M/s Emmbros Exports, Nalagarh V. ITO, Baddi

ITA 1060/CHANDI/2008

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 81105 (ITAT-CHANDIGARH)
• Duration Of Justice: 6 year(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-12-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 15-12-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 05-12-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JYOTI KUMARI
• Assessee Lawyers: PARVEEN KAPOOR
• Keywords: Transfer pricing
• Section: 92F; 80IB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH A, CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI T.R. SOOD, ACCOUNTANT MEMBER ITA NO. 1060/CHD/2008 ASSESSMENT YEARS : 2005-06 EMMBROSS EXPORTS V I.T.O. BADDI VILLAGE KATHA (BADDI) TEHSIL NALAGARH HIMACHAL PRADESH (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI PARVEEN KAPOOR RESPONDENT BY: SMT. JYOTI KUM ARI DATE OF HEARING 15.12.2014 DATE OF PRONOUNCEMENT 23.12 .2014 O R D E R PER T.R. SOOD, A.M THIS APPEAL IS DIRECTED AGAINST THE ORDER OF LD CIT (A), SHIMLA DATED 26.9.2008. 2. IN THIS APPEAL THE ASSESSEE HAS RAISED THE FOLLO WING GROUNDS: 1 THAT THE IMPUGNED ORDER IS BAD IN LAW AND CONTRA RY TO THE FACTS OF THE CASE. THE LD. CIT(A), SHIMLA HAS NOT APPRECIATED THE FACTS AND AW IN THE CORRECT MANNER AND IN ACCORDANC E WITH THE STATUTE. 2 THAT THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT(A), SHIMLA GRAVELY ERRED IN DISALLOWING DEDUCTION ON AC COUNT OF EXPORT INCENTIVES U/S 80IC OF THE IT ACT, 1961 OF RS. 12,8 3,784/-. THAT THE ORDER OF THE CIT, SHIMLA IS BASED ON WRONG INTE RPRETATION OF LAW AND FACTS AND AGAINST SETTLED LAW. 3 THAT THE LD. CIT(A), SHIMLA FURTHER GRAVELY ERRED IN ALLOWING ADDITION MADE BY THE ASSESSING OFFICER IN RENT OF R S. 9,60,000 U/S 80IA(10). THAT THE LD. CIT(A), SHIMLA BASED HER OP INION ON A WRONG INTERPRETATION OF LAW AND FACTS. 4 THAT THE LD. CIT(A), SHIMLA FURTHER ERRED IN SUST AINING THE ORDER OF THE ASSESSING OFFICER REGARDING DISALLOWIN G OF INCOME FROM SALE OF SCRAP OF RS. 3,70,760 AND INTEREST AMOUNT O F RS. 26,210 U/S 80IC. THE SAID ADDITION WAS BASED ON HYPOTHESI S, WITHOUT ANY BASIS AND THUS THE ORDER OF THE CIT, SHIMLA IS BAD BOTH IN LAW AND FACTS. 5 THAT THE LD. CIT(A), SHIMLA ALSO ERRED IN SUSTAIN ING THE ADDITION MADE BY THE ASSESSING OFFICER U/S80IA(10) OF RS. 15,35,995/- ON ACCOUNT OF ROYALTY ON TECHNICAL KNOW HOW AND 2 TRADEMARK. THE ORDER OF THE LD. CIT(A) IS BASED ON HYPOTHESIS AND THUS WRONG IN LAW AND FACTS. 3 GROUND NO. 1 IS OF GENERAL IN NATURE AND DOES NOT REQUIRE ANY SPECIFIC ADJUDICATION. 4 GROUND NO. 2 - AFTER HEARING BOTH THE PARTIES WE FIND THAT DURING ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS CLAIMED DEDUCTION U/S 80IC AN D HAD INCLUDED THE BENEFIT FROM DEPB IN THE PROFITS. THE ASSESSING OFFICER DENIED THIS DEDUCTION ON THE BASIS OF DECIS ION OF HON'BLE SUPREME COURT IN CASE OF CIT V. STERLING FO ODS LTD, 237 ITR 579. 5 ON APPEAL ACTION OF THE ASSESSING OFFICER WAS CON FIRMED BY THE LD. CIT(A). 6 BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE FAIRL Y ADMITEDTHAT ISSUE IS COVERED AGAINST THE ASSESSEE B Y THE DECISION OF HON'BLE SUPREME COURT IN CASE OF LIBERT Y INDIA V CIT, 317 ITR 218. 7 ON THE OTHER HAND, THE LD. DR FOR THE REVENUE SUP PORTED THE ORDER OF THE LD. CIT(A). 8 AFTER CONSIDERING THE RIVAL SUBMISSIONS WE FIND T HAT HON'BLE SUPREME COURT HAS CLEARLY HELD IN CASE OF L IBERTY INDIA V CIT (SUPRA) THAT DEPB DOES NOT FORM PART OF THE P ROFITS FOR CLAIMING DEDUCTION U/S 80I, 80IA OR 80IB ETC. THERE FORE RESPECTFULLY FOLLOWING THIS DECISION, THIS ISSUE IS DECIDED AGAINST THE ASSESSEE. 9 GROUND NO. 3 AFTER HEARING THE RIVAL SUBMISSION S WE FIND THAT DURING ASSESSMENT PROCEEDINGS THE ASSESSI NG OFFICER NOTICED THAT ASSESSEE HAS TAKEN ON LEASE FACTORY PR EMISES FROM ITS SISTER CONCERN I.E. M/S EMBROSE METALS LTD MEAS URING 3 10,000 SQFT FOR A RENT @ RS. 20,000 PM. ACCORDING T O HIM RENT PAID BY THE ASSESSEE WAS VERY LOW. ENQUIRY WAS CON DUCTED ABOUT THE PREVAILING RENT FOR VARIOUS BUILDINGS IN BADDI AREA. IT WAS FOUND THAT KHURANA ENTERPRISES WAS PAYING A REN T OF RS. 10.29 PER SQFT, SHUBHAM ELECTROICS WAS PAYING A REN T OF RS. 10 PER SQFT. IT WAS ALSO NOTICED THAT AFTER ANNOUNCEME NT OF TAX HOLIDAY IN BADDI AREA THERE WAS STEEP RISE IN THE L AND AND BUILDING RATES AS WELL AS RENTS OF BUILDINGS. ACCO RDING TO THE ASSESSING OFFICER THE RENT SHOULD HAVE BEEN AT LEAS T RS. 10 PER SQFT. THEREFORE HE INVOKED THE PROVISIONS OF SECTI ON 80IA(10) AND HELD THAT REASONABLE RENT SHOULD BE RS. 12 LAKH S (WHICH SEEMS TO BE MISTAKEN FIGURE BECAUSE @ RS. 2 LAKHS P M THE RENT SHOULD HAVE BEEN RS. 24 LAKHS). IN THIS BACKGR OUND THE ASSESSING OFFICER REDUCED THE PROFITS OF THE ASSESS EE BY RS. 9,60,000/-. 10 BEFORE THE LD. CIT(A) IT WAS MAINLY SUBMITTED TH AT THERE WAS NO BUSINESS TRANSACTION WITH THE SISTER CONCERN AND THEREFORE PROVISIONS OF SECTION 80IA(10) COULD NOT BE INVOKED. 11 THE LD. CIT(A) AFTER EXAMINING THE SUBMISSIONS R EFERRED TO VARIOUS PROVISIONS OF SECTION 80-IC AS WELL AS DEFINITION OF BUSINESS PROFIT U/S 2(13), CONFIRMED THE ACTION OF THE ASSESSING OFFICER. 12 BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE REIT ERATED THE SUBMISSIONS MADE BEFORE THE LD. CIT(A). HE FURTHER SUBMITTED THAT THE PREMISES WERE TAKEN IN THE REMOTE AREA AND RENT OF RS.2/- PER SQ.FT WAS JUSTIFIED. IN ANY CASE THE ASS ESSEE HAS NOT DONE ANY BUSINESS WITH THE SISTER CONCERN AND THERE FORE SECTION 80IA(10) CANNOT BE APPLIED. 4 13 ON THE OTHER HAND, THE LD. DR FOR THE REVENUE S UPPORTED THE ORDER OF THE LD. CIT(A). 14 AFTER CONSIDERING THE RIVAL SUBMISSIONS WE FIND THAT SUB- SEC (7) OF SECTION 80IC READS AS UNDER: (7) THE PROVISIONS CONTAINED IN SUB-SECTION (5) AND SUB-SECTIONS (7) TO (12) OF SECTION 80-IA SHALL, SO FAR AS MAY BE, APPLY TO THE ELIGIBLE UND ERTAKING OR ENTERPRISE UNDER THIS SECTION . THE ABOVE CLEARLY SHOW THAT SUB-SECTION (7) TO (12) OF SECTION 80IA ARE APPLICABLE. SECTION 80IA(10) READS AS UND ER: (10) WHERE IT APPEARS TO THE ASSESSING OFFICER THAT , OWING TO THE CLOSE CONNECTION BETWEEN THE ASSESSEE CARRYING ON THE ELIGIBLE BUSIN ESS TO WHICH THIS SECTION APPLIES AND ANY OTHER PERSON, OR FOR ANY OTHER REASON, THE COUR SE OF BUSINESS BETWEEN THEM IS SO ARRANGED THAT THE BUSINESS TRANSACTED BETWEEN THEM PRODUCES TO THE ASSESSEE MORE THAN THE ORDINARY PROFITS WHICH MIGHT BE EXPECTED T O ARISE IN SUCH ELIGIBLE BUSINESS, THE ASSESSING OFFICER SHALL, IN COMPUTING THE PROFITS A ND GAINS OF SUCH ELIGIBLE BUSINESS FOR THE PURPOSES OF THE DEDUCTION UNDER THIS SECTION, T AKE THE AMOUNT OF PROFITS AS MAY BE REASONABLY DEEMED TO HAVE BEEN DERIVED THEREFROM: 59 [ PROVIDED THAT IN CASE THE AFORESAID ARRANGEMENT INVOLVES A SPECIFIED DOMESTIC TRANSACTION REFERRED TO IN SECTION 92BA , THE AMOUNT OF PROFITS FROM SUCH TRANSACTION SHALL BE DETERMINED HAVING REGARD TO ARMS LENGTH PRICE A S DEFINED IN CLAUSE (II) OF SECTION 92F .]. THE ABOVE CLEARLY SHOW THAT WHAT IS MANDATED IS THA T IF BUSINESS IS ARRANGED WITH A CLOSELY CONNECTED CONCE RN IN SUCH A WAY THAT PROFIT SHOWN BY THE ASSESSEE WAS MORE TH AN THE ORDINARY PROFIT THEN THE ASSESSING OFFICER CAN INVO KE THIS PROVISION AND CALCULATE REASONABLE PROFITS. THEREF ORE IT IS CLEAR THAT IT IS NOT NECESSARY THAT THE ASSESSEE SH OULD HAVE DONE SOME BUSINESS WITH THAT CONCERN. ADMITTEDLY T HE PREMISES OF SISTER CONCERN HAS BEEN TAKEN ON RENT W HICH MEANS THERE IS CLOSE CONNECTION WITH THE ASSESSEE AND THE LANDLORD. INTERESTINGLY IT MAY BE NOTED THAT DURING THE COURS E OF HEARING WE HAD ASKED THE ASSESSEE THAT WHY THIS NEW CONCERN WAS FLOATED, HE ADMITTED THAT THE SISTER CONCERN HAD AL READY COMPLETED 10 YEARS BUT THE BUSINESS IN THE PREMISES CONCERNED IS OF DIFFERENT NATURE. THOUGH NO ADDITION HAS BEE N MADE OR 5 DEDUCTION HAS BEEN DENIED ON THIS ACCOUNT BUT THE FACT REMAINS THAT THE ASSESSEE AFTER EXHAUSTING COMPLETE PERIOD OF 10 YEARS FOR DEDUCTION HAS FLOATED THIS NEW ORGANIZ ATION IN THE SAME PREMISES FOR CLAIMING DEDUCTION. FURTHER THE R ENT OF RS. 2 PER SQFT IS TOTALLY UNREASONABLE. WE DO NOT FIND A NY FORCE IN THE SUBMISSIONS THAT THE ASSESSEE HAS TAKEN PREMISE S IN A FAR OFF AREA. FACTORY OF SISTER CONCERN IS LOCATED IN BADDI AREA ONLY WHICH IS A SMALL TOWN. THE ASSESSING OFFICER HAS ADOPTED RENT OF RS. 10 PER SQFT ON A VERY REASONABLE BASIS AND HAS GIVEN TWO EXAMPLES. IT MAY BE NOTED THAT REDUCTION SHOULD HAVE BEEN FOR RS. 21,60,000 AND BY MISTAKE THE SAME HAS BEEN DONE ONLY FOR RS. 9,60,000. RENT @ RS. 10 PER SQFT FOR 20,000 SQFT AREA WOULD BE RS. 2 LAKHS BUT THE ASSESSEE HAS PAID ONLY RS. 20,000 PM. HOWEVER, SINCE WE HAVE NO POWER TO E NHANCE, THEREFORE WE RESTRICT THE REDUCTION MADE BY THE ASS ESSING OFFICER FOR RS. 9,60,000 AND CONFIRM THE ORDER OF T HE LD. CIT(A). 15 GROUND NO. 4 AS FAR AS ISSUE REGARDING DEDUCTI ON ON ACCOUNT OF INTEREST IS CONCERNED, SAME IS COVERED A GAINST THE ASSESSEE BY THE DECISION OF HON'BLE SUPREME COURT I N CASE OF PANDIAN CHEMICALS V. CIT, 262 ITR 278 AND TO THIS E XTENT WE CONFIRM THE ORDER OF THE LD. CIT(A). 16 AS FAR AS ISSUE REGARDING DENIAL OF DEDUCTION U/ S 80IC IN RESPECT OF SCRAP SALE IS CONCERNED, SAME HAS BEEN DENIED BY THE ASSESSING OFFICER BY HOLDING THAT SCRAP INCOME IS NOT DERIVED FROM INDUSTRIAL UNDERTAKING. ACTION OF THE ASSESSING OFFICER HAS BEEN CONFIRMED BY THE LD. CIT(A). 17 BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE SUBM ITTED THAT THE ASSESSEE IS AN INDUSTRIAL UNDERTAKING AND SCRAP WAS GENERATED DURING MANUFACTURING. IN ANY CASE THE IS SUE IS 6 COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION O F CHANDIGARH BENCH OF THE TRIBUNAL IN CASE OF ACIT V MICRO TURNERS, ITA NO. 1202/CHD/2010. 18 ON THE OTHER HAND, THE LD. DR FOR THE REVENUE STRONGLY SUPPORTED THE ORDER OF THE LD. CIT(A). 19 WE FIND THAT IDENTICAL ISSUE WAS CONSIDERED IN C ASE OF ACIT V MICRO TURNERS, ITA NO. 1202/CHD/2010 (SUPRA) AND WAS ADJUDICATED VIDED PARA 8 WHICH IS AS UNDER: GROUND NO. 3 IS AGAINST THE DECISION OF THE LD. CI T(A) IN ALLOWING DEDUCTION U/S 80IC OF THE ACT IN RESPECT OF SCRAP SALES. THIS GROUND OF APPEAL IS ALSO COVERED BY THE ABOVE REFER RED DECISION OF THE HONBLE TRIBUNAL IN ASSESSEES OWN CASE. HOWEVE R, FRO THE SAKE OF READY REFERENCE, RELEVANT PART OF THE ORDER IS REPRODUCED HEREUNDER: WE HAVE CAREFULLY EXAMINED THE RIVAL SUBMISSIONS A ND FIND NO MISTAKE IN THE CONCLUSION DRAWN BY THE LD. CIT(A ). AS PER THE LD. CIT(A), IN THIS CASE, THE SALE WAS OF S CRAP GENERATED IN THE MANUFACTURING PROCESS AND, THEREFO RE IT HAD A DIRECT NEXUS WITH THE INDUSTRIAL UNDERTAKING OF T HE ASSESSEE. IN THIS CONNECTION, RELIANCE PLACED ON TH E JUDGMENT OF THE HON'BLE MADRAS HIGH COURT IN THE CA SE OF CIT V. SUNDRAM CLAYTON LTD. AND PENNER (INDIA) LTD. (SUPRA) IS APPOSITE. IN SO FAR AS THE RELIANCE PLACED BY T HE LD. DR FOR THE REVENUE ON THE JUDGMENT OF HON'BLE MADRAS HIGH COURT IN CASE OF PANDIAN CHEMICALS LTD. (SUPRA) IS CONCERNED, THE SAME IN OUR VIEW IS NOT APPLICABLE T O THE FACTS OF THE PRESENT CASE. IN THE CASE OF PANDIAN CHEMICALS LTD (SUPRA) DEDUCTION U/S 80HH WAS DENIED IN RELATI ON TO THE SALE OF SCRAP BECAUSE THERE WAS NO MATERIAL TO SHO W THAT THE SCRAP WAS A NECESSARY BY PRODUCT IN THE PROCESS OF MANUFACTURE. IN THE INSTANT CASE, THE LD. CIT(A) H AS FOUND THAT THE SCRAP SOLD WAS GENERATED DURING THE COURSE OF PRODUCTION OF THE INDUSTRIAL UNDERTAKING AND THEREF ORE IT HAS A DIRECT NEXUS WITH THE INDUSTRIAL UNDERTAKING. AC CORDINGLY THE FACTS OF THE CASE OF PANDIAN CHEMICALS LTD. (SU PRA). ACCORDINGLY THE DECISION OF HON'BLE MADRAS HIGH CO URT IN CASE OF PANDIAN CHEMICALS LTD. (SUPRA) DOES NOT HEL P THE REVENUE. THUS, ON THIS ASPECT THE REVENUE HAS TO F AIL. FOLLOWING THE ABOVE WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE. 20 GROUND NO. 5 DURING ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER OBSERVED THAT ASSESSEE HAS ESTABL ISHED NEW BUSINESS IN AUTO PARTS AND IT WAS THE FIRST YEAR OF THE BUSINESS. THE SISTER CONCERN OF THE ASSESSEE M/S EMBROSE META LS LTD HAS BEEN DOING BUSINESS OF MANUFACTURING OF AUTO PA RTS FOR THE 7 LAST SO MANY YEARS. THEREFORE THIS CONCERN HAD DEV ELOPED NECESSARY TECHNICAL KNOW HOW AND HAD DEVELOPED GOOD WILL OF TRADE AND TRADE MARK EMBROSE. IN HIS OPINION THE ASSESSEE COULD NOT MANUFACTURE AUTO PARTS AND THE SALE OF SA ME WITHOUT KNOW HOW AND GOODWILL. HOWEVER, FOR SUCH USAGE OF KNOW HOW AND GOODWILL, NO EXPENDITURE HAS BEEN DEBITED. IN RESPONSE TO THE QUERY IT WAS SUBMITTED AS UNDER: INCOME FROM SALE OF SCRAP THE ASSESSEE HAS MADE SALES OF SCRAP AMOUNTING TO R S. 370760/- WHICH HAS BEEN INCLUDED IN THE PROFIT DECLARED AT R S. 9439164/-. THE ASSESSEE HAS CLAIMED DEDUCTION U/S 80IC IN RESP ECT OF THIS INCOME ALSO. INCOME FROM SALE OF SCRAP WAS NOT INC OME DERIVED FROM MANUFACTURING OF ARTICLES AND THINGS, THEREFOR E THE SAME WAS NOT ADMISSIBLE FOR DEDUCTION U/S 80IC OF THE IT ACT , 1961. THE ASSESSEE WAS ASKED TO EXPLAIN WHY DEDUCTION IN RESP ECT OF INCOME FROM SCRAP AT RS. 370760/- SHOULD NOT BE DISALLOWED . THE ASSESSEE REPLIED THAT ANY INCOME OF AN INDUSTRIAL U NDERTAKING IS ADMISSIBLE FOR DEDUCTION U/S 80IC OF IT ACT, 1961. THE ASSESSEE CITED THE DECISION OF HON'BLE MADRAS HIGH COURT PRO NOUNCED IN THE CASE OF M/S FENNER (INDIA) V CIT (NO. 2), 241 ITR I N SUPPORT OF HIS CONTENTIONS. THE CONTENTIONS OF THE ASSESSEE IS NOT ACCEPTABLE BECAUSE THE TERM ANY INCOME IN SECTION 80IC(1) HAS BEEN U SED WITH REFERENCE TO SUB-SEC 2 OF SECTION 80IC. SUB-SEC 2 OF SEC 80IC ENVISAGES THAT ONLY THAT INCOME IN ADMISSIBLE FOR D EDUCTION WHICH IS DERIVED FROM MANUFACTURING OF ARTICLES AND TINGS . THE INCOME FROM SALE OF SCRAP WAS NOT INCOME DERIVED FROM MANU FACTURING ACTIVITY OF THE ASSESSEE. IT IS HOWEVER, INCIDENTA L TO THE BUSINESS OF THE ASSESSEE. THEREFORE THE INTERPRETATION OF T HE ASSESSEE OF SUB-SEC (I) OF SECTION 80IC IS NOT CORRECT. THE HON'BLE MADRAS HIGH COURT IN THE CASE OF PANDI AN CHEMICALS LTD V. CIT, 270 ITR 448 HAS HELD THAT THE INCOME FROM SALE OF SCRAP WAS NOT RELATABLE TO INDUSTRIAL ACTI VITIES. THUS THE INCOME FROM SALE OF SCRAP WAS NOT ADMISSIBLE FOR DE DUCTION. IN VIEW OF ABOVE THE ASSESSEE HAS WRONGLY CLAIMED DEDU CTION U/S 80IC AGAINST INCOME FROM SALE OF SCRAP THE SAME IS DISALLOWED. AN ADDITION OF RS. 371760/- IS, THEREFORE MADE IN T OTAL INCOME OF THE ASSESSEE. THE ASSESSEE IS DEEMED TO HAVE FURNI SHED INACCURATE PARTICULARS OF ITS INCOME IN VIEW OF EXP LANATION 1 OF SECTION 271(1)(C), THEREFORE PENALTY PROCEEDINGS U/ S 271(1)(C) OF IT ACT, 1961 HAVE BEEN INITIATED. THE ASSESSING OFFICER OBSERVED THAT ADMITTEDLY IT W AS THE PARTNER WHO HAD THE KNOWLEDGE AND THEREFORE HE INVO KED PROVISIONS OF SECTION 80IA (10) PARTICULARLY BECAU SE SISTER CONCERN WAS EARNING LOWER PROFITS THEN THE ASSESSEE WHICH IS CLEAR FROM FOLLOWING CHART: 8 M/S EMBROSE EXPORTS M/S EMBROSE METALS PVT LTD SALE 3,07,19,902 9,39,29,897 G.P 1,46,57,271 2,57,19,696 G.P% 47.41% 27,38% N.P 94,39,164 1,39,93,989 N.P% 30.72% 14.90% IN THE ABOVE BACKGROUND HE APPLIED 3% FEE FOR TECHN ICAL KNOW HOW AND BRAND VALUE ETC. AND REDUCED THE DEDUCTION BY RS. 15,30,995/-. 21 ON APPEAL IT WAS MAINLY STATED BEFORE THE LD. CI T(A) THAT PROVISIONS OF SECTION 80IA(10) ARE NOT APPLICABLE BECAUSE THE CONDITION MENTIONED IN THAT PROVISION IS NOT APPLIC ABLE. HOWEVER, THE LD. CIT(A) DID NOT FIND FORCE IN THE S AME AND DECIDED THE ISSUE AGAINST THE ASSESSEE VIDE PARA 6. 4 WHICH IS AS UNDER: I HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT IS SEE N THAT THERE EXISTS A CLOSE CONNECTION BETWEEN THE ASSESSEE AND M/S EMMBROS METALS LTD. WHICH IS A SISTER CONCERN OF THE APPELL ANT. THIS IS THE FIRST YEAR OF PRODUCTION OF AUTO PARTS OF THE ASSES SEE WHEREAS ITS SISTER CONCERN M/S EMMBROS METALS LTD HAS BEEN IN T HIS BUSINESS FOR LAST 7-10 YERS. THE ASSESSEE HAS NOT ONLY USED THE TECHNICAL KNOW HOW ACQUIRED BY ITS ALREADY ESTABLISHED SISTER CONCERN M/S EMMBROS METALS LT. BUT ALSO USED THE TRADE NAME EM MBROS OF ITS SISTER CONCERN WHICH HAS ENABLED THE APPELLANT TO USE THEIR CUSTOMERS BASE AS WELL. IT IS CLEAR THAT THE ASSES SEE HAS USED THE TECHNICAL KNOW HOW OF ITS SISTER CONCERN M/S EMMBRO S METALS LTD., THROUGH ITS DIRECTORS ASHOK MEHTA AND HARISH MEHTA FREE OF COST. PROVIDING OF TECHNICAL KNOW HOW AND SERVICES AMOUNT S TO BUSINESS TRANSACTED BETWEEN THE ASSESSEE AND ITS SISTER CONC ERN WHICH IS CLOSELY CONNECTED AND FALLS WITHIN THE AMBIT OF SEC TION 80IA(10). THIS AGREEMENT HAS RESULTED IN MUCH HIGHER NET PROF IT OF 30.72% FOR THE ASSESSEE AS COMPARED TO ITS SISTER CONCERN AT 14.90%. IN SUCH A CASE U/S 80IA(10)/80IC(&) OF IT ACT, 1961 TH E ASSESSING OFFICER IS ENTITLED TO ESTIMATE THE REASONABLE PROF IT AND ALLOW THE DEDUCTION CLAIMED ONLY TO THE EXTENT OF SUCH REASON ABLE PROFITS. THIS PROVISION IS TO ENSURE THE TAX INCENTIVE U/S 8 0IA/80IC ONLY ON THE PROFITS THAT THE ELIGIBLE UNIT MAKES WHILE DEAL ING WITH ANY ASSOCIATED CONCERN ON ARMS LENGTH BASIS. THE ARM S LENGTH PRINCIPLE UNDERLYING THIS PROVISION IS THE SAME AS ENSHRINED IN SECTION 92-92|F OF IT ACT, 1961. THE ASSESSEES OBJECTION TO THE APPLICATION OF AR MS LENGTH PRINCIPLE IS THAT THERE EXISTS NO MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN THE APPELLANT AND THE SISTER CONCERN IN THE NATURE OF SALE PURCHASE, LENDING OR BORROWING ON THE PROFITS, INCO ME, LOSSES OR ASSETS OF SUCH ENTERPRISE OR TO PROVE THAT PROVISIO NS OF SECTION 80IA(10) ARE APPLICABLE. THE APPELLANTS OBJECTION IS FOUND TO BE WITHOUT ANY BASIS DUE TO FOLLOWING FACTS: I RENT HAS BEEN PAID AT 10% OF THE MARKET RATE TO S ISTER CONCERN AS HELD IN GROUND NO.2. 9 II THE TRADE NAME TECHNICAL KNOW HOW AND GOOD WILL OF SISTER CONCERN HAVE BEEN USED BY THE APPELLANT. III THE CUSTOMER BASE OF THE SISTER CONCERN HAS BEE N USED BY THE APPELLANT WHICH HAS BEEN ACCEPTED IN ITS SUBMIS SIONS DURING APPEAL. IV NO ROYALTY HAS BEEN PAID FOR USE OF TRADE NAME . ALL THE ABOVE FACTS HAVE LED TO INCREASE IN PROFITS OF THE APPELLANT. THEREFORE SECTION 80IA(10)/80IC(7) IS CLEARLY APPLI CABLE IN THE CASE AND THE ASSESSING OFFICER IS JUSTIFIED TO ESTI MATE REASONABLE PROFITS. THE ASSESSING OFFICER HAS RIGHTLY ESTIMAT ED THE ROYALTY/FEES FOR TECHNICAL SERVICES AT 3% OF SALES A T RS. 9,21,597 (3% OF RS. 3,07,19,902) AND COMPENSATION FOR USE OF TRADE MARK EMMBROS AT 2% OF SALES AS ROYALTY FOR USE OF TRAD E MARK AT RS. 6,124,398 (2% OF RS. 3,07,19,902). THE ELIGIBLE PR OFIT HAS BEEN RIGHTLY REDUCED BY RS. 9,21,597/- + RS. 6,14,398 = RS. 15,35,995 U/S 80IA(10/80IC(7) AND DEDUCTION TO THIS EXTENT DI SALLOWED. AS A RESULT TGE ADDITION IF RS. 15,35,995/- IS CONFIRMED . 22 BEFORE US IT WAS SUBMITTED THAT THE PRODUCTS MAN UFACTURED BY THE ASSESSEE ARE DIFFERENT. THERE IS NO LINK BE TWEEN THE TECHNOLOGY USED BY THE ASSESSEE AND THE SISTER CONC ERN. THE PARTNERS HAD ALREADY KNOWLEDGE OF AUTOMOBILE INDUST RY. THE ALLEGATION OF HIGH MARGIN IS NOT CORRECT BECAUSE SA ME DEPENDS FROM PRODUCT TO PRODUCT. IN ANY CASE THE ASSESSEE HAS NOT USED BRAND EMBROSE. 23 ON THE OTHER HAND, THE LD. DR FOR THE REVENUE ST RONGLY SUPPORTED THE ORDER OF THE LD. CIT(A). 24 AFTER CONSIDERING THE RIVAL SUBMISSIONS WE FIND THAT IT CANNOT BE DENIED THAT PROVISIONS OF SECTION 80IA(1 0) ARE APPLICABLE BECAUSE IN THE SISTER CONCERN THE ASSESS EE HAS SOME ARRANGEMENT. FIRST OF ALL THE ASSESSEE HAS TA KEN THE PREMISES FROM THE SISTER CONCERN ON RENT. SECONDLY THE ASSESSEE COULD NOT HAVE CLAIMED DEDUCTION UNDER THE NAME OF SISTER CONCERN BECAUSE PERIOD OF 10 YEARS WAS OVER. IT CANNOT BE DENIED THAT SISTER CONCERN POSSIBLY COULD NOT HA VE EARNED MORE PROFIT THEN THE EXISTING CONCERN, WHICH BECOME S CLEAR FROM TRADE RESULTS OF BOTH THE CONCERNS WHICH ARE AS UNDER: M/S EMBROSE EXPORTS M/S EMBROSE METALS PVT LTD 10 SALE 3,07,19,902 9,39,29,897 G.P 1,46,57,271 2,57,19,696 G.P% 47.41% 27,38% N.P 94,39,164 1,39,93,989 N.P% 30.72% 14.90% FROM ABOVE IT IS CLEAR THAT THE ASSESSEE MUST HAVE USED SOME KNOW HOW OR OTHER FACILITIES. HOWEVER, AT THE SAME TIME THE REVENUE HAS NOT ESTABLISHED THAT BRAND NAME WAS USE D BY THE NEW CONCERN. IT WAS DENIED BEFORE US THAT THE ASSES SEE HAS USED BRAND NAME. THEREFORE CONSIDERING OVERALL CIRCUMSTANCES, WE REDUCE THE REDUCTION ON THIS ACCO UNT TO RS. 10 LAKHS. THUS THIS GROUND IS PARTLY ALLOWED. 25 IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 23.12.2014 SD/- SD/- (BHAVNESH SAINI) (T.R. SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 23.12.2014 SURESH COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT/THE C IT(A)/THE DR