M/s. STAR DIAMOND GROUP N.V, MUMBAI v. DDIT (I.T) - 2(1), MUMBAI

ITA 3923/MUM/2008 | 2004-2005
Pronouncement Date: 28-01-2011 | Result: Allowed

Appeal Details

RSA Number 392319914 RSA 2008
Assessee PAN AADCS9924K
Bench Mumbai
Appeal Number ITA 3923/MUM/2008
Duration Of Justice 2 year(s) 7 month(s) 23 day(s)
Appellant M/s. STAR DIAMOND GROUP N.V, MUMBAI
Respondent DDIT (I.T) - 2(1), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 28-01-2011
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted L
Date Of Final Hearing 13-01-2011
Next Hearing Date 13-01-2011
Assessment Year 2004-2005
Appeal Filed On 04-06-2008
Judgment Text
ITA.NO.3923/MUM/2008 M/S. STAR DIAMOND GROUP IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES L : MUMBAI BEFORE SHRI J. SUDHAKAR REDDY ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO JUDICIAL MEMBER ITA. NO. 3923/MUM/2008 ASSESSMENT YEAR 2004-2005 M/S. STAR DIAMOND GROUP N.V. MUMBAI 400 004 PAN AADCS9924K VS. THE DY.DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) 2(1) MUMBAI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI PANKAJ TOPRANI RESPONDENT BY : SHRI KESHAVE SAXENA ORDER PER SHRI J. SUDHAKAR REDDY A.M. 1. THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED A GAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) D ATED 31-3-2008 FOR THE ASSESSMENT YEAR 2004-2005. 2. FACTS OF THE CASE ARE BROUGHT OUT BY THE CIT(A) IN PARA 1.1 TO 1.3 WHICH ARE EXTRACTED FOR READY REFERENCE. 2.1. THE ASSESSEE-COMPANY IS HAVING ITS REGISTERED OFFICE OUT OF INDIA AND A BRANCH IN INDIA. THE INDIAN BRANCH IS I MPORTING ROUGH DIAMONDS FROM ABROAD AND SELLING THE SAME IN INDIA. IT FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2004-2005 DECLARI NG TOTAL INCOME OF RS.4 64 854/-. THE ASSESSEE HAS A BRANCH OFFICE OF STAR DIAMOND CO. (BELGIUM) N.V. AND IS IN THE BUSINESS OF IMPORT OF ROUGH DIAMONDS AND SELLING IN THE LOCAL MARKET. THIS BRANCH WAS ES TABLISHED IN THE YEAR 2000. THE ASSESSEE IS IN THE BUSINESS OF TRADI NG (NO VALUE ADDITION) AND IN ORDER TO BENCH MARK ITS TRANSACTIO NS THE RESALE PRICE METHOD (RPM) WAS FOUND SUITABLE. ACCORDINGLY FROM A SSESSMENT YEAR 2002-2003 ONWARDS THE RESALE PRICE METHOD WAS ADOP TED BY THE ASSESSEE FOR ASCERTAINING ARMS LENGTH PRICE. THE TR ANSFER PRICING ITA.NO.3923/MUM/2008 M/S. STAR DIAMOND GROUP 2 OFFICER PASSED AN ORDER UNDER SECTION 92CA (3) ON 2 2-12-2006 AND HELD THAT THE IMPORTS MADE FROM THE ASSESSEES ASSO CIATED ENTERPRISE AMOUNTING TO RS.5.62 CRORES IS NOT IN ACCORDANCE WI TH THE TRANSFER PRICING GUIDELINES AND HELD THAT ARMS LENGTH PRICE ADJUSTMENT OF RS. 96 LAKHS IS REQUIRED TO BE MADE TO THE IMPORTS. HE HAS HELD THAT ARMS LENGTH PRICE OF THE IMPORTS FROM THE AE SHOULD HAVE BEEN RS. 4.66 CRORES AS AGAINST RS.5.62 CRORES SHOWN BY THE ASSES SEE. 3. THE FIRST APPELLATE AUTHORITY HELD THAT THE RES ALE PRICE METHOD ADOPTED BY THE ASSESSEE CANNOT BE ACCEPTED FOR THE REASON THAT COMPARABLES I.E. M/S. FLAWLESS DIAMONDS AS W ELL AS M/S. PROFESSIONAL DIAMONDS CITED BY THE ASSESSEE ARE E NGAGED IN EXPORT OF CUT AND POLISHED DIAMONDS AND ARE NOT RESELLERS OF ROUGH DIAMONDS AS CLAIMED BY THE ASSESSEE. AFTER REJECTING THE RESALE PRICE METHOD ADOPTED BY THE ASSESSEE THE FIRST APPELLATE AUTHOR ITY CONSIDERED THE ARITHMETICAL MEAN OF THE OPERATING MARGINS OF THREE OTHER COMPARABLES ALONG WITH THE COMPARABLES CITED BY TH E ASSESSEE AND ARRIVED AT AN AVERAGE OF 2.68%. THEREAFTER HE APPL IED THIS PERCENTAGE TO THE ENTIRE TURNOVER OF THE ASSESSEE ON THE GROU ND THAT OPERATING PROFIT MARGINS IS ALWAYS ARRIVED AT THE ENTITY LEV EL AND CANNOT BE SEGMENTED UNLESS THE MARGINS OF THE EXTERNAL COMPAR ABLES ARE ALSO SEGMENTED. HE HELD THAT THERE IS NO PROVISION FOR C ALCULATING PROFIT ONLY ON SALES OF GOODS PURCHASED FROM AE. HENCE HE REJECTED THE CONTENTION OF THE ASSESSEE TO CALCULATE PROFIT ONL Y ON THE SALE OF THE GOODS PURCHASED FROM THE AE. THEREAFTER HE ALSO REJ ECTED THE CONTENTION OF THE ASSESSEE TO CONSIDER NET PURCHASE S INSTEAD OF GROSS PURCHASES. HE CONCLUDED AS FOLLOWS : THUS TO ACHIEVE A PROFIT MARGIN OF ARITHMETIC 2.68 % ON SALES THE APPELLANT OUGHT TO HAVE PURCHASED GOODS A T A PRICE OF RS.4.89 CRORES OR AT A PRICE WITHIN 5% OF THE ARITHMETIC MEAN WHICH WOULD MEAN THAT THE APPELLANT SHOULD HAVE PURCHASED GOODS AT A MAXIMUM OF RS.5.13 ITA.NO.3923/MUM/2008 M/S. STAR DIAMOND GROUP 3 CRORES (105% OF 4.89). SINCE THE APPELLANT HAS PURCHASED/IMPORTED AT A PRICE HIGHER THAT RS.5.13 C RORES THEREFORE THE IMPORT TRANSACTION IS NOT AT ARMS LE NGTH. IN VIEW OF THE ABOVE AN ADJUSTMENT OF RS.73 LAC (5.62 4.89) IS REQUIRED TO BE MADE TO THE INCOME OF THE A SSESSEE BY MAKING AN ADJUSTMENT OF RS.73 LACS TO THE TRANSA CTION OF IMPORT AS AGAINST AN ADJUSTMENT OF RS.96 LACS MA DE BY THE A.O. HENCE THE APPELLANT GETS RELIEF ACCORDI NGLY. APPEAL IN RESPECT OF THESE GROUNDS IS PARTLY ALLOWE D. 4. LEARNED COUNSEL APPEARING ON BEHALF OF THE ASS ESSEE MR. PANKAJ TOPRANI SUBMITTED THAT : (A) THE ASSESSEE IS CONSISTENTLY FOLLOWED RESALE PRICE METHOD FOR ARRIVING AT THE ARMS LENGTH PRICE AND THIS IS T HE MOST APPROPRIATE METHOD AND IT HAS BEEN ACCEPTED AS SUCH IN THE EARLIER ASSESSMENT YEARS BY THE TRANSFER PRICIN G OFFICER. (B) THE TRANSFER PRICING OFFICER HAS NOT WITH COGENT R EASONS REJECTED THE RSP METHOD ADOPTED BY THE ASSESSEE. (C) EACH OF THE COMPARABLES GIVEN BY THE TRANSFER PRICI NG OFFICER ARE INCORRECT COMPARABLES FOR THE REASON T HAT IN THE CASE OF M/S. SUNRAJ DIAMONDS EXPORT LTD. AND ZO DIAC JRD MRJ LIMITED. THE ORGANISATIONS WERE NOT IN THE TRADE OF ROUGH DIAMONDS BUT WERE IN THE BUSINESS OF CUT AND POLISHING OF DIAMONDS. (D) THE CASE OF SANGHVI DIAMONDS LTD. IT IS SUBMITTED T HAT THE RESULTS ARE NOT AVAILABLE IN THE PUBLIC DOMAIN AND IT IS NOT IN THE BUSINESS OF TRADING IN ROUGH DIAMONDS. (E) THAT THE TNMM AS PRESCRIBED IN THE ACT AND RULES HA S NOT BEEN APPLIED BY THE TRANSFER PRICING OFFICER AN D THE CIT(A) WAS IN ERROR IN APPROVING THE SAME. ITA.NO.3923/MUM/2008 M/S. STAR DIAMOND GROUP 4 (F) THE TNMM REQUIRES COMPARISON OF NET MARGINS OF INTERNATIONAL TRANSACTIONS. (G) THAT THE CIT(A) HAS GROSSLY ERRED IN MAKING ADJUSTM ENTS TO THE GROSS TURNOVER BY HOLDING THAT COMPARISON S HOULD BE AT ENTERPRISE LEVEL. (H) THAT ALP CAN BE DETERMINED ONLY FOR THE INTERNATION AL TRANSACTIONS AND ADJUSTMENT CAN BE DETERMINED ONLY FOR INTERNATIONAL TRANSACTIONS. (I) THAT ADJUSTMENT IS WRONGLY MADE ON GROSS PURCHASES WITHOUT REDUCING PURCHASE RETURNS. (J) HE SUBMITTED THAT PURCHASES MINUS PURCHASE RETURNS SHOULD BE CONSIDERED AS AN INTERNATIONAL TRANSACTIO N AND ALP DETERMINED FOR SUCH A QUANTUM OR OTHERWISE IT WOULD GIVE ABSURD RESULTS. 5. HE RELIED ON THE FOLLOWING CASE LAWS : (I) MUMBAI TRIBUNAL DECISION IN THE CASE OF ADDL.CIT VS . TEJ DIAN (2010) 37 SOT 341. (II) DELHI TRIBUNAL DECISION IN THE CASE OF VEDARIS TECH NOLOGY (P) LTD. VS. ACIT (2010) 131 TTJ 309. 6. THE LEARNED COUNSEL REPEATED THE CONTENTIONS RA ISED BEFORE THE FIRST APPELLATE AUTHORITY. 7. THE LEARNED DR MR. KESHAV SAXENA ON THE OTHER H AND SUBMITTED THAT : (A) THE ASSESSEE HAS GIVEN TWO COMPARABLES FOR DEMONSTRATING THAT THE ARMS LENGTH PRICE ARRIVED AT BY IT UNDER RESALE PRICE METHOD (RSP) WAS CORRECT AND THA T THE CIT(A) HAS CLEARLY DEMONSTRATED AT PARAS 7.7 AND 7. 8 OF HIS ORDER THAT BOTH M/S. FLAWLESS DIAMONDS AS WELL AS M/S. PROFESSIONAL DIAMONDS ARE IN THE FIELD OF DIAM OND CUTTING AND POLISHING AND NOT DEALING IN TRADE OF R OUGH ITA.NO.3923/MUM/2008 M/S. STAR DIAMOND GROUP 5 DIAMONDS. THUS HE SUBMITTED THAT THE ASSESSEE WAS WRONG IN ARGUING THAT RESALE PRICE METHOD ADOPTED B Y THE ASSESSEE WAS NOT REJECTED. (B) THAT TRANSACTION NET MARGIN METHOD IS THE BEST METH OD UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE. (C) THAT THE COMPARABLES GIVEN BY THE ASSESSEE WERE NO T TOTALLY REJECTED BUT THE CIT(A) ENLARGED THE NUMBE R OF COMPARABLES BY INCLUDING THREE MORE PARTIES AND THEREAFTER ARRIVED AT THE MEAN OPERATING MARGIN. (D) THAT OPERATING PROFIT MARGINS OF THE ENTIRE TURNOV ER OF THE ASSESSEE HAVE TO BE CONSIDERED FOR ADJUSTMENT QUANTIFICATION AS IN THE CASE OF COMPARABLES ENTI TY LEVEL OPERATING MARGINS WERE TAKEN FOR BENCH MARKING. (E) THAT IT IS WRONG TO SAY THAT THE ASSESSING OFFICER HAS CONSIDERED GROSS PURCHASES AND NOT NET PURCHASES I .E. PURCHASES AFTER RETURNS BY RELYING AT PARA 7.2.1 O F THE CIT(A) ORDER AT PAGE 16. 8. RIVAL CONTENTIONS HEARD. ON CAREFUL CONSIDERATI ON OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND A PERUSAL O F THE PAPERS ON RECORD AND THE ORDERS OF THE AUTHORITIES BELOW AS W ELL AS CASE LAW CITED WE HOLD AS FOLLOWS : THE CIT(A) IN HIS ORDER AT PARA 7.19 HELD AS FOLLOW S : 7.19. I HAVE CONSIDERED THIS ARGUMENT ALSO AND THE SAME IS NOT ACCEPTABLE BECAUSE TO ARRIVE AT THE OPERATING PROFIT MARGIN OF THE APPELLANT THE ENTIRE TURNOVER/SALES OF THE APPELLANT HAVE TO BE CONSIDERED. ONLY THEN CAN THE DIFFERENCE BETWEEN WHAT THE APPELLANT ACHIEVED AS PROFIT (0.66%) AND WHAT IS OUGHT TO HAVE ACHIEVED (2.68%) CAN BE ARRIVED AT. THERE IS NO PROVISION FOR CALCULATING T HE PROFIT ONLY ON SALES OF THE GOODS PURCHASED FROM ITA.NO.3923/MUM/2008 M/S. STAR DIAMOND GROUP 6 AES. THE OPERATING PROFIT MARGIN IS ALWAYS ARRIVED AT THE ENTITY LEVEL AND CANNOT BE SEGMENTED UNLESS THE MARGINS OF THE EXTERNAL COMPARABLES ARE ALSO SEGMENTED. SUCH SEGMENTED DATA WAS NEITHER AVAILABLE IN PUBLIC DOMAIN AT THE RELEVANT POINT OF TIME NOR HAS THE APPELLANT PROVIDED THE SAME FOR THE COMPARABLES CHOSEN BY IT. IN VIEW OF THE SAME THE APPELLANTS PLEA TO CALCULATE PROFIT ONLY ON SA LES OF THE GOODS PURCHASED FROM AES IS NOT ACCEPTED. (EMPHASIS OWN) 9. THIS FINDING IN OUR CONSIDERED OPINION IS TOTAL LY ERRONEOUS. THIS BENCH OF THE TRIBUNAL IN THE CASE O F DCIT VS. M/S. ANKIT DIAMONDS ITA.NO. 6437/MUM/2005 L BENCH ORDE R DATED 26 TH NOVEMBER 2010 HELD AS FOLLOWS : 13. CHAPTER X. OF THE INCOME-TAX ACT DEALS WITH T HE COMPUTATION OF INCOME FROM INTERNATIONAL TRANSACTIO N HAVING REGARD TO ALP. WE EXTRACT SOME OF THE SECTIO NS OF THE STATUTE WHICH WE FEEL RELEVANT TO THIS CASE. MEANING OF INTERNATIONAL TRANSACTION. 92B.(1) FOR THE PURPOSES OF THIS SECTION AND SECTIO NS 92 92C 92D AND 92E INTERNATIONAL TRANSACTION MEANS A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES EITHER OR BOTH OF WHOM ARE NON- RESIDENTS IN THE NATURE OF PURCHASE SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY OR PROVISION OF SE RVICES OR LENDING OR BORROWING MONEY OR ANY OTHER TRANSACTIO N HAVING A BEARING ON THE PROFITS INCOME LOSSES OR ASSETS OF SUCH ENTERPRISES AND SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES FOR THE ALLOCATION OR APPOIN TMENT ITA.NO.3923/MUM/2008 M/S. STAR DIAMOND GROUP 7 OF OR ANY CONTRIBUTION TO ANY COST OR EXPENSE INC URRED OR TO BE INCURRED IN CONNECTION WITH A BENEFIT SERVIC E OR FACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE OR M ORE OF SUCH ENTERPRISES. (EMPHASIS OURS). SECTION 92(C) READS AS FOLLOWS : COMPUTATION OF ARMS LENGTH PRICE. 92C. (1) THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS BEING THE MOST APPROPRIATE METHOD HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASSOCIATED PERSONS OR FUNCTIONS PERFORMED BY SUCH PERSONS OR SUCH OTHER RELEVANT FACTORS AS THE BOARD MAY PRESCRIBE NAMELY: (A) COMPARABLE UNCONTROLLED PRICE METHOD; (B) RESALE PRICE METHOD; (C) COST PLUS METHOD; (D) PROFIT SPLIT METHOD; (E) TRANSACTIONAL NET MARGIN METHOD; (F) SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD. (EMPHASIS OURS) SECTION 92F(II) ARMS LENGTH PRICE : ARMS LENGTH PRICE MEANS A PRICE WHICH IS APPLIED OR PROPOSED TO BE APPLIED IN A TRANSACTION BETWEEN PERSONS OTHER THAN ASSOCIATED ENTERPRISES IN UNCONTROLLED CONDITIONS. (V) TRANSACTION. TRANSACTION INCLUDES AN AGREEMENT UNDERSTANDING O R ACTION IN CONCERT - ITA.NO.3923/MUM/2008 M/S. STAR DIAMOND GROUP 8 (A) WHETHER OR NOT SUCH ARRANGEMENT UNDERSTANDING OR ACTION IS FORMAL OR IN WRITING; OR (B) WHETHER OR NOT SUCH ARRANGEMENT UNDERSTANDING OR ACTION IS INTENDED TO BE ENFORCEABLE BY LEGAL PROCEEDING. 14. WE NOW EXTRACT RULES 10B(1) 10(B) (E) :- DETERMINATION OF ARMS LENGTH PRICE UNDER SECTION 92C. 10B. (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SECTION 92C THE ARMS LENGTH PRICE IN RELATION TO AN INTER NATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS BEING THE MOST APPROPRIATE METHOD IN THE FOLLOWING MANNER NAMELY.. RULE 10B SUB-CLAUSE (E) TRANSACTION NET MARGIN METHOD : (E) TRANSACTIONAL NET MARGIN METHOD BY WHICH - (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE; (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; ITA.NO.3923/MUM/2008 M/S. STAR DIAMOND GROUP 9 (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAU SE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES IF A NY BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS OR BETWEEN TH E ENTERPRISES ENTERING INTO SUCH TRANSACTIONS WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN I N THE OPEN MARKET. (IV) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE AND REFERRED TO IN SUB-CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (III); (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION. 10. THEREAFTER THE BENCH EXTRACTED PARA 68 TO 71A OF THE ORDER IN THE CASE OF UCB INDIA (P) LTD. VS. ACIT (2 009) 121 ITD 131 (MUM) FOR THE PROPOSITION THAT UNDER THE TNMM ONLY AN INTERNATIONAL TRANSACTION OR AN AGGREGATE OF SIMILAR INTERNATIONA L TRANSACTION WERE TO BE EVALUATED ON A STAND ALONE BASIS AND COMPARED WITH UNCONTROLLED SIMILAR TRANSACTIONS AND THAT COMPARIS ON OF THE OPERATING PROFITS OF THE ASSESSEE-COMPANY AS A WHOL E AT THE ENTITY LEVEL IS NOT CORRECT. THEREAFTER THE BENCH HELD AS FOLLOWS : 17. FROM THE ABOVE IT IS CLEAR THAT UNDER CHAPTER X. OF THE INCOME-TAX ACT THE DETERMINATION OF ALP OF AN INTERNATIONAL TRANSACTION HAS TO BE ONLY AT THE TRANSACTION LEVEL OR AT THE LEVEL OF A CLASS OF TRANSACTIONS. LAW DOES NOT PERMIT DETERMINATION OF ALP OF INTERNATIONAL TRANSACTIONS BY COMPARING OPERATING MARGINS AT ENTITY LEVELS OR BY TAKING OVERALL INDUSTRY LEVEL AVERAGES. THUS THE EXERCISE DONE BY THE ITA.NO.3923/MUM/2008 M/S. STAR DIAMOND GROUP 10 TPO AS MODIFIED BY THE CIT(A) IS AGAINST THE PROVISIONS OF THE ACT AND RULES AND HAS TO BE STRUCK DOWN AS ILLEGAL. 18. IT CAN BE SEEN THAT BEFORE THE A.O. THE ASSESSEE HAD SUBMITTED AS FOLLOWS : FURTHER THE PROVISIONS AS CONTAINED IN S.92CA ARE WORTH CONSIDERING. (I) SUB-SECTION 1 STATES THAT WHEN AN ASSESSEE HAS ENTERED INTO AN INTERNATIONAL TRANSACTION THE ASSESSING OFFICER MAY WITH THE PREVIOUS APPROVAL OF THE COMMISSIONER REFER THE COMPUTATION OF ALP IN RELATION TO INTERNATIONAL TRANSACTION TO THE TRANSFER PRICING OFFICER. (II) SUB-SECTION 2 REQUIRED THE TRANSFER PRICING OFFICER TO SERVE A NOTICE ON THE ASSESSEE TO PRODUCE EVIDENCE ON WHICH THE ASSESSEE HAS RELIED UPON IN SUPPORT OF COMPUTATION OF ALP IN RELATION TO INTERNATIONAL TRANSACTION REFERRED TO IN SUB-SEC.1. (III) SUB-SECTION 3 STATES THAT THE TPO SHALL PASS THE ORDER IN WRITING DETERMINING THE ALP IN RELATION TO THE INTERNATIONAL TRANSACTION AND SEND THE COPY OF THE SAME TO THE ASSESSING OFFICER AND THE ASSESSEE. (IV) SUB-SECTION 4 REQUIRE THE ASSESSING OFFICER SHALL COMPUTE THE TOTAL ITA.NO.3923/MUM/2008 M/S. STAR DIAMOND GROUP 11 INCOME OF THE ASSESSEE HAVING REGARD TO THE ALP DETERMINED BY TRANSFER PRICING OFFICER UNDER SUB-SEC.3. THUS THE SCHEME OF THE ASSESSMENT IS VERY CLEAR AND IT STATES THAT (I) THE TRANSFER PRICING OFFICER SHALL AND IS ENTITLED ONLY TO DETERMINE THE ALP IN RELATION TO THE INTERNATIONAL TRANSACTION AND (II) THE ASSESSING OFFICER SHALL COMPUTE THE TOTAL INCOME HAVING REGARD TO THE ALP DETERMINED BY TPO IN RELATION TO THE INTERNATIONAL TRANSACTION. THERE IS NO AUTHORITY UNDER THE LAW BESTOWED ON THE TPO TO DETERMINE THE TOTAL INCOME OF THE ASSESSEE. HE IS TO DETERMINE ONLY THE ALP OF THE INTERNATIONAL TRANSACTION. (EMPHASIS OURS). 18. IN OUR VIEW THESE SUBMISSIONS OF THE ASSESSEE ARE THE CORRECT LEGAL POSITION. THE A.O. HIMSELF STATES THAT HE FIND SOME MERIT AND FORCE IN THE SUBMISSIO N OF THE ASSESSEE BUT IN VIEW OF THE DIRECTIONS OF T HE T.P.O. AND AS THE ASSESSMENT IS GETTING TIME BARRED HE MADE THE ADDITION IN QUESTION. THE SUBMISSION OF THE ASSESSEE THAT THE T.P.O. IS NOT AUTHORISED TO DETERMINE THE NET OPERATIONAL PROFITS AT THE ENTERPRISES LEVEL AND THEREBY DETERMINE THE TOTAL INCOME OF THE ASSESSEE BUT THAT HE SHALL DETERMINE ONLY THE ALP OF THE INTERNATIONAL TRANSACTION IS CORRECT. ITA.NO.3923/MUM/2008 M/S. STAR DIAMOND GROUP 12 11. SIMILAR IS THE VIEW OF THIS BENCH IN THE CASE OF ADDL. CIT 16 (3) MUMBAI VS. TEJ DIAM (2010) 37 SOT 341 (MUM. ). RESPECTFULLY FOLLOWING THE SAME THIS FINDING OF THE FIRST APPEL LATE AUTHORITY AT PARA 7.19 EXTRACTED ABOVE HAS TO BE NECESSARILY VACATED. WE HAVE TO HOLD THAT THE ORDER OF THE TRANSFER PRICING OFFICER AS CONFIRMED BY THE CIT(A) ON THE PERCEIVED APPLICATION OF TNMM METHOD IS STRUCK DOWN AS ILLEGAL. 12. COMING TO THE METHOD ADOPTED BY THE ASSESSEE I.E. RESALE PRICE METHOD NEITHER THE TRANSFER PRICING O FFICER NOR THE CIT(A) HAVE HELD THAT THIS IS NOT THE MOST APPROPRIATE ME THOD. THE ONLY GROUND FOR REJECTING RESALE PRICE METHOD ADOPTED BY THE ASSESSEE IS THAT THE COMPARABLES ARE WRONGLY CHOSEN. THE FIRST APPELLATE AUTHORITY AT PARA 7.7 AND 7.8 GAVE REASONS AS TO WHY THE COMP ARABLES GIVEN BY THE ASSESSEE FOR BENCH MARKING TRANSACTIONS CANNOT BE ACCEPTED. FOR THIS REASON HE STATED THAT THE RESALE PRICE METHOD FAILS. AT PARA 7.9 HE OBSERVED AS FOLLOWS : 7.9. THUS ON THE BASIS OF THE FACTS NARRATED ABOVE I HOLD THAT THE APPELLANT HAS NOT PROVED ITS CASE FOR APPLYING THE RESALE PRICE METHOD AS THE COMPARABLES CHOSEN BY IT ARE NOT IN THE BUSINESS OF EXCLUSIVELY RESELLING AND DISTRIBUTING ROUGH DIAMONDS. HENCE THEIR GROSS MARGINS CANNOT BE RELIED UPON AS MARGINS ACHIEVED ON ACCOUNT OF RESELLING GOODS WHICH MAKE THEIR COMPARABILITY SUSPECT AND REDUNDANT. HENCE IN ABSENCE OF PROPER COMPARABLES WHO ARE EXCLUSIVE RESELLERS THEMSELVES THE ACTION OF THE ASSESSING OFFICER IN NOT RELYING ON THE RESALE PRICE METHOD APPLIED BY THE APPELLANT AND APPLYING THE TNMM METHOD IS UPHELD. ITA.NO.3923/MUM/2008 M/S. STAR DIAMOND GROUP 13 13. THIS FINDING IN OUR HUMBLE OPINION IS WRONG FO R THE REASON THAT THE CIT(A) HAS ADOPTED THESE VERY COMPA RABLES ALONG WITH THREE OTHERS WHILE ARRIVING AT THE OPERATING MARGIN S AT PARA 7.16 OF HIS ORDER. AS THE ASSESSEE IS A TRADER WITHOUT VALUE A DDITION TO THE GOODS WE FIND FORCE IN THE SUBMISSION OF THE ASSESSEE THA T RESALE PRICE METHOD IS THE MOST APPROPRIATE METHOD FOR DETERMINI NG THE ALV WITH RESPECT TO AE TRANSACTION. IN FACT THE REVENUE HAS ACCEPTED THIS METHOD IN EARLIER TWO YEARS. THE TRANSFER PRICING O FFICER IN HIS ORDER DATED 7-3-2005 FOR THE ASSESSMENT YEAR 2002-2003 AN D ORDER DATED 20-3-2006 FOR THE ASSESSMENT YEAR 2003-2004 HAS AG REED WITH THE COMPUTATION OF ARMS LENGTH PRICE MADE BY THE ASSESS EE UNDER THE RESALE PRICE METHOD. IF THE COMPARABLES ARE NOT FOU ND APPROPRIATE FRESH COMPARABLES CAN BE SEARCHED BUT THE METHOD A DOPTED NEED NOT BE REJECTED. IN ANY EVENT AS THE COMPARABLES GIVEN BY THE ASSESSEE I.E. FLAWLESS DIAMONDS AND PROFESSIONAL DIAMONDS A RE NOT IN THE BUSINESS OF PURCHASE AND SALE OF ROUGH DIAMONDS IT WOULD HAVE TO SET ASIDE OF THE ISSUE TO THE FILE OF THE ASSESSING OFF ICER FOR FRESH ADJUDICATION SO AS TO ENABLE BOTH THE ASSESSEE AS WELL AS THE ASSESSING OFFICER TO UNDERTAKE A FRESH EXERCISE BY FINDING OUT APPROPRIATE COMPARABLES AND ADOPTING RESALE PRICE METHOD. BEFORE DOING SO WE OBSERVE AS FOLLOWS : 14. IN THE CASE ON HAND THE FACTS OF THE TRANSACT IONS IN QUESTION ARE BROUGHT OUT IN PARA 3.2 OF THE CIT(A) ORDER. THE APPELLANT IS A BRANCH OFFICE OF STAR DIAMOND C O. (BELGIUM) N.V. AND IS IN THE BUSINESS OF IMPORT OF ROUGH DIAMONDS AND SELLING IN THE LOCAL MARKET. THE ASSES SEE IS ENGAGED IN THE BUSINESS OF TRADING IN ROUGH DIAMONDS. THE ASSESSEE HAS PURCHASED ROUGH DIAMONDS FROM ITS ASSOCIATE ENTERPRISE M/S. STAR DIAMOND ENTERPRISE NV WORTH RS.5.62 CRORES. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAS ITA.NO.3923/MUM/2008 M/S. STAR DIAMOND GROUP 14 RETURNED ROUGH DIAMONDS PURCHASED FROM THE SAME ENTITY WORTH RS.4.68 CRORES SINCE THEY WERE NOT SUI TABLE FOR SALE. ACCODINGLY THE NET PURCHASES ARE ONLY WO RTH RS.94 LACS. THE ASSESSEE HAS USED RPM AS THE MOST APPROPRIATE METHOD. (EMPHASIS OWN) THESE FACTS ARE ALSO RECORDED IN PARA 3 OF THE TRAN SFER PRICING OFFICERS REPORT DATED 22-12-2006. 15. THE ASSESSEE IN THIS CASE HAS PURCHASED RS. 5. 62 CRORES OF ROUGH DIAMONDS FROM ITS AE AND IT RETURNED RS.4. 68 CRORES OF ROUGH DIAMONDS ON THE GROUND THAT THEY WERE NOT SUITABLE FOR SALE. THIS FACT IS NOT IN DISPUTE. THUS THE NET INTERNATIONAL TRANS ACTION IN THIS CASE IS ONLY RS. 94 LAKHS. THE LAW PERMITS DETERMINATION OF ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACTION ONLY. IF PURCHASES ARE HELD TO BE HAVING ARMS LENGTH PRICE OF X THEN PURCHASE RETU RNS SHOULD ALSO BE TAKEN AT THAT X RATE. THUS PURCHASES AND PURCHASE RETURNS CANNOT BE VALUED DIFFERENTLY. IF AN ADJUSTMENT IS MADE TO RS.5.62 CRORES OF PURCHASES THEN THE SAME ADJUSTMENT HA TO BE MADE T O THE PURCHASE RETURNS AS OTHERWISE THE ADJUSTMENT WOULD THROW UP ABSURD RESULTS. LOGICALLY THE SAME YARDSTICK HAS TO BE APPLIED TO BOTH PURCHASES AND RETURNS. HENCE IT WOULD BE APPROPRIATE THAT THE AR MS LENGTH PRICE HAS TO BE DETERMINED ONLY IN RESPECT OF THIS RS. 94 LAK HS AND ADDITION IF ANY HAS TO BE MADE ONLY ON THIS RS. 94 LAKHS. THE A DJUSTMENT MADE BY THE TRANSFER PRICING OFFICER WAS RS.96 LAKHS AND HAS REDUCED BY THE CIT(A) TO RS. 73 LAKHS. WHEN THE NET PURCHASES IS RS.94 LAKHS HOW CAN AN ADJUSTMENT BE SUGGESTED AT RS. 96 LAKHS WITHOUT PROPER EVIDENCE. THIS ADJUSTMENT IS ERRONEOUS AS ENTITY L EVEL MARGINS ARE APPLIED AT ENTITY LEVEL OF THE ASSESSEE. THE MARGI N ADOPTED BY THE TRANSFER PRICING OFFICER I.E. 3.31%. THIS MINUS TH E MARGIN DECLARED BY THE ASSESSEE 1.76% GIVES A DIFFERENCE OF 1.55%. IF THIS 1.55% IS APPLIED ON 94 LAKHS THE ADDITION COMES TO ONLY RS.1 .41 LAKHS. THE REVENUE IN THIS CASE HAS NOT CHALLENGED THE MARGIN OF 2.68% ARRIVED ITA.NO.3923/MUM/2008 M/S. STAR DIAMOND GROUP 15 AT BY THE CIT(A). IN SUCH A CASE THE DIFFERENCE IN THE MARGIN BETWEEN THAT ARRIVED BY THE CIT(A) I.E. 2.68% AND THAT DIS CLOSED BY THE ASSESSEE I.E. 1.76% COMES TO 0.92%. WHEN THIS IS APPLIED TO THE NET PURCHASE OF RS. 94 LAKHS THE ADJUSTMENT COMES TO R S.86 000/-. THIS IS INCORRECT. 15.1. THIS BENCH OF THE TRIBUNAL IN THE CASE OF DC IT VS. BASF INDIA LIMITED ITA.NO.7626/M/2005 AND 195/M/2006 L BENCH ORDER DATED 16-7-2010 HAS HELD AS FOLLOWS : IF TRANSFER PRICING DIFFERENCE IS LESS THAN 5% ACT UAL PRICE SHOULD BE TAKEN AS ALP. IN RESPECT OF ASSESSMENT YEAR 2002-2003 THE ASSESSE E PURCHASED GOODS FROM ITS ASSOCIATED ENTERPRISES. TH E DIFFERENCE BETWEEN THE PRICE PAID BY THE ASSESSEE A ND THE ARMS LENGTH PRICE DETERMINED BY THE A.O. WAS 4% . THE ASSESSEE ARGUED THAT BY VIRTUE OF THE SECOND PROVISO TO SEC. 92C(2) NO ADJUSTMENT COULD BE MADE . HELD ACCEPTING THE ASSESSEES CLAIM. THE SECOND PROVISO TO S. 92C(2) (AS SUBSTITUTED BY F (NO.2) ACT 2009 W.E.F. 1.10.09) CLEARLY SHOWS THAT IF THE DIFFERENCE IS LESS THAN 5% THEN THE ACTUAL PRICE PA ID SHOULD BE CONSIDERED AS ARMS LENGTH PRICE. THE TRANSFER PRICING OFFICER AS WELL AS CIT(A) HAVE CLE ARLY OBSERVED THAT DIFFERENCE IN RESPECT OF THESE TWO IT EMS IS 4% AND THEREFORE SAME HAS TO BE RECKONED IN TERMS OF SECOND PROVISO. SIMILAR VIEW WAS TAKEN IN THE CASE OF SONY INDIA VS. DY. CIT BY DELHI BENCH OF THE TRIBUN AL 114 ITD 448. 16. IN THE EARLIER PARAGRAPHS LOOKING AT THE METH ODS ADOPTED BY BOTH THE PARTIES WE WERE INCLINED TO SET ASIDE T HE MATTER TO THE FILE OF THE A.O. WE DO SO AND SET ASIDE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER. WHILE DOING SO WE DIRECT THE TRANSFER PRI CING ITA.NO.3923/MUM/2008 M/S. STAR DIAMOND GROUP 16 OFFICER/ASSESSING OFFICER TO ARRIVE AT THE ALP FOR NET TRANSACTIONS OF S. 92 LAKHS ONLY. IN CASE THE VARACITY IS LESS THAN 5% NO ADJUSTMENT NEED BE MADE. THE ASSESSEE SHALL SUBMIT A FRESH T.P . STUDY AND REPORT IN VIEW OF THE PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE AS AN EXCEPTION. 17. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOW ED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS THE 2 8 TH DAY OF JANUARY 2011. SD/- (VIJAY PAL RAO) JUDICIAL MEMBER SD/- (J.SUDHAKAR REDDY) ACCOUNTANT MEMBER DATED : 28 TH JANUARY 2011 VBP/- COPY TO 1. M/S. STAR DIAMOND GROUP N.V. 1110 PRASAD CHAMBE RS 11 TH FLOOR OPERA HOUSE MUMBAI 400 004 PAN AADCS9924K ; C /O. KARNAVAT & CO. 2A KITAB MAHAL 192 DR. D.NAOROJI ROAD FO RT MUMBAI 001. 2. THE DY.DIRECTOR OF INCOME TAX (INTERNATIONAL TA XATION) 2(1) MUMBAI. 3. COMMISSIONER OF INCOME TAX (APPEALS)-XXXI MUMBA I 4. D.I.T. (INTERNATIONAL TAXATION) MUMBAI 5. DR L BENCH 6. GUARD FILE. BY ORDER TRUE COPY ASSTT. REGISTRAR ITAT MUMBAI