Case Law Details
ITAT MUMBAI BENCH ‘K’
Tara Jewels Export (P.) Ltd.
Versus
Assistant Commissioner of Income-tax, 8(3)
IT Appeal No. 6972 (Mum.) OF 2010
[ASSESSMENT YEAR 2006-07]
JANUARY 23, 2013
ORDER
R.S. Syal, Accountant Member – This appeal by the assessee is directed against the order passed by AO under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (the Act) on 27.7.2010 in relation to the assessment year 2006-07.
2. The assessee filed revised grounds, which have been taken into consideration while disposing of the present appeal. The first five grounds are against the addition made by the AO pursuant to the adjustment proposed by the Transfer Pricing Officer (TPO) in respect of international transactions.
3. Briefly stated, the facts of these grounds are that the assessee is engaged in the manufacturing and export of studded precious jewellery. It reported international transactions of purchase and sale of studded jewellery. The benchmarking was done on the basis of Cost Plus method. For the reasons given by the TPO in his order dated 29.10.2009, the Cost plus method was rejected and instead the Transactional Net Margin Method (TNMM) was applied. In so applying the method of TNMM, the TPO worked out the assessee’s Operating Profit/Total Cost (OP/TC) at 1.77%. Certain comparable cases were chosen by the TPO whose average margin was found at 4.79%. The TPO determined arm’s length profit by considering a particular figure of Rs. 2,2,90,49,767/- which he computed vide para 7 of his order by first computing figure of Rs. 216,67,59,595/- by totalling amount of Sales (Rs. 161,69,75,273/-), Labour charges (Rs. 10,18,435/-), Other income (Rs. 3,85,485/-) and Closing stock Rs. 54,83,80,771/-). From this figure of Rs. 216.67 crores, the TPO reduced the amount of non-operating income such as Dividend on shares, Interest on income tax refund and Sales tax refund all totalling Rs. 34,473/-, thereby determining the so called amount of Operating income at Rs. 216,67,25,492/-. He also found out the amount of Total expenses before interest and taxes at Rs. 212,90,49,767/-. This figure was determined by reducing the amount of Non-operating expenses, that is, Donation and Interest after adding bank charges being non-interest element, to the amount of total expenses debited to the P&L account of Rs. 215,82,57,038/-. It is on this figure of Rs. 212,90,49,767/- that the TPO applied rate of 4.79%, being arithmetical mean of the comparable cases chosen by him and hence worked out the figure of adjustment at Rs. 6,43,05,759/-. Eventually, the AO made addition for this proposed adjustment.
4. The grievance of the Ld.AR to this adjustment is only two fold. His first contention is that the figure of closing stock should be excluded from the total income determined by the TPO and second the rate of 4.79% computed by the TPO of the comparable cases chosen by him should be applied only in respect of the international transactions with the AEs. We will take up both these objections one by one for discussions and our conclusion thereon.
5. The first objection is against the inclusion of figure of closing stock in the total income of Rs. 216.67 cores. Before we proceed further on this issue it is relevant to note that under the TNMM, the operating profit margin is computed in relation to one of the several basis given, such as Cost incurred or Sales effected or Assets employed or Any other relevant base. This is the prescription of rule 10B(1)(e) of Income-tax Rules, 1962. Only one of such bases is chosen as a Profit Level Indicator (PIL) under the TNMM. The TPO has computed Operating profit margin of the assessee at Rs. 3,76,75,725/- (1.77%) by considering the PLI as OP/TC. In this exercise, he adopted the figure of Operating income at Rs. 216,67,25,492/- by excluding non-operating income of Rs. 34,473/- from the alleged amount of sales at Rs. 216,67,59,965/-. The said figure of Rs. 216,67,59,965/-, as noticed above also includes the amount of closing stock at Rs. 54.83 crores. It is but natural that when total cost is computed then that is required to be adjusted not only by the figure of closing stock but also by the figure of opening stock. Cost of goods sold is determined by adding the amount of purchases to the figure of opening stock and then reducing the figure of closing stock. Such figure of cost on goods sold when considered with other items of cost constitutes the total cost. It is impermissible to add up figure of closing stock without giving effect to the figure of opening stock. In our considered opinion the TPO erred in computing operating profit of the assessee at Rs. 3.76 crores by considering wrong figure of sales at Rs. 216,67,59,965/- also inclusive of the figure of closing stock without giving effect to the figure of opening stock. It was open to the TPO to apply the PLI as OP/Sales, in which case again only the figure of sales, was required to be considered without any reference to the figures of opening or closing stocks. As the TPO has erred in deducing the correct figures of either total cost or the sales, being the possible constituents of PLI, we set aside the impugned order and restore the matter to the file of AO / TPO to determine the rate of assessee’s operating profit margin by applying correct base of Total Cost. Needless to say the same base as applied by the AO / TPO for determining the rate of OP/TC shall be applied in comparable cases also to find out the profit rate for the purposes of benchmarking.
6. We consider it our duty to record that the ld. AR has neither raised any objection to the application of TNMM as the most appropriate method nor to the selection of comparable cases as chosen by the TPO.
7. The second objection taken by the ld. AR is about the application of the average margin of comparables to the figures of entity as a whole instead of transaction with the AEs. After considering the rival submissions and perusing relevant material on record it is seen that Chapter-X of the Act contains special provisions relating avoidance of tax. Section 92, which is the substantive section of the Chapter, provides that : `Any income arising from an international transaction shall be computed having regard to the arm’s length price’. The term “international transaction” has been defined in section 92B as “…. a transaction between two or more associated enterprises, either or both of whom are non-residents ………..”. The term ‘associated enterprise’ has been defined in section 92A. A conjoint reading of these provisions divulges that the transfer pricing adjustment is required to be made only in respect of transactions between the AEs. In the provisions, as are applicable to the assessment year under consideration, it is wholly impermissible to apply such provisions in respect of transactions with non-AEs. We, therefore, overturn the impugned order on this score and direct the AO / TPO to compute ALP in respect of international transactions alone and restrict the amount of adjustment, if any, to such transactions only.
8. Ground No.6 about disallowance under section 14A of the Act was not pressed by Ld. AR. The same is, therefore, dismissed.
9. The only other ground which survives for our consideration is against disallowance of PF and ESIC dues amounting to Rs. 28,986/- paid beyond the due date under respective Acts but before the due date of filing the return of income under section 139 of the Act.
10. After considering the rival submissions and perusing the relevant material on record it is observed that the due date for filing the return of income by the assessee under section 139(1) for the relevant year is 30.11.2006. The AO has drawn a chart at page-4 of the assessment order showing the dates of actual deposits and due dates for the said contributions of EPF and ESIC. The Hon’ble Supreme Court in the case of CIT v. Alom Extrusions Ltd.[2009] 319 ITR 306/185 Taxman 416 has held the amendment to the first proviso and the omission of the second proviso to section 43B by the Finance Act 2003 as retrospective. In the case of CIT v. Vinay Cements Ltd. [2007] 213 CTR 268 (SC), the Hon’ble Supreme Court has held that the amount of EPF etc. deposited before the filing of return cannot be disallowed under section 43B. The Hon’ble Delhi High Court in the case of CIT v. Aimil Ltd.[2010] 321 ITR 508 allowed deduction in respect of employees’ shares if deposited before the due date of filing the return by following the judgment of Hon’ble Supreme Court in the case of Vinay Cements Ltd. (supra). In view of the foregoing discussions it is clear that the amount of EPF etc. deposited late by the assessee beyond the due date under respective Act but before the due date of filing the return of income as per section 139(1) of the Act, cannot be disallowed. We, therefore, overturn the impugned order on this issue and this ground is allowed.
11. In the result, the appeal filed by the assesee is partly allowed.
