DINA SUDHIR SHAH, MUMBAI V. ACIT 16(3), MUMBAI

ITA 1450/MUM/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 83880 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-09-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 10-09-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 21-02-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RIKANT NAMDEO
• Keywords: Business income; Transfer pricing; International transaction; Deemed dividend
• Section: 92C; 263; 154

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES K MUMBAI . . , , BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER /AND SHRI SANJAY ARORA, ACCOUNTANT MEMBER ITA NO.1450/MUM/2013 (A.Y.2008-09) SMT.DINA SUDHIR SHAH, GE-8041, BHARAT DIAMOND BROUSE, BANDRA KURLA COMPLEX, BANDRA EAST, MUMBAI 400 051. PAN:AAOPS 6594H (APPELLANT ) VS. ASSTT. COMMISSIONER OF TAX 16(13), 2 ND FLOOR, MATRU MANDIR, TARDEO ROAD, MUMBAI 400 007. (RESPONDENT) APPELLANT BY : SHRI JITENDRA JAIN RESPONDENT BY : SHRI SH RIKANT NAMDEO DATE OF HEARING : 11/09/2014 DATE OF PRONOUNCEMENT : 25 /09/2014 ORDER PER I.P.BANSAL, J.M, THIS IS AN APPEAL FILED BY THE ASSESSEE AND IT IS DIRECTED AGAINST ORDER PASSED BY LD. CIT(A)-15, MUMBAI DATED 24/01/2013 FOR ASSE SSMENT YEAR 2008-09. GROUNDS OF APPEAL FILED ALONG WITH FORM NO.36 WERE LENGTHY AND ARGUMENTATIVE. DURING THE COURSE OF HEARING LD. AR HAS FILED CONC ISE GROUNDS OF APPEAL WHICH ARE TAKEN INTO CONSIDERATION. COPY OF THE CONCISE GROU NDS WAS ALSO GIVEN TO LD. DR AND THE HEARING TOOK PLACE ON THE BASIS OF CONCISE GRO UNDS FILED BY LD. AR. THE CONCISE GROUNDS READ AS UNDER: 1. T.P. ADJUSTMENT : RS.1,68,78,811/- 1.1 THE LEARNED CIT(A) ERRED IN CONFIRMING THE ADD ITION OF RS.1,68,78,811/- BY MAKING /CONFIRMING ERRONEOUS ADJUSTMENT AT ENTITY LEVEL I NSTEAD OF AE LEVEL AND CONSEQUENTLY DENYING THE BENEFIT OF +/- 5% UNDER SECOND PROVISO TO SECTION 92C(2) OF THE ACT. 2. DEEMED DIVIDEND U/S. 2(22)(E) : RS.2,04,37,007/- ITA NO.1450/MUM/2013 (A.Y.2008-09) 2 2.1 THE LEARNED CIT(A) ERRED IN UPHOLDING ADDITION U/S. 22(22)(E) OF THE ACT AMOUNTING TO RS.2,04,37,007/- BY ERRONEOUSLY REJECTING THE SU BMISSION OF THE APPELLANT AND ON ERRONEOUS READING OF THE SAID SECTION. 2. THE ASSESSEE IS AN INDIVIDUAL INTER-ALIA CARRYI NG ON BUSINESS OF DIAMOND MERCHANT UNDER PROPRIETARY CONCERN NAMELY M/S.DIPT I DIAMONDS. THE ASSESSEE DURING THE FINANCIAL YEAR UNDER CONSIDERATION HAS E NTERED INTO FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (AES) . SR.NO. NAME OF THE AE NATURE OF TRANSACTION AMOUNT IN RUPEES METHOD ADOPTED 1. DINURJE CORP. NEW YORK.,USA PURCHASE OF CUT & POLISHED DIAMONDS 6,40,08,701/- TNMM 2. DINURGE CORP. NEW YORK, USA SALES OF CUT & POLISHED DIAMONDS 9,59,06,519/- TNMM TOTAL 15,99,15,220/- 2.1 THE PLI WAS TAKEN AS UNDER: PARTICULARS AMOUNT (RS.) OPERATING REVENUE 50841562 4 OPERATING EXPENSES 506015 254 OPERATING PROFIT 24003 70 2.2 THE PROFIT MARGIN OF THE ASSESSEE WAS TAKEN AT 0.47% ON COST. SIX COMPANIES WERE CONSIDERED AS COMPARABLES WHOSE ARITHMETIC M EAN MARGIN WAS SHOWN AT 0.05% ON COST AND THUS IT WAS CLAIMED THAT ASSESSEE S TRANSACTION WITH ITS AE WERE AT ARMS LENGTH. IN THE ORDER FRAMED BY LD. TPO UNDER SECTION 92C(3) DATED 28/10/2011 EIGHT COMPARABLES WERE ADOPTED. IN THE PRESENT APPEAL ASSESSEE DOES NOT DISPUTE EITHER INCLUSION OR EXCLUSION OF ANY OF THE COMPARABLES ADOPTED BY TPO. LD. TPO HAS ADOPTED THE MEAN MARGIN OF THE COMPAR ABLES AT 3.81% AS PER FOLLOWING TABLE: SR. NO. COMPANY OPERATING REVENUE OPERATING COST OPERATING PROFIT OP/TC AS A% 1. ZODIAC-JRD MKJ LTD. 1188.26 1135.12 53.14 4.68 2. SUNRAJ DIAMOND EXPORTS LTD. 1275.55 1233.82 41.73 3.38 ITA NO.1450/MUM/2013 (A.Y.2008-09) 3 3 MINI DIAMONDS (INDIA) LTD. 2081.15 2053.68 27.47 1.34 4. C. MAHENDRA INTERNATIONAL LTD. 2456.57 2334.48 122.09 5.22 5. SHRI SAI JEWELS PVT. LTD. 4458 4219 239 5.66 6. SHUKRA JEWELLERY LTD. 5040.13 4966.31 73.82 1.49 7. INDO UNIQUE TRADING PVT. LTD. 5091.39 4868.52 222.87 4.58 8. VARUN JEWELS PVT. LTD. 14094 13535 559 4.13 AVERAGE 3.81 2.3 AN ADDITION OF RS.1,68,78,811/- WAS COMPUTED BY LD. TPO AS PER FOLLOWING TABLE: PARTICULARS AMOUNT (RS.) OPERATING REVENUE 508415624 OPERATING EXPENSES 506015254 OPERATING PROFIT 2400370 OPERATING PROFIT @ ALP OF 3.81% 1,92,79,181 ADJUSTMENT U/S. 92CA 1,68,78,811 SALES TO AE 9,59,06,519 ALP OF SALES TO AE 11,27,85,330 SHORTFALL BEING ADJUSTMENT UNDER SEC. 92CA 1,68,78,811 2.4 IT MAY ALSO BE MENTIONED HERE THAT TPO HAD ADO PTED TWO METHODS FOR COMPUTING PLI, ONE OF THE METHOD UPON WHICH THE AFO REMENTIONED ADDITION HAS BEEN CALCULATED IS TNMM AND OTHER METHOD UPON WHICH ALS O LD. TPO HAD COMPUTED THE ADDITION WAS RETURN ON CAPITAL EMPLOYED (ROCE). C OMPUTING THE ADDITION ON THE BASIS OF THAT METHOD THE ASSESSEES PLI WAS COMPUTE D AT 1.14% WHICH IS LOWER THAN THE PLI COMPUTED IN RESPECT OF TNMM. ADOPTING ROCE METHOD THE SHORTFALL IN THE ALP WAS COMPUTED BY LD. TPO AT RS. 1,40,60,643/- A S PER FOLLOWING CALCULATION. ITA NO.1450/MUM/2013 (A.Y.2008-09) 4 ARMS LENGTH MEAN PLI OR ROCE 9.59% AVERAGE CAPITAL EMPLOYED BY THE TAX PAYER RS. 17,16,47,680/- ARMS LENGTH MEAN PLI 9.59% OF THE AVERAGE CAPITAL EMPLOYED ARMS LENGTH OPERATING PROFITS RS. 1,64,61,013/- OPERATING PROFITS SHOWN BY THE TAXPAYER RS. 24,00,370/- SHORTFALL BEING ADJUSTMENT U/S. 92CA RS. 1,40,60,643/- 2.5. THE ADDITION BEING HIGHER AS COMPUTED UNDER TNMM WAS APPLIED BY THE TPO AND ACCORDINGLY TP ADDITION OF RS.1,68,78,811/- IS MADE IN RESPECT OF INTERNATIONAL TRANSACTION STATED AT SL.NO.2 IN THE AFOREMENTIONE D TABLE I.E. UPON A SUM OF RS.9,59,06,519/-, WHICH RELATES TO SALES OF CUT AN D POLISHED DIAMONDS. THE OTHER INTERNATIONAL TRANSACTION HAS BEEN CONSIDERED TO B E AT ARMS LENGTH BY THE TPO AS PER FOLLOWING OBSERVATIONS: CONSIDERING THE DETAILS FILED AND THE ECONOMIC ANAL YSIS CARRIED OUT BY THIS OFFICE, OTHER INTERNATIONAL TRANSACTIONS OF THE ASSESSEE ARE HELD TO BE AT ARMS LENGTH. 7. IN VIEW OF THE ABOVE THE AO IS REQUESTED TO MAK E AN ADDITION OF RS.1,68,78,811/- IN THE IMPUGNED CASE. 3. AN APPEAL WAS FILED BEFORE LD. CIT(A). VARIOUS OBJECTIONS WERE RAISED BY THE ASSESSEE BEFORE LD. CIT(A). ONE OF THE OBJECTIONS RAISED WAS AGAINST ADOPTING ROCE BY LD. TPO FOR COMPUTING OF PLI. ON THIS ISSUE LD . CIT(A) HAS HELD THAT SINCE ASSESSEE IN ITS TP REPORT HAS COMPUTED PLI ON THE BASIS OF OP/TC (OPERATING PROFIT/TOTAL COST) AND THE SAME HAS BEEN ADOPTED BY LD. TPO FOR MAKING THE ADJUSTMENT, THEREFORE, THE ISSUE REGARDING ADOPTIO N OF ROCE AS METHOD TO COMPUTE PLI IS ACADEMIC IN NATURE. REFERENCE CAN BE MADE TO THE FOLLOWING OBSERVATIONS: III. THE APPELLANT IN ITS SUBMISSION HAS CONTEND ED AND ALSO HAS RAISED ISSUE IN RESPECT OF THE OPERATING PROFIT OVER OPERATION COST (OP/OC) BEING THE CORRECT PROFIT LEVEL INDICATOR (PLI) AND NOT THE RETURN ON CAPITAL EMP LOYED (ROCE) WHICH HAS BEEN DISCUSSED BY THE TPO IN HIS ORDER. IN THIS REGARD IT IS MENT IONED THAT THE RATIOS ARE IMPORTANT TOOLS FOR FINANCIAL ANALYSIS. RATIOS PROVIDE A MEANS OF CONVERTING RAW FIGURES THAT CAN BE COMPARED FOR THE TESTED PARTY AND COMPARED WITH RAT IO CALCULATED FOR THE COMPARABLES. THE PLI PROVIDES THE OBJECTIVE MEASURE OF PROFITABI LITY FOR COMPARING A TESTED PARTYS TRANSACTION TO THAT OF THE COMPARABLE COMPANIES. T HE CHOICE OF A PLI DEPENDS ON A NUMBER OF FACTORS, INCLUDING THE COMPARATIVE ANALYS IS OF THE FUNCTIONS AND RISKS/NATURE OF ACTIVITIES OF THE TESTED PARTY VIS--VIS THE COM PARABLE COMPANIES, THE AVAILABILITY, ITA NO.1450/MUM/2013 (A.Y.2008-09) 5 ACCURACY AND RELIABILITY OF THE FINANCIAL DATA OF T HE TESTED PARTY AS WELL AS FOR THE COMPARABLE COMPANIES, AND THE EXTENT TO WHICH THE P LI IS LIKELY TO PRODUCE AN APPROPRIATE MEASURE OF AN ARMS LENGTH RESULT. III.VI IN THE FACTS OF THE CASE THE APPELLANT IS M AINLY ENGAGED IN TRADING IN CUT AND POLISHED DIAMONDS AND ALSO TO SOME EXTENT MANUFACTU RING OF DIAMONDS. THOUGH THE ISSUE OF APPLICABILITY OF ROCE AS PLI HAS BEEN DISC USSED IN THE ORDER OF THE TPO, BUT FINALLY THE ADJUSTMENT WHICH HAS BEEN MADE BY THE T PO IS BY CONSIDERING THE OPERATING PROFIT OVER OPERATING COST AS THE CORRECT PLI. AS SUCH IN THE FACTS OF THE CASE, THE DISCUSSION IN RESPECT OF APPROPRIATE PLI BECOMES ON LY ACADEMIC IN NATURE. UNDER SUCH FACTS AND CIRCUMSTANCES, THE OP/TC AS CONTENDED BY THE APPELLANT AND AS ALSO ACCEPTED BY THE TPO IS CONSIDERED TO BE THE CORRECT PLI IN THIS CASE. (EMPHASIS PROVIDED) 3.1 IN THE AFOREMENTIONED MANNER LD. CIT(A) HAS PRO CEEDED TO DECIDE THE OTHER OBJECTIONS OF THE ASSESSEE WHICH INTER ALIA INCLUDE THAT LD. TPO HAS WRONGLY COMPUTED THE ALP AS DETERMINATION OF ALP COULD BE O NLY IN RELATION TO INTERNATIONAL TRANSACTIONS AND NOT ON TOTAL SALES/OPERATING REVE NUE. THESE SUBMISSIONS OF THE ASSESSEE BEFORE LD. CIT(A) HAVE BEEN INCORPORATED V IDE LETTER DATED 20/11/2012, COPY OF WHICH HAS BEEN PLACED IN THE PAPER BOOK AT PAG ES 176 TO 184. IN PARA-3 RELIANCE WAS PLACED ON THE FOLLOWING DECISIONS TO CONTEND TH AT ALP WAS REQUIRED TO BE DETERMINED ONLY IN RESPECT OF INTERNATIONAL TRANSAC TIONS OF RS.9.59 CRORES AND IF IT IS DONE SO THE CASE OF THE ASSESSEE WOULD FALL WITHIN THE SAFE HARBOUR OF +/- 5%. (1) DEMAG CRANES & COMPONENTS (INDIA) PVT. LTD. VS . DCIT, ITA NO.120/PN/2011. (2) ABHISHEK AUTO INDUSTRIES LTD. VS. DCIT, ITA NO .1433/DEL/2009 (3) IL JIN ELECTRONICS (I) (P.) LTD. VS. ACIT, ITA NO.438 OF 2008, ITAT DELHI. 3.2 THE ASSESSEE ALSO FURNISHED TABLES TO SHOW THAT IF THE ALP IS DETERMINED ONLY IN RESPECT TO INTERNATIONAL TRANSACTIONS, THE DETER MINED ALP WOULD BE WITHIN THE SAFE HARBOUR AS PER SECOND PROVISO TO SECTION 92C(2) OF THE ACT. FOR THE SAKE OF COMPLETENESS OF THE FACTS IT WOULD BE RELEVANT TO R EPRODUCE THESE SUBMISSIONS OF THE ASSESSEE. ITA NO.1450/MUM/2013 (A.Y.2008-09) 6 4.IN VIEW OF THE ABOVE ITAT DECISIONS, THE APPELLA NT SUBMITS THAT THE ALP OF THE INTERNATIONAL TRANSACTION OF RS.9.59 CRORES MAY B E DETERMINED UNDER BOTH ROCE BASIS AND OP/TC BASIS ON PROPORTIONATE BASIS AND IN CASE THE ALP IS WITHIN +/-5% RANGE OF THE VALUE OF INTERNATIONAL TRANSACTION D ISCLOSED BY THE APPELLANT, THERE NEED NOT BE ANY ADJUSTMENT IN VIEW OF THE SECOND PROVISO TO SECTION 92C(2) OF IT ACT. 5. ON THE ISSUE THAT THE ALP OF TOTAL SALES AS WELL AS ALP OF INTERNATIONAL TRANSACTION IS WITHIN +/-5% OF TOTAL SALES DISCLOSED BY THE ASS ESSEE AS WELL AS THE VALUE OF INTERNATIONAL TRANSACTION DISCLOSED BY THE ASSESS EE RESPECTIVELY, WE ARE SUBMITTING BELOW THE COMPUTATION OF THE +/-5% RANGE, WHICH PRO VES THAT THE APPELLANTS ARGUMENT THAT THE ALP IS WITHIN THE +/-5% RANGE OF THE VALU E OF TRANSACTION DISCLOSED BY THE ASSESSEE. +/-5% RANGE A) OP/TC AS PLI ( ON TOTAL SALES OF RS.50.84 CRORES) S.NO. PARTICULARS AMOUNT (RS.) I. OPERATING REVENUE 50,84,15,624 II. OPERATING EXPENSES 50,60,15,254 III. OPERATING PROFIT DISCLOSED BY ASSESSEE 24,00,370 IV. OPERATING PROFIT @ MEAN PLI OF 3.81% 1,92, 79,181 V. ALP OF TOTAL SALES (50,60,15,254 + 1,92,79,181) 52,76,94,805 VI. 95% OF SALES / OPERATING REVENUE OF RS.50.84 CRORES 48,29,94,843 VII. 105% OF SALES / OPERATING REVENUE OF RS.50.84 CRORES) 53,38,36,405 THE ALP OF SALES WITH MEAN OPERATING PROFIT OF 3.81 % OF COMPARABLE CASES HAS BEEN COMPUTED AT RS.52.76 CRORES, WHICH IS WITHIN THE + 5% RANGE OF TOTAL SALES COMPUTED AT RS.53.38 CORES. HENCE THE SECOND PROVISO TO SECTIO N 92C(2) OF THE ACT WOULD APPLY TO THE CASE AND THERE WOULD BE NO ADJUSTMENT ON ACCOUN T OF ALP. B)OP/TC AS PLI (ON INTERNATIONAL TRANSACTION OF RS. 9.59 CRORES) S.NO. PARTICULARS AMOUNT (RS. ) I. TOTAL OPERATING REVENUE 50,84,15,624 II. TOTAL OPERATING EXPENSES 50,60,15,254 III. AMOUNT OF INTERNATIONAL TRANSACTION OR SALES TO AE 9,59,06,519 IV. PROPORTIONATE OPERATING EXPENSES/TC RELATING TO INTERNATIONAL TRANSACTION (50,60,15,284 X 9,59,06,519 (50,84,15,624 9,54,53,723 ITA NO.1450/MUM/2013 (A.Y.2008-09) 7 V. OPERATING PROFIT @ 3.81% OF TC RELATING TO INTERNATIONAL TRANSACTION) 36,36,787 VI. ALP OF INTERNATIONAL TRANSACTION 9,90,90, 510 VII. 95% OF INTERNATIONAL TRANSACTION OF 9.59 CRO RES DISCLOSED BY ASSESSEE 9,11,11,193 VIII. 105% OF INTERNATIONAL TRANSACTION DISCLOSED BY ASSESSEE 10,07,01,845 THE ALP OF INTERNATIONAL TRANSACTION OF RS.9.59 C RORES WITH MEAN OPERATING PROFIT OF 3.81% HAS BEEN COMPUTED AT RS.9.90 CRORES, WHICH IS WITHIN +5% RANGE OF THE INTERNATIONAL TRANSACTION COMPUTED AT RS. 10.07 C RORES. HENCE, THE SECOND PROVISO TO SECTION 92C(2) OF THE ACT WOULD APPLY TO THE CASE A ND THERE WOULD BE NO ADJUSTMENT ON ACCOUNT OF ALP. C) ROCE AS PLI (ON TOTAL SALES OF RS.50.84 CRORES) S.NO. PARTICULARS AMOUNT (RS. ) I. TOTAL SALES /OPERATING REVENUE 50,84,15,624 II. AVERAGE MEAN PLI UNDER ROCE BASE 6.17 OF AVERAGE CAPITAL III. OPERATING PROFIT @ 6.17% OF AVERAGE CAPITAL OF RS.17,16,47,680/- 1,05,90,662 IV. OPERATING PROFITS SHOWN BY ASSESSEE 24,00 ,370 V. ADJUSTMENT ON ACCOUNT OF SHORTFALL OF PROFIT 81,90,292 VI. ALP OF TOTAL SALES (50,84,15,624 + 81,90,292) 51,66,05,916 VII. 95% OF TOTAL SALES / OPERATIVE REVENUE OF RS.5 0.84 CRORES 48,29,94,843 VIII. 105% OF TOTAL SALES / OPERATIVE REVENUE OF RS . 50.84 CRORES 53,38,36,405 THE ALP OF SALES WITH MEAN PLI OF 6.17% IS COMPUTED AT RS. 51.66 CRORES, WHICH IS WITHIN +5% RANGE OF TOTAL SALES COMPUTED AT RS.53.3 8 CRORES. HENCE, THE SECOND PROVISO TO SECTION 92C(2) OF THE ACT WOULD APPLY TO THE CA SE AND THERE WOULD BE NO ADJUSTMENT ON ACCOUNT OF ALP. D) ROCE AS PLI (ON INTERNATIONAL TRANSACTION OF RS. 9.59 CRORES) S.NO. PARTICULARS AMOUNT (RS.) I. TOTAL SALES/OPERATING REVENUE 50,84,15,624 II. AVERAGE CAPITAL EMPLOYED 17,16,47,680 III. PROPORTIONATE AVERAGE CAPITAL RELATABLE TO INTERNATIONAL TRANSACTION OF RS.9,59,06,519/- 17,16,47,680 X 9.59 50.84 13,23,78,073 IV. OPERATING PROFIT ON INTERNATIONAL TRANSACTION O F RS.9.59 CRORES UNDER ROCE BASE @ 6.17 OF PROPORTIONATE AVERAGE CAPITAL OF RS.3,23,78,073 19,97,727 V. PROPORTIONATE OPERATING PROFIT SHOWN BY THE ASSESSEE ON 9.59 CORES 4,52,784 ITA NO.1450/MUM/2013 (A.Y.2008-09) 8 24,00,370 X 9.59 50.84 VI. ADJUSTMENT ON ACCOUNT OF SHORTFALL OF PROFIT ON INTERNATIONAL TRANSACTION OF 9.59 CRORES 15,44,943 VII. ALP OF INTERNATIONAL TRANSACTION (9,59,06,519 + 15,44,943) 9,74,51,462 VIII. 95% OF INTERNATIONAL TRANSACTION OF RS.9.59 C RORES DISCLOSED BY ASSESSEE 9,11,11,193 IX. 105% OF INTERNATIONAL TRANSACTION DISCLOSED BY ASSESSEE 10,07,01,845 THE ALP OF THE INTERNATIONAL TRANSACTION WITH MEA N PLI OF 6.17% IS COMPUTED AT RS.9.74 CRORES, WHICH IS WITHIN +5% RANGE OF THE I NTERNATIONAL TRANSACTION COMPUTED AT RS.10.07 CRORES. HENCE, THE SECOND PROVISO TO S ECTION 92C(2) OF THE ACT WOULD APPLY TO THE CASE AND THERE WOULD BE NO ADJUSTMENT ON ACC OUNT OF ALP. 3.3 LD. CIT(A) AFTER CONSIDERING THESE SUBMISSIONS OF THE ASSESSEE HAS REJECTED THE CALCULATIONS SUBMITTED BY THE ASSESSEE AND HAS UPHE LD THE ADDITION WITH THE FOLLOWING OBSERVATIONS: IV.I FROM THE PLAIN READING OF THE AFORESAID PROV ISO TO SECTION 92C(2) IT IS CLEAR THAT SUCH BENEFIT AS IS PROVIDED IN THE SAID PROVISO IS TO BE COMPUTED IN RESPECT OF PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY TA KEN PLACE AND NOT IN RESPECT OF THE ENTIRE SALES OF THE TESTED PARTY. THE APPELLANT IN ITS SUBMISSION HAS GIVEN WORKING OF THE ADJUSTMENT BY CONSIDERING THE ALP OF THE ENTIRE SA LES. IT IS TO BE BORNE IN MIND THAT WHAT IS DETERMINED IN THE BENCHMARKING IS THE ALP O F THE INTERNATIONAL TRANSACTION ONLY. ACCORDINGLY THE WORKING GIVEN BY THE APPELLANT IS F LAWED AND IS NOT IN CONFORMITY WITH THE LETTER OF THE PROVISO AND THE UNDERLYING CONCEP T AS WELL. THE APPELLANT IN ITS OTHER WORKING HAS COMPUTED THE OPERATING COST IN PROPORTI ON TO THE EXPORTS TO THE AE. THIS COMPUTATION IS BY BASICALLY PRESUMING THAT THE APPE LLANT HAS EARNED SIMILAR MARGINS FROM THE AE AND THIRD PARTIES, THAN ONLY THE OPERAT ING COST CAN BE WORKED OUT IN PROPORTION OF THE SALES TO THE AE. IF THE APPELLANT HAS EARNED SIMILAR LEVELS OF MARGINS FROM THE AE AND THE THIRD PARTIES THAN QUESTION OF THEIR INTERNATIONAL TRANSACTION NOT BEING AT ARMS LENGTH WOULD NOT ARISE AT THE FIRST PLACE, BECAUSE IT IS THE UNEQUAL LEVEL OF MARGINS THAT A TAXPAYERS EARNS FROM AE AND NON-AE T HAT THE BENCHMARKING AND DETERMINATION OF ALP COMES INTO PICTURE. IV.II THE CORRECT WORKING OF BENEFIT OF +/- 5% IN R ESPECT OF BOTH THE INTERNATIONAL TRANSACTIONS I.E. EXPORTS TO THE AE AND IMPORTS FRO M THE AE WOULD BE UNDER: A METHOD : TNMM B TESTED PARTY : ASSESSEE COMPANY C COMPARABLES USED : 8 COMPARABLES AS PER THE ORDER U/S.92CA(3) D ASSESSEES OP : SALES: RS.50,84,15,624 OE : RS.50,60,15,254 OP : RS. 24,00,370 E COMPUTATION OF ALP OF EXPORTS I ASSESSEES EXPORTS PRICE : RS.9,59,06,519 ITA NO.1450/MUM/2013 (A.Y.2008-09) 9 II ASSESSEES OPERATING EXPENSES : RS.50,60,15,254 III ARMS LENGTH PLI (OP/OE) : 3.81% IV. ARMS LENGTH OP I.E. % X(II) : RS.1,92,79,181 V. ASSESSEES OP : RS.24,00,370 VI. DIFFERENCES ARMS LENGTH PROFIT (-) ASSESSEES OP (IV-V) (RS.1,92,79,181/- - RS.24,00,370/- )(I.E. SHORTFALL) : RS.1,68,78,811 VII. ALP OF EXPORT PRICE (ACTUAL EXPORT PRICE (+) SHORTFALL IN PROFIT) (RS.9,59,06,519/- -168,78,811/- RS.) : RS.11,27,85,330 VIII. -5% OF ALP OF EXPORT PRICE (RS.11,27,85,330/-X95%) : RS.10,71,46,063 CONCLUSION: ASSESSEES EXPORT PRICE AT RS.9,59,06,5 19/- IS LOWER THAN 95% OF ALP EXPORT PRICE I.E. RS.10,71,46,063. HENCE, ASSES SEE DOES NOT GET BENEFIT OF SECOND PROVISO OF SEC.92C(2) OF THE ACT. F COMPUTATION OF ALP OF IMPORTS I ASSESSEES IMPORT PRICE : RS.6,40,08,701 II. ARMS LENGTH OP AS DETERMINED AT E(IV) : RS.1, 92,79,181 III. ASSESSSEES OP : RS.24,00,370 IV. DIFFERENCE BETWEEN ARMS LENGTH PROFIT AND ASSESSEES OP [ RS.1,92,79,181/- - RS.24,00,370/-] I.E. SHORTFALL : RS.1,68,78,811 V. ARMS LENGTH PRICE OF IMPORT (I)-(V) [ RS.6,40,08,701(-) RS.1,68,78,811] : RS.4,71,29,890/- VI (+) 5% OF THE ALP OF IMPORT PRICE [105% OF RS.471,29,890/-] : RS.4,94,86,384 CONCLUSION:- ASSESSEES IMPORT PRICE AT RS.6,40,08 ,701/- IS HIGHER THAN 105% OF ALP IMPORT PRICE, I.E. RS.4,9486,384/-. HENCE, A SSESSEE DOES NOT GET BENEFIT OF SECOND PROVISO OF SEC.92C(2) OF THE ACT. ACCORDINGLY THE ADJUSTMENT MADE BY THE TPO IS BEYON D THE 5% MARGIN AS HAS BEEN PROVIDED IN THE SECOND PROVISO TO THE SECTION 92C(2 ) OF THE ACT. IV.III. AS THE ADJUSTMENT WORKED OUT BY THE TPO IS BEYOND THE MARGIN OF 5% AS HAS BEEN DEMONSTRATED HERE IN ABOVE, THE PROVISIONS OF THE EXPLANATION (2A) OF SECTION 92C(2) WHICH IS REPRODUCED HEREIN FOR READY REFEREN CE, COMES INTO PICTURE. WHERE THE FIRST PROVISO TO SUB-SECTION (2) AS IT S TOOD BEFORE ITS AMENDMENT BY THE FINANCE (NO.2) ACT, 2009 (33 OF 2009), IS APPLICABL E IN RESPECT OF AN INTERNATIONAL TRANSACTION FOR AN ASSESSMENT YEAR AND THE VARIATIO N BETWEEN THE ARITHMETICAL MEAN REFERRED TO IN THE SAID PROVISO AND THE PRICE AT WH ICH SUCH TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN EXCEEDS FIVE PER CENT OF THE ARITHMETICA L MEAN, THEN, THE ASSESSEE SHALL NOT BE ENTITLED TO EXERCISE THE OPTION AS REFERRED TO I N THE SAID PROVISO. IV.IV. ACCORDINGLY THE BENEFIT OF THE SECOND PROVIS O TO SECTION 92C(2) IS NOT AVAILABLE TO THE APPELLANT. ITA NO.1450/MUM/2013 (A.Y.2008-09) 10 3.4 THE ASSESSEE IS AGGRIEVED WITH THE AFOREMENTION ED DECISION OF LD. CIT(A) AND GRIEVANCE HAS BEEN EXPRESSED IN GROUND NO.1 OF THE CONCISE GROUNDS FILED BEFORE US. 4. AFTER NARRATING THE FACTS IT WAS SUBMITTED BY LD . AR THAT LD. TPO WHILE DETERMINING THE ALP HAD INITIALLY ADOPTED TWO METHO DS TO COMPUTE PLI I.E. OP/TC AND ROCE. HOWEVER, THE TPO ADOPTED OP/TC AS PLI TO COMPUTE THE PROFIT MARGIN OF THE ASSESSEE. LD. CIT(A) HAS ALSO ADOPTED OP/TC A S METHOD FOR COMPUTING PLI AND DISCARDED THE ROCE METHOD BY SAYING THAT IT IS ACAD EMIC. IT WAS SUBMITTED BY LD.AR THAT DEPARTMENT DID NOT EXPRESS ANY GRIEVANCE REGARDING ADOPTION OF OP/TC METHOD, THEREFORE, HE WOULD ADVANCE HIS ARGUMENTS O N THE BASIS OF PLI COMPUTING ON THE BASIS OF OP/TC METHOD AND IF DURING THE COURSE OF HEARING DEPARTMENT RAISE ANY OBJECTION OR SUPPORT THE ADOPTION OF ROCE METHOD T HEN HE WILL GIVE REPLY TO THAT. HE ALSO SUBMITTED THAT IN SUBSEQUENT YEARS I.E. FOR A. Y 2009-10 AND 2010-11 THE TPO HIMSELF HAS ADOPTED OP/TC AS APPROPRIATE METHOD FO R COMPUTING PLI AND IN THIS REGARD HE REFERRED TO THE ORDERS PASSED BY TPO, COP IES OF WHICH ARE PLACED AT PAGES 12 TO 72 AND 73 TO 150 FOR ASSESSMENT YEARS 2009-1 0 AND 2010-11 RESPECTIVELY. THUS, IT WAS CONTENDED BY LD. AR THAT OP/TC IS A CO RRECT METHOD TO COMPUTE PLI. 4.1 ADVERTING TO THE ISSUE RAISED IN THE GROUNDS OF APPEAL IT WAS SUBMITTED BY LD. AR THAT THERE IS INHERENT DEFECT IN THE COMPUTATION MADE BY LD. TPO AS WELL AS LD. CIT(A) WITH RESPECT TO DETERMINATION OF ALP. HE SU BMITTED THAT ACCORDING TO WELL ESTABLISHED LAW ALP CAN BE DETERMINED ONLY IN RESPE CT OF INTERNATIONAL TRANSACTIONS AND FOR THIS PURPOSE LD. AR RELIED UPON THE DECISI ONS WHICH WERE RELIED UPON BEFORE LD. CIT(A). REFERRING TO LD. TPOS CALCULATION OF DETERMINATION OF ALP WHICH ARE REPRODUCED IN PARA 2.3 OF THIS ORDER IT WAS SUBMITT ED BY LD. AR THAT WHILE COMPUTING SALES TO AE, LD. TPO HAS ADOPTED A FIGURE OF RS.9 ,59,06,519/-. REFERRING TO FIRST TABLE REPRODUCED IN PARA 3.2 OF THE ORDER HE SUBMIT TED THAT WHILE COMPUTING ALP OF SALES TO AE, LD. TPO HAS ADDED A SUM OF RS.1,68,7 8,811/- WHICH IS A SUM COMPUTED AFTER APPLYING 3.81% PROFIT RATE ON THE EN TIRE SALES AT ENTITY LEVEL OF ITA NO.1450/MUM/2013 (A.Y.2008-09) 11 RS.50,84,15,624/- AND AFTER REDUCING PROFIT SHOWN I N THE BOOKS. HE SUBMITTED THAT IF THE SAID FIGURE IS TAKEN INTO CONSIDERATION THEN -5% OF SALE/OPERATING REVENUE OF RS.50.84 CRORES WOULD BE A SUM OF RS.48.29 CRORES AND +5% WOULD BE A SUM OF RS.53.38 CRORES AND IN THIS MANNER THE DIFFERENCE I N THE ALP WOULD BE WITHIN THE SAFE HARBOUR OF +/-5%. REFERRING TO SECOND TABLE R EPRODUCED IN PARA 3.2 OF THIS ORDER, LD. A.R FURTHER SUBMITTED THAT IF CORRECT CALCULATION IS MADE ON THE OP/TC AS PLI ONLY ON INTERNATIONAL TRANSACTIONS OF RS.9.59 C RORES THEN ALSO THE OPERATING PROFIT IN RESPECT OF INTERNATIONAL TRANSACTION WOULD ONLY BE A SUM OF RS.36,36,787/-. IN THAT CASE ALSO THE ALP OF INTERNATIONAL TRANSACTION WOULD BE A SUM OF RS.9,90,90,510/- AND IT WOULD FALL WITHIN THE SAFE HARBOUR OF +/-5% AS THE LOWER FIGURE OF 95% WOULD BE A SUM OF RS.9,11,11,193/- A ND HIGHER FIGURE WOULD BE RS.10,07,01,845/-. THUS, IT WAS PLEADED BY LD. AR THAT IF THE DEFECT IN THE CALCULATION MADE BY LD. TPO AND LD. CIT(A) IS REMOV ED THEN THE MARGIN OF ASSESSEE WOULD FALL WITHIN THE SAFE HARBOUR OF +/-5%. 5. ON THE OTHER HAND, LD. DR RELYING UPON THE ORDER PASSED BY LD. CIT(A), THE RELEVANT PORTION OF WHICH HAS BEEN REPRODUCED IN PA RA 3.3 OF THIS ORDER, SUBMITTED THAT LD. CIT(A) HAS RIGHTLY UPHELD THE ADDITION AND HIS ORDER IN THIS REGARD SHOULD BE CONFIRMED. 6. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS IN THE LIGHT OF MATERIAL PLACED BEFORE US. SO FAR AS IT RELATES TO COMPUTAT ION OF ALP ON THE BASIS OF ROCE METHOD, THOUGH THE TPO HAD ALSO DETERMINED ALP ON T HE BASIS OF ROCE BUT ULTIMATELY HE APPLIED OP/TC METHOD. LD. CIT(A) HA S ALSO GIVEN HIS VERDICT ON THE BASIS OF METHOD OF OP/TC. NO ARGUMENTS WAS RAISED BY LD. DR IN SUPPORT OF THAT METHOD. THEREFORE, WE PROCEED ON THE BASIS THAT OP /TC IS CORRECT METHOD TO EVALUATE THE INTERNATIONAL TRANSACTION FOR DETERMIN ING THE ALP. THE TABLE REGARDING COMPUTATION OF ALP BY THE TPO HAS ALREADY BEEN REP RODUCED IN PARA 2.3. IT CAN BE SEEN FROM THE SAID TABLE THAT A SUM OF RS.1,92,79,1 81/- COMPUTED AS OPERATING PROFIT BY TAKING MEAN MARGIN OF THE COMPARABLES AT 3.81% ON THE FIGURE OF RS.50,60,15,254/-, WHICH REPRESENT OPERATING EXPENS ES. THUS, THE OPERATING PROFIT ITA NO.1450/MUM/2013 (A.Y.2008-09) 12 HAS BEEN TAKEN ON THE OPERATING EXPENSES WHICH COMP RISES OF INTERNATIONAL TRANSACTION WITH THE AE AS WELL AS OTHER TRANSACTIO NS AS INTERNATIONAL TRANSACTION OF SALES TO AE ARE ONLY A SUM OF RS.9,59,06,519/-. W HILE COMPUTING THE ALP OF SALES TO AE WHICH IS COMPUTED AT A SUM OF RS.11,27,85,330/- ENTIRE AMOUNT OF OPERATING PROFIT OF ALP WHICH IS COMPUTED ON ENTIRE OPERATIN G EXPENSES AT ENTITY LEVEL HAS BEEN ADDED ( RS.9,59,06,519 + ADJUSTMENT U/S. 92CA OF RS.1,68,78,811). THUS, FIRST THE PROFIT AT THE ENTITY LEVEL HAS BEEN TAKEN AT AR MS LENGTH AND THEN AFTER REDUCING PROFIT SHOWN BY THE ASSESSEE TP ADJUSTMENT IS ARRIV ED AT RS.1,68,78,811/- AND THE SAME IS ADDED TO INTERNATIONAL SALES TO AE WHICH WILL MEAN THAT ENTIRE ALP OF THE AES INTERNATIONAL TRANSACTION IS THE PROFIT DET ERMINED AT THE ENTITY LEVEL. THIS POSITION TAKEN BY TPO WOULD BE CONTRARY TO THE DEC ISIONS RELIED UPON BY THE ASSESSEE BEFORE TPO AS WELL AS LD. CIT(A). THESE D ECISIONS HAVE BEEN REFERRED TO IN PARA 3.1 OF THIS ORDER . 6.1 IN THE CASE OF DEMAG CRANES & COMPONENTS (INDI A) PVT. LTD. VS. DCIT (SUPRA) IT IS HELD THAT THE EXPRESSION IN RELATION TO MEANS AND IT IMPLIES IN CONNECTION BETWEEN IMPUGNED INTERNATIONAL TRANSACTION AND TO T HE RELATED SALES AND NOT TO THE ENTIRE SALE OF THE MANUFACTURING SEGMENT OF THE ASS ESSEE. THE SAID RELATIONSHIP/RATIO IS THE REQUIREMENT IN THE PRESENT COMPARABILITY A NALYSIS AND NOT THE ENTITY LEVEL SALES AS WRONGLY CONSIDERED BY THE TPO AND RELIED U PON BY THE DRP. IN TNMM METHOD WHEN SALES IS USED AS A BASE FOR DETERMININ G NET PROFIT MARGIN THEN IT WOULD BE ERRONEOUS TO BRING RELATIONSHIP BETWEEN SALES A T THE ENTITY LEVEL AND INTERNATIONAL TRANSACTION. THE FAILURE OF THE ASSESSEE TO SUPPL Y THE DATA ON THE RELEVANT SALES IS NO DEFENSE PARTICULARLY WHEN THERE ARE SETTLED AL TERNATIVES FOR ADOPTION IN SUCH CIRCUMSTANCES, WELL TESTED PRINCIPLE OF PROPORTI ONALITY SHOULD HELP. THUS, IT WAS HELD THAT THE BASE OF SALES DOES NOT NEED TO B E TOTAL SALES; BUT THE PROPORTIONATE SALES RELATABLE TO THE IMPUGNED INTER NATIONAL TRANSACTION AND IT IS A COMMONSENSIBLE APPROACH. THE RELEVANT OBSERVATION S OF THE TRIBUNAL HAS BEEN REPRODUCED IN THE SUBMISSIONS MADE BEFORE LD. CIT(A ) VIDE LETTER DATED 20/11/2012 AND FOUND PLACE AT PAGE 78 OF THE PAPER BOOK. ITA NO.1450/MUM/2013 (A.Y.2008-09) 13 6.2 IN THE CASE OF ABHISHEK AUTO INDUSTRIES LTD. V S. DCIT (SUPRA) IT HAS BEEN HELD THAT SECTION 92C IN CHAPTER -10 DEAL WITH INTERNAT IONAL TRANSACTION ONLY AND NOT WITH TRANSACTIONS WHICH HAVE NO INTERNATIONAL CROSS BORDER ELEMENT AT ALL. THEREFORE, THE BASIS OF MAKING THE ADJUSTMENT ON THE ENTERPRIS E LEVEL BY TAKING RS.68.76 CRORES AS THE BASE IS NOT CORRECT. 6.3 IN THE CASE OF IL JIN ELECTRONICS (I) (P.) LT D. VS. ACIT (SUPRA) IT WAS HELD THAT AO WAS INCORRECT IN CALCULATING OPERATING PROFIT ON THE ENTIRE SALES OF THE ASSESSEE PARTICULARLY IN VIEW OF THE ADMITTED POSITION THAT ONLY 45.51% OF THE RAW MATERIAL WAS ACQUIRED BY THE ASSESSEE FROM ITS AE FOR THE PU RPOSE OF MANUFACTURING ITEMS. ON THE SUBMISSIONS OF THE ASSESSEE IT WAS FOUND THA T OPERATING PROFIT, IF APPLIED TO 45.51% OF THE TURNOVER IT WOULD COME TO RS.24,35,1 75/- BOOKED BY THE ASSESSEE AND THE DIFFERENCE THEREOF ADDITION COULD BE MADE AND IT WAS DIRECTED BY THE TRIBUNAL THAT ADJUSTMENT SHOULD BE MADE ONLY TO THE EXTENT O F DIFFERENCE IN ARMS LENGTH OPERATING PROFIT WITH ADJUSTED PROFIT WITH REFEREN CE TO 45.51% OF THE TURNOVER AND NOT TO THE TOTAL TURNOVER OF THE ASSESSEE. 6.4 IN VIEW OF THE AFOREMENTIONED DECISIONS OF THE TRIBUNAL IT IS CLEAR THAT PRINCIPLE OF PROPORTIONALITY IS WELL ACCEPTED PRI NCIPLE AND TRANSFER PRICING ADJUSTMENT, IF ANY, IS REQUIRED TO BE MADE THEN T HE SAME WILL BE LIMITED TO THE DEALINGS OF THE ASSESSEE WITH ITS AE IN RESPECT OF INTERNATIONAL TRANSACTION AND ALP CANNOT BE DETERMINED ON THE BASIS OF TURNOVER AT E NTITY LEVEL. NO CONTRARY DECISIONS HAS BEEN BROUGHT ON RECORD IN WHICH LEGAL POSITIO N CONTRARY TO THE ABOVE POSITION HAS BEEN TAKEN. HERE IT CAN BE MENTION THAT IN T HE ORDER PASSED BY LD. CIT(A) REFERENCE HAS BEEN MADE TO THE DECISION IN THE CASE OF M/S. GIVAUDAN FLAVOURS INDIA PVT. LTD., IN WHICH INITIAL RELIEF WAS GRANTED BY LD. CIT(A) BUT THE ISSUE WAS RESTORED BACK BY THE TRIBUNAL TO THE FILE OF AO AND ON THAT BASIS LD. CIT(A) DID NOT ACCEPT THE SUBMISSION OF THE ASSESSEE. IN THE SAID CASE THE PURCHASES OF THE ASSESSEE WITH ITS AE WERE TO THE TUNE OF RS.8.10 CRORES AGAINST TOTAL PURCHASES OF RS.116.67 CRORES. THERE WAS NO DISPUTE REGARDING THE METHOD ADOPTED B Y THE ASSESSEE OR AO AND THE SHORT POINT FOR CONSIDERATION WAS WHETHER AN ADJUS TMENT COULD BE MADE TO THE ENTIRE ITA NO.1450/MUM/2013 (A.Y.2008-09) 14 PURCHASES INCLUDING DOMESTIC AS WELL AS INTERNATION AL TRANSACTION. IT WAS SUBMITTED THAT IF MARGIN OF 11.87% WHICH WAS DETERMINED BY TH E AO IS APPLIED TO INTERNATIONAL TRANSACTION THEN NO ADJUSTMENT UNDER SECTION 92C WA S CALLED FOR. RELIANCE WAS PLACED ON ANOTHER DECISION OF MUMBAI TRIBUNAL IN T HE CASE OF TEJ DIAM 130 TTJ 570 TO CONTEND THAT ADJUSTMENT CAN BE MADE ONLY TO INTERNATIONAL TRANSACTIONS AND NOT TO DOMESTIC TRANSACTIONS. RELIANCE WAS ALSO PL ACED ON THE DECISION OF ITAT, MUMBAI IN THE CASE OF DCIT VS. STARLITE 133 TTJ 42 5 (MUM) AND ANOTHER DECISION OF IL JIN ELECTRONICS (I) (P.) LTD. VS. ACIT (SUPRA) A ND IT WAS POINTED OUT THAT IT WAS CLEARLY HELD THAT APPLYING OPERATING PROFIT ON TOTA L SALES WAS NOT JUSTIFIED AND AT BEST IT CAN BE APPLIED TO PROPORTIONATE SALES MADE OUT O F RAW MATERIAL IMPORTED FROM THE ASSOCIATE CONCERN. THE ISSUE HAS BEEN DECIDED BY THE TRIBUNAL AS PER PARA -15 & 16 OF THE ORDER. THE ARGUMENTS OF THE PARTIES AN D THE DECISION OF TRIBUNAL READ AS UNDER: ARGUMENTS OF THE PARTIES: 9. COMING TO GROUND NO.4, WHICH IS ON THE ISSUE OF ADJUSTMENTS MADE U/S 92C, THE LEARNED COUNSEL SUBMITTED THAT THE ASSESSEES TOTAL PURCHASES ARE RS.116.67 CRORES AND WHEREAS THE PURCHASES FROM ASSOCIATED ENTERPRISE IS JUST RS.8.10 CRORES. HE VEHEMENTLY CONTENDED THAT THERE IS NO DISPUTE WHATSOEVER IN TH E METHOD ADOPTED BY THE ASSESSEE OR THE AO AND THAT THE SHORT POINT FOR CONSIDERATION I S WHETHER AN ADJUSTMENT CAN BE MADE TO THE ENTIRE PURCHASES, BOTH DOMESTIC AND INT ERNATIONAL TRANSACTIONS. HE FILED THE CALCULATION SHEET TO DEMONSTRATE THAT EVEN IF THE MARGIN OF 11.87% AS DETERMINED BY THE AO IS APPLIED TO INTERNATIONAL TRANSACTIONS, THEN A LSO NO ADJUSTMENT IS CALLED FOR U/S 92C. HE RELIED ON THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF TEJ DIAM (SUPRA) AND SUBMITTED THAT THE BENCH HAS HELD THAT THE ADJUSTMENTS CAN BE MADE ONLY TO INTERNATIONAL TRANSACTIONS AND NOT TO DOMES TIC TRANSACTIONS. SIMILARLY HE RELIED ON THE DECISION OF I-BENCH OF THE TRIBUNAL IN THE C ASE OF DCIT VS. STARLINE (SUPRA). HE ALSO RELIED ON THE DECISION OF THE DELHI BENCH OF THE TR IBUNAL IN ITA NO. 438/DEL/2008 IN THE CASE OF IL JIN ELECTRONICS (I) (P) LTD. VS. ACIT, O RDER DATED 6 TH NOV., 2009 AND POINTED OUT THAT THE BENCH HAS CLEARLY HELD THAT APPLYING THE O PERATING PROFIT ON TOTAL SALES IS NOT JUSTIFIED AND AT BEST IT CAN BE APPLIED TO THE PROP ORTIONATE SALES MADE OUT OF RAW MATERIAL IMPORTED FROM THE ASSOCIATED CONCERN. ON A QUERY FROM THE BENCH, HE SUBMITTED THAT THE ISSUE WHETHER OPERATING MARGINS AT ENTERPR ISE LEVEL CAN BE TAKEN AS THE MARGINS EARNED ON A TRANSACTION OR A CLASS OF TRAN SACTION, IS NOT THE ISSUE WHICH IS IN DISPUTE BEFORE THIS BENCH OF THE TRIBUNAL AND HENCE IT DOES NOT CALL FOR ANY ADJUDICATION. HIS CONTENTION IS THAT, A PARTICULAR PROFIT MARGIN , BY WHATEVER METHOD, IS ARRIVED AT BY THE ASSESSEE AND THE AO ARRIVED AT A MARGIN OF 11. 87% AND THE ASSESSEES ONLY REQUEST IS THAT THE LAW 6 DOES NOT PERMIT ADJUSTMENTS TO B E MADE TO TRANSACTIONS WHICH ARE NOT INTERNATIONAL TRANSACTIONS WITH ASSOCIATED CONCERN. ITA NO.1450/MUM/2013 (A.Y.2008-09) 15 10. THE LEARNED DR, ON THE OTHER HAND, REFUTED THES E ARGUMENTS BY SUBMITTING THAT, AN ADJUSTMENT HAS NOT BEEN MADE BY THE AO ON TRANSACTI ONS WHICH ARE NOT INTERNATIONAL TRANSACTIONS WITH AN ASSOCIATED ENTERPRISE BUT HAS ONLY ALLOCATED THE EXPENDITURE BETWEEN THE INTERNATIONAL TRANSACTIONS WITH AN ASSO CIATED ENTERPRISE AND OTHER TRANSACTIONS BASED UPON THE OPERATING MARGINS AT TH E ENTERPRISE LEVEL AND THEREAFTER CAME TO THE CONCLUSION, AS TO WHAT SHOULD BE THE AR MS LENGTH PRICE OF AN ASSOCIATED ENTERPRISE. HE SUBMITTED THAT WHEN ENTERPRISE LEVEL MARGINS ARE TAKEN, THE ONLY ALTERNATIVE WOULD BE TO ALLOCATE THE PROFITS AND EX PENSES BETWEEN THE INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISE AND OTHERS AND THEN ARRIVE AT THE ARMS LENGTH PRICE. HE REPEATED HIS CONTENTION THAT THESE METHOD S ARE NOT APPROVED UNDER THE STATUTE AND HENCE THE ISSUE MAY BE SET ASIDE TO THE FILE OF THE AO IN THE LINE WITH THE DECISION OF THE TRIBUNAL IN THE CASE OF TEJ DIAM (SUPRA) DECISION OF THE TRIBUNAL: 15. COMING TO GROUND NO.4, BOTH THE ASSESSEE AS WEL L AS THE AO HAVE NOT FOLLOWED THE STATUTORY REQUIREMENTS. THE PROVISIONS OF THE ACT A ND RULES HAVE BEEN TOTALLY IGNORED. ENTERPRISE LEVEL OPERATING PROFITS ARE SOUGHT TO BE IMPOSED AS MARGINS EARNED ON AN INTERNATIONAL TRANSACTION WITH AN ASSOCIATED CONCER N. THIS, IN OUR CONSIDERED OPINION, CANNOT BE APPROVED BY US. THOUGH THE ISSUE IS NOT I N DISPUTE, BETWEEN THE PARTIES, THEN THE SAME IS PATENTLY ILLEGAL, THE TRIBUNAL CANNOT G IVE ITS STAMP OF APPROVAL FOR THE SAME. IT IS THE DUTY OF THE TRIBUNAL TO ENSURE THAT THE PROVISIONS OF THE ACT AND THE RULES ARE FOLLOWED AND JUST BECAUSE THE REVENUE AS WELL AS T HE ASSESSEE AGREED NOT TO FOLLOW THE ACT AND THE RULES AND DO NOT 8 DISPUTE THE SAME BEF ORE THE TRIBUNAL, IT DOES NOT PREVENT THE TRIBUNAL FROM ENFORCING THE LAW. IN ANY EVENT, IN THIS CASE THE LEARNED DR HAS CITED THE DECISIONS I.E. IN THE CASE OF TEJ DIAM (SUPRA) AND STARLINE (SUPRA) WHEREIN THE TRIBUNAL HELD AS FOLLOWS : TNMM REQUIRES COMPARISON OF NET PROFIT MARGINS REA LIZED BY AN ENTERPRISE FROM AN INTERNATIONAL TRANSACTION OR AN AGGREGATE O F INTERNATIONAL TRANSACTIONS AND NOT COMPARISON OF OPERATING MARGIN S OF ENTERPRISES. 16. THE MUMBAI L-BENCH OF THE TRIBUNAL, ON SIMILAR ISSUE, IN THE CASE OF DCIT VS. M/S ANKIT DIAMONDS IN ITA NO. 6437/MUM/2005, ORDER DATE D 26TH NOV., 2010, HAS SET ASIDE THE ISSUE TO THE FILE OF THE AO FOR FRESH ADJ UDICATION IN ACCORDANCE WITH LAW. RESPECTFULLY FOLLOWING THE SAME, WE SET ASIDE THE I SSUE TO THE FILE OF THE AO FOR FRESH ADJUDICATION IN ACCORDANCE WITH LAW. THE ASSESSEE I S DIRECTED TO FILE FRESH TRANSFER PRICING STUDY IN ACCORDANCE WITH LAW. 6.5 FROM THE ABOVE OBSERVATIONS IT CAN BE SEEN THAT THE SAID ORDER OF THE TRIBUNAL CANNOT BE TAKEN AS AN AUTHORITY IN WHICH IT CAN BE SAID THAT EITHER TRIBUNAL DID NOT ACCEPT THE DECISIONS RELIED UPON BY LD. AR OF THE A SSESSEE OR A DIFFERENT PROPOSITION HAS BEEN LAID DOWN AS HAS BEEN CANVASSED BY THE LD . AR OF THE ASSESSEE. THEREFORE, THE DECISIONS RELIED UPON BY LD. AR WOULD BE APPLIC ABLE TO THE FACTS OF THE PRESENT CASE. THUS, TABLE NO.2 REPRODUCED IN PARA 3.2 WIL L BE APPLICABLE AND OPERATING PROFIT ITA NO.1450/MUM/2013 (A.Y.2008-09) 16 @ 3.81% OF TOTAL COST RELATING TO INTERNATIONAL TR ANSACTION WOULD BE A SUM OF RS.36,36,787/- AND IF THE SAME IS ADDED AND REDUCED TO THE EXTENT OF 5% FROM THE INTERNATIONAL TRANSACTION OF RS.9,59,06,519/- THEN THE -5% WOULD BE A SUM OF RS.9,11,11,193/- AND +5% WOULD BE A SUM OF RS.10,07 ,01,845/-, WHICH WOULD BE WITHIN EITHER OF THE ABOVE FIGURES AS THE ALP OF TH E INTERNATIONAL TRANSACTION WOULD BE A SUM OF RS.9,90,90,510/- ( RS.59,59,06,519 + RS .36,36,787/-). 6.6 EVEN OTHERWISE IF THE OPERATING EXPENSES ARE TA KEN AT ENTITY LEVEL AND OPERATING PROFIT IS DETERMINED FOR ALP AT ENTITY LEVEL THEN ALP OF THE TOTAL SALES WOULD BE A SUM OF RS.52,76,94,805/- AS DESCRIBED IN TABLE -1 IN PARA 3.2 REPRODUCED ABOVE AND THE SAME WOULD ALSO FALL WITHI N THE SAFE HARBOUR OF RS.48,29,94,843/- AND RS.53,38,36,405/-. THEREFOR E, IN BOTH THE CIRCUMSTANCES THE ADJUSTMENT IF COUNTED ONLY ON INTERNATIONAL TR ANSACTIONS OF THE ASSESSEE WITH ITS AE, THEN ALP WOULD FALL WITHIN SAFE HARBOUR OF +/- 5% AND NO ADJUSTMENT WOULD BE CALLED FOR. ACCORDINGLY, WE ORDER TO DELETE THE ADDITION AND GROUND NO.1 IS ALLOWED. 7. APROPOS GROUND NO.2, IT MAY BE MENTIONED THAT IT RELATES TO AN ADDITION MADE WITH REFERENCE TO DEEMED DIVIDEND AS DESCRIBED IN SECTION 2(22)(E) OF THE INCOME TAX ACT, 1961. THERE WAS SOME DISPUTE WITH REGARD TO F IGURES AS THERE WERE CERTAIN MISTAKES IN THE ASSESSMENT ORDER. INITIALLY THE AO MADE AN ADDITION OF RS.3,21,37,007/- IN THE ASSESSMENT ORDER AS PER TAB LE GIVEN BELOW: DATE PARTICULARS OF OUTSTANDING DEBIT BALANCE AMOUN T (IN RS.) 04.07.2007 IN THE BOOKS OF DINURJE(SEEPZ), DEBIT BALANCE OF DIPTI DIAMONDDS 43,00,000 29.03.2009 IN THE LEDGER OF DINA SUDHIR SHAH AS DEBIT BALANCE AS DINURJE (SEEPZE) 1,29,99,655 29.02.2008 IN THE BOOKS OF DINURJE MUMBAI DEBIT BALANCE OF ACE DIVINE JEWELLERY 3,21,37,007 7.1 BEFORE LD. CIT(A) IT WAS CONTENDED THAT FIGURE MENTIONED AT SL.NO.2 WAS IN FACT A FIGURE OF RS.12,99,655/- AND IT WAS MISTAKENLY TA KEN BY THE AO AT RS.1,29,99,655/-. LD. CIT(A) HAS DIRECTED THE AO T O MAKE VERIFICATION IN THIS REGARD ITA NO.1450/MUM/2013 (A.Y.2008-09) 17 AND ADOPT CORRECT FIGURE. HOWEVER, ASSESSEE IN THE PAPER BOOK HAS FILED ORDER PASSED BY THE AO UNDER SECTION 154 OF THE ACT, COPY OF WHI CH IS PLACED AT PAGE 156 TO 160 OF THE PAPER BOOK AND AFTER VERIFICATION OF RECORDS TH E AO HAS FOUND THAT CORRECT AMOUNT WAS A SUM OF RS.12,99,655/- IN PLACE OF RS. 1,29,99,655/-. THEREFORE, TO THIS EXTENT THERE IS NO DISPUTE. ANOTHER DISPUTE W AS IN RESPECT OF ITEM NO.3 WHICH WAS A CLERICAL MISTAKE AS REAL FIGURE WAS A SUM OF RS.1,48,37,352/-. LD. CIT(A) HAS FOUND THAT IN FACT FIGURE TO BE MENTIONED AT SL.NO .3 WAS A SUM OF RS.1,48,37,352/- AND THE FIGURE WRITTEN BY THE AO AS RS.3,21,37,007/ - WAS AN AGGREGATE OF ALL THE THREE ITEMS INCLUDING SECOND ITEM WHICH WAS TAKEN B Y THE AO AT A SUM OF RS.1,29,99,655/-. THE AO HAS ALSO ACCEPTED THIS FIG URE IN ORDER PASSED U/S.154 OF THE ACT. SO THE CORRECT POSITION AFTER RECTIFICATIO N WOULD BE THE FOLLOWING TABLE: DATE PARTICULARS OF OUTSTANDING DEBIT BALANCE AMOUN T (IN RS.) 04.07.2007 IN THE BOOKS OF DINURJE(SEEPZ), DEBIT BALANCE OF DIPTI DIAMONDDS 43,00,000 29.03.2009 IN THE LEDGER OF DINA SUDHIR SHAH AS DEBIT BALANCE AS DINURJE (SEEPZE) 1,29,99,655 29.02.2008 IN THE BOOKS OF DINURJE MUMBAI DEBIT BALANCE OF ACE DIVINE JEWELLERY 1,48,37,352 TOTAL 2,04,37 ,007 7.2 IN THE CONCISE GROUND ALSO THE ASSESSEE HAS STA TED A SUM OF RS.2,04,37,007/-. 7.3 IT HAS ALREADY BEEN MENTIONED THAT ASSESSEE I S AN INDIVIDUAL. IT MAINTAIN TWO BOOKS OF ACCOUNT, ONE IN THE INDIVIDUAL NAME AND OTHER IN THE NAME OF PROPRIETARY CONCERNM/S. DIPTI DIAMONDS. THE ASSESSEE IS MAINT AINING TWO ACCOUNTS IN HER LEDGER, ONE IN THE PERSONAL BOOKS AND OTHER IN THE BOOKS OF M/S. DIPTI DIAMONDS AND IN THE NAME OF M/S. DINURJE JEWELLERY PVT. LTD. (SE EPZ) (IN SHORT DINURJE). COPY OF BOTH THESE ACCOUNTS ARE FILED AT PAGES 241 TO 243 O F THE PAPER BOOK WHICH IS IN THE PERSONAL BOOKS OF THE ASSESSEE AND A SUM OF RS.12, 99,655/- IS SHOWN AS CREDIT BALANCE AS ON 29/3/2008. IN THE OTHER ACCOUNT, C OPY OF WHICH IS PLACED AT PAGES ITA NO.1450/MUM/2013 (A.Y.2008-09) 18 243 OF THE PAPER BOOK WHICH IS IN THE NAME OF M/S. DIPTI DIAMONDS A SUM OF RS.43.00 LACS HAS BEEN SHOWN AS CREDIT AS ON 4/7/2 007. ACCORDING TO DEPARTMENT BOTH THESE ENTRIES REPRESENT LOANS IN THE HANDS OF THE ASSESSEE ADVANCED BY DINURJE. ACCORDINGLY, THE ASSESSEE WAS ISSUED SHOW CAUSE NOT ICE TO SHOW AS TO WHY AFOREMENTIONED AMOUNTS SHOULD NOT BE TREATED AS D EEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT AS ASSESSEE IS A SHAREHOLDER HAVING SUBSTANTIAL INTEREST IN THE SAID COMPANY. IN RESPONSE, IT WAS SUBMITTED THAT ASSESSEE IN ITS PERSONAL CAPACITY AND PROPRIETOR OF DIPTI DIAMONDS IS ONE ASSESSABLE UNIT AND THOSE TWO ACCOUNTS MAINTAINED BY THE ASSESSEE IN THE NAME OF DINURJE S HOULD NOT BE SEEN IN INDEPENDENT MANNER, WHEREIN THE CLOSING BALANCE AS ON DATE AND THE SAID AMOUNT WAS DRAWN OUT OF CREDIT BALANCE ONLY. HOWEVER, NEI THER AO ACCEPTED SUCH SUBMISSIONS OF THE ASSESSEE NOR LD. CIT(A). LD. CI T(A) HAS OBSERVED THAT THIS CONTENTION OF THE ASSESSEE CANNOT BE ACCEPTED AS TH E TRANSACTION IN THE NATURE OF TRADING IN THE REGULAR COURSE OF BUSINESS CANNOT BE COMBINED WITH THE TRANSACTION OF LOANS AND ADVANCES. THEREFORE, LD. CIT(A) HAS UPHE LD THE ADDITION. 8. DURING THE COURSE OF HEARING IT WAS POINTED OUT BY LD. AR THAT THE CONSOLIDATED COPY OF ACCOUNT OF THE ASSESSEE WITH DINURJES ACCOUNTS IS FILED AT PAGES 236 TO 238 OF THE PAPER BOOK. ACCORDING TO T HE SAID ACCOUNT THE ASSESSEE WAS HAVING CREDIT BALANCE AS ON FIRST DAY OF THE ACCOUN TING YEAR OF A SUM OF RS.4,59,80,228/- AND REFERRING TO THE SAID ACCOUNT IT WAS SUBMITTED THAT THE CREDIT BALANCE OF THE ASSESSEE WITH THE SAID CONCERN HAS N EVER TURNED INTO NEGATIVE. ON 4/7/2007 UPTO WHICH DATE A SUM OF RS.43.00 LACS WHI CH IS CONSIDERED TO BE DEEMED DIVIDEND, AFTER DRAWING THE SAME THE CREDIT BALAN CE OF THE ASSESSEE WITH DINURJE IS A SUM OF RS.3,49,86,271/-. SIMILARLY, AS ON 29/3/200 8 ON WHICH DATE RS.12,99,655/- HAS BEEN CONSIDERED AS DEEMED DIVIDEND, THE CREDIT BALANCE OF THE ASSESSEE WITH THE SAID CONCERN WAS A SUM OF RS.11,99,54,236/-. IT WA S SUBMITTED THAT ALL THESE SUBMISSIONS WERE MADE BEFORE THE AO AS WELL AS LD. CIT(A). REFERENCE IN THIS REGARD WAS MADE TO THE LETTER DATED 28/12/2011 FILED WITH THE AO ( COPY OF THIS IS FILED AT PAGES 246 AND 247 OF THE PAPER BOOK) IN WHICH ALL T HE DETAILS WERE FURNISHED TO THE ITA NO.1450/MUM/2013 (A.Y.2008-09) 19 AO. HE FURTHER INVITED OUR ATTENTION TOWARDS FOLLO WING OBSERVATIONS OF LD. CIT(A) IN WHICH THESE SUBMISSIONS OF THE ASSESSEE HAVE BEEN RECORDED. IT WAS SUBMITTED THAT THE AO HAS WRONGLY CONSIDERE D THE OUTSTANDING BALANCE OF DINURJE JEWELLERY PVT. LTD. (SEEPZ) IN THE BOOKS OF DIPTI DIAMONDS AND IN THE BOOKS OF DINA SUDHIR SHAH SEPARATELY. IT WAS CONTENDED THAT DINA SUDHIR SHAH AS INDIVIDUAL AND DINA SUDHIR SHAH AS PROPRIETOR OF M/S. DIPTI DI AMONDS SHOULD BE CONSIDERED AS ONE AND SAME INSTEAD OF TWO SEPARATE ENTITIES AND T HE TWO ACCOUNTS SHOULD BE COMBINED/CONSOLIDATED TO FIND OUT ANY CREDIT OR DEB IT BALANCE OUTSTANDING IN THE NAME OF ANY OTHER PARTY IN THE BOOKS OF DINA SUDHIR SHA H. THEREFORE, IT WAS SUBMITTED THAT THE AO HAS ERRED IN CONSIDERING THE ACCOUNT OF DINU RJE JEWELLERY PVT. LTD. (SEEPZ) IN THE BOOKS OF DIPTI DIAMONDS AND THE ACCOUNT OF DINURJE JEWELLERY PVT LTD. (SEEPZ) IN THE BOOKS OF DINA SUDHIR SHAH SEPARATELY. V. THE AO HAS ALSO ERRED IN CONSIDERING THE ACCOUNT OF DINURJE JEWELLERY PVT. LTD. (SEEPZ) AND DINURJE JEWELLERY PVT. LTD. (MUMBAI) AS TWO SEP ARATE ACCOUNTS. THESE TWO ARE ONLY DIFFERENT UNITS OF DINURJE JEWELLERY PVT. LTD. THER EFORE, ANY CREDIT OR DEBIT BALANCE OF DINURJE JEWELLERY PVT. LTD. IN ANY THIRD PARTYS AC COUNT SHOULD BE CONSIDERED BY COMBINING /CONSOLIDATING THE ACCOUNT OF DINURJE JEW ELLERY PVT. LTD. (SEEPZ) AND DINURJE JEWELLERY PVT. LTD. (MUMBAI). VI. IT WAS SUBMITTED THAT IF THE ACCOUNTS OF DINURJ E JEWELLERY PVT. LTD. (MUMBAI) AND DINURJE JEWELLERY PVT. LTD. (SEEPZ) IN THE BOOKS OF DINA SUDHIR SHAH (INDIVIDUAL) AND M/S. DIPTI DIAMONDS (PROPRIETOR DINA SUDHIR SHAH) A RE CONSOLIDATED, THEN AS ON 01.04.2007 DINURJE JEWELLERY PVT. LTD. WAS A DEBTOR TO DINA SUDHIR SHAH TO THE EXTENT OF RS. 4.59 CRORES. THROUGH OUT OF THE YEAR DINURJE JE WELLERY PVT. LTD. REMAINED A DEBTOR TO DINA SUDHIR SHAH. THIS SHOWED THAT DINA SUDHIR SHAH WAS NOT A DEBTOR TO DINURJE JEWELLERY PVT. LTD. ANY TIME DURING THE ENTIRE YEA R. VII. AS ON 04.07.2007 THE DEBIT BALANCE OF DINURJE JEWELLERY P. LTD. IN THE BOOKS OF DINA SUDHIR SHAH AS PER THE CONSOLIDATED LEDGER ACCOUNT STANDS AT RS. 3.49 CRORES. AS ON 29.03.2008 THE DEBIT BALANCE OF DINURJE JEWELLERY P VT. LTD. IN THE CONSOLIDATED ACCOUNT OF DINA SUDHIR SHAH STANDS AT RS. 14.96 CRORES. THEREFORE, IT WAS SUBMITTED THAT THE PROVISIONS OF SECTION 2(22)(E) OF IT. ACT WERE NOT ATTRACTED IN RESPECT OF LOAN TRANSACTIONS BETWEEN DINA SUDHIR SHAH / DIPTI DIAMONDS AND DINU RJE JEWELLERY PVT. LTD. HENCE, THE ADDITIONS RS.43,00,000/- AND RS. 1,29,99,655/- (COR RECT AMOUNT BEING RS. 12,99,655/-) WERE NOT AT ALL WARRANTED. VIII. IT WAS FURTHER SUBMITTED THAT AS REGARDS THE LOAN TRANSACTION BETWEEN DINURJE JEWELLERY PVT. LTD. AND ACE DIVINE JEWELLERY PVT. LTD. IT WAS OBSERVED THAT THE LOAN ADVANCED BY DINURJE JEWELLERY PVT. LTD. TO ACE DIVI NE JEWELLERY PVT. LID. AS ON 29.02.2008 WAS ONLY RS. 1,48,37,352 AS AGAINST RS. 3,21,37,007 WRONGLY NOTED BY THE AO IN THE ORDER. HOWEVER, AS ON 29.02.2008 DINURJE JEWELLERY PVT. LTD. WAS A DEBTOR TO DINA SUDHIR SHAH / DIPTI DIAMONDS TO THE TUNE OF RS. 11,99,54,236/-. SO THE LOAN ADVANCED BY DINA SUDHIR SHAH TO DINURJE JEWELLETY PVT. LTD. AS ON 29.02.2008 FAR EXCEEDS THE AMOUNT O LOAN GIVEN BY DINURJE JEWELLER Y PVT. LTD. TO ACE DIVINE JEEL1ERY PVT. LTD. DO NOT BESTOW ANY DIRECT OR INDIRECT BENE FIT TO THE APPELLANT, AS EVEN AFTER ADJUSTING THIS LOAN OF RS.1.48 CRORES BETWEEN TWO COMPANIES AGAINST THE LOAN OF ITA NO.1450/MUM/2013 (A.Y.2008-09) 20 RS.11.59 CRORES GIVEN BY THE APPELLANT TO DINURJE J EWELLERY PVT. LTD. AS 29.02.2008, THERE IS STILL A NET LOAN AMOUNT OF RS.10.51 CRORES (11.99 1.48) GIVEN BY THE APPELLANT TO DINURJE JEWELLERY PVT. LTD. AS ON THAT DATE. HE NCE, THE PROVISIONS OF SECTION 2(22)(E) SHALL NOT BE ATTRACTED IN THE CASE OF THE APPELLANT DINA SUDHIR SHAH ON LOANS ADVANCED BY DINURJE JEWELLERY PVT. LTD. TO ACE DIVINE JEWELL ERY PVT. LTD. EVEN THOUGH THE ASSESSEE HAD A SUBSTANTIAL INTEREST IN BOTH THESE COMPANIES. THEREFORE, THE ADDITION OF RS.1,48,37,352/- NEEDED TO BE DELETED. (EMPHASIS OURS) 8.1 LD. AR SUBMITTED THAT LD. CIT(A) HAS COMMITTED AN ERROR IN NOT ALLOWING RELIEF TO THE ASSESSEE AND THE REASON FOR REJECTION OF THE CONTENTION OF THE ASSESSEE IS THAT TRANSACTIONS IN THE NATURE OF TRADING IN THE REGULA R COURSE OF BUSINESS CANNOT BE CLUBBED WITH THE TRANSACTIONS OF LOANS AND ADVANCE S. IT WAS SUBMITTED BY LD. AR THAT IT WILL BE INCORRECT TO SAY THAT THE ASSESSEE HAS OBTAINED ANY LOAN FROM THE COMPANY IN WHICH SHE WAS HAVING SUBSTANTIAL INTERES T AS THE ASSESSEE WAS HAVING HER CREDIT BALANCE IN THE SAID COMPANY. THEREFORE , LD. AR PLEADED THAT APPROPRIATE RELIEF SHOULD BE ALLOWED TO THE ASSESSEE. 9. ON THE OTHER HAND, RELYING UPON THE ASSESSMENT O RDER AND THE OBSERVATIONS OF LD. CIT(A) LD. DR PLEADED THAT NO BENEFIT SHOULD BE GRANTED TO THE ASSESSEE IN THE LIGHT OF ASSESSEES TRANSACTION WITH DINURJE WHICH ARE IN THE NATURE OF TRADE. 10. IT MAY BE MENTIONED HERE THAT DURING THE COURSE OF HEARING ON 10/09/2014, SINCE THE ACCOUNT OF THE ASSESSEE IN THE BOOKS OF D INURJE WAS NOT AVAILABLE IN THE PAPER BOOK, THE ASSESSEE WAS REQUIRED TO FILE THE S AME ON 11/9/2014. THE SAID COPY OF ACCOUNT WAS FILED BY LD. AR AND WAS ALSO GIVEN T O LD. DR. IT MAY BE MENTIONED HERE THAT THOUGH THE ASSESSEE IS MAINTAINING SEPARA TE ACCOUNTS IN HER BOOKS OF ACCOUNT BUT DINURJE IS MAINTAINING SINGLE ACCOUNT OF THE ASSESSEE IN WHICH ALL THE ENTRIES HAVE BEEN INCORPORATED AND THE OPENING BALA NCE AND CLOSING BALANCE OF THE SAID ACCOUNT IS MATCHING WITH THE CONSOLIDATED ACC OUNT FILED BY THE ASSESSEE. 11. WE HAVE HEARD BOTH THE PARTIES AND THEIR CONTEN TIONS HAVE CAREFULLY BEEN CONSIDERED. THIS HAS BEEN THE CONTENTION OF THE AS SESSEE RIGHT FROM THE BEGINNING THAT THE AFOREMENTIONED AMOUNT OF RS.43.00 LACS AND RS.12,99,655/- COULD NOT BE ITA NO.1450/MUM/2013 (A.Y.2008-09) 21 TREATED AS DEEMED DIVIDEND AS ASSESSEE DID NOT TAKE ANY LOANS OR ADVANCES FROM DINURJE. ACCORDING TO CONSOLIDATED ACCOUNT THE AS SESSEE WAS HAVING MUCH MORE BALANCE FROM THE AMOUNT DRAWN AND THUS NO LOAN OR A DVANCE WAS TAKEN BY THE ASSESSEE FROM DINURJE. RELEVANT COPIES OF ACCOUNTS WERE FILED AND THESE CONTENTION OF THE ASSESSEE HAVE ALSO BEEN RECORDED BY LD. CIT( A) IN HIS ORDER. SO THE FACT REMAINS THAT IF CONSOLIDATED ACCOUNT IS TAKEN INTO CONSIDERATION THEN ON 4/07/2007 AND ON 29/3/2008 THE CREDIT BALANCE OF THE ASSESSEE WITH DINURJE WAS MUCH MORE THAN THE AMOUNT OBTAINED BY THE ASSESSEE. THEREFOR E, IT CANNOT BE SAID THAT ANY WITHDRAWAL MADE BY THE ASSESSEE FROM DINURJE COULD REPRESENT AS LOAN OR ADVANCE WITHIN THE MEANING OF SECTION 2(22)(E) OF THE ACT. THE REASON GIVEN BY LD. CIT(A) IS ALSO WITHOUT APPRECIATING THE FULL FACTS OF THE CAS E AS EVEN AFTER DRAWING THOSE AMOUNTS AND GIVING EFFECT TO THE TRADE TRANSACTION S, THE BALANCE, IN THE ACCOUNTS OF THE ASSESSEE WITH DINURJE, WAS IN SURPLUS. THE WIT HDRAWAL MADE BY THE ASSESSEE FROM HER OWN CREDIT BALANCE CANNOT BE TRETED AS LO AN OR ADVANCE WITHIN THE MEANING OF SECTION 2(22)(E). MOREOVER, THE PAYEE COMPANY I S MAINTAINING ONE CONSOLIDATED ACCOUNT OF THE ASSESSEE. THEREFORE, THE SUSTENANCE OF ADDITION OF THE AMOUNT OF RS.43.00 LACS AND RS.12,99,655/- IS NOT JUSTIFIED A T ALL AND IS NOT CONFORMITY WITH THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT. THE SAI D ADDITION IS LIABLE TO BE DELETED AND IS ACCORDINGLY DELETED. 12. NOW COMING TO THE BALANCE AMOUNT OF RS.1,48,37, 352/- WHICH REPRESENT AMOUNT OF LOAN OR ADVANCES GIVEN BY DINURJE TO M/ S. ACE DIVINE JEWELLERY PVT. LTD. (IN SHORT ACE DIVINE), THE ASSESSEE IS A SUBSTANTIA L SHARE HOLDER OF BOTH THESE CONCERNS HAVING AROUND 70% SHARE OF BOTH THE CONCER NS. APPLYING SECTION 2(22)(E) OF THE ACT THIS ADDITION HAS BEEN MADE IN THE HAND S OF THE ASSESSEE. THE SCHEME OF SECTION 2(22)(E) HAS BEEN EXPLAINED BY HONBLE DELH I HIGH COURT IN THE CASE OF CIT VS. ANKITECH PVT. LTD. 340 ITR 14. THE OBSERVATIONS OF THEIR LORDSHIPS ARE AS UNDER: IN SO FAR AS THE PROVISIONS OF SECTION 2(22)(E) AR E CONCERNED, WE HAVE ALREADY EXTRACTED THIS PROVISION AND TAKEN NOTE OF THE CONDITIONS/REQUISITES WHICH ARE TO BE ESTABLISHED FOR MAKING THE PROVISIO N APPLICABLE. IN CIT V. C. P. SARATHY MUDALIAR [1972] 83 ITR 170 (SC), THE SUPREME COURT HAD TRACED OUT THE ASSESSEE OF THIS PROVISION IN THE FO LLOWING MANNER : ITA NO.1450/MUM/2013 (A.Y.2008-09) 22 'ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN W HICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WH ETHER AS REPRESENT- ING A PART OF THE ASSETS OF THE COMPANY OR OTHERWIS E) MADE AFTER THE 31ST DAY OF MAY, 1987, BY WAY OF ADVANCE OR LOAN. FIRST LIMB (A) TO A SHAREHOLDER, BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFIT S) HOLDING NOT LESS THAN TEN PERCENT OF THE VOTING POWER, SECOND LIMB: (B) OR TO MY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST (HEREAFTER IN THIS CLAUSE REFERRED TO AS THE SAID CONCERN) THIRD LIMB (C) OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPAN Y IN EITHER CASE POSSESSES ACCUMULATED PROFITS.' IT IS RIGHTLY POINTED OUT BY THE BOMBAY HIGH COURT IN UNIVERSAL MEDI- CARE (P) LTD. [2010] 324 ITR 263 (BOM) THAT SECTION 2(22)(E) OF THE ACT IS NOT ARTISTICALLY WORDED. BE AS IT MAY, WE MAY REITE RATE THAT AS PER THIS PRO- VISION, THE FOLLOWING CONDITIONS ARE TO BE SATISFIE D : (1) THE PAYER COMPANY MUST BE A CLOSELY HELD COMPAN Y. (2) IT APPLIES TO ANY SUM PAID BY WAY OF LOAN OR AD VANCE DURING THE YEAR TO THE FOLLOWING PERSONS : (A) A SHAREHOLDER HOLDING AT LEAST 10 OF VOTING POW ER IN THE PAYER COMPANY. (B) A COMPANY IN WHICH SUCH SHAREHOLDER HAS AT LEAS T 20 PER CENT. OF THE VOTING POWER. (C) A CONCERN (OTHER THAN A COMPANY) IN WHICH SUCH SHAREHOLDER HAS AT LEAST 20 PER CENT. INTEREST. (3) THE PAYER COMPANY HAS ACCUMULATED PROFITS ON TH E DATE OF ANY SUCH PAYMENT AND THE PAYMENT IS OUT OF ACCUMULATED PROFITS. (4) THE PAYMENT OF LOAN OR ADVANCE IS NOT IN COURSE OF ORDINARY BUSI- NESS ACTIVITIES. THE INTENTION BEHIND ENACTING THE PROVISIONS OF SEC TION 2(22)(E) IS THAT CLOSELY-HELD COMPANIES (I.E., COMPANIES IN WHICH PU BLIC ARE NOT SUBSTAN- TIALLY INTERESTED), WHICH ARE CONTROLLED BY A GROUP OF MEMBERS, EVEN THOUGH THE COMPANY HAS ACCUMULATED PROFITS WOULD NOT DISTR IBUTE SUCH PROFIT AS DIVIDEND BECAUSE IF SO DISTRIBUTED THE DIVIDEND INC OME WOULD BECOME TAX- ITA NO.1450/MUM/2013 (A.Y.2008-09) 23 ABLE IN THE HANDS OF THE SHAREHOLDERS. INSTEAD OF D ISTRIBUTING ACCUMULATED PROFITS AS DIVIDEND, COMPANIES DISTRIBUTE THEM AS L OAN OR ADVANCES TO SHAREHOLDERS OR TO CONCERN IN WHICH SUCH SHAREHOLDE RS HAVE SUBSTANTIAL INTEREST OR MAKE ANY PAYMENT ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF SUCH SHAREHOLDER. IN SUCH AN EVENT, BY THE DEEMING PROVISIONS, SUCH PAY- MENT BY THE COMPANY IS TREATED AS DIVIDEND. THE INT ENTION BEHIND THE PRO- VISIONS OF SECTION 2(22)(E) OF THE ACT IS TO TAX DI VIDEND IN THE HANDS OF SHAREHOLDERS. THE DEEMING PROVISIONS AS IT APPLIES TO THE CASE OF LOANS OR ADVANCES BY A COMPANY TO A CONCERN IN WHICH ITS SHA REHOLDER HAS SUB- STANTIAL INTEREST, IS BASED ON THE PRESUMPTION THAT THE LOANS OR ADVANCES WOULD ULTIMATELY BE MADE AVAILABLE TO THE SHAREHOLD ERS OF THE COMPANY GIVING THE LOAN OR ADVANCE. 12.1 ACCORDING TO AFOREMENTIONED DECISION THE CASE OF ASSESSEE WILL FALL IN SECOND LIMB OF SECTION 2(22)(E) WHICH DESCRIBE THAT THE LO AN OR ADVANCE WILL BE TREATED AS DEEMED DIVIDEND IN A CASE WHERE SHAREHOLDER IS A ME MBER OR PARTNER AND IS HAVING SUBSTANTIAL INTEREST. ACCORDING TO THE FACTS OF T HE CASE THERE IS NO DISPUTE REGARDING THE FACT THAT THE ASSESSEE IS HAVING SUBSTANTIAL IN TEREST IN BOTH THE CONCERNS AND THERE IS ALSO NO DISPUTE TO THE EXTENT THAT A SUM OF RS.1,48,37,352/- HAS BEEN GIVEN AS LOAN OR ADVANCE BY DINURJE TO ACE DIVINE. THER E IS NO MATERIAL ON RECORD TO SAY THAT THE SAID AMOUNT OF RS.1,48,37,352/- RELATES TO TRADE TRANSACTIONS MADE IN THE REGULAR COURSE OF BUSINESS AS THE TRADE TRANSACTION S BETWEEN THESE TWO CONCERNS ARE RECORDED IN SEPARATE LEDGER ACCOUNTS, COPIES OF WHI CH ARE PLACED AT PAGES 248 & 249 OF THE PAPER BOOK. UNDER THESE FACTS IT HAS TO BE SEEN THAT WHETHER LD.CIT(A) WAS RIGHT IN UPHOLDING THE ADDITION TO THE EXTENT OF RS .1,48,37,352/-. ACCORDING TO THE SECOND LIMB OF SECTION 2(22)(E) OF THE ACT THIS TRA NSACTION SQUARELY FALL WITHIN THE PURVIEW OF SECTION 2(22) (E) AND AS ALREADY MENTIO NED THERE IS COMPLETE ABSENCE OF FACT THAT THIS AMOUNT IN ANY WAY IS CONCERNED WITH THE TRADING ACTIVITIES BETWEEN THESE TWO CONCERNS. 12.2 IT IS THE CONTENTION OF THE ASSESSEE THAT ON 29/2/2008, WHEN THIS AMOUNT WAS OBTAINED BY ACE DIVINE FROM DINURJE, THE ASSESSEE WAS HAVING CREDIT BALANCE OF RS.11,99,54,236/- IN THE BOOKS OF DINURJE, THEREFOR E, THE ASSESSEE WAS HAVING FAR EXCEEDED AMOUNT AS CREDIT BALANCE WITH DINURJE AND THUS, IT CANNOT BE SAID THAT ITA NO.1450/MUM/2013 (A.Y.2008-09) 24 ASSESSEE HAS DERIVED ANY BENEFIT FROM THE LOAN GIV EN BY DINURJE TO ACE DIVINE. THERE IS NO FORCE IN SUCH CONTENTION OF THE ASSESSEE AS ACCORDING TO SECTION 2(22) (E) FOR APPLICATION OF SECOND LIMB THERE IS NO SUCH REQUIR EMENT AND SUCH REQUIREMENT IS EXISTING ONLY IN THIRD LIMB WHERE THE EXPRESSION USED IS AS UNDER: (C) OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, O R FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPAN Y IN EITHER CASE POSSESSES ACCUMULATED PROFITS.' IN SECOND LIMB THERE IS NO SUCH QUALIFICATION, THER EFORE, THE CONTENTION OF THE ASSESSEE IS NOT TENABLE IN LAW. 12.3 THERE IS ONE MORE ASPECT OF THE ISSUE AND ASSE SSEE CAN CONTEND THAT SHE IS UNCONNECTED WITH THE TRANSACTION BETWEEN DINURJE A ND ACE DIVINE, THEREFORE, SHE SHOULD NOT BE SADDLED WITH THE AMOUNT EXCHANGED BE TWEEN TWO CONCERNS AND THE ADDITION, IF ANY, SHOULD BE MADE IN THE HANDS OF RE CIPIENT CONCERN. THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. ANKITECH P.LTD. (SUPRA) AND REFERENCE IN THIS REGAR D CAN BE MADE TO THE FOLLOWING OBSERVATIONS OF THEIR LORDSHIPS. IN A CASE LIKE THIS, THE RECIPIENT WOULD BE A SHAR EHOLDER BY WAY OF DEEM- ING PROVISION. IT IS NOT CORRECT ON THE PART OF THE REVENUE TO ARGUE THAT IF THIS POSITION IS TAKEN, THEN THE INCOME 'IS NOT TAX ED AT THE HANDS OF THE RECIPIENT'. SUCH AN ARGUMENT BASED ON THE SCHEME OF THE ACT AS PROJECTED BY THE LEARNED COUNSEL FOR THE REVENUE ON THE BASIS OF SECTIONS 4, 5, 8, 14 AND 56 OF THE ACT WOULD BE OF NO AVAIL. SIMPLE ANSW ER TO THIS ARGUMENT IS THAT SUCH LOAN OR ADVANCE, IN THE FIRST PLACE, IS N OT AN INCOME. SUCH A LOAN OR ADVANCE HAS TO BE RETURNED BY THE RECIPIENT TO T HE COMPANY, WHICH HAS GIVEN THE LOAN OR ADVANCE. PRECISELY, FOR THIS VERY REASON, THE COURTS HAVE HE LD THAT IF THE AMOUNTS ADVANCED ARE FOR BUSINESS TRANSACTIONS BETWEEN THE PARTIES, SUCH PAY MENT WOULD NOT FALL WITHIN THE DEEMING DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT. IN SO FAR AS RELIANCE UPON CIRCULAR NO. 495, DATED SEPTEMBER 22, 1987, ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES IS CONC ERNED, WE ARE INCLINED TO AGREE WITH THE OBSERVATIONS OF THE MUMBAI BENCH DEC ISION IN BHAUMIK COLOUR (P) LTD. [2009] 313 ITR (AT) 146 (MUMBAI) [S B] THAT SUCH OBSER- VATIONS ARE NOT BINDING ON THE COURTS. ONCE IT IS F OUND THAT SUCH LOAN OR ADVANCE CANNOT BE TREATED AS DEEMED DIVIDEND AT THE HANDS OF SUCH A CON- ITA NO.1450/MUM/2013 (A.Y.2008-09) 25 CERN WHICH IS NOT A SHAREHOLDER, AND THAT, ACCORDIN G TO US, IS THE CORRECT LEGAL POSITION, SUCH A CIRCULAR WOULD BE OF NO AVAI L. NO DOUBT, THE LEGAL FICTION/DEEMED PROVISION CREATE D BY THE LEGISLATURE HAS TO BE TAKEN TO 'LOGICAL CONCLUSION' AS HELD IN ANDALEEB SEHGAL [2010] 173 DLT 296 (DELHI) [FB]. THE REVENUE WANTS THE DEE MING PROVISION TO BE EXTENDED WHICH IS ILLOGICAL AND THE ATTEMPT IS TO C REATE A REAL LEGAL FICTION, WHICH IS NOT CREATED BY THE LEGISLATURE. WE SAY AT THE COST OF REPETITION THAT THE DEFINITION OF SHAREHOLDER IS NOT ENLARGED BY AN Y FICTION. BEFORE WE PART WITH, SOME COMMENTS ARE TO BE NECESS ARILY MADE BY US. AS POINTED OUT ABOVE, IT IS NOT IN DISPUTE THAT THE CONDITIONS STIPULATED IN SECTION 2(22)(E) OF THE ACT TREATING THE LOAN AND A DVANCE AS DEEMED DIVIDEND ARE ESTABLISHED IN THESE CASES. THEREFORE, IT WOULD ALWAYS BE OPEN TO THE REVENUE TO TAKE CORRECTIVE MEASURE BY TREATI NG THIS DIVIDEND INCOME AT THE HANDS OF THE SHAREHOLDERS AND TAX THEM ACCOR DINGLY. AS OTHERWISE, IT WOULD AMOUNT TO ESCAPEMENT OF INCOME AT THE HANDS O F THOSE SHARE- HOLDERS (EMPHASIS OURS) 13. IN THE PRESENT CASE THE AMOUNT HAS RIGHTLY BEE N TAXED IN THE HANDS OF THE ASSESSEE WHO IS SUBSTANTIAL SHARE HOLDER OF BOTH THE CONCERNS AND THAT IS IN ACCORDANCE WITH THE AFOREMENTIONED DECISION OF HON BLE DELHI HIGH COURT. THEREFORE, ADDITION MADE UNDER SECTION 2(22)(E) TO THE EXTENT OF RS.1,48,37,352/- IS UP AND GROUND NO.2 OF THE ASSESSEE IS PARTLY ALLOWED. 14. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 25/09/2014 ! ' #$ % &'( 25/09/2014 ' ) SD/- SD/- ( /SANJAY ARORA ) ( . . / I.P. BANSAL ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI; &' DATED 25/09//2014 ITA NO.1450/MUM/2013 (A.Y.2008-09) 26 ! ! ! ! ' '' ' *+, *+, *+, *+, -,$+ -,$+ -,$+ -,$+ / COPY OF THE ORDER FORWARDED TO : 1. ./ / THE APPELLANT 2. *0./ / THE RESPONDENT. 3. 1 ( ) / THE CIT(A)- 4. 1 / CIT 5. ,2) *+' , , / DR, ITAT, MUMBAI 6. )3 4 / GUARD FILE. !' !' !' !' / BY ORDER, 0,+ *+ //TRUE COPY// 5 55 5 / 6 6 6 6 (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI . ' . ./ VM , SR. PS