SAUNAY JEWELS . P. LTD, MUMBAI v. ITO RG 8(3)-1, MUMBAI

CO 83/MUM/2009 | 2004-2005
Pronouncement Date: 31-08-2010 | Result: Allowed

Appeal Details

RSA Number 8319923 RSA 2009
Assessee PAN AAECS3130Q
Bench Mumbai
Appeal Number CO 83/MUM/2009
Duration Of Justice 1 year(s) 4 month(s) 2 day(s)
Appellant SAUNAY JEWELS . P. LTD, MUMBAI
Respondent ITO RG 8(3)-1, MUMBAI
Appeal Type Cross Objection
Pronouncement Date 31-08-2010
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted L
Tribunal Order Date 31-08-2010
Date Of Final Hearing 23-10-2009
Next Hearing Date 23-10-2009
Assessment Year 2004-2005
Appeal Filed On 28-04-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L MUMBAI BEFORE SHRI R.S. PADVEKAR JM & SHRI R.K.PANDA AM I.T.A. NO. 5758/MUM/2007 (ASSESSMENT YEAR : 2004-05) THE I.T.O. RANGE 8(3)-1 201 AAYAKAR BHAVAN M.K. ROAD MUMBAI-400 020 VS. M/S. SAUNAY JEWELS PVT. LTD. GJ-12 SDF-VII SEEPZ ANDHERI (E) MUMBAI-400 096 PAN: AAECS3130Q APPELLANT RESPONDENT C.O. NO. 83/MUM/2009 ARISING OUT OF I.T.A. NO. 5758/MUM/2007 (ASSESSMENT YEAR : 2004-05) M/S. SAUNAY JEWELS PVT. LTD. GJ-12 SDF-VII SEEPZ ANDHERI (E) MUMBAI-400 096 PAN: AAECS3130Q VS. THE I.T.O. RANGE 8(3)-1 201 AAYAKAR BHAVAN M.K. ROAD MUMBAI-400 020 CROSS OBJECTOR (APPELLANT) RESPONDENT REVENUE BY : MR. AARSI PRASAD/ MR. NARENDER SINGH ASSESSEE BY : MR. K. GOPAL ORDER DATE OF HEARING: 16.06.2010 DATE OF ORDER: 31.08.2010 PER R.K. PANDA AM THIS APPEAL FILED BY THE REVENUE AND THE CROSS OBJ ECTION (CO) FILED BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER DATED 5 TH JUNE 2007 OF THE CIT(A)-XXIX MUMBAI RELATING TO ASSESSMENT YEAR 2004-05. FOR THE SAKE OF CONVENIEN CE THE APPEAL AND THE CO WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER. 2. FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF DIAM OND ITA NO. 5758/MUM/2007 C.O. NO. 83/MUM/2009 M/S. SAUNAY JEWELS PVT. LTD. ======================== 2 STUDDED GOLD JEWELLERY IN SEEPZ AREA. THE ASSESSEE FILED ITS RETURN OF INCOME DECLARING TOTAL INCOME OF RS.5 39 690. THE ASSESSING OFFICER HAS NOTED THAT THE ASSESSEE HAS E NTERED INTO INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRI SES (AES) AND FOR THIS REASON HAS FILED THE PRESCRIBED REPORT . HE REFERRED THE CASE U/S. 92CA(1) OF THE INCOME-TAX ACT 1961 T O THE TRANSFER PRICING OFFICER (TPO) MUMBAI FOR COMPUTAT ION OF ARMS LENGTH PRICE (ALP) IN RELATION TO INTERNATIONAL TRA NSACTIONS. HE OBSERVED FROM THE ORDER PASSED BY THE TPO U/S. 92CA (3) OF THE ACT THAT THE TPO HAS PASSED THE ORDER WITH AN ADJUS TMENT OF RS.2 02 37 536. THE ASSESSING OFFICER CONFRONTED T HE SAME TO THE ASSESSEE. REJECTING THE VARIOUS EXPLANATIONS G IVEN BY THE ASSESSEE THE ASSESSING OFFICER COMPUTED THE TOTAL INCOME OF THE ASSESSEE AFTER MAKING ADJUSTMENT OF RS.2 02 37 536 U/S. 92C(4) R.W.S. 92CA(3) OF THE ACT. WHILE DOING SO HE FURT HER HELD THAT THE ASSESSEE IS NOT ELIGIBLE FOR DEDUCTION U/S. 10A ON ENHANCED PROFIT/INCOME AS PER THE PROVISO TO SECTION 92C(4) OF THE ACT. 3. BEFORE CIT(A) IT WAS SUBMITTED THAT THE ASSESSEE HA S MAINTAINED PROPER RECORDS IT HAS SELECTED MOST APP ROPRIATE METHOD I.E. COST PLUS METHOD SELECTION OF PROFIT LEVEL INDICATOR I.E. GROSS PROFIT MARK UP AND HAS SUBMITTED AND PR ODUCED ALL NECESSARY RECORDS AND DETAILS AS REQUIRED BY THE TP O. IT WAS SUBMITTED THAT THE ASSESSEE HAS PROVED THAT THE INT ERNATIONAL TRANSACTIONS ARE AT ARMS LENGTH. ACCORDING TO THE ASSESSEE THE MARGIN OF COST OF AES IS 7.95% AS AGAINST 7.12% WIT H NON-AES. IT WAS SUBMITTED THAT AS PER THE PROVISIONS OF SECT ION 92C(3) ONCE THE PRIMARY ONUS IS DISCHARGED BY THE ASSESSEE BY SHOWING THAT ALP IS DETERMINED BY APPROPRIATE METHOD THERE CAN BE NO INTERVENTION BY THE ASSESSING OFFICER SAVE FOLLOWIN G CIRCUMSTANCES EXISTED: ITA NO. 5758/MUM/2007 C.O. NO. 83/MUM/2009 M/S. SAUNAY JEWELS PVT. LTD. ======================== 3 1. INFORMATION AND DATA USED BY THE ASSESSEE IS NOT RELIABLE AND CORRECT OR 2. INFORMATION AND DOCUMENTS ARE NOT KEPT AND MAINTAINED BY THE ASSESSEE AS PER SEC. 92D(1) AND RULES MADE THERE UNDER OR 3. THE ASSESSEE HAS FAILED TO FURNISH WITHIN THE SPECIFIED TIME INFORMATION OR DOCUMENT WHICH HE WAS REQUIRED TO FURNISH BY A NOTICE U/S. 92D(3); OR 4. ON THE BASIS OF MATERIAL OR INFORMATION OR DOCUMENT IN HIS POSSESSION OF THE OPINION THAT THE PRICE CHARGED IN THE INTERNATIONAL TRANSACTION HAS NOT BEEN DETERMINED IN ACCORDANCE WITH SUB SECTIONS (1) & (2) OF SECTION 92C. 4. IT WAS SUBMITTED THAT IN CASE OF THE ASSESSEE NONE OF THE ABOVE CIRCUMSTANCES EXISTED. THE CBDT CIRCULAR NO. 12/2001 DATED 23 RD AUGUST 2001 WAS ALSO BROUGHT TO THE NOTICE OF THE CIT(A) AND IT WAS SUBMITTED THAT IN VIEW OF THE BOA RD CIRCULAR WHICH IS BINDING ON THE REVENUE THE TPO HAS NO OTH ER OPTION BUT TO ACCEPT THE ALP DETERMINED BY THE ASSESSEE AN D HE CANNOT INTERVENE AND MAKE ANY ADJUSTMENT. 5. IT WAS SUBMITTED THAT WHILE RELYING ON EXTERNAL DAT A VIS-- VIS INTERNAL COMPARABLE DATA THE TPO HAS IGNORED A ND VIOLATED THE OECD GUIDELINES ACCORDING TO WHICH EXTERNAL COM PARABLES ARE DIFFICULT TO OBTAIN AND ALSO IT MAY BE INCOMPLE TE AND DIFFICULT TO INTERPRET. THEREFORE INTERNAL COMPARABLES ARE PREFERRED TO EXTERNAL COMPARABLES AND TRANSACTIONS ENTERED INTO BY AES WITH UNRELATED PARTIES (CALLED INTERNAL COMPARABLES) WOU LD PROVIDE MORE RELIABLE AND ACCURATE DATA AS COMPARED TO TRAN SACTIONS BY AND BETWEEN THIRD PARTIES. IT WAS FURTHER SUBMITTE D THAT AS FAR AS THE FOUR EXTERNAL COMPARABLES RELIED ON BY THE T PO ARE ITA NO. 5758/MUM/2007 C.O. NO. 83/MUM/2009 M/S. SAUNAY JEWELS PVT. LTD. ======================== 4 CONCERNED THREE COMPANIES ARE NOT AT ALL COMPARABL E DUE TO DIFFERENCE IN PRODUCTION GEOGRAPHICAL LOCATION AND PRESENCE AND SIZE OF OPERATION ETC. 6. IT WAS SUBMITTED THAT IN THE CASE OF DEEP DIAMOND I NDIA LTD. IT IS ENGAGED IN THE BUSINESS OF JEWELLERY OF PEARLS PRECIOUS AND SEMI PRECIOUS STONES WHEREAS THE ASSESSEE IS NO T ENGAGED IN THE JEWELLERY OF PEARLS BUT IN GOLD AND DIAMOND STUDDED JEWELLERY. IN CASE OF SHANTIVIJAY JEWELS LTD. IT IS ENGAGED IN THE BUSINESS OF DIAMONDS AND IT HAS OVERSEAS SUBSIDIARY IN DUBAI AS WELL AS MAURITIUS WHICH IS DIFFERENT FROM THE BU SINESS OF THE ASSESSEE. IN CASE OF SOVEREIGN DIAMONDS LTD. IT I S ENGAGED IN THE BUSINESS OF DIAMONDS BUT THE RESULT SHOWN BY IT IS BEYOND ANY NORMS AND STANDARDS OF THE INDUSTRY SINCE THE G P MARGIN ON COST HAS BEEN DECLARED AT 53.81% WHICH IS UNUSUA L UNIQUE UNBELIEVABLE AND TO SOME EXTENT AN ABSURD RESULT. HOWEVER THE FOURTH COMPANY I.E. MOON DIAMOND INDIA LTD. CAN B E CONSIDERED AS COMPARABLE WHOSE GROSS PROFIT MARGIN ON COST AS WORKED OUT BY THE TPO IS ONLY 7.38% AS AGAINST 7.95 % DECLARED BY THE ASSESSEE. 7. THE ASSESSEE FURTHER RELIED ON THE PROVISIONS OF SE CTION 10B(2) WHICH LAYS DOWN THE CRITERIA FOR COMPARABILI TY BETWEEN INTERNATIONAL TRANSACTIONS AND UNCONTROLLED TRANSAC TIONS. WITHOUT PREJUDICE TO THE ABOVE IT WAS SUBMITTED TH AT IF THE EXTERNAL COMPARABLES OF THE FOUR COMPANIES AS TAKEN BY THE TPO ARE ACCEPTED AS CORRECT THEN ALSO THE TPO CANNO T MAKE ADJUSTMENT BY APPLYING THE SIMPLE ARITHMETIC MEAN O F GROSS PROFIT MARGIN OF THE FOUR COMPANIES AND THE TPO HAS TO CONSIDER WEIGHTED AVERAGE ARITHMETIC MEAN WHICH ACCORDING TO THE ASSESSEE WAS 12.27% AS PER THE CHART PRODUCED BEFO RE THE CIT(A). SINCE THE ASSESSEE HAS DECLARED GROSS PROF IT MARGIN OF ITA NO. 5758/MUM/2007 C.O. NO. 83/MUM/2009 M/S. SAUNAY JEWELS PVT. LTD. ======================== 5 7.94% THEREFORE THE ASSESSEES ALP DIFFERENCE IS ONLY 4.33% WHICH IS LESS THAN 5% AND WHICH IS ACCEPTABLE DIFFE RENCE IN VIEW OF THE PROVISIONS OF SECTION 92C(2) OF THE ACT AS W ELL AS CIRCULAR ISSUED BY THE BOARD. 8. BASED ON THE VARIOUS ARGUMENTS ADVANCED BY THE ASSESSEE THE CIT(A) RESTRICTED SUCH ADJUSTMENT TO RS.17 96 663.46 AS AGAINST THE ADJUSTMENT OF RS.2 0 2 37 536 MADE BY THE ASSESSING OFFICER. WHILE DOING SO HE O BSERVED THAT WHILE THE TPO WAS JUSTIFIED IN COMPUTING THE ALP H E WAS NOT JUSTIFIED IN TAKING SIMPLE AVERAGE OF GROSS PROFIT MARGIN OF THE COMPARABLE CASES. THE WEIGHTED AVERAGE WOULD DO AW AY WITH THE EXISTENCE OF VARIATION IN FIGURES OF VARIOUS CO MPARABLES. HE HELD THAT FOR MAKING A FRUITFUL COMPARISON IT IS IM PERATIVE THAT FIGURES ARE ADJUSTED. ACCORDING TO HIM IF FIGURES OF DEPRECIATION OR STOCK ADJUSTMENT HAS/HAS NOT BEEN TAKEN IN COMPA RABLE CASES IT WOULD NOT BE PROPER TO INCLUDE/NOT INCLUD E THE FIGURE OF DEPRECIATION OR STOCK ADJUSTMENT IN THE CASE OF THE ASSESSEE TO WORK OUT GROSS PROFIT MARGIN. HE ACCEPTED THE C ONTENTION OF THE ASSESSEE THAT SOVEREIGN DIAMONDS LTD. CANNOT B E TREATED AS A COMPARABLE CASE BEING UNREALISTIC AND UNFEASIB LE WHERE THE GP MARGIN HAS BEEN DECLARED AT 53.81%. HOWEVER HE REJECTED THE CONTENTION OF THE ASSESSEE REGARDING THE OTHER THREE COMPARABLES AS TAKEN BY THE TPO WHICH ACCORDING TO THE CIT(A) ARE PROPER. ACCORDING TO HIM NO TWO BUSINESS ARE E XACTLY COMPARABLE AND THERE IS BOUND TO BE SOME DIFFERENCE AMONG THE COMPARABLE BUSINESS ENTITIES. 9. AFTER CONSIDERING THE VARIOUS ARGUMENTS ADVANCED BY THE ASSESSEE HE HELD THAT THE ALP OF THE ASSESSEE SHOU LD BE WORKED OUT BY TAKING THE WEIGHTED AVERAGE OF THE THREE COM PARABLES ITA NO. 5758/MUM/2007 C.O. NO. 83/MUM/2009 M/S. SAUNAY JEWELS PVT. LTD. ======================== 6 EXCLUDING THE CASE OF SOVEREIGN DIAMONDS LTD. WHIC H WAS WORKED OUT BY HIM AS UNDER: P&L MANUFACTURING ALP 95% OF ALP SALES (MANUFACTURING)** 159326000 169602803.24 (152726522.86 + 16876280.78) 161122663.46 159326000 169602803.64 161122663.46 MATERIAL COST (EXCLUDING TRADING) 141842342.43 141842342.43 141842342.43 MANUFACTURING EXPENSES (STORES) 2278006.43 2278006.43 2278006.43 ELECTRICITY CHARGES 979240 979240 979240 PAYMENT TO WORKERS AND EMPLOYEES 7900582 7900582 7900582 STOCK ADJUSTMENT -273648 -273648 -273648 152726522.86 152726522.86 152726522.86 GROSS PROFIT 6599477.14 16876280.78 (1.05%* 152726522.86/100) 8396140.60 GROSS PROFIT/COST% 4.32% 11.05% 5.50% 10. HE ACCORDINGLY DETERMINED THE ADJUSTMENT IN THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE AT RS.17 96 653.46 AS AGAINST RS.2 02 37 536 DETERMINED BY THE ASSESSING OFFICER. 11. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REVENUE IS IN APPEAL BEFORE US WITH THE FOLLOWING GROUNDS: (I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) ERRED IN DIRECTING TO REDUCE THE ADJUSTMENT IN INTERNATIONAL TRANSACTION OF THE ASSESSEE COMPANY FROM RS.2 02 37 536/- TO RS.17 96 663.46 WITHOUT APPRECIATING THE FACTS OF T HE CASE. (II) THE APPELLANT PRAYS THAT THE ORDER OF THE CIT(A) ON THE ABOVE GROUNDS TO BE SET ASIDE AND THA T OF THE ITO/AC/DCIT BE RESTORED. 12. THE ASSESSEE HAS ALSO FILED THE CO WITH THE FOLLOWI NG GROUNDS: 1. THE LD. CIT(A) ERRED IN REJECTING THE ASSESSEES CONTENTION THAT THE PROVISION OF SECTION 92C CANNOT BE INVOKED. 2. WITHOUT PREJUDICE TO THE ABOVE THE LD. CIT(A) ERRED IN REJECTING THE ASSESSEES CONTENTION THAT THE LD. ASSESSING OFFICER IS NOT JUSTIFIED IN ITA NO. 5758/MUM/2007 C.O. NO. 83/MUM/2009 M/S. SAUNAY JEWELS PVT. LTD. ======================== 7 COMPARING THE ASSESSEES CASE WITH OTHER COMPARABLE CASES. THE NATURE OF THE BUSINESS THE QUANTUM OF BUSINESS IN THE FACTS OF THE ALLEGED COMPARABLE CASES WERE NOT SIMILAR TO THE ASSESSEES CASE HENCE NO ADVERSE CONCLUSION CAN BE DRAWN BY RELYING ON THE COMPARABLE CASES. 3. THE LD. CIT(A) FAILED TO APPRECIATE THAT THE NATURE OF BUSINESS OF ASSESSEE IS OF DOING JOB WORK. HENCE THE COMPARISONS WITH THE CASES WHICH WERE CARRYING OUT ACTIVITY OF MANUFACTURING AND SELLING ARE NOT ALL JUSTIFIED. HENCE NO ADVERSE INFERENCE CAN BE DRAWN AGAINST THE ASSESSEE COMPARING WITH OTHER CASES. 13. THERE IS A DELAY OF 489 DAYS IN FILING OF THE CO BY THE ASSESSEE. THE ASSESSEE HAS FILED A CONDONATION PET ITION ALONG WITH AN AFFIDAVIT EXPLAINING THE REASONS FOR SUCH D ELAY IN FILLING OF THE CO. THE LEARNED COUNSEL FOR THE ASSESSEE RE FERRING TO THE CONDONATION PETITION AND THE AFFIDAVIT SUBMITTED TH AT THERE WAS A CHANGE IN THE CONSTITUTION IN THE MANAGEMENT OF T HE COMPANY DURING THE YEAR 2007-08 WHICH TOOK OVER THE CHARGE OF THE ASSESSEE COMPANY FROM THE PAST MANAGEMENT AFTER THE SHAREHOLDERS AGREEMENT DATED 28.5.008 WAS SIGNED AN D ENTERED INTO. WHEN THE ASSESSEE CONSULTED THE CONSULTANTS ABOUT THE PENDING MATTER BEFORE THE ITAT IT WAS ADVISED FOR FILING OF THE CO AGAINST THE APPEAL FILED BY THE REVENUE. UNDER THESE CIRCUMSTANCES THERE WAS A DELAY OF 489 DAYS IN FIL ING OF THE APPEAL WHICH WAS UNINTENTIONAL AND BEYOND THE CONTR OL OF THE ASSESSEE. REFERRING TO THE DECISIONS OF THE HONBL E SUPREME COURT IN THE CASE OF COLLECTOR LAND ACQUISITION VS . MST. KATIJI & ORS. REPORTED IN 167 ITR 471 AND L. BALKRISHNAN V S. M. KRISHNAMURTHY REPORTED IN 7 SCC 123 AND THE DECISIO N OF THE HONBLE KERALA HIGH COURT IN THE CASE OF VASU & CO. VS. STATE OF KERALA REPORTED IN 124 STC 124 (KER.) HE SUBMITTED THAT IN VIEW ITA NO. 5758/MUM/2007 C.O. NO. 83/MUM/2009 M/S. SAUNAY JEWELS PVT. LTD. ======================== 8 OF THE PRINCIPLES LAID DOWN IN THE ABOVE CITED DECI SIONS THE DELAY SHOULD BE CONDONED. 14. WITHOUT PREJUDICE TO THE ABOVE HE SUBMITTED THAT IN CASE THE DELAY IS NOT CONDONED AND THE CO IS DISMISSED T HEN THE ASSESSEE MAY BE PERMITTED TO RESORT TO RULE 27 OF T HE INCOME- TAX (APPELLATE TRIBUNAL) RULES 1963 TO DEFEND THE APPEAL ON THE ISSUES DECIDED AGAINST THE ASSESSEE. RELYING ON TH E FOLLOWING DECISIONS HE SUBMITTED THAT RULE 11 RULE 27 AND P ROVISIONS OF SECTION 254(1) ARE IN FAVOUR OF THE ASSESSEE. 1. ASSAM COMPANY (INDIA) LTD. VS. CIT 256 ITR 423 (GAU.) 2. CIT BOMBAY CITY-I VS. GILBERT & BARKAR MANUFACTURING CO. USA 111 ITR 529 BOM). 3. CIT VS. SMT. S. VIJAYALAXMI 242 ITR 46 (MAD.). 15. THE LEARNED DR ON THE OTHER HAND HAD STRONGLY OPP OSED THE CONDONATION PETITION. AS REGARDS THE CONTENTIO N OF THE ASSESSEE REGARDING RULE 27 HE SUBMITTED THAT THERE IS NO SPECIFIC GROUND DECIDED AGAINST THE ASSESSEE THERE FORE RULE 27 IS NOT APPLICABLE. REFERRING TO THE DECISION OF TH E HONBLE GAUHATI HIGH COURT REPORTED IN 256 ITR 423 (SUPRA) HE SUBMITTED THAT IT DOES NOT GIVE RIGHT TO THE RESPON DENT. 16. ARGUING ON MERIT THE LEARNED DR SUBMITTED THAT THE ASSESSEE HAS PURCHASED GOODS FROM AND SOLD TO ITS A ES AND HAS ADOPTED THE COST PLUS METHOD. HE SUBMITTED THAT TH E CIT(A) WAS NOT JUSTIFIED IN ADOPTING THE WEIGHTED AVERAGE METHOD. HE ALSO SHOULD NOT HAVE EXCLUDED SOVEREIGN DIAMOND LTD . FROM THE COMPARABLES ADOPTED BY THE TPO. HE SUBMITTED THAT ALTHOUGH THE FOUR COMPARABLE CASES AS SELECTED BY THE TPO AR E HAVING SIMILAR FUNCTIONS STILL THE CIT(A) EXCLUDED SOVEREI GN DIAMOND LTD. FROM THE COMPARABLES. REFERRING TO PROVISIONS OF SECTION ITA NO. 5758/MUM/2007 C.O. NO. 83/MUM/2009 M/S. SAUNAY JEWELS PVT. LTD. ======================== 9 92C(2) HE SUBMITTED THAT THERE IS NO SCOPE FOR THE CIT(A) TO ADOPT WEIGHTED AVERAGE METHOD SINCE THE ACT PROVIDE S ONLY SIMPLE ARITHMETIC MEAN. 17. THE LEARNED COUNSEL FOR THE ASSESSEE ON THE OTHER HAND REFERRING TO THE ORDER OF THE TPO SUBMITTED THAT TH E ASSESSEE HAS ACCEPTED MOON DIAMONDS LTD. AS A COMPARABLE CAS E WHEREAS THE OTHER COMPARABLES SELECTED BY THE TPO C ANNOT BE ACCEPTED AS A BENCHMARK SINCE THEY ARE DEALING IN D IFFERENT PRODUCTS TO THOSE OF THE ASSESSEE AND IN THE CASE O F SOVEREIGN DIAMONDS THE GP MARGIN AT 53.81% IS UNTHINKABLE. HE SUBMITTED THAT THE ASSESSEE HAD TAKEN INTERNAL COMP ARABLES WHEREAS THE TPO HAS ADOPTED THE EXTERNAL COMPARABLE . HE SUBMITTED THAT THE ASSESSEE COMPANY IS CARRYING ON MANUFACTURING ACTIVITY AS JOB ACTIVITY AND ALL PURC HASES ARE FROM SIMPLEX. SIMILARLY MAJORITY OF TRANSACTIONS I .E. ABOUT 70% OF THE TRANSACTIONS ARE WITH SIMPLEX WHEREAS 30% OF TRANSACTIONS ARE WITH OTHER THREE CONCERNS. HE SUB MITTED THAT THE ASSESSEE IS A 100% EXPORT ORIENTED UNIT SITUATE D IN SEEPZ AND HAS EARNED 7.94% GP FROM SIMPLEX AND 7.16% FROM OTHER THREE PARTIES. HE SUBMITTED THAT SIMPLEX PROVIDES DIAMONDS TO THE ASSESSEE AND ADJUSTMENTS ARE MADE IN THE INVOIC E ITSELF. REFERRING TO THE CBDT CIRCULAR NO. 12/01 DATED 23 RD AUGUST 2001 HE SUBMITTED THAT THE DEPARTMENT HAS NOT CONS IDERED PROPERLY THE CLARIFICATION ISSUED BY THE CBDT WHICH IS BINDING ON THE DEPARTMENT. HE SUBMITTED THAT THE DEPARTMEN T HAS NEITHER OBJECTED TO NOR REJECTED THE METHOD ADOPTED BY THE ASSESSEE. WHILE SUPPORTING THE ORDER OF THE CIT(A) TO THE EXTENT OF EXCLUDING THE COMPARABLE WHICH HAS SHOWN EXORBIT ANT PROFITS AND TO THE EXTENT OF ADOPTION OF WEIGHTED AVERAGE M ETHOD HE SUBMITTED THAT THE CIT(A) HAS NOT GIVEN ANY SPECIFI C FINDING ITA NO. 5758/MUM/2007 C.O. NO. 83/MUM/2009 M/S. SAUNAY JEWELS PVT. LTD. ======================== 10 REGARDING THE NON COMPARABILITY OF ALP WHEN THE DIF FERENCE IS 5%. 18. THE LEARNED DR IN HIS REJOINDER SUBMITTED THAT PROVISIONS OF SECTION 92C(2) SPEAK OF THE MOST APPR OPRIATE METHOD. HE SUBMITTED THAT SINCE THE FOUR COMPARABL ES ADOPTED BY THE TPO GIVE FOUR DIFFERENT MARGINS THEREFORE THE SIMPLE AVERAGE HAS TO BE TAKEN. NONE OF THE COMPARABLES A RE WITHIN 5% RANGE. IF THE AVERAGE MARGIN IS REDUCED BY 5% T HEN THE MARGIN COMES TO 9.5% WHICH IS NOWHERE NEAR TO THE M ARGIN DECLARED BY THE ASSESSEE. HE SUBMITTED THAT SINCE THE CIT(A) HAS GIVEN THE FINDING THAT THERE IS NO FUNCTIONAL D IFFERENCE IN THE FOUR COMPARABLES SINCE THEY ARE IN THE SAME BUSINES S THEREFORE ONLY SOME ADJUSTMENT COULD HAVE BEEN DON E AND ONE COMPARABLE CASE SHOULD NOT HAVE BEEN EXCLUDED. AS REGARDS THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSES SEE THAT TRANSFER PRICING IS NOT APPLICABLE TO THE ASSESSEE HE SUBMITTED THAT APPLICABILITY OF TRANSFER PRICING METHOD WHEN THE DIFFERENCE IS WITHIN 5% WAS NOT BEFORE THE ASSESSING OFFICER BUT BEFORE THE CIT(A) ONLY. HE HOWEVER SUBMITTED THAT SIN CE THE CIT(A) HAS NOT CONSIDERED THE ISSUE OF NON APPLICABILITY O F ALP IN CASE THE DIFFERENCE IN THE MARGIN OF PROFIT IS WITHIN TH E 5% OF THE COMPARABLES THEREFORE THE ISSUE MAY GO BACK TO HI M FOR FRESH ADJUDICATION. 19. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS MADE BY BO TH THE SIDES PERUSED THE ORDERS OF THE ASSESSING OFFI CER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE AS SESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BE FORE US. AFTER CONSIDERING THE REASONS GIVEN IN THE CONDONATION PE TITION THE AFFIDAVIT AND THE VARIOUS DECISIONS RELIED ON BY TH E LEARNED COUNSEL FOR THE ASSESSEE THE DELAY IN FILING OF TH E CO IS ITA NO. 5758/MUM/2007 C.O. NO. 83/MUM/2009 M/S. SAUNAY JEWELS PVT. LTD. ======================== 11 CONDONED AS THE ASSESSEE IS NOT OTHERWISE GAINING MORE AS HE CAN ALSO TAKE SHELTER OF RULE 27. 20. NOW COMING TO THE MERITS OF THE CASE WE FIND THE ASSESSING OFFICER MADE THE ADDITION OF RS.2 02 37 5 32 ON THE BASIS OF THE ORDER OF THE TPO WHO HAD SELECTED FOUR PARTIES AS COMPARABLE CASES FOR THE T.P. STUDY. WE FIND OUT O F THE FOUR COMPANIES NAMELY MOON DIAMONDS (INDIA) LTD. DEEP DIAMONDS (INDIA) LTD. SHANTIVIJAY JEWELS LTD. AND SOVEREIGN DIAMONDS LTD. THE CIT(A) CONSIDERED THE FIRST THRE E PARTIES AS COMPARABLES AND HE ACCEPTED THE CONTENTION OF THE A SSESSEE THAT SOVEREIGN DIAMONDS LTD. CANNOT BE COMPARED BEC AUSE IT IS ENGAGED IN THE BUSINESS OF DIAMONDS AND THE RESULTS SHOWN BY IT I.E. G.P. OF 53.81% ON COST IS BEYOND THE NORMS AND STANDARDS OF THE INDUSTRY. HE FURTHER ACCEPTED THE CONTENTION OF THE ASSESSEE THAT SIMPLE AVERAGE TAKEN BY THE AS SESSING OFFICER DOES NOT GIVE CORRECT PICTURE SINCE THERE A RE WIDE VARIATIONS IN VARIOUS PARAMETERS OF THE COMPARABLES AND THEREFORE WEIGHTED AVERAGE SHOULD BE WORKED OUT FO R THE PURPOSE OF COMPARISON. WE DO NOT FIND ANY INFIRMIT Y IN THE ABOVE FINDINGS OF THE CIT(A). IN OUR OPINION SOVE REIGN DIAMONDS LTD. SHOWING A GROSS PROFIT MARGIN OF 53.8 1% CANNOT BE CONSIDERED AS A COMPARABLE WHICH SHOWS ABNORMAL PROFIT WHICH IS BEYOND THE NORMS AND STANDARDS OF THE INDU STRY. SIMILARLY IN VIEW OF THE WIDE VARIATIONS IN VARIOU S PARAMETERS OF THE COMPARABLES WEIGHTED AVERAGE IN OUR OPINION SHOULD BE ADOPTED AS AGAINST SIMPLE ARITHMETIC AVERAGE ADOPTE D BY THE ASSESSING OFFICER. WE THEREFORE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) TO THIS EXTENT AND THE GROUNDS RAISED BY THE REVENUE HAVE TO BE DISMISSED. ITA NO. 5758/MUM/2007 C.O. NO. 83/MUM/2009 M/S. SAUNAY JEWELS PVT. LTD. ======================== 12 21. AS REGARDS THE CONTENTION OF THE LEARNED COUNSEL FO R THE ASSESSEE THAT THE CIT(A) WHILE DECIDING THE ISSUE H AS NOT CONSIDERED THE CBDT CIRCULAR ACCORDING TO WHICH NO ADJUSTMENT TO THE ALP CAN BE MADE WHERE THE DIFFERENCE IN THE MARGIN IS WITHIN 5% OF THE PRICE DETERMINED BY THE ASSESSIN G OFFICER WE FIND THE CBDT CIRCULAR NO. 12/2001 DATED 23 RD AUGUST 2001 AS REPRODUCED IN THE CIT(A)S ORDER AT PAGE 3 READS AS UNDER: DEPARTMENTAL GENERAL CLARIFICATIONS FOLLOWING NE ED BE NOTED: I. THE ASSESSING OFFICER SHALL NOT MAKE ANY ADJUSTM ENT TO THE ARMS LENGTH PRICE DETERMINED BY THE TAXPAYER IF SUCH PRICE IS UP TO 5% LESS OR UP TO 5% MORE THAN THE PRICE DE TERMINED BY THE ASSESSING OFFICER. IN SUCH CASES THE PRICE DEC LARED BY THE TAXPAYER MAY BE ACCEPTED. II. THE PROVISIONS OF SECTION 92 AND 92A TO 92F COM E INTO FORCE WITH EFFECT FROM 1 ST APRIL 2002 AND ARE ACCORDINGLY APPLICABLE TO ASSESSMENT YEAR 2002-03 AND SUBSEQUEN T YEARS. THE LAW REQUIRED THE ASSOCIATED ENTERPRISES TO MAIN TAIN SUCH DOCUMENTS AND INFORMATION RELATING TO INTERNATIONAL TRANSACTIONS AS MAY BE PRESCRIBED. HOWEVER THE NE CESSARY RULES COULD BE FRAMED BY THE BOARD ONLY AFTER THE F INANCE BILL RECEIVED THE ASSENT OF THE PRESIDENT AND HAVE JUST BEEN NOTIFIED. THEREFORE WHERE AS ASSESSEE HAS FAILED TO MAINTAIN THE PRESCRIBED INFORMATION OR DOCUMENTS IN RESPECT OF T RANSACTIONS ENTERED INTO DURING THE PERIOD 1.4.2002 TO 31.8.200 2 THE PROVISIONS OF SECTION 92C(3) SHOULD NOT BE INVOKED FOR SUCH FAILURE. PENALTY PROCEEDINGS UNDER SECTION 271AA O R 271G SHOULD ALSO NOT BE INITIATED FOR SUCH DETAILS. III. IT SHOULD BE MADE CLEAR TO THE CONCERNED ASSES SING OFFICERS THAT WHERE AN INTERNATIONAL TRANSACTION HA S BEEN PUT TO A SCRUTINY THE ASSESSING OFFICER CAN HAVE RECOURSE TO SUB- SECTION (3) OF SECTION 92C ONLY UNDER THE CIRCUMSTA NCES ENUMERATED IN CLAUSES (A) TO (D) OF THAT SUB-SECTIO N AND IN THE EVENT OF MATERIAL INFORMATION OR DOCUMENT IN HIS PO SSESSION ON THE BASIS OF WHICH AN OPINION CAN BE FORMED THAT AN Y SUCH CIRCUMSTANCES EXISTS. IN ALL OTHER CASES THE VALU E OF THE INTERNATIONAL TRANSACTION SHOULD BE ACCEPTED WITHOU T FURTHER SCRUTINY. CIRCULAR : NO. 12/2001 DATED 23.08.200 1. ITA NO. 5758/MUM/2007 C.O. NO. 83/MUM/2009 M/S. SAUNAY JEWELS PVT. LTD. ======================== 13 22. IT IS THE SETTLED PROPOSITION OF LAW THAT THE BOARD S CIRCULARS ARE BINDING ON THE DEPARTMENT. WE FIND ALTHOUGH THE CIT(A) HAS DISCUSSED THE ISSUE HE HOWEVER HAS NO T GIVEN ANY SPECIFIC FINDING WHETHER THE ASSESSEES CASE IS COV ERED BY THE BOARDS CIRCULAR. IT IS THE SUBMISSION OF THE LEAR NED DR THAT SINCE THIS ISSUE WAS NOT BEFORE THE ASSESSING OFFIC ER AND THE ASSESSEE HAS RAISED THE ISSUE BEFORE THE CIT(A) FOR THE FIRST TIME WHO HAS NOT GIVEN ANY DECISION ON THIS ISSUE THERE FORE THE MATTER MAY BE RESTORED TO THE CIT(A) FOR ADJUDICATI ON ON THIS ISSUE. HOWEVER CONSIDERING THE TOTALITY OF THE FA CTS OF THE CASE WE ARE OF THE CONSIDERED OPINION THAT THIS ISSUE I .E. APPLICABILITY OF THE BOARD CIRCULAR NO. 12/2001 TO THE FACTS OF THE CASE OF THE ASSESSEE SHOULD BE RESTORED TO THE FILE OF THE ASSESSING OFFICER SINCE IT REQUIRES CERTAIN CALCULA TIONS AND VERIFICATIONS. WE THEREFORE RESTORE THE MATTER T O THE FILE OF THE ASSESSING OFFICER FOR FRESH ADJUDICATION OF THE ISS UE IN THE LIGHT OF OUR ABOVE OBSERVATIONS. THE GROUNDS RAISED BY T HE REVENUE ON THIS ISSUE ARE DISMISSED AND THE CO FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 23. IN THE RESULT THE APPEAL BY THE REVENUE IS DISMISS ED AND THE CO FILED BY THE ASSESSEE IS ALLOWED FOR STATIST ICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 31 ST AUGUST 2010. SD/- (R.S. PADVEKAR) JUDICIAL MEMBER SD/- (R.K. PANDA) ACCOUNTANT MEMBER MUMBAI DATED 31 ST AUGUST 2010 ITA NO. 5758/MUM/2007 C.O. NO. 83/MUM/2009 M/S. SAUNAY JEWELS PVT. LTD. ======================== 14 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A)-XXIX MUMBAI 4. THE CIT-8 MUMBAI 5. THE DR L BENCH. //TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT MUMBAI BENCHES MUMBAI TPRAO