IN THE ITAT MUMBAI BENCH ‘L’
Assistant Commissioner of Income-tax, 15(2)
versus
Super Diamonds
IT APPEAL NO. 6399 (MUM.) OF 2007
[ASSESSMENT YEAR 2004-05]
AUGUST 3, 2012
ORDER
I.P. Bansal, Judicial Member
This is an appeal filed by the revenue. It is directed against the order dated 1st Aug. 2007 of Ld. CIT(A)-XV, Mumbai for the assessment year 2004-05. The grounds of appeal raised by the revenue read as under:
1. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 2,58,00,000/- being the adjustments made to the purchase price of imports from Associated Enterprises.
2. On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in observing that the Comparable Uncontrolled Price Method can be used for determining the Arm’s Length Price in this case.
3. On the facts and in the circumstances o the case and in law, the Ld. CIT(A) erred in accepting the assessee’s plea that the benchmarked operating profit ratio should be applied to the sale turnover corresponding to the purchases made from Associated Enterprises and not to the total turnover.
4. On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in holding that the wording net profit margin for Rule 10B, necessarily means only the net profit determined after allowance of cost inclusive of interest cost and consequently holding that taking operating profit as base for benchmarking as considered by the Transfer Pricing Officer is not in tune of Rule 10B of Income tax Rules.
5. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that the ‘capital base’ materially affect the operating profit, ignoring the findings of the Transfer pricing Officer that during the proceedings, the assessee could not demonstrate that the diamond industry is a capital intensive industry.
6. On the facts and in the circumstance of the case and in law, the Ld. CIT(A) erred in holding that seven comparable entities selected by the Transfer Pricing Officer do not appear to be comparable with the assessee.
7. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in accepting the working of Arm’s Length Price as done by the assessee which are based only on three entities or industry average based on four entities”
2. The assessee firm imports rough diamonds from M/s. Swetgems BVBA and other parties on principal to principal basis. It gets these diamonds cut and polished and then export such processed diamonds. The return of income was filed on 28/10/2004 on a total income of Rs. 26.26.217/-, which has been assessed vide order dated 26/12/2006 on an income of Rs. 2,84,26,217/- by making an addition of Rs. 2,58,00,000/- as per order dated 22/12/2006 passed by TPO under section 92CA(3) of the Income Tax Act, 1961 (the Act.). The international transactions entered into by the assessee with its Associated Enterprises (AE) is an aggregate sum of Rs. 16,19,73,522/- which represent import cost of rough diamonds. The assessee adopted TNMM method to bench mark the said transaction and during the course of hearing before TPO the assessee had additionally taken support of CUP method to bench mark the transaction. The TPO rejected the CUP method in view of the non availability of adequate documentary evidence regarding comparability of diamonds purchased from the AE and Non-AEs and took recourse to the remarks made in the transfer pricing report submitted vide letter dated 12/5/2006 in which it was stated as under:
“it is impossible and impracticable to compare the prices in one invoice with that in another though having same description i.e. Rough Diamonds. In fact, even a single invoice of rough diamonds contains different lots, all described as rough diamonds but priced differently and sometimes invoice gives details of only one lot though there are different qualities of goods included in parcel”.
After rejection of CUP method claimed by the assessee the TPO had proceeded to use TNMM method. The TPO selected certain comparables out of 65 diamond manufacturing cases which had different categories of sale turnover. As the assessee’s turnover is Rs. 57.27 crores the TPO selected the comparables having sales between Rs. 50 to Rs. 100 crores and the operating profit margin on sales of those comparables was worked out at 5.13%. A list is stated to be enclosed as Annexure -A with the order of the TPO, however, the said annexure has not been filed by the revenue alongwith order of the TPO. It is observed by the TPO that since assessee’s margin did not fall within safe harbour of +/- 5% the assessee was required to explain as to why TP adjustment should not be made. The assessee inter- alia submitted that the working capital was only Rs. 36.92 lacs as against the total capital of some of the entities sought to be compared of Rs. 102.72 crores; outstanding creditors constitute 134 days to the purchases as against only 103 days for some of the comparables; outstanding debtors constitute only 46 days of the sales as against 110 days of the comparables; sale of the assessee to capital ratio i.e. capital turnover ratio is about 158 times as against just 1.83 times of some of the comparables etc. Ld. TPO rejected all the these submissions of the assessee stating inter-alia that diamond is not a capital intensive industry; the assessee did not incur interest cost while comparables have incurred and the margin of the comparables have been worked out after excluding the interest cost; the assessee did not furnish any price comparison data on an invoice to invoice basis etc. The TPO calculated an addition of Rs. 2.58 crores vide para 12 of his order as under:
“12. In the light of the above, the arguments provided by the assessee are rejected. Thus an adjustment is made to the purchase price of import from AEs as under:
