JYOTI CERAMIC INDUSTRIES P. LTD, MUMBAI V. DCIT 5(2), MUMBAI

ITA 1087/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8987 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-09-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: L
• Next Hearing Date: 25-07-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 10-02-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Earning of tax free income
• Section: 92A; 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L BEFORE SHRI D.K. AGARWAL, JUDICIAL MEMBER AND SHRI P.M.JAGTAP, ACCOUNTANT MEMBER. I.T.A. NO. 1087/MUM/2010. ASSESS MENT YEAR : 2006-07. JYOTI CERAMIC INDUSTRIES P. LTD., DY. COMMISSIONER OF B-603, PARLE UDYAN CO-OP. VS. INCOME-TAX-5(2), HSG. SOC. LTD., 25, PARK ROAD, MUMBAI. VILE PARLE (EAST), MUMBAI 400057. PAN AAACJ0247P APPELLANT RESPONDENT . APPELLANT BY : SHRI K. GOPAL. RESPONDENT BY : SHRI AJIT KUMAR JAIN. DATE OF HEARING : 26-07-2012. DATE OF PRONOUNCEMENT : 14 -09-2012. O R D E R PER P.M. JAGTAP, A.M. THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER OF LEARNED CIT(APPEALS)-9, MUMBAI DATED 16-12-2009. 2. GROUND NO. 1 AND 2 OF THIS APPEAL INV OLVE A COMMON ISSUE RELATING TO THE ADDITION OF RS.1,08,843/- MADE BY THE AO AND CONFIRMED BY THE LEARNED CIT(APPEALS) ON ACCOUNT OF TRANSFER PRICIN G ADJUSTMENT. 2 ITA NO.1087/MUM/2010 3. THE ASSESSEE IN THE PRESENT CASE IS A COMPANY WHICH IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND EXPORT OF TECH NICAL CERAMIC ITEMS. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION W AS FILED BY IT ON 26-11- 2006 DECLARING TOTAL INCOME OF RS.148,47,38,843/-. ALONG WITH THE SAID RETURN, REPORT IN THE PRESCRIBED FORM NO. 3CEB RELA TING TO INTERNATIONAL TRANSACTIONS WAS SUBMITTED BY THE ASSESSEE. FROM P ERUSAL OF THE DETAILS GIVEN IN THE SAID REPORT, THE AO FOUND THAT THE INT ERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE COMPANY WITH ITS ASSOC IATED ENTERPRISES DURING THE YEAR UNDER CONSIDERATION WERE LESS THAN RS. 15 CRORES. HE, THEREFORE, PROCEEDED TO VERIFY THE ISSUE RELATING TO ARMS LEN GTH PRICE CHARGED IN THE SAID TRANSACTIONS ON HIS OWN WITHOUT REFERRING THE MATTER TO THE TPO. ON PERUSAL OF THE DETAILS OF INTERNATIONAL TRANSACTION WITH ITS ASSOCIATED ENTERPRISES FURNISHED BY THE ASSESSEE, THE AO FOUND THAT THE SAME PRODUCT, NAMELY, GRINDING MEDIA (MICRO) ZIROCONIUM OXIDE BEA DS-DIA 0.4MM TO 0.7MM WAS SUPPLIED BY THE ASSESSEE COMPANY TO ITS ASSOCIATED ENTERPRISES, NAMELY, TECHNO CERAMIC AT RS.1556.20 AS AGAINST THE PRICE OF RS.1665/- CHARGED TO AN INDEPENDENT THIRD PARTY, NAMELY, M/S HOFFMAN. SINCE THE QUANTITY SUPPLIED TO M/S TECHNO CERAMIC WAS 1000 KG S., TRANSFER PRICING ADJUSTMENT OF RS.1,08,843/- WAS MADE BY THE AO TAKI NG THE ALP AT RS.16,65,000/- AS AGAINST RS.15,56,157/- CHARGED BY THE ASSESSEE FOR THE LOT OF 1,000 KG. AN ADDITION TO THAT EXTENT WAS MADE BY HIM TO THE TOTAL INCOME OF THE ASSESSEE. 4. THE ADDITION MADE BY THE AO ON ACCOUNT OF TP ADJUSTMENT WAS DISPUTED BY THE ASSESSEE IN AN APPEAL FILED BEFORE THE LEARNED CIT(APPEALS). BEFORE THE LEARNED CIT(APPEALS), ITS SHARE HOLDING PATTERN WAS FURNISHED BY THE ASSESSEE TO POINT OUT THAT IT WAS CONTROLLED BY MERANI FAMILY. IT WAS 3 ITA NO.1087/MUM/2010 SUBMITTED THAT M/S TECHNO CERAMIC HAD ONLY TWO SHAR EHOLDERS, NAMELY, MR. CHATRU WADHWANI AND HIS WIFE MRS. JYOTI WADHWANI, E ACH HOLDING 50% SHARES AND ALTHOUGH MRS. JYOTI WADHWANI WAS THE DAU GHTER OF MR. SHYAM MERANI, MANAGING DIRECTOR OF THE ASSESSEE COMPANY, MRS. JYOTI WADHWANI HELD ONLY 5 SHARES IN M/S MERANI INVESTMENT AND TRA DING COMPANY P. LTD. WHICH WAS HOLDING 12000 SHARES IN THE ASSESSEE COMP ANY. THE ASSESSEE COMPANY CONTENDED THAT THERE WAS THUS NO PARTICIPAT ION IN THE MANAGEMENT OR CONTROL OR CAPITAL EITHER BY MR. SHYAM MERANI IN THE BUSINESS OF M/S TECHNO CERAMIC OR BY MR. CHATRU WADHWANI AND MRS. JYOTI WADHWANI IN THE ASSESSEE COMPANY. IT WAS CONTENDED THAT M/S TEC HNO CERAMIC THUS WAS NOT THE ASSOCIATED ENTERPRISES OF THE ASSESSEE COMP ANY AS DEFINED IN SECTION 92A(1) AND THERE WAS NO QUESTION OF MAKING ANY TRA NSFER PRICING ADJUSTMENT IN RESPECT OF TRANSACTIONS BETWEEN THE ASSESSEE COM PANY AND THE SAID CONCERN. 5. THE LEARNED CIT(APPEALS) DID NOT FIND MERIT IN THIS PRELIMINARY OBJECTION RAISED BY THE ASSESSEE WHILE DISPUTING TH E ADJUSTMENT MADE BY THE AO ON ACCOUNT OF TP ADJUSTMENT. HE FOUND THAT THE A SSESSEE COMPANY ITSELF HAD TREATED M/S TECHNO CERAMIC AS ITS ASSOCIATED EN TERPRISE NOT ONLY IN THE YEAR UNDER CONSIDERATION BUT EVEN IN THE IMMEDIATE LY SUCCEEDING YEARS IN THE TRANSFER PRICING REPORT. HE ALSO FOUND THAT MRS . JYOTI WADHWANI WHO WAS 50% SHAREHOLDER IN M/S TECHNO CERAMIC DID PARTICIPA TE IN THE MANAGEMENT, CONTROL OR CAPITAL OF THE ASSESSEE THROUGH M/S MERA NI INVESTMENT AND TRADING COMPANY P. LTD. AND SHE WAS ALSO DAUGHTER OF MR. SHYAM MERANI, MANAGING DIRECTOR OF THE ASSESSEE COMPANY. HE, THER EFORE, HELD THAT M/S TECHNO CERAMIC WAS AN ASSOCIATED ENTERPRISE OF THE ASSESSEE COMPANY AND OVERRULED THE PRELIMINARY OBJECTION RAISED BY THE A SSESSEE ON THIS ISSUE. AS 4 ITA NO.1087/MUM/2010 REGARDS THE MERIT OF THE TP ADJUSTMENT MADE BY THE AO, THE LEARNED CIT(APPEALS) FOUND NO MERIT IN THE CONTENTION OF TH E ASSESSEE THAT THERE WAS ANY PRIOR COMMITMENT ON ITS PART TO SUPPLY GOODS TO M/S TECHNO CERAMIC AT RATES PREVAILING PRIOR TO THE PRICE REVISION AS THE SAME WAS NOT SUPPORTED BY ANY EVIDENCE OR AGREEMENT BETWEEN THE ASSESSEE COMP ANY AND M/S TECHNO CERAMIC. HE ALSO REJECTED THE CONTENTION OF THE ASS ESSEE THAT PRICE CHARGED TO THE AE DURING THE ENTIRE PERIOD SHOULD BE TAKEN ON AVERAGE BASIS FOR THE PURPOSE OF COMPARABILITY ANALYSIS HOLDING THAT ONLY PRICE CHARGED ON SIMILAR PRODUCTS UNDER SIMILAR CIRCUMSTANCES WAS TO BE CONS IDERED FOR THE COMPARABILITY ANALYSIS. ACCORDINGLY, THE ADDITION M ADE BY THE AO ON ACCOUNT OF TP ADJUSTMENT WAS SUSTAINED BY THE LEARN ED CIT(APPEALS). 6. WE HAVE HEARD THE ARGUMENTS OF BOTH T HE SIDES ON THIS ISSUE AND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. IN GR OUND NO.1, THE ASSESSEE HAS RAISED THE PRELIMINARY ISSUE THAT TECHNO CERAMI C IS NOT ITS ASSOCIATED ENTERPRISE SO AS TO WARRANT ANY TRANSFER PRICING AD JUSTMENT AS MADE BY THE AO AND CONFIRMED BY THE LEARNED CIT(APPEALS) IN RES PECT OF INTERNATIONAL TRANSACTIONS ENTERED INTO WITH THE SAID CONCERN. IT IS OBSERVED THAT THE MEANING OF THE TERM ASSOCIATED ENTERPRISE IS GIVE N IN SECTION 92A AND AS PER CLAUSE (J) OF SUB-SECTION (2) OF SECTION 92A, T WO ENTERPRISES ARE DEEMED TO BE ASSOCIATED ENTERPRISES IF, AT ANY TIME DURING THE PREVIOUS YEAR, WHERE ONE ENTERPRISE IS CONTROLLED BY AN INDIVIDUAL, THE OTHER ENTERPRISE IS ALSO CONTROLLED BY SUCH INDIVIDUAL OR HIS RELATIVE OR JO INTLY BY SUCH INDIVIDUAL AND RELATIVE OF SUCH INDIVIDUAL. IN THE PRESENT CASE, T HE ASSESSEE COMPANY IS CONTROLLED BY MR. SHYAM MERANI WHILE M/S TECHNO CER AMIC IS CONTROLLED BY MRS. JYOTI WADHWANI WHO IS THE DAUGHTER OF MR. SHYA M MERANI AND THIS BEING SO, THE ASSESSEE COMPANY AND M/S TECHNO CERAM IC, IN OUR OPINION, ARE 5 ITA NO.1087/MUM/2010 ASSOCIATED ENTERPRISES AS PER CLAUSE (J) OF SUB-SEC TION (2) OF SECTION 92A. WE, THEREFORE, FIND THE PRELIMINARY OBJECTION RAISED BY THE ASSESSEE ON THIS ISSUE TO BE UNSUSTAINABLE AND OVERRULING THE SAME, WE DIS MISS GROUND NO.1 OF THE ASSESSEES APPEAL. 7. AS REGARDS GROUND NO.2 RELATING TO TH E MERIT OF THE ADDITION MADE BY THE AO AND CONFIRMED BY THE LEARNED CIT(APPEALS) ON ACCOUNT OF TP ADJUSTMENT, THE LEARNED COUNSEL FOR THE ASSESSEE HA S MAINLY REITERATED BEFORE US THE SUBMISSIONS MADE BEFORE THE LEARNED CIT(APPE ALS) ON THIS ISSUE. HE HAS CONTENDED THAT ALTHOUGH THERE WAS A PRICE REVIS ION, THE LOT OF 1000 KGS. WAS SUPPLIED TO M/S TECHNO CERAMIC AT OLD RATE TO F ULFILL THE COMMITMENT. THERE IS, HOWEVER, NO EVIDENCE THAT HAS BEEN BROUGH T ON RECORD BY HIM TO SHOW THAT THERE WAS ANY SUCH COMMITMENT TO SUPPLY T HE GOODS TO M/S TECHNO CERAMIC AT OLD RATE. HE HAS ALSO CONTENDED T HAT THE AVERAGE RATE CHARGED BY THE ASSESSEE COMPANY TO M/S TECHNO CERAM IC DURING THE RELEVANT PERIOD WAS ACTUALLY MORE THAN THE RATE CHA RGED TO THE THIRD PARTY. HOWEVER, AS RIGHTLY HELD BY THE LEARNED CIT(APPEALS ) IN THIS REGARD, IT IS THE PRICE CHARGED FOR A PARTICULAR TRANSACTION WITH AE HAS TO BE CONSIDERED AND COMPARED WITH THE PRICE CHARGED FOR A SIMILAR PRODU CT TO UNRELATED PARTY FOR THE PURPOSE OF COMPARABILITY ANALYSIS TO ASCERTAIN THE ALP BY ADOPTING A COMPARABLE UNCONTROLLED PRICE (CUP) METHOD. SINCE T HE PRICE CHARGED BY THE ASSESSEE IN A PARTICULAR TRANSACTION OF SUPPLY OF 1000 KGS. MATERIAL WAS LOWER THAN THE PRICE CHARGED FOR THE SIMILAR PRODUC T TO THE UNRELATED PARTY, WE ARE OF THE VIEW THAT THE PRICE CHARGED TO THE UN RELATED PARTY WAS RIGHTLY TAKEN AS ALP AND THE ADDITION MADE BY WAY OF TRANS FER PRICING ADJUSTMENT ON THE BASIS THEREOF IS IN ACCORDANCE WITH THE RELE VANT PROVISIONS OF THE ACT. WE, THEREFORE, UPHOLD THE IMPUGNED ORDER OF THE LEA RNED CIT(APPEALS) 6 ITA NO.1087/MUM/2010 CONFIRMING THE ADDITION MADE BY THE AO ON THIS ISSU E AND DISMISS GROUND NO. 2 OF THE ASSESSEES APPEAL. 8. THE ISSUE RAISED IN GROUND NO. 3 OF THE ASSESSEES APPEAL RELATES TO THE DISALLOWANCE OF RS.27,99,532/- MADE BY THE AO A ND CONFIRMED BY THE LEARNED CIT(APPEALS) U/S 14A OF THE ACT READ WITH R ULE 8D OF THE INCOME- TAX RULES, 1962. 9. IN THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD EARNED DIVIDEND INCOME OF RS.4,73,99,378/-, INTEREST ON TAX FROM TH E BOND OF RS.7,05,075/- AND LONG TERM CAPITAL GAIN OF RS.39,78,250/-. ALL T HESE ITEMS OF INCOME WERE CLAIMED TO BE EXEMPT IN THE RETURN OF INCOME FILED FOR THE YEAR UNDER CONSIDERATION. NO DISALLOWANCE ON ACCOUNT OF EXPENS ES INCURRED IN RELATION TO THE SAID EXEMPT INCOME, HOWEVER, WAS MADE BY THE ASSESSEE AS REQUIRED BY THE PROVISIONS OF SECTION 14A. THE AO, THEREFORE , WORKED OUT SUCH EXPENSES BY APPLYING RULE 8D OF THE INCOME-TAX RULE S, 1962 AT RS.27,99,532/- AND DISALLOWANCE TO THAT EXTENT WAS MADE BY HIM U/S 14A. ON APPEAL, THE LEARNED CIT(APPEALS) CONFIRMED THE S AID DISALLOWANCE MADE BY THE AO RELYING ON THE DECISION OF SPECIAL BENCH OF ITAT IN THE CASE OF DAGA CAPITAL MANAGEMENT P. LTD. 26 SOT 603 WHEREIN IT WAS HELD THAT RULE 8D IS APPLICABLE RETROSPECTIVELY. 10. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES ON THIS ISSUE AND PERUSED THE RELEVANT MATERIAL ON RECORD. AS AGREED BY THE LEARNED REPRESENTATIVES OF BOTH THE SIDES, THE ISSUE INVOLV ED IN THIS APPEAL NOW STANDS SQUARELY COVERED BY THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE MANUFACTURING CO. LTD. (2010) 234 C TR (BOM) 1, WHEREIN IT HAS BEEN HELD THAT RULE 8D OF INCOME-TAX RULES, 1962 IS APPLICABLE ONLY 7 ITA NO.1087/MUM/2010 FROM ASSESSMENT YEAR 2007-08. AS FURTHER HELD BY HO NBLE HIGH COURT, THE DISALLOWANCE U/S 14A FOR THE YEARS PRIOR TO ASSESSM ENT YEAR 2007-08 HAS TO BE MADE BY ADOPTING SOME REASONABLE METHOD. RESPECT FULLY FOLLOWING THE SAID DECISION OF HONBLE JURISDICTIONAL HIGH COURT, WE SET ASIDE THE IMPUGNED ORDER OF THE LEARNED CIT(APPEALS) ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE OF THE AO WITH A DIRECTION TO RE COMPUTE THE DISALLOWANCE OF EXPENSES TO BE MADE U/S 14A BY APPLYING SOME REA SONABLE METHOD AFTER GIVING THE ASSESSEE AN OPPORTUNITY OF BEING HEARD. ACCORDINGLY, GROUND NO. 3 OF THE ASSESSEES APPEAL IS PARTLY ALLOWED FOR ST ATISTICAL PURPOSE. 11. IN THE RESULT, THE APPEAL OF THE ASS ESSEE IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 14 TH DAY OF SEPT., 2012. SD/- (D.K. AGARWAL) JUDICIAL MEMBER SD/- (P.M. JAGTAP) ACCOUNTANT MEMBER DATED : 14 TH SEPT., 2012 COPY TO : 1. THE ASSESSEE 2. THE RESPONDENT 3. THE CIT(A)-CONCERNED. 4. THE CIT, CONCERNED. 5. THE DR CONCERNED, MUMBAI 6. GUARD FILE BY ORDER TRUE COPY ASSTT. REGISTRAR, ITAT, MUMBAI WAKODE