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Judgment
This Appeal under Section 260-A of the Income Tax Act, 1961 (the Act), challenges the order dated 23rd April, 2013 passed by the Income Tax Appellate Tribunal (the Tribunal). The impugned order is in respect of Assessment Year 2008-09.
The Revenue urges the following questions of law for our consideration:
"(a) Whether on the facts and in the circumstance of the case and in law, the Tribunal is justified in upholding the assessee''s Profit Level Indicator (PLI) of OP/TC and rejecting the TPO''s PLI of ''Return On Capital Employed'' (ROCE) without appreciating that in the assessee''s line of business of low value added jewellery manufacturing, which is working capital incentive, ROCE is the most appropriate PLI and has been rightly applied by the TPO in terms of Rule 10B(e)(i) of the Income Tax Rules, 1962?
(b) Whether on the facts and in the circumstance of the case and in law, the Tribunal is justified in restricting the adjustment only on international transactions without appreciating that
(i) the assessee has itself applied TNMM at entity level; and (ii) that the presumption underlying the arm''s length principle is that uncontrolled transactions are at arm''s length, and therefore, if the overall margins are less than arm''s length margins, the short fall must be on account of AE transactions only and not on pro rata basis?"
Regarding Question (a) :-
(a) The Respondent-Assessee is engaged in the business of manufacturing, importing and exporting jewellery. As the Respondent-Assessee had entered into International Transaction with its Associated Enterprises (AE), a reference was made by the Assessing Officer to the Transfer Pricing Officer (TPO) to determine the Arms Length Price (ALP) of such International transactions. The TPO adopted the Transactional Net Margin Method (TNMM) as had also been done by the Respondent-Assessee. However, the base applied was capital employed by the TPO to determine the Profit Level Indicator (PLI) to bench mark its international transactions As against the base of Total Cost incurred was adopted by the Respondent-Assessee to determine the PLI. In the above view, the TPO worked out the Return on Capital Employed (RoCE) to arrive at ALP margin at 12.97% to carry out the Transfer Pricing adjustment.
(b) The Assessing Officer passed a draft Assessment Order in terms of the ALP determined by the TPO. This was objected to by the Respondent before the Dispute Resolution Panel (DRP). However, the objection was rejected by the DRP leading to the order of the Assessing Officer under Section 143(3) of the Act. This was in terms of the TPO order, in so far as it dealt with International Transactions;
(c) On appeal, the Tribunal by the impugned order did not disturb the TNMM as the most appropriate method to determine the ALP. However, it held that though capital employed in terms of Rule 10B(e)(i) of the Income Tax Rules could be the base, the RoCE obtained in the absence of there being any segregation of the capital employed in respect of AE transaction and others, would not give an appropriate result to determine the ALP in respect of transaction with AE. Thus, in the peculiar facts it applied, the Total Cost (TC) as the base to determine the ALP under the TNMM. It further places reliance upon the orders of the Tribunal determining the ALP in respect of International Transaction entered into by persons in jewellery business similar to that of Respondent-Assessee where the TC or Total sales was applied as base to determine the PLI. In the above view, the Tribunal directed the application of TC as the base to arrive at the PLI under the TNMM for determining the ALP;
(d) Mr. Pinto, learned Counsel appearing for the Revenue submit that the business of the Respondent is a capital intensive industry i.e. diamond and jewellery. In such cases, it is submitted that RoCE would be the most appropriate method. However, the reasoning of the Tribunal for not adopting the RoCE Method in the present facts has not disputed and no attempt to show it to be fallacious is even made.
(e) We find that in terms of Rule 10-B1(e) (i) of the Income Tax Rules, it is open for the authorities to determine the net profit margin by applying as its base either cost or sales or any other relevant base. It is for the authorities to determine the appropriate base while applying the TNMM entirely depending on the facts and circumstances of the case before it. Although the RoCE could be a basis to determine the profit margin to arrive at ALP having regard to capital employed as a base. In the present facts, as correctly emphasised by the Tribunal, there is a common pool of capital used both for International Transaction with AE''s and also others. Thus, in the absence of identification or segregation of capital employed with regard to AE''s transaction and those with others, the RoCE method would not indicate the appropriate margin for determining the ALP;
(f) Thus, the RoCE method has not been accepted by the Tribunal to determine the ALP. Further, even before us, as also before the Tribunal, the Revenue has not been able to show any determination of margin by RoCE method to arrive at the ALP of International Transactions in the Respondent-Assessee''s industry;
(g) Therefore in the facts and circumstances of the case, the view taken by the Tribunal is a reasonable and possible view. Thus, Question (a) as formulated by the Revenue does not give rise to any substantial question of law.
Regarding Question (b):- It is not disputed by the Counsel that the issues raised herein stands concluded against Revenue and in favour of Respondent-Assessee by the decision of this Court in CIT v. Tara Jewels Exports (P) Ltd (2016) 129 DTR 410 and CIT v. Thyssen Krupp Industries India (P) Ltd. (2016) 129 DTR 412. In view of the above, Question (b) as formulated by the Revenue does not give rise to any substantial question of law. Hence, not entertained.
Accordingly, Appeal dismissed. No order as to costs.