FIRESTONE INTERNATIONAL P. LTD, MUMBAI V. DCIT CEN CIR 39, MUMBAI

CO 47/MUM/2012

• Counselvise Citation: [2012] 122 COUNSELVISE.COM (IT) 8048 (ITAT-MUMBAI)
• Duration Of Justice: 6 month(s) 29 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 09-11-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 05-11-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 10-04-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJEET KUMAR JAIN
• Keywords: Transfer pricing; Business expenditure; International transaction
• Section: 14A; 10B

Judgement Text

ITA NO.4520 OF 2011 & CO NO.47 OF 2012 FIRESTONE IN TERNATIONAL PVT LTD MUMBAI PAGE 1 OF 14 IN THE INCOME TAX APPELLATE TRIBUNAL 'K' BENCH, MUMBAI BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER AND ITA NO. 4520/MUM/2011 (ASSESSMENT YEAR: 2006-07 ) DCIT, CENTRAL CIRCLE 39, ROOM NO.32 (1) GROUND FLOOR, AAYAKAR BHAVAN, MK ROAD, MUMBAI 400020 VS. FIRESTONE INTERNATIONAL (P) LTD, 110 PRASAD CHAMBERS, 11 TH FLOOR, OPERA HOUSE, MUMBAI 400004 PAN: AAACF 7931 L (APPELLANT) (RESPONDENT) C.O NO.47/MUM/2012 (ARISING OUT OF ITA NO.4520/MUM/2011) FIRESTONE INTERNATIONAL (P) LTD, 110 PRASAD CHAMBERS, 11 TH FLOOR, OPERA HOUSE, MUMBAI 400004 PAN: AAACF 7931 L VS. DCIT, CENTRAL CIRCLE 39, ROOM NO.32 (1) GROUND FLOOR, AAYAKAR BHAVAN, MK ROAD, MUMBAI 400020 (CROSS OBJECTOR) (RESPONDENT) DEPARTMENT BY: SHRI AJEET KUMAR JAIN, CIT AND SHRI DINESH KUMAR, DR ASSESSEE BY: SHRI VIJAY MEHTA & SHRI SUNIL HIRAWAT DATE OF HEARING: 06/11/2012 DATE OF PRONOUNCEMENT: 09/11/2012 O R D E R PER BENCH: THESE ARE CROSS APPEALS BY REVENUE AND ASSESSEE AG AINST THE ORDERS OF THE CIT (A)-15 MUMBAI, DATED 21.3.2011. 2. ASSESSEE IS IN THE BUSINESS OF DIAMOND EXPORT AND A LSO ENGAGED IN JEWELER MANUFACTURING. APART FROM ALLOCA TION OF EXPENDITURE BETWEEN DIAMOND EXPORT BUSINESS AND JEW ELLERY MANUFACTURING BUSINESS THE UNIT OF WHICH WAS ELIGIB LE FOR DEDUCTION UNDER SECTION 10B, AO ALSO MADE AN ADDITION OF ` .1,20,84,042/-ON ITA NO.4520 OF 2011 & CO NO.47 OF 2012 FIRESTONE IN TERNATIONAL PVT LTD MUMBAI PAGE 2 OF 14 THE BASIS OF THE REPORT OF TPO TOWARDS INTERNATIONA L TRANSACTIONS WITH AE BY DETERMINING THE ARMS LENGTH PRICE. THE L EARNED CIT (A) RESTRICTED THE ADJUSTMENT TO THE TRANSACTIONS WITH AE THEREBY CONFIRMING ONLY AN AMOUNT OF ` .8,39,245/- AS AGAINST ` .1,20,84,882/- ADDED BY AO. THE CIT (A) ALSO REALLO CATED SOME EXPENDITURE. ACCORDINGLY, THE GROUNDS ARE RAISED BY ASSESSEE AND REVENUE IN THESE APPEALS. FOR THE SAKE OF RECORD, T HE GROUNDS ARE EXTRACTED AS UNDER: ITA NO.4520/MUM/2011: 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE AND IN LAW, THE LEARNED CIT (A) ERRED IN REDUC ING THE ADJUSTMENT MADE TO THE INCOME OF ASSESSEE FROM ` .1,20,84,042/- TO ` .8,39,245/- ON ACCOUNT OF TRANSACTION CARRIED OUT WITH ASSOCIATE CONCERNS UND ER SECTION 92CA(3) OF THE IT ACT. 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) IS JUSTIFIED I N HOLDING THAT ADJUSTMENT TO THE RETURNED INCOME UNDE R SECTION 92CA(3) CAN BE MADE ONLY ON SALES MADE TO ASSOCIATE ENTERPRISES WITHOUT APPRECIATING THE FACT THAT ON TNMM ANALYSIS THE ADJUSTMENT IS REQUIRED TO BE MADE ON TOTAL TRANSACTIONS ENTERED AS THE ANALYSIS IS ON ENTITY LEVEL. 3. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) ERRED IN DELET ING ALLOCATION OF TRAVELLING EXPENSES, DONATION AND PAR T OF MISCELLANEOUS EXPENSES TO JEWELLERY UNIT WITHOUT EXPLAINING THE FACT AS TO WHY THE SAME ARE ALLOCABL E TO DIAMOND UNIT ONLY C.NO.47/MUM/2012 1. ON FACTS AND IN LAW, THE LEARNED CIT (A) ERRED I N CONFIRMING THE ADDITION OF ` .8,39,245/- UNDER SECTION 92CA(3) OF THE I.T. ACT. UNDER THE FACTS AND CIRCUMSTANCES OF THE MATTER, HE OUGHT TO HAVE DELET ED THE SAID ADDITION OF ` .8,39,245/-. 2. ON FACTS AND IN LAW, THE LEARNED CIT (A) ERRED I N NOT DIRECTING AO NOT TO ALLOCATE THE COMMUNICATION EXPE NSES, CONVEYANCE & VEHICLE EXPENSES, MISCELLANEOUS EXPENSES, AUDIT FEES ETC., IN THE RATIO OF 95:05 BE TWEEN DIAMOND UNIT AND JEWELLERY UNIT RESPECTIVELY. UNDER THE ITA NO.4520 OF 2011 & CO NO.47 OF 2012 FIRESTONE IN TERNATIONAL PVT LTD MUMBAI PAGE 3 OF 14 FACTS AND CIRCUMSTANCES OF THE MATTER, HE OUGHT NOT TO HELD SO. 3. ON FACTS AND IN LAW, THE LEARNED CIT (A) OUGHT T O HAVE DELETED THE DISALLOWANCE OF ` .7,73,425/- MADE BY AO UNDER SECTION 14A OF THE INCOME TAX ACT. 3. WE HAVE HEARD THE LEARNED CIT (DR) AND THE LEARNED COUNSEL IN DETAIL AND CONSIDERED THEIR SUBMISSIONS. THE APP EALS ARE DECIDED AS UNDER: TRANSFER PRICING ISSUE: 4. GROUND NOS. 1 & 2 IN REVENUE APPEAL AND GROUND NO.1 IN CROSS OBJECTION ARE WITH REFERENCE TO THE TRANSFER PRICING ADJUSTMENT MADE IN THE ORDER. ASSESSEE HAS FOREIGN TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (AE) IN THE JEWELLE RY AND DIAMOND BUSINESS AND ACCORDINGLY THE MATTER WAS REFERRED TO THE TRANSFER PRICING OFFICER (TPO) FOR ANALYZING THE FOREIGN TRA NSACTIONS AT ARMS LENGTH PRICE. TPO EXAMINED THE ISSUE AND VIDE HIS O RDER DATED 22.10.2009 HAS PROPOSED ADJUSTMENT OF ` .1,20,84,042/-. THE ORDER OF AO DOES NOT SPEAK ABOUT THE ADJUSTMENT SO MADE A ND IN FACT REFERS ONLY TO THE SHOW CAUSE NOTICE ISSUED TO AO A FTER RECEIPT OF THE ORDER OF TPO WITHOUT SPECIFYING ANY ADDITION SO TO BE MADE ON THE BASIS OF THE TPO ORDER. BE THAT AS IT MAY, IN THE C OMPUTATION OF INCOME AO MADE ADDITION OF ` .1,20,84,042/-. THE TPO ORDER WAS PLACED ON RECORD. 5. THE REVISED INTERNATIONAL TRANSACTION OF ASSESSEE A RE AS UNDER: S.NO NATURE OF TRANSACTION AMOUNT 1 IMPORT OF POLISHED DIAMOND- BOND 70,60,082 2 IMPORT OF POLISHED DIAMOND MANUFACTURING 1,45,46,358 3 EXPORT OF POLISHED DIAMOND MANUFACTURING 4,51,20,741 4 EXPORT OF POLISHED DIAMOND-BOND 6,48,59,891 5 IMPORT OF JEWELLERY 3,49,76,753 6 EXPORT OF DIAMOND STUDDED JEWELLERY 10,40,49,417 TOTAL 27,06,13,242 ITA NO.4520 OF 2011 & CO NO.47 OF 2012 FIRESTONE IN TERNATIONAL PVT LTD MUMBAI PAGE 4 OF 14 THE TPO AFTER EXAMINATION OF THE DETAILS ACCEPTED S OME TRANSACTIONS AS AT ARMS LENGTH PRICE. SO FAR AS IMP ORT AND EXPORT OF STUDDED JEWELLERY IN THE JEWELLERY DIVISION AND IMP ORT AND EXPORT OF POLISHED DIAMOND- BOND ARE CONCERNED, AS THERE ARE SEPARATE LOT- WISE RECORDS THESE WERE ACCEPTED. HOWEVER, WITH REF ERENCE TO IMPORT AND EXPORT OF POLISHED DIAMOND HE HAS REJECTED ASSE SSEES COMPARABLES AND AFTER FRESH ANALYSIS AND GIVING OPP ORTUNITY TO ASSESSEE AND TAKING HIS OBJECTIONS INTO CONSIDERATI ON, DETERMINED THE ARMS LENGTH PRICE AS UNDER:- 9. DETERMINATION OF ARMS LENGTH PRICE. ACTUAL BENCH MARKED ON COST ADJUSTMENT SALES 607,846,238 619,930,280 NON-AE 562,725.497 562,725,497 AE 45,120,741 57,204,783 12,084,042 VARIATION (%) 21.12 COST 590,972,622 590,972,622 OP PROFIT 16,873,616 28,957,658 OP/OC 2.86 4.9 THE ARMS LENGTH PRICE OF ` .5.72 CRORES VARIES FROM THE TRANSACTION PRICE OF ` .4.51 CRORES BY 21.12% I.E. MORE THAN 5%. THIS WILL RESULT IN AN ADJUSTMENT OF ` .1,20,84,042/- AS SHOWN ABOVE 6. BEFORE THE CIT (A) ASSESSEE CONTENDED AND PLACED MA NY ARGUMENTS WHICH THE CIT (A) HAS NOT ACCEPTED. HOWEV ER, THE ONE ARGUMENT WHICH WAS ACCEPTED BY THE CIT (A) WAS THAT THE ADDITION CANNOT BE MADE ON THE ENTIRE TURNOVER OF ASSESSEE W HEN THE SAME WAS ONLY TO BE CONSIDERED ON THE TRANSACTIONS WITH AE. FOLLOWING THE DECISION OF THE ITAT DELHI BENCH IN EL JIN AND ABHISEK INDUSTRIES, IT WAS HELD THAT SUCH ADDITION SHOULD B E RESTRICTED TO TRANSACTIONS WITH AE ONLY. THEREFORE, THE CIT(A) H AS RECASTED THE ADJUSTMENT SO MADE IN ARRIVING AT AN ADJUSTMENT OF 1.86% ON SALES ITA NO.4520 OF 2011 & CO NO.47 OF 2012 FIRESTONE IN TERNATIONAL PVT LTD MUMBAI PAGE 5 OF 14 TO AE ON ` .4,51,20,741/- I.E. AT ` .8,39,245/-. THEREFORE, THE SAME WAS CONFIRMED WHEREAS THE BALANCE AMOUNT WAS DELETE D. 7. THE REVENUE IN GROUND NOS. 1 & 2 IS MAINLY CONTESTI NG THE RELIEF GIVEN BY THE CIT (A), ON THE REASON THAT UND ER THE TNMM ANALYSIS, ADJUSTMENT IS REQUIRED TO BE MADE ON TOTA L TRANSACTIONS ENTERED AS THE ANALYSIS IS ON ENTITY LEVEL. AT THE OUTSET IT IS FAIRLY ADMITTED THAT THIS ISSUE WAS ALREADY CRYSTALLIZED I N FAVOUR OF ASSESSEE BY THE FOLLOWING DECISIONS: A) DCIT V. STARLITE (40 SOT 421 (MUM) B) DCIT VS. ANKIT DIAMONDS (43 SOT 523 (MUM) C) ADDL. CIT VS. TEJ DAM (37 SOT 341 (MUM) D) M/S GENISYS INTEGRATING SYSTEMS (INDIA) PVT. LTD (I TA NO.1231/BANG/2010) E) ACIT VS. WOCKHARDT LTD (6 TAXMAN.COM 78 ITAT (MUM) F) ABHISHEK AUTO INDUSTRIES LTD (2010 TII-54-ITAT (DEL ) G) DCIT VS. STARTEX NETWORKS (INDIA) PVT. LTD (2010 TII-13 ITAT (DEL). RESPECTFULLY FOLLOWING, WE HOLD THAT THE CIT (A) OR DER IS IN TUNE WITH THE PROVISIONS OF THE ACT AS INTERPRETED BY THE ABO VE ORDERS OF THE ITAT. SINCE THE ARMS LENGTH PRICE HAS TO BE DETERMI NED ONLY WITH REFERENCE TO THE INTERNATIONAL TRANSACTIONS, WHATEV ER BE THE METHOD FOLLOWED OR ADOPTED FOR ARRIVING AT THE ALP, THE AL P CAN ONLY BE CONSIDERED ON THE VALUE OF INTERNATIONAL TRANSACTIO NS ALONE AND NOT ON THE ENTIRE TURNOVER OF ASSESSEE. IF THIS SORT OF ADJUSTMENT IS PERMITTED THIS WILL RESULT IN INCREASING THE PROFIT OF ASSESSEE ON THE ENTIRE NON-AE SALES ALSO, WHICH IS NOT ACCORDING TO THE PROVISIONS OF TRANSFER PRICING MANDATED BY THE ACT FOR THE IMPUGN ED ASSESSMENT YEAR. THEREFORE, THE REVENUE GROUNDS ON THIS ARE RE JECTED. 8. THE CROSS OBJECTION BY ASSESSEE ON THE SAME ISSUE I S WITH REFERENCE TO THE CONFIRMATION OF AN AMOUNT OF ` .8,39,245/- BY THE CIT (A) WITHOUT APPLYING THE SAFE HARBOR PROVISIONS OF +/- 5%. ASSESSEE RAISED THE OBJECTION BEFORE THE TPO AS WEL L AS BEFORE THE ITA NO.4520 OF 2011 & CO NO.47 OF 2012 FIRESTONE IN TERNATIONAL PVT LTD MUMBAI PAGE 6 OF 14 CIT (A), BUT THESE ARE NOT ACCEPTED BY THEM. THE LE ARNED DR ALSO GAVE HIS WORKING OF +/- WORKING OF SAFE HARBOR PROV ISIONS AS UNDER: TOTAL AE TRANSACTION NON AE TRANSACTION SALES OF ASSESSEE 607846238 A 45120741 562725497 SINCE NON AE TRANSACTIONS ARE AT ARMS LENGTH HENCE APPLY THE ARMS LENGTH MARGIN I.E. 4.90% TO ARRIVE AT THE COST COST 590972622 B 54532682 536439940 APPLY THE ARMS LENGTH MARGIN ON THE COST USED TO EARN THE AE SALES C 2672101 ARMS LENGTH PRICE OF SALES MADE TO THE AES D=B+C 57204783 DIFFERENCE OF ARMS LENGTH PRICE AND THE PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS TAKEN PLACE E=D-A 12084042 95% OF ARMS LENGTH PRICE 54344544 9. THE LEARNED AR OBJECTED TO THE ABOVE WORKING STATIN G THAT IN THIS WORKING THE COST OF NON AE TRANSACTIONS ARE RE DUCED SO AS TO INCREASE THE COST OF AE TRANSACTIONS WHICH CANNOT B E PERMITTED AS ASSESSEE IS MAINTAINING ITS COST WORKING AS PER THE PROFITS EARNED BY ASSESSEE. HOWEVER, IF THE WORKING OF THE CIT (DR) I S TO BE ACCEPTED, THEN IT IS A SORT OF READJUSTING THE ADDITION UNDER DOMESTIC SALES ALSO WHICH CANNOT BE PERMITTED. IT WAS FURTHER CONT ENTION THAT THE CIT (DR) CANNOT IMPROVE THE ORDER OF THE TPO WHEREI N THE OPERATING COST WAS DETERMINED WHICH CANNOT BE VARIED. HE SUBM ITTED THE WORKING OF SAFE HARBOR PROVISIONS AS UNDER: ITA NO.4520 OF 2011 & CO NO.47 OF 2012 FIRESTONE IN TERNATIONAL PVT LTD MUMBAI PAGE 7 OF 14 WORKING SHOWING DIFFERENCE IN PRICE (OP/SALES) ( IN RUPEES) SALES TO ASSOCIATED ENTERPRISES 4,51,20,741 OPERATING MARGIN PERCENTAGE AS PER P/L A/C 2.78% OPERATING MARGIN (4,51,20,741 * 2.78%) 12,54,357 OPERATING MARGIN DETERMINED BY TPO 4.84% OPERATING MARGIN AS PER TPO (4,51,20,741 * 4.84%) 21,83,844 DIFFERENCE IN OPERATING MARGIN (21,83,844- 12,54,357) 9,29,487 PRICE AS PER TPO (4,51,20,741+9,29,487) 4,60,50,228 DIFFERENCE IN PRICE (4,60,50,228-4,51,20,741) 9,29, 487 PERCENTAGE DIFFERENCE (9,29,487*100/4,51,20,741) 2. 06% WORKING SHOWING DIFFERENCE IN PRICE ( OP/TC) ( IN RUPEES) TOTAL COST 59,09,72,622 OPERATING MARGIN AS A PERCENTAGE OF TOTAL COST 2.86 % OPERATING MARGIN (59,09,72,622*2.86%) 1,69,01,817 OPERATING MARGIN DETERMINED BY TPO 4.90% OPERATING MARGIN AS PER TPO(59,09,72,622*4.90%) 2,8 9,57,658 DIFFERENCE IN OPERATING MARGIN (2,89,57,658- 1,69,01,817) 1,20,55,841 PRICE AS PER TPO(59,09,72,622+2,89,57,658) 61,99,30 ,280 DIFFERENCE IN PRICE (61,99,30,280-60,78,74,439) 1,2 0,55,841 PERCENTAGE DIFFERENCE (1,20,55,841*100/59,09,72,622) 2.04% 10. THE LEARNED COUNSEL SUBMITTED THAT CONSIDERING THE AMOUNTS EITHER WAY, WHATEVER IS THE WORKING, THE PERCENTAGE DIFFERENCE IS ONLY AROUND 2%. THEREFORE, IT IS WITHIN THE +/- 5% SAFE HARBOR RANGE AS PER THE PROVISIONS OF THE ACT. ITA NO.4520 OF 2011 & CO NO.47 OF 2012 FIRESTONE IN TERNATIONAL PVT LTD MUMBAI PAGE 8 OF 14 11. WE HAVE CONSIDERED THE ISSUE. AS SEEN FROM THE ORDE R OF THE CIT (A) HE HAS ARRIVED AT THE DIFFERENCE IN ALP AT 1.86% AND ON THE AE TRANSACTIONS HE CONFIRMED ONLY AN AMOUNT OF ` .8,39,245/-. THIS AMOUNT IS CERTAINLY WITHIN THE +/-5% RANGE AS PROVI DED UNDER SECTION 92CA(4) OF THE INCOME TAX ACT. NOT ONLY THA T AS SUBMITTED BY THE LEARNED COUNSEL, THE DIFFERENCE IN PRICE (OP ERATING PROFITS/ SALES) THE A L P AS PER THE TPO COMES TO ` .4,60,50,228/-. 105% OF ALP (+5% RANGE) ON THIS IS AT ` .4,83,52,739/-. 95% OF THE ALP DETERMINED (-5% RANGE) IS AT ` .4,37,47,717/-. THEREFORE, THE SALES TO AE AT ` .4,51,20,741/- IS WITHIN THE SAFE HARBOR RANGE. THE DIFFERENCE IN PRICE (OPERATING PROFITS/ TOTAL COSTS ) IE.THE SECOND TABLE, THE A L P AS PER THE TPO COMES TO ` .61,9930,280/-. THE OPERATING COST CONSIDERED BY TPO IN TP REPORT WAS R S. 59,09,72,622 . 105% OF THIS (+5% RANGE) IS AT ` . 65,09,26,794/-. 95% OF THIS (-5% RANGE) IS AT ` .58,89,33,766/-. THEREFORE, THE OPERATING COST AT RS. 59,09,72,622 IS WITHIN THE SA FE HARBOR RANGE. THEREFORE, THERE IS NO NEED TO MAKE ANY ADDITION UN DER THE PROVISIONS OF THE TRANSFER PRICING. IN VIEW OF THE ABOVE ASSESSEES GROUND NO. 1 IS ALLOWED AND THE ADDITION SUSTAINED AT ` .8,39,245/- IS ALSO DIRECTED TO BE DELETED. ALLOCATION OF EXPENSES : 12. ASSESSEE IS RUNNING TWO UNITS I.E. DIAMOND POLISHIN G AND MANUFACTURING OF JEWELLERY. THE UNIT MANUFACTURING JEWELLERY IS ELIGIBLE FOR DEDUCTION UNDER SECTION 10B. AO HAS LI STED OUT THE TOTAL EXPENSES AND ALLOCATION TO DIFFERENT UNITS BY ASSES SEE AS UNDER: PARTICULARS TOTAL EXPENSE ALLOCATED TO DIAMOND UNIT EXPENSES ALLOCATED TO JEWELLERY UNIT TRAVELLING EXPENSES 2,34,19,542 1,83,94,685 50,14,858 COMMUNICATION EXPENSES 46,55,399 45,97,656 57,743 CONVEYANCE AND VEHICLE EXPENSES 34,27,161 33,95,054 32,106 DONATION 20,52,300 20,52,300 - ITA NO.4520 OF 2011 & CO NO.47 OF 2012 FIRESTONE IN TERNATIONAL PVT LTD MUMBAI PAGE 9 OF 14 MISCELLANEOUS EXPENSES 1,00,59,268 96,47,042 4,12,225 AUDIT FEES 2,53,125 2,53,125 - TOTAL 4,36,66,795 3,83,39,862 55,26,932 AO DID NOT ACCEPT ASSESSEES CONTENTION THAT ACTUAL EXPENDITURE WAS ALLOCATED. HE WENT ON TO ALLOCATE THE EXPENDITU RE IN THE RATIO OF 76:24 WHICH IS RATIO OF SALES IN RESPECT OF THE DIA MOND UNIT AND JEWELLERY UNIT. EVEN THOUGH HE HAS MENTIONED THAT T HE AFORESAID EXPENSES ARE RE-ALLOCATED AS FOLLOWS, THE ORDER DOE S NOT CONTAIN ANY TABLE INDICATING ALLOCATION OF EXPENDITURE. HOWEVER , THE TOTAL DISALLOWANCE WAS DETERMINED AT ` .50,01,097/-. IN FACT THIS IS NOT A DISALLOWANCE OUT OF THE RETURNED INCOME BUT ALLOCAT ION OF EXPENDITURE FROM DIAMOND UNIT TO JEWELLERY UNIT AND AO SHOULD HAVE REWORKED OUT THE PROFITS OF DIFFERENT UNITS WH ILE COMPUTING THE TOTAL INCOME WHICH HE HAS NOT DONE. THE CIT (A) AFT ER CONSIDERING THE RELEVANT SUBMISSIONS OF ASSESSEE CONFIRMED THE ISSUE PARTLY BY STATING AS UNDER: 2.4 I HAVE PERUSED THE ASSESSMENT ORDER AND THE WRITTEN SUBMISSIONS. THE APPELLANT HAS TWO UNITS - (A) DIAMOND UNIT. (B) .JEWELLERY UNIT. THE JEWELLERY UN IT IS ENTITLED TO DEDUCTION U/S 1OB. THE APPELLANT HAS DR AWN TWO SEPARATE P&L ACCOUNTS FOR THESE UNITS AND ALLOC ATED EXPENDITURE AND AUDITED ACCORDINGLY. THE AO IS OF T HE VIEW THAT EXPENSES HAVE NOT BEEN ALLOCATED PROPORTIONATE LY SO AS TO ENSURE HIGHER DEDUCTION UNDER SECTION 10B IN JEWELLERY UNIT. IN ORDER TO RECTIFY THE ABOVE SITUA TION, IT HAS ALLOCATED THE EXPENDITURE IN THE RATIO OF SALES. SI NCE THE SALES OF DIAMOND UNIT CONSTITUTED 76%, HENCE EXPENS ES TO THAT EXTENT WAS ALLOCATED TO JEWELLERY UNIT WHICH C LAIMS EXEMPTION UNDER SECTION 10B. 2.5 THE APPELLANT HAS MADE DETAILED SUBMISSION INCLUDING THE FACT THAT SEPARATE BOOKS OF ACCOUNT H AVE BEEN MAINTAINED FOR BOTH THE UNITS AND AUDITED ACCORDING LY. WHILE THE FACT OF MAINTAINING SEPARATE BOOKS OF ACC OUNTS FOR BOTH THE UNITS IS NOT DISPUTED BY THE AO BUT THE MA NNER OF ALLOCATION OF EXPENSES REMAINS AT THE DISCRETION OF THE APPELLANT ITSELF AS ALL THE TRANSACTIONS ARE CONTRO LLED BY IT. THERE IS NO INDEPENDENT, CORROBORATIVE EVIDENCE TO JUSTIFY THE ALLOCATION OF EXPENSES. MOREOVER THE NATURE OF EXPENSES ITA NO.4520 OF 2011 & CO NO.47 OF 2012 FIRESTONE IN TERNATIONAL PVT LTD MUMBAI PAGE 10 OF 14 ARE ALSO FUNGIBLE AND NOT AMENABLE TO ALLOCATION TO EITHER OF THE UNITS IN A CLEAR CUT MANNER. THAT IS LO SAY THAT THEY REMAIN IN THE SUBJECTIVE DOMAIN OF THE TA XPAYERS. THIS SUBJECTIVELY ASSUMES GREATER IMPORTANCE IN THE LIGHT OF THE FACT THAT ONE OF THE UNITS ENJOYS EXEMPTION UND ER SECTION 10B. THUS THE ISSUE OF ALLOCATION OF EACH O F THE EXPENSES HAS TO BE EXAMINED IN ABOVE CONTEXT. 2.6 TRAVELLING EXPENSES OUT OF THE TOTAL EXPENDITUR E INCURRED AT RS.2.34 CRORES AROUND RS.50,14,858/- HA S BEEN ALLOCATED TO JEWELLERY UNIT WHICH APPEARS TO BE REA SONABLE AND SO IT IS FE1T THAT THERE IS NO SCOPE FOR ANY REALLOCATION OR THE 76:24 FORMULA BASED ON SALES RA TIO. 2.7. AS REGARDS COMMUNICATION, OUT OF TOTAL EXPENDI TURE OF ` .46,55,399/- THE APPELLANT HAS ALLOCATED ONLY ` .57,743/- ON THE JEWELLERY UNIT. THIS IS ABNORMALLY LOW AND O BVIOUSLY DOES NOT REFLECT THE ACTUAL GROUND REALITIES. THE A PPELLANT HAS TAKEN A PLEA REGARDING MR. MIHIR BHANSALI EXPEN DITURE BEING BORNE BY ANOTHER RELATED FIRM. THE SAME IS NO T ACCEPTED AS IT WAS NOT RAISED BEFORE AO NOR BACKED BY REQUISITE EVIDENCES AT THE ASSESSMENT LEVEL OR AT A PPELLATE LEVEL. AS SUCH IT REMAINS AN ASSERTION ONLY. IN SUC H CIRCUMSTANCES IT WILL BE FAIR TO REJECT THE APPELLA NTS ENTRY INTO BOOKS AND ADOPT A FORMULARY APPROACH BASED ON SALES. THE REALLOCATION DONE BY AO OF THIS EXPENSES IS THE REFORE HELD TO BE IN ORDER. THE SAME PLEA HAS BEEN TAKEN F OR CONVEYANCE AND VEHICLE EXPENSES. HERE ALSO OUT OF T OTAL EXPENDITURE OF ` .34,27,161/- THE APPELLANT HAS ALLOCATED ONLY ` .32,106/- TO THE JEWELLERY UNIT, WHICH IS ABNORMALL Y LOW. AS SUCH THE ACTION OF AO IN CARRYING OUT PRO-R ATA ALLOCATION ON THESE ITEMS OF EXPENDITURE ALSO IS HE LD TO BE IN ORDER. 2.8 AS REGARDS DONATION, THE SAME HAS ALREADY BEEN DISALLOWED BY THE APPELLANTS IN ITS COMPUTATION AND SO THE REALLOCATION OF THE SAME TO THE JEWELLERY UNIT IS L EADING TO THE DOUBLE DISALLOWANCE TO THE EXTENT OF ` .4,92,552/-. AS SUCH THE SAME IS DELETED. 2.9 COMING TO THE MISCELLANEOUS EXPENSES OF ` .1 CRORES APPROX, IT IS OBSERVED THAT THE APPELLANT HAS ALLOC ATED ONLY 4 LAKHS TO THE JEWELLERY UNIT. THE SAME IS ALSO ABN ORMALLY LOW AND CANNOT BE SAID TO BE REFLECTING THE TRUE AN D FAIR PICTURE. THE APPELLANT CLAIMS THAT MISCELLANEOUS E XPENSES INCLUDES COMMISSION, ASSORTMENT CHARGES OF ` .17.5 LAKHS WHICH IS CLEARLY ALLOCABLE TO THE DIAMOND UNIT AND SO THERE IS NO SCOPE FOR REALLOCATION. THERE IS FORCE IN THE ARGUMENT OF THE APPELLANT AS ASSORTMENT CHARGES ARE SPECIFIC TO DIAMOND BUSINESS UNIT AND SO IT WILL NOT BE FAIR TO TREAT THEM AS COMMON OR FUNGIBLE. AS SUCH ` .17.5 LAKHS WILL ITA NO.4520 OF 2011 & CO NO.47 OF 2012 FIRESTONE IN TERNATIONAL PVT LTD MUMBAI PAGE 11 OF 14 HAVE TO BE EXCLUDED FOR REALLOCATION. AS REGARDS OF FICE EXPENSES ETC., THE CONTENTION OF THE APPELLANT THAT DIAMOND UNIT OCCUPIES MORE SPACE AND HAS MORE STAFF IS ACCE PTED BUT AO HAS ALREADY GIVEN 76% WEIGHTAGE TO THIS ASPE CT, HENCE IN WAY THIS ARGUMENT HAS BEEN TAKEN CARE OF. AS SUCH, THE ACTION OF AO IN REALLOCATING IT IS IN ORD ER. TO SUM UP, AFTER EXCLUDING ` .17.5 LAKHS RELATED TO ASSORTMENT CHARGES, THE BALANCE IS LIABLE TO BE APPORTIONED ON 76:24 BASIS. WITH REGARD TO THE AUDIT FEES OF ` .2.53 LAKHS, THE APPELLANT HAS NOT ALLOCATED A SINGLE PAISA TO THE JEWELLERY U NIT THOUGH IT CLAIMS BOTH THE UNIT ARE AUDITED SEPARATELY. THI S BETRAYS A CONTRADICTION IN ITS STAND AND ALSO STRENGTHENS T HE CASE OF AO THAT ALLOCATION TO BOTH THE UNITS IS NOT SCIENTI FIC AND OBJECTIVE CALLING FOR REALLOCATION. THE ACTION OF A O IN APPLYING THE RATIO AS ABOVE ON AUDIT FEES IS HELD T O BE CORRECT. TAKING INTO ACCOUNT THE REASONS AS AFORESAID, THIS GROUND IS PARTLY ALLOWED. 13. BOTH THE REVENUE AND ASSESSEE HAVE RAISED THE RESPE CTIVE GROUNDS ON THE ISSUE. THE LEARNED DR HOWEVER, MAINL Y EXPLAINED THAT IN THE ABSENCE OF ANY PROPER ALLOCATION OF EXP ENDITURE, THE RATIO OF SALES IN DIFFERENT UNITS IS THE MAIN BASIS FOR A LLOCATION OF EXPENDITURE AND PARTICULARLY REFERRED TO THE TRAVEL LING EXPENSES WHICH WERE NOT ACCORDING TO THE RATIO. THE LEARNED COUNSEL HOWEVER, SUBMITTED THAT ASSESSEE HAS MAINTAINED SEP ARATE BOOKS OF ACCOUNT AND EXPENDITURE WAS ALLOCATED ON ACTUAL BAS IS. THEREFORE, THERE IS NO NEED FOR ALLOCATING ON THE RATIO OF SAL ES AS WAS DONE BY AO. IN THE ITEMS CONFIRMED BY THE CIT (A), IT WAS H IS SUBMISSION THAT THE EXPENDITURE ALLOCATED TO A PARTICULAR UNIT WAS ON THE BASIS OF ACTUAL EXPENDITURE IN THE UNIT AND THEREFORE, TH ERE IS NO NEED FOR ALLOCATION OF EXPENDITURE ON A DIFFERENT RATIO. 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND EXAMIN ED THE ALLOCATION OF EXPENDITURE. AS FAR AS TRAVELLING EXP ENDITURE IS CONSIDERED THE CIT (A) AFFIRMED THE ALLOCATION OF E XPENDITURE ON ACTUAL BASIS WITH WHICH WE ALSO AGREE. THEREFORE, R EVENUE GROUND ON THIS ISSUE CANNOT BE ACCEPTED. WITH REFERENCE TO THE COMMUNICATION EXPENDITURE THE EXPENSES ALLOCATED TO THE DIAMOND ITA NO.4520 OF 2011 & CO NO.47 OF 2012 FIRESTONE IN TERNATIONAL PVT LTD MUMBAI PAGE 12 OF 14 UNIT IS ALMOST IN ITS ENTIRETY WITH A MEAGER EXPEND ITURE FOR JEWELLERY UNIT WHICH EARNED PROFIT AT 18.25% AS AGAINST 2.66% IN THE DIAMOND UNIT. AS RIGHTLY POINTED OUT BY THE CIT (A) SINCE NO EVIDENCE WAS FURNISHED FOR THE ARGUMENT THAT MOST O F THE EXPENDITURE PERTAINS TO MR. MIHIR BHANSALI WAS BOOK ED IN ANOTHER RELATED FIRM, THE CONTENTION OF ASSESSEE CANNOT BE ACCEPTED. NO EVIDENCE WAS ALSO PLACED BEFORE US. SINCE THIS ISSU E WAS DECIDED ON FACTUAL BASIS, IN THE ABSENCE OF JUSTIFICATION OF E XPENDITURE ALLOCATED DISPROPORTIONATELY, THERE IS NO OTHER OPTION THAN T O ALLOCATE ON PRO- RATA BASIS. THEREFORE, THE ORDER OF THE CIT (A) IS CONFIRMED AND ASSESSEES CONTENTION ON THIS IS REJECTED. 15. WITH REFERENCE TO THE MISCELLANEOUS EXPENSES, WE CO NFIRM THE ORDER OF THE CIT (A) AS HE HAS CONSIDERED THE ISSUE ON FACTUAL BASIS AND ALSO ON THE REASON THAT THE ALLOCATION TO JEWEL LERY UNIT IS VERY MEAGER AND THERE COULD BE BOOKING OF EXPENDITURE IN THE UNIT NOT ELIGIBLE FOR DEDUCTION. FOR THESE REASONS, WE UPHEL D THE ORDER OF THE CIT (A) AND REJECT ASSESSEES CONTENTIONS. WITH REF ERENCE TO THE DONATIONS THE CIT (A) EXAMINED THIS ISSUE GAVE RELI EF AS IT MAY RESULT IN DOUBLE DISALLOWANCE. NOTHING WAS BROUGHT ON RECORD TO COUNTER THE FINDINGS OF THE CIT (A), THEREFORE, REV ENUE GROUND ON THIS ISSUE IS REJECTED. 16. WITH REFERENCE TO THE AUDIT FEES, AS RIGHTLY POINTE D OUT BY THE CIT (A), ASSESSEE HAS NOT ALLOCATED A SINGLE PAISA TO THE JEWELLERY UNIT, THOUGH IT CLAIMED BOTH THE UNITS ARE AUDITED SEPARATELY. THE CIT(A) UPHELD THE ALLOCATION OF AUDIT FEES TO THE J EWELLERY UNIT AS WELL, AS WAS DONE BY THE AO IN THE SAME RATIO OF SA LES. FOR THESE REASONS, WE UPHOLD THE ORDER OF THE CIT (A) ON THE ABOVE ISSUES AND REJECT THE GROUNDS RAISED BY THE REVENUE AS WELL AS ASSESSEE. DISALLOWANCE U/S 14A. 17. ASSESSEE HAS RAISED ISSUE OF DISALLOWANCE UNDER SEC TION 14A AS GROUND NO.3 IN CROSS OBJECTION. SINCE THIS ISSUE WAS NOT AGITATED ITA NO.4520 OF 2011 & CO NO.47 OF 2012 FIRESTONE IN TERNATIONAL PVT LTD MUMBAI PAGE 13 OF 14 BEFORE THE CIT(A) AND THE DISALLOWANCE MADE BY AO W AS NOT CONTESTED, THE GROUND CANNOT BE ACCEPTED AS MAIN GR OUND IN CROSS OBJECTION. IN VIEW OF THIS, ASSESSEE PRAYED FOR ADM ISSION OF ADDITIONAL GROUND ON THE ISSUE AND FILED A REQUEST ACCORDINGLY. AFTER CONSIDERING THE PLEA, THIS GROUND IS ADMITTED AS AD DITIONAL GROUND. 18. DURING THE YEAR ASSESSEE HAS RECEIVED INTEREST ON R BI RELIEF BONDS TO AN EXTENT OF ` .31,87,500/- AND AO INVOKING THE RULE 8D WORKED OUT WORKED OUT THE DISALLOWANCE AT ` .7,73,425/-. SINCE THIS ISSUE WAS NOT AGITATED BEFORE THE CIT (A), WE ARE O F THE OPINION THAT AO IS REQUIRED TO REWORK OUT THE DISALLOWANCES AFTE R EXAMINING THE REASONABLENESS OF THE EXPENDITURE. BASICALLY ON RBI BONDS, THERE CANNOT BE ANY EXPENDITURE EXCEPT TO EXAMINE WHETHER THE FUNDS ARE OWN FUNDS OR BORROWED FUNDS AND ANY INTEREST EXPEND ITURE WAS INCURRED. THIS ASPECT WAS NEVER EXAMINED. IT WAS AL SO ASSESSEES CONTENTION THAT 0.5% OF THE DISALLOWANCE WAS WORKED ON THE TOTAL INVESTMENT OF ` .15.46 CRORES WHICH ITSELF WAS CARRIED OVER FROM MARCH 31, 2005 OUT OF WHICH ` .10.57 CRORES WAS INVESTED IN A SUBSIDIARY COMPANY, THE INCOME OF WHICH IS NOT EXEM PT AS IT IS A US BASED COMPANY. ON INVESTMENT IN JOINT VENTURE COMPA NY, THERE WAS NO CHANGE IN FACTS FROM EARLIER YEAR. THEREFORE, IF AT ALL ANY DISALLOWANCES IS TO BE WORKED OUT ON A REASONABLE B ASIS AS PER THE PRINCIPLES ESTABLISHED BY THE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. DCIT (323 ITR 81) (BOM), IT HAS TO BE ON THE AMOUNT OF ` .3.75 CRORES INVESTED IN RBI RELIEF BONDS. DURING THE COURSE OF THE ARGUMENT, THE LEARNED COUN SEL PLACED AN ORDER OF THE COORDINATE BENCH IN THE CASE OF PAWAN KUMAR PARMESHWARLAL VS. ACIT IN ITA NO.530/MUM/2009, DATE D 11 TH JANUARY, 2011 FOR THE PROPOSITION THAT NO DISALLOWA NCE UNDER SECTION 14A IS REQUIRED. HOWEVER, THE FACTS OF THAT CASE WAS THAT ASSESSEE WAS AN INDIVIDUAL AND THERE WAS NO DISALLO WANCE OF THE BUSINESS EXPENDITURE WHILE DETERMINING THE INCOME F ROM BUSINESS. THE INVESTMENT MADE BY ASSESSEE IN PERSONAL CAPACIT Y IN THE RBI ITA NO.4520 OF 2011 & CO NO.47 OF 2012 FIRESTONE IN TERNATIONAL PVT LTD MUMBAI PAGE 14 OF 14 BONDS AND PPF WERE CONSIDERED FOR DISALLOWANCE. THE REFORE, CONSIDERING THE FACTUAL POSITION THEREIN, THE DISAL LOWANCE UNDER SECTION 14A WAS HELD TO BE NOT WARRANTED. HOWEVER, IN THIS CASE ASSESSEE IS NOT AN INDIVIDUAL AND THE FUNDS ARE INV ESTED AS PART OF COMPANY BUSINESS EITHER AS INVESTMENT OR FOR BUSINE SS PURPOSES. WHETHER THEY ARE MADE WITH OWN FUNDS OR WITH BORROW ED FUNDS AND WHETHER THERE IS ANY EXPENDITURE INCURRED OR NOT WA S NOT EXAMINED BY AO AND DISALLOWED AMOUNT U/S 14A, INVOKING RULE 8D. AS RULE 8D IS NOT APPLICABLE FOR THE IMPUGNED ASSESSMENT YE AR, THE MATTER IS RESTORED TO THE FILE OF AO FOR EXAMINATION OF TH E ISSUE AFRESH AND DETERMINING THE REASONABLE AMOUNT AS PER THE PRINCI PLES LAID DOWN BY THE HONBLE HIGH COURT OR HONBLE SUPREME COURT IF ANY, AFTER GIVING DUE OPPORTUNITY TO ASSESSEE. ADDITIONAL GROU ND IS RESTORED TO THE FILE OF AO. 19. IN THE RESULT, REVENUE APPEAL IS DISMISSED AND ASSE SSEES C.O IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 9 TH NOVEMBER, 2012. SD/- SD/- (AMIT SHUKLA) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED 9 TH NOVEMBER, 2012. VNODAN/SPS COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, K BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI