjudication in the light of observation made in this order. The AO will also recover the cost of Rs. 10,000/- from the assessee which has been imposed by us as per the observation given in the foregoing paragraph.
12. In the result appeal of the assessee is treated as allowed for statistical purposes.
Order pronounced on 23-10-2013
Sd/- Sd/-
(P.M. Jagtap) (Amit Shukla)
Accountant Member Judicial Member
SKS Sr. P.S, Mumbai dated 23.10.2013
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M/s Twilight Jewellery Pvt. Ltd
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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