JUDGEMENT
PER R.K.PANDA, AM,
This appeal filed by the Revenue is directed against the order dated 12th 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 Suashish Jewellery Ltd., is a closely held Indian company incorporated on 16th July, 1999. It is engaged in the business of manufacturing and export of plain and studded jewellery of gold, platinum, silver and other precious/semi precious diamonds, synthetic stones in the form of rings, pendants, ear rings, bracelets, etc. The company’s products are exported mainly to US and UK.
3. During the year the assessee has entered into international 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’) On being questioned by the TPO, the assessee justified the transactions under the overall TNM Method. It was submitted that the assessee’s operating profit margin is 3.56% on sales and 3.70% on cost while that of com parables used by it is 3.27% on sales 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 submitted that the same is to be at arms length.
4. The TPO perused the split financials provided by the assessee and rejected the same on the ground that the allocation keys used by the assessee for the purpose of split of the expenses are not appropriate. He observed that in case of allocation of manufacturing expenses like employees’ remuneration, rent, etc., the allocation key used is sales which is not appropriate. According to him the ideal allocation 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 of the assessee for the purpose of bench marking. The TPO adopted a fresh search to find companies in the comparable business as that of the assessee as per para 10 of the TPO’s order and asked the assessee to explain as to why margin of the above com parables engaged in the business of manufacturing jewellery could not be applied to bench marking the assessee’s transactions.
5. It was explained by the assessee that some of the above companies as pointed out by the TPO are not comparable with that of the assessee company on the basis of their turnover and their location in Seepz, etc. However, the TPO rejected the arguments advanced by the assessee on the ground that if arithmetic mean is taken, the differences are averaged out. The various other arguments put forth by the assessee were also rejected by the TPO. The TPO observed that the average operating profit margin on cost of the comparable companies comes to 7.25% which he took as the arms length operating margin. Accordingly he made the adjustment in respect of sales to AEs, the details of which are as under:
