2016-TII-434-ITAT-MUM-TP

AUROSTAR JEWELLERY INDIA PVT LTD Vs DCIT: MUMBAI ITAT (Dated: August 17,2016)

Income tax - ALP - AE - entity level transaction - TNMM - unrelated parties & variation in closing stock.

Whether the ALP has to be determined only with reference to the international transactions by comparing the price charged for such international transactions between two or more AEs with similar one or more transactions between unrelated parties - YES: ITAT

Whether a TP adjustment if any, has to be made to the turnover relating to international transactions with AE instead of the entire turnover of the assessee at entity level - YES: ITAT

The assessee is engaged in the business of import of rough diamonds and export of cut and polished diamonds. During the subject year, the assessee had imported rough diamonds from M/s. Arjav Diamonds N.V., Belgium and exported cut and polished diamonds to various customers including M/s. Arjav Diamonds N.V, Belgium and M/s. Arjav Diamonds (Middle East). Though, in the TP study report, the assessee had claimed the overseas entities, M/s. Arjav Diamonds N.V, Belgium and M/s. Arjav Diamonds as not related parties, however, the assessee itself conducted a benchmarking of the international transactions entered with these two overseas entities by applying TNMM. The TPO however, did not accept assessee's contention and after verifying the TP study report of the assessee was of the view that the benchmarking done by the assessee was inappropriate. He proposed certain comparables in the diamond industry and called for the objections. After considering the submissions of assessee, the AO rejected most of the objections of assessee except the objection in respect of a comparable, viz. M/s. Bapalal Keshavlal, which he excluded on account of abnormal margins. Thus, the final comparables selected by the TPO were 9 and the average OP/TC of the comparables selected worked out to 4.32% as against the margin shown by the assessee of 2.31%. Applying the aforesaid margin, the TPO determined the A.E sales at Rs.2.20 crores as against Rs.2.03 crores. The resultant shortfall of Rs. 17 lacs was treated as TP adjustment. On appeal, the DRP excluded one more comparable, viz., Hope (India) Polishing Works as a result of which the average OP/TC of the comparable companies was further reduced to 3.72% as against 4.32% worked out by the TPO. In terms of the directions of DRP, the AO, applying the revised margin of 3.72% to the total sales of Rs.8.83 crores, determined the ALP of sales to A.E at Rs. 2.15 crores. The resultant shortfall of Rs. 12 lacs having exceeded the +5% range was treated as TP adjustment and added back to the income of assessee.

Having heard the parties, the Tribunal held that,

+ on a perusal of the table containing working of ALP in the assessment order, there is no doubt that the AO has computed the ALP by applying the margin (OP/TC) of comparables to the total turnover of the assessee at entity level by including both A.E and non-A.E sales. Therefore, the issue arising for consideration is whether the adjustment of margin is to be restricted only to the turnover relating to international transactions or the turnover at the entity level. On going through the transfer pricing provisions contained under Chapter X of the Act, we are of the view that the ALP has to be determined only with reference to the international transactions by comparing the price charged for such international transactions between two or more AEs with similar one or more transactions between unrelated parties. Therefore, if any adjustment has to be made, it has to be made to the turnover relating to international transactions with AE instead of the entire turnover of the assessee at entity level. That being the case, respectfully following the ratio laid down in case of CIT vs. Ratilal Becharlal & Sons, we hold that the adjustment, if any, has to be made to the turnover relating to international transactions with A.E and not at entity level. Therefore, the non-A.E sales cannot be taken into consideration while computing/determining the ALP. It is the contention of the AR that if the arms length margin of 3.72% is applied to the A.E transactions only, then, the difference/variation would come down to 1.37% and the ALP will be within the + 5% range requiring no further adjustment. We direct the AO to examine the working of the assessee while determining the ALP afresh by restricting the adjustment to only A.E transactions.

Case remanded

 

CENTUM RAKON INDIA PVT LTD Vs ACIT: BANGALORE ITAT (Dated: August 19, 2016)

Income Tax - Sections 143(3) & 144C.

Keywords - rejection of comparables - RPT percentage - electronic units - related party transactions.

Whether for the purpose of selecting comparbles, RPT filter can be accepted as a criterion without ascertaining the actual related party transactions entered into by the assessee - NO: ITAT

Whether when the assessee company is into production of various electronic goods, can the same be compared with a company engaged in manufacturing "Electronic Units" without any other description - NO: ITAT

The assessee is a company. It had submitted that admittedly as per order of TPO, all three comparables 1) Ador Powertron Ltd., 2) Centum Electronics Ltd. and 3) Incap Ltd. were rejected on account of RPT filter and before DRP, it was contended by the assessee that the RPT percentage of these companies is below 25% but the objection of the assessee was rejected by saying that no factual information in this regard was furnished. It had submitted that this was not correct because these details were submitted before TPO containing details of RPT transactions of these companies in the range of 0 3.61% to 6.36% and hence to be accepted as good comparable because RPT % was below 15%. Regarding Spectom Infotech Pvt. Ltd., assessee submitted that Annual Report of this company was available, where it was pointed out that this company’s products were said to be "Electronic Units" without any other description but the assessee company was engaged in manufacture and supply of Electronic products including frequency control products and resistor networks and therefore, this was not a good comparable.

Having heard the matter, the Tribunal held that,

+ we find that three companies were rejected by TPO on the basis RPT filter but it is seen that as per page 538 of the paper book, these companies are satisfying RPT filter of 15% but there is no finding of TPO or DRP about actual RPT 5 of these companies. Hence, on this aspect, the matter has to be restored back to find out actual RPT % of these companies and if this assertion of the assessee is found correct that these companies are satisfying 15% RPT filter, then acceptability of these companies as good comparables is to be examined on other aspects such functional similarity etc. Similarly, regarding functional similarity or dissimilarity of Spectom Infotech Pvt. Ltd. i.e. Ground No. 3.1 also, we feel it proper to restore the matter back to the file of AO/TPO to examine afresh the functional similarity of this company and to pass a speaking and reasoned order on this aspect. We also feel it proper that when the matter is going back to AO/TPO on these two aspects, then it will be not improper to restore the entire matter to the AO/TPO for fresh decision by way of a reasoned and speaking order after providing adequate opportunity of being heard to the assessee. We order accordingly. Therefore, no adjudication is called for in respect of other issues raised before us. In the result, the appeal of the assessee is allowed for statistical purposes.

Case remanded