2015 (3) TMI 1025 – ITAT MUMBAI – [2014] 29 ITR (Trib) 362 (ITAT [Mum]) – – Transfer pricing adjustment – assessee has challenged the addition on account of transfer pricing adjustment in respect of sale made to the associated enterprise by applying comparable uncontrolled price method instead of transactional net margin method – Held that:- Under a particular description, invoices raised to associated enterprise and non-associated enterprise were similar. Exact difference in invoices have not been brought forth before us. Thus in the case of the assessee, there was availability of the internal comparable uncontrolled price, wherein on similar nature of transaction and similar description of product as given in the invoices, the assessee has been charging prices from the associated enterprise as well as from the third party. Even though there may be some differences of size, carat, weight and other aspects, however the same has not been clearly demarcated or demonstrated by the asses
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the assessee to one M/s. Simona NV. Now it has been brought on the record before the Commissioner of Income-tax (Appeals), which has also been a subject matter of remand before the Transfer Pricing Officer that the said transactions have been cancelled, as the said party has returned back/diverted the diamonds sold to them to the assessee's associated enterprise. This is evident from the letter dated October 14, 2010, written by Simona NV. Thus as from the above letter and relevant finding of the Commissioner of Income-tax (Appeals), it is quite conclusive that, the said party has not purchased the diamonds sent on these two invoices and ultimately, it has been sold to associated enterprise only. Thus, such a transaction cannot be considered for benchmarking and determining the arm's length price. Once the particular transaction, which is the subject matter of comparison for transfer pricing adjustment, has not even undertaken or has been cancelled, then such a transaction has to be e
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is always a chance of negotiation of preferable price by the purchaser and there is difference in the price as compared to the one where very small quantity of sale or purchase takes place. Such difference of volume, definitely has a bearing on the negotiation of the prices and, therefore, adjustment on this factor has to be made. This itself is a material difference. We, also agree with the contention of the assessee that marketing expenses in the case of the associated enterprise are comparatively less as there is quite probability of the transaction being finalised. There is also an element of bad debt risk involved in the case of a third party which is much less probable in the case of the related party. If all these differences, which in our opinion are quite “material differences” are taken into account and adjustment is made then difference of rate, which here in this case is approximately 11 per cent., can be made. Thus, looking to these factors of material difference includin
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omparison to non-associated enterprises – CIT(A) deleted the addition – Held that:- The average days of delay in payment as worked out by the Transfer Pricing Officer is also inappropriate as number of sale transactions with associated enterprise is far more than the non-associated enterprise and will result in improper working of average days. On these facts of the case, we do not find any reason for making any kind of upward adjustment on account of differences in period for realisation of payments in respect of sales made to associated enterprise as well as non-associated enterprises. Such a notional interest cannot be charged for the purpose of making adjustment in the arm's length price. Thus the order of the Commissioner of Income-tax (Appeals) deleting the adjustment of Rs, 4,65,23,007 on this score is upheld – Decided in favour of assessee. – ITA NO. 7303/Mum/2011, ITA NO. 7460/Mum/2011 Dated:- 23-10-2013 – SHRI P.M. JAGTAP AND SHRI AMIT SHUKLA, JJ. For the Appellant : Shri Vi
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to be charged on delayed payment on sales/invoices which are receivables from the associated enterprise. Since common issue of transfer pricing adjustment is involved in both the appeals, therefore, they are being disposed of by this consolidated order for the sake of convenience. 2. The facts in brief, are that the assessee which is a partnership firm, is engaged in the business of manufacture of cut and polished diamonds and selling them to associated enterprise as well as to the third parties. In the transfer pricing report in Form 3CEB, the assessee has disclosed the following international transaction with its associate enterprises (AEs) : Sl. No. Class of transactions in the financial year 2006-07 Amount Method used 1. Purchase of rough diamonds 10,88,53,365 Transactional net margin method 2. Sale of cut and polished diamonds 1,26,34,59,644 Transactional net margin method For benchmarking the transactions with its associated enterprise, the assessee has adopted the transactional
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ise. The list of such invoices has been illustrated at page 2 of the Transfer Pricing Officer's order. From details of such transactions, he noticed that there are differences in prices which were charged from associated enterprise and from the third parties. Accordingly, he deduced that the prices charged from the non-associated enterprise can be used as comparable for benchmarking the price charged by the assessee from its associated enterprises, by applying internal comparable uncontrolled price. On this aspect, the Transfer Pricing Officer required the assessee to show cause, as to why the difference in the rates paid to the associated enterprise in comparison to non-associated enterprise should not be considered as additional price to be charged from the associated enterprise on sales made to them and upward adjustment be made on the value of such international transaction. In response, the assessee submitted that there are various reasons for non comparability of associated e
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re was difference in price of more than 5 per cent. as the prices charged from the associated enterprises were less than the prices charged from the non-associated enterprises, accordingly he proceeded to make adjustment in respect of the said three categories of transactions. The calculation and the addition made by the Transfer Pricing Officer in respect of three categories of the diamonds were as under : Products Qty. in carats Difference/-carats (US dollar) Value of differences (US dollar) Value of difference (in Rs.) Export to the associated enterprise 25 P/CT D CUT white VS1 3250.08 82.28 270667.65 1,21,85,458 25 P/CT D CUT white VVS1 2773.20 41.11 114005.15 51,32,512 6P/CT D CUT White VVS1 201.35 69.94 14083.40 6,34,035 Total 398756.20 1,79,52,005 2.2. Accordingly the Transfer Pricing Officer made an adjustment of ₹ 1,79,52,005 to the arm's length price of the exports of diamonds to the associated enterprise. 2.3. Further while analysing the details of realisation peri
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red with the comparable companies. Further there is a less risk involved in the payment from associated enterprises and, therefore, the benefit of extended credit period is quite justified. However the Assessing Officer rejected the assessee's contention and worked out the upward adjustment of ₹ 4,65,23,007 after observing and holding as under : "The submission of the assessee has been duly considered. It is clear that the assessee is giving benefit to its associated enterprise by allowing more days of interest free credit vis-a-vis the non-associated enterprises. Thus, an adjustment is warranted on account of delayed average realisation period. Following the comparable uncontrolled price Method, because no person in uncontrolled transactions will permit use of money without interests, so as to consider the trans action to be at arm's length. The assessee was also asked to furnish the average borrowing cost of its fund. The assessee vide its submis sion dated October
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Income-tax (Appeals), on the first issue, the assessee submitted that the comparable uncontrolled price method (CUP) cannot be adopted as most appropriate method, because the prices of two diamonds cannot be same or can be compared merely on the basis that the diamonds have same description on invoices, as there are several factors which has to be taken into consideration on which diamonds are priced like quality of diamonds, size per carat, type of shape, type of colour and fluorescence, purity and various grades of diamonds. All these factors needs to be differentiated and they have affect the pricing of the diamonds, and these differences are not possible to mention in the invoices. In support of this contention, the assessee submitted Rapport report, and certificate from International Gemological Institute, to point out various sub-classifications within each category of diamond and the impact on pricing of the diamonds. The assessee has also highlighted the various instances, whe
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ere huge as compared to non-associated enterprises. Further, in case of sale to associated enterprises, the assessee does not have to incur various costs of marketing expenses and the risk factor is also less while making sales to the associated enterprises. These differences has to be taken into account while benchmarking the prices with the associated enterprises as well as with non-associated enterprises. 3.1. During the course of appellate proceedings, the assessee also filed additional evidence with regard to particular transactions in the case of Simona NV (third party), which has been benchmarked by the Transfer Pricing Officer and had made the adjustment in respect of two categories of transactions, this has resulted into adjustment of ₹ 1,28,19,493. From the said additional evidence which was in the form of letter from the said party the assessee had contended that the said non-associated enterprise had not purchased the diamonds, but had forwarded the said consignment o
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the Transfer Pricing Officer. However, the Transfer Pricing Officer on perusal of the confirmation letter and invoices, observed that this transaction was circular in nature as the sale has been diverted to the assessee's associated enterprise. The learned Commissioner of Income-tax (Appeals) accepted the said additional evidence on the ground that, the said letter was dated October 14, 2010, whereas the proceedings before the Transfer Pricing Officer had ended by that time as the order of the Transfer Pricing Officer was passed on October 18, 2010. After detail reasoning the learned Commissioner of Income-tax (Appeals) has admitted this additional evidence, because it goes to the very root of the transfer pricing adjustment. The admission of this additional evidence has also not been challenged by the Department in its appeal. 3.2. Thus after admitting this additional evidence and considering the entire material on record, this issue of transfer pricing adjustment of ₹ 1,79
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oducts. Accordingly even if such differences existed, the same at best could be treated as 'mere differences' and not the 'material differences', which would affect the price of the product in the open market, as has been envis aged in rule 10B(1)(a)(ii) of the Income-tax Rules, 1962. In view of these facts and circumstances, the objections raised by the appellant in this regard are rejected. 2. The appellant has further mentioned that diamond industry is very price sensitive and that there are various judicial precedents in the Indian context, wherein, it has been held that each diamond is unique, and hence, the prices of different diamond cannot be compared. In this regard it is stated that the appellant has not demonstrated with any facts or figures, how such a mention is relevant to the appellant's case. Further what are those judicial pronouncements which have held about the uniqueness of the diamond in the Indian context has not been submitted by the appellant
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ransfer Pricing Officer has not granted enough opportunity and time to prove that the comparable prices used by the Transfer Pricing Officer in respect of which the adjustments have been made are in fact not comparable transactions at all. In this regard it is stated that the appellant was given sufficient opportunity by the Transfer Pricing Officer. The proceedings before the Transfer Pricing Officer were initiated on March 18, 2010 and the order under section 92CA(3) was passed on October 18, 2010. During the course of the proceedings the authorised representative attended before the Transfer Pricing Officer at least for 8 times on various dates. Accordingly it cannot be arrived, at that the appellant was not given sufficient opportunity to make its submissions or it was not given sufficient or reasonable opportunity by the Transfer Pricing Officer. However it may be mentioned here that the additional evidence which the appel lant filed and seems to be considered in the instant proce
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confirmation letter and bills submitted by the assessee, it is seen that the said transactions under reference were of circular nature" it is seen that in respect of the said two categories of diamonds, Transfer Pricing Officer had used sales made to Simona N. V. vide invoice No. 187 dated March 13, 2007 and vide invoice No. 215 dated March 31, 2007 as comparable uncontrolled transaction and made adjustments accordingly. In this respect, as submitted by the appellant and also confirmed by the Transfer Pricing Officer vide his remand report dated July 20, 2011, the said sales to non-associated enterprise (Simona N.V.) were eventually sold to associated enterprise, since the non-associated enterprise found the prices to be very high. Accordingly, the said transaction cannot be regarded as comparable uncontrolled transactions ; accordingly conse quent benchmarking and hence the adjustment done by the Transfer Pricing Officer would not be valid. In view of these set of facts the conse
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s as against the sale of ₹ 126.34 crores made to associated enterprise. Further, there are also various other dffferences such as difference in credit risk, marketing expenses, etc. The appellant also stated that an appropriate adjustment would have to be made to the prices charged to non-associated enterprises to make them comparable to the prices charged to associated enterprises. The appellant also submitted the calculation of the said adjustment and contended that the prices charged to associated enterprises were at arm's length. 8. I have gone through the arguments and I do not agree with the appellant's contention. The appellant has not submitted any basis of calculation of the said discount adjustment. Further, the appellant has not brought anything on record to suggest that the associated enter prises were eligible for discount based on the quantity sold. In its submission the appellant has not been able to demonstrate that the factors of dffferences which it has
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rm's length price. Secondly, he has accepted the additional evidence in the form of letter dated October 14, 2010 of M/s. Simona NV after giving the detail reasoning and based on such letter, he came to the conclusion that no adjustment on account of such transaction can be made, as the sale itself was not undertaken and hence cannot be considered for comparable uncontrolled transaction and, therefore, adjustment on such a transaction is not valid. Accordingly sum of ₹ 1,28,19,493 based on such transaction was deleted. Lastly, on the balance transaction, wherein, the adjustment of ₹ 51,32,512 was made by the Transfer Pricing Officer has been confirmed by him. Against this, the assessee as well as the Department had come in appeal before us. 4. Learned counsel, Shri Vijay Mehta on behalf of the assessee submitted before us that first of all, no valid reason had been given by the Transfer Pricing Officer or the Commissioner of Income-tax (Appeals) for rejecting the assess
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ity, colour fluorescence, polish, etc. Such a huge dissimilarity in the products itself cannot lead to application of comparable uncontrolled price method, which requires very high degree of product similarity. He drew our attention to Rapport report and certificate of International Gemological Institute, along with the literature on shapes and sizes of the diamonds in support the contention that, there is a huge difference in the grading and pricing of the diamonds. Even in the transfer pricing study report this issue has been highlighted in detail and our specific attention was drawn to page 129 of the paper book and also on pages 39 and 40 of the paper book. Even from the perusal of the invoices, he submitted that, it can be seen that Transfer Pricing Officer has not taken piece wise or carat wise description but has gone by the pricing by the category of diamond which was sold to the associated enterprise as well as to unrelated parties. Within the same category, there is a huge va
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propriate method in the case of the assessee but also the same comparables. 5. Per contra, the learned Commissioner of Income-tax (Departmental representative), Shri Ajit Jain, submitted that, from the very perusal of the transaction as highlighted by the Transfer Pricing Officer at page 2 of his order, it can be seen that there is a clear cut description of piece per carat, the kind of cut and the description of the clarity of the diamonds. Under such description, the assessee has not only sold the diamonds to the associated enterprise but also to the third party customers and, therefore, in such a situation the negotiated price with the associated enterprise as well as with the unrelated parties has to be compared and benchmarked. This is what Transfer Pricing Officer has done after applying the comparable uncontrolled price method. In this case, there was an internal comparable uncontrolled price, therefore, there was no need to resort to transactional net margin method. Once the di
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ables has to be done because neither the Transfer Pricing Officer nor the Commissioner of Income-tax (Appeals) has carried out any comparability analysis. Some of the comparables as highlighted by the assessee are also into jewellery business, whereas the assessee is purely engaged in the business of selling of cut and polished diamonds. In any case, if transactional net margin method has to be accepted then the matter is required to be sent back to the Transfer Pricing Officer for fresh consideration. 5.1. As regards deletion/adjustment of ₹ 1,28,19,493 on account of transaction with M/s. Simona NV, learned Commissioner of Income-tax (Departmental representative) strongly relied upon the findings given by the Transfer Pricing Officer in the remand report, which has been dealt at page 7 of the appellate order and further submitted that the transaction with the said party has to be seen for the purpose of comparing the prices only and whether such transaction has actually material
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e relevant finding by the Commissioner of Income-tax (Appeals) and by the Transfer Pricing Officer and also the material referred to, before us. The assessee is mainly engaged in the manufacturing and selling of cut and polished diamonds and for this purpose it has purchased rough diamonds from associated enterprise and had also sold cut and polished diamonds to its associated enterprise. The transaction with the associated enterprise constitutes more than 66 per cent. of the entire sale. The operating margin as shown by the assessee on its sales was at 8.22 per cent. For benchmarking the arm's length price of its international transaction with its associated enterprise, the assessee has adopted transactional net margin method as the most appropriate method, after analysing various other methods and also as to why other methods cannot be applied in the case of the assessee. For comparability analysis under transactional net margin method, it has finally selected seven comparables w
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ould be the most appropriate method. 7.1. The application of the arm's length price is based on comparison of the conditions in controlled transaction with the conditions in transaction between independent enterprise, i.e., uncontrolled transaction, so as to determine the market price or the margin on which the two related parties are carrying on their transaction. The determination of the arm's length price has to be done as per the methodology prescribed under section 92C read with rule 10B. All these methods are either based on price or on profit which determine the transfer price by examining comparable matching transaction, comparable adjustable transaction and comparable profit transaction. Rule 10B(1)(a) provides that the comparable uncontrolled price method, i.e., comparable uncontrolled price, is a comparison of the prices of property or services transferred in a controlled transaction with the price charged for property or services transferred in a comparable uncontro
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tments. There can be an internal comparable uncontrolled price, when one of the group entity enters into a comparable transaction with an unrelated party where the goods or services under consideration are the same or similar. There can be an external comparable uncontrolled price also, if a transaction between two independent enterprises involves goods or services under comparable conditions. As pointed out by learned counsel, in diamond industry/business within the same product of diamond, there is a huge dissimilarity and variation of features which leads to difference in the prices. The pricing of the diamonds depends upon various parameters/factors like size of the diamond, carat weight, various types of shape, colour fluorescence, clarity, grade, polishing, height and depth angle, girdle thickness, etc., which leads to differential pricing of the diamonds. In such a condition it becomes very difficult to apply comparable uncontrolled price method in benchmarking the pricing of th
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amond. Under this description, invoices has been raised not only to the associated enterprise but also to the third party customers. If on the similar nature of transaction and description of goods the prices have been negotiated by two parties, one in controlled situation and another in uncontrolled transaction, then such a pricing can be examined for the purpose of benchmarking the price which had been charged by the assessee unless it is shown that within such invoices there were different kinds of diamonds under sale transaction. Though we have already held that in the sale of diamonds, it is very difficult to benchmark the price by applying the comparable uncontrolled price method, however on the peculiar facts of the present case, it is seen that in the nature of sale transaction undertaken by the assessee and the price which has been charged from the associated enterprise appears to be on similar description of diamonds which has been sold to the third party also. The nature and
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114005.15 5 100 P/CT D CUT White SI 1599.92 360.53 63.84 370.01 9.47 5683.98 6 100 P CT D CUT White VVS1 144.49 481.71 16.04 485.00 3.29 475.70 7 10 P/CT D CUT White VVS2 485.47 648.66 70.32 673.73 25.07 12169.22 8* 6P/ CT D CUT White VVS1 201.35 847.02 2.37 916.96 69.94 14083.40 9 6P/CT D CUT White VVS2 100.89 793.15 14.38 823.79 30.64 3091.22 10 6P/CT D CUT White VS2 42.84 635.00 43.43 662.17 27.17 1164.17 11 10P/CT D CUT White VVS1 431.09 715.57 9.89 720.70 5.13 2213.19 * Subject matter of transfer pricing adjustment. 7.3. Out of all these transactions, nine transactions have been accepted by the Transfer Pricing Officer, as the price difference was less than 5 per cent. and it was only with regard to three transactions, which have been given at serial Nos. 2, 4 and 8, the Transfer Pricing Officer has drawn the adverse inference on the basis of major difference in prices charged by the assessee. From the above details, it appears that under a particular description, invoices raised
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(Appeals) that there was internal comparable uncontrolled price available in the case of the assessee for determining the transfer price. Once a direct method of internal comparable uncontrolled price is available then there is no need to resort to transactional net margin method. 7.4. Now coming to the deletion of addition of ₹ 1,28,19,493 by the Commissioner of Income-tax (Appeals), which is subject matter of ground Nos. 1, 2 and 3 in the Department's appeal. Out of the three transactions, which has been adversely viewed by the Transfer Pricing Officer, two transactions pertained to sale made by the assessee to one M/s. Simona NV. Now it has been brought on the record before the Commissioner of Income-tax (Appeals), which has also been a subject matter of remand before the Transfer Pricing Officer that the said transactions have been cancelled, as the said party has returned back/diverted the diamonds sold to them to the assessee's associated enterprise. This is evident
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arats for US$ 353,490.41)." The said letter has been subject to remand before the Transfer Pricing Officer, who has given his remark, which has been incorporated and dealt with by the Commissioner of Income-tax (Appeals) also as discussed herein the foregoing paragraphs, from the above letter and relevant finding of the Commissioner of Income-tax (Appeals), it is quite conclusive that, the said party has not purchased the diamonds sent on these two invoices and ultimately, it has been sold to associated enterprise only. Thus, such a transaction cannot be considered for benchmarking and determining the arm's length price. Once the particular transaction, which is the subject matter of comparison for transfer pricing adjustment, has not even undertaken or has been cancelled, then such a transaction has to be excluded for the purpose of benchmarking the transfer price. The detail reasoning and the conclusion given by the Commissioner of Income-tax (Appeals) as have been reproduce
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me which should be taken into consideration while examining the price differences and accordingly the adjustment should be made. Besides this, it was also submitted that price differences in diamond business are also on account of price fluctuation and differential time period. Further, in case of third party there is always a risk of bad debt which is not there in the case of the associated enterprise and also the marketing expenses in the case of the associated enterprise is less. If these differences are taken into consideration and accordingly adjustment is made, then there is no requirement for making any upward adjustment of the arm's length price. The learned Commissioner of Income-tax (Appeals) has rejected this contention, mainly on the ground that the assessee could not brought anything on the record that associated enterprises were eligible for discount, based on quantity sold and these differences are not material difference. We are of the opinion that such a reasoning
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c. All these factors have to be taken into account for determination of the price in a given transaction. In this particular transaction, the assessee has sold a total quantity of 2773.20 to its associated enterprise with an average rate of 328.89 dollars, whereas to the third party, the assessee has merely sold quantity of 8.50 carats with the rate of 370 dollars. Thus there is a huge difference in volume of sale and it is quite a normal phenomena that if the purchases and sales are made in huge quantity then there is always a chance of negotiation of preferable price by the purchaser and there is difference in the price as compared to the one where very small quantity of sale or purchase takes place. Such difference of volume, definitely has a bearing on the negotiation of the prices and, therefore, adjustment on this factor has to be made. This itself is a material difference. We, also agree with the contention of the assessee that marketing expenses in the case of the associated en
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well as from the third party and if such an adjustment is carried out then there is no requirement for making any kind of upward adjustment in this case. Therefore, the decision of the Commissioner of Income-tax (Appeals) in confirming the adjustment of ₹ 51,32,512 to the arm's length price is reversed and the said addition is deleted. Accordingly, the ground raised by the assessee is treated as allowed, whereas ground Nos. 1, 2 and 3 as raised by the Revenue stands dismissed. 9. The other issue involved in the Departmental appeal is with regard to the transfer pricing adjustment of ₹ 4,65,23,007 on account of notional interest on delayed collection of payment on sale invoices from associated enterprises in comparison to non-associated enterprises. The Transfer Pricing Officer has made this adjustment only on the ground of average days of realisation in respect of sales to associated enterprise which was 210 days, whereas in respect of non-associated enterprises the av
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ch delayed payments. In support of this, a certificate/letter from Gem and Jewellery Export Promotion Council was filed before the Commissioner of Income- tax (Appeals). Besides this various judicial precedents were also cited which has been dealt by the Commissioner of Income-tax (Appeals) in pages 13 to 15 of the appellate order. The learned Commissioner of Income-tax (Appeals) duly appreciated the assessee's contention and also relying upon the various decisions of the Income-tax Appellate Tribunal, has deleted the said addition. 11. Before us, learned counsel reiterated the submissions made before the lower authorities and also relied upon the decisions of the co-ordinate bench of the Tribunal in the case of Lintas India P. Ltd. v. Asst. CIT reported in [2013] 152 TTJ (Mum) 706 and the decision of Deputy CIT v. Indo American Jewellery Ltd. reported in [2012] 50 SOT 528 (Mum), wherein similar charging of notional interest on delayed realisation of payment from associated enterpr
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. 12. We have carefully considered the rival submissions and also perused the relevant finding of the Transfer Pricing Officer as well as the Commissioner of Income-tax (Appeals) and also the material on record. It is an undisputed fact that the assessee has not charged any interest from the third party in respect of delayed payments even when the time period of realisation has exceeded more than 300 to 400 days. From the perusal of the details as submitted by learned counsel in the paperbook, it is seen that there are many instances in which more than 200 days have been exceeded in realisation of payments in case of third parties. Once on such delayed payments with third party no interest has been charged, then to work out the notional interest in case of delayed payment by the associated enterprise is also not called for. The comparison in such a case has to be made with controlled and uncontrolled transactions and once there is no such factor present in the uncontrolled transaction
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