Income Tax Appellate Tribunal - Mumbai
Bhansali & Co., Mumbai vs Assessee on 2 September, 2013
आयकर अपील य अ धकरण "K " यायपीठ मंब
ु ई म।
IN THE INCOME TAX APPELLATE TRIBUNAL "K" BENCH, MUMBAI
ी पी.एम. जगताप, लेखा सद य एवं अ मत शु ला, या यक सद य के सम ।
BEFORE SHRI P.M. JAGTAP, AM AND SHRI AMIT SHUKLA, JM
आयकर अपील सं./I.T.A. No. 7352/Mum/2012
( नधारण वष / Assessment Year : 2008-09
आयकर अपील सं./I.T.A. No. 7969/Mum/2010
( नधारण वष / Assessment Year : 2006-07
M/s Bhansali & Co., Additional
बनाम/
बनाम
640-646, Panchratna, Commissioner of income
Vs.
Mama Parmanand Tax - Range 16(3),
Marg, Room No. 212,
Opera House, 2 n d floor,
Mumbai - 400 004. Matru Mandir, Tardeo,
Mumbai - 400 007.
थायी ले खा सं . /PAN : AACFB 8643 C
(अपीलाथ /Appellant) .. ( यथ / Respondent)
Appellant by Shri Ajit Tolani
Respondent by : Shri Ajeet Kumar Jain
सनवाई
ु क तार ख / Date of Hearing : 02-09-2013
घोषणा क तार ख /Date of Pronouncement : 22-11-2013
आदे श / O R D E R
PER P.M. JAGTAP, A.M. :
पी.एम. जगताप, लेखा सद य Out of these two appeals filed by the assessee, the appeal for A.Y. 2006- 07 being ITA No. 7969/Mum/2010 is directed against the order of the ld. CIT(A) -2 Mumbai dated 27-1-2010 while the appeal for A.Y. 2008-09 is directed against the order of Addl. CIT - Range 16(3), Mumbai dated 12-10- 2012 passed u/s 143(3) r.w.s. 144-C of the Income Tax Act, 1961. Since some of the issues involved in these appeals are common, the same have been 2 ITA 7969/M/2010& 7352/M/2012 heard together and are being disposed by this single consolidated order for the sake of convenience.
2. First, we shall take up the appeal of the assessee for A.Y. 2008-09, ground No. 1 of which is general calling for which no specific decision from us.
3. The common issue raised in ground No. 2, 4 & 5 relates to the addition of Rs. 6,48,72,712/- made by way of transfer pricing adjustment in respect of export sales made by the assessee to its Associated Enterprise (AE).
4. The assessee in the present case is a partnership firm which filed its return of income for the year under consideration on 29-9-2008 declaring total income of Rs. 8,22,90,939/-. It is engaged in the business of cutting rough diamonds, subjecting the same to manufacturing process and then exporting the cut and polished diamonds. The manufacturing process for cutting and polishing diamonds stated to involve very specialized skill which is carried out by expert karigars - some of whom are independent sub- contractors and some of whom are employed by the assessee. This process results in various categories of polished diamonds having different sizes and quality. During the year under consideration, the assessee had made export of cut and polished diamonds to its AEs namely Prism Diamonds, USA and Bhansali & Co., Hongkong amounting to Rs. 7,10,78,575/- and Rs. 52,92,74,437/- respectively. These international transactions of the assessee company were referred by the A.O. to the TPO along with other international transactions for the determination of the Arm's Length Price (ALP). In the transfer pricing study report, the assessee had used profit split method as the primary method of benchmarking supported by TNMM. It had selected 11 comparables and since the average (arithmetic mean) OP/OC of the said comparables at 6.64% was less than OP/OC of the assessee at 7%, it was claimed that the international transactions of the assessee with AEs were at 3 ITA 7969/M/2010& 7352/M/2012 arm's length. It was also reported that the average OP/TC of the said eleven comparables at 6.18% was less than OP/TC of the assessee company at 6.54%. In so far as the profit split method adopted by the assessee, the TPO was of the view that the case of the assessee was not that of unique transaction. He also noted that the relative contributions made by each of the AEs to the earning of combined net profit had not been evaluated on the basis of functions performed, assets employed and risks assumed. He further noted that even the split figures as obtained had to be benchmarked using third party data, which was not done. He, therefore, held that the split profit method adopted by the assessee was not appropriate and the TNMM was considered by him as the most appropriate method in the facts of the assessee's case. In so far as the OP/OC taken by the assessee as profit level indicator (PLI), the TPO was of the view that the most appropriate PLI in the facts of the assessee's case was Return On Capital Employed (ROCE) as the industry of the assessee was highly working capital intensive. According to him, the level of sundry debts and inventories was very high in this industry whereas the value addition as well as contribution of human capital was less when compared to value of the goods purchased and sold. He, therefore, adopted ROCE as the most appropriate PLI and proceeded to determine the ALP. In this regard, he rejected six of the eleven comparables selected by the assessee for the following reasons:-
4 ITA 7969/M/2010& 7352/M/2012 Zodiac-JRD-MKJ The company is mainly into trading in cut & polished Ltd. diamonds. The RPTs constitute less than 25% of the 6 revenues. RPTs - Rs. Nil. As the company is not functionally similar, the same is not considered as a comparable.
5. After adding one new comparable to the remaining five comparables selected by the assessee, the average ROCE of these final six comparables was worked out by the TPO at 8.93% as under:-
5 ITA 7969/M/2010& 7352/M/2012
6. The assessee raised various objections to the comparability analysis made by the TPO taking ROCE as PLI which were not found suitable by the TPO on the following grounds:- 6 ITA 7969/M/2010& 7352/M/2012 7 ITA 7969/M/2010& 7352/M/2012
7. Accordingly, after rejecting the objections of the assessee, the TPO proceeded to determine the ALP of the international transactions of the assessee with its AEs of export of cut and polished diamonds. In this regard, he observed that the return on capital employed of the assessee was at 6.92% being Rs. 16.57 crores on Rs. 239.47 crores which was less than the average ROCE of the comparables finally selected by him at 8.93%. Accordingly, the TP adjustment of Rs. 4.81 crores was proposed by him being 2.01% of Rs. 239.47 crores.
8. The TP adjustment proposed by the TPO on account of international transactions of export of cut and polished diamonds to its AEs was objected by the assessee before the DRP by raising the following objections:-
"The TPO has determined a difference in PLI between the assessee and the comparables of 2.01% and made an addition on the total capital employed of the assessee. It is well settled law that any additions if 8 ITA 7969/M/2010& 7352/M/2012 made, to the ALP as determined by the assessee the same has to be restricted to the international transactions reported with the AE and not on the entire business of the assessee.
• The assessee has used the PLI as OP/TC over the past `several years in determining the ALP. The assessments for earlier years were also assessed by the TPO and this method was deemed appropriate. In the instant assessment year, the TPO has rejected OP/TC and used PLI as RoCE. For the reasons stated in the order.
In the Gems and Jewellery industry, there are distortions in R0CE due to ageing of assets. These distortions cannot be identified and eliminated in schedule VI of the Balance Sheet. Further there are distortions due to location of units which cannot be identified and eliminated in a Schedule VI prepared Balance Sheet. Further unproductive assets cannot be so identified. Therefore, ROCE as a concept is not suitable to Jewellery Manufacturing and Sales units. Therefore, the choice of PLI is incorrect for the industry in which the assessee operates.
• From the list of 11 comparables selected by the assessee, Karp Impex Ltd. has been incorrectly excluded. As per the financials of Karp Impex Ltd -- Notes to Accounts -- clearly state the Company operates in one segment i.e. manufacturing and selling a single product i.e. Diamond to various customers located outside India. Further the notes to accounts as well as the Profit and Loss Account show that manufacturing activity is carried on by the assessee as Rough Diamonds are purchased and polished diamonds are sold. Further, the fixed assets shows Gross block of Plant and Machinery of Rs. 56 crores. This clearly indicates that Karp Impex has been incorrectly excluded from the list of comparables of the assessee.
• In addition to the rejection of some of the comparables that the assessee selected, the TPO has on its own added a few more comparables. No basis has been provided to us for making the said addition.
• In the final list of comparables taken by the TPO, 2 outliers have been included. Asian Star having a R0CE of 24.63% and Suraj Diamond Industries Limited having a RoCE of 0.88%. Outliers have tobe excluded as per the judgement referred to above.
• Export invoices show that credit period given to AE and non-AE is 180 days. This submission has not been taken on record by the TPO. As the credit period given in both cases is the same, the same is at ALP and there should be no interest charge in respect of the delayed receivables.
9 ITA 7969/M/2010& 7352/M/2012 As regards the outstanding debtors, the total outstanding debtors as on 31st March, 2008 from the AE were Rs. 32.26 crores. In respect of the outstanding debtors from the AE, the assessee confirms that all sales in respect of which the debtors are outstanding have occurred on or after October the details of which have already been furnished to the Assessing Officer.
• The use of the debtors/turnover ratio is not relevant as sales have occurred at different times during the year to the AE and non-AE. The terms of credit are equivalent of 180 days to both the AE and non-AE. Therefore, if an export has been made on l October by the assessee firm, any realization received by 3l March of the following year is deemed to have been received within time. As stated above, in the instant case, the outstanding debtors for the AE are for sales made on or after l October and therefore, are at arm's length with the credit period granted to the non-AE of 180 days i.e. realization received before 315t March or outstanding as on 3lst March.
• Notwithstanding the above, if an addition is to be made for delayed realisation, the rate of 12% being the yield on bonds of 1 to 2 years cannot be used as a CUP. The assessee was not given the working of 12% and asked to show cause why this rate should not be used. Therefore, the assessee has no opportunity to determine the adequacy of this method for CUP."
9. The DRP did not find the above objections raised by the assessee to be sustainable and overruling the same, the TP adjustment of Rs. 4.81 crores was held to be proper by DRP for the following reasons given in para 3.3 of its impugned order:-
"We have considered the TPO's order and the assessee's submissions. Considering the TP rules, the trends in the assessee's line of business, the FAR analysis and other facts brought on record by the TPO, we agree with the methodology. The profit split method used by the assessee has been rightly substituted by the TPO. There are no unique transactions in the assessee's case and the respective contributions by the AEs to the group's net profit have not been determined on a scientific FAR analysis. The results are also not benchmarked with data from third parties. In these circumstances, the TPO has rightly held that TNMM is the most appropriate method. The TPO has given detailed reasons for adopting the RoCE as the most appropriate PLI. The Gem & Jewellery industry is highly working capital intensive. The TPO has also found that in assessee's case value addition as well as employee cost as a percentage of sales is less. RoCE has thus been rightly adopted as the appropriate PLI. The TPO has given detailed reasons for rejecting the assessee's comparables in para 9 of this order. We find the TPO's
10 ITA 7969/M/2010& 7352/M/2012 analysis apt. The six comparables chosen by the TPO are also scientific and compatible to the assessee's profile and business functions. The assessee's specific reference to the rejection of Karp Impex Ltd. as a comparable is misplaced. The company is functionally not similar. This company is mainly into trading in polished diamonds whereas the assessee is engaged in the business of cutting rough diamonds, subjecting it to manufacturing process and then exporting the cut and polished diamonds. The assessee's business is thus highly specialised. Since the TPO has used RoCE as the P11, there could be no question of applying the arm's length R0CE to the sales made to the AEs, and he has correctly applied the same to the capital employed in the assessee's case to determine the adjustment. The adjustment is thus in order."
10. The ld. counsel for the assessee raised mainly two contentions in support of the assessee's case on this issue. He submitted that even going by the return on capital employed taken by the TPO as price level indicator, if the adjustment is limited to international transactions of the assessee with its AEs, the ALP of the transactions of the assessee of export of cut and polished diamonds with its AEs would come to Rs. 61.15 crores as against Rs. 60.04 crores charged by the assessee and the difference being within the range of 5%, no TP adjustment is required to be made in respect of the said transaction. In this regard, he invited our attention to the working furnished at page 6 of his paper book and submitted that if the difference in ROCE of 2.01% (8.93% as per TPO's comparables and 6.92% that of the assessee) is applied to the average capital employed by the assessee in relation to its transactions with AEs of Rs. 55.37 crores, the resultant adjustment would be Rs. 1.11 crores and the ALP would accordingly come to Rs. 61.15 crores as against Rs. 60.04 crores charged by the assessee. He contended that since the difference in these two prices is less than 5%, no adjustment would be required to be made as per the proviso to section 92-C of the Act. He further submitted that the OP/TC is actually more appropriate price level indicator in the facts of the assessee's case and the same has been accepted by the Assessing Officer/TPO in assessee's own case for the earlier years. He submitted that if the said PLI is used by adopting the consistent approach, the arithmetic mean of OP/TC of the comparables selected by the TPO would 11 ITA 7969/M/2010& 7352/M/2012 come to 7.60% as against 6.82% that of the assessee. He invited our attention to the working furnished in this regard at page 7 & 8 of the paper book and submitted that if the difference of 0.78% is adjusted, the ALP of the relevant international transactions made by the assessee with its AEs would come to Rs. 60.48 crores as against Rs. 60.04 crores and this difference being less than 5%, no adjustment would be required on account of transfer pricing as per the proviso to section 92-C of the Act. In support of this contention, the ld. counsel for the assessee relied on the decision of co-ordinate Bench of this Tribunal in the case of M/s Ratilal Becharlal & Sons vs. JCIT rendered vide its order dated 7th November, 2012 passed in ITA No. 7876/Mum/2011.
11. The ld. D.R., on the other hand, did not raise any material contention to dispute the propositions put forth by the ld. counsel for the assessee in principle. He, however, contended that the working furnished by the assessee for the first time before the Tribunal in support of its two contentions showing that the difference is less than 5% between the ALP and price charged by the assessee requires verification and therefore an opportunity may be given to the A.O./TPO to verify the same.
12. We have considered the rival submissions and also perused the relevant material available on record. It is observed that ROCE is taken by the TPO as price level indicator and since the average ROCE of the comparables selected by him was found to be 8.93% as against 6.92% that of the assessee, the difference of 2.01% was applied by him to the capital employed for the entire business of the assessee to make TP adjustment of Rs. 4.81 crores. As rightly contended by the ld. counsel for the assessee, the said difference of 2.01% is required to be applied only to the capital employed by the assessee for the purpose of its transactions of export of cut and polished diamonds with its AEs. The ld. counsel for the assessee has furnished the following working in this regard:-
12 ITA 7969/M/2010& 7352/M/2012 Particulars Transactions Transactions with Total with AEs Non-AEs Sales A 60.04 199.61 259.65 Average Capital B 55.37 184.10 239.47 Employed ROCE as per C 6.92% 6.92% 6.92% Assessee's Comparables ROCE as per D 8.93% 8.93% 8.93% TPO's Comparables Difference in E=D-C 2.01% 2.01% 2.01% ROCE Adjustment to F=E*B 1.11 3.70 4.81 Export Sales Arm's Length G=A+F 61.15 203.31 264.46 Sales Range of Arms Length Price considering 5% Variation from ALP +5% 64.21 277.69
-5% 58.10 251.24
13. A perusal of the above working shows that if the difference of 2.01% in ROCE is applied to the average capital employed at Rs. 55.37 crores for the purpose of assessee's transactions with its AEs, the adjustment required to be made would be Rs. 1.11 crores and accordingly the ALP of the international transactions would come to Rs. 61.15 crores as against Rs. 60.04 crores charged by the assessee. Consequently, the difference between these two values being less than the safe harbor limit of 5% stipulated in proviso to section 92-C of the Act, no TP adjustment is required to be made in respect of
13 ITA 7969/M/2010& 7352/M/2012 assessee's transactions of export of cut and polished diamonds with its AEs as rightly contended by the ld. counsel for the assessee.
14. It is also observed that ROCE is taken by the TPO as PLI for the purpose of comparability analysis as against operating profit to total cost (OP/TC) as taken consistently by the assessee and even accepted by the Department in the earlier years. If OP/TC is taken as PLI in the year under consideration for the purpose of comparability analysis in consistent with the approach adopted in the preceding years, the arithmetic mean of OP/TC of the comparables selected by the TPO would be 7.60% as shown in the following working furnished by the assessee:-
Sr Name of the comparable PLI Comments
No. company (OP/TC)%
1 Asia Star Co. Ltd. 7.14 Selected as a comparable
company by the assessee.
2 Goenka Diamonds & 9.30 Selected as a comparable
Jewels Ltd. company by the assessee.
3 Mohit Diamonds Pvt. 4.46 Selected as a comparable
Ltd. company by the assessee.
4 Shyam Star Gems Ltd. 17.15 New Company included by
the TPO
5 Suraj Diamonds & 3.48 New Company included by
jewellery ltd. the TPO
6 Suraj Diamond 4.08 Selected as a comparable
Industries Ltd. company by the assessee.
Arithmetic mean 7.60
As against the average OP/TC of the comparables selected by the TPO, the OP/TC of the assessee for the year under consideration is 6.82%as shown in the following working furnished by the assessee:-
14 ITA 7969/M/2010& 7352/M/2012 Particulars Amount(INR) Income Sales 2,596,478,466 Other income 27,480 Total Income 2,596,505,946 Expenditure Cost of goods sold 2,164,488,618 Administrative & other expenses 79,526,805 (includes Bank charges and bad debts) Increase/(decrease) in stock 176,757,200 Depreciation 10,002,802 Total Expenditure 2,430,775,425 Net Operating Profit 165,730,521 OP/TC(%) 6.82
15. The OP/TC of the assessee thus is lower by 0.78% (7.60% (-) 6.82%) and if the adjustment to that extent is made to the transactions of the assessee company with its AEs on account of cut and polished diamonds amounting to Rs. 60.04 crores, the ALP of the said transactions would come to Rs. 60.48 crores as against Rs. 60.04 crores charged by the assessee as shown in the following working furnished by the assessee:-
Particulars Transactions Transactions Total
with AEs with Non-AEs
Sales A 60.04 199.61 259.65
Total Cost B 56.21 186.61 243.07
Total Profit C 3.83 12.75 16.58
OP/TC of D 6.82% 6.82% 6.82%
Assessee
OP/TC as per E 7.60% 7.60% 7.60%
TPO's
15 ITA 7969/M/2010& 7352/M/2012
Comparables
Difference in F=E-D 0.78%
OP/TC
Adjustment to G=F*B 0.44
Export Sales
Arm's Length H=A+G 60.48
Sales
Range of Arms
Length Price
considering 5%
Variation from
ALP
+5% 63.50
-5% 57.45
16. As the ALP of the relevant transactions of the assessee company with its AEs as worked out above at Rs. 60.48 crores is within the range of safe harbor limit of 5% as stipulated in proviso to section 92-C of the Act, no TP adjustment is required to be made to the transactions of the assessee company with its AEs of export of cut and polished diamonds as rightly contended by the ld. counsel for the assessee.
17. At the time of hearing before us, the ld. D.R. has not raised any material contention to dispute the propositions put forth by the ld. counsel for the assessee duly supported by the working furnished by him showing that the ALP of the international transactions of the assessee company with its AEs of export of cut and polished diamonds would be within the range of safe harbor limit of 5% as stipulated in the proviso to section 92-C of the Act going by any of the two methods adopted for the purpose of comparability analysis. He, however, has contended that this working furnished by the assessee for the first time before the Tribunal in support of its two alternative stands requires verification and the A.O/TPO may therefore be given an opportunity to verify the said working. We find merit in this contention of the 16 ITA 7969/M/2010& 7352/M/2012 ld. D.R. Accordingly, the matter is restored to the file of the A.O./TPO with a direction to verify the working furnished by the assessee in support of its case that the ALP as worked out by any of the two methods being within the safe harbor limit of 5% that the price charged by the assessee, no TP adjustment is required to be made in respect of the transactions of the assessee company with its AEs of import and export of cut and polished diamonds. On verification, if it is found that the difference is less than 5% as claimed by the assessee, the A.O. shall not make any TP adjustment in respect of transactions of the assessee with its AEs of export of cut and polished diamonds. Ground No. 1, 2, 4 & 5 of the assessee's appeal for A.Y. 2008-09 are accordingly treated as allowed as indicated above.
18. The issue raised in ground No. 3 of assessee's appeal for A.Y. 2008-09 relates to the addition made by the Assessing Officer/TPO by way of transfer pricing adjustment on account of notional interest on outstanding AE debtors.
19. As noted by the TPO, the assessee had granted excess credit period to its AEs by 85 days vis-à-vis credit granted to third parties. As the assessee could not bring any evidence on record to support and substantiate its claim that the third parties were also being granted same credit period of 180 days as granted to the AEs, the TPO held that the assessee ought to have charged interest on the excess credit period granted by it to the AEs. On the basis of the information obtained by him from M/s Crisil regarding the average yield on the short/long term instruments, he adopted arm's length rate of such interest at 12% by following CUP method. This interest rate of 12% was applied by him to the excess credit of 85 days allowed by the assessee to its AEs on total sales of Rs. 60.02 crores to work out the interest that ought to have been charged by the assessee to its AEs at Rs. 1,67,72,712/- and accordingly the adjustment to that extent was proposed by the TPO. The 17 ITA 7969/M/2010& 7352/M/2012 assessee raised objection to the said adjustment before the DRP by making the following submissions:-
"• Export invoices show that credit period given to AE and non-AE is 180 days. This submission has not been taken on record by the TPO. As the credit period given in both cases is the same, the same is at ALP and there should be no interest charge in respect of the delayed receivables.
As regards the outstanding debtors, the total outstanding debtors as on 31st March, 2008 from the AE were Rs. 32.26 crores. In respect of the outstanding debtors from the AE, the assessee confirms that all sales in respect of which the debtors are outstanding have occurred on or after October the details of which have already been furnished to the Assessing Officer.
• The use of the debtors/turnover ratio is not relevant as sales have occurred at different times during the year to the AE and non-AE. The terms of credit are equivalent of 180 days to both the AE and non-AE. Therefore, if an export has been made on l October by the assessee firm, any realization received by 3l March of the following year is deemed to have been received within time. As stated above, in the instant case, the outstanding debtors for the AE are for sales made on or after l October and therefore, are at arm's length with the credit period granted to the non-AE of 180 days i.e. realization received before 315t March or outstanding as on 3lst March.
• Notwithstanding the above, if an addition is to be made for delayed realisation, the rate of 12% being the yield on bonds of 1 to 2 years cannot be used as a CUP. The assessee was not given the working of 12% and asked to show cause why this rate should not be used. Therefore, the assessee has no opportunity to determine the adequacy of this method for CUP."
20. After taking into consideration the above objection raised by the assessee, the DRP directed the A.O. to decide this issue as per the following directions given in para 3. 3.1 of his order:-
"3.3.1 The adjustment on account of excess credit period of 85 days to AE has also been examined by us. The assessee has stated that the terms of credit are equivalent of 180 days to both the AE and non-AE. In this respect we find that if this is borne out by facts, there is no case for the adjustment as the transaction between AE and non-AE will be at par so far as the credit period is concerned. There is no specific finding in the TPO's order that the non-AEs paid back earlier than 180 days. The TPO has only given an inferential observation that this is not 18 ITA 7969/M/2010& 7352/M/2012 so. In view of the assessee's submission before us we find that this verification needs to be revisited. AC is therefore directed to verify this and delete the adjustment f the assessee's contention is found correct. Otherwise, in absence of equivalent benefit to non-AE, the adjustment made by the TPO will be in order. In this situation, it is obvious, the assessee has given a benefit to its AE for which a compensation will be inevitable: In that event, the basis of interest charged by the TPO is also found to be in order."
21. As per the directions of the DRP, the A.O. examined this issue and found that although the credit period in the case of AEs and non-AEs was the same of 180 days as mentioned in the relevant copies of invoices placed by the assessee on record, there was a specific finding given by the TPO that the assessee has granted excess credit period to its AEs by 85 days vis-à-vis credit granted to third parties. According to the A.O., the assessee could not rebut or controvert this finding given by the TPO and accordingly made an addition on account of interest that the assessee ought to have charged from its AEs on the excess credit period allowed.
22. We have heard the arguments of both the sides and also perused the relevant material available on record. It is observed that the specific direction was given by the DRP to the A.O. after considering the objection raised by the assessee to verify that the credit period granted to AEs and non-AEs was at par. The A.O. was also directed by the DRP that if the claim of the assessee was found to be correct, no adjustment would be required to be made on this issue. The ld. counsel for the assessee in this regard has submitted that the relevant copies of invoices were filed by the assessee before the A.O. showing that the credit period allowed was 180 days to both the AEs and non-AEs. He has submitted that the A.O., however, brushed aside the same on the basis of finding given by the TPO that the assessee has granted excess credit period to its AEs by 85 days vis-a-vis credit granted to third parties and made the addition on this issue without giving the assessee an opportunity to establish its claim on further evidence that the credit period allowed to both AEs and non-AEs was at par. He has submitted that the assessee is in a position to 19 ITA 7969/M/2010& 7352/M/2012 establish its claim on this issue and urged that one more opportunity may be given to the assessee for this purpose. Since the ld. D.R. has not raised any objection in this regard, we set aside this issue to the file of the A.O. for deciding the same afresh after giving an opportunity to the assessee to establish its claim on further evidence that the credit period offered by it to AEs as well as non-AEs was at par. Ground No. 3 of assessee's appeal is accordingly treated as allowed for statistical purpose.
23. In ground No. 6, a limited issue raised by the assessee is that its profitability for the purpose of transfer pricing should be computed after considering the effect of various allowances/disallowance as made to its total income.
24. As agreed by the ld. representatives of both the sides, this issue is consequential in nature and accordingly the A.O. is directed to give consequential relief to the assessee on this issue.
25. The issue raised in ground No. 7 relates to the disallowance made u/s 40A(2)(b) of the Act to the total income of the assessee on account of labour charges paid to M/s Aakash Diamonds.
26. During the year under consideration, the assessee had paid total labour charges of Rs. 14,83,30,322/- to M/s Aakash Diamonds, the related concern covered u/s 40A(2)(b) of the Act. The assessee was called upon by the A.O. to justify the reasonableness of these payments and after considering the explanation offered by the assessee in this regard as well as the material placed on record in support, the A.O. recorded his findings/observations on this issue as under:-
"(i) The assessee is paying average per Carat Rate of Rs. 831 per Carat for Surat unit while for the Deesa unit; the average rate of Rs.
870.31 is paid. No justification for this substantial difference is given.
20 ITA 7969/M/2010& 7352/M/2012
(ii) The assessee has increased the rates of Surat unit by only Rs. 25 over the year but for Deesa unit, rate was increased by Rs. 75. No justification for this substantial variation is given.
(iii) The assessee has not given any detail in the bills in respect of quality of diamond processed by these parties.
(iv) Even in the Jangads issued to AD, no details in respect of quality are mentioned.
(v) In the Stock register of the assessee also, no details of diamonds like Carat, colour, quality, size are mentioned.
(vi) During the preceding year, the labour payments for the AD, Surat have increased from Rs. 810 per Carat for the month of April 2006 to Rs. 910 per Carat for the month of March 2007. The assessee has paid AD, Surat at the rate of Rs. 910 per Carat for the period of January to March 2007. However, from the month of April 2007 to December 2007, the rates charged were Rs. 825 per Carat which have increased to Ps. 850 per Carat from January, 2008 to March 2008. There is no justification available the assessee for decrease or increase of rates.
(vii) The assessee has got polishing work of 2586 Carats done from Shri Revabhai K. Desai, one un-related party, who has processed the rough diamonds at the average rate of Rs. 313.63 per Carat. It is seen that this party is also working for the assessee for the whole year and as in the case of AD, in case of this party also the party is raising monthly bills only. However, the labour rates of this party are varying over the year between about Rs. 275 per Carat to Ps. 487 per Carat and the average rate of Rs. 313.63 per Carat was charged. The assessee could not give any justification for this substantial difference between the rate charged by this party and AD except giving a general reply that rough given to this party was very cheap and lower quality goods were given to it. However, the assessee could not substantiate the same by documentary evidence. Moreover, there is substantial difference in the rates charged by AD compared to this party and the payments to AD are 2.72 times of the rates charged by this party. This in view of the fact that Shri Jyibiai K. Desai is a regular party who has worked for the assessee for the whole year and it is the only un-related party working for the assessee."
On the basis of above findings/observations, the A.O. came to the conclusion that the assessee company and its related concern M/s Aakash Diamonds were not acting as independent parties and the transactions between them were not at arm's length. According to him, the reasonable average labour rate for polish work done by Aadash Diamonds for the assessee was Rs. 450/-
21 ITA 7969/M/2010& 7352/M/2012 per carat and accordingly the excess labour charges allegedly paid by the assessee to Aakash Diamonds was worked by him at Rs. 7,00,92,107/-. Accordingly, the disallowance u/s 40A(2)(b) of the Act was proposed by the A.O. to that extent. On objection raised by the assessee, the DRP held that the reasonable labour rate for the polish work done by Aakash Diamonds for the assessee was Rs. 808.33 per carat as paid in the earlier years. Accordingly, the disallowance was finally made by the A.O. at Rs.77,91,886/-.
27. We have heard the arguments of both the sides and also perused the relevant material available on record. It is observed that a similar issue was involved in assessee's own case for A.Y. 2005-06 and the same was set aside by the Tribunal to the file of the A.O. for deciding the same afresh for the following reasons given in para 11,12 & 13 of its order dated 19th December, 2012 passed in ITA No. 2282/Mum/2010:-
"11. We have heard the arguments in detail and we find that Mr. Mahesh Bhasali, partner of the assessee firm is also a partner in 75% ratio in Aakash, hence, the assessee and the vendor, i.e. Aakash are associates and provisions of section 40A(2)(b) are attracted. On the issue of justification of addition made by the AO and sustained by the CIT(A), we find from the impugned order that the assessee had, in fact, accepted that some addition could be justified, the question is how much, i.e. Rs 5,64,000 as admitted by the assessee or Rs. 43,97,629/- as computed by the AO. Since the assessee has accepted to some addition, in the submissions made before the CIT(A), we cannot now, accept that there cannot be any addition. This observation gathers strength from the order of the CIT(A), wherein he observes, "they have given no analysis of labour, wages, etc. paid and cost of cutting and polishing of diamonds.....".
12. In our opinion, neither the assessee has provided any comparable rates to the revenue authorities nor the revenue authorities have made any attempt either by asking the assessee to provide for the comparable nor they suo moto collected any data from the market. What the revenue authorities have done is that they have relied on the internal comparable only to arrive at a figure of estimated charges per carat. In fact, the AO should have collected independent data or have asked the assessee to provide comparable periodic rates prevailing in the market at Deesa to set the bench mark. This exercise has not been done by the 22 ITA 7969/M/2010& 7352/M/2012 AO or by the CIT(A), which according to us, the revenue authorities should have done to arrive at some definite estimate.
13. In these circumstances, we are of the opinion that in the interest of justice to both the sides, the AO must make enquiries and examine the comparable rates from the third parties at Deesa and then benchmark the average job work rate for the financial year in question and compute the job work charges."
The order for A.Y. 2005-06 has been subsequently followed by the Tribunal in A.Y. 2007-08 to restore the similar issue to the file of the A.O. for deciding the same afresh as per the same directions as given in A.Y. 2005-06 vide an order dated 21-02-2013 passed in ITA No. 7052/Mum/2011. As the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to that of A.Y. 2005-06, we respectfully follow the order of the Tribunal for A.Y. 2005-06 and restore this matter to the file of the A.O. for deciding the same afresh as per the same direction as given in A.Y. 2005-06. Ground No. 7 of assessee's appeal for A.Y. 2008-09 is accordingly treated as allowed for statistical purpose.
28. The issue raised in ground No. 8 relates to the disallowance made on account of assessee's claim for additional depreciation on plant and machinery.
29. In its return of income, the assessee had claimed additional depreciation @ 20% u/s 32(1)(iia) of the Act on the new plant and machinery acquired and installed during the year under consideration. As per section 32(1)(iia) of the Act, additional depreciation was allowable to an assessee who is engaged in the business of manufacture or production of any article or thing. In this regard, the A.O. relied on the decision of Hon'ble Supreme Court in the case of CIT vs. Gem India Manufacturing Co. (2001 249 ITR 307 (SC) wherein it was held that cutting and polishing of diamonds does not amount to manufacturing or production of goods and disallowed the claim of 23 ITA 7969/M/2010& 7352/M/2012 the assessee for additional depreciation in plant and machinery u/s 32(1)(iia) of the Act.
30. We have heard the arguments of both the sides and also perused the relevant material available on record. The ld. counsel for the assessee in support of the assessee case on this issue has relied on the decision of the Tribunal in the case of Sheetal Diamonds Limited vs. ITO (ITA No. 6687 to 6689/Mum/2003 dated 23rd March, 2011 where it was held that the profits derived by the assessee from the business of cutting and polishing of rough diamonds is eligible for deduction u/s 80IA of the Act. A perusal of the order of the Tribunal, however, shows that although a reference in the said order was made by the Tribunal to the decision of Hon'ble Supreme Court in the case of Gem India Manufacturing Co. (supra), the tribunal finally relied on the decision of Hon'ble Bombay High Court in the case of CIT vs. London Star Diamond Co. (India) Ltd. 213 ITR 517 (Bom) and that of Hon'ble Supreme Court in the case of ITO vs. Arihant Tiles & Marbles Pvt. Ltd., 320 ITR 79. It is, however, observed that in the case of London Star Diamond Co. (India) Ltd. (supra), it was held by the Hon'ble Bombay High Court that the activity of cutting and polishing of diamond would definitely constitute processing and relying on the same, it was held by the Tribunal in the case of Sheetal Diamonds Ltd. that the assessee was entitled to deduction u/s 80IA of the Act as the processing or production of articles is also eligible for deduction u/s 80IA of the Act. In the case of Arihant Tiles & Marbles Pvt. Ltd. (supra), the issue before the Hon'ble Supreme Court was whether cutting and polishing of marble slabs into marble tiles would amount to manufacture or production of article or thing and the same was decided by the Hon'ble Apex Court in favour of the assessee. In the case of Gem India Manufacturing Co. (supra) relied upon by the A.O., the issue before the Hon'ble Supreme Court was whether the cutting and polishing of diamonds would amount to manufacturing or production of goods and the same was decided by the Hon'ble Supreme Court 24 ITA 7969/M/2010& 7352/M/2012 against the assessee holding that cutting and polishing of diamonds does not amount to manufacturing or production of goods. The Hon'ble Apex Court decision in the case of Gem India Manufacturing Co. (supra) thus is directly applicable in the present case involving a similar issue and respectfully following the same, we uphold the impugned order of the A.O. disallowing the assessee's claim for additional depreciation u/s 32(1)(iia) of the Act. Ground No. 8 of assessee's appeal is accordingly dismissed.
31. The issue raised in ground No. 9 relates to the addition made to the total income of the assessee on account of difference in value of closing stock as shown by the assessee in the stock statement submitted to the bank and as shown by the assessee in the books of account.
32. During the course of assessment proceedings, it was noticed by the A.O. that although the quantity of stock of diamonds as shown in the stock statement submitted to the bank as o n 31-3-2008 was same as shown in its books of account, the valuation as shown in the bank statement was higher at Rs. 139.46 crores as against 138.80 crores shown by the assessee in the books of account. Since the difference could not be explained by the assessee to the satisfaction of the A.O. and the assessee also could not give any basis of valuation of stock as shown either in the bank statement or in the books of accounts, the A.O. added the difference of Rs. 66 lacs in the valuation of closing stock to the total income of the assessee.
33. We have heard the arguments of both the sides and also perused the relevant material on record. Although the ld. counsel for the assessee has tried to justify the valuation of closing stock as taken by the assessee in the balance sheet, he has not been able to give any basis of the said valuation taken by the assessee. It is noted that the quantity of rough diamonds and polished diamonds shown in both the statement is same and there is only a difference in the valuation of the said quantity which is higher in the case of 25 ITA 7969/M/2010& 7352/M/2012 statement given to the bank than the one shown by the assessee in its books of accounts. In our opinion, the burden in this regard is on the assessee to prove which of these two values is correct by providing the relevant details regarding the basis adopted for the said valuation. Since this has not been done by the assessee, we are of the view that this issue needs to be set aside to the A.O. to give one more opportunity to the assessee to explain the basis of valuation. Accordingly, this issue is set aside to the file of A.O. with a direction to the assessee to furnish the relevant details in order to explain the basis of valuation of the closing stock adopted by it. The A.O. shall verify the details furnished by the assessee in this regard and decide the issue accordingly. Ground No. 9 of assessee's appeal is accordingly treated as allowed for statistical purpose.
34. The issue raised in ground No. 10 relating to the disallowance of assessee's claim for deduction u/s 80G of the Act is not pressed by the ld. counsel for the assessee at the time of hearing before us. The same is accordingly dismissed as not pressed.
35. Now, we shall take up the appeal of the assessee for A.Y. 2006-07 being ITA No. 7969/Mum/2010, ground No. 1 to 5 of which involve a common issue relating to the disallowance made by the A.O. and confirmed by the ld. CIT(A) u/s 40A(2)(b) of the Act in respect of labour charges paid to Aakash Diamonds.
36. As the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to A.Y. 2005-06 & 2008-09, we respectfully follow the said orders of the Tribunal for A.Y. 2005-06 & 2008-09 and restore this matter to the file of the A.O. for deciding the same afresh as per the same direction as given in A.Y. 2005-06 & 2008-09. Ground No. 1 to 5 of assessee's appeal for A.Y. 2006-07 is accordingly allowed for statistical purpose.
26 ITA 7969/M/2010& 7352/M/2012
37. The next issue involved in ground No. 6 relates to the disallowance of 60% made by the A.O. out of residential telephone expenses which has been sustained by the ld. CIT(A) to the extent of 30%.
38. During the course of assessment proceedings, it was noticed by the A.O. that out of the total telephone expenses of Rs. 7,82,759/- claimed by the assessee, a sum of Rs. 4,38,668/- was in respect of residential telephone expenses of its partners. In this regard, the explanation offered by the assessee before the A.O. was that it is dealing in import and export of goods with suppliers/customers from Far East and South East Asian countries, Europe, U.S.A., Israel etc. and the telephones are required to be made during morning and night hours from the residential telephones of the partners. It was also brought to the notice of the A.O. by the assessee that it has already paid FBT @ 20% on telephone expenses. The A.O. partly accepted this explanation of the assessee. He, however, held that in the absence of any record maintained by the assessee to show that the residential telephone expenses are wholly incurred for the business, the personal use of the residential telephones by the partners could not be ruled out. Accordingly disallowance of 60% out of the total residential telephone expenses was made by him for such personal use. On appeal, the ld. CIT(A) restricted the said disallowance to 30% of the residential telephone expenses.
39. After considering the rival submissions and perusing the relevant material available on record, we find that no record was maintained by the assessee to show that the expenses incurred on residential telephones of the partners were wholly and exclusively for the purpose of its business. As rightly held by the A.O., personal use of residential telephones by the partners in the absence of such record could not be ruled out and some reasonable disallowance for such personal use was very much warranted. Although, such disallowance made by the A.O. at 60% of the total telephone 27 ITA 7969/M/2010& 7352/M/2012 expenses was excessive and unreasonable, we are of the view that the ld. CIT(A) is quite fair and reasonable to restrict the same to 30% of the residential telephone expenses. Having regard to all the facts of the case, we are of the view that there is no case of any further relief to the assessee on this issue and upholding the impugned order of the ld. CIT(A), we dismiss ground No. 6 of the assessee's appeal.
40. In the result, appeal of the assessee for A.Y. 2006-07 is treated as partly allowed for statistical purpose and appeal for A.Y. 2008-09 is partly allowed.
Order pronounced in the open court on 22nd November, 2013.
.
आदे श क घोषणा खले
ु यायालय म दनांकः 22-11-2013 को क गई ।
Sd/- sd/-
(AMIT SHUKLA) (P.M. JAGTAP)
या यक सद य JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER
मंुबई Mumbai; दनांक Dated 22-11-2013
व. न.स./ RK , Sr. PS
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 Addl CIT--concerned Mumbai.
4. आयकर आयु / DRP - concerned, Mumbai
5. वभागीय त न ध, आयकर अपील य अ धकरण, मंुबई / DR, ITAT, Mumbai K Bench
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