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04-09-2019, P.N. Gadgil Jewellers, Section 144C(13), 234A, Tribunal Pune
The appeal filed by assessee is against the order of ACIT, Circle 4, Pune, dated 16.10.2018 relating to assessment year 2014-15 passed under section 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (in short ‘the Act’).
2. At the outset, the learned Authorized Representative for the assessee pointed out that ground of appeal No.1 is general. Further, he did not press grounds of appeal No.2 to 6, 10 and additional ground of appeal No.13. The ground of appeal No.11 was against levy of interest under section 234A, 234B & 234C was said to be consequential and ground of appeal No.12 was pointed out to be premature. Hence, the issues which need to be adjudicated are against transfer pricing adjustment made in the specified domestic transactions, vide grounds of appeal No.7, 8 and 9, which read as under:-
7. Inappropriate consideration of segmental operating profit margins of the Appellant.
Erred on the facts and in circumstances of the case and in law in considering segmental operating profit margins related to gold and silver segment of the Appellant while applying TNMM instead of entity wide margins.
8. Inappropriate computation of transfer pricing adjustment on the entire segmental revenue of the Appellant instead of adjustment, if any only on the value of international / specified domestic transactions of the Appellant.
Erred on the facts and in circumstances of the case and in law by computing the transfer pricing adjustment on the entire segmental revenue of the Appellant instead of adjustment, if any only on the value of international/ specified domestic transactions of the Appellant.
9. Inappropriately not aggregating the specified domestic transaction pertaining to payment of director's remuneration while applying TNMM.
Erred on the facts and in circumstances of the case and in law by not aggregating the specified domestic transaction pertaining to payment of director's remuneration while applying TNMM.
3. Briefly, in the facts of the case, the assessee for the year under consideration had filed return of income declaring total income of ₹ 33,61,11,590/-. The assessee was engaged in the business of carrying on jewellery business. The assessee company was incorporated on 28.10.2013 and it took over as a going concern the business carried on by two firms M/s. PN Gadgil & Co. and M/s. PN Gadgil & Co. (Silver). The Assessing Officer notes that partnership firms were controlled by the members of Gadgil family who were engaged in the business of jewellery for more than 150 years. The assessee had shown total receipts from its operations at ₹ 503.30 crores and had shown gross profit of ₹ 73.57 crores, which worked out to 14.62%. The net profit shown was at 4.70%. The Assessing Officer made reference under section 92CA(1) of the Act to the Transfer Pricing Officer (TPO). The TPO noted that the assessee had undertaken various domestic transactions during the year. The assessee had benchmarked all the transactions by applying CUP method as most appropriate method except the transaction pertaining to remuneration to Directors. The transaction with which we are concerned is purchase of gold, silver and diamond jewellery, bullion stock of firm at ₹ 2,32,29,60,348/-. The assessee company had acquired the business of PN Gadgil Jewellers through Business Transfer Agreemen dated 16.11.2013. The assessee claimed it to be in the nature of slump sale whereby all assets and liabilities of jewellery business of the firm were taken over by the company at book value. Thereafter, jewellery business was carried out by assessee company instead of partnership firm. The total of bullion and jewellery inventory of the value at ₹ 232 29 crores as reflected in the books of firm was taken over by the assessee company and the assessee claimed it to be mere book entry from one entity to another and there was no profitability motive like in an independent purchase / sale transaction between two different parties. The TPO vide para 7.2.2 at page 18 of his order notes that as per Article 3, consideration at page 8 of the said agreement was disclosed at ₹ 85,83,31,999/- instead of amount of ₹ 232.29 crores. On further verification, the TPO found that as per Form No.3CEB, assessee company had taken over assets and liabilities of the firm at agreed consideration of ₹ 9091.82 lakhs, whereas assessee in the agreement has mentioned sum of ₹ 8583.32 lakhs and hence, there was difference of ₹ 508 lakhs. The extract of Form No.3CEB is reproduced at para 7.2.3 at page 19 of TPO’s order. The variation of amount of consideration in differentdocuments was confronted to the assessee and the assessee was asked to explain the same along with documentary evidence.
The second plea of assessee that the transaction was not reported as expenditure was also found to be incorrect as the assessee in clause No.23 of Form No.3CD had made certain reports and the TPO was of the view that where the assessee had shown it as purchases, therefore the same figure might have been reflected in expenses of the assessee company, thereby reducing the margins of assessee. The assessee was asked to explain that how the figure of ₹ 23,229.60 lakhs was worked out and what were the supporting evidences. The TPO observed that in the absence of any justification, the transaction amount of ₹ 2,32 29,60 348/- for purchase of gold, silver and diamond jewellery and bullion stock of associated enterprise as mentioned in Form No.3CD and Form No.3CEB was considered as consideration, hit by provisions of section 40A(2) of the Act and was to be considered for benchmarking The TPO also observed that though the assessee had shown the above said purchases from the firm and had benchmarked by applying CUP method as most appropriate method; however, the assessee had not justified the transaction and the method in TP study report and the subsequent submissions, the only submission made was of copy of Business Transfer Agreement. The claim of assessee that stock was transferred at the book value, was also without any justification, as per TPO. In the absence of the same, the TPO observed that CUP method was not most appropriate method to benchmark the transaction and TNMM method was sought to be applied for verification of benchmarking. The TPO first computed PLI computation of net margins and five concerns were finally selected as comparables as tabulated under para 9 at page 30 of TPO’s order. The TPO