ITO 8(1)(1), MUMBAI V. K.P. SANGHVI JEWELS P. LTD, MUMBAI

ITA 21/MUM/2009

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 92376 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 3 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-04-2015
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: K
• Next Hearing Date: 27-04-2015
• Assessment Year: 2004-2005
• Appeal Filed On: 02-01-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: N PADMAN AVAN DR
• Keywords: Business income; Transfer pricing; Opportunity of being heard

Judgement Text

, , , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES K, MUMBAI , , , BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER, AND SHRI SANJAY ARORA, ACCOUNTANT MEMBER ITA NO.7345/MUM/2008 ASSESSMENT YEAR: 2004-05 K.P. SANGHVI JEWELS PRIVATE LIMITED( FORMERLY KNOWN AS ACE JEWELS PVT. LTD.) 10 TH FLOOR, PAREKH MARKET, OPERA HOUSE, MUMBAI-400004 / VS. INCOME TAX OFFICER, WARD-8(1)(1), 2 ND FLOOR, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020 ( ! ' /ASSESSEE) ( # / REVENUE) P.A. NO.AACCA8412D ITA NO.21/MUM/2009 ASSESSMENT YEAR: 2004-05 INCOME TAX OFFICER, WARD-8(1)(1), 2 ND FLOOR, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020 / VS. K.P. SANGHVI JEWELS PRIVATE LIMITED( FORMERLY KNOWN AS ACE JEWELS PVT. LTD.) 10 TH FLOOR, PAREKH MARKET, OPERA HOUSE, MUMBAI-400004 ( # / REVENUE) ( ! ' /ASSESSEE) P.A. NO.AACCA8412D # / REVENUE BY SHRI N. PADMAN AVAN DR ! ' / ASSESSEE BY SHRI ROHIT JAIN K.P. SANGHVI JEWELS PRIVATE LIMITED 2 $ #% & ' ' / DATE OF HEARING 27/04/2015 & ' ' / DATE OF ORDER: 01/05/2015 / O R D E R PER JOGINDER SINGH (JUDICIAL MEMBER) THE ASSESSEE AS WELL AS THE REVENUE ARE IN CROSS APPEAL AGAINST THE IMPUGNED ORDER DATED 20/10/2008 OF THE LD. FIRST APPELLATE AUTHORITY, MUMBAI, THE ASSE SSEE HAS CHALLENGED THE ORDER THAT THE LD. COMMISSIONER OF I NCOME TAX (APPEALS) ERRED IN LAW AND ON FACTS AND IN THE CIRCUMSTANCES DISREGARDING THE FACT THAT TRANSFER P RICING OFFICER (IN SHORT TPO) DID NOT GRANT OPPORTUNITY OF BEING HEARD TO THE ASSESSEE BY SERVING SHOW CAUSE NOTICE AS REQUIRED U/S 92C(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER THE ACT), WHEREAS THE REVENUE IS ALSO AGGRIEVED IN DELETING THE ADDITION OF RS.95,47,914/- RELYING UPON THE FACT THAT THE TRANSACTION OF THE ASSESSEE WITH ITS ASSOCIATE ENTERPRISE (IN SHORT AE) IN U.S.A TO THE EFFECT THA T IT WAS AT ARMS LENGTH (IN SHORT AL) AND NO ADJUSTMENT IS CAL LED FOR WITHOUT APPRECIATING THE FACTS AND FURTHER ERRED IN DELETING THE GP ADDITION OF RS.2,79,86,052/-. 2. DURING HEARING OF THESE APPEALS, WE HAVE HEARD S HRI ROHIT JAIN, LD. COUNSEL FOR THE ASSESSEE, AND SHRI N. PADMANAVAN, LD. DR. THE CRUX OF ARGUMENT ON BEHALF OF THE ASSESSEE IS THAT THE ASSESSEE FIRM WAS FORMED I N THE YEAR 2000 AND IT IS THE SECOND YEAR OF OPERATION. IT WAS CONTENDED THAT COMPARABLES PROVIDED BY THE ASSESSEE ARE RELIABLE AS THE ASSESSEE TOOK THE AVERAGE, THEREFOR E, NO K.P. SANGHVI JEWELS PRIVATE LIMITED 3 ADJUSTMENT IS REQUIRED. IT WAS ASSERTED THAT OUT O F THE SIXTEEN COMPARABLES, ONLY FOUR WERE CHOSEN AND FURT HER 80% ARE NON-AE TRANSACTIONS. IT WAS PLEADED THAT T AX RATE APPLICABLE IN U.S. ARE HIGHER, THUS, THERE WAS NO A TTEMPT ON THE PART OF THE ASSESSEE TO SHIFT THE PROFIT TO U.S.A. IT WAS EMPATHETICALLY PLEADED THAT PROPER OPPORTUNITY WAS NOT PROVIDED BY THE ASSESSING OFFICER TO PRESENT IT S CASE. IT WAS POINTED OUT THAT THERE IS NO FINDING IN THE IMP UGNED ORDER AS TO HOW MUCH ADJUSTMENT IS NEEDS TO BE MADE ON THE ISSUE. ON THE OTHER HAND, THE LD. DR INVITED O UR ATTENTION TO PAGE-15,18 (BACK SIDE) OF THE PAPER-BO OK ALONG WITH PAGE 19 OF THE PAPER-BOOK SHOWING EXTERNAL COMPARABLES. IT WAS POINTED OUT THAT THE ASSESSEE SHOWED THE PROFIT AT 3.65%, WHEREAS, THE GROSS PROFIT IS 2 2.55%, THUS, THERE IS SHIFTING OF PROFIT. OUR ATTENTION W AS INVITED TO SECTION 92C(3) OF THE ACT ALONG WITH PAGES 109 T O 111 OF THE PAPER BOOK BY CONTENDING THAT AE WAS IN USA. I T WAS EMPATHETICALLY CONTENDED THAT LD. COMMISSIONER OF I NCOME TAX (APPEALS) WHILE GRANTING RELIEF REJECTED THE CO MPARABLE IGNORING THE OBJECTIONS MADE IN THE REMAND REPORT. IT WAS EXPLAINED THAT TPO HAS NOT APPLIED TNMM METHOD FOR WHICH RELIANCE WAS PLACED UPON 27 TAXMAN.COM 213 (CHENNAI). 2.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE FACTS , IN BRIEF, ARE THAT THE ASSESSEE IS A CLOSELY HELD INDIAN COMP ANY INCORPORATED UNDER THE COMPANIES ACT, 1956 ON 30/05/2000, HAVING ITS REGISTERED OFFICE IN MUMBAI. THE K.P. SANGHVI JEWELS PRIVATE LIMITED 4 ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURIN G OF DIAMOND STUDDED JEWELLERY IN THE FORM OF BANGLES, R INGS, EARRINGS, BRACELETS, PENDANTS AND NECKLACE, ETC. THE STUDDED DIAMOND JEWELLERY IS SOLD IN THE LOCAL AS W ELL AS OVERSEAS MARKET. THE JEWELLERY MANUFACTURED BY THE ASSESSEE COMPANY SOLD IN THE LOCAL MARKET WAS UNDER THE BRAND NAME ACE. THE TOTAL SALE OF THE ASSESSEE, DURING THE YEAR WAS RS.24,69,09,406/- OUT OF THIS THE TOTA L EXPORT TO AE WAS RS.5,23,56,886/-, WHICH COMES TO 21.2% OF THE TOTAL SALES OF THE COMPANY. THERE ARE NO PURCHASES FROM ITS AE. DURING THE YEAR, THE ASSESSEE ENTERED INTO TRA NSACTION WITH K.P. JEWELLERY USA (AE) AND MADE EXPORT OF STU DDED JEWELLERY AMOUNTING TO RS.5,23,56,886/-. THE ASSESS EE CAUSED LOSS OF RS.1.79 CRORES AS COMPARE TO LOSS OF RS.1.72 CRORES DURING THE PREVIOUS YEAR. THE ASSESSEE COMPA NY ALSO AVAILED GOLD LOAN FACILITY, OFFERED BY STATE BANK O F INDIA AND ON THE MATURITY OF THE SAID LOAN, THE ASSESSEE INCU RRED LOSS AROUND 12 LAKH. THE COMPANY EXPANDED ITS PRODUCTIO N CAPACITY SIGNIFICANTLY. THE ASSESSEE MADE HUGE INV ESTMENT IN PLANT, MACHINERY AND EQUIPMENT FOR FURTHER EXPAN SION. THE ASSESSING OFFICER FOUND THAT THE AVERAGE GROSS PROFIT MARGIN ON COST OF COMPARABLE COMES TO 22.55% AS COM PARE TO ASSESSEES GROSS PROFIT MARGIN ON COST AT 3.65%. HE CONCLUDED THAT THE ADJUSTMENT IN RESPECT OF SALES T O AE IS REQUIRED TO BE MADE. HE OPINED THAT THE ARMS LENG TH PRICE OF SALES MADE TO AE COMES TO RS.6,19,04,700/- AS COMPARED TO THE TRANSACTION VALUE OF RS.5,23,56,886 /-. HE MADE ADJUSTMENT OF RS.95,47,814/- TO THE TOTAL INCO ME OF K.P. SANGHVI JEWELS PRIVATE LIMITED 5 THE ASSESSEE. ON APPEAL, THE LD. COMMISSIONER OF IN COME TAX (APPEALS), THE ASSESSEE CHALLENGED THE ASSESSME NT ORDER WITH ONE OF THE GROUND ALONG WITH OTHERS THAT THE TPO DID NOT ISSUE A SHOW CAUSE NOTICE FOR REJECTING TNM M METHOD, USED BY THE ASSESSEE, BY USING CPM FOR DETERMINING THE ARMS LENGTH PRICE. THE LD. COMMISS IONER OF INCOME TAX (APPEALS) CONSIDERING THE FACTS GAVE PART RELIEF TO THE ASSESSEE AGAINST WHICH THE ASSESSEE A S WELL AS THE REVENUE BOTH ARE AGGRIEVED. IF THE TOTALITY OF FACTS AND THE CONCLUSION DRAWN IN THE IMPUGNED ORDER ARE CONSIDERED, ONE CLEAR FACT IS OOZING OUT THAT THE L D. COMMISSIONER OF INCOME TAX (APPEALS) HAS NOT PASSE D A REASONED ORDER, BECAUSE INTERNAL COMPARABLES SHOULD NOT HAVE BEEN DISCARDED AND THERE IS NO FINDING TO THIS EFFECT IN THE IMPUGNED ORDER. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) PICKED UP CERTAIN COMPARABLES AND DID NOT GIVE ANY FINDING FOR THE REMAINING ONES I.E. HIS ORDER I S NOT SPEAKING ONE. FURTHER, IN THE IMPUGNED ORDER, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS NOT DEALT WITH THE OBJECTIONS RAISED BY THE TPO AS AT PAGE-4 OF TH E ORDER OF THE TPO, BASIC REASON FOR DISCARDING THE INTERNAL COMPARABLES HAVE BEEN MENTIONED. AT THE SAME TIME, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS NOT MA DE ANY DISCUSSION REGARDING THE CASES CITED BY THE ASS ESSEE. MORE SPECIFICALLY, WHEN THE ASSESSEE AS WELL AS THE TPO MADE THEIR VALID STAND BUT THE SAME WERE NOT DEALT WITH PROPERLY BY THE LD. COMMISSIONER OF INCOME TAX (APP EALS), CONSEQUENTLY, WE REMAND BOTH THESE FILES TO EXAMINE AFRESH K.P. SANGHVI JEWELS PRIVATE LIMITED 6 THE FINDING OF THE TPO ALONG WITH THE ARGUMENTS/OBJ ECTIONS RAISED BY THE ASSESSEE IN ACCORDANCE WITH LAW. THE ASSESSEE MAY BE GIVEN OPPORTUNITY OF BEING HEARD, W ITH FURTHER LIBERTY TO THE ASSESSEE TO FURNISH EVIDENCE , IF ANY, IN SUPPORT OF ITS CLAIM. THUS, THE APPEAL OF THE ASSES SEE AS WELL AS OF THE REVENUE IS ALLOWED FOR STATISTICAL P URPOSES. FINALLY, APPEAL OF THE ASSESSEE AS WELL AS OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. THIS ORDER WAS PRONOUNCED IN THE OPEN COURT IN THE PRESENCE OF LD. REPRESENTATIVE OF BOTH SIDES, AT TH E CONCLUSION OF HEARING ON 27/04/2015. SD/- SD/- ( SANJAY ARORA ) (JOGINDER SINGH) '# / ACCOUNTANT MEMBER $# / JUDICIAL MEMBER $ % MUMBAI; ) DATED : 01/05/2015 F{X~{T? P.S/. .. %$&'()(*& / COPY OF THE ORDER FORWARDED TO : 1. +,- / THE APPELLANT 2. ./,- / THE RESPONDENT. 3. 0 0 $ 1' ( + ) / THE CIT, MUMBAI. P4. 0 0 $ 1' / CIT(A)- , MUMBAI 5. 3#4 .' , 0 +' 5 , $ % / DR, ITAT, MUMBAI 6. 7% / GUARD FILE. / BY ORDER, /3+' .' //TRUE COPY// / (DY./ASSTT. REGISTRAR) , $ % / ITAT, MUMBAI