Decided on May 07,2014

Kiara Jewellery P. Ltd. Respondents


P.M.JAGTAP,AM - (1.) THIS appeal filed by the Revenue is directed against the order of Id. CIT(A) -15, Mumbai dated 19.9.2011 and the same is being disposed off along with the Cross -objection filed by assessee being CO No. 228/Mum/2012.
(2.) THE solitary common issue arising out of this appeal of the revenue and the cross -objection of the assessee relates to the Transfer Pricing adjustment of Rs.1,01,06,805/ - made by the Assessing Officer/ Transfer Pricing Officer (TPO) which has been partly sustained by the ld. CIT(A).
(3.) THE assessee in the present case is joint venture company of Saphire Products SA, Switzerland and Shreruj and Company Limited India. It is engaged in the business of manufacturing of diamonds and precious stones studded jewellery. The return of income for the year under consideration was filed by it on 22.10.2007 declaring loss of Rs.88,24,570/ -. During the course of assessment proceedings, it was noticed by AO from the transfer pricing study report submitted by the assessee that the assessee has entered into various international transactions with its Associated Enterprises (AE) including transactions involving export of studded jewellery to its AE worth Rs.12,77,59,946/ -. He, therefore, made a reference u/s 92CA (1) of the Income Tax Act, 1961 (the Act) to the TPO for determining the Arm's length price of the said international transactions. During the course of proceedings before him, the TPO found that the average profit margins (OP/OC) of the comparable selected was 5.31% as against the OP/OC of the assessee shown at ( -2.48%). In this regard, the explanation offered by the assessee before the TPO was that it was operating at 50% of its actual capacity during the year under consideration and therefore its operating profit margin was lower as compared to all the comparables selected. It was pointed out that the capacity utilization of the comparables companies for the year consideration was not available in the public domain and if the same would be taken at 75% and suitable adjustment is made to the profit margin on account of capacity utilization, the adjusted profit margin of the assessee would be 0.93% as against average profit margin of the comparable companies of 5.31%. It was also claimed that the difference between these profit margins being less than 5%, no TP adjustment was required to be made in the case of assessee as per proviso to Section 92C(2) of the Act. The adjustment claimed by the assessee on account of capacity utilization was not allowed by TPO by raising certain doubts about the fixed cost claimed by the assessee. He also did not allow the claim of the assessee for the benefit of 5% adjustment holding that such benefit could be allowed only when the difference between the profit margin of the assessee and the profit margin of the comparables is within the range of 5%. Accordingly, taking the average profit margin of 5.31% of the comparable companies as Arm's length profit, TP adjustment of Rs.1,01,06,805/ - was worked out by the TPO in his order passed u/s 92CA(3) of the Act. When addition on account of the TP adjustment of Rs.1,01,06,805/ - worked out by the TPO was made by AO to the total income of the assessee in his assessment order passed u/s 143(3) of the Act, appeal was preferred by the assessee before the ld. CIT(A) challenging the said addition.;

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