D.C.I.T.9(2), MUMBAI v. M/S. INDO AMERICAN JEWELLERY LTD. (FORMERLY KNOWN AS SUASHIS JEWELLERY LTD), MUMBAI

ITA 6194/MUM/2008 | 2004-2005
Pronouncement Date: 31-05-2010 | Result: Dismissed

Appeal Details

RSA Number 619419914 RSA 2008
Assessee PAN AAACI5033J
Bench Mumbai
Appeal Number ITA 6194/MUM/2008
Duration Of Justice 1 year(s) 7 month(s) 15 day(s)
Appellant D.C.I.T.9(2), MUMBAI
Respondent M/S. INDO AMERICAN JEWELLERY LTD. (FORMERLY KNOWN AS SUASHIS JEWELLERY LTD), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 31-05-2010
Appeal Filed By Department
Order Result Dismissed
Bench Allotted L
Tribunal Order Date 31-05-2010
Date Of Final Hearing 07-10-2009
Next Hearing Date 07-10-2009
Assessment Year 2004-2005
Appeal Filed On 16-10-2008
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L MUMBAI BEFORE SHRI D.MANMOHAN VICE PRESIDENT & SHRI R.K.PANDA AM I.T.A. NO. 6194/MUM/2008 (ASSESSMENT YEAR 2004-05) DCIT 9(2) R. NO. 218 2 ND FLOOR AAYAKAR BHAVAN M.K. ROAD MUMBAI-400 020 VS. M/S. INDO AMERICAN JEWELLERY LTD. B-203 THE NIGHTINGALE CHS LTD. CHARKOP ROAD KANDIVLI (WEST) MUMBAI-67 PAN: AAACI5033J APPELLANT RESPONDENT APPELLANT BY : MR. NARENDER SINGH RESPONDENT BY : MR. K. SHIVARAM ORDER DATE OF HEARING: 09.03.2010 DATE OF ORDER: 31.05.2010 PER R.K.PANDA AM THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAIN ST THE ORDER DATED 12 TH AUGUST 2008 OF THE CIT(A)-XIX MUMBAI RELATING TO ASSESSMENT YEAR 2004-05. 2. FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESSEE COMPANY M/S. INDO AMERICAN JEWELLERY PVT. LTD. PREVIOUSLY KNOWN AS S UASHISH JEWELLERY LTD. IS A CLOSELY HELD INDIAN COMPANY INCORPORATED ON 16 TH JULY 1999. IT IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND EXPORT OF PLAIN AND STUDDED JEWELLERY OF GOLD PLATINUM SILVER AND OTHER PRECI OUS/SEMI PRECIOUS DIAMONDS SYNTHETIC STONES IN THE FORM OF RINGS PE NDANTS EAR RINGS BRACELETS ETC. THE COMPANYS PRODUCTS ARE EXPORTE D MAINLY TO US AND UK. 3. DURING THE YEAR THE ASSESSEE HAS ENTERED INTO INTE RNATIONAL TRANSACTION WITH THE FOLLOWING AES: A) SUASHISH DIAMONDS HONG KONG LTD. B) SUASHISH STAR INC. (SSI) C) ISHISH JEWELLERY LLC D) STAR DIAMOND GROUP INC. USA (STAR) ITA NO. 6194/MUM/2008 M/S. INDO AMERICAN JEWELLERY LTD. ======================== 2 ON BEING QUESTIONED BY THE TPO THE ASSESSEE JUSTIF IED THE TRANSACTIONS UNDER THE OVERALL TNM METHOD. IT WAS SUBMITTED THAT THE ASSESSEES OPERATING PROFIT MARGIN IS 3.56% ON SALE S AND 3.70% ON COST WHILE THAT OF COMPARABLES USED BY IT IS 3.27% ON SA LES AND 3.83% ON COST. ON THE BASIS OF DETAILS PROVIDED BY THE ASSESSEE IT WAS SUBMITTED THAT THE ASSESSEE EARNS A NET MARGIN OF 5.38% ON SALE TO THE AES AND NET MARGIN OF 1.77% ON SALE TO NON-AES. ACCORDINGLY IT WAS SUBMI TTED THAT THE SAME IS TO BE AT ARMS LENGTH. 4. THE TPO PERUSED THE SPLIT FINANCIALS PROVIDED BY TH E ASSESSEE AND REJECTED THE SAME ON THE GROUND THAT THE ALLOCATION KEYS USED BY THE ASSESSEE FOR THE PURPOSE OF SPLIT OF THE EXPENSES A RE NOT APPROPRIATE. HE OBSERVED THAT IN CASE OF ALLOCATION OF MANUFACTURIN G EXPENSES LIKE EMPLOYEES REMUNERATION RENT ETC. THE ALLOCATION KEY USED IS SALES WHICH IS NOT APPROPRIATE. ACCORDING TO HIM THE IDEAL ALL OCATION KEYS SHOULD HAVE BEEN THE NUMBER OF EMPLOYEES SPACE UTILISED ETC. SINCE THE SEGMENTAL ACCOUNTS PREPARED BY THE ASSESSEE ARE NOT BASED ON PROPER ALLOCATION KEY THE TPO CONSIDERED THE ENTITY LEVEL PROFITABILITY O F THE ASSESSEE FOR THE PURPOSE OF BENCHMARKING. THE TPO ADOPTED A FRESH S EARCH TO FIND COMPANIES IN THE COMPARABLE BUSINESS AS THAT OF THE ASSESSEE AS PER PARA 10 OF THE TPOS ORDER AND ASKED THE ASSESSEE TO EXP LAIN AS TO WHY MARGIN OF THE ABOVE COMPARABLES ENGAGED IN THE BUSINESS OF MANUFACTURING JEWELLERY COULD NOT BE APPLIED TO BENCHMARKING THE ASSESSEES TRANSACTIONS. 5. IT WAS EXPLAINED BY THE ASSESSEE THAT SOME OF THE A BOVE COMPANIES AS POINTED OUT BY THE TPO ARE NOT COMPARABLE WITH T HAT OF THE ASSESSEE COMPANY ON THE BASIS OF THEIR TURNOVER AND THEIR LO CATION IN SEEPZ ETC. HOWEVER THE TPO REJECTED THE ARGUMENTS ADVANCED BY THE ASSESSEE ON THE GROUND THAT IF ARITHMETIC MEAN IS TAKEN THE DI FFERENCES ARE AVERAGED OUT. THE VARIOUS OTHER ARGUMENTS PUT FORTH BY THE ASSESSEE WERE ALSO REJECTED BY THE TPO. THE TPO OBSERVED THAT THE AVE RAGE OPERATING PROFIT ITA NO. 6194/MUM/2008 M/S. INDO AMERICAN JEWELLERY LTD. ======================== 3 MARGIN ON COST OF THE COMPARABLE COMPANIES COMES TO 7.25% WHICH HE TOOK AS THE ARMS LENGTH OPERATING MARGIN. ACCORDIN GLY HE MADE THE ADJUSTMENT IN RESPECT OF SALES TO AES THE DETAILS OF WHICH ARE AS UNDER: PARTICULARS ASSESSEES MARGIN (RS.) ARMS LENGTH (7.25% ON COSTS) OPERATING COST 891376402 891376402 OPERATING MARGIN 30661123 64624789 TURNOVER 922037525 956001191 UNCONTROLLED 609586554 609586554 CONTROLLED 312450971 346414637 95% OF RS.346414637 = RS.329093905 I.E. NOT FALLIN G WITH ARMS LENGTH. HE OBSERVED THAT THE ARMS LENGTH PRICE OF THE INTE RNATIONAL TRANSACTIONS WITH AE COMES TO RS.346414637 AS COMPARED TO THE T RANSACTION VALUE OF RS.312450971. HE ALSO OBSERVED FROM THE ABOVE ANAL YSIS THAT THE ASSESSEES INTERNATIONAL TRANSACTION RELATING TO SA LES DOES NOT FALL WITHIN A RANGE OF +/- 5% OF THE ARMS LENGTH PRICE. HE ACCORDINGLY MADE ADJUSTMENT OF RS.33 963 606 TO THE VALUE OF INTERNATIONAL TRANSACTIONS. THE ASSESSING OFFICER THUS MADE AN ADDITION OF RS.3 39 63 606 ON ACCOUNT OF DISALLOWANCE OF ARMS LENGTH U/S. 92C(4) OF THE A CT. 6. BEFORE CIT(A) IT WAS SUBMITTED THAT USING FINANCIAL DATA OF THE ENTITIES FROM THE NEW SET OF COMPARABLES DERIVED BY TPOS OFFICE TANTAMOUNT TO REJECTING THE SET OF COMPARABLES PROV IDED BY THE ASSESSEE IN ITS TP STUDY IS UNJUST AND GOES AGAINST THE PRIN CIPLES OF NATURAL JUSTICE. IT WAS SUBMITTED THAT THE ASSESSEE HAS FOLLOWED THE BASIS AS PRESCRIBED IN THE LAW AND UNDER THE OECD PRINCIPLES IN RESPECT OF ITS SEARCH FOR COMPARABLES TO JUSTIFY THE ALP. THE ASSESSEE HAS S ELECTED ITSELF AS TESTED PARTY AND ITS RESULT HAS BEEN BENCHMARKED WITH THE RESULT OF THE COMPARABLE COMPANIES. THE PROVISIONS OF RULE 10B(2 ) OF THE INCOME-TAX RULES 1962 (THE RULES) AND PROVISIONS OF SECTION 9 2CA(3) R.W.S. 92C(3)(C) WERE BROUGHT TO THE NOTICE OF THE CIT(A) AND IT WAS SUBMITTED THAT THE ASSESSEE COMPANY HAS DULY COMPLIED WITH THE ABOVE P ROVISIONS. IT WAS SUBMITTED THAT AS PER THE OECD TRANSFER PRICING GUI DELINES IF THE TAX PAYER ITA NO. 6194/MUM/2008 M/S. INDO AMERICAN JEWELLERY LTD. ======================== 4 PRESENTS A REASONABLE ARGUMENT AND EVIDENCE TO SUGG EST THAT ITS TRANSFER PRICING WAS THE ALP THE BURDEN OF PROOF MAY LEGALL Y AND DE FACTO SHIFT TO THE TAX ADMINISTRATION TO ESTABLISH WHY THE TAX PAY ERS TRANSFER PRICING WAS NOT AT ARMS LENGTH. THE CBDT CIRCULAR NO. 12 D ATED 23 RD AUGUST 2001 AND CIRCULAR NO. 14 DATED 22.11.2002 WAS ALSO BROUG HT TO THE NOTICE OF THE CIT(A) ACCORDING TO WHICH ALP COULD NOT BE DISTURBE D UNLESS THE PRICING IS NOT BASED ON THE PRESCRIBED METHOD OR APPROPRIAT E DOCUMENTS/ INFORMATION HAS NOT BEEN FURNISHED WITHIN THE PRESC RIBED TIMEFRAME AND DATA FOR COMPUTING ALP IS NOT RELIABLE. IT WAS SUB MITTED THAT IT IS NOT CLEAR AS TO HOW THE TPO HAS CARRIED OUT THE SEARCH STRATE GY FOR ARRIVING AT THE PROPOSED LIST OF COMPARABLES SINCE THE TPO HAS NOT CONSIDERED THE ENTIRE JEWELLERY MANUFACTURING INDUSTRY TO ARRIVE AT A MOR E MEANINGFUL COMPARABILITY. IT WAS SUBMITTED THAT THE TPO HAS N OT CONSIDERED THE FAR (FUNCTIONS PERFORMED ASSETS EMPLOYED AND RISK ASSU MED) OF THE VARIOUS COMPARABLES BEFORE APPLYING THE SAME IN THE CONTEXT OF THE ASSESSEE. VARIOUS JUDICIAL DECISIONS WERE ALSO RELIED UPON AN D IT WAS SUBMITTED THAT IN THIS CASE IT HAS BEEN HIGHLIGHTED THAT SELECTION OF COMPARABLES SHOULD BE BASED ON FAR OF BOTH THE PARTIES. IT WAS SUBMITT ED THAT THE TPO HAS SELECTED COMPANIES HAVING WIDE RANGE OF TURNOVER ST ARTING FROM RS. 3 CRORES TO RS. 723 CRORES. THEREFORE SUCH YARDSTICK CANNOT BE APPLIED TO THE ASSESSEE COMPANY WHOSE TURNOVER IS ABOUT RS.91 CRORES ONLY. IT WAS FURTHER SUBMITTED THAT THE COMPANIES SELECTED BY TH E TPO ARE MAINLY SITUATED IN SEEPZ AREA WHICH GET VARIOUS BENEFITS O N ACCOUNT OF CUSTOMS AND OCTROI DUTIES CONCESSIONAL MUNICIPAL/PROPERTY TAXES CHEAPER FINANCE ON LOWER RATE OF INTEREST REBATE OF DUTY ON ELECTR ICITY CHARGES EASY AVAILABILITY OF LABOUR LOWER SALES PROMOTION EXPEN SES LOGISTICAL ADVANTAGE OF SEEPZ ETC. APART FROM INCOME-TAX BENE FITS FOR WHICH THEIR PROFIT MARGIN IS MORE THAN THAT OF THE ASSESSEE WHI CH IS SITUATED IN A NON- SEEPZ ZONE. IT WAS ACCORDINGLY SUBMITTED THAT THE TPO HAS WRONGLY MADE EXCESS ADJUSTMENT. 7. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE TH E LEARNED CIT(A) DELETED THE ADDITION OF RS.3 39 63 666. WHI LE DOING SO HE ITA NO. 6194/MUM/2008 M/S. INDO AMERICAN JEWELLERY LTD. ======================== 5 OBSERVED THAT THE LAW OF TRANSFER PRICING IS STILL AN AREA AT A NASCENT STAGE AS SUCH MUCH IMPORTANCE HAS TO BE GIVEN TO THE METH ODOLOGY AND PROCEDURE WHICH NEEDS TO BE FOLLOWED FOR ARRIVING A T A FAIR DECISION. REFERRING TO THE VARIOUS DECISIONS CITED BEFORE HIM HE OBSERVED THAT THE TRANSFER PRICING IS NOT AN EXACT SCIENCE AND SOME D EGREE OF ESTIMATION IS INBUILT WITH THE WHOLE PROCESS. HE OBSERVED THAT T HE INITIAL ONUS TO ESTABLISH THAT THE INTERNATIONAL TRANSACTION IS WIT HIN THE ALP LIES WITH THE ASSESSEE AND THE ASSESSEE HAS DISCHARGED ITS BURDEN OF PROOF BY FILING THE DETAILED TRANSFER STUDY. THE TPO SHOULD MAKE A PRO PER STUDY AND ANALYSIS ON THE BASIS OF THE DATA AVAILABLE AS WELL AS THE PROPER METHOD TO BE FOLLOWED. HE REFERRED TO THE CBDT INSTRUCTION A ND THE PROVISIONS OF SECTION 92C(3) AND 92CA(3). HE OBSERVED THAT IN TH E INSTANT CASE THE TPO HAS NOT CONSIDERED THE VARIOUS FACTORS WHICH REQUIR E THE ADJUSTMENTS IN THE INDUSTRY MARGIN CALCULATED ON THE BASIS OF THE COMPARABLES OF THE ASSESSEE AND IT IS NOT CLEAR AS TO WHY THE TPO DID NOT REJECT THE TRANSFER PRICING STUDY SUBMITTED BY THE ASSESSEE AND STILL W ENT AHEAD MAKING THE TRANSFER PRICING ADJUSTMENTS IN A SUMMARY MANNER. HE ALSO QUESTIONED THE SELECTION OF VARIOUS COMPANIES AS COMPARABLES. CONSIDERING THE OPERATING PROFIT/SALES OF THE ASSESSEE AT 3.56% WHI CH WAS HIGHER THAN THE INDUSTRY MARGIN HE OBSERVED THAT THE TRANSACTIONS B ETWEEN THE ASSESSEE AND ITS AES WERE AT ARMS LENGTH. SINCE THE ASSESSE E IN THE INSTANT CASE HAS SELECTED THE EXTERNAL COMPARABLES FROM THE PUBLIC D ATA BASE AND HAS FOLLOWED A DETAILED SEARCH PROCESS AND MADE AN ANAL YSIS CONSIDERING THE VARIOUS FACTORS OR SELECTING THE EXTERNAL COMPARABL ES AS REQUIRED UNDER THE TRANSFER PRICING REGULATIONS AND GUIDELINES HE ACCEPTED THE TP STUDY OF THE ASSESSEE AND ALP OF INTERNATIONAL TRANSACTIO N DETERMINED ON THE BASIS OF THE SAME. HE THUS DELETED THE ADDITION MADE BY THE ASSESSING OFFICER. 8. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REVENU E IS IN APPEAL BEFORE US WITH THE FOLLOWING GROUNDS: 1. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETING THE ADDITION OF RS.3 39 63 666/- ON ACCOUN T OF ITA NO. 6194/MUM/2008 M/S. INDO AMERICAN JEWELLERY LTD. ======================== 6 ADJUSTMENT MADE TO ARMS LENGTH PRICE IN RESPECT OF INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES WITHOUT APPRECIATING THAT THE ARMS LENG TH OPERATING MARGIN OF 7.25% WAS TAKEN BY THE ASSESSIN G OFFICER ON THE BASIS OF AVERAGE OPERATING PROFIT MARGIN ON COST OF COMPARABLE CASES LISTED IN PARA 1 0 OF THE ORDER U/S. 92CA(3) DATED 22.12.2006 PASSED B Y THE ADDL. CIT TRANSFER PRICING-III MUMBAI. 2. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN ACCEPTING THE ASSESSEES OPERATING PROFIT MARGIN OF 3.7% ON COST (AND 3.56% ON SALES) BY ERRONEOUSLY HOLDING THAT OPERATING PROFIT MARGIN SH OWN BY THE ASSESSEE WAS HIGHER THAN THE AVERAGE INDUSTRY MARGI N OF 3.27% OF EXTERNAL COMPARABLE WHEREAS THE AVERAGE INDUSTRY MARGIN OF 3.27% WORKED OUT BY THE ASSESSEE IS NOT BASED ON PROPER COMPARABLES. 3. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN ACCEPTING THE ASSESSEES OPERATING PROFIT MARGIN (DISCLOSED AT 3.7% ON COST AND 3.56% ON SALES) BY ERRONEOUSLY HOLDING ON IRRELEVANT CONSIDERATION THA T THERE WAS NO TRANSFER OF PROFIT BY THE ASSESSEE OUT SIDE INDIA AS ITS ASSOCIATE ENTERPRISES EARNED EITHER MEAGRE PROFIT OR INCURRED LOSSES AND THAT THE TAX R ATE WAS HIGHER IN US THAN IN INDIA 4. YOUR APPELLANT PRAYS THAT THE ORDER OF THE CIT(A) O N THE GROUNDS BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. 9. THE LEARNED DR RELIED ON THE ORDER OF THE ASSESSING OFFICER AND THE TPO. HE SUBMITTED THAT THE ASSESSEE HAS ALLOCATED ALL EXPENSES ON THE BASIS OF TURNOVER WHICH IS NOT CORRECT. HE SUBMITT ED THAT IN CASE OF ALLOCATION OF MANUFACTURING EXPENSES LIKE EMPLOYEES REMUNERATION RENT ETC. THE IDEAL ALLOCATION KEY SHOULD HAVE BEEN N O. OF EMPLOYEES SPACE UTILISED ETC. WHICH THE ASSESSEE HAS NOT DONE. HE ACCORDINGLY RELIED ON THE ORDER OF THE ASSESSING OFFICER. 10. THE LEARNED COUNSEL FOR THE ASSESSEE ON THE OTHER HAND WHILE SUPPORTING THE ORDER OF THE CIT(A) SUBMITTED THAT T HE ASSESSEE HAS SHOWN OPERATING PROFIT MARGIN OF 3.56% ON SALES AND 3.70% ON COST WHILE THAT OF COMPARABLE USED BY THE ASSESSEE IS 3.27% ON SALES A ND 3.83% ON COST. HE ITA NO. 6194/MUM/2008 M/S. INDO AMERICAN JEWELLERY LTD. ======================== 7 SUBMITTED THAT NET MARGIN OF 5.38% ON SALE TO AES A ND NET MARGIN OF 1.77% TO NON AES AS DISCLOSED BY THE ASSESSEE IS JU STIFIED WHO ABIDES BY THE OECD TRANSFER PRICING GUIDELINES AND WHICH HAS USED TNM METHOD. HE SUBMITTED THAT THE ASSESSING OFFICER FAILED TO A PPRECIATE THAT INTERNAL COMPARABLES ARE MORE RELIABLE AS COMPARED TO EXTERN AL COMPARABLES. REFERRING TO THE FRESH BENCHMARKING HE SUBMITTED T HAT THE TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS AES ARE AT AR MS LENGTH. HE SUBMITTED THAT THE COMPARABLES CHOSEN BY THE TPO CA NNOT BE APPLIED TO THE ASSESSEES CASE AS MOST OF THEM ARE EITHER LOCA TED IN SEEPZ OR HAD THEIR JEWELLERY MANUFACTURING IN SEEPZ SINCE OUT OF 18 COMPARABLE COMPANIES 13 ARE LOCATED IN SEEPZ. HE SUBMITTED TH AT THE SEEPZ UNITS GET A NUMBER OF BENEFITS WHICH WERE POINTED OUT BEFORE THE CIT(A) AND WHICH ARE ENUMERATED IN THE ORDER OF THE CIT(A). AS REGA RDS THE REMAINING 5 ENTITIES LOCATED OUTSIDE SEEPZ TWO UNITS VIZ. DEE P DIAMONDS INDIA LTD. AND SU-RAJ DIAMONDS AND JEWELLERY LTD. ARE NOT AT ALL COMPARABLES. HE SUBMITTED THAT FOR THE FINANCIAL YEAR 2003-04 DEEP DIAMONDS BUSINESS COMPRISES OF DOMESTIC OPERATIONS ONLY WHEREAS THE A SSESSEE HAD EXPORT SALES OF 95% OF TOTAL TURNOVER. FURTHER DEEP DIAMO NDS HAD A TURNOVER OF RS.3.70 CRORES WHEREAS THE ASSESSEE HAS A TURNOVER OF RS.91 CRORES. SIMILARLY IN THE CASE OF SU-RAJ DIAMONDS THE TURNO VER WAS RS.724 CRORES OUT OF WHICH MAJOR AMOUNT WAS FOR DIAMOND AT RS.521 CRORES. THEREFORE THE ABOVE TWO CASES ARE NOT AT ALL COMPARABLE. AS REGARDS THE BALANCE THREE COMPANIES HE SUBMITTED THAT AVERAGE OPERATING PROFIT TO TOTAL COST OF THESE ENTITIES WORKS OUT TO 2.87% AS AGAINST 3.6 9% OF THE ASSESSEE COMPANY. HE SUBMITTED THAT FOR MAKING A FAIR STUDY AS PER THE PROVISIONS OF THE ACT IT IS NECESSARY THAT A PROPER FAR ANALYS IS SHOULD BE CARRIED OUT AND RELEVANT ADJUSTMENTS SHOULD BE MADE. FOR THIS PROPOSITION HE RELIED ON THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF MENTOR GRAPHICS P. LTD. VS. DCIT REPORTED IN 109 ITD 101 ( DEL). REFERRING TO THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE C ASE OF DCIT VS. MSS INDIA PVT. LTD. REPORTED IN 32 SOT 132 HE SUBMITTE D THAT WHEN AN ASSESSEE HAS FOLLOWED ONE OF THE STANDARD METHODS F OR DETERMINING THE ITA NO. 6194/MUM/2008 M/S. INDO AMERICAN JEWELLERY LTD. ======================== 8 ALP SUCH AN EFFORT CANNOT BE DISCARDED IN PREFERENC E OVER TRANSACTIONAL PROFIT METHOD UNLESS THE REVENUE AUTHORITIES ARE AB LE TO DEMONSTRATE FALLACIES IN APPLICATION OF THE STANDARD METHOD. R EFERRING TO THE DECISION IN THE CASE OF SCHEFENACKR MOTHERSONS LTD. VS. ITO REPORTED IN 123 TTJ 509 HE SUBMITTED THAT FOR DETERMINATION OF ALP UND ER TNMM THE ASSESSEE WAS JUSTIFIED IN TAKING PROFIT LEVEL INDIC ATORS OF COMPARABLE COMPANIES. HE SUBMITTED THAT SINCE THE AES ARE MAI NLY BASED IN USA AND SINCE THE TAX RATES ARE HIGHER IN USA THAN IN INDIA IT IS UNLIKELY THAT THE ASSESSEE WILL GAIN ANYTHING. FURTHER DURING THE RE LEVANT ASSESSMENT YEAR THE ASSESSEE IS ALSO ELIGIBLE FOR DEDUCTION U/S. 80 HHC. THEREFORE THERE CANNOT BE ANY BASIS TO PRESUME THAT THE ASSESSEE HA S CHARGED LESS. HE SUBMITTED THAT THE AO/TPO HAS NOT MADE OUT A CASE T O ESTABLISH THAT THE COMPARABLES USED BY THE ASSESSEE DESERVED TO BE REJ ECTED. REFERRING TO CBDT CIRCULAR NO. 12 DATED 23 RD AUGUST 2001 AND CIRCULAR NO. 14 DATED 22.11.2002 HE SUBMITTED THAT THE ALP SHOULD NOT BE DISTURBED UNLESS THE PRICING IS NOT BASED ON THE PRESCRIBED METHODS. SI NCE THE ASSESSEE HAS SHOWN OPERATING PROFIT ON SALES AT 3.5% WHICH IS HI GHER THAN THE INDUSTRY MARGIN AT 3.27% THEREFORE THE TRANSACTION BETWEEN THE ASSESSEE AND ITS AES WERE AT ARMS LENGTH. HE ACCORDINGLY SUPPORTED THE ORDER OF THE CIT(A) AND SUBMITTED THAT THE GROUNDS RAISED BY THE REVENUE SHOULD BE DISMISSED. 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS MADE BY BO TH THE SIDES PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. THERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE DURING THE RELEVANT ASSESSMENT YEAR HAS ENTERED INT O INTERNATIONAL TRANSACTIONS WITH FOUR AES THE DETAILS OF WHICH AR E ALREADY GIVEN AT PARA 3 OF THIS ORDER. WE FIND THE ASSESSEE IN THE INST ANT CASE HAS ADOPTED TNM METHOD. WE FIND THE SPLIT FINANCIALS PROVIDED BY T HE ASSESSEE WERE REJECTED BY THE TPO ON THE GROUND THAT ALLOCATION O F MANUFACTURE EXPENSES LIKE EMPLOYEES REMUNERATION RENT ETC. T HE ALLOCATION KEY USED IS SALES WHEREAS ACCORDING TO THE TPO THE IDEAL AL LOCATION KEY IN THIS CASE ITA NO. 6194/MUM/2008 M/S. INDO AMERICAN JEWELLERY LTD. ======================== 9 COULD HAVE BEEN NUMBER OF EMPLOYEES SPACE UTILIS ED ETC. WE FIND WHILE REJECTING THE METHOD ADOPTED BY THE ASSESSEE THE T PO CONDUCTED FRESH SEARCH TO FIND COMPANIES IN THE COMPARABLE BUSINESS AS THAT OF THE ASSESSEE. HOWEVER WE FIND THOSE COMPARABLES AS SE LECTED BY THE TPO CANNOT BE COMPARED WITH THAT OF THE ASSESSEE. WE FI ND OUT OF THE 18 COMPARABLES 13 OF THEM ARE SITUATED IN SEEPZ WHICH CANNOT BE COMPARED WITH THAT OF THE ASSESSEE BECAUSE THEY GET VARIOUS BENEFITS LIKE CUSTOMS AND OCTROI DUTY CONCESSIONAL MUNICIPAL/PROPERTY TA XES CHEAPER FINANCE AT LOWER RATES OF INTEREST REBATE OF DUTY ON ELECT RICITY CHARGES EASY AVAILABILITY OF LABOUR LOWER SALES PROMOTION EXPEN SES ETC. APART FROM INCOME-TAX BENEFITS FOR WHICH THEIR PROFIT MARGIN I S MORE THAN THAT OF THE ASSESSEE WHICH IS SITUATED IN NON-SEEPZ ZONE. OUT OF THE REMAINING FIVE COMPANIES WE FIND IN CASE OF DEEP DIAMONDS INDIA L TD. THE BUSINESS FOR THE A.Y. 2004-05 COMPRISED OF DOMESTIC OPERATIONS O NLY WHEREAS THE ASSESSEES EXPORT TURNOVER WAS AROUND 95% OF ITS TO TAL TURNOVER. FURTHER THE TURNOVER OF DEEP DIAMONDS WAS ONLY RS.3.5 CRORE S AS AGAINST THE ASSESSEES TURNOVER OF RS.91 CRORES. SIMILARLY IN THE CASE OF SU-RAJ DIAMONDS AND JEWELLERY LTD. THE TURNOVER WAS ABOUT RS.724 CRORES AND OUT OF WHICH MAJOR AMOUNT WAS FOR DIAMONDS AT RS.5 21 CRORES. THEREFORE THIS ALSO CANNOT BE COMPARED WITH THAT O F THE ASSESSEE COMPANY. AS FAR AS THE REMAINING THREE COMPANIES A RE CONCERNED WE FIND THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSES SEE THAT THE AVERAGE PROFIT TO TOTAL COST OF THESE COMPANIES AT 2.87% IS MUCH LESS THAN THE OPERATING PROFIT TO TOTAL COST RATIO AT 3.69% OF TH E ASSESSEE COMPANY COULD NOT BE CONTROVERTED BY THE LEARNED DR. WE ALSO FIND MERIT IN THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT SINCE THE TAX RATES WERE HIGHER IN USA COMPARED WITH THOSE OF INDIA TH EREFORE THERE WOULD NOT BE ANY INCENTIVE TO TRANSFER THE PROFITS TO HIG HER TAX CHARGEABLE REGIONS ESPECIALLY WHEN THE COMPANY ENJOYS DEDUCTIO N U/S. 80HHC OF THE ACT. FURTHER THE AES HAVE EARNED MEAGRE PROFIT OR INCURRED LOSSES AS COMPARED TO THE PROFIT OF THE ASSESSEE AND THEREFO RE THE SUBMISSION OF THE ASSESSEE THAT THERE WAS NO TRANSFER OF PROFIT B Y THE ASSESSEE OUT SIDE ITA NO. 6194/MUM/2008 M/S. INDO AMERICAN JEWELLERY LTD. ======================== 10 INDIA FINDS MERIT. IT HAS BEEN HELD BY VARIOUS JUD ICIAL PRONOUNCEMENTS THAT UNLESS PROPER METHOD IS FOLLOWED COMPARABLES ARE CHOSEN AND SELECTED AFTER DOING A PROPER FAR STUDY AS WELL AS ADJUSTMENTS ARE MADE TO THE EXTENT POSSIBLE IT WOULD BE UNFAIR TO SUMMAR ILY REJECT THE TRANSFER PRICING ANALYSIS MADE BY THE ASSESSEE. WE FIND IN THE INSTANT CASE THE ASSESSING OFFICER/TPO HAS NOT MADE OUT A CASE TO ES TABLISH THAT THE COMPARABLES USED BY THE ASSESSEE DESERVE TO BE REJE CTED. 12. WE FURTHER FIND THE LEARNED COUNSEL FOR THE ASSESSE E ON BEING ASKED BY THE BENCH FILED ADDITIONAL DETAILS EXPLAI NING THE COMPLIANCE TO RULE 10B OF THE I.T. RULES 1962. THE LEARNED COUNS EL FOR THE ASSESSEE EXPLAINED IN WRITING THAT THE ASSESSEE COMPANY HAS COMPLIED WITH RULE 10B(2)(A) 10B(2)(B) 10B(2)(C) AND 10B(2)(D) AND T HE LEARNED DR COULD NOT CONTROVERT THE ABOVE SUBMISSIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE. WE FIND THE ASSESSEES OPERATING PROFIT MARGIN IS 3.56% ON SALES AND IS 3.70% ON COST WHEREAS THAT OF THE COMP ARABLES USED BY THE ASSESSEE IS AT 3.27% OF SALES AND AT 3.82% ON COST. FURTHER FROM THE DETAILS PROVIDED AND AS MENTIONED IN TPOS ORDER AT PARA 7 WE FIND IT WAS SUBMITTED THAT THE ASSESSEE EARNS A NET MARGIN OF 5 .38% ON SALES TO AES AND NET MARGIN OF 1.77% ON SALES TO NON-AES WHICH R EMAINS UNCONTROVERTED. WE THEREFORE FIND MERIT IN THE SU BMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE OPERATING PROFIT/ SALES OF THE ASSESSEE AT 3.56% BEING HIGHER THAN THE INDUSTRY MARGIN THEREF ORE THE TRANSACTIONS BETWEEN THE ASSESSEE AND ITS AES ARE AT ARMS LENGTH . WE FURTHER FIND THE EXTERNAL COMPARABLES SELECTED BY THE ASSESSEE ARE F ROM THE PUBLIC DATA BASE AND THE ASSESSEE HAS FOLLOWED A DETAILED SEARC H PROCESS AND MADE AN ANALYSIS CONSIDERING THE VARIOUS FACTORS OF SELECTI NG THE EXTERNAL COMPARABLES AS REQUIRED UNDER TRANSFER PRICING REGU LATIONS AND GUIDELINES. THEREFORE THE TRANSFER PRICING STUDY OF THE ASSESSEE AND ALP OF INTERNATIONAL TRANSACTIONS DETERMINED ON THE BAS IS OF SUCH STUDY SIMPLY CANNOT BE REJECTED WITHOUT ANY COGENT REASONS. IN THIS VIEW OF THE MATTER AND IN VIEW OF THE DETAILED ORDER PASSED BY THE CIT (A) DELETING THE ADDITION OF RS.3 39 63 656 WE DO NOT FIND ANY INFI RMITY IN THE SAME AND ITA NO. 6194/MUM/2008 M/S. INDO AMERICAN JEWELLERY LTD. ======================== 11 ACCORDINGLY UPHOLD THE ORDER OF THE CIT(A). THE GR OUNDS RAISED BY THE REVENUE ARE ACCORDINGLY DISMISSED. 13. IN THE RESULT THE APPEAL FILED BY THE REVENUE IS D ISMISSED. PRONOUNCED ON 31 ST MAY 2010 SD/- (D. MANMOHAN) VICE PRESIDENT SD/- (R.K. PANDA) ACCOUNTANT MEMBER MUMBAI DATED 31 ST MAY 2010 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A)-XIX MUMBAI 4. THE CIT-9 MUMBAI 5. THE DR L BENCH. //TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT MUMBAI BENCHES MUMBAI TPRAO