AI Structured Summary
Not yet generated for this judgment
Judgment
PER VIMAL KUMAR, JM:
The appeal filed by the assessee is against the final assessment order dated 25.10.2023 of the Ld. Assessing Officer/DCIT, Circle 19(1), New Delhi [hereinafter referred to as “the AO”] under section 143(3)/254 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for assessment year 2016-17.
Brief facts of the case are the return of income was filed by the assessee declaring total loss of Rs. 4,03,83,257/- on 30.11.2012. Subsequently, the assessee revised its return of income on 30.03.2013 at the same income as declared in original return. The case was selected for scrutiny under CASS and the income of assessee was assessed at Rs. (-) 3,20,78,082/- on 29.04.2016. The assessee preferred appeal before Ld. CIT(A)-38, New Delhi. Aggrieved, the assessee preferred appeal before ITAT, Delhi bench, and ITAT, New Delhi which was partly allowed. The issue was sent back to the file of Ld. TPO. As per direction of Hon’ble ITAT, Ld. ACIT, TPO-3(2)(2), New Delhi passed order dated 28.11.2022 u/s 92CA(3) r.w.s. 254 of the Act. The adjustment of Rs. 83,05,175/- was revised to Rs. 3,64,42,184/-.
Draft assessment order u/s 144C dated 09.12.2022 was passed. The assessee filed objection before DRP. The DRP vide order dated 31.08.2023 gave directions in pursuance to the directions final assessment order dated 25.10.2023 making TP adjustment of Rs. 2,36,84,410/- was made.
Being aggrieved, the appellant/assessee preferred present appeal on following grounds:
“1.That on the facts and circumstances of the case and in law, the AO has erred in assessing the loss of the Appellant at INR 1,66,98,847 in pursuance to the directions issued by the DRP, as against the returned loss of INR 4,03,83,257.
2.That on the facts and circumstances of the case and in law, the final assessment order passed by the AO under section 143(3) read with section 144C(13) and 253(1) of the Act is erroneous, bad in law and thus, liable to be quashed.
3.That on the facts and circumstances of the case and in law, the final assessment order passed by the AO is time barred by limitation and is bad in law, as it has been passed beyond the time frame prescribed under section 153(3) read with section 153(4) of the Act.
4.That on the facts and circumstances of the case and in law, the order passed by the Transfer Pricing Officer ("TPO") dated November 28, 2022 is bad in law and liable to be quashed as the same was passed manually without issuance of Document Identification Number ("DIN") as mandated by CBDT Circular no. 19/2019, and the proceedings based on such order is bad in law, void ab initio and liable to be quashed.
5.That on the facts and in the circumstances of the case and in law, the directions issued by the DRP are bad in law, void ab initio and liable to be quashed as the same have been passed in violation of the provisions of sub-section (8) to section 144C of the Act.
6.That on the facts and circumstances and in law, the AO/ DRP/TPO have erred in arbitrarily selecting certain additional companies viz. Karp Jewellery Private Limited, Ziv Diamond Private Limited. Pushpak Bullion Private Limited, Lakshmi Gold Khazaanaa Private Limited, as comparable companies for benchmarking the international transaction pertaining to purchase of finished goods.
7.That on the facts and circumstances of the case and in law, the learned AO/TPO have erred in arbitrarily selecting certain additional companies viz. Karp Jewellery Private Limited. Ziv Diamond Private Limited, Pushpak Bullion Private Limited, Lakshmi Gold Khazaanaa Private Limited, as comparable for which the relevant financial information for computation of gross profit margin i.e, profit and loss account, is neither available in public domain nor on the ministry of corporate affairs website. While doing so, the learned AO/TPO have erred in:
7.1.not disclosing the source of information relied upon and thereby issuing final assessment order which is not in conformity to the directions of the Hon'ble DRP. Therefore, the order passed by the AO/TPO are bad in law and liable to be quashed.
7.2.not appreciating the fact that as per the provisions of erstwhile Companies Act, 1956, no person other than member/shareholder were entitled to inspect or obtain copies of the profit and loss account in case of a private limited company and therefore disclosure of profit and loss account by a private limited company was completely voluntary.
7.3.computing arbitrary gross profit margins of 100 percent or above in respect of the said companies for the sole purpose of making an unwarranted transfer pricing adjustment.
8.That on the facts and circumstances of the case, the learned TPO has erred in arbitrarily rejecting a functionally comparable company namely Starline Enterprises Limited (formerly known as L'avance Dirays Limited) quoting non-availability of annual report, without heeding to the fact that the annual report of the said company was available in the public domain and was furnished before the TPO in various occasions by the Assessee.
9.That on the facts and circumstances of the case, the learned TPO has erred in computing the gross profit margin of Jewelsouk Marketplace Limited at 1.49% as against the correct gross profit margin of (-) 1.49%.”
Ld. Authorized Representative for appellant/assessee submitted that ground No. 1 and 2 are general in nature, ground No. 3 to 5 were not pressed.
As per submissions of Ld. Authorized Representative for appellant/assessee, ground of appeal No. 1 and 2 being general do not require separate adjudication. Grounds of appeal Nos. 3 to 5 are dismissed as not pressed.
Ld. Authorized Representative for appellant/assessee submitted that ground of appeal No. 6, 7 to 7.3 are regarding exclusion of companies selected by Ld. TPO with GP/Sale of 100%. Ld. AO/ DRP/ TPO erred in selecting additional companies for bench marking the international transactions pertaining to purchase of its goods. The appellant/assessee written contention are as under: -
The Appellant submits that TPO has considered additional companies arbitrarily to the final set of the comparable companies to benchmark the transaction of purchase of finished goods.
The Appellant, during the course of proceedings before the TPO & DRP, had requested to provide the source of margin computation of the additional comparable companies selected by the TPO as the same was not available in the public domain. \ GP/Sales ratios computed by TPO are arbitrary and unrealistic: The TPO selected 4 companies (listed below) and computed their GP/Sales on an arbitrary basis at >= 100%
Refer page 19 of the order passed by the TPO and page 05 of the order passed by the TPO giving effect to DRP directions.
| Sr. No. | Name of the Company | GP/Sales computed by TPO |
| 1 | Karp Jewellery Private Limited | 100.00% |
| 2 | Ziv Diamond Private Limited | 100.00% |
| 3 | Pushpak Bullions Private Limited | 100.00% |
| 4 | Lakshmi Gold Khazaanaa Private Limited | 128.33% |
GP/Sales ratio of 100% implies that the company generates all its revenue without incurring any cost of goods sold ('COGS'), meaning the COGS is effectively zero. This is impractical scenario for a trading company. In the case of a trading company, COGS typically includes the purchase cost of the goods sold and having a 100% GP/Sales ratio would suggest no COGS, which is not possible.
Moreover, the ratio of 128.33% for Lakshmi Gold Khazaanaa Private Limited is even more unrealistic as it suggests the company is earning more profit than its total sales, which is logically and financially impossible Reliance in this regard is placed upon the following judicial precedents wherein it has been held that super profit making (100% or more) companies have to be excluded from the list of comparable before making transfer pricing adjustment:
- Adobe Systems India (P.) Ltd. v. Add. CIT: [2011] 44 SOT 49 (Delhi) (URO)
- Sapient Corporation (P.) Ltd. v. DCIT: [2011] 11 taxmann.com 69 (Delhi)
-Baxter India (P.) Ltd. v. ACIT: [2017] 85 taxmann.com 285 (Delhi -Trib.)
-Google India (P.) Ltd. v. DCIT: [2013] 29 taxmann.com 412 (Bangalore -Trib.)
-SAP LABS India (P.) Ltd. v. ACIT: [2011] 44 SOT 156 (Bangalore)
-Standard Chartered Finance Ltd. v. DCIT: [2023] 153 taxmann.com 343 (Mumbai - Trib.)
-Banc Tec TPS India (P.) Ltd. v. ACIT: [2020] 117 taxmann.com 979 (Mumbai - Trib.)
-M Modal Global Services (P.) Ltd. v. ACIT: [2019] 112 taxmann.com 67 (Mumbai - Trib.)
-CES (P.) Ltd. v. DCIT: [2014] 41 taxmann.com 409 (Hyderabad - Trib.)
Profit & Loss account is not available in the annual reports shared by TPO: During the course of DRP proceedings, the DRP requested a copy of the source of financials of the above-mentioned companies from the TPO. (Refer page 05 and 06 of the DRP directions dated Paper Book)
In response to the same, the TPO shared annual reports of these companies. In the said annual reports, the Profit and Loss account of these companies are not available due to which the Appellant was not able to verify the margin computation of these companies (Copy of the annual reports shared by the TPO are available from Page 46-338 of the Paper Book).
The profit & loss account of the disputed comparable were not available in public domain and TPO used arbitrary margins - Disclosure restrictions under Companies Act, 1956: The Appellant would like highlight that as per the provisions of Section 220 of the Companies Act, 1956 prevailing during the year under consideration, no person other than member/shareholder of a company was entitled to inspect or obtain copies of the profit and loss account in case of a private limited company and therefore disclosure of profit and loss account by a private limited company was completely voluntary (Refer page 344 of Paper Book).
- Non-availability of Profit & Loss Account of the disputed companies in the public domain: The Appellant would like to mention that the aforesaid companies have not made available their Profit & Loss Account. The same is evident from the fact that Form 23ACA which was the statutory form for the profit and loss account is not available for inspection on the Ministry of Corporate Affairs portal. (Screenshots of the MCA portal is available from Page 339 to Page 342 of the Paper Book)
The TPO does not have any backup for these arbitrary margins: The Appellant would like to highlight that the TPO also does not have P&L data for these companies. It is relevant to note that the DRP directed the TPO to mention the source of financials of these companies in the transfer pricing order giving effect. (Refer page 32 of Paper Book). However, the TPO did not specify the source of the financials, clearly implying that these numbers were arbitrary. (Refer page 21 and 22 of Paper Book)
Therefore, it can be concluded that the TPO has computed GP/Sales of the disputed companies on an arbitrary basis, without any supporting evidence, only for the purpose of making a transfer pricing adjustment and causing undue hardship for the Appellant.
In light of the above, the Appellant humbly requests your Honours to kindly exclude the above motioned four companies on account of non-availability of profit and loss statement.
Reliance in this regard is placed upon the following judicial precedents wherein the companies were excluded from the final list of comparables due to non-availability of complete, accurate and reliable data in the public domain:
-Mavenir India (P.) Ltd. v. DCIT: [2022] 141 taxmann.com 160 (Delhi -Trib.)
-IHG IT Services (India) (P.) Ltd. v. DCIT: [2015] 64 taxmann.com 427 (Delhi - Trib.)
-Xchanging Technology Services India (P.) Ltd. v. DCIT: [2015] 62 taxmann.com 253 (Delhi - Trib.)
-ACIT v. CH2M Hill (India) (P.) Ltd.: [2022] 134 taxmann.com 303 (Delhi -Trib.)
-Samsung India Electronics (P.) Ltd. v. DCIT: [2024] 165 taxmann.com 654 (Delhi - Trib.)
-DSV Air & Sea (P.) Ltd. v. ACIT: [2025] 180 taxmann.com 787 (Mumbai - Trib.)
-Acuity Knowledge Centre (India) (P.) Ltd. v. DCIT: [2026] 182 taxmann.com 114 (Bangalore - Trib.)
-BancTec TPS India (P.) Ltd. v. ACIT: [2019] 108 taxmann.com 109 (Mumbai Trib.)”
Ld. Departmental Representative submitted that Ld. TPO selected four companies similar to the assessee. The selected companies were engaged in trading of jewellery products.
From examination of record in light of aforesaid rival contention, it is crystal clear that three companies namely Karp Jewellery private Limited, Giv Diamond Private Limited and Pushpak Bullions Private Limited had GP/Sales as 100.00% ratio of GP/sales of Lakshmi Gold Khazaanaa Private Limited was on to 8.33%. the above noted GP/sales of 100% and 128.33% were financial appeared illogical as per well settled principle of law holding that super profit of making (100% or more) companies have to be excluded from the list of comparable before making transfer pricing adjustment. Reference to judgment in Baxter India (P) Ltd. vs. ACIT: [2017]85 taxmann.com 285 (Delhi-Trib.) is material.
The inclusion of four comparables is also challenged on the ground that profit and loss account of the four companies is not available.
In view of the material facts the impugned action of inclusion of four companies namely Karp Jewellery private Limited; Giv Diamond Private Limited; Pushpak Bullions Private Limited; and Lakshmi Gold Khazaanaa Private Limited being illegal is set aside, and the matter is restored to file of ld. TPO for afresh decision in accordance with law after affording fair opportunity of hearing to the assessee. Accordingly, the ground of appeal No. 6, 7 to 7.3 are partly allowed.
Regarding Ground of appeal No. 8, the appellant/assessee submitted that Ld.
AO/DRP/TPO erred in rejecting the functional comparables companies for benchmarking the international transaction pertaining to purchase of finished goods on following submissions. The appellant pleaded for inclusion of comparables rejected of TPO i.e. Starline Enterprise Ltd. on following submissions:
“Comparable rejected by TPO quoting non availability of annual report: The TPO has rejected a comparable selected by the Appellant namely, Starlines Enterprises Ltd. alleging that its annual report is not available. (Refer page 466 of Paper Book)
Annual report submitted by the Appellant was ignored by the TPO: In this regard, the Appellant would like to highlight that annual report of the aforesaid comparable was furnished by the Appellant before the TPO at multiple occasions, however, the TPO has not given cognizance to the same and proceeded to reject the comparable quoting non availability of annual report. Copy of the annual reports of Starlineps Enterprises Ltd. is at pages 345 to 356 of the paperbook which was filed before the TPO vide submission dated August 30, 2022 at page 498 of the paperbook.
Availability of annual report in public domain and clarification on name appearing in the annual report: The Appellant submits that the TPO may have not considered the annual report of the company because the name appearing on its financial statement is L'avance Dirays Limited. In response, the Appellant submitted certificate of incorporation, in which it has been stated that Starline was originally incorporated as L'avance Dirays Limited (Refer page 357 and 358 of Paper Book).
Functional comparability engaged in trading of diamonds: The Appellant would like to submit that Starline is engaged in trading of luxury goods viz. polished diamonds and has earned 100% of revenue from the said business. (Refer page 353 of Paper Book). It is pertinent to note that the Appellant is also engaged in trading of jewelry and diamonds. Hence, Starline can be considered as comparable to the Appellant's business.
Profit & Loss structure clearly depicts trading activity: It can be observed from the profit and loss account of Starline, that it has incurred cost for purchasing traded goods i.e. polished diamonds rather than manufactured goods. Further, the company has earned 100% of revenue from sale of such traded goods. (Refer page 349, 353 of Paper Book)
No manufacturing expense incurred: The company has not incurred any manufacturing expenses as evidenced in the other expense schedule of the financial statements. (Refer page 353 of Paper Book)
No fixed assets or plant and machinery: The company does not have any plant or machinery in its balance sheet which is required for undertaking any kind of manufacturing activity. (Refer page 348 of Paper Book)
In light of the above, the Appellant humbly requests your Honours to kindly consider Starline in the final set of comparables.”
Ld. Departmental Representative relied on impugned order.
From examination of record in light of aforesaid rival contention, it is crystal clear that especially page No. 466 of paper book, it is evident that Ld. TPO rejected comparables selected by appellant namely Starline Enterprises Ltd. alleging that its annual report is not available. It is a fact that annual report from page No. 345 to 356 of paper book was filed before Ld. TPO vide submissions dated 30.08.2022 at page No. 498 of paper book. Therefore, the rejection of Starline Enterprise Ltd. as comparable by Ld. TPO is illegal, set aside. Starline Enterprise Ltd. comparable has to be included while the benchmarking the international transaction. Therefore, the matter is restored to file of ld. TPO for afresh decision in accordance with law after affording fair opportunity of hearing to the assessee. Accordingly, the ground of appeal No. 8 is partly allowed.
Ld. Authorized Representative regarding ground No. 9 submitted that Ld.
TPO erred in computing gross profit margin computation of Jewelsouk Marketplace Limited at 1.49% against correct gross profit margin of (-) 1.49%. Ld. Authorized Representative for appellant/ assessee submitted as under:
Incorrect GP/Sales computed by the TPO: The Appellant would like to mention that the TPO has incorrectly considered the GP/Sales of Jewelsouk at 1.49% instead of GP/Sales of (-) 1.49%. (Refer page 22 of Paper Book)
Correct GP/Sales computation: The computation of the correct GP/Sales of Jewelsouk is as below: (Refer page 361 of Paper Book)
| Particulars | Formula | Amount(INR) |
| Revenue from sale of products | A | 15,39,61,015 |
| Cost of materials consumed | B | 12,73,79,714 |
| Changes in inventories of finished goods, work-in-progress and stock-in-trade | C | 2,88,71,919 |
| Cost of goods sold | D-B=C | 15,62,51,633 |
| Gross Profit | D=A-D | -22,90,618 |
| GP margin | F-E/A | -1.49% |
Ld. Departmental Representative relied on impugned order.
From examination of record in light of aforesaid rival contention, it is crystal clear that Ld. TPO erred in computing gross profit margin of Jewelsouk Marketplace Limited at 1.49% against correct gross profit of (-) 1.49% as mentioned in page No. 361 of paper book. Therefore, the matter is restored to the file of Ld. TPO for afresh decision in accordance with law after affording fair opportunity of hearing to the assessee. Accordingly, the ground of appeal No. 9 is partly allowed.
Consequently, Grounds of appeal Nos. 1 and 2 are general in nature while Grounds of appeal Nos. 3 to 5 are not pressed. The issues raised in Grounds of Appeal Nos. 6 to 9 are restored to the file of the ld. TPO for afresh adjudication in accordance with law, after affording fair opportunity of being heard to the assessee. Accordingly, the Grounds of appeal Nos. 6 to 9 are partly allowed.
In the result, the appeal filed by the assessee is partly allowed for statistical purposes.