ASTRA MANAGEMENT SERVICES PRIVATE LIMITED,NEW DELHI V. DCIT CIRCLE-3(2), NEW DELHI

ITA 8332/DEL/2019

AI Insights

The case involves M/s Astra Management Services (P) Ltd., which appealed against the order of the Commissioner of Income-tax (Appeals)-1, New Delhi, concerning an assessment for the year 2014-15. The primary issue was the disallowance of Rs. 1,26,54,000 made by the Assessing Officer under section 40A(2)(b) of the Income-tax Act, 1961, for purchases of poppy seeds from a related party at what was deemed an excessive price. The Tribunal examined whether the disallowance was justified and whether the transactions were at arm's length as per Indian transfer pricing regulations. The Tribunal ultimately decided in favor of the assessee, citing that the disallowance was not applicable as both parties were taxed at the same rate and the transactions did not involve any tax arbitrage.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 471961 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2024
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2014-2015
• Other Referred Cases: Sigma Research & Consulting Pvt. Ltd. vs. CIT, CIT v. Indo Saudi Services (Travel) (P) Ltd.
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Business expenditure; Fair market value; Maximum Marginal Rate
• Section: 143(3); 244A

Judgement Text

"1 ITA no. 8332/Del/2019 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘A’ NEW DELHI BEFORE SHRI SATBEER SINGH GODARA, JUDICIAL MEMBER AND SHRI M. BALAGANESH, ACCOUNTANT MEMBER ITA No. 8332/Del/2019 Assessment Year: 2014-15 M/s Astra Management Services (P) Ltd., C-15, Qutab Institutional Area, New Delhi-110016. PAN: AAECA 0355 P Vs DCIT, Circle 3(2), New Delhi. APPELLANT RESPONDENT Assessee represented by Sh. Sanjeev Kr. Choudhary, AR; Sh. Anil K. Chopra, FCA; & Sh. Praveen Kiumar, CA Department represented by Shri Poojan Rana, Sr. DR Date of hearing 19.11.2024 Date of pronouncement 31.12.2024 O R D E R PER SATBEER SINGH GODARA, J.M: This assessee’s appeal for assessment year 2014-15 arises against Commissioner of Income-tax (Appeals)-1, New Delhi’s’ order dated 06.08.2019, in case no. 432/16-17, in proceedings u/s 143(3) of the Income-tax Act, 1961, hereinafter referred to as the ‘Act’. Heard both the parties at length. Case file perused. 2. The assessee pleads the following substantive grounds in the instant appeal: 2 ITA no. 8332/Del/2019 “1. That on facts and law involved, the Learned Commissioner of Income Tax (Appeals) [Ld. CIT(A)] has erred in not deleting the entire disallowance of Rs.1,26,54,000/- made by the Learned Assessing Officer (Ld. AO) by invoking provisions of section 40A(2)(b) and in restricting the disallowance to the extent of Rs.82,80,000/-. 2. That on facts and law involved, the Ld. CIT(A) has erred in not deciding the issue of reasonableness of the transaction of purchase of poppy seeds from the AE being at Arm's length Price as per Indian transfer pricing regulations and accordingly, in not deleting the entire disallowance of Rs. 1,26,54,000/- as made by the Ld. AO u/s 40A(2)(b) of the Act 3. That the Ld. CIT(A) has erred in not deciding the specific Ground No. 3 relating to jurisdiction of the Ld. AO in determining the FMV of the purchase transaction with AE. 3.1 That on the fact and law involved, Ld. CIT(A) has erred in ignoring the submissions made by the appellant that the FMV determined by the Ld. AO was without jurisdiction being against the binding CBDT instruction No. 3/2016 dated 10.03.2016 read with proviso to section 40A(2)(b) whereby the AO is debarred from determining the ALP of Specified Domestic Transactions in a case where reference is not made to the TPO. On this score itself the disallowance of Rs. 1,26,54,000/- as made by the Ld. AQ u/s 40A(2)(b) should have been deleted by the Ld. CIT(A). 4. That on facts and law involved, the Ld. CIT(A) has erred in ignoring the submissions made by the assessee that the Ld. AO erred in comparing the price of the poppy seeds purchased from related party in domestic market with the price prevailing in international market and not with the price prevailing in domestic market. As such too the entire disallowance of Rs. 1,26,54,000/- deserves to be deleted. 5. That the Ld. CIT(A) has erred in disposing off the specific Ground No. 5 relating to tax arbitrage as 'general in nature requiring no adjudication' and in not deciding the same on merits. 5.1 Tat on facts and law involved the Ld. CIT(A) has erred in ignoring the submissions of the appellant that the addition under Section 40A(2)(b) is not warranted as there is no tax arbitrage involved on the facts of this case. On this ground itself and as per binding precedents, the entire disallowance of Rs.1,26,54,000/- as made by the Ld. AO u/s 40A(2)(b) of the Act deserves to be deleted. 3 ITA no. 8332/Del/2019 6. That the above addition as confirmed, is based on erroneous views and / or non-appreciation of the facts or law involved without properly considering the material on record and without affording appropriate specific lawful opportunity. As such too the addition as made is unwarranted and deserves to be deleted. 7. That the interest charged u/s 244A & 234D is incorrect. 8. That the assessment as made and the order of the Ld. CIT(A) are against law and facts of the case involved. 9. That the grounds of appeal as herein are without prejudice to each other. 10. That the appellant respectfully craves leave to add, amend, alter and / or forego any ground(s) at or before the time of hearing.” 3. Both the learned representatives invite our attention to the learned CIT(A)’s lower appellate discussion particularly upholding the Assessing Officer’s action invoking section 40A(2)(b) disallowance of Rs. 82,80,000/- as under: 7.4 The AO had asked the appellant company vide note sheet entry dated 16.09.2016 to furnish explanation as to why section 40A(2)(b) of the IT Act, 1961 should not be invoked in purchase of poppy seeds from M/s Arushi Exports (related party) and Yumurtacilar, Turkey. The AO had further asked the appellant company vide note sheet entry dated 28.09.2016 to furnish explanations regarding quality difference in purchase of poppy seeds and extra expenses Incurred on purchase at higher rate with justification. The AO had also asked the appellant company vide note sheet entry dated 24.10.2016 to furnish explanations in respect of the following queries: (1) Purchase, sales, stock, etc. of PS(poppy seeds) of M/s Arushi Exports, Purchase-bills of M/s Arushi Exports, import cost, if any, purchase order copy, batchwise /lotwise purchase, quality of PS, sale bills, parties other than Astra to which sales were made, rate quality, (ii) detalled qualitative difference in poppy seeds purchased from Turkey party and Arushi Exports and give detalls as per chart too. The AO had asked the appellant to furnish the requisite information in the form of the following chart: Poppy Seeds from Turkey Poppy Seeds from M/s Arushi 4 ITA no. 8332/Del/2019 Exports. Items Rate Quantity Total rate How order got placed Purcase order Batch wise/ lotwise cost price Other expenses on purchase of PS Expenses upto Port Expenses from Port to godown/shop Any other expenses on purchases like storage Sale price Any discount given on sale Any modification on sale items Vouchers of sale of PS Difference of sale quality 7.5 In response to the above queries, the appellant filed reply dated 10.11.2016 In the office of the AO. The appellant had furnished the details of purchase, sale and stock of poppy seeds from Arushi Exports as Annexure-1, copy of import Invoice of Arushi Exports along with related documents and also the incidental expenses on import as Annexure 2. Copy of invoices of Arushi Exports against sales made to unrelated parties attached as Annexure 3. The appellant had submitted that the sale to unrelated parties is also at the same rate of Rs. 300/- per KG as in the case of Astra. The appellant has submitted that Astra has sold the entire quantity of Poppy seeds purchased from Arushi at Rs. 310/- per KG to unrelated third parties. Regarding applicability of section 40A(2)(b) on purchase of pappy seeds from the AE, M/s Arushi Exports and import thereof from Turkey, the appellant has submitted that the FMV of any commodity in the domestic market cannot be computed by comparison thereof with the prices prevailing in the International market. The appellant has submitted that FMV of a commodity in the domestic market has to be seen in context of the prices prevailing in the domestic market. The appellant has submitted that the fact that M/s Arushi Exports has sold the same goods to other parties at the same rate of Rs. 300/- per kg and the further fact that the appellant company has 5 ITA no. 8332/Del/2019 sold the same very poppy seeds in local market at the rate of Rs. 310/- kg shows that the transaction with M/s Arushi Exports at FMV. Even in the domestic market prices of a product vary from state to state, it is submitted that the Poppy seeds being controlled item its import is not free for any body and any time. Import of poppy seeds is permitted under license from Central Bureau of Narcotics, Ministry of Finance, Government of India, import is permitted of the quantity permitted in the license and the quantity has to be imported within the period specified in the license. On expiry of license period fresh license has to be taken and it takes a long process and tune to import the same. The appellant has also submitted that at the time of purchase of Poppy seeds from Arushi, the appellant company had no stock of Poppy seeds. As such the purchase of Poppy sends was made from the local market at the prevailing domestic market prices to meet the customers' demand. The appellant has submitted that in case of Import the assesses company has to incur much import related direct expenses such as license fee, Insurance, clearing expenses, ocean freight and transportation etc. Apart from this, there is also indirect cost such as storage and inventory holding cost which further adds to the import cost of goods imported. 7.6 As regards the purchase of poppy seeds of M/s Arushi Exports, filed by the appellant, the AO noted from the ne Invoice that M/s Arushi Exports itself has purchased the poppy seeds from M/s Yumurtacilar, Turkey, the entity with which the appellant company has directly purchased the poppy seeds. The AO noted that the motive of the appellant company behind the purchase of the poppy seeds from M/s Arushi Exports when it had itself purchased from Yumurtacilar, Turkey is very doubtful. The AO noted that it proves beyond doubt that the appellant company is purchasing poppy seeds at excessive and unreasonable price from its related party le M/s Arushi Exports. The AO had again asked the appellant vide note sheet entry dated 23.11.2016 to produce the complete chart as requisitioned on previous date. The appellant filed the chart which is as under: Particulars Poppy Seeds from Turkey Poppy Seeds from M/s Arushi Exports. Items Poppy Seeds Poppy Seeds Rate 159.40 300 Quantity (kgs) 16200 90000 Total rate 25823160 2700000 Expenses upto Port 7260292 6 ITA no. 8332/Del/2019 Expenses from Port to godown/shop 605836 Any other expenses on purchases like storage 62785 Net purchase rate (including direct costs) 208.35 300/- Sale price 275 310 Any discount given on sale 0 0 Any modification on sale items No No 7.7 In the assessment order the AO noted that the appellant has not furnished any evidence in support of its clalm to prove that the purchase made from M/s Arushi Exports is not at excessive and unreasonable rates. The reliance of Appellant Company upon various judgments does not hold any ground, as these are not similar to the Issue involved in this case. In view of the above, the AO has held that the appellant company has clearly violated the provisions of section 40A(2)(b) by purchasing the poppy seeds at an unreasonable and excessive price of Rs. 140.60 (Rs. 300.00-159.40). The total quantity purchased is 90,000 kg. The AO has computed the amount of disallowance u/s 40A(2)(b) at Rs. 1,26,54,000/-. 7.8 I have carefully considered the assessment order and written submissions filed by the Ld. AR. During the course of appellate proceedings, Ld. AR has submitted that the computation of excessive payment as done by the AO is apparently Incorrect, Ld. AR has stated that vitels borne out from the table giving comparative figures of import and GONGVEA local purchase reproduced in the assessment order as at page 8 thereof, the Import price taken at Rs. 159.40 per/Kg. Is Incorrect. Ld. AR has argued that the AO has taken the purchase price of import without considering the direct cost of import mentioned in the table. Ld. AR has also argued that if the total cost of Import with direct cost only is considered, the same comes to Rs. 208.35 per Kg. as against Rs. 159.40 considered by the AO. Ld. AR has stated that if the correct amount even as per AO is taken at Rs 208.35, the excess price comes to Rs. 82,80,000/- as against Rs 1,26,54,000/-, I have carefully considered the submission of Ld. AR. It is found that expenses upto port, expenses from port to godown/shop, other expenses on purchases like storage have not been considered by the AO. If expenses upto port, expenses from port to godown/shop, other expenses on purchases like storage considered, Net Purchase Rate comes to Rs 208.35 per Kg instead of Rs. 159.40 per Kg. The difference per Kg comes to Rs 92/- [300-208]. The total 7 ITA no. 8332/Del/2019 quantity is 90,000 Kg. Thus the disallowance u/s 40A(2)(b) is determined at Rs. 82,80,000/- [ Rs 92 x 90,000 1. Accordingly, the disallowance u/s 40A(2)(b) is restricted to Rs. 82,80,000/- instead of Rs 1,26,54,000/- and the appellant gets a relief of Rs 43,74,000/-. Ground No. 1, 2, 3, 4 and sub- ground number 4.1, 4.2, 4.3 & 4.4 are partly allowed.” 4. We have given our thoughtful consideration to the vehement rival contentions so far as the assessee’s sole substantive ground challenging both the learned lower authorities’ respective findings holding it to have made excess than the market price payments, in purchase poppy seeds to its relating parties there could be hardly any dispute that the impugned disallowance comes into play in case of business expenditure claim when it is found that the corresponding payments made to such group concerns exceed the comparable market price of the corresponding goods of services, as the case may be. 5. The Revenue placed vehement reliance on the learned CIT(A)’s extracted detailed discussion that the assessee has been rightly found to have made the impugned excessive payments. 6. Learned counsel, on the other hand, takes us to the assessee’s detailed paper book at page nos. 1 & 2 as well as 128 indicating itself to have been assessed at the maximum marginal rates(s) of Rs. 30.9% and that of the related party at 33.99%; respectively along with the corresponding twin computations to this effect. We make it clear that all these facts and figures have nowhere been disputed at the Revenue’s behest. This being the clinching factual background emerging from the case file, we hereby quote CBDT landmark Circular 6-P dated 6.7.1968 that the 8 ITA no. 8332/Del/2019 purpose of the impugned statutory provision is to check evasion of tax through excessive or unreasonable payments to related or associate concerns. Cas law (2019) 103taxman.com 397 (Del.) Sigma Research & Consulting Pvt. Ltd. vs. CIT as well as (2009) 310 ITR 306 (Bom.) CIT v. Indo Saudi Services (Travel) (P) Ltd. also settle the issue against the department that the impugned disallowance is not sustainable when both the payer and payee are assessed at the same rate in light of the foregoing circular. We accordingly delete the impugned section 40A(2)(b) disallowance in very terms. 7. This assessee’s appeal is allowed in above terms. Order pronounced in open court on 31.12.2024. Sd/- Sd/- (M. BALAGANESH) (SATBEER SINGH GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER *MP* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI "